How Tight is Today’s Labor Market?

In CUInsight’s Sunday jobs report, there are credit unions listing 10 to as many as 40 job openings in this weekly post. In addition to individual senior management positions, the most recent numbers ranged from a high of 23 to a low of 7 openings per credit union.

Finding and keeping employees is getting tougher. In a recent presentation by Economics Professor Alan Gin from the University of San Diego, some of the macro trends show why today’s labor market is so competitive.

All traditional measures of under or unemployment segments are the lowest levels in the past 15 years.

Secondly, the labor force participation rate is at its lowest since the 1980s. He cites four factors contributing to this structural decline:

  1. Baby boomer retirements;
  2. Fewer students working;
  3. Disability leavings;
  4. Affordable Care Act enabling persons to be insured when leaving a company plan

The Human Factor Challenge

Tactics for responding to this tight labor market are vital. Retaining and growing current staff becomes more urgent.

Other efforts include automation (how many credit unions answer the phone with a live person), moving jobs to different areas with less tight labor markets, process and productivity improvements, and outsourcing.

Whether the situation is short lived or a more permanent feature of the evolving economy, the need for new ways to find and retain the right staff will be a critical factor in many credit union’s ability to grow and to serve members well.

Why Risk Based Capital Requirements Fail in Practice

We’ve already seen that the risk based approach does not work. It’s obvious that neither man nor model can adequately assess a given asset’s risk under all circumstances before the fact. It doesn’t make sense to spend a lot of time trying. It does make sense to have a minimum leverage ratio but it should be the same for banks of all sizes.”

(Thomas Brown, A Loss of liquidity, not inadequate capital, is what often dooms banks., April 22, 2014)

The leverage, net worth ratio, is the current credit union capital model. Risk based capital formulae should be tools, not a rule.

The immediate vulnerability for the credit union system at this time is the absence of the CLF-Corporate liquidity safety net.  Liquidity allows fluctuations in asset values to recover rather than selling during market disruptions and taking losses that reduce capital.

The End of Risk Based Capital for America’s Community Banks

On September 17, the FDIC board eliminated risk based capital (RBC) requirements for community banks with assets of less than $10 billion.

It replaced the international banking BASEL-inspired approach with a simple leverage ratio. A community bank will be considered well-capitalized under required prompt corrective action (PCA) regulations if the tier 1 leverage ratio is 9%.

Banks will not be required to report or to calculate a risk-based capital according to the FDIC’s press release.

The FDIC Chairman Jelena Williams said the new rule ensures that the regulatory framework is commensurate with the operational reality of these institutions.

“The final rule. . .supports the goals of reducing regulatory burden for as many community banks as possible. . .and will allow community banks to significantly reduce the regulatory reporting associated with capital adequacy on the call report.”

The rule was also supported by all the other banking regulators,  the comptroller of the currency and the Federal Reserve.

An Example for the NCUA Board

The final RBC rule passed by the NCUA board was over 400 pages and requires all of the regulatory and reporting burdens cited by the FDIC as the reason for eliminating this requirement.

Surely the NCUA can learn from this experience! There is no better time or precedent to cancel this ineffectual, burdensome and deeply flawed approach to capital measurement. For if such a rule had been effective, it would have stayed. The FDIC’s experience shows RBC doesn’t work in practice.

The simple to understand leverage ratio, now in effect, has served credit unions well since deregulation and the imposition of PCA in 2008.

Don’t be misled by the 9% well-capitalized FDIC level versus the credit union’s 7% well-capitalized PCA standards into thinking cooperatives need to raise their capital. All of the capital reserves in credit unions are “free.” More than half of bank capital is in equity shares, whose owners are expecting a return on their investment.  Free cooperative reserves do not have this performance expectation and cost.

There is no better time for NCUA board to withdraw this misguided rule. Will the board show the leadership demonstrated by the FDIC?

All credit unions would give a great sigh of relief to have this burden removed from the horizon.

Why Cooperatives Exist in a Market Economy

While it is true that cooperatives create “common wealth” to be paid forward for use by future generations of cooperative members, the context of why this option is critical in a market economy is often overlooked.

The following statement by Mark Carney, Governor of the Bank of England, in a May 29, 2014 speech, outlines the importance of the contribution from cooperative design:

Just as any revolution eats its children, unchecked market fundamentalism can devour the social capital essential for the long term dynamism of capitalism itself. . .Prosperity requires not just investment in economic capital, but investment in social capital; that is the links, shared values, and beliefs in a society which encourages individuals not only to take responsibility for themselves and their families, but also to trust each other and work collaboratively to support each other.”

A Regulator on Bank Ethics

Recently the CEOs of the Business Roundtable issued a policy statement that proclaimed the purpose of the corporation is to promote “an economy that serves all Americans.”  Hopefully that would embrace the vital role of cooperative credit unions.

The Chairman of the Business Roundtable is Jamie Dimon, who is also CEO and Chair of JP Morgan Chase and Co. The statement is a positive example of a vision for corporate America that transcends the single-minded pursuit of shareholder value.

But the challenge is more than an expanded purpose statement as we are reminded in the following comment:

“There is evidence of deep-seated cultural and ethical failures at many large financial institutions. Whether this is due to size and complexity, bad incentives or some other issues is difficult to judge, but it is another critical problem that needs to be addressed.”

William Dudley, President, New York Federal Reserve Bank, November 7, 2013

This observation was years before Wells Fargo’s decade long mistreatment of consumers became public.

Just Another Bank?

From the 2008 Filene study: The Credit Union Brand: What is it good for?

“For years now, it seems that credit unions have placed themselves more and more in the bank brandscape, and our research supports this conclusion. What a pity that credit union members think that credit unions are just another bank. But when you look at credit unions, what is there about them that signals to consumers that they are not banks? The buildings are often designed to look exactly like a bank. Consumers conduct their financial affairs in a similar manner. Often even the advertising shouts “bank!” These signals do not go unnoticed by consumers. And, it appears that some credit union management may have felt that credit unions as financial institutions didn’t get the same respect as banks in the past; thus a natural reaction would be to try to make credit unions more like banks to attain the same status. (page 41)

The Only Threat to Credit Unions

At a time when many credit union leaders see NCUA board members announcing new regulatory agendas in virtually every speech, it is helpful to remember this counsel from a former NCUA Chairman:

“The only threat to credit unions is the bureaucratic threat to treat them for convenience sake, the same as banks and savings and loans.  This is a mistake, for they are made of a different fabric.  It is a fabric woven tightly by thousands of volunteers, sponsoring companies, credit union organizations and NCUA-all working together.”

 Source:  Chairman’s letter: NCUA 1984 Annual Report

President Obama Speaks to Cooperatives in Canada


The Nova Scotia Co-operative Council in celebration of their 70th anniversary have teamed up with presenting sponsor Atlantic Credit Unions and a grouping of other sponsors to host “A conversation with Barack Obama” in Halifax at the Scotiabank Centre in Halifax.

Wednesday November 13, 2019  6:30pm

$115 – $325

The web site reports the 9,000 seat auditorium was sold out almost immediately.  Now that’s an eye-opening brand impact!

Pick Your Number: What Risk Based Capital Looks Like Today

Corporate credit unions have labored under a very detailed risk based capital rule (RBC) for almost eight years. At the end is a footnote from a corporate’s audit showing the reporting required by the rule which demonstrates four very different outcomes:

  1. Leverage ratio
  2. Tier 1 risk based capital
  3. Total risk based capital ratio
  4. Retained earnings as % of capital

As of December 2018 these ratios range from 6.26% (leverage) to 44.07% (total risk based). These single numbers actually simplify the multiple ways the ratios can be presented by using different ways to calculate the average asset denominator.

Two other columns show the regulatory minimum ratios to be considered “adequately capitalized” or “well capitalized” under the rule..

There are a total of 12 numbers for a reader to compare to evaluate a corporate’s capital status at a point in time—before undertaking any trend analysis.

With a range of outcomes from 6.26% to over 44% as indicators capital sufficiency, one must ask if the numbers have any meaning at all.

The Delay in Risk Based Capital for Natural Person Credit Unions

In June the NCUA board approved a two-year delay in RBC rules for credit unions. Among reasons given was consideration of yet another leverage rule for complex credit unions in addition to PCA. That would make the rule more complicated, not less.

As shown by the bank regulatory agencies and even more clearly by the corporate RBC rule, the outcomes are so complicated that the data fails to clarify any dimension of capital adequacy; for example does this corporate have  too much or too little capital?

It is a tool that confuses, adds burdens and ultimately locks credit unions into a legally-mandated assessment of relative risk among all asset categories.

Natural person credit union balance sheets are many times more complex than corporates whose balance sheets are almost all investment securities. These all have relatively easy market based values for referencing.

Risk based approaches are not only confusing, they can also tilt credit union decisions to increase exposure to whatever the regulatory “safest” relative  risk of the day might be.

The simple leverage ratio has served the industry well for over one hundred years including more than 50 since deregulation. RBC might be useful as a tool; but it could potentially drive credit unions off a cliff if it were to be a rule.


The Credit Union is subject to various regulatory capital requirements administered by the NCUA. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Credit Union’s financial statements. Failure to meet minimum capital requirements would require the Credit Union to submit a plan of action to correct the shortfall. Additionally, NCUA could require an increase in capital to specific levels, reduction of interest, and ceasing or limiting the Credit Union’s ability to accept deposits.

The Credit Union’s actual and required ratios for December 31, 2018 and 2017 are as follows:

A Credit Union Member Takes a Stand After a $40 Million Loss

In an 18-page complaint filed August 7, Victor Webb filed suit against the board and supervisory committee of the failed CBS Employees FCU seeking over $40 million in recoveries for members.

According to press reports the loss was first discovered on March 6, by an employee who raised questions about a $35,000 check the CEO, Rostohar, had made out to himself.

NCUA’s audit as of February 28, 2019 said the loss could be as high as $40.5 million for an embezzlement scheme that Rostohar admitted carrying out over two decades. In the credit union’s last call report as of December 31, 2018, it reported $21 million in assets, $2.6 million in capital and 2,798 members.

A Member Acts

The federal credit union was chartered in 1961 to serve CBS employees and related companies. In the complaint Webb stated he joined the credit union in 1970 while a CBS employee. He remained a member until the credit union was liquidated in March, although he retired from CBS in 2014.

His suit names the board and supervisory committee members at the time of liquidation and prior members who served in similar capacities during the two decades of defalcations.

As a class action, Webb seeks damages of $40 million on behalf of all members, by stating that the benefits of membership were devalued by this amount which should have been available so members could benefit from lower fees and loan rates or higher dividends—that is the lost benefits of credit union ownership.

“A Fiduciary Relationship”

The core argument for suing the Board and supervisory committee members is summarized as follows:

“By reason of Individual Defendants’ positions with CBS Employees (FCU) as members of the Board of Directors, they are or were, at all times herein relevant, in a fiduciary relationship with Plaintiff and other CBS Employees (FCU) members and owe them a duty of highest good faith, fair dealing, loyalty, as well as a duty to maximize member value.” (Page 3)

The fiduciary responsibility of directors and committee members is well documented in NCUA regulations and letters, but rarely is their conduct formally challenged by a member. But this is a case of extraordinary loss equal to almost 10% of the last reported assets, or $2 million per year, for over two decades. Both the amount and length suggest a complete breakdown in both internal and external, regulatory oversight.

How Could This Happen?

This suit focusing on the fiduciary duties of the Board and Supervisory committee could be a very important milestone in cooperative governance and oversight.

How NCUA’s reported audited shortfall of $40.5 million in a $21.3 million asset size credit union could occur is hard to fathom.

The credit union’s December 2018 call report shows $18.4 million in shares for 2,798 members, resulting in an average share balance of $6,576. The credit union’s assets consisted of $14.7 million of investments and $6.1 million in loans with a reported delinquency of only 0.33%.

The credit union’s $18.4 million in member shares would seem to be more than adequately covered by the $21.2 million (with $2.6 million net worth) in easily verifiable assets if a liquidation were ever necessary.

Internal processes to monitor the credit union’s management are mandated in both bylaws and by rule and reg.

Every federal credit union is required to complete an annual audit under the auspices of its Supervisory Committee. Such an audit, whether internally conducted or outsourced, would entail a verification of member accounts, selected confirmations of investments and loans, and a review of internal controls. The results are reported to the Board.

The Regulatory Review

Additionally, NCUA has conducted annual audits of every FCU since the 2008-09 financial crisis. This review would review the credit union’s own supervisory committee’s audits, including member confirmations, plus a complete examination of investments and loans. In addition, the examiner would review all settlement accounts against the latest bank statements to ensure up to date postings and that the credit union’s general ledger is in agreement with external financial confirmations.

If the assets reported by the credit union are correctly reported, then that would mean the total loss caused by the CEO’s fraudulent activities would be the $40.5 million shortfall plus the $2.6 million in net worth for a total of $43.1 million.

NCUA’s obligation to member shareholders is to pay up to the $250,000 per account insured limit. A $43.1 million payment on top of the $18 million in reported shares would mean that over 6,500 more accounts (using the average share balance from reported members) would have been kept in a second set of off-the-book records.

There are only two explanations for NCUA’s reporting a $40.5 million loss after its February 28,2019 audit:

  1. The reported asset values were widely inaccurate, which raises the question, what kind of annual regulatory examination was done; or
  2. The assets are properly recorded, which means that from $40.5-$43.1 in off balance sheet shares were being managed by the corrupt CEO.

If the second option is the explanation, this suggests the CEO was running a shadow credit union with almost three times the number of members and shares as the reporting credit union. How could this activity be hidden from employees, the directors or supervisory committee, since these members must have received statements and conducted business transactions regularly with the credit union?

If the reported assets are phony, which would account for half of the loss, the only question is what type of annual exam had NCUA conducted over the two decades that this theft occurred?

Time for a Real Accounting

I salute member Webb for standing up and asking that responsible parties be held to account. This is more than sending the former CEO to jail and then covering the tens of millions shortfall out of NCUA’s “rainy day insurance fund.”

All the public evidence suggests that the problems are much more extensive than a corrupt CEO and a hoodwinked and a deleterious board and supervisory committee. The regulatory oversight that is supposed to assure the industry’s safety and soundness through onsite examinations would appear to have been negligent as well.

When a member takes a stand against ineptness, self-serving conduct and dereliction of duty, the whole democratic movement will benefit. Cooperative governance requires that fiduciary duty have real meaning, not just good intentions. Hopefully this suit will bring out the full story and create a much-needed precedent along with a correction of examination shortfalls.

I salute Victor Webb and say with him, “Enough is Enough.” Stop paying out losses, let’s correct the problems letting these occur.