A vital leadership skill for persons and organizations is the ability to learn from mistakes. Ignoring failures can lead to coverups and ultimately the loss of personal integrity and institutional purpose.
At the March NCUA board meeting, all three members, including Chairman Harper, publicly supported a “look back” to understand the Corporate crisis and lessons that might be gained. This could be an invaluable effort if truly open, independent and expert.
Last week NCUA conserved Edinburg Teachers CU with a net worth over 20%, without explanation. If the problems are not quantitative (financial) but qualitative (internal fraud, governance failures) is this a situation examiners should have discovered?
Self-examination is difficult in the best of circumstances. In some respects, it is contrary to the ethos of a regulatory enterprise which itself is charged with ensuring proper conduct. To admit its own processes and judgments may be less than satisfactory, could harm the agency’s reputation. Better to stonewall and let bygones be gone.
Look Backs at An Agency
The FDIC’s success in assuring the public that insured deposits are indeed safe does not rest on its fund balance. The FDIC resources are far less than 1% of the banking assets it insures. Rather it depends on public confidence in the FDIC’s ability to resolve problems-whether caused by circumstances within insured banks or from its own supervisory shortcomings.
One key to this continuous improvement process is FDIC’s public analysis of failed banks.
The most recent was posted on Friday, March 26, the Failed Bank Review, Almena State Bank, Almena, Kansas.
The 5-page report on the October 2020 closure of Almena State bank shows a loss of $18 million or 27% of the bank’s $69 million total assets.
The IG’s review is to determine “whether the subject bank failure warrants an In-Depth Review.”
This initial assessment analyzes “key documents related to the bank’s failure, including the Division of Risk Management Supervision’s (RMS) Supervisory History, the Division of Resolutions and Receiverships’ (DRR) Failing Bank Case, and examination and visitation reports dated 2016, 2017, 2018, 2019 and 2020.4”
The Analysis
Report sections include Causes of Failure and listings of all FDIC supervisory contacts. The review process includes multiple considerations:
“The OIG considers four factors to determine whether unusual circumstances warrant further review. These include: (1) the magnitude and significance of the loss to the DIF in relation to the total assets of the failed institution; (2) the extent to which the FDIC’s supervision identified and effectively addressed the issues that led to the bank’s failure or the loss to the DIF; (3) indicators of fraudulent activity that significantly contributed to the loss to the DIF; and (4) other relevant conditions or circumstances that significantly contributed to the bank’s failure or the loss to the DIF.”
The factor most relevant for credit unions is (2), cases where “the OIG identifies significant programmatic weaknesses in the FDIC’s supervision, to determine if there is a need for follow-up work and the appropriate course of action.”
In the Almena case “we found that the FDIC’s supervision identified and effectively addressed the issues that led to the bank’s failure and the loss to the DIF.”
What NCUA Can Learn
As valuable as an analysis of the corporate resolution efforts will be, there are more immediate lessons NCUA might draw from FDIC’s ongoing “after-action reports.” Improvements include:
- Publish full details in all reports, including exam contacts. If critical facts are kept from the public, it is the same as if no assessment was done.
- Set up an independent process. NCUA’s OIG is dependent on the agency and personnel whose actions it is supposed to review.
- Include exam and supervision findings in the report (factor 2 above)- what went right and what mistakes occurred? For example, NCUA’s IG review of Chairman McWatters’ travel expenses and his verbal explanations had more facts than the agency provided in its loss review of CBS Employees FCU. That loss exceeded $40 million, according to one newspaper article, and extended over decades of NCUA examinations.
- Evaluate how reviews and audits are done. NCUA OIG contracts much of its work to outside auditors. This process, while seemingly objective, is rarely expert and relies on the cooperation of those whose responsibilities are being assessed.
- Be timely in reporting. Late, after the fact analysis, may not change current performance. Conservatorships often do not return control to members but are quietly ended in private sales. Meantime all members and the public are in the dark.
Maintaining public confidence requires leaders who acknowledge mistakes. Credit unions pay the bills for regulatory short comings. Today it is too easy to expense away failures and avoid public questions. In the end, this will only lead to further errors, misjudgments and greater losses.
Board leadership is required if NCUA self-assessment is to be an agency priority. This can also be a chance to identify staff with the capability for this institutional self-examination.