As Prepared for Delivery on September 10, 2019
Thank you very much for that kind introduction. It’s my great pleasure to join you today.
One advantage we have today is that this doesn’t have to be a “getting to know you” session. Since I’ve served on the NCUA Board previously, we have a history together. I know many of you, and you know me. Which means we can save some time on introductions and pleasantries.
I was sworn in as Chairman in April, which means I’ve been in this position almost for five months. I wanted to give you a brief overview of what we’ve done in that time, and more importantly, where we’re headed in the years to come.
So I’d like to approach this from the perspective of
- First, what we’re doing at the NCUA to ensure the safety and soundness of the industry while giving you the flexibility you need to provide the highest levels of service to your members;
- Second, what you need to be doing to respond to changes in the industry and to prepare for the future;
- And finally, what we should be doing together to extend the credit union industry’s promise of financial inclusion more widely.
What you’ll see in each of these areas is that my goal is to support and expand upon the credit union industry’s long commitment of people helping people. That is the core value that serves as the foundation of everything we do, and it’s foremost on my mind with every decision I make at NCUA.
What NCUA Is Doing
First, I’ll start with what we’re doing at the NCUA. As always, our paramount responsibility is to ensure the safe and sound operation of federally insured credit unions. That’s our top job as a regulatory agency, and we will continue to build upon the strong system of rules and supervisory programs that are in place. Those rules are vitally important to maintain confidence, fairness, and accountability.
At the same time, we need to make sure our rules and supervisory programs achieve their intended results in the least burdensome way possible.
That’s why my regulatory philosophy has always been that regulation must be effective, but not excessive. I believe we need to be realistic about regulatory and compliance burdens. And we need to relieve those burdens, when and where it makes sense, so your institutions can compete more effectively in a dynamic and changing marketplace.
The NCUA has been working steadily to take a closer look at rules that are outmoded, ineffective, or unduly burdensome. That means modifying, updating, or in some cases, eliminating regulations that may no longer fit today’s financial system.
Under President Trump’s leadership, the NCUA has developed and is acting on a comprehensive and ambitious regulatory reform agenda. We’re cutting red tape and enacting other changes that allow credit unions to provide more financial services to small businesses and a broader range of consumers, especially those in rural and low-income communities.
With respect to modernizing our rules, we’ve made some positive steps in recent months. For example:
- We’ve increased the threshold on appraisal requirements for commercial property from $250,000 to $1 million.
- We’ve proposed an increase to the limit on non-member deposits, which will provide credit unions with significant additional flexibility in managing their funding sources.
- We’ve issued interim guidance, the first of any federal banking regulator, on doing business with the legal hemp industry in an effort to give your institutions some clarity and flexibility that will help you to respond to changes in the law for this exciting new industry in rural America.
- And we’ve proposed to delay the risk-based capital rule for two years, so that we can explore improvements to it.
And we have much more to come. For example, by the end of the year, I plan to bring before the Board a proposed rule to allow subordinated debt to be counted as regulatory capital for a broader range of credit unions.
Meanwhile, I’m sure all of you saw the report on the Wall Street Journal last week about credit unions acquiring small banks. It’s still a relatively small number of transactions by any standard. Right now, the NCUA must approve these transactions, as does the FDIC for these identical transactions. Data suggest these are generally smaller institutions with lower profitability before the transactions occurred. If it makes it possible for a local financial institution to keep its doors open, then we must consider this factor. I am a strong believer in the free market, and one of my priorities is to be forward thinking. Later this year, I plan for the NCUA to consider a rulemaking on this issue to add even more transparency to the process.
And I am delighted to announce the agency’s General Counsel has determined the NCUA Board has the authority to phase-in the effects of FASB’s current expected credit losses accounting standard, or CECL, on credit union net worth ratios. This will go a long way toward providing relief to credit unions that could see relatively large increases to their loan loss reserves when the new accounting standard becomes effective.
While we are on the subject, I know many of you are also concerned about the operational burdens associated with CECL. The NCUA and other banking agencies have been working with the Financial Accounting Standards Board to provide clarifications and training on practical methods for credit unions and community banks to calculate estimates under CECL. FASB has provided simplified options that would be acceptable to estimate allowances for less-complex financial asset pools.
In particular, I want to thank FASB for listening to our concerns and issuing a second question and answer document that recognizes that “reasonable and supportable forecasts” required by CECL can be scaled to the size and complexity of the institution and do not necessarily require modeling or economic forecasting. We will continue to work with our partners to provide information and training on these new standards.
We’re also looking at ways we can modernize our supervisory programs. We have a project underway to update our legacy examination system. Our new system, called MERIT, will greatly improve the agency’s capabilities. It will incorporate streamlined processes, improved analytical capabilities, and other efficiency improvements.
We also are in the process of modernizing the Call Report. We have developed a streamlined and much-better-organized report. We will be adopting this modernized version when we replace the system’s underlying legacy technology, which will also provide an enhanced user experience.
Our goal is to create a streamlined and modernized regulatory and supervisory system that encourages innovation, provides flexibility, and fulfills our primary mission of protecting safety and soundness. We’re trying to take prudent steps to balance the needs of the industry, the needs of your members, and the realities of the financial system as a whole.
It is all in service to a shared goal: we all want the credit union system to grow, to thrive, and to continue serving your members and your communities while ensuring the confidence and accountability that come from smart, effective regulation.
What Credit Unions Need to Be Doing
Second, I’d like to focus on what the industry needs to be doing, given what we see in the economy. I know that we are all looking closely at some of the financial pressures credit unions are experiencing. Credit unions overall have enjoyed solid share growth, a reflection of the high-quality service you provide. Loan growth over the last several years has been very strong, also reflecting the value of credit unions to consumers, and has consistently outpaced share growth.
However, this trend can create liquidity risk for some credit unions, so we will need to keep an eye on this. Also, low-interest rates and a flat yield curve may put pressure on some credit unions’ earnings.
Because of this, credit unions should avoid the temptation to take potentially undue risk, such as credit risk, to offset the impact of low interest rates on your earnings.
We will pay particular attention to credit unions that heavily concentrate in particular asset classes. Credit unions with highly specialized business models need to have very strong capital and liquidity levels and best-in-class risk-management and monitoring approaches.
In terms of other supervisory priorities, we need for you all to continue to be vigilant in complying with the Bank Secrecy Act and anti-money laundering laws. These laws are as critical as they’ve ever been, and you all are on the front lines of ensuring that our financial institutions aren’t exploited as an avenue for illicit financing.
And of course, you all are working hard to keep up with the shifting demands that technology has wrought upon this industry. Cybersecurity is a top priority both for you and for us at the NCUA; I know it’s something that keeps me up at night. So, keep working to protect your members’ data and to harden your systems against the threat of a costly data breach.
But as you well know, technology is more than a security threat. It’s also an opportunity, in the form of financial technology.
We can go down the list: mobile banking, digital payments, artificial intelligence, data aggregation, and whatever may come next. We know these trends are going to change the way you engage with your members, the way you analyze lending risk, and the way you market and deliver your products and services. You’re certainly not alone in facing these challenges. These technological changes are creating challenges for regulators, as well. So, we all need to be prepared.
What I want to emphasize when I talk about these challenges is that we should not approach them as things to be feared or avoided. Instead, we should view them as opportunities to serve your members, your employees, and your communities even more effectively.
What We Can Work On Together
Finally, I’d like to touch on what we can be doing together to continue moving this industry forward and to continue responding to the needs of your members and communities.
One of my top priorities has been to focus more energy on what the industry can do to encourage greater financial inclusion for underserved communities. We all know that in many parts of our nation, it has gotten harder for people to get the financial services they need.
Certainly, in rural America, where so many financial institutions have shut their doors over the last decade, credit unions should be in the position to extend lending and other services that will provide these communities with the oxygen they need to survive. We need fresh thinking on how to address the needs of those communities.
The recent D.C. Court of Appeals’ decision upholding our field-of-membership rule was welcomed news. I believe this decision was absolutely the right thing to help your institutions to grow and to reach more potential members in rural and underserved areas. We’ll continue working on the phased implementation of this rule, but the D.C. Circuit Court’s decision is a significant step forward.
These are issues I spend a great deal of time thinking about, and my great hope is that they are things we can work together to address. Because reaching these underserved communities is a critical part of credit unions’ historical mission.
In June, we marked the 85th anniversary of the signing of the Federal Credit Union Act. This industry, which serves more than 118 million members and holds assets of more than $1.5 trillion, has come a long way in those 85 years. That’s a success story we should all be proud of.
But the question is: What’s the next chapter? What story will we tell in 15 years, when we mark the 100th anniversary of the Federal Credit Union Act? Many of the decisions we all make today will be reverberating then.
The industrialist Henry Ford once observed that, “coming together is a beginning; keeping together is progress; and working together is success.”
Our challenge now should be to determine the best ways to keep the industry’s record of success going, so as to set us on the right course for the future.
Most importantly, this industry’s future success lies with staying true to the values the credit union system was founded upon, and where I began my remarks today: the commitment to people helping people by fostering greater financial inclusion, accessibility, and opportunity for all Americans. I look forward to working with you to advance those values. Thank you very much.