As a financial journalist, I spend a lot of time seeing what people well smarter than me have to say about money, markets, and the economy. One report, written by the Federal Reserve’s own economists, left me with not exactly an upbeat outlook.
1. Researchers at the US central bank just published a paper warning that a historic surge in the percentage of distressed American companies could worsen the fallout from the Fed’s inflation battle. Plainly, they said high borrowing costs could cause a huge number of companies to crumble.
“The share of nonfinancial firms in financial distress has reached a level that is higher than during most previous tightening episodes since the 1970s,” Ander Perez-Orive and Yannick Timmer wrote.
The Fed’s 10 consecutive interest rates — intended to quell historically high prices — threaten to hammer business investment, employment, and economic activity. Now, the economists said, it’s possible that debt-ridden companies will avoid spending money on new developments or facilities, hiring, or production.
The full extent of the damage remains to be seen, but as of now, the central bank authors said about 37% of firms are in trouble.
That is, more than a third of companies could default in the coming months, thanks to tightening monetary policy. Pardon the jargon, but here’s how the researchers put it:
“Our hypothesis is that following a policy tightening, access to external financing deteriorates more for firms that are in distress than for healthy firms, while following a policy easing, external financing conditions do not change appreciably enough for the two groups of firms to trigger a differential response.”
Got it? It’s okay, I didn’t either the first time around.
Basically, they are predicting that companies feel pain in times of policy tightening, especially those with weaker balance sheets to begin with. But at the same time, loosening of policy doesn’t necessarily translate to smoother sailing in the same way.
Courtesy of Phil Rose, Business Insider
Click here for the full article link
June 22, 2023 — The NCUA Board meeting agenda consisted of three items for consideration, including a request for comment regarding NCUA’s Operating Fee Schedule Methodology, a board briefing regarding new charter modernization, and a proposed Interpretive Ruling and Policy Statement (IRPS) specific to the Minority Depository Institution (MDI) Program.
Operating Fee Schedule Methodology
As the first action item, the Board unanimously approved a notice and request for comment on revisions to the NCUA Operating Fee Schedule Methodology. In the request for comment, the Board seeks to increase the threshold at which federal credit unions are exempt from paying an operating fee from $1 million to $2 million in assets. This change would be adjusted annually for inflation. The Board is also seeking comments about whether and how the Board should modify the current three-tier Operating Fee Schedule.
Specifically, the Board is evaluating how the current methodology is regressive in that credit unions with assets exceeding $1 billion pay a lower marginal rate than those credit unions with less than $1 billion in assets. Prior to approving the notice and request for comment Board Member Hood also inquired as to whether a larger exemption threshold of $10 million had been considered vs. the $2 million. The NCUA considered the larger threshold and determined if the threshold were increased to $10 million, it would exempt 27% of federal credit unions vs. 7% if increased to an exemption of $2 million. Comments will be due 60 days from the date of publication in the Federal Register.
Board Briefing – New Charter Modernization
The Board was also briefed on the new charter modernization efforts by the Office of Credit Union Resources and Expansion (CURE). The briefing discussed the three phases of the charter process, and staff presented the significant strides made in improving the chartering process for a new credit union.
The improvements include updates to the chartering webpage and new templates and forms to help new groups seeking to organize a new credit union. Due to the various improvements, the average time to review and approve a complete application has been reduced from 564 to 130 days from start to finish. In total, there have been 29 applications received since 2018, with 14 applications approved, five currently under review, two denials, and one withdrawal. The Board was also briefed on a new provisional charter pilot program that is set to launch by the end of September 2023. For the agency to receive stakeholder feedback on the pilot program, it program will be open for a 60-day comment period upon publication in the Federal Register.
Interpretive Ruling and Policy Statement – MDI Preservation Program
Also unanimously approved were proposed changes to the IRPS on the agency’s Minority Depository Institution Preservation Program. The proposal would amend IRPS 13-1, approved by the agency on June 18, 2015. The proposed changes include:
- Incorporating recent program initiatives such as the consulting and support program for MDIs and providing examples of technical assistance an MDI may receive.
- Including subsections on engagement with MDIs, technical assistance, examination of MDIs, Community Development Revolving Loan Fund grants and loans, training and education, and preservation of MDIs.
- Establishing a new standard for MDIs to assess their designation periodically and updating how the NCUA will review an MDI’s designation status to reflect it will be part of the examination process.
- Simplifying “community it services, as designated in its charter” to refer to an MDI’s field of membership.
- Specifying that “Asian American” includes Native Hawaiian or Other Pacific Islander, and “Native American” includes American Indian and Alaska Natives.
- Clarifying that “small entity” means a “small credit union” as defined by the NCUA and the simplified process for a small credit union to determine whether it qualifies as an MDI.
- Adding new sections that address comments to the agency, the agency’s annual congressional reporting on MDIs, and the availability of the list of MDIs from the NCUA website.
Comments on the changes to the IRPS will be due 60 days from the date of publication in the Federal Register.
CFPB Finds that Billions of Dollars Stored on Popular Payment Apps May Lack Federal Insurance
The Consumer Financial Protection Bureau (CFPB) published an issue spotlight on digital payment apps heavily used by consumers and businesses. The analysis finds that funds stored on these apps may not be safe in the event of financial distress, since the funds may not be held in accounts with federal deposit insurance coverage. The CFPB also issued a consumer advisory for customers holding funds in these apps and how they can make sure their funds remain safe.
Today’s issue spotlight finds that:
- More than three quarters of adults in the United States have used a payment app. Younger customers’ use of these payment app services is especially prevalent. Approximately 85 percent of consumers aged 18 to 29 have used such a service. Transaction volume across all service providers in 2022 was estimated at approximately $893 billion, and is projected to reach approximately $1.6 trillion by 2027.
- Nonbanks can earn money when users store funds on their platforms. When users of these digital apps receive payments, the funds are not usually swept automatically to the recipient’s linked bank or credit union account. Instead, companies hold and invest the funds. These activities are not typically subjected to the same oversight that an insured bank or credit union faces. Apps also earn money through fees on merchants and other ancillary services, like selling crypto-assets and offering affiliated financial products.
- Funds sitting in payment app accounts often lack deposit insurance. When users receive payments, through these apps, these funds are not automatically swept into their linked bank or credit union account. In addition, payment app companies do not necessarily store customer funds in an insured account through a business arrangement with a bank or credit union. The company’s investments carry risk and if it were to fail, customers could lose their funds.
- User agreements often lack specific information. User agreements for digital payment apps often lack information on where funds are being held or invested, whether and under what conditions they may be insured, and what would happen if the company or the entity holding the funds were to fail. Read more
The Consumer Financial Protection Bureau (CFPB) has ordered installment lender OneMain Financial to pay $20 million in redress and penalties for failing to refund interest charged to 25,000 customers who cancelled purchases within a purported “full refund period,” and for deceiving borrowers about needing to purchase add-on products to receive a loan.
The CFPB found that OneMain:
- Tricked borrowers into signing up for optional products: OneMain customers were led to believe that they could not receive a loan without signing up for an add-on product. Some employees added the products to paperwork without verbally informing the consumer that the products were included or optional, a practice referred to internally as “pre-packing.” If the consumer identified the products and asked for their removal, employees were expected to make it seem difficult to remove the products. In other cases, employees obscured written disclosures from consumers’ view, or verbally contradicted them.
- Kept $10 million in interest charges despite its “full-refund” policy: OneMain told borrowers they would receive a “full refund” on add-on purchases if they cancelled within a certain period (generally 30 days). However, OneMain unfairly failed to refund interest charges for about 25,000 borrowers who signed up for add-ons such as roadside assistance benefits, identity theft protection, or entertainment discounts. Because of how OneMain precomputed interest on some loans, customers had already been charged significant amounts of interest that the company did not refund. Over the past four years, OneMain kept approximately $10 million in interest charges attributable to add-ons cancelled within its purported “full refund period.” Read more
June 13 – 14, 2023
The Exchange (A NASCUS Initiative) is an annual issues-driven event that brings state- and federally-chartered credit union CEOs with assets greater than $10B+ together with dynamic state system regulators to identify and discuss emerging issues and trends affecting dual charters and the financial services sector.
In an effort to foster further collaboration and develop innovative solutions, NCUA, federal regulatory agencies, and/or subject matter experts may be invited to participate in part of the discussion.
Location:
Westin Denver International Airport
8300 Peña Boulevard
Denver, CO 80249
The Westin Hotel is in the Jeppessen Terminal, adjacent to the Denver International Airport.
Event Registration:
The Exchange is by invitation only. Please contact Isaida Woo at [email protected] with any questions.