In this episode, Mark Treichel is joined by Government Affairs Practitioner John McKechnie, his former colleague back at NCUA. Aside from catching up, they also discuss the latest financial proceedings being discussed by Congress today in regard to the recent string of bank failurs. They delve into the attacks of banks on credit unions, vendor authority, CLF, CFPB, and the climate-related financial risk ANPR from NCUA.
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Catching Up With John McKechnie Governmental Affairs Practitioner
I am here with another episode of the show. I'm with government affairs practitioner, John McKechnie. John, how are you doing?
I am doing great. Thanks for having me on your show.
You and I go way back. Our paths first crossed at NCUA but you've been in the industry as long as I have. Could you give the audience a little taste of how you got into credit unions and your career summary?
I worked on Capitol Hill in the mid-‘80s for a member of Congress who served on the House. It was called the House Banking Committee back then before they named it to the House Financial Services Committee. I worked for him for three years and got to know one of the CUNA lobbyists on Capitol Hill who offered me an opportunity to come over. I started at CUNA appropriately enough on April Fool's Day 1987 and have been around since.
You and I were colleagues at NCUA from 2006 until 2011. We happened to be there during the meltdown of the mortgage market and the associated turmoil. Frankly, even though it was not something I would call fun in any way, it was the most fascinating and exhilarating part of my career. It afforded me so many opportunities to learn, grow professionally and be part of something big.
There were times that tested the credit union system and NCUA and we passed. Your show is called With Flying Colors. It was a time where we came out of it in a lot of ways stronger even though it was difficult to live through those days. In 2011, I decided to go back into the private sector. I hung out a shingle in DC. I do a lot of work with credit unions, leagues and a couple of other association credit union groups. It’s like that thing in Godfather Part III where he tries to get out, but he keeps bringing me back in.
I understand. That's because credit unions and their members are such a noble purpose. Once you and I both found it, we didn't stray very far from it. We're still ticking in the industry. I thought it'd be great to get on and catch up with you. You talked about ’08 and ’09. I was a regional director at the time. They pulled me in to work on the conservatorships at Westcorp and US Central.
At the time, I had done the biggest conservatorship which was substantially smaller than those at that point in time. I know that our paths crossed relative to that. You worked with the board at that time in particular with then Chairman Mike Fryzel relative to getting expanded authorities liquidity-wise. Ironically, today we've got the SVB and liquidity challenges. You have to go back to ’08 and ‘09 for there to be challenges of holding the maturity, access to portfolios and different related liqudity challenges.
You played a big role in helping NCUA at the time get expanded authorities as it related to the CLF to help the industry through that. This is the first question. Oftentimes you hear the NCUA board, in particular Chairman Todd Harper, who pounds the table anytime he can. He is like, “We need broader authorities at the CLF. ” Do you have any thoughts relative to looking back at how you were able to obtain that and/or what the likelihood of NCUA and Chairman Harper getting that sometime down the road is?
That’s an excellent question and a great way to frame it. The financial system was locked up back in 2008 and early 2009. Even though people talked about the different collapses in the mortgage market, the first problem was a liquidity problem. To your point, one of the first things we had to do at NCUA was to persuade Congress to expand the ability of the CLF. It is an arcane thing. It is not used very much, fortunately, because it's a backup source of liquidity. What we had to do was get Congress to expand the ability of that entity to provide liquidity to the system.
We went from $0 loan demand at the CLF to almost $7 billion in loan demand in less than 2 months. That was eye-popping but those were the times we were in. That is the thing about crises. You don't know when they are going to materialize. That's why it is a crisis. The other part of it is FDIC and the banking system were under, in a lot of ways, much more stress than the credit unions. We were able to use that atmosphere to go to Congress and say, “There's a real need here.” Congress, fortunately, looked ahead, looked down the road and proactively agreed with us that we needed to do some things to update the CLF.
today we're a little bit in the same situation in that even though the turmoil in the banking system has not exactly touched credit unions, what I see on Capitol Hill is an appetite to listen to NCUA and the industry to say, “Let's make sure we're prepared and we have all the ducks in a row in case there is another strain on the liquidity system.”
The CLF is perfectly positioned but it needs to be enhanced a bit, especially in ways that enable the corporate system to distribute liquidity. I'm guardedly optimistic that the Congress is going to be receive it very well. You mentioned Chairman Harper. His leadership is essential. Our board at NCUA has been effective and outspoken in trying to promote the need for CLF enhancements. I am very happy about that.
I'm happy about it. I hope they get it. I love quotes. There's a quote and you might have been the one who introduced it to me. “Don't let any good crisis go to waste.”
That was Obama's first chief of staff who said that but I'll take credit if you’d like me to.
SVB or Silicon Valley Bank, I've had a lot of episodes on that. You talked about how ’08 and ‘09 were one of your most exciting times because you got to learn new things. When SVB hit on a Friday, I was on a call with a client. I had done a post about their stock tanking and the liquidity issues in the morning on LinkedIn. By noon, the FDIC had taken them over. I was glued over the weekend to things that were happening. Janet Yellen was coming out saying, “There's not going to be a bailout.” In my view, by Monday morning, there was a bailout. They invoked systemic impact on some different things. It has created a storm initially relative to liquidity.
There is this natural tension of opposites between banks and credit unions and bank trade associations and credit union trade associations. I know that you probably deal with that side of it. Banks say fields of memberships are getting too broad, taxation and all these things. What's a hot topic in that arena as far as the natural tension between banks and credit unions?
In the first place, if a similar situation had occurred in the credit union system, the banks would be all over NCUA and credit unions. They would be talking about how inadequately regulated they are and how unprofessional credit union boards and management is. I'll leave that comment. The banks have shown themselves to be a little bit of a mess in the way that those institutions were managed and candidly in the way that they were regulated.
FDIC and the Fed allowed things to happen at those banks. It frankly boggled my mind as I'm sure you, as a career in the regulatory realm also. The idea of the FDIC and the state regulator in California allowing SVB to go almost a year without a chief risk officer is mind-boggling.
It is mind-boggling to think that the FDIC and the state regulator in California is allowing SBB to run for almost a year without a risk officer.
You're without a risk officer buying long assets with short liabilities uninsured. With the whole uninsured deposits at 95%, there are no credit unions even close to that, a natural person credit union. It was a fascinating train wreck but there are going to be some ramifications out of it. There are 4 or 5 reports that are coming out. On May 1st, 2023, FDIC has lessons learned and then there'll be the IG reports. I did see something where there are 4 or 5 action items/reports. Different agencies tied to it will be doing some reporting. Will it lead to more regulation? Will it not lead to more regulations? Do you have any thoughts relative to where that might land or where it should land?
This is allowing me as someone who spends a lot of time on Capitol Hill to talk about the differences between banks and credit unions. You mentioned the uninsured deposits, for instance. Ninety-one percent of the credit union deposits are federally insured or privately insured. Mostly, they are federally insured. The point is the situation that existed at those banks with uninsured deposits would never exist in the credit union world. There's a simple reason for that. We're different. We have different business models and business practices. We interact with consumers differently than those banks did. The banks did a high wire act and they got caught in it. We are a lot more conservative and basic.
I've used the sound bite a lot on Capitol Hill that we're boring. That's what you want. We don't want anything. The fascinating part of your question there is about what comes next. It's possible that Congress and all the regulators sit around a table. There's a thing in DC called FSOC or Financial Stability Oversight Council. NCUA is a member of that but also, it is chaired by the Treasury Secretary and has got all the other regulators. That body seems to be looking at a series of recommendations on both capital and liquidity that we're going to have to keep an eye on. I wonder also if there are going to be any suggested changes to the deposit insurance system. If FDIC changes, then NCUSIF is going to have to follow suit. We'll be watching that very closely.
In FSOC, they're talking about more requirements for the big institutions and the questions becomes what happens at NCUA. NCUA doesn't have systemically important institutions as it relates to the US economy but they do have the Office of National Exam and Supervision, which are the big credit unions that are significantly important to the insurance fund. Whatever happens relative to liquidity and capital, NCUA will analyze that and see if there's something that they should add to their bigger institutions which are defined as over $15 billion. That's interesting.
The deposit insurance item, let's say, goes up from $250, $350, $450 or $500. The challenge NCUA is going to have there is that it will increase the denominator but it won't increase the retained earnings in the fund. That will drop the operating level, which could result in a quicker need or a need for a premium for credit unions. While bigger insurance sounds good on its face, there are consequences and unintended consequences of that. It will be interesting to see how that plays out too.
That's one of the laws in DC. They are called unintended consequences. To piggyback a minute, you mentioned something about the way the banking industry continues to pick at credit unions. It was amazing and amusing at the same time. In the middle of all the turmoil in the banking system, at a time when you think that they would be saying, “We're sorry. We made some mistakes. We're going to do better,” instead, one of the bank trade associations decided to use this episode as an opportunity to say the Congress needs to respond by having an oversight hearing on NCUA. It was a classic diversionary tactic. I don't think it gained much traction on Capitol Hill but it was silly to see the smaller bank trade association try to make this into a credit union problem. That doesn't work.
With social media and different terminologies for how that's used, people try about everything. I agree with you. That isn't going to work. You and I worked closely with the NCUA board. You were politically appointed and brought in by a board member. We've got Chairman Harper who's going to be around a long time. He got a new full 6 year term. In August of 2023, board member Rodney Hood's term is coming up.
On average, when a term is up, people stay somewhere between 10 and 14 months. Sometimes, a president moves quicker. Sometimes, a board member will want to find their next place and they'll decide, “I'm done.” Those are three scenarios that might happen. The other thing is it is a unique board structure. The president is a Democrat. The chairman of NCUA is a Democrat. There are two Republicans on the board. Whenever Hood leaves, it will be a Democrat that comes in. 1) How do you see that playing out? 2) What might that mean for the NCUA Board agenda?
There is a lot to unpack there. In the first place and I've tried to be as much of an NCUA historian as I can be, I don't think we've ever had a situation where the chairman has been a minority on the board. We've had a two-member board. You were there longer than me. The chairman being of one party that's in the minority is a very unusual situation. Having said that, this board has at least functioned. All three of them realized that they can be adults about things and try to find areas of agreement where they can. It's not always possible because there are different philosophies between Chairman Harper and the two Republicans but they've made it work relatively well.
I'm intrigued about what's going to happen after August 3rd, 2023. That's the day that Board Member Hood's term is technically over. In the past, you said there was an average of 10 or 14 months of a holdover. I wonder, though, this time since the president is of one party and Board Member Hood is a Republican. There may be a desire to turn the board into a Democratic majority board as quickly as possible. It's conceivable that President Biden may say to Board Member Hood, “You finished your term. Thank you for your service.” He may replace him.
I've heard various rumors about people considering the NCUA board. I'm not going to name any names because it's not appropriate but I will say that there's probably a good long list of Democrats who would want the NCUA board slot and who could get confirmed by the Senate, which is also important. Being nominated is one thing. Being confirmed is another. I suspect that if we did an episode, let's say, in December 2023, we'd be talking about a very different NCUA board. A board is going to be more active on the regulatory front when you have two Democratic members.
The consumer compliance side of it is where I'd be looking first to see maybe a little bit more bandwidth, maybe some expansion of exams and expansion of staff in that arena. Todd is very passionate about that. Looking at how he was able to get his second term and some other things I've heard, he is pretty well connected so that, on average, he can get things moving quicker than maybe perhaps the average connectivity of NCUA chairman in the past. It will be interesting to watch.
You make a good point. This White House probably surveys the landscape. They've got a lot of Biden-appointed regulators and wards out there. NCUA is the only regulatory entity in the Biden administration where you've got a Republican majority. I know that that can't be politically palatable to any of them. That's the way this business works. When in elections you get majorities and you get to do stuff, that's something I respect.
Another thing that's on NCUA’s list a lot relative to changes to the Federal Credit Union Act is vendor authority. That's something that NCUA had during Y2K, which was many years ago. Do you have any thoughts relative to, A) The success of that or, B) What the credit unions are thinking on that?
It is a very predictable fight in some ways. Fight, I use that word because eventually, it's going to come to a head. Predictably, Chairman Harper has articulated his views about third-party vendor authority and the need to have that. I've heard Senate Banking Committee Chairman Brown speak favorably of the idea. There's resistance from the industry. Other NCUA board members have expressed some skepticism, like Vice Chairman Hauptman and Board Member Hood. This issue is going to have to be fought out.
I suspect that there are going to be attempts to look for the next moving financial services vehicle in Capitol Hill. They might try to tack it onto that. The trade associations in the credit union industry generally have some real misgivings about that. Although, there's not a unanimous opinion among credit unions. Some credit unions, in a way, feel like it might be helpful to them. I'm not sure I agree with that, given the fact that I'm not exactly sure what the dimensions of third-party vendor authority, the costs and the reach are going to be.
Many years ago, we had vendor authority. At that time, I was one of the people who was fighting to make sure we had a sunset provision in it if you remember. It was to get us through Y2K. The arguments that were used back then about whether NCUA had a handle on the costs and had the expertise, those same arguments are going to be trotted out this time. On the other side, the same arguments about whether credit unions need more oversight in that area, especially in this day of cyber breaches, are all issues going to be put on the table. I like the fight.
It's a fascinating topic. I tend to agree with you on those issues of, “Do they have the expertise? What will it cost?” If you get the authority, you have to do something with it. If you're going to do something with it, you either got to add staff so you can study it or figure it out. If you don't add staff, you've got to take it away from safety and soundness staff. You can argue it is safety and soundness if a breach happens but you have to cannibalize your staff over there. Like the Dunkin’ Donuts on the corner has a challenge getting staffing and some of my credit union clients having challenges getting fully staffed, NCUA already has that challenge without vendor authority on their plate. It’s like the dog catching the ice cream truck.
You're smarter and more experienced than me on this so I'm going to turn the question around. What do you think the agency is going to do? I'm fascinated. From the work in the bureaucracy, how are they going to manage that? Are they going to simply try to add staff? Are they going to retrain some of the existing staff? What do you think the cost measurements are going to be? I'd like to hear your perspective on that.
There are some people at NCUA when I was there that I mentioned this. When I said it, they smiled. They don't have the authority, number one. If something blows up and they didn't ask to get the authority, why didn't they tell us they didn't have this authority? Part of the positioning at NCUA is, “All the other regulators have it. We don't have it. This is a blind spot.”
While I was there, I thought, “We can't get blamed if it blows up but I don't necessarily want to get it.” I don't want to deal with, as executive director, all those things you said. How am I going to get a, let’s say, 10% increase in staff? NCUA staff is paid well. They're required to be paid well because they're challenging jobs. The credit unions are going to push back on the budget side of it and rightfully so.
Historically, NCUA sometimes will try and retrain people but in this arena, you need to have people who are passionate about that to understand it. They would have to go out and create a specialty tied to this. I don't view it as something that would be cheap. Even though there have been times when NCUA has publicly said, “There won't be much cost tied to this. We need the authority but we'll be able to do it with most of the resources that we have,” to me, that's not reality. If you're going to get it, you have to do something. Something means more money and resources.
I'll add one more thought from a legislative standpoint. There's a bill in the last congress to allow NCUA to have third-party vendor authority. The title was the Cybersecurity Improvement Act. The only time in the entire legislation the word cybersecurity appeared was in the title. There was nothing in the actual body of the legislation. There's a saying, “When in doubt, read the bill,” and I read through it. It doesn't limit NCUA's reach.
NCUA has the ability to gain more support on Capitol Hill if they do focus on cyber because that's a hot topic as it should be. There's hesitance to go beyond maybe the cyber aspect of it. This is probably fodder for a longer discussion. We're going to be talking about third-party vendor authority and potential conflict between the industry and the agency on the Hill later in 2023. I'd be willing to bet on that.
NCUA can gain more support on Capitol Hill if they focus on cyber since it is a real hot topic these days.
I'm not surprised but that's interesting to hear. You picked up on something. I talked about needing particular skillsets. I didn't say the word cyber but as I was thinking it through in my head, I was thinking of cyber experts. As you pointed out, what they asked for was much broader. Maybe it needs to be a little bit more tailored because that might be the Achilles heel of that whole third-party relationship. If they end up getting the authority, making sure the language is tight enough is something you and the trade associations will be watching quite closely, I would imagine.
You ask the wrong question, you get the wrong answer. You better read the bill. NCUA had a board action on climate-related financial risk. I did an episode on it. You might, in particular, like that episode. The board talked about it. You talked about the board working well. They are working well. It was a 2-1 vote. It cited Harper and said he'd given his word relative to that. He got his vote to get the request for information out. They all had good statements. It was a 2-1 vote on our voting with the deed. It was fascinating from that perspective.
I sat down and read the 38 questions. In the hour that they talked about it, they didn't read any of the questions. There was this whole discussion about, “We'll come back to the table and have another vote before we do anything audit,” which is what the Rs are saying. They’re like, “This is a request for information. Todd, even though you could issue a letter to credit unions if you wanted to, you commit to having that done before you'll do anything.” Todd said, “That's where we're going on this.” You read the questions and it is like, “Should we regulate it? How could we regulate it? Should we have guidance?”
WhereI sit, I view this as the first step towards something. We talked about Chairman Harper getting a second vote. You think about climate-related financial risk, the Biden administration and other things. This is a big thing on the Democratic side. It's big for everybody but it's particularly big for the people in power. This was the first test step toward something. Do you have any thoughts on that arena?
I went to the board meeting. I talked to some of the senior staff and the board members at the meeting and afterward. You captured it quite well. All three board members brought a lot of brain power to the issue to the table. There's no question they had thought about this. Chairman Harper's been very passionate about it. The staff who heard has been working pretty intensely on this request for information and the 38 questions.
It is a prelude. I don't know what. Board Member Hood, when he gave Todd his vote, said, “This is not committing us to any particular course of action or any rulemaking.” That's true at the moment but it may not be true in a few months because the board and the DC staff are going to do something with the feedback they get from credit unions.
What I've heard overwhelmingly from credit unions is that when you talk about the NCUA changing its policy about climate, it gets down to lending. That's what it's all about. It's overseeing how credit unions make loans in certain areas that are maybe prone to flooding, winter events or tornadoes. It's an attempt to nudge the financial services sector, not just credit unions.
The group we talked about, FSOC, Janet Yellen's group, is placing quite a bit of emphasis on adding climate sensitivity to regulation. You're seeing, at least under a democratic administration, more emphasis on oversight as it relates to climate change. This is a bigger issue. Republicans and Democrats are always having a tug of war about the green energy policy or climate. This is our front in that battle.
That’s well said. I'm sure you picked up on Board Member Hood looking to get commitment to vote on the participations loans rule in July 2023 and Todd said maybe July or September 2023. Hood's term is up in the middle. Clarify that for me. Thank you.
It was loan participation that Board Member Hood brought up in that context. That's important too because that bridges over into a larger philosophical question on the board about how much CUSOs and other entities can help credit unions participate in loans. That's something that will have real tentacles in the crediting world. I don't know if it's going to be a vote. I don't know when a vote's going to occur on that.
I don't either. Hood's passionate about that. He was trying to get it moving quicker. He's probably cognizant of his August 2023 date. The sooner, the better. He was one of the architects of getting the proposed rule out. They always get to see their pet projects play out before they depart. I've got one more question before I ask you if I've missed any questions. I was looking at MajorLeagueBaseball.com and saw that the Orioles are 16 and 8 and the Twins are 14 and 11. The last time our two teams had that combined winning percentage, Paul Blair was in centerfield for the Orioles and César Tovar for the Twins.
This is taking me back to the golden age of my youth when the Orioles and the Twins played the first two AL Championship Series featured the Orioles and the Minnesota Twins. This was in ‘69 and ‘70. I am very excited here about my Orioles. Even though I live in DC, I grew up in the Baltimore area. I've never changed my colors. I’m excited about the Orioles and you should be about the Twins. They look like they've got something going too.
I'm excited about them probably more than anytime since 1991 in the World Series back in the day with Kirby Puckett. We got something to talk about there as well. Shifting back to credit unions and government affairs, is there any question I should have asked you about what's going on in your world and credit union world that I did not ask?
I don't think you've missed any questions that I can think of at the moment. I would want to reiterate though back to the discussion we had about the bank uncertainty and the unrest of that sector. This is an opportunity to talk about never letting a crisis go to waste. The opportunity for credit unions is to make sure that our lawmakers and regulators know about how different credit unions are from banks. We also have the opportunity to frankly let our policymakers know how much better we are at serving consumer needs.
We haven't even talked in any depth about CFPB or the Consumer Financial Protection Bureau. That should be probably the subject of an entirely different episode because there's so much there. In some ways, CFPB has almost approached NCUA as the most important regulator we pay attention to in Washington. They do so many active things. CFPB is doing things that frankly are controversial in our industry. That's also a group that we all need to keep very close attention to. We ought to tell Congress and CFPB we do a good job with consumers. We don't need the federal government to tell credit unions to treat our members well.
Amen to that. As I look at all the stuff I thought I would ask you, I have CFPB written down here and the term junk fees, which they seem to have created. They seem to ram everything into junk fees. There are a lot of controversial thoughts out there relative to that. I had Dan Berger on my show talking about the junk fees and his view of the overreaching of CFPB. I agree with you. That's the one agency that credit unions need to keep their eye on. I’m glad you brought that up. That’s very good. If my audience would like to reach out and connect with you, what's the best way for them to reach you?
Let me give you two ways. One is my email. It is John@McKechnieLLC.com. LLC is for Limited Liability Corporation. My phone number is (202) 997-5816. A call or a text on that would be returned immediately. I am glad to talk to any of our audience. This has been a lot of fun.
I appreciate your time.
I always enjoy talking to you. Let's talk again soon.
Let's do it again soon. To the audience, thank you for reading.
About John McKechnie
John McKechnie is a Governmental Affairs Practitioner who formerly worked at both CUNA and NCUA.