An Emerging Board Design at NCUA?

A critical factor in credit union success is the board’s role.   Credit unions fail when boards are weak.  Board recruitment becomes static, CEO succession plans are lacking, and longevity, not oversight, the primary qualification for renomination.

In a credit union it is the responsibility of the CEO to develop the board as an asset of the organization.  There is no such direct responsibility for NCUA’s board. The three members are often selected by different administrations; political connections, not credit union knowledge, is the deciding factor in who is appointed.

If the NCUA’s board is to be an asset, it will require the efforts of individuals chosen with different skill sets, backgrounds and possibly differing views on the regulator’s role, to make it so.

The Current Situation

The current NCUA board is showing signs of designing a role that could be much different than in past years.  By leadership style and bureaucratic habit, the NCUA chairman often operated as the final authority with the board expected to follow along, even with a 2-1 vote.

An Initial Example of Board Redesign

A critical organizational skill is learning from the past, not in the that’s-the-way-we-always-done it, but a willingness to evaluate the effectiveness of critical decisions or agency processes.

In the February meeting all three board members agreed that a “look back” on the entire corporate resolution process could be helpful. What can be learned from this event in which projected losses in the billions and caused five corporates to be liquidated?

Today the surpluses are over $6 billion and four of the corporate’s shareholders will receive all (and two a bonus) or a significant portion of their membership capital shares.  This change of fortune in the tens of billions by itself would justify a reassessment.

The Value of Reviews

Effective board oversight can improve the agency’s capabilities going forward.   Transparency is enhanced and responsibility better understood.

A minor example of the benefit of the board’s public role is how the agency reports its management of the NCUSIF investment portfolio approaching $20 billion.  This interest revenue is the primary income source for the fund and its financial model.

At a time of an historically low Treasury yield curve in December, the question was posed, What is the NCUSIF’s IRR Policy?

Just 45 days later February 16, 2021, the NCUA’s investment committee invested $600 million for seven years yielding .90%, seemingly oblivious to the recent uptick in rates and the increasing talk of inflationary pressures.

February is the last investment report issued by NCUA. The March NCUSIF update included no transaction information.  With over $800 million in additional 1% deposits now in hand, it is highly likely that there have been subsequent investments.  Is the committee using judgment or just locked into a pattern of laddering investments whatever the outlook for rates?

A $16.8 Million Loss of Income

We know that less than 60 days after this February investment was made, the cost of this decisions versus waiting for another month or two to see the direction of interest rates.

With the 7 year treasury now running .40 basis points higher, the lost revenue versus investing  60 days later is $2.4 million per year, or $16.8 million over the seven year life.  The foregone revenue from just this short pause, would be $850K, an amount recovered in four months from the higher yield.  The security purchased in February will remain under water, less than book value, if rates do not return to the levels at the time the investment was made.

The Board as an Asset

The board is not making investments, but it should have a way of monitoring decisions especially in uncertain or unprecedented times.  Timely transparency, both for the board’s oversight role and credit union confidence in the fund’s management, enables both outcomes.

All three board members bring different experiences, capabilities, and points of view to their role.   Even if there are individual policy differences, that should not prevent all having a common goal of making the NCUA board a source of agency strength and of pride for credit unions.

I will describe tomorrow some encouraging signs of a more deliberate and substantive role emerging from recent meetings.

 

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