Credit Union Exam Solutions Presents With Flying Colors

Speaker: Hey everyone, this is Mark T
Trike with another episode of With Flying

Colors Again, flying solo here today.

So I saw an article in the Wall
Street Journal which caught my

attention, and that's what I'm
gonna be talking about here today.

And I'll just say it's not often
that I agree with the big banks in

America, but I do in this instance.

And it's not often that I disagree
with politicians when you have the

DS and the R'S agreeing on something,
which doesn't happen very often.

So with that.

I'm going to jump into the Wall
Street Journal article that I saw

this morning, which is big banks are
fighting a new $10 million FDIC cap.

So that's where I agree with the
big back banks and what they're

fighting and why I fight it is I
think it would be very bad for credit

unions if that got put in place.

And I'll walk through the
article and I'll explain why.

An increase in the insured.

Insured deposits to $10 million at FDIC,
I think would be bad for credit unions.

So the sub headline is Scott
Bessett and Elizabeth Warren want

to raise the deposit insurance cap.

A Senate bill proposes a 40 fold increase,
so 40 fold would be 250 K to 10 million.

Here's the article.

In a nightmare scenario for the
nation's biggest bank banks, treasury

Secretary Scott Bassett and Senator
Elizabeth Warren, Democrat from

Massachusetts both want to raise the
$250,000 limit on uninsured shares.

That unlikely alliance is boosting
efforts from mid-size banks that argue

higher caps would help deter Rapid
bank runs like those seen during the

2023 failures of Silicon Valley Bank.

Signature Bank.

Their efforts have helped spark a
Senate bill that proposes raising

the insurance limit to as much as
$10 million for certain accounts.

For the biggest banks, which are
the primary funders of the FDIC

corporation, a cap of that size
would come with a hefty price tag.

Deposit insurance has proved a
dilemma for banks, regulators.

And lawmakers.

While 250 K is a lot for a consumer
account, many businesses were holding

far more in accounts at Silicon Valley
Bank and raced to pull their money out.

Fearing they would lose it in the event
of a collapse, but increasing the limit

risks emboldening banks and depositors to
take more risks and could make financial

crises much more costly for the FDIC.

Banks backstop.

The FDIC deposit insurance
funds, not taxpayers.

They pay quarterly, quarterly
premiums and special assessments.

If the FDIC fund needs to be re
topped after a failure, their

contributions are largely determined
by their size and riskiness.

In late 2023, big banks reported
collectively paying more than

$9 billion to replenish the
FDA's deposit insurance fund.

With JP Morgan Chase funding 2.9

billion and Bank of America ponying up 2.1

billion.

Smaller banks also contributed,
but in smaller amounts,

despite their chunky payments.

Big banks were largely seen as the winners
of the 2023 crisis since deposits shifted

from the regional banks into their vaults.

That has driven a renewed
interest in insurance reform

with Bessant Warren and others.

Viewing a raise to the cap as a way of
providing a critical bulwark for smaller

banks as behemoths like JP Morgan have
come to dominate the playing field under

the Senate bill Co-sponsored by Senators
Bill Haggerty and Angela also Brooks.

The $10 million limit would only apply
to the type of accounts that the set

at the center of the 2023 bank runs are
those typically used by businesses for

payroll and other operational expenses.

Silicon Valley Bank, which catered
to technology, startups and high net

worth venture capitalists, held a
high number of so-called non-interest

bearing transaction accounts.

In the lead up to the crisis, more than
94% of the bank's deposits were uninsured.

Shortly after the bank's failure,
the government government announced

that it would be making an exception
to the insurance policy and, and

would make all depositors whole.

In an effort to stop the crisis
from spreading to other banks, the

largest banks would be eligible
for the additional insurance.

Those types of accounts under the proposed
bill, but would still have access to the

250,000 max payouts for all accounts.

We wanna, we want to get back to a
level playing field, Bassen said at a

conference on community banking at the
Federal Reserve earlier this month.

While he hasn't endorsed any
specific legislation, the Treasury

Secretary has been pushing the
Senate to advance the Haggerty.

Also, Brooks Bill.

Some regional banks saw their share of
the country's deposits decrease during

the 2023 crisis as businesses fled
to the safety of larger institutions

perceived to be too big to fail.

Smaller community banks
have also been on the ropes.

The number of community banks
in the US has declined by

about 45% for 45% since 2020.

But editorial comment.

About the same amount of
reduction in credit unions.

Raising the limit for transaction
accounts would help smaller banks compete

and would also require big banks to
start paying for some of this insurance

coverage that they've implicitly.

Been receiving for free.

Senator Warren has said the sudden
emergence of a bipartisan push to

raise the limit more than two years
after Silicon Valley Bank's failure has

caught some in the industry by surprise.

The last raise to the insurance
cap, which occurred in response

to the 2008 financial crisis.

Was from a hundred thousand.

Big banks have so far been sharply
critical of the Senate bill and

have questioned the rationale
for the $10 million figure.

A massive expansion of FDIC insurance
is unwarranted and would do little to

improve the fundamental determinants
of bank safety and resilience.

Sean.

Campbell head of a policy research
at the Lobby Group Financial Services

Forum wrote, while midsize banks were
broadly supportive of the bill, community

Banks typically defined as a bank
with less than 10 billion in assets.

FYI just like credit unions.

Have been less uniform in their response.

The Independent Community Bankers
of America on October 14 said it was

endorsing the $10 million cap bill
after lawmakers added a provision

exempting community banks from
paying for any associated costs with

the, with the raise for 10 years.

But some community banks skeptical
of the proposal said Christopher

Williston, chief Executive Office.

Chief Executive of the Independent
Bankers Association of Texas, which counts

many smaller banks among its members on
member visits this month, Williston said

he asked about the deposit insurance
reform and found hardly anyone who

thought 10 million was the right number.

Some said 1 million, some or 2 million,
or maybe 5 million would be helpful.

Coming up with the right
number is tricky for lawmakers.

Regulators acknowledge that they have
limited data, which would assess.

With which to assess the size and
distribution of non-interest bearing

transaction accounts across the country.

The health and wellness of the deposit
insurance fund is something we should

make sure we don't lose sight of.

Williston said you're just talking
about more expensive bank failures.

Then there's a correction
in amplifications the

independent com community.

Bankers of America said it was Endor.

It was endorsing the Senate bill
with $10 million cap proposal.

An earlier version of this
article incorrectly said.

The Independent Community Bankers
Association made the endorsement.

Even the Wall Street Journal makes
mistakes, stakes, apparently.

Okay, so.

Back when Silicon Valley Bank and
Signature Bank imploded they ignored

the insured levels and then it
got real political and they bailed

them out with some phone calls over
the weekend to the the powers that

be at the Biden administration.

And Janet Yellen bailed them out, said
it wasn't a bailout, but bailed 'em out.

So now we've got both sides saying for
big business accounts checking accounts,

non-interest, bearing checking accounts,
those should have a $10 million.

Insurance about meaning that the, when
they failed, you'd still be paying those.

So the, a net effect would be
maybe there wouldn't have been a

run because they would've said,
oh, we have $10 million insurance.

And then they wouldn't have had to pull
the plug and, and say, Hey, we're gonna

give you insurance that doesn't exist.

But if that same thing, if 10 million
wasn't enough and you had a Silicon Valley

bank and everybody had a hundred million
and they had 98% uninsured deposits.

The treasury would cave and
the insurance fund would lose

the disciplines that it has.

Now, the other problem I have with
this is if the FDIC gets it, what

does, what do credit unions get, and
let's just say it happens to be in

these, these business type accounts?

Well, guess what?

Credit unions will lose
their business type accounts.

If the N-C-U-S-I-F doesn't have.

The matching insurance amount, right?

So well then you say, okay, let's go
get the matching insurance amount.

So the FDIC gets 10 million.

The trade groups run and say, Hey,
we need to have 10 million too.

Well what 10 million does that apply to?

Right?

So I did some simple math and if we,
and, and this is a big assumption I'm

making, but if we look at the data.

Roughly recently, rough justice 12% of
deposits in credit unions are uninsured,

which is a good thing compared to banks.

They don't have the big deposits.

If we assume that 90% of that 12% is
in business type accounts, which may

or may not be accurate, but just for
the sake of argument, let's say it's

90% of those 12%, that gets us to 10.8%

of that.

Of shares that would need to be insured.

Okay, so 12% times 90% is 10.8%.

If we look at the net operating level,
that NCO a's goal is, it's just 1.33

versus the current operating level of
the net of the N-C-S-I-F, which is 1.28.

If we inflated.

The sh the numerator and the denominator.

If we, if we inflated
the denominator by 10.8%.

Okay?

So for every dollar of insured shares in
the N-C-U-S-I-F, there is now $1 and 10.80

cents.

Credit unions would, would put
in a deposit of that amount.

To get so that their, their
required 1% was in the N-C-U-S-I-F.

The problem with that is N C's denominate
Numerator is the $1 that credit unions

put in plus 28 cents of retained earnings.

So 1.28,

that's where the operating level, the, the
current net operating level comes from.

So 1.28

divided by one is 1.28,

but if you have 1.28

divided by 1.108.

The current operating level falls to 1.1

5, 5 2 3.

Didn't round that.

So 1.16,

let's say that.

So the problem with that is that the
Federal Credit Union Act requires

where's the specifics I have on this?

So it would require a, the statutory
minimum of the N-C-O-S-I-F is 1.2%.

So falling to 1.15

would trigger a mandatory requirement
for NNC A to either assess a

premium or adopt a restoration plan.

Now again, the trade groups would
say, we don't want the full premium,

we need a restoration plan, and we
wanna get it back up to the required

level by a certain amount of time.

And my recollection is that NCUA.

Can only bring the ratio back to 1.25%

unless they decide that they wanna
go above that to get to the 1.33%,

which would get credit unions
and the trade group screaming.

So.

If NCUA if Congress was to ensure
credit union deposits up to the

10 million, and assume that 90% of
the 12% that are uninsured were in

the type of accounts that would be
insured, that would drop it to 1.15%.

Okay.

And NCOA is currently
saying via its most recent.

Operating level the
equity ratio was at 1.28,

as I said, and the normal
operating ratio is at 1.33%.

So if they kept the normal
operating ratio at 1.33%

and it dropped to 1.15%.

NCUA could do a premium backup to the 1.20

which then would leave no margin for air.

They could do a, a
assessment up to the 1.28

to get it back to where it was.

They could do it up to 1.3%,

but they can't go over the 1.3%.

Only above.

1.30

has to be the result of retained
earnings from the insurance fund.

So the reality is if this number goes up,
and if most of it was to be insured there

would be a big premium that would take
money out of your cash account at credit

unions and put it in to the N-C-O-S-I-F
deposit account, and which means you can't

borrow it out, you can't use it as your
cash, et cetera, et cetera, et cetera.

Not a good thing.

And if they don't get the number increased
for those types of accounts, then those

types of accounts would move to banks.

So again, my example was a, an
aggressive amount saying 90% of 'em

would be member business type accounts
and is probably closer to half of that

or a third of that, pick a number.

But it would impact the operating norm,
the equity ratio and would then put.

The equity ratio further away
from the normal operating level,

putting pressure on the board.

Currently the board of one, to
assess a premium or develop a plan.

And again, that gets really, really
political when that all plays out.

So in the final analysis, I think the
10 million sounds good to Bassett..

It sounds good to Elizabeth Warren.

But I think it's more lipstick on
a pig because I think 'cause a, a

failure comes along in a Silicon
Valley bank type institution, you're

gonna have a council over 10 million.

Those, a council over 10 million are
gonna scream bloody murder to their

friends in DC and then voila, they're
gonna cover it over the limit anyway.

So if that's the case.

Why increase it?

I would be much more supportive
of something that puts a cost of

living increase or a cost of deposit
insurance, increase that if a dollar

today is worth a dollar and then
going forward with inflation in five

years, a dollar is a dollar five.

I would say that a $250,000
limit should go up.

By 5% that, that makes more sense
to me than this jump from 250 to 10

million and without it with, without
changing the rules for credit unions.

At the same time, you have the haves
being the FDIC insured banks and

the have nots being credit unions.

But then when you do it, you gotta
look the reality in the face and

what that does to the insurance fund.

And the politics of that
gets real ugly real quick.

All right that's all I've
got on that topic for today.

There were a couple other
things I wrote down.

There was also an article in the
Wall Street Journal I posted on,

on LinkedIn about the repo man
saying repos are going through the

roof, which is not a good sign.

And I also saw articles that were
touting how good credit unions

were handling giving interest rate
loans to their members due to the

federal government shutdown which
was getting some really good coverage

on Capitol Hill, which is, you know,
showing the credit union difference.

So that's cool.

Those credit unions that are
out there, some of them I, I

know quite well are doing that.

I, I really.

Appreciate that as it's good
anecdotal evidence that credit

unions are, are doing a good job.

Alright, that's it.

This is Mark reel signing
off with flying colors.

I hope you will listen again soon, and
I thank you for listening or watching.

As always, thanks again.