Written Notice for Existing Accounts (disturbing notification from my Credit Union)

My Credit Union, via US Postal Service | August 7, 2009 | My Credit Union

[RegulatorCountry]

Written Notice for Existing Accounts

The Credit Union will make a change in the way it reports your Account balance as part of an aggregate total to the Federal Reserve Bank (FRB). This change will not affect your available balance, dividend earnings on dividend bearing accounts, NCUA insurance, statement or any other feature of your Account. This will allow us to substantially lower our reserve requirement balance at the FRB and increase the amount of funds available for loans and investments, thereby increasing our ability to serve our members. Credit Union Checking, Savings and Money Market Accounts will now be structured into checking and savings sub-accounts for regulatory accounting purposes. The Credit Union may periodically transfer finds between these two sub-accounts. Your dividend calculation on dividend bearing accounts will stay the same on both sub-accounts. If your Account does not earn dividends, the savings sub-account will not earn dividends. If you need further assistance, please contact our Member Center at 1-800-***-****.

[Fingolfin]

You’re right, the risk does increase. I guess the degree of risk is based on the quality of loans they make off of this newly available money.

Your credit union might have been very conservative with high lending standards in the past. The general push from the Fed is for it’s member banks (and credit unions) to make more loans so they might be targeting good institutions like yours.

[GovernmentShrinker]

There’s nothing here to suggest that the Fed has lowered reserve requirements, nor have I seen anything anywhere else to suggest this has occurred — it would be front page news if it happened. The whole business of calculating reserves and reserve requirements is insanely complex. It sounds like your credit union discovered that its internal accounting procedures were artificially increasing its reserve requirement and is remedying the situation with a change to its internal accounting procedures. There are lot of things in current economic news that are worth worrying about, but this isn’t one of them.

[RegulatorCountry]

It would appear that hey’ve effectively been asked to lower their lending standards, correct? And are doing so via creative accounting methods involving transfers of hidden accounts, of which I will not be aware.

Don’t like it at all. Not sure what to do about it at this point, though.

[RegulatorCountry]

Sounds like two sets of books, to me. If I learn of other CU’s issuing similar notifications, I’ll be less concerned about it.

[GovernmentShrinker]

I don’t know if this is a policy decision from the regulator, or if one CU has a really sharp lawyer that’s spotted a loophole (or thinks that he has).

I really doubt that it's either of those. Much more likely is that a new inside or outside accountant noticed that this CU wasn't exploiting a loophole that practically every other CU in the country has been exploiting for a long time. Fixing that makes sense, since failing to fix it simply lowers the CU's profitability, and thus reduces the interest it can afford to pay to its member-investors.

[RegulatorCountry]

Believe me, I will be asking pointed questions, come Monday morning, regarding commensurate reward for increased risk, pertaining to these creative accounting methods.

[GovernmentShrinker]

Any financial institution necessarily has multiple “sets of books”. The various assets and liabilities they have must be classified differently for reporting to different audiences. Regulators insist on a certain set of classifications, accounting firms which will audit financial statements require a different set, the IRS requires another different set, and customers require yet another different set.

If this change is pursuant to a recent regulatory change or regulatory advisory, then you may see other CUs issuing similar notifications. But it may well just be that they’re cleaning up an internal inefficiency that they’ve recently become aware of, in which case you probably won’t see other CUs issuing similar notifications.

[GovernmentShrinker]

There’s nothing here to suggest that they’ve “lowered their lending standards”. Nothing. They need to use their capital efficiently in order to operate with optimal financial efficiency, which benefits YOU. Having extra capital unnecessarily tied up in regulatory red tape is not a good thing. If they start actually relaxing their criteria for making loans, then you should be concerned, but that’s not what’s being described here.

It’s like if you’ve got a an interest bearing savings account and also a non-interest bearing checking account that has no fees if you maintain a minimum balance. And then you realize you’ve been keeping more in the checking account than you need to in order to avoid the fees, because you hadn’t realized that the calculation was on the average balance over the whole month, and thought it had to stay above the minimum at all times to avoid the fee. If you fix this by moving the excess to your savings account where it will start earning interest for you, you’ve done a *good* thing. This is basically what your credit union is doing here — maybe because they’ve been late to realize something, or maybe because there’s been a change or clarification of the regulatory rules, but either way, it would be irresponsible of them not to maximize how their regulatory reserves are calculated.

[IllumiNaughtyByNature]

IIRC, the banks were hording the minimum cash on hand from the previous bail out. (I could be corrected by someone smarter than I, and will appreciate it if i state something incorrect) The bail outs that were handed out were NOT passed on to the small biz and consumers, they were kept in reserve by the banks. I heard one mention that some banks went from 3% before the bailout to 30% cash in reserves after. This could be an adjustment from that in order to open credit lines since your bank feels a little more secure with its position?

It might be a good idea to ask them what their cash ratio is going from to what it will be.

[PAR35]

A quick Google shows that Lockheed and Verity credit unions are doing this as well - so it looks like it might not be unusual.

Lockheed PDF
http://staging.lockheedfcu.com/content/released/High_Rate_Checking_Acct_Agmt_and_Disclosure_4_27_06_Final.pdf

Verity
http://www.veritycu.com/verity.cfm?tn=nw3col&menuid=526&navids=203,526&pageid=737

[Brad from Tennessee]

I read that Bank of America had been determining individual mortgage risk using software that analyzed the personal characteristics and history of customers then approved or disapproved the application. I believe they inherited the computer program from Bank of Boston when BOA absorbed them. The mortgage risk program allowed BOA to feel safe in increasing their leverage ratio from something like 1:5 to 1:12 on mortgages. Apparently there was a flaw in the software formula that didn't become apparent until the economy began to melt and panic.

[RegulatorCountry]

This CU did not partake in TARP, to my knowledge, and I’ve been monitoring them and all my various financial insituttions for over a year, as I noted upthread.

I’ve actually moved my commercial accounts, from my now-essentially-inactive s-corp (casualty of the economy, I’m now employed by a former customer) to a privately-held, locally owned and very old bank & trust, dating to the Reconstruction era, specifically because it has not touched any of the bailout programs, and has purposely kept itself isolated from lending to certain segments all along, as a matter of prudence and fiduciary responsibility.

[RegulatorCountry]

Thank you. This is oddly reassuring, even though it doesn’t exactly bode well for Federal Credit Unions as a whole. I’m usually very handy with a search engine, and didn’t come up with such results myself.

[RegulatorCountry]

Probably didn’t dawn on them, that real estate could ever actually fall in value. Which is odd, because Boston had quite the R/E bust in the early nineties, itself.

[Brad from Tennessee]

Yeah, I remember when Gov. King offered all the incentives to create a new Silicon Valley west of Boston creating an amazing boom. Then Dukakis reinstated taxes and regulations and chased a lot of business out. At the same time Dukakis took credit for King's “Massachusetts Miracle.”