February 28, 2020

Economic and Market Update: The Impact of COVID-19

The COVID-19 outbreak in Wuhan, China, began Jan. 17, 2020, and quickly spread to more than 30 countries. Equity markets around the world initially ignored the potential risks of the virus. However, this week risk-based investments sold off sharply. In addition, the Center for Disease Control and Prevention issued a warning to prepare for an eventual outbreak of COVID-19 in the U.S., adding additional negative sentiment to markets. KC Mathews, CFA, chief investment officer for UMB, examines the impact of the coronavirus on the economy, equity markets and the bond market.

ABA Ads Call For End To Large CU Tax Exemption

As part of its ongoing efforts to educate policymakers and the public about large credit unions’ abuse of their tax exemption, the American Bankers Association — through its Explore Credit Unions campaign — has launched a new series of ads designed to highlight how large credit unions have lost their way. The ads highlight several ways that large credit unions have far exceeded their statutory mission to serve individuals of modest means —from buying up taxpaying banks to purchasing naming rates to sports stadiums. They also call for a reexamination of the tax exemptions for these institutions.

In addition to the advertising campaign, ExploreCreditUnions.com features new blog posts that highlight the ways credit unions have outgrown their special treatment. 

The ad campaign coincided with Credit Union National Association’s governmental affairs conference in Washington, D.C., this past week. 

ABA: Congress Should Apply CRA To Large Credit Unions

Congress must do more to ensure that the nation’s largest credit unions are accountable to their statutory mission to serve individuals in low- to moderate-income areas, according to a recent blog post from the American Bankers Association. 

Citing data from S&P Global, ABA Chief Economist James Chessen noted that among large credit unions with more than $500 million in assets, the majority of branches —73% — are currently concentrated in middle- and upper-income communities, while just 6% are located in low-income areas.

“These largest credit unions receive the highest dollar benefit from the tax exemption, yet they have chosen to focus their resources on the well-to-do rather than using their tax advantage to help expand cheaper credit to those who need it most,” Chessen wrote. “Simply put, they are using their tax-exempt status to make profitable consumer and business loans to people who do not need taxpayer-subsidized financial services and can afford to shop around for financial products elsewhere.” By contrast, he noted that of all the credit union branches headquartered in low-income communities, two out of three are operated by small credit unions.

One way Congress could ensure greater accountability for large credit unions would be to require them to comply with the Community Reinvestment Act, as taxpaying banks are required to do, Chessen said. “If these credit unions are in fact meeting the needs of low- and moderate-income people, they should have no fear of demonstrating that explicitly as banks must do.”

ABA’s blog post echoed findings from a report issued last year by Federal Financial Analytics that highlighted the need to impose mission-related requirements on credit unions. Writings by the National Taxpayers Union and the Tax Foundation also have emphasized the immediate need for Congress to revisit the credit union tax exemption.

U.S. Senators Urge Greater Regulatory Flexibility For Ag Lenders 

In a letter to the federal banking agencies, Sens. John Thune, R-S.D., and Tammy Baldwin, D-Wis., made a bipartisan appeal for greater regulatory flexibility that would allow community financial institutions to work with farmers and ranchers during a challenging time in the agricultural economy. The senators raised concerns about policies that could limit banks’ ability to lend to struggling farmers and ranchers, such as arbitrary concentration limits on ag portfolios. 

“Community financial institutions have a great deal of experience in agriculture lending during downturns in the farm economy,” they wrote. “We urge you to encourage your examiners to continue valuing their judgment when it comes to providing capital to producers.” 

They added that additional flexibility need not come at the expense of safety and soundness, emphasizing that “we believe community financial institutions, together with examiners and regulators, can exercise sound judgment until the farm economy rebounds.”

FDIC: Overall Bank Earnings Decline, Community Bank Earnings Up

FDIC-insured banks and savings institutions earned $55.2 billion in the fourth quarter of 2019, a 6.9% decrease from the industry’s earnings a year before, the Federal Deposit Insurance Corporation said in its Quarterly Banking Profile. The decline was attributed to lower net interest income and higher expenses. Noninterest income rose 2.5% from the previous year, driven by higher trading revenues.

“The FDIC’s report shows that our nation’s banks remain healthy and well capitalized as they continue to support a strong U.S. economy,” said James Chessen, chief economist for the American Bankers Association. “While business lending moderated in the fourth quarter amid policy and trade uncertainty, overall bank lending grew by more than $360 billion over the course of 2019, with loans up in nearly every category including business, consumer and real estate.”

Community banks earned $6.4 billion during the fourth quarter, up 4.4% from the same period last year. Net interest income ticked up 2.1% as a result of strong annual loan growth. Loan and lease balances were up 5.5% year-on-year, led by growth in nonfarm nonresidential loans, single-family residential loans and construction and development loans. The loan growth rate slowed to 1%, down from 1.3% in the third quarter. The average community bank net interest margin fell 15 basis points to 3.62%.

Overall, banks’ noninterest expense was up 3.2% from the year prior, driven by higher salary and employee benefits. Average return on assets fell from 1.35% to 1.29% year-on-year, and average net interest margin fell 20 basis points from a year ago to 3.28%, as funding costs outpaced asset yields. Deposit balances increased by 1.8% from the third quarter.

Net charge-offs rose 10.4% from a year ago, while the rate of loans that were 90 or more days past due remained relatively stable at 0.91%. Meanwhile, the number of institutions on the problem bank list fell from 55 to 51. Three de novo banks were added in the fourth quarter.

As Agencies Revisit CAMELS, ABA Urges More Transparency

The American Bankers Association welcomed efforts from the Federal Reserve and Federal Deposit Insurance Corporation to revisit the 41-year-old CAMELS uniform rating system. ABA urged the agencies to make CAMELS ratings reflective of today’s regulatory requirements, communicate ratings expectations in advance and make the “M” or management component more transparent.

Specifically, ABA noted that banks today operate under a more stringent quantitative framework for capital and liquidity and that accounting standards have changed. ABA said, “We encourage the agencies to accept compliance with these standards as evidence of operating within the highest ratings tier.”

The association also called on the agencies to communicate in advance when their expectations under CAMELS change, noting that “it is currently unclear how, or if, the underlying expectations change as banks cross a certain asset threshold, engage in new business, or prioritize different lines of business.” And ABA asked for greater transparency in the management component, which is “viewed by banks of all sizes as an arbitrary, highly subjective, catch-all category.”

Pentagon Makes ABA-Urged Fix to Military Lending Act Interpretive Rule

The U.S. Defense Department is withdrawing a provision in its interpretive rule to the Military Lending Act regulations related to vehicle loans that finance Guaranteed Auto Protection and insurance credit. 

In December 2017, the Pentagon amended its earlier MLA interpretive rule to provide that vehicle loans are not exempt if they finance “any credit-related product or service” such as GAP. The interpretation was inconsistent with the statute and the regulation and created uncertainty, confusion, compliance burdens and substantial potential liability for banks, the American Bankers Association said.

The DoD is amending the interpretive rule by withdrawing the existing Q&A 2 and reverting to the prior Q&A 2, which would interpret loans used to purchase vehicles securing the loan as exempt even if they are used to purchase GAP and other products.

CFPB Updates TRID FAQs

The Consumer Financial Protection Bureau updated its FAQs related to the TILA-RESPA Integrated Disclosure Rule. The latest updates address lender credits under the TRID rule, which are defined as payments, including credits, rebates or reimbursements, that a creditor provides to a consumer to offset closing costs, and premiums in the form of cash that a creditor provides to a consumer in exchange for specific acts, such as for accepting a specific interest rate. The FAQs detail the differences for specific and general lender credits, disclosure requirements related to lender credits and more.

ABA Seeks Banker Feedback on FDIC Signage, Advertising Proposal

The American Bankers Association is seeking bankers to join a comment letter working group to provide feedback that will inform ABA’s response to a recent request for information by the Federal Deposit Insurance Corporation on modernizing the agency’s official signage and advertising rules. Through the RFI, the agency is seeking to ensure that its rules are keeping pace with changes in how financial services products are delivered and how consumers interact with financial services providers. Comments are due Thursday, March 19.