LHCU News - Interoffice Circulation and Bulletin Boards
April 3, 2017
In 2014 we welcomed the Basel IV agreement, which mandated that all financial institutions increase their unimpaired capital. In response, all major US banks have issued new stock or financed their capital short-comings by raising more debt through new bond issuance. Banks also have created internal models to further mitigate the cost of this extra levy of non-producing capital. These models (floors) are self-serving and the stakes are huge. Morgan Stanley estimated that in Europe alone the elimination of the in-house floors could cost more than $400B of capital.
Now the new US administration could throw another spanner in the works of Basel IV by promoting financial deregulation aside from repealing the Dodd Frank provisions. It looks like Basel IV will be abandoned or watered down into irrelevance.
If all financial institutions make use of this relief to the fullest extent, to please shareholders with higher dividends/earnings, we could be headed towards another financial crisis. Your Credit Union at present has a 14% reserve level, more than double of the required ratio and will keep it at this level! We will not raid the coffers to attract new funds.
In spite of this new “go-go” euphoria the credit union will continue its wait and see policy, forgoing higher yields for now. This policy is costly because if we would extend our maturities of our investments by two years we could earn an extra $800,000.00 each year. The downside to this action is that we would expose the credit union to multi-million dollar interest risk when rates accelerate upwards.
The credit union will continue to pay above market rates as we ride the short term segment of the yield curve. If there are no major gyrations in the interest rate in the next few months, we plan to make an extra distribution in the June quarter.
On behalf of our Board of Directors, we enclose our financials and thank you for your loyalty and trust.