Exec Pay Disincentives, Lending Demonstrations
First regulators put the squeeze to your credit unions and now the squeeze is on credit union executives. Multiple financial services regulators, including the NCUA, are required under the Dodd-Frank Act to curb executive compensation packages that could create a tension between personal interests and the long-term safety and soundness of the financial institution overall.
The goal of the regulation absolutely makes sense. But this is the job of the boards of directors and not the federal regulators, particularly as it pertains to credit unions. The board’s entire purpose is to ensure long-term viability of the credit union for its members. The legislation on this is bad public policy from the start. It represents further infringement of the government into free-market enterprise.
The regulation also attacks a symptom that took place by some bad actors rather than the root of the problem. Many things went wrong causing the current economic crisis, including lack of oversight of unregulated entities like mortgage brokers and the conflict of interest at the ratings agencies. And, some were outright breaking the laws and regulations already in place. The idea that credit union executive compensation packages led to the crisis is ludicrous.
Credit unions are already restricted in the compensation packages they offer vis-à-vis competing banks by virtue of their not-for-profit, cooperative structure. There’s also no documentation of credit unions getting into trouble with this (more on that in a moment). Yet the asset-size threshold for credit unions ensnared in this regulation is much lower for credit unions than for banks. Banks threshold for compliance with the most stringent part of the regulation is institutions over $50 billion while credit unions’ threshold is $10 billion. The discrepancy further serves to hinder credit unions in getting the caliber executives they want and their members deserve.
Further, credit unions over $1 billion could not employ compensation programs that could lead to a material loss for the credit union and would have to document its compliance procedures. That is all code for greater regulatory compliance burden.
True, compensation isn’t everything when it comes to job hunting, but it certainly counts for a lot. The federal banking regulators made this case when the Financial Institutions Reform, Recovery and Enforcement Act became law. The FIRREA agencies, including the NCUA, escaped the standard federal government grade system in part because they said they couldn’t attract the necessary talent otherwise; the best financial minds would be scooped up by the institutions themselves. That may not be the best example since the NCUA employees are now some of the highest paid in the federal government.
It is also true that credit unions have not had a history of lavish pay packages, but then again, federal credit unions have never been required to disclose their executives’ compensation. Disclosure could very well be the next step if regulators go down this path of intervening in your business decisions.
In other news, Sen. Mark Udall re-upped the member business lending legislation, minus the increase in the threshold on reporting business loans from $50,000 to $250,000. The credit union trades are trying to work their magic on the legislation despite the uproar of the banking trade groups.
Numbers–numbers of contacts, numbers of visits, numbers of constituents–are a key part of getting this legislation that is a positive for credit unions and small businesses through. But it must run deeper than that. If credit unions truly can call themselves a movement, they need to be able to mobilize.
The trade groups are important to work with to coordinate mobilization, so partnering with the National Cooperative Business Association and the Chambers of Commerce and others is a good place to start. Next the borrowers and potential beneficiaries need to be mobilized for the cause. Members of Congress are aware of the pent-up need for small business loans. What would really drive it home to them are demonstrations, locally and nationally. Main Street shop owners, who want this service and cannot find other lenders willing to help, and credit union executives supporting expanded business lending should take to the streets outside representatives’ district offices. No shenanigans. Just a demonstration of sheer numbers. Invite a lawmaker to speak and provide a list of attendees, their businesses and where they’re from in the district. . A real showing could make the theoretical discussion of what 12.25% of assets versus 27.5% of assets could mean for small businesses more tangible for lawmakers.