The U.S. Government Accountability Office (GAO) is often called the “congressional watchdog” because it oversees how the federal government operates and spends its money. Congress established the department to control expenses and debt after World War I. GAO’s responsibilities broadened to include performance audits to examine if government programs were meeting their objectives. This bipartisan group is recognized as apolitical and delivers a robust analysis in areas ranging from income taxes to social programs and operational efficiency.
GAO recently reported on The National Credit Union Administration (NCUA), an oversight body similar to the Federal Reserve. Though the review was generally complimentary, the agency reached an expected conclusion with credit union failures currently at record low levels. When the individual components of Capital Adequacy, Asset Quality, Management, Earnings and Liquidity (CAMEL) fall below the composite rankings, the financial institution is more prone to fail than those who meet that threshold.
The conclusion is not a surprise. If the financial institution does not deliver on asset quality or fails to properly leverage, the ability to operate in a competitive environment is at risk. In addition, recent action by the NCUA placed an exciting spin on the CAMEL by pluralizing the acronym to now be called CAMELS, where it recognized the importance of “Sensitivity to Market Risk,” as the NCUA recently reported.
The benefits of adding the “S” component are to enhance transparency and allow the NCUA and federally insured consumer and corporate credit unions to better distinguish between liquidity risk (“L”) and sensitivity to market risk (“S”). The addition of “S” also enhances consistency between the supervision of credit unions and financial institutions supervised by the other banking agencies.
This distinction is important and reflective of the changes found in the loss recognition requirements of CECL. As Mercator discussed, when the Current Expected Credit Loss (CECL) requirements required large banks to fund loss reserves ahead of the loss occurrence, the process helped top banks navigate the complexities of COVID-19. The regulation now aims towards smaller financial institutions. This change is an important step to protect against financial shock. Although the conversion may have some operational change, it provides essential protection against the threat of a downward economic environment.
In summary, CECL accelerates the recognition of loan loss reserves by requiring that community banks and credit unions consider the impact of the current and expected economic environment. Thus, instead of linear projections on how portfolios perform, the new loss models must consider the impact of macroeconomic factors such as employment and inflation, two timely issues in the COVID-world.
Five thousand credit unions handle a significant amount of consumer credit. According to the latest metrics, the total consumer credit owned by credit unions is $525.3 billion as of September 2021. This is more than double the level reported in September 2010, when the metric hit $224.9 billion.
Auto loans play the most significant role in the credit union’s consumer credit portfolio for a good reason. As member-owned institutions, credit unions are more risk-averse than banks. With this in mind, many consumer loans are secured. For the same period reported above, auto loans were $393.9 billion in September 2021 or 75% of the credit union’s receivables. In September 2011, auto loans were $165.9 billion, or 74.7%, roughly flat.
Total credit card volume at credit unions was $61.5 billion in September 2021, up from $35.3 billion in September 2010, up 74.4%. Credit unions rebounded faster than financial institutions after COVID. In 2019, financial institutions carried $984 billion in credit card receivables but fell to $874 billion in September 2021, or down 11%. Credit unions slipped only 7% during the same period, moving from $66.5 billion to $61.5 billion. This trend suggests better customer loyalty and on-par card benefits for credit union credit cards.
CNBC mentioned that anticipated softening in auto sales might signal an important lending shift:
The sales pace in the U.S. market has fallen every month since reaching a peak of 18.3 million in April. It’s expected to be 12.1 million to 12.2 million in September.
Cox analysts predict vehicle supply will improve mildly in the fourth quarter and continue to improve throughout 2022, but won’t return to “normal” until 2023 – if ever.
Now is an excellent time to look at credit cards as a growth opportunity. Recent numbers indicate that credit unions have a rate advantage over financial institutions. In September 2021, the average interest rate charged by banks was 12.28%. Credit union interest rates were more than 1% better, at 11.27%.
With tighter regulatory controls under CECL and a trend to retain cardholders running better than banks, incremental growth for credit cards at credit unions might pose a substantial opportunity in 2022.
Overview by Brian Riley, Director, Credit Advisory Service at Mercator Advisory Group
