Two historical antagonists, one a banking advocate and the other an outspoken credit union executive, joined forces when they traveled together to Washington to meet with federal banking regulators to talk about what they considered to be a crisis in community access to financial services.
Thad Woodard, pictured at far left, will retire as 37-year president/CEO of the North Carolina Bankers Association on Jan. 1, 2015.
Jim Blaine, pictured to the right of Woodard, has served as president of the $28.6 billion State Employees' Credit Union, in Raleigh, N.C., for 35 years.
Over the years, both have sparred over the usual bank and credit union issues of taxation and field of membership.
However, their visit to Washington in August revealed parallel concerns faced by smaller banks and credit unions.
“It's not too much to say that the far eastern parts of our state, east of Interstate 95, and the far western mountainous regions, are becoming almost like third world nations in terms of access to financial services,” Blaine said.
Many smaller communities have community banks that remain open for business but for the most part, have stopped growing and may disappear within the next 20 years, he added.
“And, we are seeing that when they do disappear, they are not being replaced,” he said, noting that larger banks and credit unions have been looking at more urban areas as sites for new branches.
Woodard offered a more robust appreciation of the financial health of banks in North Carolina, but agreed that smaller community banks faced a daunting mix of economic, regulatory and economy of scale issues that could threaten their survival.
He also characterized the trip as Blaine's attempt to find a way into the banking world without having to convert SECU into a mutual bank – something Woodard said Blaine failed to do.
“Jim Blaine is an outstanding banker,” Woodard said. “What he discovered was that there is only one door for a credit union to take on a bank charter in North Carolina and that is to convert the credit union.”
But Woodard also acknowledged that such a conversion could be open to moves by insiders
“What we really wanted to see (is) if we could find out is whether there is a future for mutuality, whether for credit unions or banks,” Blaine explained.to further flip the bank to a stock-issuing institution in an attempt to cash out on what had been mutually held equity – an outcome he agreed would also not serve the community's interest.
So the two, along with Jim Johnson, chairman of the SECU board of directors, made a trip to Washington Aug. 12 and met with Paul Nash, chief of staff, and Toney Bland, senior deputy comptroller, with the Office of Comptroller of the Currency, the U.S. Treasury Department agency that charters and regulates federally chartered banks.
Blaine and Woodward also met with Doreen Eberly, director of risk management supervision at the FDIC, and briefly with FDIC Chairman Martin Gruenberg, about the possibility of merging the NCUSIF and FDIC. Their conversation also touched upon whether there needs to be another financial institution charter such as a community development charter that would combine aspects of both credit unions and banks.
The OCC and FDIC did not confirme the meetings or the subjects discussed.
While Blaine and Woodard characterized the exchanges as friendly and the officials as cordial and welcoming, they are said the meetings were not helpful because they didn't get much feedback.
The OCC took over the federal chartering and regulation of mutual banks when it absorbed the former Office of Thrift Supervision as one of the consequences of the housing finance crisis and the Dodd-Frank Financial Reform Act.
Blaine and Woodard said the officials expressed confidence about the future of the mutual charter at the federal level, but said any efforts to update the charter would require Congressional action.
The American Bankers Association confirmed that need saying mutual banks face charter issues similar to those of credit unions, but not identical.
One similarity involves capital. Mutual banks, like credit unions, cannot issue stock and raise funds from capital markets and can only rely on retained earnings to build capital.
A second shared issue deals with lines of business. At the federal level, the Home Owners Loan Act requires mutual banks to be concentrated residential real estate lenders, an approach that is at odds with the prevailing regulatory attitude that frowns upon concentrating lending in any one type of loan.
The ABA said it is backing a legislative measure that would provide what it calls mutual capital certificates to act as a means for mutual banks to raise tier one capital with other than retained earnings. The proposed law would also expand the mutual bank charter at the national level to allow mutual banks to enter into other lines of business besides real estate lending.
Blaine, Woodard and Johnson met with officials at the FDIC to examine whether that regulator might be open to providing credit unions with an alternative source of insurance than the NCUSIF, something the FDIC said it could not do as the insurance fund for bank deposits by statute.
Blaine stressed that the goal was not to shop for an easier insurer, but instead, for one which tended, in his view, to adopt a more evidence-based approach to risk.
“From our perspective, we viewed the NCUA's risk based capital proposal as a direct assault on the state charter, a direct assault,” Blaine said. He argued that a credit union, even a large one like SECU, that makes consumer and real estate loans that are soundly underwritten does not constitute a threat to either the NCUSIF or the overall financial system.
“Bear in mind that these increased capital requirements are being proposed by our insurer as an insurance matter, not by statute,” Blaine pointed out. “If our insurer begins to consider what we do to serve our members too risky for its insurance fund, we may have no choice but to convert.”
Blaine also praised the FDIC for its willingness to listen to industry concerns and input and for being more respectful of state charters, pointing out that North Carolina bank regulators and the FDIC alternate years in which they examine the state's chartered banks.
Steve Williams, a principal partner at Phoenix-based research firm Cornerstone Advisors, praised Blaine and Woodard for having taken the trip to meet the federal regulators.
“This is the kind of thing that needs to start happening to let regulators know just how out of balance they are becoming,” Williams said.
He continued, “From my perspective, this is less about what charter a given financial institution has and more about the regulators' rigorous scourging of the innocent. The last thing any regulator wants to be seen as is soft on risk or as not taking possible losses seriously; but as a result, they have turned up the heat on people who have never posed the sorts of risks they feared.”
Williams pointed to the Bank Secrecy Act as an example of a regulatory regime whose impact is disproportionately heavy on smaller institutions, both banks and credit unions, than on larger ones because the bigger financial centers have more resources to meet the burden.
Banks and credit unions need to find a vehicle to awaken lawmakers and the public about the imbalance of regulations, Williams suggested.
“Somewhere, there has to a balance between protecting against genuine risks, and costs which force financial institutions away from the activity at all,” he said.
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