As Prepared for Delivery on August 12, 2021
Thank you, Tony for that generous introduction, and good morning everyone!
After participating in countless virtual events throughout what has been a truly extraordinary and unprecedented year-and-a-half, it is wonderful to be here and to see all of you, live and in-person. In fact, this is my first in-person event since the 2020 GAC.
I am grateful to Tony and his team for the invitation to discuss the state of the credit union industry and to provide a brief update on the NCUA’s programs and initiatives.
State of the Industry
I will begin by noting the credit union system has remained on solid footing in 2020 and into the first half of 2021, despite the pandemic and its resulting decrease in economic activity.
In the first quarter of the year, federally insured credit unions saw strong net income, steady loan growth, and lower delinquency rates. Credit unions continued to see compressed margins due to low interest rates, and as expected, economic stimulus payments drove growth in insured shares, ultimately contributing to lower net worth levels across the credit union system. Yet, credit unions overall have weathered the pandemic well and remain well-capitalized.
Economic conditions have steadily improved in recent months, and the outlook for the remainder of the year and into early 2022 is favorable. But, I must caution everyone that we are not out of the woods just yet. Credit union performance will continue to be shaped by the fallout from the pandemic and its financial and economic disruptions. With pandemic-relief efforts like supplemental unemployment benefits, foreclosure prevention programs, and eviction moratoriums coming to an end, many households could face financial stress in the coming weeks and months. This could lead to higher delinquency and charge-off rates and potential losses for credit unions — and even failures.
Additionally, an uncertain interest rate environment and the potential for continued elevated insured share growth place additional stress on credit union capital levels. The NCUA is actively monitoring economic conditions and assessing these and other risks to credit unions, their members, and the Share Insurance Fund. Accordingly, credit unions should pay careful attention to capital, asset quality, earnings, and liquidity.
Working with Members and Overdrafts
It is also important that you continue to focus on the needs of your members and continue to work with those affected by the pandemic. Millions of Americans are still experiencing financial struggles, which affect their ability to cover bills and purchase essentials. Many of those attempting to stretch their budgets may wind up overdrawing their accounts and paying significant overdraft fees.
In my view, the overdraft fee practices of some federal credit unions are fundamentally detrimental to members and inconsistent with the definition of ‘federal credit union’ in the Federal Credit Union Act: ‘a cooperative association organized ... for the purpose of promoting thrift among its members and creating a source of credit for provident or productive purposes.’ Overdraft fee programs can make it harder for members to regain their financial footing, and households hit by persistent overdraft fees often have their checking accounts closed. This, together with Black and Hispanic consumers being disproportionately harmed by overdraft fees, leads to financial exclusion, not financial inclusion.
The pain for these communities is real. That’s why I am pleased to see credit unions and other financial institutions stepping up to eliminate or significantly decrease their overdraft fees. I encourage more credit unions to do the same so that we can help credit union members who are in harm’s way.
Improvements to the NCUA’s Examination Program
Just as the world and credit union industry changes, the NCUA must adopt new tools that allow us to be more forward-looking with our analysis and better focused on risks when conducting our supervisory activities.
That is exactly what the agency is doing through the deployment of MERIT and its associated systems, which together will modernize the agency’s examination, data collection, and reporting efforts. As we start using MERIT, we will discontinue using AIRES, the examination system that has served the agency well over the last quarter of a century.
But much has happened technologically since 1995 when AIRES was first deployed, and when we were all excited about the relatively new “electronic skip protection” on our portable CD players and, of course, 500 free hours of America Online. Broadband, wi-fi, cloud computing, smartphones, tablets, and virtual assistants, not to mention online banking, cryptocurrency, and fintech, have all come into being during the last 25 years. And, each of these tools has profoundly altered the way we live, regulate, and conduct personal financial transactions.
Likewise, much has changed throughout the credit union industry since 1995. Twenty-five years ago, credit unions served nearly 67 million members. Today, that figure has more than doubled to almost 126 million members. And, in the 1990s, many credit unions were making the transition to greater automation and electronic records. Some were even taking their first steps on the internet using dial-up technology to meet their members’ financial needs. In contrast, today’s sophisticated credit unions provide remote deposit capture, online banking, and mobile apps to their members, and they have even begun to deploy machine learning and other forms of artificial intelligence in their operations.
With so many changes in the way that credit unions and the NCUA operate taking place since 1995, it makes sense that MERIT is completely different than AIRES from a technological and operational perspective. MERIT will change everything we do in examinations, from how we manage workflow and request documents, to how we evaluate a credit union’s performance and prepare and deliver exam reports. MERIT will also provide us new analytical capabilities that both examiners and credit unions will appreciate.
Diversity, Equity & Inclusion
Lastly, I want to say a few words about the principles of diversity, equity and inclusion, which are vital to the continued health and success of the credit union system.
Over the last several decades, numerous studies have shown that organizations that prioritize the creation of a more diverse and inclusive workplace experience:
- greater staff motivation;
- better, and more creative problem-solving;
- improved customer service, innovation, and decision-making; and
- higher employee retention.
All of these lead to greater efficiencies and better financial performance. Unfortunately, far too often organizations treat diversity as simply a “human resources” issue. To be truly effective, diversity and inclusion requires a commitment to cultural change at every level and must extend throughout the entire organization, beginning at the staff level, then extending to the C-suite, and ultimately, its board.
For the financial services industry in particular, diversity is vital when it comes to reaching and serving a wider range of people. Simply put, members of credit unions want people on staff who look like them.
Similarly, the military needs soldiers, sailors, airmen and Marines who represent the diversity of America. Indeed, the Department of Defense has been at the forefront of social change starting with desegregation of the military in 1948. Over the past few decades, we have witnessed rapid changes in policies regarding diversity, equity, and inclusion in the military, especially towards women serving in combat roles, and the inclusion of LGBTQ+ individuals in our troops. The result is a more diverse Armed Forces, which has the potential to be more efficient and flexible, and able to meet a broader set of challenges.
Beyond diversity and inclusion, though, we need economic equity and justice, which will help ease the financial impact of COVID-19 and systemic racism on communities of color. By enhancing support for Minority Depository Institutions, enforcing fair lending laws, and advancing initiatives to close the wealth gap, we can address the disparities created by centuries of systemic discrimination and exacerbated by the pandemic. Additionally, we can ensure that the cooperative nature of the credit union system lives up to its mission of meeting the credit and savings needs of consumers, especially those of modest means. And, the result will be a more vibrant economic outcome for everyone in society.
The Army has a great saying: “Diversity is the Force. Equity is the Goal. Inclusion is the Way.” I love that statement, because each one of us has an obligation to address these issues directly and chart a better course for the future of the credit union system and our country.
Let me close, then, by encouraging all of you to stay focused on serving your members. They will remember who supported them during their times of need, and that loyalty will lead to better earnings in the future. In serving everyone, your credit union, your members, your communities, and our nation will be better for it.