Despite a surge of interest in their services and business model that has seen credit unions add 1.3 million new members in the past year, the industry faces some daunting demographics that could lead to its obsolescence if institutions don’t keep up with the latest trends in on-line banking and mobile applications.
That was the warning handed down by Debbie Matz, chair of the National Credit Union Administration, to members of the Credit Union National Association at CUNA’s March 19 government affairs conference in Washington, D.C.
In her address, Matz noted the average age of credit union members has ticked up from 40 a few years ago to 47 today, meaning a typical member is now past the prime borrowing ages of 24-to-44. Just 9% of credit union members are between 18 and 24, compared with 33% of the U.S. population.
“At a minimum, young people expect services like mobile banking and online bill-paying. They expect to open accounts and get approved for loans online. They expect immediate service 24/7. And they expect to make deposits using their smart phone, and to use their digital wallet to buy movie tickets,” Matz said. “If you don’t offer what they expect, they’re going to take their business elsewhere.”
Since being named to the post by President Barack Obama and confirmed by the U.S. Senate in August 2009, Matz has been a fairly vocal champion of regulatory reform for the credit union industry. She has launched her own “regulatory modernization initiative” that has included reallocating examiner resources to spend more time in the largest credit unions; offering greater transparency on the NCUA’s ongoing resolution program for corporate credit unions (institutions that provide liquidity to the more than 7,400 federally insured credit unions); easing rules on troubled debt restructuring; and working to permit credit unions to use plain derivatives to manage interest rate risk.
Matz also announced that she will host six “listening sessions” with credit unions this spring and early summer, starting with a May 2 session in Boston before moving on to other sessions in Alexandria, Va.; St. Louis, Mo.; Orlando, Fla.; San Diego, Calif.; and Denver, Colo. She told CUNA members she considered the most fundamental question she faces is determining how to “ensure safety and soundness for you, your members and the (National Credit Union Share Insurance Fund) while imposing the lightest possible regulatory burden.”
Matz, who serves as serves as one of 10 voting members of the Financial Stability Oversight Council, also has endorsed a pair of bills that rank among CUNA’s top legislative priorities.
First and foremost, there’s the Small Business Lending Enhancement Act – introduced in the Senate as S. 509 by Sen. Mark Udall, D-Colo., and in the House as H.R. 1418 by Rep. Ed Royce, D-Calif. – which would raise the cap on small business loans that credit unions can extend to 25% of total assets, from the current 12%. Matz has testified favorably on the proposal before House and Senate committees and also wrote to Treasury Secretary Timothy Geithner asking that the restriction on member business lending be lifted.
She also voiced support for a bill – H.R. 3993, the Capital Access for Small Businesses and Jobs Act – introduced in February by Rep. Peter King, R-N.Y., that would grant NCUA discretion to allow credit unions that met certain conditions to raise supplemental capital. Matz called the bill “long overdue,” noting that because new deposits can lower a credit union’s net worth ratio, current law effectively forces health credit unions to turn customers away.
“With appropriate safeguards, healthy credit unions should be able to access supplemental capital to allow those new deposits. Consistent with safety and soundness, we can work together to make that happen,” Matz said.
But there are clear limits to what sort of rules Matz is interested in bending, reiterating that NCUA “can’t afford to give any credit union a pass on adhering to policies which protect safety and soundness.” She noted that, coming out of the Great Recession, credit unions keep on their books too many mortgages at historically low rates, and when interest rates rise, credit unions could earn less on their long-term assets than they pay for short-term deposits.
Matz added that there are still more than 400 credit unions holding more than $26 billion in shares that are either CAMEL Code 4 or Code 5. Under the NCUA’s “CAMEL” rating system for evaluating the health of credit unions (the moniker is acronym for Capital, Asset quality, Management, Earnings, and asset Liability management) an entity rated CAMEL Code 1 is considered the most financially secure and Code 5 is the least.
The failure between early 2008 and mid-2011 of five corporate credit unions that accounted for roughly 75% of all corporate assets proved a serious challenge for the NCUA, which used the National Credit Union Share Insurance Fund and a newly created Credit Union Stabilization Fund to provide liquidity for the failing corporates, which were taken into conservatorship. In a January 2012 report, the Government Accountability Office noted that the corporates over-concentrated their investments in private label mortgage-backed securities. NCUA subsequently banned private label MBS investments in 2010 and established a new framework for prompt corrective action on corporates.
She stressed the need for credit unions to perform thorough due diligence, not only for evaluating loans, but also for evaluating Credit Union Service Organizations, to ensure they are “in sound financial condition and meet the highest data security standards.” She also stressed the need for credit union board members to be well-trained and able to meet their fiduciary responsibilities.
“Perhaps the most important thing you can do, each year, is to undertake serious, realistic strategic planning,” Matz said. “This will help you assess where you want the credit union to be in five or ten years – and determine what it will take to get there.”