WASHINGTON, D.C. (Feb. 24, 2020) – National Credit Union Administration Board Member J. Mark McWatters discussed the agency’s recent taxi medallion sale as well as issues around regulation, credit union-bank transactions, and preparing for an economic downturn in remarks to the Credit Union National Association’s Governmental Affairs Conference here today.
A copy of Board Member McWatters’ prepared remarks is available online.
Duty to Credit Unions, Members Guided Taxi Medallion Sale
The NCUA’s statutory requirement to limit losses to the National Credit Union Share Insurance Fund was the primary factor in the decision to sell its portfolio of taxi medallion loans, McWatters said, adding that consumer protection was a major consideration in choosing the winning bidder.
“The NCUA was charged, under the Federal Credit Union Act, with developing a plan that would yield the least long-term cost to the Share Insurance Fund,” McWatters said. “We made it very clear to those interested in acquiring the portfolio that the winning bidder must work with the taxi medallion loan borrowers in a transparent, good-faith manner and in full compliance with all applicable consumer protection laws.”
The agency carefully considered a proposal for a public-private partnership to purchase the loans; however, with a firm offer already in-hand and no assurance when, if ever, the proposed partnership might be able to act, the agency could not risk losing its qualified bidder. Noting the Share Insurance Fund has already booked approximately $750 million in losses, McWatters said further losses would certainly delay future possible Share Insurance Fund distributions that would put money back into use by credit unions and their members.
“It is critically important to note we would not have permitted the sale unless we sincerely believed the winning bidder would treat taxi medallion borrowers in a transparent, good-faith manner,” McWatters said. “If we were to have delayed the disposition of the medallion loan portfolio, there is a substantial likelihood the agency would have to forego distributions to credit unions for the immediate future, if not longer.”
McWatters stressed the NCUA understood the impact the collapse of the medallion market has had on borrowers, and he said the public-private partnership idea could still provide them with a measure of relief.
A “Thoughtfully Tailored’ Approach to Regulation
McWatters described the NCUA’s approach to regulation, saying the agency has become more transparent and more active in reducing regulatory burdens.
“We have enacted thoughtfully tailored and targeted rules aimed at the actual risks present by the credit union system to the Share Insurance Fund,” McWatters said. “I am pleased to report we have made substantial progress as an agency in a spirit of collegiality and collaboration.”
The many examples of this progress over the last five years, McWatters said, include:
- Closing the Temporary Corporate Credit Union Stabilization Fund, transferring its assets to bolster the Share Insurance Fund, and delivering a distribution of nearly $800 million to eligible credit unions;
- Restructuring the agency for greater efficiency and cost-effectiveness;
- Expanding stakeholder input, particularly on the agency’s annual budget; and
- Implementing new regulations, guidance, and initiatives in areas ranging from fields of membership to credit union governance, lending, and capital planning.
“Diligence, prudence, transparency, and respect for competing ideas have a practical effect,” McWatters said. “We will work and reason together with you to achieve those goals.”
Credit Unions and Community Banks
McWatters expanded on his point of working and reasoning together by discussing credit union and community bank mergers.
“It is worth considering whether credit unions and community banks could benefit from a ‘come now, and let us reason together’ approach,” he said.
McWatters discussed misperceptions that have arisen, in large part over bankers’ objections to the credit unions’ statutory federal tax exemption, about the purpose and the result of the relatively small number of transactions each year where credit unions acquire bank assets or liabilities.
“We should remain mindful that it is not intellectually possible to discuss the credit union tax exemption in a fair-minded and objective manner without acknowledging the additional statutory restrictions placed on credit unions and the absence of such restrictions on community banks, notwithstanding their ability to avoid corporate-level taxation by making a taxpayer-subsidized Subchapter S election,” McWatters said.
The transactions between credit unions and banks, he added, are business decisions between the parties.
“These transactions reflect market forces and are negotiated in an arm’s-length manner,” McWatters said. “The NCUA should respect the independent, market-driven decisions of the interested parties, unless safety and soundness, consumer protection, and related matters indicate to the contrary.”
Avoid Dropping the Basket
Noting that his 40-year career has seen several financial crises, including the most severe economic downturn since the Great Depression, McWatters discussed the importance of adequate liquidity and capital and the necessity of avoiding concentration risk.
While credit unions did not trigger these crises, he noted, they were not completely insulated from the effects.
“Each of these events was caused, in substantial part, by the over-concentration of banking and other financial assets in narrowly circumscribed areas of lending and investment,” McWatters said. “Simply put, the banking and financial communities stuffed too many eggs in one basket and then proceeded to drop the basket.”
Surviving a crisis depends on have adequate liquidity and capital levels, McWatters said. Liquidity allows an institution to pay its bills; capital provides a buffer against declining asset values. McWatters advised credit unions to avoid over-concentration in lending and investments, maintain strong internal controls, anticipate cybersecurity threats, and “hire people you trust implicitly.”