NCUA Board Member Todd M. Harper delivers his remarks remotely during the Credit Union Business Group's National Business Services Conference on Oct. 29, 2020.
As Prepared for Delivery on October 29, 2020
Opening Comments
Thank you for the kind introduction and to everyone joining this conference by video. Your work as financial first responders on the frontlines of the COVID-19 pandemic is protecting the financial and economic health of more than 122 million members of federally insured credit unions and ensuring the survival of many small businesses around the country.
Today, I want to put the financial fallout of the pandemic in context by discussing the state of our economy, highlighting some of the NCUA’s new priorities and actions in response to the pandemic, and reviewing emerging risks for federally insured credit unions. I also want to review why we must stay sharply focused on matters of diversity, equity and inclusion and advance economic equality and justice within the credit union system.
Economic Overview
Without question, the recent economic news has been sobering. The precautions needed to combat the spread of COVID-19 have caused economic activity to plummet and layoffs to surge. In all, more than 80 million Americans have filed for unemployment since the start of the pandemic. And, millions of American small businesses have suffered considerably since the start of the pandemic with many shutting their doors for good.
Although the evidence now shows the economy may be recovering with today’s announced quarterly GDP growth, there is still a tremendous amount of uncertainty, as demonstrated by yesterday’s market selloff and the steeply rising COVID-19 caseloads across the country, especially in the Upper Midwest, and in Europe. Additionally, the positive trends appear to be slowing now that the benefits of the federal stimulus have begun to fade.
Overall, the current recession is shaping up to be the most severe since the Great Depression. In the best-case scenario, forecasters currently predict the economy will not return to its pre-pandemic output level until late 2021, and it will take considerably longer for employment to recover. Going forward, much will depend on the progression of the virus, testing capabilities, the availability of a vaccine and public acceptance of mitigation efforts to slow the spread of COVID-19, but the risk of a prolonged period of economic weakness is high.
It, therefore, comes as no surprise that credit unions are already facing a more difficult environment than they have in many years. The industry’s net worth ratio declined by 91 basis points to 10.46 percent in the first half of 2020. And, the system’s return on average assets fell by more than a third to 57 basis points over the same timeframe. Credit union performance is likely to continue to deteriorate in the months ahead.
At the end of the second quarter, the industry’s year-over-year delinquency rate had declined by just five basis points to 58 basis points. This rate, however, is clouded by the congressionally imposed forbearance policies contained in the CARES Act. Over the same timeframe, the industry’s commercial delinquency rate jumped by about 25 percent to 86 basis points. NCUA’s examiners will watch these metrics closely. You should, too.
While much of the economic outlook appears daunting, there is at least one bright spot: The U.S. housing market has held up fairly well. Home sales remain strong, and we have experienced elevated loan demand driven by mortgage refinancing activity.
It is also worth noting that consumers’ equity in their homes is much higher than during the 2008 financial crisis. While not ideal, that equity provides consumers with a lifeline in case they cannot return to work quickly and need to tap into the value of their homes to cover living expenses. In the event of loan defaults, that equity will also protect credit unions from losses on their mortgage portfolios, which now make up half of all loans within the system.
NCUA’s Priorities
As the COVID-19 pandemic has unfolded, the NCUA has focused on three priorities. Our first priority is to protect the health and safety of NCUA staff and contractors, so that we can maintain our ability to perform the agency’s mission and complete its essential functions.
Our second priority is assessing the impact of COVID-19 on credit union members and operations. The NCUA has a dedicated webpage at ncua.gov/coronavirus, and we have generally found that federally insured credit unions are open, lending and serving their members.
Our third priority is to assess how COVID-19 will affect the financial condition of credit unions and the Share Insurance Fund going forward.
To protect the fund, we are already actively monitoring certain sectors of the credit union system, including credit unions closely connected to the oil and gas, agricultural, leisure and hospitality sectors. We are also focusing on credit unions with elevated risks, such as those with large commercial real estate portfolios. Our work will safeguard member deposits and preserve their financial providers of choice. It also protects the employees who work at credit unions.
One thing that seems likely is that, as during past recessions, credit union performance will lag the unemployment rate by one to two years. The national unemployment rate peaked at 14.7 percent in April. Today, the rate stands at 7.9 percent, but it is even higher for Black and Hispanic workers. What is more, the U6 unemployment rate — which includes the unemployed, the underemployed and workers who have dropped out of the workforce but who still want a job — stood at 12.8 percent in September. That means one in eight workers nationwide are without work or working less than they want.
We, therefore, should expect declines in the industry’s composite CAMEL ratings to begin in the next few quarters. Your credit union management teams and boards should pay careful attention to capital, asset quality, earnings and liquidity and act quickly to mitigate problems.
And, when problems occur, do not kick the can down the road. Your credit union should heed the timeless advice of the first loss often being the best loss.
Share Insurance Fund Performance
With respect to the Share Insurance Fund, the NCUA is actively modeling the effects of the dramatic rise in assets, falling loan demand, compressed earnings and subdued consumer confidence. We must all prepare for increased member delinquencies, loan defaults, consumer and business bankruptcies and even credit union failures.
At September’s NCUA Board meeting, we learned that the Share Insurance Fund equity ratio fell 13 basis points during the first half of the year to 1.22 percent, just a thin hair’s width of two basis points above the statutory trigger requiring the adoption of a restoration plan. While the ratio should bounce back before the end of the year, there are still many moving parts and great economic uncertainty. The NCUA, therefore, must be prepared to charge a Share Insurance Fund premium, should events warrant.
That said, I recognize that charging premiums during the midst of an economic downturn is less than optimal. Accordingly, I believe the NCUA should work with Congress after this crisis to modify the Share Insurance Fund’s operations. Doing so would create a countercyclical stance to allow for the accumulation of greater reserves during good times to cover losses in bad times.
Central Liquidity Facility Growth
Liquidity risk is another issue I am closely monitoring, especially after the federal government’s stimulus efforts stop.
Disruptions in financial markets can quickly turn into liquidity shortfalls. Because credit unions need to have access to liquidity when other parts of our economy freeze up, in mid-March I called upon the NCUA to seek legislation to enhance the capacity and powers of the Central Liquidity Facility. Congress acted quickly to adopt those temporary enhancements as part of the CARES Act at the end of March, and the NCUA Board swiftly approved a rule to implement these reforms. Because of these changes, the facility’s capacity to lend has grown more than fourfold to $32.6 billion since the start of the year.
I strongly encourage all consumer credit unions that do not already belong, or have access to an agent for the Central Liquidity Facility, to join as soon as possible. By joining, you will be demonstrating the best of the cooperative nature of the credit union movement. To learn more about and how to join, go to ncua.gov/CLF.
Other NCUA Responses
As the COVID-19 pandemic has progressed, the NCUA has actively worked to protect credit union members, provide regulatory relief, and inform credit unions about potential economic problems and financial sector developments. In just seven months, the agency has issued more than two dozen communications to credit unions.
One of these letters provided assurance that the NCUA’s examiners will not penalize your efforts to provide prudent relief for members when a credit union conducts such efforts in a reasonable manner, with proper controls and management oversight. Another letter outlined the NCUA’s offsite supervisory and examination approach for the duration of the pandemic. We have also made it easier for federal credit unions to hold virtual annual meetings.
Additionally, with my support, the NCUA Board adopted a rule to amend the prompt corrective action requirements in two ways. The first of these amendments waives the earnings transfer requirement for credit unions that fall from well capitalized to adequately capitalized because of deposit inflows. The second change creates a streamlined net worth restoration plan for credit unions that become undercapitalized because of an inflow of shares. Both the earnings transfer waiver and the net worth restoration plan provisions will expire at the end of 2020.
Paycheck Protection Program
Through the Paycheck Protection Program, credit unions have worked to save tens of thousands of jobs. That is why I voted for the NCUA Board’s interim final rule to ease regulatory burdens and capital requirements for credit unions making these loans.
The size of these credit union PPP loans has varied greatly with the largest exceeding $5 million. In contrast, the smallest credit union PPP loan of which I know was for just $627. At a reimbursement fee of 5 percent, that credit union made less than $32 on the transaction.
Focusing more broadly on PPP loans of $150,000 or less, credit unions made nearly 194,000 loans totaling nearly $4.9 billion through the Paycheck Protection Program. Full-service restaurants were the top recipients of credit union PPP loans. As a whole, credit unions concentrated their lending to religious organizations, real estate and insurance brokers, plumbers and HVAC contractors. In contrast, banks tended to focus more on serving doctors, dentists and lawyers for PPP loans of $150,000 or less.
While this financial support for non-profits, professionals, contractors and entrepreneurs is admirable, these loans were unevenly distributed. Because Black-, Hispanic-, Latino-, and Asian-owned businesses had greater difficulties in accessing PPP forgivable loans, these communities have suffered greater economic losses during the pandemic. That is one reason why I want to address the issues of economic equality and justice before closing my remarks.
Economic Equality and Justice
Diversity, equity and inclusion are necessary for the success of the credit union system and increasingly vital to strategy, sustainable growth, innovation, talent acquisition and employee retention. Diversity, equity and inclusion not only elevate the NCUA’s ability to better understand and supervise credit unions, but also increase a credit union’s ability to add members and create new products.
The COVID-19 pandemic-induced health and economic crises, the recent killings of George Floyd in Minnesota and far too many other Black men and women nationwide, and the ongoing coast-to-coast Black Lives Matter protests have shown once again that communities of color bear many burdens white communities do not. The NCUA and credit unions have an important role to play in assisting these historically under-resourced populations.
At the NCUA, we need to take concrete steps to advance economic equality and justice by:
- maintaining and building diverse and inclusive workforces and supplier chains at the NCUA and throughout the credit union system,
- enhancing support for minority depository institutions,
- enforcing fair lending laws, and
- advancing initiatives to close the wealth gap.
As for credit unions, research has shown that there are three primary ways to close the wealth gap. One way is to open and regularly fund a retirement account. Another way is to own a home. And, the third way is to start a business.
The COVID-19 pandemic has harmed minority-owned businesses considerably more than white-owned businesses. According to a report by the New York Federal Reserve Bank, the number of active business owners fell by 22 percent from February to April. While the number of white-owned businesses dropped 17 percent, the figures fell for Asian business owners by 26 percent, Hispanic and Latino owners by 32 percent and Black small businesses by 41 percent.
Given the people-helping-people philosophy at the core of the credit union movement, credit unions have a moral obligation to step up and help minority-owned businesses to recover and start anew in the months ahead. Depository institutions of all charter types — banks, thrifts and credit union — need to do better than they did in making PPP loans. Therefore, my challenge for you today is to find ways to make more member business loans to people of color and within neighborhoods of color. Your efforts will be vital to ensuring a more equitable recovery of our economy from the COVID-19 pandemic.
One very good place for your credit union to begin its investment in diversity, equity and inclusion is the diversity self-assessment available at cudiversity.ncua.gov. Credit unions have used this tool to establish a baseline for action, such as the commitment to develop new products and services aimed at addressing the needs of communities of color, increasing investment in underserved areas and improving community marketing and outreach.
Ultimately, the NCUA and credit unions must do all they can to advance economic equality and justice. In doing so, we will demonstrate that Black lives matter to all of us.
Closing Comments
In closing, the NCUA will continue to focus on protecting credit union members and ensuring the safety and soundness of the credit union system during the COVID-19 pandemic and the subsequent economic fallout.
In return, we need you to stay focused on serving your members, including minority-owned businesses and members of color who want to start businesses. They will remember who supported them during their times of need. That loyalty not only will lead to better earnings in the future, but your efforts should also facilitate the strength of the recovery in all communities.
Thank you again for inviting me. I look forward to your questions.