What works – and what doesn’t – is the subject of virtually any study of organizations, whether political, business or nonprofit. The topic of governmental leadership is even more critical in a crisis. Survival of an organization or even a movement could be at stake.
Many sectors of American society face existential challenges now. Can credit unions navigate these events with their mission and system intact?
Two Case Studies of Crisis Response
The word “change” traditionally signifies something new. But the ultimate irony is that transformation, what today’s protesters might call “real change,” most often occurs not when something new begins, but when something old falls apart.
In addressing current economic, pandemic and financial uncertainties, understanding how credit union regulators reacted in two previous economic downturns is enlightening.
The first economic disruption, 1981-1985, accelerated the deregulation of financial services. This change occurred in the midst of double-digit inflation and unemployment. Interest rates reached the mid-teens, their highest level since establishment of the Federal Reserve in 1913. Voters chose new national political leadership.
The second event was the Great Recession in 2008-2009. This was characterized by a bubble in home prices exacerbated by investment products (CMOs) leveraging unsustainable spikes in property values. Again Presidential political leadership changed.
Two Different Outcomes
In the first case, credit unions came out winners. In the decade 1979-1989 the industry achieved compounded annual growth in shares of 12.9%; in capital, 10.9%; and steady member expansion, 3.9%.
For the decade ending 2019, the annual compounded growth was much lower: shares, 5.3%; capital, 6.8%; and membership, 2.8%.
Why this difference in outcomes following these two economic downturns? What can they teach us about responding to current events?
Case I. Regulatory Leadership and Deregulation (1981-1985)
Ed Callahan became Chair of NCUA after a career as an educator and an administrator in the Illinois state government. From 1977-1981 he was Director of the Department of Financial Institutions. The Credit Union division supervised the largest number of credit union charters in any state.
Working cooperatively with Illinois’ 1,000 credit unions, the industry navigated the regulatory and economic changes characterized as “deregulation.” Callahan understood the old system of legacy guidelines and rules wasn’t working. The regulator had to let go of traditional thinking to give boards and managers the responsibility for their own business decisions.
When Callahan left the state for NCUA, the Illinois Credit Union League presented him with a framed slogan characterizing his tenure which read: We Don’t Run Credit Unions.
Chairman Callahan took the words and philosophy to NCUA in October 1981. The traditional regulatory system wasn’t working there either. “Survival” during these unprecedented economic events was the most pressing concern for the entire industry.
Deregulation–putting responsibility for business decisions in the hands of boards and managers, those closest to the member–meant doing away with the old rule-making concepts. In one short paragraph, the agency in April 1982 eliminated all prior rules and practices controlling the rates and terms on all share accounts. The agency reinterpreted the common bond to be more flexible and inclusive, participated in and endorsed a capital adequacy study by CUNA, and eliminated dozens other regulations accumulated over the years.
Two Institutional Makeovers
In his prior educational and state leadership roles, Chairman Callahan was regarded as an outstanding administrator. He enjoyed managing people and institutions even in bureaucracies enveloped by politics and patronage. He transformed organizations to be more effective and efficient.
At NCUA this management emphasis resulted in two major priorities.
The first was a multifaceted effort at transparency and continuous dialogue with credit unions. So that credit unions could see the agency at work, board meetings were taken on the road to cities in each of NCUA’s six regions. The NCUA Video Network was created to send credit unions video updates on major issues or policy changes.
Open press conferences were held after each Board meeting. Senior agency personnel spoke at credit union conferences across the country. The agency’s publications were issued with full details of key events for the three areas of NCUA’s responsibilities: the CLF, NCUSIF, and FCU chartering and supervision.
The pinnacle of this cooperative industry engagement was the December 1984 credit union conference in Las Vegas organized by the Agency. Over 3,000 attendees including state and federal regulators and examiners, and credit unions from all over the country joined to hear and attend breakouts on multiple topics of industry importance.
Callahan knew that for NCUA to succeed with deregulation, credit unions must step up and assume responsibility for their future.
Reforming the Agency
Callahan’s second priority was to upgrade all aspects of the agency’s internal administration and restructure critical functions. Ed practiced careful stewardship of credit union resources which fund all the agency’s activities.
The agency instituted an annual exam cycle of all FCUs. Operational responsibility for exams and supervision was put in the hands of the regional directors; and headquarters staff were transferred to support field operations. External audits by CPA firms were started for all three agency funds to ensure accurate reporting. Call reports were collected from all credit unions and the information formatted into peer analysis for each credit union. The agency’s internal operations were automated. Operating expenses were reduced annually, and the operating fee scheduled for FCUs was lowered four consecutive years.
Two of the agency’s most important functions were reconfigured to make them more responsive in the deregulated era. Through a partnership with the corporate network, the CLF was organized so that all credit unions would be members. The NCUSIF was capitalized emulating the member owner cooperative model. Every credit union now sent 1% of member share accounts as a capital deposit in the fund.
By eliminating the regulator’s traditional “controlling” mindset, credit unions were free to make their own decisions of how best to serve their members. The change initiated a growth boom for the cooperative system.
As the first financial sector to fully deregulate deposit rates, credit unions had a head start in the art of setting rates based on market pricing. The result was a five-year compounded annual share growth of over 15% from 1982 through 1987. Banks and S&Ls were not given this full freedom until 1987.
This period of transformative change through effective public leadership rested on two pillars: the efficient management of agency resources and continuous, open communication to enlist credit union support.
Case II. Responding to the 2008-2009 Great Recession
NCUA responded exactly opposite in the next economic crisis, the Great Recession of 2008-2009. Because of uncertainty about the ultimate value of investments by corporates, the entire corporate network was required to sign a single letter of understanding and agreement with NCUA, effectively putting them under government control.
The agency conserved the two largest corporates in April 2009 and appointed their chosen managers reporting only to NCUA staff. This approach resulted in the liquidation of five corporates in September 2010.
Multiple extra premiums for the NCUSIF and the newly created TCCUSF were assessed to pay for liquidations and ever-increasing agency budgets.
Staff and agency expenditures grew without limit, justified by the economic emergency. A new CPA firm was brought in for the NCUSIF to modify the accounting standard to avoid private sector disclosures mandated by GAAP.
The agency’s supervisory actions were unilateral. Workout plans were developed behind closed doors for the $100 billion in the five liquidated corporates. Credit union expertise and interests were shunted aside. New corporate rules were imposed that neutered the network’s critical roles in aggregation, payments and liquidity.
The CLF was eviscerated. A new liquidity rule was passed to substitute for the prior system-wide CLF safety net. A 400-page risk-based capital rule was imposed in 2016 over the widespread objections of the industry.
Instead of transformation, the agency forced its determinations on the industry. Individual credit unions were required to implement examiner dictates or merge. The agency believed money, not management, solved problems. Even after the crisis was long over, the agency doubled down on its regulatory fiats.
In the great recession, the agency ignored the critical lesson from the 1981-85 crisis: members’ relationship with their credit unions are the foundation of sustainable success, not government diktats. NCUA imposed its judgmental certitudes even when faced with contrary facts and better options. Resolving problems through patient workouts was not acceptable. Instead of the CLF and NCUSIF partnerships helping credit unions, the industry learned that credit unions were on their own when it came to addressing problems.
Two Crises, Two Contrasting Outcomes
At the core of Callahan’s philosophy, “We Don’t Run Credit Unions,” was a deeply held belief about human nature. Freedom is a powerful motivator. It enables innovation and sacrifice. It affirms purpose for those with leadership responsibilities. The results are much more positive than when government dictates solutions. The data prove it.
Public leadership is more than good management. Political regulatory appointments involve a relationship between persons in authority and those they supervise. Effectiveness means both are positively transformed by their interactions. Productive democratic governance requires reaching consensus among groups with different perspectives and interests.
The best example of how this process works is an excerpt from NCUA’s first Video Network presentation on deregulation. The 24-minute discussion features Ed Callahan in conversation with a panel of credit union industry representatives.
Jim Barr, CUNA, to Chairman Callahan: How much input will the credit union response actually have to your [deregulation] proposal?
Callahan: It will have everything to do with what we ultimately do on this subject. While I am philosophically opposed to government making these business decisions, should the majority of credit unions say they want things to stay the way they are, I’ll support them and I’ll back them. In fact, I will read every single letter credit union people send to me addressing this subject. (Source: The NCUA Review, February 1982, pg 6)
I believe the results of these two regulatory approaches offer a startling contrast. One positioned credit unions to prosper for the next 25 years. The second severely hurt the industry’s capabilities.
In this crisis the future of a distinct cooperative financial system may be at stake, depending on how NCUA decides to interact with the industry.