CONTINUOUS LEARNING. INDUSTRY ENGAGEMENT.
High Quality Liquid Assets (HQLA) - Treasury tactics
Household pets have been covering their ears. During the first calendar quarter, once reticent finance executives, and finance-engaged CEOs, of B.C. and ON credit unions may have been raging expletives. It’s been a frustrating, challenging and unfamiliar period. Financial instruments once wholly alien to small Canadian credit unions, perhaps large ones too, are now commonplace.
‘A turn in the road is not the end of the road, unless you fail to make the turn’ - Anonymous
Household pets have been covering their ears. During the first calendar quarter, once reticent finance executives, and finance-engaged CEOs, of B.C. and ON credit unions may have been raging expletives. It’s been a frustrating, challenging and unfamiliar period. Financial instruments once wholly alien to small Canadian credit unions, perhaps large ones too, are now commonplace. A whole new lexicon of investment terminology has been explored, digested and applied. Stakeholder reporting may have underwhelmed expectations. New journal entries may have being imagined from first principles. Financial reports and risk oversight may require a refresh. BCFSA has a new guideline and a new regulatory report (and several consultations). And your prudential supervisor Relationship Manager has requested a touch-base video conference call, again.
Note: A formatted, graphical PDF version of this article is available at https://www.bitly.com/rm-hqla
Almost two years ago, FICOM issued a decree. The ‘mandatory liquidity pool’ structure was dead. It had been used for decades to execute credit union compliance with Liquidity Requirement Regulation of the B.C. Financial institution Act and equivalent ON legislation, and as a contingent funding source. Jumping to 2021, substantially all B.C. and ON credit unions likely now have portfolios of fixed income securities, held in legally ring-fenced trust accounts, on their balance sheets. Forget proportionality. Regulatory changes impacted the largest and smallest credit unions alike. Identical regulatory reporting requirements and frequency. Hopefully Canadian consumers can sleep a lot more easily each night, safe in the knowledge that their cooperative financial institution has lower systemic liquidity risk due to it directly holding a ring-fenced portfolio of high quality liquid assets. Or not. Retail banking, it seems, is a whole lot more complex than it used to be.
‘Forget proportionality. Regulatory changes impacted the largest and smallest credit unions alike. Identical regulatory reporting requirements and frequency. ’ - Ross McDonald
Credit unions should reflect on unpleasant realities. Fixed income securities, once the domain of second-tier entities and wholesale banks, are new to substantially all credit unions and executives. Regulatory guidelines, prudential supervisory expectations, and regulatory reporting in regards liquidity management have escalated to a level unimaginable only a few years ago. This new world seems a permanent, irreversible change. It may contribute to collaboration, amalgamation or other strategic discussions. Any credit union that fails to duly adapt is likely to experience the relentless intervention wrath of its financial regulator.
In the spirit of cooperative values and wiser together, below are several treasury tactic ideas that smaller credit unions may consider in regards statutory liquidity deposits.
First, consider radical simplification. In January 2021, Central 1 Credit Union terminated legacy term deposits and migrated equivalent portfolio of fixed income securities. This provided member credit unions with duly equivalent exposure. Credit unions may continue in this way. But there is no such compulsion. Central 1 Credit Union, and its peers, are now service providers to be duly instructed. Credit unions have discretion in selection of asset manager and in the establishment of related investment strategy. Academic research highlights the ‘cost of complexity’. Were it so inclined then a credit union could consciously instruct its asset manager to discard all fixed income securities and hold familiar bank deposits, provided that they satisfy HQLA criteria. Perhaps lesser yields may result. But the potentially material simplification of accounting journals, risk management and/or resourcing costs could make such an approach attractive. This approach aligns with strategic practice of choosing ‘where-to-play’. Perhaps treasury, for some smaller credit unions, is somewhere not-to-play. K.I.S.S. is a timeliness axiom for a reason.
‘a credit union could instruct its asset manager to discard all fixed income securities and hold familiar bank deposits, provided that they satisfy HQLA criteria’ - Ross McDonald
Second, constrain portfolio scope. Many types of securities qualify as High Quality Liquid Assets. A regulator may recommend, or require, that an Investment and Lending Policy provide detailed criteria of securities attributes (e.g. credit rating) for each security type. For example, if ILP states that corporate bonds are acceptable as a security type then it may need to state which issuers, industries, credit ratings or other attributes are acceptable or unacceptable. A credit union may determine that some potential HQLA security types are undesirable. Maybe the credit rating specification is unfamiliar. Or perhaps the accounting journals are troublesome. A credit union may direct its asset manager not to hold corporate bonds, mortgage backed securities or another type of HQLA. This approach may align with the concept of competitive advantage. Perhaps being good-enough at treasury management is just that - good enough.
Third, evolve oversight. Finance & Risk reporting should include Liquidity Adequacy Ratio. Prudential supervisors appear to have sharpened their liquidity compliance. The legacy broadly defined Statutory Liquidity Ratio has been effectively replaced by a more restrictive Liquidity Adequacy Ratio. Most liquidity held by a credit union outside of the in-trust account(s) does not count towards its compliance with legislative requirements. As part of ‘Quality of Risk Management’, assessment prudential supervisors may be re-reviewing executive expertise and board oversight of liquidity management. This approach may align with measuring what matters. Your friendly regulator may have said that LAR% now matters.
‘As part of Quality of Risk Management assessment, prudential supervisors may be re-reviewing executive expertise and board oversight of liquidity management.’ - Ross McDonald
Fourth, expectation management. Despite commendable enthusiasm, executive/board committees and boards may be content to receive limited reporting on key finance & risk topics. At least for an initial period. Reporting from an asset manager, custodian or other service provider may well be evolving in its rigour, scope or timeliness. Trailblazing credit union executives may have already designed comprehensive internal reporting. Smaller credit unions likely have not. Patience can be a virtue, and may save duplicated effort. Whether as part of mandated work scope; a response to industry feedback; or to mitigate threats from circling competitors then asset manager and/or other service providers have every incentive to provide appropriate reporting at their earliest convenience.
Fifth, professional development. Treasury competences are now cool in credit unions. Who’d have ever guessed that! Executive Asset & Liability Committees and board Investment & Lending Committees may find unfamiliar and elevated stakeholder attention. Some finance executives may need to brush up on technical knowledge of financial instruments. Or to initiate accelerated training. Scary times perhaps. Finance executives with a growth mindset may view HQLA as a wonderful opportunity to expand product knowledge; to extend functional maturity; and to better serve the business and membership. Executives with a curious mindset may ask ‘dumb’ questions about how liquidity, risk, return and cashflows impact their organization. This approach may align with functional maturity. Given changes in external environment, some credit unions may re-evaluate their current and target levels of functional maturity for Finance or treasury. Financial regulator(s) may have moved the goalposts. Time to recalibrate.
‘internal stakeholders may be content to receive limited reporting on key finance & risk topics in regards HQLA, at least for an initial period.’ - Ross McDonald
Lastly, seek help. Sometimes we all need a little help from our friends. As appropriate, reach out to peer credit unions for advice. Or seek a paid contractor relationship with a credit union that has relevant expertise. B.C. credit unions may request the assistance of Stabilization Central Credit Union. Or explore support from service provider(s).
Make no mistake, prudential supervisors may well dispense some unpleasant letters. Remediation from a regulatory intervention is a thoroughly unpleasant place. Credit unions may mitigate regulatory risk through proactive adaptation of liquidity management practices, rather than naively hoping for the best.
During the pandemic, many executives and staff have been working from home. The presence of domestic pets may provide welcomed comfort and companionship. A wagging dog tail; a purring cat; a chirping bird; or otherwise may bring joy and smiles. Such selfish pleasures may be repaid through fewer expletives from their owners.
DISCLAIMER & COPYRIGHT
This article reflects the personal opinions of the author, Ross McDonald. This article does not represent the views of any financial cooperative, corporate organization, regulatory body, government ministry or other organization. All content is wholly based on information that is in the public domain. Where relevant, sources have been identified and referenced.
Although the author has made significant effort to ensure that the information in this submission was accurate at the date of completion then the author does not assume any liability to any party for any loss, damage, or disruption caused by errors or omissions, whether such errors or omissions result from negligence, accident, or any other cause.
Proportionality in financial regulations. Asset size, business complexity & risk profile should matter.
Financial regulation is not national security. Edward Snowden alleged that 'collect it all' was a mantra of the US National Security Agency. But this seems rather heavy-handed for regulatory oversight of provincial credit unions. As a self-declared 'data-driven regulator', BC Financial Services Authority appears intent on data collection regardless of prudential supervisory risk or industry impact.
Financial regulation is not national security. Edward Snowden alleged that 'collect it all' was a mantra at the U.S. National Security Agency. But this seems rather heavy-handed for regulatory oversight of small provincial credit unions. As a self-declared 'data-driven regulator', BC Financial Services Authority (BCFSA) appears intent on maximum data collection regardless of its supervisory framework and industry consequences.
A formatted PDF of this article is available at https://www.bitly.com/rm-proportionality.
Following the 2008 financial markets crisis, regulators of major global banks duly turned up the heat. New mechanisms were designed and introduced to assess the capital, liquidity and risk profile of regulated financial institutions. Entities that regulators deemed 'too-big-to-fail' or 'globally systemically important banks' (G-SIB) were exposed to incremental costs, being higher compliance costs that were commensurate with their regulatory risk profile. These reporting requirements and supervisory expectations have steadily trickled down to domestic equivalents (D-SIB) and, in Canada, to provincially regulated financial institutions. The extent of due adaptation of G-SIB regulatory requirements for small community credit unions seems variable. Copy-and-paste can be a dangerous tool.
The regulatory environment for B.C. credit unions is wholly unrecognizable from a decade ago. Over recent years then BCFSA - and its predecessor FICOM - introduced numerous regulatory guidelines; escalated prudential supervisory expectations; and intensified regulatory reporting. The number, diversity and complexity of these new regulations are dizzying. By way of illustration, in late 2020, BCFSA launched an overhaul of regulatory reporting requirements for credit unions. The proposal seeks to expand data scope; introduce greater data granularity; on a more frequent basis; and from an increased number of credit unions. As regulated entities, B.C. credit unions have but three choices - comply, strategic transformation, or federal charter.
"The intensity of supervision will depend on the nature, size, complexity and risk profile of a PRFI.” - BCFSA Supervisory Framework
BCFSA appears to have discarded FICOM’s risk-based supervisory framework. Default prudential supervision, and regulatory reporting, was relatively modest. But credit unions of larger size, greater complexity and/or intervention stage rating should be subject to commensurately escalated intensity of prudential supervisory requirement and regulatory reporting. Following a flurry of new regulatory requirements then this approach - proportionality - is now being embraced by OSFI, a federal Canada financial regulator. BCFSA should take note. Instead, BCFSA seems intent on a wholly opposite approach - standardization. Vancity Credit Union (C$23 billion assets) and Vancouver Police Credit Union (C$18 million assets) have order-of-magnitude organizational differences, yet BCFSA proposed regulatory reporting would impose substantially similar regulatory reporting requirements. As would credit unions with scarcity or bountiful levels of capital or liquidity. As would credit unions with low-risk or high-risk intervention stage ratings. The objective of regulatory reporting should be to ensure legislative compliance and to assist prudential supervisory assessment of composite risk rating. This risk-based approach wholly aligned with its supervisory framework. No matter. Collect it all. Fill those databases.
"One of the key priorities identified in OSFI's Strategic Plan 2019-2022 is to further adapt its regulatory approaches to reflect the size, complexity and risk profile of financial institutions.’ – Source: OSFI ‘Advancing Proportionality: Tailoring Capital and Liquidity Requirements for Small and Medium-Sized Deposit-Taking Institutions'
BCFSA should stop and think. What is the purpose of the collected data? Why do the proposed changes fall disproportionally on credit unions with less than C$1 billion assets? How will the proposed changes have intended and/or unintended consequences on B.C. credit unions?
BCFSA should consider alternative tactics. Perhaps there could be two sets of 'standardized' regulatory reports - a simple set and a comprehensive set. This may mirror efforts in accounting standards - small, private enterprises and large, publicly listed companies produce financial statements of differing complexity. The Financial Accounting Standards Board 'Simplifying Accounting Standards' is exploring various topics related to proportionality in application of accounting standards. Perhaps there are learnings from the U.S. Federal Reserve, that has four intensities of regulatory reporting for deposits based on financial institution size. Perhaps B.C. credit unions could have an opt-in approach with a distant date rather than a near-term effective date (hat tip to peer for this pragmatic idea). Such an approach would allow smaller credit unions to consider banking system changes, resourcing requirements and/or strategic viability of the proposed changes. Perhaps CUDIC excess capital could be rebated, say on an equal dollar value basis across B.C. credit unions, to help fund process improvements, system implementation or other necessary automation to satisfy elevated reporting requirements?
BCFSA should recognize that there are multiple, diverse & complex changes impacting B.C. credit unions. BCFSA-required transformation of statutory liquidity deposits. Central 1 and membership driven implementation of digital technologies. BCFSA new supervisory expectations, such as the January 2021 Liquidity Guideline. At this time, BCFSA has four active consultations with credit unions - regulatory reporting, CUDIC assessments, IT Security, Outsourcing. Some requirements may even be competitive. For example, if credit unions respond the proposed regulatory reporting by sharing expert resource then this may create resource dependency and outsourcing risk. But if credit unions respond by recruiting dedicated staff or investing in technology then this will impact prudential supervisory assessment of earnings risk. Credit unions less than C$1 billion assets face a lose-lose situation.
“It certainly seems possible that BCFSA consequences and Competition Bureau objectives, as they relate to credit union amalgamations, may be significantly misaligned.” - Ross McDonald
Collectively these, mostly BCFSA driven, changes will permanently impact the B.C. credit union system. Ultimately, ever-increasing baseline regulatory requirements must surely translate into fewer provincial credit unions and increased minimum efficient scale. Should BCFSA continue on its seeming path, there may be only a residual few B.C. credit unions with less than C$1 billion assets by 2025, and perhaps none by 2030. A torrent of amalgamations seems inevitable. Per related member website, the ongoing proposed merger by six B.C. credit unions has been referred to the Competition Bureau. It certainly seems possible that BCFSA consequences and Competition Bureau objectives, as they relate to credit union amalgamations, may be significantly misaligned.
Do-as-I-say, not do-as-I-do. As part of the Ministry of Finance, FICOM reporting to industry was negligible, if anything. As a crown corporation, time will tell if BCFSA complies with the B.C. government 'Performance Reporting Principles For the British Columbia Public Sector'. The related publication, approved by the Auditor General of B.C, frames eight principles of deemed best practice that seek to support an open and accountable government. BCFSA compliance with B.C. government reporting principles for crown corporations require it to provide comprehensive disclosures to industry and to taxpayers. People who live in glass houses shouldn't throw stones.
“BCFSA compliance with B.C. government reporting principles for crown corporations require it to provide comprehensive disclosures to industry and to taxpayers.” - Ross McDonald
BCFSA executive has the near infinite authority over its expanded empire. Oversight lies in its board of directors, and ultimately the B.C. Ministry of Finance. Under the Taxpayer Accountability Principles of the B.C. government state that ‘Board members act independently from the organization’s executive and have the best interests of taxpayers and shareholder as their primary consideration.' Hopefully this enshrines expectations of a principal-agency relationship. Approximately 40% of British Columbians are members of B.C. credit unions. Collectively B.C. credit unions provide substantial benefit to their members, employees, communities and the B.C. economy. BCFSA Board should ask difficult questions of the executive team; demand a business case for proposed changes; and consider the collective impact on British Columbians.
In the short-term, BCFSA may amass a standardized, NSA-worthy database about B.C. credit unions. Probably significantly more than that required to fulfil the needs of executive management, board oversight or risk-based prudential supervision. In the medium term, this database may become a museum relic. A moment in time record of an industry that was subject to accelerated transformation and proactive consolidation by its regulator. A priceless collector’s piece but a needless lament.
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REFERENCES
OSFI January 2020 'Advancing Proportionality: SMSB Capital & Liquidity Requirements - Consultatitve Document' - https://www.osfi-bsif.gc.ca/Eng/fi-if/in-ai/Pages/SMSB20_cp.aspx
OSFI July 2019 'Advancing Proportionality: Tailoring Capital and Liquidity Requirements for Small and Medium-Sized Deposit-Taking Institutions' - https://www.osfi-bsif.gc.ca/Eng/fi-if/in-ai/Pages/smsb.aspx
FICOM/BCFSA June 2012 'Supervisory Framework' -https://www.bcfsa.ca/pdf/aboutus/FICOMSupervisoryFramework.pdf
FASB 'Simplifying Accounting Standards' - https://www.fasb.org/simplification
B.C. Government 2003 - “Performance Reporting Principles” - https://www2.gov.bc.ca/assets/gov/british-columbians-our-governments/services-policies-for-government/public-sector-management/performance_reporting_principles.pdf
Member website for potential amalgamation of B.C. interior credit unions - https://www.exploringstrengthandunity.ca/awesometogether.html
U.S. Federal Reserve Reporting Requirements for deposit reporting: https://www.federalreserve.gov/monetarypolicy/reserve-maintenance-manual-reporting-requirements.htm
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DISCLAIMER & COPYRIGHT
This article reflects the personal opinions of the author, Ross McDonald. This article does not represent the views of any financial cooperative, corporate organization, regulatory body, government ministry or other organization. All content is wholly based on information that is in the public domain. Where relevant, sources have been identified and referenced.
Although the author has made significant effort to ensure that the information in this submission was accurate at the date of completion then the author does not assume any liability to any party for any loss, damage, or disruption caused by errors or omissions, whether such errors or omissions result from negligence, accident, or any other cause.
All rights reserved.
System-Level Leadership Vacancies - 3/3 - Glass slippers
Prince Charming used but a glass slipper and unerring faith to find his true love Cinderella. Governance bodies may need to take a more sophisticated, pragmatic and urgent approach to recruit permanent system leadership.
“A weighty burden falls on governance bodies of system-level organizations. It is they that will ultimately select and nurture a new generation of system leaders”
SERIES OVERVIEW
This article is the third part - Glass Slippers - of a three-part series related to current vacancies of permanent leadership at system-level organizations that impact B.C. credit unions.
Empty Seats: Current vacancies & short term impact
Visionaries Wanted: Medium & long-term implications
Glass Slippers: Governance actions & best practices
This publication may be easier to read in PDF format. Download per bit.ly/bc-leadership-doc-all
This article comprises four sections - Cinderella's glass slipper; System-level CEO recruitment; Stealing good ideas & leveraging best practices; and a Call to system-level governance bodies.
CINDERELLA’S GLASS SLIPPER
Prince Charming used but a glass slipper and unerring faith to find his true love Cinderella. Governance bodies may need to take a more sophisticated, pragmatic and urgent approach to recruit permanent system leadership.
Imagine for a moment that the Prince faced three options to find his bride:
Search high and low throughout the land. The glass slipper must surely be a perfect fit to signal true love. Patience.
Ask advisors & other palaces. Perhaps different slippers or a prioritized search process. Assemble a royal working group.
Trust his heart. Seek passion for serving the realm today & for dreaming of a better tomorrow. Forget footwear.
An unromantic royal advisor may tell the prince of trade-offs between time, cost and quality. A recent ball attracted but a few, rare princesses. Princes of nearby kingdoms also seek brides. Some princesses may be seasoned wearers of high heels. Some may simply covet a pair of snazzy slippers. Extra resources may quicken slipper fittings. But while the prince searches, the realm may become restless and remains unattended.
“Prince Charming used but a glass slipper and unerring faith to find his true love Cinderella. Governance bodies may need to take a more sophisticated, pragmatic and urgent approach to recruit permanent system leadership.”
SYSTEM-LEVEL CEO RECRUITMENT
Each system-level organization, in its own way, has a significant current and/or future impact on the credit union system. But there appear to be several key differences in organization and circumstance that may impact CEO recruitment:
System-level organizations vary materially in their employee size, legal basis, ownership basis and ultimate purpose
System-level governance bodies vary materially in their number, expertise, representation and nominations authority
All recruitment processes, with exception of Central 1, appear not to be assisted by incumbent permanent CEOs
Exit circumstances of prior/current permanent leadership may vary significantly by system-level organization
Current process stage of recruitment of permanent leadership appears to vary materially by system-level organization
Ideal profile, and likely compensation expectations, of new permanent leadership may differ materially by organization
Permanent leadership may face near-term challenges that, despite overlaps, may be dominated by entity-specific issues
Leadership recruitment initiatives by governance bodies of FICOM/CUDIC and of Stabilization Central Credit Union do not appear to have significantly leveraged, if at all, executive search services.
“Boards often fail to grasp the complex nature of succession.”
STEALING GOOD IDEAS & LEVERAGING BEST PRACTICES
Plenty has been written about CEO recruitment. Thought leadership, perceived best practices and potential pitfalls seem well-documented across a range of publications. Some expert advice appears both timelessly and generic while some advice may be specific to an economic cycle, industry, organizational type, organizational circumstance or nature of the transition. There are inevitable differences between CEO succession issues at an international corporate conglomerate, such as General Electric, and the equivalent processes at any of the system-level organizations that impact B.C. credit unions.
Significant wisdom may be gleaned. In efforts to assist governance bodies then the author has selected a handful of publication. Where possible, direct quotation has been made. The governance bodies responsible for the appointment of permanent leadership of B.C. credit union organizations vary significantly in their profile. As do the organizations that they govern. Learnings may be applied on a selective basis or adapted as appropriate. The author perceives that related external advice may be categorized into three discrete components - succession planning; executive search & selection; and leadership on-boarding.
SELECTED PUBLICATIONS
HLS#1 - Harvard Law School, ‘Advice for Boards in CEO Selection and Succession Planning’
HBR#1 - Harvard Business Review, ‘The Art and Science of Finding the Right CEO’
HBR#2 - Harard Business Review, ‘Don’t Hire the Wrong CEO’
HBR#3 - Harvard Business Review ‘The Secrets of Great CEO Selection’
HBR#4 - Harvard Business Review ‘The Right Way to Bring a New CEO on Board - After the Handshake’
FAST#1 - Fast Company, ‘Why You Should Hire for Potential not Experience’
Weblinks to all publications append this document.
SUCCESSION PLANNING
HLS#1: ‘Most boards review succession planning with the incumbent CEO on a regular basis. We advise that there be a comprehensive discussion at least annually regarding internal candidates and planning for emergency circumstances.’
HLS#1: ‘In ideal circumstances, the succession process will be managed by a successful and trusted incumbent CEO, with the board or a board committee overseeing the process, reviewing the candidates and providing advice.’
HLS#1 - ‘A board working on CEO succession without [an incumbent] CEO can be dysfunctional where:
‘a board has personal animosities or recurring substantive disagreements that prevent it from reaching consensus on priorities or candidates, or
the board has one dominant personality whose influence is so strong that other directors are effectively excluded from the decision-making process, or
a board [say through prioritization of independence] lacks the depth of experience and expertise in the company’s business and industry.’
HBR#1: ‘Many CEOs don’t push their boards to discuss what might happen when they leave, because they don’t want to think about it—unless they know their departure is imminent. By then it’s probably too late to start preparing succession candidates.’
EXECUTIVE SEARCH & SELECTION
HBR#2: “If boards follow the guidelines below, they are much more likely to hire the right CEO:
Come to a shared definition of leadership [in the specific context of current organizational challenges]
Resolve strategic & political conflicts [‘board should not assume that a new CEO can come in and puts its house in order’]
Actively measure the soft qualities in CEO candidates
Beware of candidates who act like CEOs
Recognize that real leaders are threatening [‘without realizing it, many boards are adverse to outsiders who threaten to shake things up’]
Know that inside heirs usually aren’t apparent [‘outgoing CEOs often aren’t good at ... choosing their own successor’]
Don’t rush to judgment’
HBR#3: ‘Board members who are adept at picking CEOs do four things others don’t:
Work painstakingly to clarify the essential qualities to succeed in the job [‘two or three pivot capabilities’]
Keep an open mind about where the best candidate will come from [‘back off from longtime favorites and keep an open mind’]
Go deep to understand which candidate is the best fit
Allow for imperfections in the chosen candidate [’every CEO has an open flank’]’
HBR#2: ‘During a search process, Boards might do well to keep their long knives sheathed because, in fact, real leaders are threatening to those intent on preserving the status quo’.
HBR#2: ‘Search firms do what they are told. In essence, headhunters look to fill round holes with round pegs. And that is fine so long as they are told the right thing. There are two problems with this. First, the Board had better be sure that they have a round hole to fill. Second, talented, frequently younger people - high-potential sorts - are excluded from searches because they lack the exact experience being sought.’
FAST#1: ‘Organizations and their leaders must transition to what I think of as a new era of talent spotting–one in which our evaluations of one another are based not on brawn, brains, experience, or competencies, but on potential. The question is not whether your company’s employees and leaders have the right skills; it’s whether they have the potential to learn new ones. Four other hallmarks of potential are curiosity, insight, engagement, and determination.’
LEADERSHIP ON-BOARDING
HBR#4: ‘Whether new CEOs are hired from the outside or promoted from within, they should be aware of a daunting statistic: One-third to one-half of new chief executives fails within their first 18 months, according to some estimates.’
HBR#4: ‘Most new leaders fail not because their financial or operational abilities are inadequate but because their style or political skills render them unprepared to manage the organization’s culture.’
HBR#4: ‘Although many people tend to think of succession as the process of identifying and assessing internal and external candidates, defining the characteristics the new CEO will need, and ultimately settling on a final choice then that’s really only half the job. Succession should include activities that occur after the new CEO takes the job - activities designed to maximize their chance of success. In many ways, the later stages are more difficult than recruitment and assessment phases. They involve emotions, ego, beliefs about what the organization should become, and, in particular, company culture and politics.’
HBR#4: ‘For a board, a CEO succession is a critical moment in the life of the company - a time when directors should expect to be meeting, talking and contributing more than they ordinarily do, much as they would during a merger or an acquisition.’
HBR#4: ‘Clear expectations are among the most crucial things directors can provide.’
CALL TO SYSTEM-LEVEL GOVERNANCE BODIES
The B.C. credit union system needs permanent leadership. The system’s purposeful impact on membership, employment and communities seem stronger today than ever. Its future potential to benefit the economy and society appear vibrant. The system seems likely to face challenges that are numerous, complex and substantive. It needs strong and progressive permanent leadership, across all system-level entities, to embrace a daunting suite of circumstances; to imagine a better future; to engage disparate system opinions; to navigate challenging political realities; and perhaps to bushwack a trail through unfrequented or uncomfortable terrain.
A leadership transition in a single organization may be significantly effectual to that organization. New leadership in a organization with system scope or authority has broader impact. But concurrent new permanent leadership across many system-level organizations may create implications and opportunities of seismic proportions.
Research notes sobering statistics of CEO failure. It also highlights best practices, potential pitfalls and thought leadership that may assist efficient, effective execution. The risk of untimely appointment of permanent leadership may be material too.
There is competition to attract leadership talent. In September 2016, the Board of Deposit Insurance Corporation Ontario appointed Guy Hurbert as Acting President & CEO. In March 2017, Credit Union Deposit Guarantee of Saskatchewan’s CEO Garth Melle announced his intention to retire effective December 2017. Numerous Canadian credit unions - including Cornerstone, Encompass, VP, Auto Workers, Plainsview, Mount Lehman, Lake View and North Winnipeg - have active or recent CEO recruitment campaigns.
A weighty burden falls on governance bodies of system-level organizations. It is they that will ultimately select and nurture a new generation of system leaders. Recruitment processes may be difficult, demanding and even frictional. There may be issues that impact, and consequences of, any untimely appointments (‘empty seats’); with any trade-offs in ideal candidate between short-term operational execution and long-term leadership potential (‘visionaries wanted’); and inevitable desire to appoint the perfect candidate (‘glass slippers’). The stakes are high. The future is watching. Both the B.C. public and the national credit union membership likely applaud your best efforts. Good luck.
“Selecting the chief executive officer and planning for CEO succession are among the most important responsibilities of a company’s board of directors.”
REFERENCES
B.C. system-level and other leadership announcements
Central 1 Credit Union. Press release: https://www.central1.com/news/central-1-ceo-announces-intention-step-down
Stabilization Central Credit Union, Executive Team: https://www.stabil.com/contact/
FICOM / CUDIC, Executive Team: http://www.fic.gov.bc.ca/pdf/news/News%20release_InterimLeadership.pdf
CUDGC SK, CEO: https://www.cudgc.sk.ca/wp-content/uploads/2017/03/CEO-Retirement-Announcement-20170314.pdf
Lake View Credit Union, Executive Team: http://lakeviewcreditunion.com/your-credit-union-2/management-and-board/
DICO, Acting President & CEO: https://www.dico.com/design/4_14_Eng.html
Selected recent B.C. system-level publications
Central 1, ‘Supporting Credit Union Success: A discussion of the future role and structure of centrals and system partners’. Report: https://www.central1.com/sites/default/files/uploads/files/Future%20State%20Discussion%20Paper%20with%20Letter.pdf
Central 1, ‘If not now, when? Next steps in the future role and structure of centrals and system partners. Report: https://www.central1.com/sites/default/files/uploads/files/FutureState_IfNotNowWhen.pdf
BC Ministry of Finance, ‘Financial Institutions Act / Credit Union Incorporation Act Consultations’. Submissions by B.C. credit union system, centrals, FICOM & other entities: http://www.fin.gov.bc.ca/pld/fiareview.htm
BC Auditor General, ‘Credit Union Supervision in British Columbia’. Report: http://www.bcauditor.com/sites/default/files/publications/2014/report_16/report/OAG%20Credit%20Union%20Supervision%20in%20BC_FINAL.pdf
BC Auditor General, ‘Progress Report: Credit Union Supervision in British Columbia’. Report: https://www.bcauditor.com/sites/default/files/publications/reports/FINAL_Credit_Union_Progress_Audit.pdf
FICOM, ‘Identification of Central 1 as a Domestic Systemically Important Financial Institution’. Press release: http://www.fic.gov.bc.ca/pdf/info_bulletins/cu-14-001.pdf
FICOM, ‘Financial Institutions Commission Regulation of Central 1 Credit Union'. Press release: http://www.fic.gov.bc.ca/pdf/fid/correspondence/16-2452-LTR.pdf
FICOM, ‘Credit Union Guidelines’. List: http://www.fic.gov.bc.ca/?p=fid/guidelines#cu
CUDIC, ‘Update on the Proposed CUDIC Risk Based Premium Assessment Methodology’. Letter: http://www.fic.gov.bc.ca/pdf/fid/correspondence/17-0024-LTR.pdf
Deloitte, ‘21st century cooperative: Rewrite the rules of collaboration’. Report: https://www2.deloitte.com/content/dam/Deloitte/ca/Documents/financial-services/ca-en-financial-services-21st-century-co-operative.pdf
Central 1 Enterprise, ‘Executive Exodus’. Article: http://enterprise-magazine.com/features/executive-exodus/
CEO recruitment
Harvard Business School, ‘The Art and Science of Finding the Right CEO’. Article: https://hbr.org/2011/10/the-art-and-science-of-finding-the-right-ceo
Harvard Law School, ‘Advice for Boards in CEO Selection and Succession Planning’. Report: https://corpgov.law.harvard.edu/2012/06/11/advice-for-boards-in-ceo-selection-and-succession-planning/
Harard Business School, ‘Don’t Hire the Wrong CEO’. Article: https://hbr.org/2000/05/dont-hire-the-wrong-ceo
Harvard Business Review ‘The Right Way to Bring a New CEO on Board’. Article: https://hbr.org/2016/12/after-the-handshake
Harvard Business Review ‘The Secrets of Great CEO Selection’. Article: https://hbr.org/2016/12/the-secrets-of-great-ceo-selection
Fast Company, ‘Why You Should Hire for Potential not Experience’. Article: https://www.fastcompany.com/3035990/why-you-should-hire-for-potential-not-experience
ACKNOWLEDGEMENT
The author wishes to thank selected credit union system veterans that generously volunteered technical expertise, system memory and professional guidance. Out of discretion then no names are noted. Thank you. Their wisdom, perspective and encouragement were most appreciated.
DISCLAIMER & COPYRIGHT
This article reflects the personal comments of the author, Ross McDonald. This article does not represent the views of any financial cooperative, corporate organization, regulatory body or government ministry. Comments are wholly based on information that is in the public domain.
Although the author has made every effort to ensure that the information in this article was correct at press time, the author does not assume and hereby disclaim any liability to any party for any loss, damage, or disruption caused by errors or omissions, whether such errors or omissions result from negligence, accident, or any other cause.
All rights reserved.
System-Level Leadership Vacancies - 2/3 - Visionaries Wanted
To advance impactful, perhaps disruptive, change then permanent leaders must be bold, persistent and persuasive. There will inevitably be doubters, detractors and stallers. Were the changes easy, they may already have been implemented. Visionaries wanted.
“To advance impactful, perhaps disruptive, change then permanent leaders must be bold, persistent and persuasive. There will inevitably be doubters, detractors and stallers. Were the changes easy, they may already have been implemented. Visionaries wanted.”
SERIES OVERVIEW
This article is the second part - Visionaries Wanted - of a three-part series related to current vacancies of permanent leadership at system-level organizations that impact B.C. credit unions.
Empty Seats: Current vacancies & short term impact
Visionaries Wanted: Medium & long-term implications
Glass Slippers: Governance actions & best practices
This publication may be easier to read in PDF format. Download per bit.ly/bc-leadership-doc-all
This part comprises three sections - medium term implications; external quotations and graphics; and long term implications.
MEDIUM TERM IMPLICATIONS - PERHAPS PRIORITIES RESET
Newly appointed leaders may bring curiosity and energy.
New leaders may ask questions, perhaps not posed for a while. They may contribute incremental technical expertise, professional experience or stakeholder relationships. They may bring creativity to frame fresh solutions to address historical challenges. They may benchmark the status quo versus industry best practices or consider learnings from other provincial credit union systems. They may consider alternative strategies to execute current organization roles and responsibilities. But it will likely take a while for leaders to complete any on-boarding and to reach full productive capacity.
“Recruitment may drain scarce leadership capacity, intensify succession planning or accelerate merger discussions.”
In the medium term, current initiatives may be re-prioritized. Legacy pet projects may lapse. New focus areas may emerge. Investments and/or partnerships in products, services or operational capabilities may be tweaked. Shifts in system, legislative and regulatory priorities may create opportunities or threats.
Examples are numerous and inherently uncertain. Any securement of a federal charter by one or more provincial credit unions will catalyze decisions by system stakeholders. Any untimely or unappealing response may bolster demand for federal charters. Credit union centrals may accelerate the transfer of trade association activities to the recently formed CCUA. A new Central 1 CEO could reframe proposed steps towards consolidation of second-tier organizations or national payments execution strategy. System stakeholders may need to respond to a stress event, say in regards a deflated housing market.
“‘The status quo is not an option. It is a slow and painful road to death’”
Regulatory matters may also be impacted. Permanent leaders may re-prioritize operations, initiate alternative strategies or execute policy redirection from a new Ministry of Finance. Operational expectations, stakeholder accountability, governance practices or reporting standards may be reassessed. To optimally fulfill responsibilities, some execution of regulatory functions may shift between FICOM, CUDIC, credit union central(s) and/or other resources. Regulatory priorities, supervisory practices, or operations models from other provincial jurisdictions may be selectively adopted in B.C. Any surge in federal charters would reduce the reach of provincial regulators and may reduce, or perhaps temporarily eliminate, deposit insurance assessments.
System-level leadership appointments may impact other executive positions. A new leader may seek to change their executive team. Recruitment may drain scarce leadership capacity, intensify succession planning or accelerate merger discussions. Credit unions already face an ‘Executive Exodus’ (Enterprise magazine, May/June 2016) given baby boomer retirement. A 2015 Central 1 survey found that 36% of Canadian credit union CEOs expect to retire by December 2019, with half of those by December 2017.
“Vacant positions in the Financial Institutions Division [at FICOM] are concentrated in senior level roles and specialized positions.”
LONG TERM - POSSIBLE SUBSTANTIVE PIVOT
In time, future system leaders may wield vision and courage.
Established permanent leaders may brandish bold imagination to envision a stronger future for provincial and federal credit union systems and their members. They may possess the persuasive prowess and determination to lead execution of transformative change through member-driven collaborative processes or politic-quagmired legislature.
In the long term, the Canadian credit union landscape may change materially. Some evolutionary changes, while likely challenging, seem reasonably foreseeable. Historically local, provincial credit unions may be displaced by hybrid of federal and provincial credit unions with differing legal basis; economic scale; membership geography; internal capabilities and regulatory requirements. Mandated credit union membership to provincial credit union centrals may be substituted for voluntary membership of consolidated central service provider(s), perhaps per the recent Central 1 ‘Consolidate and Integrate’ proposal. Traditional branch-based service channels may be diminished in favour of digital delivery, in response to consumer preferences and cost efficiency. Consolidation of credit unions, whether by mergers or other tactics, will likely continue with potentially acute strategic disconnect between large complex ‘corporate’ credit unions and small local community credit unions.
“Let’s face it - we have been down this road before. The consolidation of provincial centrals is hardly a new idea.”
Some implications are frankly speculative. Emergent financial technology innovation or expansive technology giant strategic ambitions may disrupt financial services, including credit unions, and stimulate new competitive entrants or business models. Any unconventional political representation at federal and/or provincial level may introduce policies of a disruptive or unexpected nature. Perhaps an increasing scope of operational functions of credit unions may migrate to credit union central(s) or credit union service organizations.
“The number, complexity, and impact of issues facing the credit union system and its new permanent leaders may seem daunting.”
Likewise, the regulatory landscape could change materially. Roles, responsibilities, and governance of relevant organizations may be re-imagined. Risk-based assessments may leverage artificial intelligence, big data or other technologies. CUDIC or FICOM may become a provincial crown corporation, perhaps comparable with other jurisdictions. Perhaps all large, complex and/or multi-province credit unions may be regulated by OSFI - whether through the popularity of federal charters or otherwise - and provincial regulators oversee smaller, simpler and/or local credit unions. Perhaps provincial governments may align deposit insurance, regulatory standards or supervision expectations/practices. This may simplify consumer protection as multi-province credit unions gain traction. Or some manner of consolidation of provincial regulator functions may access economies of scale and expertise. While perhaps politically unimaginable today then provincial jurisdictions may shrink, regulatory environments may become more complex, and/or provincial systems may become more inter-connected.
Without a shadow of a doubt, the above conjectures will be inaccurate, incomplete or plain wrong. Some may even appear unimaginable today. Future-guessing is perhaps better left to science fiction bestsellers. But the number, complexity, and impact of issues facing the credit union system, its regulators and collective new permanent leaders may seem daunting.
To advance impactful, perhaps disruptive, change then permanent leaders must be bold, persistent and persuasive. There will inevitably be doubters, detractors, and stallers. Were the changes easy, they may well already have been implemented. Visionaries wanted.
APPENDICES
CENTRALS MILESTONES
“CCUA has been established as the national trade association”
“The National Payments Strategy is nearing completion of work towards ... consolidation of the payments function”
“not all centrals are ready to merge into one national organization at this time. However, there may be some centrals that are ready to explore it right now.”
“Efforts to bring about an economic scale, integrated wealth management platform would continue.”
Source: Central 1
REGULATOR EFFICACY
“With their shortage of staff, it would take over 14 years to review all of BC’s credit unions instead of FICOM’s intended target of two to three.”
“FICOM may not [in 2016] be able to detect a worsening situation at a credit union in time to address and reduce the risk of failure.”
“Given that FICOM is funded entirely by credit unions ... and in recent years it has not spent all of the revenue it receives, it should be able to hire additional staff without an increase in its funding.”
Source: Auditor General of BC
STABILIZATION CENTRAL ROLE
“lack of clarity [of its role] makes it difficult for Stabilization Central to resource itself for a long-term vision.”
“... difficult for Stabilization Central to gain access to all information that is necessary to effectively identify and manage risk in the system.”
Source: Stabilization Central
CREDIT UNION SYSTEM PROFILE
SYSTEM EXPECTATIONS
“We expect the future for Credit Unions will include the following:
The primary relationship between Credit Unions and their members will increasingly be digital
Traditional economies of scale will increasingly be challenged by distributed, transparent and collaborative networks
The strategic management of data will be critical
Financial margins will continue to be under pressure
Regulatory costs and capital requirements are likely to increase
The diversity amongst Credit Unions will continue to grow”
Source: Central 1, author abbreviations
CENTRALS UNIFICATION
“SaskCentral aspires to a vision of a nationally unified and internationally capable co- operative financial network. [Central 1 proposed] vision would be realized when the services of all Centrals are consolidated.”
“Our vision for the national system calls for significant consolidation of Tier 2 organizations to a single national trade association and a single national wholesale financial institution.”
Source: SaskCentral, Alberta Central
FINANCIAL TECHNOLOGY
This concludes the second part of a three-part series. A list of sources and references will be appended to the final part in this series.
DISCLAIMER & COPYRIGHT
This article reflects the personal comments of the author, Ross McDonald. This article does not represent the views of any financial cooperative, corporate organization, regulatory body or government ministry. Comments are wholly based on information that is in the public domain.
Although the author has made every effort to ensure that the information in this article was correct at press time, the author does not assume and hereby disclaim any liability to any party for any loss, damage, or disruption caused by errors or omissions, whether such errors or omissions result from negligence, accident, or any other cause.
All rights reserved.
System-Level Leadership Vacancies - 1/3 - Empty Seats
There is currently a void of permanent leaders at system-level organizations that impact B.C. credit unions. All leaders of credit union centrals and relevant provincial government entities are currently appointed on an interim, acting or retiring basis. Unquestionably improbable but such are circumstances. Individually each leader has system influence but collectively they wield transformative impact.
“There is currently a void of permanent leaders at system-level organizations that impact B.C. credit unions.”
SERIES OVERVIEW
This article is the first part - Empty Seats - of a three-part series related to current vacancies of permanent leadership at system-level organizations that impact B.C. credit unions.
Empty Seats: Current vacancies & short term impact
Visionaries Wanted: Medium & long-term implications
Glass Slippers: Governance actions & best practices
This publication may be easier to read in PDF format. Download per bit.ly/bc-leadership-doc-all
INTRODUCTION
There is currently a void of permanent leaders at system-level organizations that impact B.C. credit unions. All leaders of credit union centrals and relevant provincial government entities are currently appointed on an interim, acting or retiring basis. Unquestionably improbable but such are circumstances. Individually each leader has system influence but collectively they wield transformative impact. This article explores system implications in the short, medium and long term. The future is alas tricky to predict, especially given a context of new permanent leadership. Presented implications will inevitably be wrong but they strive to illustrate the nature of potential change and the magnitude of positive opportunity. But first, the entities.
B.C. SYSTEM-LEVEL ORGANIZATIONS & LEADERSHIP STATUS
Central 1 Credit Union
Central 1 Credit Union provides a suite of wholesale products and services to credit unions nationally. It is also the primary liquidity manager, payments provider and trade association for its credit unions in B.C. and Ontario.
Central 1 Credit Union announced on 19 May 2017 that its CEO, Don Wright, ‘has decided to step down, effective July 31’. The related press release noted that 'To ensure a successful transition, Wright plans to stay on at Central 1 until a new CEO is chosen' and that 'The process of selecting a new CEO will begin immediately'.
Stabilization Central Credit Union
Stabilization Central Credit Union provides remedial advisory as a ‘stabilization authority’ to credit unions, including those under regulatory intervention; manages the Master Bond Program; and aids in the timely identification of system risks.
Its Board appointed an Interim CEO, Jennifer Scott, following the January 2017 departure of Chad Boyko. Its Board initiated a public search for a permanent CEO in February 2017. As at publication date then no appointment had been announced.
Financial Institutions Commission (‘FICOM’)
FICOM is a branch of the B.C. Ministry of Finance that provides regulation, prudential supervision and market conduct oversight to provincial credit unions, provincial credit union centrals and selected other financial services industries.
Current FICOM leadership is wholly comprised of non-permanent appointments. Carolyn Rogers resigned as Superintendent of Financial Institutions in May 2016. Frank Chong, Tara Richards, Michael Peters and Chris Cater hold roles of Acting Superintendent of Financial Institutions, Acting CEO, Acting Superintendent of Pensions, and Acting Superintendent of Real Estate and Acting Registrar of Mortgage Brokers respectively.
The B.C. Ministry of Finance publicly marketed the positions of Superintendent of Financial Institutions and CUDIC CEO in July 2016 and again in December 2016. The B.C. Ministry of Finance also publicly marketed, in March 2016, positions that included Deputy Superintendent Regulation, Deputy Superintendent Prudential Supervision and Deputy Superintendent Market Conduct. As at publication date, and to knowledge of the author, then neither FICOM’s Commission nor CUDIC’s Board - governance bodies with the same membership - had announced permanent appointments.
Credit Union Deposit Insurance Corporation (‘CUDIC’)
CUDIC is a statutory corporation, administered by FICOM, that provides deposit insurance coverage for provincial credit unions; determines annual assessments; manages the ex-ante fund, and substantially funds FICOM operations.
Its Board appointed an Interim CEO, Frank Chong, following the 2016 departure of Carolyn Rogers. The Superintendent of Financial Institutions of FICOM also holds the role of CEO of CUDIC. CUDIC has an Acting Executive Director.
B.C. Ministry of Finance
British Columbia held provincial elections on 9 May 2017. No political party secured a majority of seats. Political party discussions and government legislative processes appear to be evolving. As at publication date, any impact on the leadership, priorities or specific policies of the B.C. Ministry of Finance remains unclear.
IMPLICATIONS OF NEW SYSTEM LEADERSHIP
The credit union industry is a busy place. Numerous circumstances and developments have created current need or future opportunity for material change. Some initiatives are reactive to externalities, such as demographic changes in member expectations or emergence of financial technology. Some initiatives are proactive to bolster the long-term market competitiveness and positive impact of the credit union industry. While a few changes may impact a single credit union then most material developments are at system level. Even matters initiated in regards a single provincial system, such as regulatory legislation or standards, may likely influence peer policies and practices nationally over time.
The implications of current B.C. system-level leadership vacancies could be considers in multiple ways. For simplicity, this article uses a time-based approach:
Short term - Likely operational execution
Medium term - Perhaps priorities reset
Long term - Possible substantive pivot
SHORT TERM IMPLICATIONS - LIKELY OPERATIONAL EXECUTION
Faced with high complexity and material uncertainties then existing decision makers are prone to pause.
The greater the number of risks, probability of occurrence and/or severity of impact then the stronger is the incentive to defer decisions. Examples of this include major political uncertainties (e.g. Brexit or CETA); corporate opportunities (e.g. M&A transactions); forthcoming legal or regulatory decisions (perhaps federal credit union); unclear visibility on economic conditions (e.g. base rates); and changes in leadership.
In the short term, system stakeholders may focus on the execution of day-to-day operations. Members and communities must still be served. Centralized infrastructure must still operate. Government processes continue. For middle managers, staff and membership then it may feel like business-as-usual. At least for a while. But without clear leadership then system-level initiatives, legislative reviews and regulatory decisions may be progressed with a reduced level of ambition or urgency, if at all.
An example may be deposit insurance. In March 2016, CUDIC circulated a consultation paper in regards its methodology that determines assessments. In January 2017, the Acting Executive Director CUDIC reporting to Interim CEO CUDIC issued a public letter that stated ‘FICOM and CUDIC staff determined that further work was necessary’ with expectations of a release of a ‘new methodology for comment to the system by Fall 2017’. 2016 CUDIC assessments of C$47 million represented 18% of system net income. The deferral may impact any credit union subject to active or recent regulatory intervention.
“Choosing the next CEO is the single most important decision a board of directors will make.”
Governance bodies, selection committees and any executive search advisors will presumably be busy. In some cases then a Board may consciously seek to appoint an Interim or Acting CEO, say to bridge a limited time gap between a departing and recruited permanent CEO or to engage specialist leadership expertise for a specific issue. For example, the Board of Lake View Credit Union (C$330 million assets and 10,500 members) recently appointed an Interim CEO shortly after it announced the exploration of a potential merger with Integris Credit Union (C$700 million assets and 25,000 members). But any failure to appoint a permanent qualified leader on a timely basis may merit questions to - and of - a governance body in regards succession planning, recruitment deficiencies and remedial Board intentions.
This concludes the first article of a three-part series. A list of sources and references will be appended to the final article in this series.
DISCLAIMER & COPYRIGHT
This article reflects the personal comments of the author, Ross McDonald. This article does not represent the views of any financial cooperative, corporate organization, regulatory body or government ministry. Comments are wholly based on information that is in the public domain.
Although the author has made every effort to ensure that the information in this article was correct at press time, the author does not assume and hereby disclaim any liability to any party for any loss, damage, or disruption caused by errors or omissions, whether such errors or omissions result from negligence, accident, or any other cause.
All rights reserved.
Credit union intervention: an ERM failure?
John Lennon penned ‘we get by with a little help from our friends’. Credit unions can need help too, say when placed under regulatory intervention. Does such an act signal ineffective Enterprise Risk Management practices of the credit union?
John Lennon penned ‘we get by with a little help from our friends’.
Credit unions can need help too, say when placed under regulatory intervention. Does such an act signal ineffective Enterprise Risk Management practices of the credit union?
REGULATION
Regulators have the legislative power to impose an intervention on, or to ‘stage’, a credit union. A regulatory intervention seeks to minimize potential depositor losses and related insurance exposure. Dependent on the perceived severity of circumstances then there are multiple potential intensities of intervention. These can range from an early-warning to imminent insolvency. Specific information related to the number; identity; issues; and matters related to interventions are not in the public domain.
Just like their small business members then credit unions need to balance growth rate, cashflow and earnings. Over time then aggresive growth, capital investments or declining membership may strain capital adequacy, stretch liquidity, erode margins or surface other adverse effects.
Like their business members then credit unions need to offer a reasonable value proposition. Service offering, product range and operational footprint should be commensurate with the customer/member needs; economic climate; organization size; and competitive landscape. Over time then any related deficiencies may yield declined market/wallet share; elevated risk appetite; unsustainable operating efficiency; outdated management; inadequate governance practices and/or broader strategic challenges.
CREDIT UNION INTERVENTIONS
Interventions can be costly. The primary direct expense to a credit union is a higher premium for deposit insurance. This will impact the bottom line, potentially materially. Indirect costs may also be significant as executive and Board time is likely redirected to execute remedial requirements and to manage an elevated regulatory relationship.
Interventions are driven by specific perceived deficiencies. These may relate to a specific risk type (e.g. credit, liquidity); a specific inadequacy (e.g. oversight, policies); an atypical theme (e.g. growth, strategy) or other matters in the credit union.
There is no single remedy for interventions. Perhaps akin to a medical doctor appraisal of a patient then there may be various apparent symptoms and underlying causes. But there may be common themes, say based on historical ailments or current circumstances. Given the escalation to intervention then the remedial prescription will probably be more intense, and less palatable, than a hearty hot toddy.
Remedial resources vary by province. For example, BC credit unions may receive confidential consultative advisory services that are executed, and funded, by Stabilization Central Credit Union.
ENTERPRISE RISK MANAGEMENT
Risk is the lifeblood of any financial institution. For credit unions then taking deposits, extending loans and executing other services inherently involves risk. Entity-level oversight of risk - or Enterprise Risk Management - typically assesses credit, interest rate, liquidity, transaction, strategic, strategic, compliance and other risks as appropriate. Just the sort of topics that are likely relevant to an intervention. Whether a credit union intervention signals an ERM deficiency, in my personal view, rests on two questions.
First, to what degree were management and the Board surprised by the intervention and regulatory concerns?
CEOs and Board Chairs may relish surprises delivered by Santa Claus. Not so much by their regulator. If intervention concerns draw gasps then there may well be misunderstanding of regulatory expectations; inadequate risk oversight; and/or poor ERM execution. Surprises may suggest challenges that extend beyond ERM. For example, if a Board first learns of statutory compliance breaches from the regulator then risk culture and governance practices may be awry.
Second, are the risk competencies and oversight appropriate for the current organization size and complexity?
Progressive organizations typically grow over time. Academics suggest that gradual evolution of organizational size is typically accompanied by periodic step-changes in capabilities. For credit unions then there are arguably levels of size and complexity that may trigger internal step-changes, and perhaps external expectations, in regards appropriate maturity of risk oversight functions. As a ballpark then a recently published Oliver Wyman report notes that in 2016 ‘risk functions will account for about 4 percent of the operating costs of an average bank’. This benchmark may not be appropriate credit unions of all sizes and complexities but peer comparison of the maturity of risk managment function may be insightful.
STAKEHOLDER ENCOURAGEMENT
To a Board Chair of a staged credit union then I urge due concern. The regulator may have identified one or more specific, material, time-sensitive threats to the membership that the Board is elected to represent. Board agenda should reflect this reality. As appropriate then seek advice or assistance. Related resources vary by province. Consider review of Board composition, competences and governance practices. And ultimately remember the arguably most important Board role is CEO selection.
To a CEO of a staged credit union then I encourage a deep breath. You are probably not going to enjoy this experience. The future will likely be required to be significantly different than the past. You may not agree with some perceived concerns. Expansive strategies and favoured initiatives may now deferred. Any ‘too difficult box’ may be prised open with gusto. The foreseeable future likely holds plentiful, potentially difficult, work; rather lower profitability; elevated levels of scrutiny; and no small measure of change. But it is hopefully an opportunity to question accepted norms, and to seek and embrace best practices that will - in time - yield organizational betterment and enhanced member service.
To regulators then I implore use of the motivation ‘carrot’ in addition to the penalty ‘stick’. Identifying the need for intervention is an important function, indeed duty, of any regulator. But as remedial actions are completed, trust is restored, and risk is demonstrably lessened then any onsite assessment and/or intervention appraisal should be undertaken in a timely manner. Incremental to risk-based prudential supervision then the motivational reward of successful betterment - and of normalized deposit insurance premiums - may be material indeed.
Unlike the Beatles then a staged credit union may not be feeling much love. But cooperation amongst cooperatives is a core credit union principle. And the industry is stronger together. So there are likely friends willing, even eager, to help. Let it be.
REFERENCES
Regulatory Guidelines
OSFI, federal regulator, ‘Guide to Intervention for Federally Regulated Deposit-Taking Institutions’ - Guideline: http://www.osfi-bsif.gc.ca/Eng/Docs/Guide_Int.pdf Overview & Process: http://www.osfi-bsif.gc.ca/eng/fi-if/rai-eri/sp-ps/Pages/gid.aspx Risk Management Assessment Criteria: http://www.osfi-bsif.gc.ca/eng/docs/11-risk_management.pdf
FICOM, BC provincial regulator, ‘Guide to Intervention - BC Credit Unions’ - Guideline: http://www.fic.gov.bc.ca/pdf/creditUnionsTrusts/GuideToIntervention.pdf FIA Review: http://www.fin.gov.bc.ca/pld/fiareview.htm
DICO, ON provincial regulator, ERM - Framework and Guide: https://www.dico.com/design/Publications/En/ERM%202011/ERM_Framework_September_2011.pdf
https://www.dico.com/design/Publications/En/ERM%202011/ERM_Application_Guide_September_2011.pdf
Other References
Credit Union Deposit Insurance Corporation, BC government credit union deposit guarantor - Publications: http://www.cudicbc.ca/Publications.html
Stabilization Central Credit Union - Services: https://www.stabil.com/services/
Oliver Wyman Risk Journal - December 2016: http://www.oliverwyman.com/our-expertise/insights/2016/dec/oliver-wyman-risk-journal.html
Colorado Credit Union Working Group on ERM - White paper: https://mwcua.com/wp-content/uploads/2014/09/White_Paper_ERM.pdf
Harvard Business School, ‘Managing Risks - A New Framework’ - Article: https://hbr.org/2012/06/managing-risks-a-new-framework
Harvard Business School, ‘Evolution and Revolution as Organizations Grow’ - Article: https://hbr.org/1998/05/evolution-and-revolution-as-organizations-grow
Wikipedia, ‘Too difficult box’ - Article: https://en.wikipedia.org/wiki/Too_difficult_box
DISCLAIMER & COPYRIGHT
This article reflects the personal comments of the author, Ross McDonald. This article does not represent the views of any financial cooperative, corporate organization, regulatory body or government ministry. Comments are wholly based on information that is in the public domain.
Although the author has made every effort to ensure that the information in this article was correct at press time, the author does not assume and hereby disclaim any liability to any party for any loss, damage, or disruption caused by errors or omissions, whether such errors or omissions result from negligence, accident, or any other cause.
All rights reserved.
Coast Capital Savings: Federal credit union implications for the B.C. system
One member one vote. A core principle of cooperative organizations.
Coast Capital Savings Credit Union is currently conducting an important member vote. Its management and Board seek member approval to submit, and to progress, an application to the federal government for Coast Capital Savings to become a federal credit union.
This is a big deal for members of Coast Capital Savings. But it also has significant and diverse implications for the B.C. credit union industry.
One member one vote. A core principle of cooperative organizations.
Coast Capital Savings Credit Union is currently conducting an important member vote. Its management and Board seek member approval to submit, and to progress, an application to the federal government for Coast Capital Savings to become a federal credit union.
This is a big deal for members of Coast Capital Savings. But it also has significant and diverse implications for the B.C. credit union industry.
Federal Credit Unions
First, context. In 2012, the federal government enacted legislation that permitted federal credit unions. Federal credit unions are authorized to operate branches in any Canadian province. Therefore they are subject to federal legislation and federal regulation. For example then any federal credit union would be subject to OSFI Guidelines, including those on the adequacy of their liquidity and capital that are perhaps more stringent than current provincial regulations. In July 2016 then Caisse populaire acadienne ltée (“UNI Financial Cooperative”) became the first - and currently only - federal credit union. UNI Financial Cooperative is a credit union, headquartered in New Brunswick, that has C$3.5 billion assets; 155,000 members; and 1,000 employees.
Coast Capital Savings Credit Union
Second, Coast Capital Savings. Per CCUA then, at end 2015, Coast Capital Savings was the third largest Canadian credit union with C$13.7 billion assets and 532,000 members. Management and the Board of Coast Capital Savings support the federal credit union strategy. Under its own Rules then Coast Capital Savings must secure 66.7% member approval to execute this strategy. To that end then Coast Capital Savings has recently published documents and videos to educate its members on related matters. Coast Capital Savings has also scheduled two member information sessions. Any approval by members of Coast Capital Savings would represent an important, and necessary, first step. Subsequent consent would be required from CDIC (federal deposit guarantor); FICOM (provincial regulator); OSFI (federal regulator) and the federal Ministry of Finance.
B.C. Credit Union system
Third, the BC credit union system. Now it gets complicated. Credit unions, while distinct cooperative entities, significantly operate as a system. This is partly driven by legal regulations - for example, the B.C. Financial Institutions Act requirement that B.C. credit unions hold certain liquidity deposits at Central 1 Credit Union. It is partly driven by collective commercial benefit - for example, centralized clearing and settlement of payments - that enable product innovation and provide cost economies that would be unavailable to any single credit union. And it is partly driven by cooperative principles (“cooperation among cooperatives”).
The federalization of Coast Capital Savings would have numerous indirect implications for the B.C. credit union industry.
No stress event is likely. The press release of UNI Financial Cooperative noted that its federal charter was secured ‘nearly 18 months after having received a merger approval from its members’. Any similar schedule for Coast Capital Savings would likely allow significant time for members and stakeholders to consider implications and to execute actions.
Central 1 Credit Union would face broad and material impact. If federal then Coast Capital Savings would likely lose its class A membership of Central 1. Cascade effects include share capital, liquidity deposits, governance representation, and potentially profitability and service pricing. Any change in the level of utilization of cooperative centralized products - such as for payments, trade or treasury - by Coast Capital Savings may impact the scope and/or pricing such services, both to Coast Capital Savings and other credit unions.
The residual B.C. credit union industry would still have significant scale and be larger than in any other province. Per CCUA, at December 2015, Canadian credit unions collective reported assets of C$188 billion. B.C. credit unions represented 35% of this, with C$66.4 billion assets. A federal Coast Capital Savings would remove C$13.7 billion assets from the B.C. system. For context then Ontario credit unions held C$40.0 billion assets at end 2015.
Individual B.C. credit unions may receive a short-term boost. High-value member deposits, say amounts larger than the federal deposit guarantee, may migrate from Coast Capital Savings to other B.C. credit unions. Some current members of Coast Capital Savings may also seek an alternative credit union. There may also be medium-term benefits. In time then credit unions may have an incremental intermediary for securitization, through a debt-rated Coast Capital Savings. Residual credit unions may enjoy lower deposit insurance premiums - Frank Chong, Acting Superintendent FICOM, 7 October 2016 Public Accounts Committee draft minutes “A credit union opting to continue into the federal jurisdiction would not be able to bring their funds that were provided to CUDIC to the federal jurisdiction. Those funds would be retained by CUDIC.”
But B.C. credit unions, collectively and individually, would face negative impact too. Industry fragmentation - between large commercial and small community credit unions - may accelerate. Competitive forces could increase as a federal Coast Capital Savings could offer product types, funding sources and cost economies that could attract members from BC credit unions. But the B.C. credit union industry would lose the ideas; expertise; experience; and contributions of a major current stakeholder. B.C. system-level initiatives, such as the FIA review or liquidity stress test, would be have one fewer voice. But Coast Capital Savings may add its voice to federal-level credit union issues. Stronger together, perhaps, but at a federal rather than provincial level.
Were Coast Capital Savings a federal credit union then the BC provincial government would face lower deposit guarantee risk; a smaller mandatory liquidity pool; a lesser regulatory footprint; and the potential for consumer confusion, initially at least, in regards market conduct. Both the federal transition and residual circumstances may impact FICOM, CUDIC and other government entities.
One member one vote may be a compelling principle. But in practice then only a small proportion of members typically vote for credit union resolutions. This one is unprecedented. I encourage members of Coast Capital Savings to read the documentation, to attend an information session scheduled by Coast Capital Savings, and to vote.
http://www.coastcapitalsavings.com/vote
REFERENCES
Coast Capital Savings Credit Union
- Press release - https://www.coastcapitalsavings.com/lang/en/host/.coast.com/PressRoom/NewsReleases/20161017/
- Member vote information - http://www.coastcapitalsavings.com/vote
- Management/Board rationale - https://vote.coastcapitalsavings.com/why-go-national/
- Sept 2015 FIA response - http://www.fin.gov.bc.ca/pld/files/Coast%20Capital%20Savings%20Credit%20Union.pdf
OSFI - Federal Regulator
- Guidance on federal credit unions - http://www.osfi-bsif.gc.ca/eng/fi-if/app/aag-gad/Pages/CFCU.aspx
- List of OSFI Guidelines - http://www.osfi-bsif.gc.ca/eng/fi-if/rg-ro/gdn-ort/gl-ld/Pages/default.aspx
UNI Financial Cooperation - Federal Credit Union
- UNI Financial Cooperation (profile) - http://www.acadie.com/en/contenu.cfm?id=2057
- UNI Financial Cooperation (announcement) - http://www.acadie.com/en/communique2.cfm?id=144
- Federal Department of Finance - http://www.fin.gc.ca/n16/16-086-eng.asp
- CDIC - http://www.cdic.ca/en/newsroom/newsreleases/Pages/first-federal-credit-union.aspx
- CCUA - https://www.ccua.com/news/uni_financial_cooperation_first_credit_union_to_obtain_federal_charter
OTHER
- Central 1: Supporting Credit Union Success - https://www.central1.com/sites/default/files/uploads/files/Future%20State%20Discussion%20Paper%20with%20Letter.pdf
- CCUA: Canadian Credit Union System Brief - https://www.ccua.com/~/media/Public/About/facts_and_figures/documents/Quarterly%20National%20System%20Results/2016_03_15_4Q15_system_results.pdf
- CCUA: Top 100 credit unions - https://www.ccua.com/~/media/Public/About/facts_and_figures/documents/Largest%20100%20Credit%20Unions/2016_04_05_top100_4Q15.pdf
- Draft minutes of BC Select Standing Committee on Public Accounts, October 2016 - https://www.leg.bc.ca/documents-data/committees-transcripts/20161005am-PublicAccounts-Vancouver-Blues
- Vancouver Sun: http://vancouversun.com/business/local-business/surrey-based-coast-capital-savings-making-bid-to-go-national
DISCLAIMER & COPYRIGHT
This article reflects the personal comments of the author, Ross McDonald. This article does not represent the views of any financial cooperative, corporate organization, regulatory body or government ministry. Comments are wholly based on information that is in the public domain.
Although the author has made every effort to ensure that the information in this article was correct at press time, the author does not assume and hereby disclaim any liability to any party for any loss, damage, or disruption caused by errors or omissions, whether such errors or omissions result from negligence, accident, or any other cause.
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