Tell Me Why I'm Wrong

Feat. Randy Karnes

We Can’t Trust in Traditional Comments to the NCUA Alone

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A new type of voice is needed to reach the NCUA regarding its budgeting practices

The Ohio Credit Union League certainly knows how to write a letter where the good stuff is buried in the BS… no wonder no one really reads these kinds of comments! Think they should have just sent some HEADLINES or QUOTES they are planning for their local papers, and been done with it. Here it is translated:

  • The CUs and their employees are pissed that the NCUA has no self-control, or awareness of how they justify stealing income from the mouths of the citizens of Ohio that employee so many in serving even more.
  • Please excuse the false praise included in the third paragraph of our comment – it is just the BS that you expect to read, before you, the NCUA, blow us off.
  • You are killing us with a death of a thousand cuts, endless annual increases doled out like you do not think we can do the math for the last 10 years. 57% increase in an era of CU consolidation and an NCUA response that puts more and more on CU third party commentators so the NCUA can just validate the work of others instead of being a real vendor to the industry.
  • While you promise the innovation that you claim will be the effective solution to lower overhead, you all know this is double speak for just increasing your budget for painful mismanaged change that only a government agency could abide.
  • Please disregard any hope that the NCUA remains a separate entity from the other agencies, for almost anything would better than having to survive your incompetence in the financial management of our industry. While we long for independence, it might be better to suffer new government approaches.
  • We end with BS that could only be typed, because we could not verbalize these words aloud without choking.

In short, WE do not accept your budget, your thinking, or your taxing of our system without representation or a process that better allows us a voice in the selection of our representation.

Why Do Today’s Credit Union Thought Leadership Topics Create Doubt About the Future?

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An all too common conversation or email these days: “Randy, I have officially entered the frantic zone! I am overwhelmed by the sense that the future is so complex, moving further and further ahead of where we are today, and just too big for us to face. Every meeting with a consultant, every review by a regulator, every time my staff or board members tell me what they learned at their last industry event, and every time I look up and down the road, I feel defeated and ready to drive my credit union directly into the waiting arms of a merger partner. And somehow it feels like that was the design. The industry is herding me, and the thought leadership themes all seem to be the same melody.”

No doubt today’s overall marketplace environment can be overwhelming and push both consumers and business leaders into the “frantic zone”. Social and business connections are so fine tuned to reach us all, and the content so diversified and attention grabbing that it seems the whole point is to make us panic about everything.

On one level you can just write it off as “life in the modern world.” Hype is the game, and we all must find our way through it without losing our balance and connection to the work needed. We push through the hype to face the changing realities and find success for our communities. But that is easier to type than to accomplish sometimes.

It’s life today… we all know… so what?

What if our credit union industry’s thought leaders all stopped and took responsibility for the impact of our work: We are the drivers of the sense of frantic resign of so many CU leaders and owners. Is that our goal?

Problem One: Identify our thought leaders and our goals.

Impossible – everyone believes they (including me) are a thought leader, so to get everyone in a room and brainstorm on our goals and impact is tough. But what if we could urge credit unions to stay in the game? “Instigating frantic fear of the future is a marketing ploy, not a theme for leadership. We get it.”

Problem Two: Frantic fear of future regulation and compliance themes.

When will regulators wake up and avoid creating regulatory or compliance fear that lines the pockets of vendors and discourages the heck out of stressed or crisis junkies in our industry? Feels as though more money has been spent on the fear of CECL than all the money to ever be saved by the execution of CECL. Where is the leadership to calm the credit union stakeholders that regulatory fear years ahead of regulatory realities is irrational and industry defeating?

Problem Three: Frantic fear of technology differentials.

Almost a psychosis where CEOs are dead certain that every tech trend rumor is the competitive requirement for every CU that hopes to have a future. A complete disregard for the hype cycles during the build out of solutions, and the difference between the calls for capital to build solutions and the calls for customers and distributors to implement solutions. We are encouraged to jump in too early by the hype cycle that teases us with the hopes we will own tech and corner an advantage to avoid being left out. A tease we fall for over and over so we can lead the pack.

We are encouraged to implement solutions as distributors and customers with the same sentiment – hype the CU industry to be first movers for status, and tease the second and third movers to overextend and wish to be closer to the leaders of the pack. The strain or anxiety of not conforming pushes another frantic round of “I will never reach the stars without merging for scale.” What stars, tech stars? I thought we were worried about the agenda of our members and their aspirations?

Why buy into tech at the edge? Why waste current dollars for education on tech 5-10 years away for tactical solutions realized? Why convince yourselves that on-the-edge tech investments guarantee CUs a seat at the table when there are very few seats at the table for credit unions once the tech firms become mainstream and are harvesting on the capital of realistic investors – round 6-12 players. Tech has a “frantic lure” for consumers and business leaders alike – our thought leaders should see the responsibility to help all of us rethink our affinity for falling for the disappointment over and over. Wait patiently. Wait for the guy who knocks on your door with a solution that has a yield, a solution that has implementation support, and a solution that will have a good run to accumulate the returns you need with your members.

Problem Four: Frantic fear from the dubious best practice declarations of peers and vendors yet executed in your organization.

From your best peers: “If I have invested in this practice, you should too! If our CU does this every CU should as well! It is the tribe thing to do. Trust us, we have done so much research about your situation, that we know this will be winner for everyone.” And generally, the vendors of best practices are even worse (for profit vendors and our regulatory vendor endorsers) and they have more dubious reasons to influence teams than your best friends. But year after year credit union leaders become more and more frantic about the list of things they must implement to keep up with the pack.

Why write this now… hasn’t it been the same deal for 20 years or more?

Because the world is more anxious right now and credit union leaders are more likely to capitulate to the nature of the times and just give it up. Because the group think of the industry is “scale is a safe”. Because so many of us as commenters seem unaware that we are adding to the frantic nature of our industry’s operators.

As thought leaders, we may have lost some sense of our responsibility to downplay the fear as the most important theme of this era for credit unions. To encourage the self-confidence of credit union consumer-owners as the capital that we all count on for safety and soundness. And to most importantly separate our day jobs from the bigger themes we throw out to the cosmos for credit unions to ponder.

I am on my way to the Money2020 conference after just returning from the World Council event in the Bahamas. Big events with self-branded thought leaders who do a great job of adding to all of these frantic fears, selling just how far many operators are from the future of the industry.

In fairness I should not judge their motivations too harshly. But on some days, it seems that like a Halloween haunted house, our best thought leaders are simply selling tickets to scare the hell out of everyday credit union managers. And I fear far too many times over my career I have let myself down as a thought leader too – we all deserve better from those who should lift us up.

Note: This blog was written for an upcoming Underground Collision event in Las Vegas that is colliding with the Money2020 event, where I will participate in a back and forth on these topics and many others.

  1. Why would the Underground Collision be colliding at Money 2020? What does it have to do with credit unions?
  2. How can credit union leaders feel less overwhelmed by the constant pressure to up their digital game?
  3. What happens to credit unions if we don’t speed up our innovation toward the future of #CUMoney?

You can Tell Me Why I’m Wrong, but I guarantee Sarah Cooke will on October 26. Hope to see you there.

Should I Be Jealous of Bankers Over Their Regulator’s Appeal?

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Lately I find myself searching out more and more the comments of FDIC Chairperson Jelena McWilliams and wondering if our NCUA leaders could ever motivate me like she does. Could they speak to everyday local financial institution like she does? Do we (and more specifically the NCUA) have anyone who cares to embrace the spirit of consumers as well as she seems to do? Anyone ready to  align with the ideas that motivate our from-the-community CU board members like she does?

Does the credit union industry even have a process that is capable of placing a real leader of people, communities, and our CU stakeholders on the board today? Or are we doomed to a continuing future of cardboard, keep your head down, tactical players who only confirm the bureaucratic functions over board members that could balance the need for a strong regulator with the passion for a strong credit union industry, and sell it?

Am I just enamored with Jelena McWilliams’ speeches, or should I really be jealous and doubt the quality of the NCUA board and the process that selects them? Read her speech below and Tell Me Why I’m Wrong.

Keynote Remarks by FDIC Chairman Jelena McWilliams on the “The Future of Banking” at The Federal Reserve Bank of St. Louis; St. Louis, Missouri

October 1, 2019

Thank you for having me again this year. I am grateful to the St. Louis Fed, under the capable leadership of Jim Bullard; CSBS; and the dedicated FDIC staff for putting together a great conference.

When I addressed this conference last year, I had served in my role as FDIC Chairman for about four months. So this year, you get what is hopefully an improved version of a keynote speech.

Last October, I discussed the FDIC’s efforts to strengthen trust among the agency, other regulators, the public, and banks through transparency and accountability. I explained that transparency is pivotal to maintaining trust in the safety and soundness of the entire banking system.

As I pondered potential topics for this year’s conference, my thoughts kept coming back to a simple question: “Why do regulators do what we do?”

At both the state and federal level, regulatory agencies have their missions. For the FDIC, those missions include maintaining stability and public confidence in the nation’s financial system by insuring deposits, examining and supervising financial institutions for safety and soundness and consumer protection, making large and complex financial institutions resolvable, and managing receiverships. We implement these missions through multiple regulatory, supervisory, and enforcement channels. Not to oversimply the critical and often complex work of our regulatory agencies, but once we fulfill those missions, we should ask, “Why do we do what we do?”

The FDIC was created in 1933 to protect bank depositors and ensure a level of trust in our banking system as our nation emerged from the Great Depression. In order to ensure that public trust in our financial institutions exists, we have to make sure that banks are safe and sound.

The basic tenets of safety and soundness focus on capital, liquidity, assets, bank management, earnings, and the banks’ ability to manage risk. A safe and sound bank is able to withstand market shocks and survive. It is the ability of banks to survive and thrive that is the focus of my speech today.

“Video Killed the Radio Star”

To illustrate what I mean by survival, I will highlight the story of a company that was once a behemoth in its industry. Because I have been told by my capable staff not to mention any bank by name, this story is not about a bank. It is, in fact, about Blockbuster.

Blockbuster had thousands of retail locations, millions of customers, a sizeable marketing budget, and a successful business model. In 2000, a little start-up proposed a deal to Blockbuster: the start-up would run Blockbuster’s brand online and Blockbuster would promote the start-up’s mail-order rentals in its stores. Blockbuster declined. It also declined an opportunity to buy the start-up for $50 million.

You know where I am going with this story. Blockbuster has since filed for bankruptcy. The one remaining store in Portland, Oregon, is a vestige of a bygone era.

Meanwhile, the little start-up helped usher in the era of online streaming, has a market cap of over $100 billion, and serves more than 150 million subscribers, including many in this audience.

There are numerous case studies dissecting why Blockbuster failed, but the angle I would like to explore today is innovation. At the risk of oversimplifying, Blockbuster was not quick enough to adopt – perhaps even understand – emerging trends. Just like Video Killed the Radio Star, we could say that new, more convenient delivery channels put Blockbuster out of business. But it was not mail-order DVDs or streaming per se that killed Blockbuster, it was Blockbuster’s inability to recognize an emerging trend and adapt to it.

Rapid Technological Developments

In his 1996 book, “The Road Ahead,” Bill Gates wrote, “People often overestimate what will happen in the next two years and underestimate what will happen in ten.”

Technology and innovation had been transforming financial services long before smartphones and machine learning became frequent topics at banking conferences. From the development of double-entry accounting and the first stock exchange to the more recent innovations brought about by ATMs and internet banking, financial innovators have worked for centuries to improve access and better serve customer and industry needs.

The speed and breadth of technological innovation in recent years, however, marks a shift from earlier eras. Advances in payments, credit, and funding, to name a few, have tremendous potential to transform the business of banking as we know it – both in the way consumers interact with their financial institutions and the way banks do business. Now, more than ever, it is crucial that we understand the impact, scope, and consequences of what we have come to call “fintech.”

When Bill Gates made that statement in 1996, the FDIC was actively thinking about the changes that technology would bring to financial services. We were focused on electronic banking. By year-end 1997, 602 of 6,117 FDIC-supervised banks operated internet sites – that is, less than one in 10 banks. Thirty-four were “transactional” sites that provided customers the ability to pay bills, transfer funds, and open accounts. The others were “information only” sites that described the bank’s products and services. The FDIC’s 1997 Annual Report observed that while institutions on the internet represent a small segment of all financial institutions, acceptance of the new technology by consumers and financial institutions is increasing rapidly.

Since 1997, the pace of technological change has continued to accelerate. In the late 1990s who among us would have imagined being able to deposit a check with a computer we carried around in our pockets? Yet that was the reality 10 years later.

A few years after, and that same computer was serving as a point-of-sale device that allowed micro-vendors to access the payments system and voila! – you might have applied for your last mortgage wearing pajamas.

Technology continues to advance at a relentless pace, and we all must challenge ourselves to think about what that means for the future of the banking industry, and community banks in particular.

How Technology is Transforming Banking

Many have speculated about what the future of banking holds. Just a few years ago, some predicted that technological advancements and the rise of fintech firms would lead to the demise of the banking industry. However, the last few years have shown that fintechs and banks have learned to coexist and often prosper through partnerships. Fintechs bring new technology and speedy delivery to the table, and banks bring deep customer relationships, access to the payment system, and, of course, deposit insurance.

Current predictions about how technology could transform the banking industry fall into a handful of broad categories that will affect how fintechs and banks partner in the future: digitization, data access and open banking, machine learning/artificial intelligence, and personalization.

Digitization

Consumers are increasingly demonstrating a preference and expectation for digital lending and deposit platforms. As a result, many banks are now offering these services, sometimes through a separate division and trade name.

Digitization can lead to efficiencies for banks by reducing the time needed to make lending decisions and by improving a lending department’s capacity to manage and administer loan portfolios. At the same time, it can improve the loan application process for consumers, reducing the amount of application data they need to enter and often leading to faster credit decisions.

The key customer-centric features of digital banking are affordability, convenience, and instantaneous access to information. These features help consumers understand their financial standing in real time, as well as plan for long-term goals and unexpected emergencies. They also allow financial institutions to reach unbanked or underbanked customers and communities who increasingly have mobile or online access to services.1

The adoption of mobile banking is a great start, but consumer expectations for a truly digital experience continue to grow. Banks must evolve with these expectations, and their technology service providers must evolve, as well. Existing core processing systems typically provide a number of different platforms for lending and deposit-taking activities. These platforms may use differing data standards and may not interact with one another, let alone solutions from other companies.

Consider a future where next-generation core service providers offer an end-to-end digital banking experience to their partner banks. These future core providers will develop their own innovative solutions for their financial institution clients. But they will also allow institutions to develop their own technology or partner with fintechs – all while providing flexible access to the data on the core provider’s systems. These shared data and software interface standards will support a marketplace of innovative technology, providing creative freedom to banks and new products and services for consumers. We are not there yet.

Beyond the products and services they offer, digitization will also change how banks operate. Taking advantage of technology will transform back-office operations, and will demand new skills from a bank’s workforce. Increased digitization also comes with important considerations related to security and resiliency. Banks must embrace these benefits and challenges to stay relevant in an ever more competitive market for customers.

Data Access and Open Banking

Some consumers are increasingly interested in sharing their financial account data with third parties. These companies, including fintechs, provide personal financial management, budgeting, savings, and other services. The firms may use this customer-permissioned data to verify account information and loan applications or to evaluate creditworthiness – and these are just a few examples. This concept of customer-permissioned data sharing is often referred to as “open banking.”

Data is the new capital. Financial service providers are using data and technology to develop new services for consumers. These providers often rely on data aggregators to consolidate a customer’s financial information from one or more institutions. The data aggregator can then present the consolidated information in a user-friendly format to these service providers.

Consumers clearly benefit from the innovation and competition that “open banking” fosters. But these benefits do not come without some costs. Customer-permissioned data sharing raises a number of questions regarding data ownership, privacy, security, liability, and consumer control.

As with many emerging trends, stakeholders have expressed a preference for addressing issues such as these through industry-led efforts, rather than regulatory intervention. For example, a popular method of data aggregation called screen scraping has raised many concerns, particularly related to information and identity security. This is because customers enable screen scraping by providing log-in credentials for their bank accounts, including user IDs and passwords. There appears to be broad consensus within the industry that APIs and tokenization are a better method to facilitate data sharing to avoid the risks associated with screen scraping.

Developments that allow data access and open banking while ensuring security, safety and soundness, and consumer protection hold a great deal of promise to enable further innovation in the financial services marketplace.

Machine Learning and Artificial Intelligence

With the amount of data being created, as well as advances in computing power, data is increasingly being leveraged by fintechs and financial institutions to create new insights and monitoring tools using artificial intelligence and machine learning (AI/ML).2

The use of machine learning is growing in models used by financial institutions and technology firms. These models can help banks make credit decisions, detect fraud, and improve customer service – to name only a few. Existing, principles-based guidance, such as the Interagency Guidance on Model Risk Management and the FDIC’s Guidance on Managing Third-Party Risk,3 serve as a solid foundation for managing risks associated with these models. These guidance documents do not carry the force of law, but describe a framework for institutions to manage and mitigate risks associated with the use of models and third-party vendors. The depth of risk management practices needed to mitigate model risk depends upon the materiality of the activity being modeled or services being provided.

AI/ML has also been used to leverage alternative data for a range of purposes, including for credit decisions. This alternative data generally includes information not typically found on credit reports or customarily provided by customers. If used appropriately, alternative data has the potential to help demonstrate the creditworthiness of consumers who currently may be unable to access credit from banks, or to enable consumers to obtain more favorable products and pricing based on more accurate assessments of repayment capacity.

When deploying AI/ML tools, an institution must consider many factors, beginning with the level of workforce expertise needed to manage the capabilities. The transparency of AI/ML models and the ability to interpret and understand their results is vital to ensure compliance with regulatory obligations. Properly managed, AI/ML can help institutions better understand their consumers and their operations.

Personalization

Consumer expectations are propelling this explosive growth in technology. Consumers expect convenience and a 24/7 connection to their financial services providers. Experts predict demand for increasingly personalized services.

Mobile and internet banking allow consumers to conduct banking activities at any time and from any location, and chat bots allow institutions to interact with customers and answer questions they may have about these transactions.

Through advanced data analysis, institutions can offer customers better tools to manage their financial lives. These tools can also provide banks with a better understanding of the financial products and services their customers need – a win-win for both customers and banks.

The FDIC and Innovation

Now, it would be easy to just say: “Banks, if you do not innovate, you will lose in the long run.” Banks know that. Customers often demand the latest products and services that they have seen their friends use or that may have been featured on social media. For the most part, banks would like to meet and even exceed customers’ expectations. So, if that is the case, then why are more community banks not developing new technologies? For two principal reasons: cost and regulatory uncertainty.

The cost to innovate is in many cases prohibitively high for community banks. They often lack the expertise, the information technology, and research and development budgets to independently develop and deploy their own technology. That is why partnering with a fintech that has already developed, tested, and rolled out new technology is often a critical mechanism for a community.

The business case for collaboration is clear. Fintech firms are built on a digital infrastructure that can develop and offer consumer products quickly and with requisite agility as consumer demand evolves. Banks have a built-in customer base, an understanding of regulatory requirements, access to the payment system, and deposit insurance.

A few months ago, I met with two dozen fintechs in Silicon Valley and San Francisco to learn how they team up with banks. For the most part, the FDIC does not regulate these companies, but I was eager to get their feedback for a simple reason: if our regulatory framework is unable to evolve with technological advances, the United States may cease to be a place where ideas become concepts and those concepts become the products and services that improve people’s lives.

The challenge for the regulators is to create an environment in which fintechs and banks can collaborate. It is my goal that the FDIC lays the foundation for the next chapter of banking by encouraging innovation that meets consumer demand, promotes community banking, reduces compliance burdens, and modernizes our supervision.

This is not optional for the FDIC. We must lay this foundation because the survival of our community banks depends on it. These small banks face challenges from industry consolidation, economies of scale, and competition from their community bank peers, larger banks, credit unions, fintechs, and a plethora of other non-banks lenders.

While the FDIC has limited ability to address the direct cost of developing and deploying technology at any one institution, there are things that we can do to foster innovation across all community banks and to reduce the regulatory cost of innovation. We cannot sit on that proverbial regulatory perch and observe the change from above. We have to get on the ground, roll up our sleeves, and get to work on supporting and advancing scalable technological change that works for community banks.

The FDIC is a link in the community bank ecosystem, just like banks’ customers and their communities. As the primary regulator of most community banks in America, we have a responsibility to ensure that our regulatory framework supports innovation in a manner that is accessible to community banks and responsive to ever-changing technological demands.

FDiTech will do just that.

Broad adoption of technology – both at the FDIC and within the banking system – was one of the driving factors behind our decision to establish a new office of innovation within the FDIC. The FDIC Tech Lab (FDiTech) will collaborate with community banks on how to deploy technology in delivery channels and back office operations to better serve customers. Many of the institutions we supervise are already innovating, but a broader adoption of new technologies across this sector will allow community banks to stay relevant in the increasingly competitive marketplace.

First, we can reduce the regulatory cost to banks of developing and implementing new technology. It is our job as a regulatory agency to understand technology by engaging with innovators in banks and at fintechs and to provide sound guidance and technical assistance to banks that choose to deploy new technology. My goal is not to replace the business judgement of banks, but to identify and eliminate unnecessary regulatory burdens that discourage innovation. Whether banks choose to develop technology on their own or partner with a fintech, the FDIC will work with them to identify and address unnecessary regulatory impediments. Through engagement and technical assistance we can help eliminate the regulatory uncertainty that prevents some banks from adopting new technologies.

Second, through tech sprints and other innovative approaches, the FDIC can help encourage the market to develop technology that improves the operations of financial institutions and how the FDIC functions as a regulatory agency. Tech sprints are designed to challenge innovators, technologists, coders, engineers, developers, and subject matter experts to develop technological solutions to address specific industry or regulatory challenges, in a competitive team environment. Tech sprints are not a new tool, but the FDIC can use these events to motivate the development of technologies that address challenges beyond the capacity of any one institution to solve. These public/private partnerships can also help promote market-based solutions that may not have been obvious to any one participant.

We are also considering other tools – such as prize competitions and rapid prototyping – to help promote private sector development of innovative solutions to supervisory challenges. These strategies for developing new “reg-tech” and “sup-tech” solutions will encourage innovation and problem solving more quickly and at less cost than traditional government contracting. They will incentivize the private sector to produce market-driven solutions that will help transform the FDIC. These tools may also help institutions that voluntarily adopt them to become more efficient in their operations. These efforts will encourage non-traditional partners to engage in the development of cutting-edge technology for the financial services industry, and will help avoid the limitations of monolithic, government-imposed technological mandates that are too expensive and out-of-date by the time they are developed.

Third, the FDIC can work with developers to pilot products and services for truly innovative technologies. Working with our partner regulators at the state and federal level and with the institutions themselves, our goal will be to build compliance into the pilot, considering regulatory questions or impediments as they arise and then working to address them. Once a pilot is completed, we will work with the institution and its partners to understand and publish the results: what worked, what did not work, and how to make any necessary adjustments to make the product or service better once it is scaled and deployed.

Over the coming months, the FDIC will play a convening role to encourage community bank consideration of how technological developments could impact their businesses and to ensure community bank perspectives are considered in industry-led efforts to establish standards.

The FDIC will host a series of community bank-focused stakeholder roundtables on digitization, data access and ownership, machine learning and artificial intelligence, and personalization of the banking experience. We will invite a mix of community banks, technologists, and technology service providers to these discussions.

This task will not be easy, and people will be the key to its execution. We are currently searching for a Chief Innovation Officer (CINO) to lead our Tech Lab. The CINO will work across the FDIC and with our U.S. and international partners to create a regulatory environment that increases the velocity of transformation and removes unnecessary impediments to innovation. We are also looking for staff with the technical expertise to can help us better understand technology already deployed at our banks, develop new supervisory tools to be more efficient and effective as a regulator, and secure our networks and ensure that our supervised institutions’ networks are secure.

By promoting these developments and encouraging our FDIC-supervised institutions to voluntarily adopt a more advanced technological footing, we can help foster the transformation of the community banking sector. In turn, the institutions we supervise can reach greater efficiency with products and services that are more attractive to consumers. Ultimately, these advances will allow the FDIC to use a new regulatory approach to supervision, powered by the same technology that is revolutionizing the banks we supervise. We have already begun to make progress.

For example, we have been exploring ways to leverage technology in our examination program. In 2019, technology enabled us to conduct an average of 64 percent of our consumer compliance examinations and 44 percent of our prudential examinations off-site. And, as we train our examiners more on the use of these techniques and incorporate more new technology, we will further cut the costs of our exams on institutions without compromising on quality.

To build on these efforts, earlier this year, we established a Subcommittee on Supervision Modernization to consider how the FDIC can further leverage technology and refine processes to improve our examination program. Subcommittee members include representatives from banks – large and small – technology companies, and other thought leaders in the private sector and academia. They have met three times this year, and I am very excited to see the Subcommittee’s recommendations to make our supervision even more efficient, transparent, and accountable.

Conclusion

Shortly after becoming FDIC Chairman, I went to a small community bank to open a checking account. I wanted to experience firsthand what consumers across the country experience when they visit a community bank. I drove away from Washington and entered a branch of a small bank.

Community banks are characterized by their customer relationships. And my visit was no exception. I was greeted with a smile and an offer of candy. While the patient branch manager went through the requisite paperwork to open my account, a customer walked in with his three-year-old daughter. Mary ran up to the teller to give her a hug. The father said that Mary insisted on stopping by the bank to say “hi.” The bank manager smiled and told me, “She has been coming here since she was born.” It felt just like a Norman Rockwell painting.

Then, the branch manager went to an IBM typewriter, removed the dust cover, typed up my new account card, and laminated it. As she handed me the fresh-from-the-laminator card, she said “Be careful, it is hot.” And with that, Norman Rockwell left the room, and I could not help but remember that last time I held a laminated card with my name and account number on it. I was renting a movie at Blockbuster.

Small banks like that one are slowly disappearing from America’s landscape. Based on 2018 Summary of Deposit data, 627 counties are only served by community banking offices, 122 counties have only one banking office, and 33 counties have no banking offices at all.

I have noted on many occasions how vital community banks are to their communities. They support the small businesses, farms, libraries, and other entrepreneurs that help small towns, rural communities, and inner-city locations stay economically relevant and even thrive. If our community banks are unable to adapt to innovation that is sweeping their industry and which their customers have grown to expect, small banks will simply not survive.

I do not profess to know what the right number of banks in the U.S. is, but I recognize that community banks have to be competitive in order to survive. And as I ponder “why we do what we do,” I inevitably reach the same conclusion over and over again: we do what we do to make sure that small banks across this great land can survive – in the soybean fields of Missouri and the cornfields of Iowa, next to the cattle ranches of Texas and the potato farms of Idaho, up and down the San Joaquin Valley in California and in the fishing towns of Maine, and everywhere in between.

The FDIC stands ready to take on the challenge of innovation and to create a regulatory environment that will make it easier for small banks to adopt new technologies and thrive. Together, we can ensure that Mary’s future daughter can still work with a local banker that knows her community – even if the “hug” is virtual.

Thank you.

The FDIC Has an Epiphany – Moves to a KISS Approach for Using Only a “Simple Leverage Ratio”

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Credit unions knew this all along

I have been trying to write a witty blog on this all morning. I wrote a few thousand words focusing on “I told you RBC was a bad idea.” Then I switched to “how much money have we wasted debating RBC and do examiners feel bad now that the banks are seeing the light” and have recently scooped them by giving regulatory relief first. Then I moved over to studying all of Chip’s comments on the fact that world regulatory leaders understand that liquidity save organizations in tough times, not goofy long-winded complex models for capital (wow, forgot how much that guy can confuse issues with the facts). Finally I just gave up on being right and the glories in rubbing the NCUA’s nose in the investment they made in RBC, and decided to write you a more direct piece: a call to action.

In the blog yesterday, Vic Pantea sent a call to action to the NCUA Board of Directors and gives them the CYA they so badly always need. You can simply follow the lead of other smarter agencies and take the credit for the right decisions. But what should you and I do?

Simple: Add our voice to the cry for the NCUA to come to its senses NOW. To rally the support of your lobbyist, trade organizations, and peers to amplify the call by simply communicating our hopes over and over. Push everyone to advertise a CU WIN: the FDIC adopts a proven CU model for evaluating capital adequacy. To call out that in the end, the FORMER FDIC Vice Chair (Koenig) was right: RBC is a burden, not a safety and soundness improvement. While BASEL might demand a way for large international banks to communicate with a common language, RBC is not what anyone needs in the community banking or credit union industries. It’s a loser and CUs want it gone, and wiped from the NCUA’s game plans.

Oh by the way, CECL is no better. So put a P.s. in every message you write and let’s refocus the agendas for the NCUA in 2020, right now! Help the NCUA tell the FASB people that approaches that need 10 years and constantly moving deadlines, are generally dead on arrival. Here is to the KISS (Keep It Simple Stupid) movement moving through the NCUA team like a wildfire. What a glorious vision after all.

Tell Me Why I’m Wrong.

Should the NCUA Follow the FDIC’s Lead?

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Below is a letter Vic Pantea recently sent to the NCUA Board of Directors advocating for abandoning risk-based capital regulation on the grounds that the FDIC gave it up for its regulated banks under $10 billion. Do you agree with him?

Subject: FDIC Final Rule on RBC for Community Banks under $10 B

NCUA Board Members:

On September 17, the FDIC adopted a final rule which defined the optional simplified measure of capital adequacy for qualifying community banking organizations. Also known as the community bank leverage ratio this rule was required by the Economic Growth Regulatory Relief and Consumer Protection Act. Under this rule all community banks less than $10 billion in consolidated assets and maintaining a tier 1 leverage ratio of greater than 9% will not be required to report or calculate risk-based capital.

I hope that this action by your fellow agency will bring to a final and well-deserved demise any NCUA efforts to develop risk-based standards for implementation in credit union leverage calculations. I feel that it has been proven since our earliest discussions that efforts to implement RBC in the nation’s credit unions was an ill-conceived regulatory intrusion into safety and soundness calculations. Certainly, this FDIC decision should quickly bring to an end the use of funds necessary to continue the study of RBC approved in the June 2019 Board Meeting.

I look forward to your individual responses to the FDIC final rule and the subsequent board actions necessary to remove the regulatory threat of RBC for all credit unions under $10 B.

Thank you.

Vic Pantea

Will the NCUA Keep Beating a Dead Horse Named RBC?

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The Great Pyramids of Egypt were built in less time than it has taken for the NCUA to recognize that they are not only beating a dead horse when it comes Risk Based Capital, they continue to waste credit union capital on studies of a bank-tested tactic that has the same smell of the aforementioned expired equine.

If you haven’t yet, check out Chip Filson’s blog on the matter: NCUA Board has a Unique Opportunity to Eliminate the Flawed Risk Based Capital Proposal. In it Chip details the proposal’s flawed foundation and the NCUA Board’s can kicking approach to it.

The NCUA persists in pursuing a disowned strategy that is now as outdated as the Sony Walkman while failing to take the time and make the effort to understand the fundamental differences between the cooperative institutions they are responsible for and the rest of the financial institutions marketplace. Can we ever hope to get them to recognize that CREDIT UNION is not spelled the same as BANK?

Why should we do our best to change the NCUA Board Member selection approach?

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For a future that would get our NCUA leaders focused on comments like Jelena McWilliams

This week, June 19, you will see that CU*Answers is trying to rally NACUSO to help us push CUSOs towards some big projects. My favorite is an effort by CUSOs to impact the selection process for the NCUA board of directors. For ten years, or more we have not seen a NCUA board member step up and rally a single project that was designed for a growth initiative, for a cooperative consumer-owner initiative, or for any initiative that was pointed at the chance to expand our members’ sense of well-being. We simply suffer the government’s assigned “snow fence installation crew” – the people that wrap us in safety and soundness and corral us behind fences designed to stave off storms. We need leaders with new mindsets and sincere intent, because they have felt stifled in their lives too.

We need a counterbalance to the two new directors, and we need it soon, before we all pass away from boredom and the ground hog day effects of “been there, done that.” It is time to select someone that is pro-cooperative business models, understands a CUSO’s drive for cooperatives, and someone that might put some heart into the game to inspire our faith in the heart of the NCUA. Can that start with a person, the next appointee, or will it wait for us to push harder to change the selection process? I say try both. Push for an immediate talent to join the other two, push for someone like Sarah Canepa Bang, or even Sarah Canepa Bang… And prepare for a long process to influence the way the next ten administrations select our directors.

We have work to do if we are to ensure that we might have a chance to match the talent and sentiments of Jelena McWilliams on her best day. Here is to better days ahead.

Read the remarks by FDIC Chairman Jelena McWilliams at the CATO Summit on Financial Regulation, “If You Build It, They Will Come”; Washington, D.C.

An off ramp for credit union charters

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In the preamble to Randy’s recent post The NCUA’s role has become writing a check and giving the bad news, he challenged me about how the insurance fund got its start:

Chip, did you, Bucky, and Ed build this system to simply sell our members to someone else when the going got tough? Was the insurance fund designed to punish credit unions, and reward non-CU problem solvers? Was the point of our investment to hire consultants to broker our problems away? Was the point of insurance not to keep us better off, but whole. Somehow, feeling whole and true to the game is not something I associate with the managers of our fund today. Are they insurance people, or just money managers and political fixers?

When all of this was set up, we saw the need to see it as a system and not an aggregation of independently funded and operating institutions. As to the insurance fund we had to start somewhere. The bottom line is we could not prove with numbers that the 1% plan was a better way, because there were no audited numbers and therefore no accurate loss reserves. Just a cash basis kind of accounting. And 10-15 years of successful state operations. We now have the numbers and almost 30 years of experience. The critical factor is there is so much money that NCUA can use it as a slush fund, not just insurance; and they can claim they are doing their duty just by liquidations—which was not the intent. They seem to be opportuning the system instead of managing or running the fund the way it should work.

In Randy’s blog, he makes the case that he sees the NCUA’s practice of liquidating versus solving credit union problems as just that; mismanagement, a departure from the design, and ratifying their actions by a misinterpretation of the design in the best light, and a clear perversion of the design in the worst light. The $1.62 billion cash outlay to close Melrose and Lompto is just an extreme case of NCUA’s inability to effectively resolve problems, whether they be temporary, such as leadership performance or a CEO transition, or longer term with overvalued assets. NCUA has outsourced its responsibilities to third party, for-profit firms such as Barclays and Black Rock in the case of the corporates. More routinely today, examiners strongly “encourage” credit unions that are having organizational shortcomings to seek a merger rather than working with the credit union to sustain operations.

One study by a CDFI group calculates the age of the average founding date of all active credit union charters today as 1954. Many are older. All have lived through the 70s oil crisis, the recession and double-digit inflation and unemployment of the 1980s, deregulation, multiple banking crises including the shuttering of the S&L industry, the Internet revolution and even the Great Recession. So why would someone quit the charter now having survived a history of economic perils that have caused so many other industries to fail? I believe people give up when they are told repeatedly that the unique capabilities possessed within their credit union charter no longer matter. Members can get the same or better deal elsewhere.

The unique co-op design was not just at the member-owner level. The regulatory system followed the same principles. Whereas the banking industry had three separate institutions responsible for chartering (OCC), liquidity (the Fed) and insurance (FDIC); credit unions created a unified regulatory structure with all three oversight functions under a single board. This approach reflected both the fact that co-ops were a unique financial system outside traditional clearing house and liquidity options. More importantly the structure of the CLF and NCUSIF copied the member-owner design of the credit union model. Consolidated oversight allowed different funds for different needs, good coordination and greater efficiency in sharing information and data. But the cost was the checks and balances of three different institutions in the banking sector.

And credit unions’ combined regulatory capabilities were extremely effective in responding to the economic, political and financial upheavals that occurred. From the 1980s onward.

The structure of the NCUSIF with the 1% deposit and a retained earnings range of 20-30 basis points on top proved to be an ingenious solution. When the NCUSIF was launched in 1971 it had no ability to build retained earnings as did the FDIC and FSLIC both created in the 1930s. The fund’s equity ratio never exceeded .30 basis points of insured shares. The premium-only system did not work. A better way was found by copying the structure and successful experiences of the 16-state chartered private insurance funds.

But the solution was more than design: it also changed the role of the fund from a purely “insurance-pay out the loss and move on model” to a co-op venture capital fund that could be used to stabilize, and recapitalize if necessary to support credit unions affected by internal or external events. Because credit unions had no access to outside capital, the NCUSIF became the capital provider “of last resort”. No institution experiencing a financial downturn will have access to normal capital markets. Title II of the FCU Act created a special section for providing fund assistance (section 208) to provide financial help for credit unions to right themselves when falling short of required capital standards. Capital assistance was an integral part of the NCUSIF design. Credit unions have no other capital options which is why the role of the NCUSIF is so vital.

These early NCUSIF workouts succeeded and saved the NCUSIF and credit unions hundreds of millions of dollars during the 1980s recession and challenges from the transition to deregulation. More importantly, this was the commitment NCUA made to credit unions who were concerned that sending more money all at once to Washington (versus an annual premium) which they feared would just increase the temptation to spend it.

Most importantly the fund’s design worked as intended:

  • From 1971-1984 when the NCUSIF could rely only on premiums (1/12th of 1% or 8 basis points) the fund’s annual insurance loss rate was 4.16 basis points or half of the annual premium.
  • From 1985 through 2007 the fund’s annual loss rate was only 1.6 basis points. Moreover, the fund required an outside audit according to private company standards so that the loss reserving expense and allowance accounts remained objectively verifiable. In seven years there was not even an insurance loss. In other words, a yield of only 1.6% interest per year on the 1% deposit would be sufficient to cover the annual loss, before adding interest on retained earnings.
  • The fund’s normal operating level of 1.2-1.3% of insured shares was 81 times more than the rate of the annual insurance loss. And the 10 basis point retained earnings range in the NOL would have covered a catastrophic loss six times the average with no need for a premium. Today that 10 basis point range is almost $1.2 billion.
  • The design worked because of the accountability that was part of the fund’s reporting structure plus the ability and willingness of examiners to assist with problem resolution.

From 2008 through 2018 the loss rate jumped to 1.9 basis points due to NCUA’s practice of liquidating problems versus solving them, which began with the corporate resolution which was moved off the NCUSIF’s balance sheet and onto a separate fund of the TCCUSF. This liquidation pattern carried over into the shutdown of all lenders affected by the taxi medallion disruption. But a second factor was the NCUA’s transferring an increasing percentage of its every growing operating budget to the NCUSIF through the overhead transfer rate. Thus, over 90% of the NCUSIF operating expenses were not from managing the insurance fund, but rather paying for NCUA’s overall operations.

NCUA has changed both the practice and the cooperatively designed approach to use the NCUSIF to liquidate rather than rehabilitate credit union downturns. Instead of using cooperatively provided resources to support turnarounds, NCUA used them to make the problems go away: merge them for someone else to worry about or liquidate. Instead of being a source for system support, it became an off ramp for credit union charters.

About Chip Filson

A nationally recognized leader in the credit union industry, Filson is an astute author, frequent speaker, and consultant for the credit union movement. He has more than 40 years of experience in government, financial institutions, and business. Filson’s breadth of experience makes him an authority on a range of topics, including analysis of credit union trends, credit union public and market-facing opportunities, and strategies for enhancing member value. His contributions to the cooperative movement have been demonstrated with his analysis and advocacy for the corporate credit union system, NCUA’s Corporate Stabilization role, and the need for regulatory reform.

Chip co-founded Callahan & Associates. Filson has held concurrent positions at the National Credit Union Administration (NCUA) as president of the Central Liquidity Facility (CLF) and Director of the Office of Programs, which includes the NCUSIF and the examination process. He holds a magna cum laude undergraduate degree in government from Harvard University. After being awarded a Rhodes Scholarship, he earned a master’s degree in politics, philosophy, and economics from Oxford University in England. He also holds an MBA in management from Northwestern University’s Kellogg School in Chicago.

The Next NCUA Board Member Will Probably Be Cut from the Same Cloth

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On 3/28 Chip Filson pushed this to our marketplace. Did you read it? Did you yawn, and then delete it? Or did you think about it and act on it? I can think of a few things to do with this posting:

  • Send it to my board and declare that the future based on these new board members will probably be a lot more of the same – they are cut from known cloth with known track records, and with no new things in sight.
  • I would then send it to everyone I know that might have some influence over this process and say I hope McWatters’ replacement is at least a small if not major course adjustment.
  • I would drop every contribution to the political side of our industry—there are no lobbies that really are as upset as our members are with these leaders—until they decided to do something about the way we assign NCUA board members. I would follow that up by pushing for future administrations to actually have a plan or project for these seat warmers to lead on, if they can lead. Board members are supposed to push for something other than bureaucratic constants.
  • I would then study board members that get appointed to the agencies that lead our competitors and consider the fact that we do not get the same draft picks for our hopes and dreams. Another thing to point out as we think about our political contributions and support lent to others. Have you read the writings or speeches made by Chairman Jelena McWilliams? Wow.
  • And finally, I would send all politicians a message: My Organization Has Left the Building – savings its money to survive the political system’s wake washing up my strategies and hope I have enough saved to avoid being washed away by their actions. Because based on the history that Chip lays out here, there are no players coming to the NCUA that are worth the money to stay engaged.

You might say, Randy hold on here, we can’t change anything by quitting, we need to influence the game. To that I say we have to REVOLT against the current game, and since so many of us just do not know how to really get our politicians’ attention that might be a sucker’s bet. I have no kingdom to offer in exchange for a solution here, just my hope. Chip gets me thinking…..

One Step Forward and Two Steps Back

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What Does the Changing of the Guard at NCUA Mean?

NCUA Board Member Richard Metsger, whose term expired in August 2017, leaves shortly. Two board members, Harper and Hood, will fill the Metsger “democratic” seat and the vacancy that has existed since Debra Matz resigned in 2016.

NCUA’s role is unique and consequential. No other organization in the cooperative system has the influence and resources to affect the direction of the entire credit union enterprise as does the regulator.

This three-person turnover in the Agency’s leadership is an opportunity to assess the past and to consider what the new board members may need to address. This new leadership configuration should be at the front and center of everyone’s attention who believes a course change is necessary.

Metsger’s Tenure

Metsger’s nearly six-year tenure is important because for that time he was effectively “in the majority.” He was the automatic second vote for Chairman Matz until her departure in early 2016; he served as chair from May 2016 to January 2017. And as the only other board member with Chair McWatters, he was effectively co-chair for any decisions requiring Board approval, for his veto would mean nothing gets passed.

While facts do not always tell their own story, they are an important place to start when evaluating a person’s leadership contribution. Some of the outcomes during Metsger’s term include:

  • A 33% increase in NCUA’s budget from $251.4 million in 2013 to $334.8 million for 2020, the second year of the most recent two-year approval process.
  • A reduction in NCUA staffing from 1,261.5 FTEs to 1,173 and closure of two regional offices.
  • A total of 935 federal credit union charter cancellations since 2013. The total decline in NCUSIF insured state and federal credit unions was 1,443, or 21% of the industry numbers at the end of 2012, the year prior to his arrival.
  • Granting 4 de novo federal charters in the same six years.
  • Reporting the first ever loss in the history of the NCUSIF in 2017 of $229.1 million.
  • Recording the single largest cash payout by the NCUSIF for natural person credit union resolution in 2018 of $1.165 billion. The previous highest cash payout was $349 million in 2012.
  • Approving the “merger” of over $3.1 billion of TCCUSF surplus into the NCUSIF in 2017 despite the Congressional language accompanying the enabling legislation which stated: “These provisions are intended to ensure that the activities of the Fund are restricted to resolving problems in the corporate credit union system and not used for other purposes, such as for dealing with natural person credit union problems.”
  • Raising the NOL of the NCUSIF for the first time since the fund was restructured with the 1% deposit in 1984, despite comments from credit unions in which only 12 of 663 (1.4%) respondents were in favor. As pointed out in credit union comments, the numbers presented by staff were fictional, not related to any real data or historical validation, and contradicted by auditors’ own comments about contingent liabilities.
  • By raising the NOL to 1.39 and “merging” the TCCUSF surplus, Metsger admitted in a December 8, 2017 speech that staff analysis “reinforces why we needed to increase the fund’s normal operating level this year, to account for any significant losses that otherwise might have required a sudden and significant premium charge to credit unions.” The statement confirms the intent to circumvent the FCU Act’s premium restrictions when the NOL was above 1.3% of insured shares and use the TCCUSF for natural person losses.
  • Passage of the 400-page risk-based capital rule despite overwhelming evidence that that the approach was intellectually flawed and legally dubious. This was the most burdensome, lengthy and intrusive rule ever imposed on insured credit unions. This action continues even though the FDIC’s own experience as stated repeatedly by Vice Chairman Tom Hoenig’s is that “a more dependable measure of capital strength is the tangible leverage ratio” or in credit union terms, the net worth ratio.

Even Metsger’s description of the $160 million NCUSIF 2019 “dividend” as the second highest in fund history is a misstatement. NCUSIF retained the entire $3.1 billion TCCUSF surplus, the ongoing earnings on that amount plus NGN fees—all intended by Congress to go back to credit unions. NCUA still owes the industry $2.2 billion before any return could accurately be called a “dividend.”

One might counter the above summary with the industry’s continued growth in assets and members despite the decline in charters and increasing NCUA burdens. I believe a more accurate assessment would be that credit unions have succeeded in spite of NCUA, not because of their oversight.

Two Steps Back?

If Metsger’s departure is a step forward, what about the two NCUA returnees in Harper and Hood as board members? Will they just rely on previous experience to continue past practice or will they see a need for change, and if so where and how? How would they interpret the trends above?

One point of commonality among all three is that the terms cooperative system and cooperative design are almost never used or referred to. The term “cooperative association” is in the first paragraph of the FCU Act. It is the most important factor distinguishing credit unions from other financial firms. It characterizes credit unions’ singular responsibility to the member-owner.

Cooperative design also creates a different regulatory agenda from banks where there is an ongoing challenge of balancing shareholder interests, with fair consumer treatment and with the public’s backstop of insurance and liquidity safety nets. Instead of regulators trying to align private wealth with public purpose, credit unions create common wealth that can be “paid forward” to benefit future members and communities.

Expectations of a Board

The Federal Credit Union Act is clear on the Board’s role in that it uses the term “manage” the agency. That word can have a lot of different interpretations. But there can be no doubt that this is where the buck stops, not matter how responsibilities are assigned by the Chair.

Unfortunately, in their board role, members most often present themselves as performers at public meetings, reading scripts, and never discussing real policy or “management” options. The role of the board to ask thoughtful questions and/or to challenge prepared positions and data never occurs. Staff’s assessments and conclusions are accepted without meaningful dialogue.

Instead of leading, the board merely endorses the staff’s interpretations and in-house views. No outside perspective from the members, policy perspective or even board expertise is provided. Board members become merely voyeurs going through pre-staged motions of accountability.

Can either Hood or Harper learn from versus repeat these past experiences?

McWatters’ Conundrum

So, will McWatters stay the course charted with Metsger? Or has he been biding his time to make real change until he has a second vote?

McWatters’ initial participation in 2014 as a minority board member was very encouraging for credit unions. He was bright, willing to listen, unfailingly polite and responsive to issues brought to his attention. His dissents around NCUA budget processes and substance, the risk-based capital rule and other interpretations of authority (think corporate capital rule) were positive contributions on critical topics. He openly challenged the “regulatory aggression” practiced by the agency on credit unions after the Great Recession including the then Chairman’s very public feud with State Employees Credit Union in North Carolina. Or even the agency’s self-justifying so-called appeals process.

McWatters repeatedly showed, while in the minority on the board, the competence to challenge the regulatory status quo. His long essay style, legal briefs of dissents were a level of effort and insight never seen at the board level.

But somehow those positions dissolved once he became Chair. Was this because he felt checkmated by having only one other board member? Or that it was not his role, but staff’s, to initiate change? Was his assessment that personal circumstances did not allow him to “manage” the agency, so he must revert to a role that credit unions refer to as a “knife and fork” director?

One role of a Chair is to help define the contribution expected of other board members in their collective capacity to lead the NCUA. Can he recover from a period of passive leadership where bipartisanship seems the only justification for action? Can he break the cycle of hyperbolic spending through the NCUSIF’s manipulation of numbers to underwrite off budget expenses? Can he rise above the Orwellian use of “safety and soundness” to justify any and every regulatory event? Will he articulate the unique value of cooperatives in the American financial system and re-energize the entrepreneurial spirit that animated almost 50,000 charter creations in the 20th century but almost none in the 21st?

I don’t know what the answers to these questions will be. But what I believe is that credit unions are running out of runway to correct the trends that Metsger inherited and then dramatically extended. If these trends continue, the endgame is becoming clear. An independent cooperative financial choice for the next generation will just be an episode for economic history texts, much like the S&L system which expired in the last century.

About Chip Filson

A nationally recognized leader in the credit union industry, Filson is an astute author, frequent speaker, and consultant for the credit union movement. He has more than 40 years of experience in government, financial institutions, and business. Filson’s breadth of experience makes him an authority on a range of topics, including analysis of credit union trends, credit union public and market-facing opportunities, and strategies for enhancing member value. His contributions to the cooperative movement have been demonstrated with his analysis and advocacy for the corporate credit union system, NCUA’s Corporate Stabilization role, and the need for regulatory reform.

Chip co-founded Callahan & Associates. Filson has held concurrent positions at the National Credit Union Administration (NCUA) as president of the Central Liquidity Facility (CLF) and Director of the Office of Programs, which includes the NCUSIF and the examination process. He holds a magna cum laude undergraduate degree in government from Harvard University. After being awarded a Rhodes Scholarship, he earned a master’s degree in politics, philosophy, and economics from Oxford University in England. He also holds an MBA in management from Northwestern University’s Kellogg School in Chicago.