CONTINUOUS LEARNING. INDUSTRY ENGAGEMENT.

Ross McDonald 2016-12-15 Ross McDonald 2016-12-15

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deficiencies may yield declined market/wallet share; elevated risk appetite; unsustainable operating efficiency; outdated management; inadequate governance practices and/or broader strategic challenges.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.

Ross McDonald 2016-10-23 Ross McDonald 2016-10-23

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.

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

CONTINUOUS LEARNING. INDUSTRY ENGAGEMENT.

Credit union intervention: an ERM failure?

REGULATION

CREDIT UNION INTERVENTIONS

ENTERPRISE RISK MANAGEMENT

STAKEHOLDER ENCOURAGEMENT

REFERENCES

Regulatory Guidelines

Other References

DISCLAIMER & COPYRIGHT

Coast Capital Savings: Federal credit union implications for the B.C. system

Federal Credit Unions

Coast Capital Savings Credit Union

B.C. Credit Union system

REFERENCES

Coast Capital Savings Credit Union

OSFI - Federal Regulator

UNI Financial Cooperation - Federal Credit Union

OTHER

DISCLAIMER & COPYRIGHT