“Empowering Regulation: Helping Firms to Meet the Needs of Society”
As Prepared for Delivery on May 3, 2023
Good morning! It’s a great pleasure to join you today. While I’ve made many visits to the United Kingdom over the years, this is my first trip to Liverpool. It’s especially exciting to be here at a time of such great historical import for the United Kingdom. I consider it a great stroke of luck that my visit should coincide with the first royal coronation in more than seven decades.
And while we’re marking notable changes in leadership, I’d like to extend my warm congratulations to BSA’s incoming chair Rob Pheasey. We’ve enjoyed a great working relationship with his predecessor, Mark Bogard, and I’m sure that will continue. So that gives us yet another reason to celebrate.
I want to discuss some critical issues facing the financial services industry in today’s extremely challenging environment. In so doing, I hope to be able to share some pertinent insights and ideas about the cooperative finance industry in my country. Moreover, I hope to gain some valuable insights and ideas about the industry here in the UK that I can take back to the United States.
As a preamble, I will emphasize I am speaking in my individual capacity as a regulator, not as an industry representative or booster. I am one of three members of the Board of the National Credit Union Administration, the independent regulatory agency that oversees the U.S. system of federally insured credit unions. I served as chairman of the Board from 2019 to 2021. This is my second term on the Board, having served previously as an NCUA Board member from 2005–2009.
And on top of my service as a regulator, I have spent more than three decades working in or around the financial services industry, working for several of the largest financial institutions, with periodic service in appointed government positions along the way.
So, while I seek to maintain a disinterested posture as a regulator, my career experience reflects my strong interest in a financial services sector that is healthy and well-functioning as well as a strong belief that finance can and should be, a constructive and beneficial force in our society.
A Time of Turmoil
But looking around today, many people are concerned by what we see around us. We’ve all seen the turmoil in the banking sector reflected in the news headlines lately. In just the last couple of months, we’ve seen reports about notable failures or scandals at Silicon Valley Bank, Signature Bank, First Republic, and Credit Suisse, with other institutions facing additional challenges.
Meanwhile, in the United States, while consumer spending, hiring, and other metrics continue to be strong, there remains a threat of recession, and the International Monetary Fund has warned of a recession risk globally. So, there’s understandable anxiety about what might be next, and I regularly field questions from people about whether we’re going to see a repeat of the 2008 financial crisis, which had global impacts and is still a relatively fresh memory for most of us.
So, first of all, let me try to alleviate some of the anxiety. Up to this point, I don’t believe we’ve seen anything suggesting we are facing another crisis of the scope that we experienced 15 years ago. As I noted, I was serving in my first term as a credit union regulator during that previous crisis, and the conditions then were much more daunting. At this point, the recent turmoil doesn’t appear to be a crisis of the same magnitude, and the response from regulators, central banks, and the industry has been sound.
However, I do believe these recent failures are a symptom of something serious to which we must pay heed: When we see these kinds of banking failures and financial scandals, what strikes me as the common denominator is that their difficulties emerged as a result of these institutions losing sight of their true mission, which is to serve the needs of their customers and society.
Finance as a Creative Force
In his landmark book “Finance and the Good Society,” the American economist Robert Shiller makes the case that finance, at its best, should be a system that “acts as the steward of society’s assets and an advocate of its deepest goals.” I appreciate the idea that finance and banking are acts of stewardship, with a social purpose beyond simply generating profits and growth. As such, I would like to take that as my theme today.
Of course, we all understand the concept of “fiduciary responsibility,” the legal obligation of a financial firm or adviser to act in a client’s best interests, which is an incredibly important responsibility. But I’m drawn to Shiller’s idea of “stewardship” as a different sort of commitment that goes further, challenging us to think more deeply about the responsibility we bear to those we serve, to the communities we live in, and to our broader society.
In the specific bank failures, I noted a moment ago, I would argue those institutions failed to act as sound stewards of the trust that was placed in them. Whether we’re talking about taking on unsustainable risks in a turbulent marketplace, or, even worse, outright fraud and abuse of customers’ trust, these are signs of institutions that have lost their way. And when that happens, we all pay a price. It breeds a sense of cynicism and mistrust toward financial institutions, which is often particularly pronounced among underserved and marginalized communities —— the very communities we are trying to reach through our financial inclusion efforts.
The question for us is how do we restore that sense of stewardship, that sense of trust, which is so essential to the functioning of a sound financial system? And this is a place where I believe smaller financial services institutions — including credit unions, building societies, and other cooperative finance entities — should have a distinct advantage. Because in a time of declining trust in so many of our society’s institutions, these entities have maintained a strong commitment to the first principle of their founding, which is to serve their members and their communities.
I like to point out to people that the financial industry, at its best, can and should be a creative force that solves problems. One of the things I’ve always appreciated about the industry is how financial services providers make a real, positive difference in people’s lives every day:
- Financial services firms help people save and invest for a college education or retirement.
- They help young families buy their first homes and achieve financial freedom by building generational wealth.
- They help entrepreneurs get their small businesses off the ground, creating jobs and strengthening communities.
- They help to provide financing to local and state governments to fund needed projects – when you see a new school or highway being built, that’s very often the result of municipal bond financing handled by the financial industry.
Even with its flaws, I believe the free market remains the most effective mechanism to direct capital and credit to the best, most innovative purposes. When we think about the advances we’ve made in technology, medicine, education, and a host of other areas, that’s at least partly, owed to capital markets steering investment where it’s needed. A healthy, vibrant, competitive financial sector is critical for the functioning of our society.
I certainly saw this in my own time in the private sector, where much of my banking career was focused on community development issues, helping to steer funding and investment to underserved communities for projects that would improve the quality of life.
So, in my roles as both a financial services professional and as a regulator, I am an advocate for a strong and healthy financial sector, which means a diverse financial services sector that offers consumers a wide range of options to meet their financial needs while also focusing on the broader needs of the communities they serve and society at large.
Bigger Is Not Necessarily Better
But the trend toward concentration in the industry, which has accelerated over the last couple of decades, threatens that beneficial diversity. I have stated many times before that I find the increasing concentration in the financial services industry to be a source of some concern, and I think the fundamental trends bear out that concern.
If we look back to the crisis of 2008, or if we look closely at some of the more recent bank failures I mentioned, I could argue that a contributing factor to many of these failures has been the size of the institutions. As institutions grow larger, they risk becoming less focused on the needs of the people they’re supposed to serve. They risk becoming less focused on the needs of any particular community. They risk losing their sense of stewardship.
Now, I should pause here to make myself clear: my point here is not to issue a broadside against large financial institutions, and I’m not calling on everyone to rush to the streets to tear down the big banks. Let’s not get carried away. The larger firms serve an important role in the financial ecosystem as well, and thanks to economies of scale they’re able to do things that smaller institutions cannot. I have no animus toward large financial institutions and will note that I myself have worked for some large firms in my own career.
But I would offer as a general proposition that there is a point at which bigger is not necessarily better, and at some point, larger institutions reach a point of diminishing returns on their size.
In the United States, one of the more alarming developments after the 2008 crisis was a severe contraction in the number of smaller institutions. Some failed, and others were acquired by or merged with larger institutions. You very well may have witnessed a similar dynamic in the banking sector here in the UK.
I found this to be particularly vexing as most of these smaller institutions bore little or no responsibility for the crisis, but they paid the heaviest price, as did the communities they served. As a result, many communities are now underserved and lack options for affordable financial services. Credit unions in the United States continue to be a vibrant sector, although they, too, face competitive pressures. The overall trend toward consolidation and growth in financial institutions, and the loss of diversity within the financial services system, has not necessarily been beneficial for consumers or communities.
Restoring the Sense of Service, Trust, and Stewardship
Yet at the same time, we have clear evidence that many smaller financial institutions like credit unions and building societies still manage to thrive in today’s challenging marketplace. What’s their secret? The answer, my friends, lies in service, in trust, and in stewardship.
There’s a fascinating report published last year by the Filene Research Institute, a U.S.-based think tank that focuses on the cooperative finance industry, that explored how small credit unions manage to thrive in today’s marketplace. If you’re not familiar with Filene, I highly recommend studying this report, which is titled “The Puzzle-Solving Approach That Enables Small Credit Unions to Thrive.” (opens new window) (You will be leaving NCUA.gov and accessing a non-NCUA website. We encourage you to read the NCUA's exit link policies. (opens new page).) They determined that successful small cooperative finance institutions focus primarily not on growth, but on service to their members, so that growth is “an outcome of member-focused strategy.” They go on to conclude, and I quote:
In short, when credit unions serve their members better, they also grow faster. Thriving small credit unions are clear about who comprises their market and what their target members’ needs are. We find that these organizations think deeply and clearly about what matters in the specific market they serve, and then tailor a focused set of offerings to meet those needs.
Now to be clear, I don’t advise financial institutions to renounce growth. Healthy financial institutions of all sizes, if they are to endure for the long term, need to show that they can cover their costs and flourish. But the idea of focusing on growth as an outcome of service strikes me as a positive lesson for any financial institution. It’s also a positive lesson in the value of stewardship towards the members and the communities that your institutions serve.
I will pause to note here that I am not trying to suggest there is something necessarily more virtuous in small financial institutions. Smaller institutions can encounter the same problems and pressures that larger institutions can face when it comes to managing risks; adverse market conditions; or weak and dysfunctional management.
However, I do believe the more limited scale of smaller institutions, particularly credit unions and building societies, serves as a set of guardrails. Limits on fields of membership, and field and scope of operations, coupled with prudent regulation, serve to ensure that these institutions are more accountable and responsive to those they serve.
The Way Forward
Now, I’ve offered you a broad diagnosis of what I see as some key challenges in today’s financial services industry. But I don’t like to describe problems without making at least some attempt to provide some solutions. So, what do we need to be doing more to help smaller institutions to prosper and thrive? Here I’ll limit myself to a few bullet points, and I’ll be happy to flesh out these ideas more fully in the discussion session to follow.
First, from a policymaking standpoint, regulators and lawmakers need to be focusing on helping the industry to flourish. By providing a regulatory framework that empowers small institutions like credit unions and building societies to prosper, we can ensure they will maintain their position within the financial services ecosystem. This perspective underscores my own approach to regulation in my position on the NCUA Board. As a regulator, my outlook is that regulation needs to be effective without being excessive. So that means I’m always attuned to ways to address the regulatory burden that gives federally insured credit unions in the United States the flexibility they need to compete in a very challenging marketplace.
So, for example, in recent years, we saw that the number of new charters for credit unions in the United States had slowed dramatically. Recognizing this trend, the NCUA Board acted to streamline the process for chartering to allow for more credit unions to be established in the United States, and we’ve been seeing gradual success here over the last couple of years. In the interest of time, I’ll not belabor the point with too many specific examples of our regulatory approach, but those of you who have a deeper interest in U.S. credit union regulation are invited to raise those questions in the discussion to follow.
Second, I constantly encourage the industry to focus on that point where innovation and service come together to create the best experience for your members. Experiment with new approaches to doing business that will heighten your competitive advantages in a crowded marketplace. One area I always urge credit unions to explore and experiment with is financial technology. I used to say that “fintech is the future of financial services,” but I really need to revise that line to say that “fintech is the here and now of financial services.” So smaller institutions like credit unions and building societies need to be working to make sure these innovative tools are working on behalf of your members and your institutions.
Third, I encourage the industry to seek out and nurture partnerships with other credit unions and building societies. I think one of the great strengths of the cooperative finance movement is that credit unions and building societies can often work together in mutually supportive ways, because they’re not necessarily in direct competition with one another. This can be a great source of constructive partnership and can serve to strengthen the cooperative finance system as a whole.
Again, I can address any or all of these in greater detail in our discussion session.
I’ve detailed here today many of the challenges that smaller, community-based financial institutions face in today’s marketplace. However, I do want to make it clear that I’m extraordinarily optimistic about the potential that these institutions have for the future, and I encourage you all to be optimistic as well. I’ll remind you of Winston Churchill’s remark that he was an optimist, because, as he noted, “It does not seem too much use being anything else.”
While the challenges are real, and the trend toward growth and consolidation is undeniable, we see every day that there is a strong demand for financial services providers that operate at the human scale, and at the community scale. Your job is to take advantage of that opportunity to restore the sense of service, trust, and stewardship that should be the foundation for this industry.
My advice for credit union and building society leaders is to hold fast to those principles of stewardship that have served as the foundation of the cooperative finance movement for over a century. In the United States, credit unions subscribe to the mantra of “people helping people.” I’m not sure if credit unions and building societies here in the UK employ that precise phrasing. If not, feel free to borrow it! But regardless, I’m sure the sentiment is understood, and I know your institutions strive to embody the same values with regard to serving your own members and communities. Thank you very much, and I’ll be happy to turn things over to Caroline to moderate our discussion session.