The crisis of 2007-2008 brought profound changes to the financial services industry as well as to the American consumer's habits. One change-albeit more subtle-is that this event served as a catalyst for the chief financial officer's transformation, a process that has been in the works for a number of years.
Influence and its consequence, more in power in the workplace, have shifted to the finance area; in the past its residents were often dismissed as bean counters.
"The CFO used to be the guy in the room waving hands and saying, too much risk, while other folks saw opportunity," said Scott Waite, CFO & SVP, Patelco Credit Union, Pleasanton, Calif. "Today, the whole world is more aware of risk questions and chief financial officers don't feel as lonely in the risk game. The CFO is being used and viewed as a strategic advisor for the CEO and board."
The chief financial officer's transformation is the subject of a white paper just released by CUNA's CFO Council.
Background of Transformation
While there are obvious reasons and others less so for this transformation, the prevention of another financial meltdown is at the top of the list. Because of the heightened tensions within the financial services industry, the board and CEO are demanding more from their CFO. While in the past the monthly reporting of numbers and meeting targets were thought to be sufficient. Today the data need to be interpreted and put into context for tactics and strategies.
In the past, capital could be calculated in mergers by the pooling method. Today it is determined by fair value accounting, which typically requires hiring an outside firm for the intricate and time-consuming calculus. The CFO, though, is accountable for overseeing and evaluating the efforts of those hired for this task.
Three reasons are noted for the CFO's evolution, according to Bill Before, VP of finance and CFO at the $1.60-billion Spokane Teachers Credit Union in Washington.
"First, there is a change in consumer behavior," said Before. "Consumers are more willing to walk away from their home that is now worth much less than they owe. We did not see this before 2007. This changed the financial landscape. Many loans now require troubled debt restructure accounting, and regulation around this topic has made these loans even more complicated to manage."
"The second reason is the NCUA assessments that we can expect for the next decade when we have losses of our own and then we have to pay for losses in the conserved corporates. The regulator has a lien on our capital and can assess it as needed. This suggests that the credit union must not only budget for inherent loss in their loan portfolios but must have capital to sustain systemic losses."
"The third and final reason is a strong regulatory reaction to concentration risk. The NCUA is pushing credit unions away from mortgages to cash, from a 4% to 5% return on mortgages to a 25 basis point return from Fed funds. Carrying mortgages does cause interest rate risk but, unfortunately, based on the current economy, we could have these extremely low rates for a long time and such a move could be costly."
Directors Join ALCO
It has been said that one can tell the type of credit union by the way the ALM committee is structured and how it works. As can be expected, there are plentiful variations on this theme. At the $1.8-billion asset Summit Credit Union, Madison, Wis., the committee is composed of board members who meet quarterly for oversight and policy making. ALM operational decisions, such as setting rates, are made by management as needed.
One of the most important jobs of the CFO is making sure that board members have an understanding of the ALM process, especially the terms used and the policies being developed. More credit unions are moving in the direction of having a board member on the ALCO.
The board has more responsibility and accountability in concentration risk than in the past; serving as a board member on the ALCO can help to meet those duties. In the past, the ALCO at the $145-million West Community Credit Union in O'Fallon, Mo., included just three members of the management team and two or three board members. Today, it includes two or three board members as well as all of the senior management team.
No Need To Start From Scratch
"Because of this, I don't have to start from scratch at the board meetings," said CFO Jason Peach. "I give a monthly 15-minute review of financials and I talk about budget goals."
In West Palm Beach, Fla., the $111-million PBC Credit Union has board members on the ALCO. "The number-one job of the board is strategy," said Pam Rower. "Their responsibility is to see that the credit union continues into perpetuity. The major risk is through asset-liability management, so having board representation on the ALCO Committee is essential."
The question as to whether the financial disaster of 2008 could happen again is worth considering in the context of the CFO's transformation. The question echoes a similar question of whether the events of 1929 and the ensuing Great Depression could happen again.
History does repeat as the stock market crash of 1929 has a parallel in the stock market decline of 2000 also known as the Dotcom crash. Both followed "a frenzied bubble" in which stocks lost touch with reality by becoming overvalued by some 30% to 40%, according to Liaquat Ahamed in his compelling book, The Lords of Finance.
In both cases, after the sell-off it became apparent that much of the rise "had been pushed by a rogue's gallery of Wall Streeters and corporate insiders," writes Ahamed. Both resulted in similar losses expressed as a percentage of GDP, about 40% in the first year, and were followed by a sharp contraction in investment. And the reaction of the governmental authorities was eerily similar.
In 1929 interest rates were cut from 6% to 2% and in 2000 they were cut from 6.5% to 2%. In some respects, the current crisis that started in 2007-2008 is "more virulent than the banking panics of 1931-33," according to Ahamed. "In the 1930s most depositors had to line up physically outside their bank to get their money. Now massive amounts of money are being siphoned off with a click of a mouse."
Lessons from the Depression
For years, a number of experts maintained that mysterious forces, like a natural disaster, caused the Great Depression. These were forces that governments were powerless to resist. Ahamed argues that the Great Depression was caused by a series of misjudgments by economic policymakers, a failure of intellectual will, and a lack of understanding of how the economy works.
The events of 2007-2008 could also be viewed as a lack of understanding of economics and bad decisions by policymakers. It's clear now that housing prices could not continue to climb to ridiculous heights and that concentrating investments in one market basket was a recipe for disaster.
The CFO can help to educate members of the management team and board of directors so that each participant in the CU system can help assure a secure haven for their members' deposits as well as a resource for reliable financial advice. Educating the American public about the basics of economics and financial literacy is a role credit unions and their CFO can play, helping to prevent future financial calamities.
Jim Jerving is a freelance writer based in Madisoin, Wis., and can be reached at jim@jimjerving.com.
