Time to Be Weirdos Again: A Cooperator Reflects on Leading a Cooperative

Today, Randy Karnes passes the CU*Answers CEO’s reins to Geoff Johnson after twenty-seven years as the cooperative’s leader. The CUSO has reached new heights by every performance criteria in these three decades. Most importantly it has created a novel network business model combining the unique advantages of cooperative design with the strategic opportunities enabled by technology.

This interview is part of a longer conversation in CUSO Magazine, which I encourage you to read in full. Randy’s insights, beliefs, contrarian style, and enthusiasm are all captured in this dialogue.

The following selections reflect these qualities. I believe his observations are relevant for all credit unions today and as far into the future as we can hope.

What Drew You to CU*Answers?

What really drew me was that CU*Answers was a manufacturer—of software, of copyrights, of solutions, et cetera— and as a manufacturer, we have a different perspective than a retailer. Now I don’t have a problem with retailers. Walmart’s an excellent retailer, but when you go over to Walmart, you’re selling somebody else’s bubblegum. Being a manufacturer and having that creative opportunity was big to me. And that was exciting here. I’m not sure I would have come if it was a co-op and just a retailer. Retail is a very valuable business, but that’s not at the core of who I am.

 What have you enjoyed the most about being CEO at CU*Answers?

Well, I would have to say the collaboration and the cooperation to have a customer-owned business and the chance to make that concrete and real. Because the truth of the matter is being a cooperative is such a subjective thing. What is a customer-owned business? How does a customer-owned business work differently than a traditional business? What does it mean to be so transparent that you would tell your client everything? What does it mean to really worry about the client’s agenda as your own?

Co-ops are not just about building a business to sell things to people. They’re also about building a business with people who buy your things. In a co-op the concept is you share everything. You don’t hide any of your pimples, any of your wrinkles, any of those kinds of things—both sides work together just to improve. Most of the time businesses avoid inconvenient truths. Our business model is to share inconvenient truths as much as we share happy truths.

So, the constant evolution in a cooperative environment was such a challenging business problem. To me, it became the most rewarding thing we worked on. There are tactics and there are strategies. Anyone can be good at designing a platform or technical solutions. Anyone can do that or sell that. The missing ingredient is when you say you’re going to build a cooperative with your customer. And not just market it, but make it real—that’s a daunting challenge.

You’ve seen a lot during your tenure–what has surprised you the most about the path our industry has taken?

I’m truly surprised by how easy our industry has given up its differential. Today’s credit unions are wonderful. They’re doing great things and they have a lot of capability. But I feel that they’ve lost sight of their uniqueness and the way we do things. We’ve allowed our vocabulary to merge with banking. We’ve allowed our way of motivating consumers to be too close to how banks motivate consumers. The world is just merging wonderful differences into a gray blob, and I thought that some of the credit unions out there would have fought that with all their might.

So how do you think credit unions should go about fixing that, to keep from becoming one big, homogenous blob?

We have to start focusing and searching on what needs to be truly different, not just truly successful. Let’s say someone says to me, “You’re different, but you’re never going to be a success.” Well, if I’m different, maybe I’m already a success. I’m not just doing it like the next person, I’m not just giving into status quo, I’m not becoming part of the lowest possible denominator. I’ve got a spark. I’ve got something new.

We need a bigger focus on saying we’re different, and not just saying it, but proving it. You can’t just say you really love people. Everybody loves people. You can’t say you give good service. Everybody gives good service. We’re going to have to find a unique differential. Many of the places that I eventually got invited in to, they invited me because I was a weirdo and I spoke differently. Maybe it’s time for credit unions to be weirdos again.

His comments about future plans and more truisms are in the complete interview. You can access it in today’s issue of CUSO Magazine.

Harper’s Senate Confirmation Hearing:  What will his tenure mean for credit unions?

Probably no prior Senate confirmation hearing for an NCUA Chair has had a candidate with as documented a track record of actions and beliefs about credit unions, agency priorities and the cooperative system’s role versus banks as Todd Harper.

Readers can view the nomination hearing tomorrow, September 30, starting at 10 a.m. on the Senate Banking, Housing, and Urban Affairs Committee’s website at https://www.banking.senate.gov//

Harper’s direct NCUA experience extends from February 2011 through January 2017 when he served as Director of Public and Congressional Affairs and Senior Policy Advisor to both Chairs Debbie Matz and Rick Metsger.  He was nominated by President Trump to serve on the NCUA board in February 2019 and sworn in on April 8, 2019.  President Biden designated him as NCUA chair on January 20, 2021.

The following are excerpts from speeches, writings and events during his time at NCUA as senior policy advisor and NCUA board member.

Harper’s desire to emulate the practices of the FDIC and banking regulators is clear.   He believes credit unions should be on a “level playing field” with banks.

His policy positions show a questionable grasp of cooperative purpose, their institutions and credit union history.

His  leadership priorities are based on dystopian forecasts creating the need for ever expanding governmental regulation  and oversight.

On Confidence in the Credit Union System’s Future

At June 2019 board meeting:   With the recent inversion of the yield curve, we know that a recession is coming, we just don’t know exactly when and how severe.

December 2019 OpEd in CuToday:

We know that a recession is coming. We just don’t know when and how severe it will be. That’s why we should fix the roof before it rains by implementing this rule (RBC) at the start of 2020. 

February 2021 speech to the DCUC after becoming chair:

As the COVID-19 pandemic rages on, we must smartly, pragmatically, and expeditiously address the economic fallout within the credit union system. To that end, when I first became Chairman, I issued my Commander’s Call to the agency.”

August 2021 DCUC speech:

But, I must caution everyone that we are not out of the woods just yet. Credit union performance will continue to be shaped by the fallout from the pandemic and its financial and economic disruptions. With pandemic-relief efforts like supplemental unemployment benefits, foreclosure prevention programs, and eviction moratoriums coming to an end, many households could face financial stress in the coming weeks and months. This could lead to higher delinquency and charge-off rates and potential losses for credit unions — and even failures.

September 2021 Board meeting:  But, nevertheless, we ultimately should expect delinquencies and charge-offs to rise in the months ahead, and all credit unions should pay careful attention to their capital, asset quality, earnings, and liquidity. To protect the Share Insurance Fund — and, ultimately, taxpayers — against losses, the NCUA needs to stay on top of these emerging risks and problems in the credit union system.

Harper’s modus operandi when presenting the credit union’s system’s outlook is to focus on risk, uncertainty and fear.

His continual dour forecasts remind one of economists who have successfully predicted ten of the past two recessions.

Harper’s view of the system’s resilience to economic change is so overtly negative, it leads one to ask if he has any confidence in credit unions or the agency’s supervision competencies.

Planting a Risk Story with the WSJ

Credit Unions Ramp Up Risk

Lenders Loosen Lending Standards, Increase Exposure to Longer-Term Assets  By Ryan Tracy June 5, 2014

This article in the Journal was revealed as an NCUA sourced effort by a credit union blogger who obtained a copy of an internal NCUA email celebrating its online publishing.

This PR misinformation effort occurred at the same time NCUA had to withdraw and rethink its first risk-based capital RBC rule proposal.  Over 2,050 comment letters (the most ever on a rule) were submitted, all with substantive criticism.

As a result, the agency backed off and said it would make significant changes in what became the RBC-2 proposal.

Forecasting a future of doom and gloom or hyping a present crisis is unfortunately an all-too-frequent regulatory temptation. Predicting negativity creates an aura of expertise.   It elevates the power of the regulator.  Crises enable overreach of authority.

There is no downside to predictions of future problems  by regulators.  If nothing happens, then the warning worked.  Everything turns our OK and no-harm-no foul for an erroneous judgment.  If there is a down trend, then one can claim prescience and proven expertise about the future.

This regulatory “banging the drum” PR effort with the WSJ was when Harper was in charge of NCUA’s Public and Congressional Affairs office.

On the NCUSIF’s Financial Sufficiency

Harper’s August 2021 letter to Congress recommending legislative changes to the fund’s design included:

  • Increase the Share Insurance Fund’s capacity by removing the 1.50 percent statutory ceiling on its capitalization.
  • Remove the limitation on assessing premiums when the equity ratio exceeds 1.30 percent, granting the NCUA Board more discretion on the assessment of premiums; and
  • Institute a risk-based premium system.

These recommended changes, if enacted, would allow the NCUA Board to build, over time, enough retained earnings capacity in the Share Insurance Fund to effectively manage a significant insurance loss without impairing credit unions’ contributed capital deposits in the Share Insurance Fund, thus avoiding situations like the one that led to the creation of the Corporate Stabilization Fund during the last financial crisis. Moreover, these changes would generally bring the NCUA’s statutory authority over the Share Insurance Fund more in line with the statutory authority over the operations of the FDIC’s Deposit Insurance Fund.

In this June 2019 board meeting exchange with Larry Fazio, Harper conflates FDIC’s premium-based insurance system with the credit union’s 1% cooperative deposit underwriting model.  One doesn’t have to read between the lines to see where Harper would like to go with this 1% deposit asset:

Board Member Harper: Great. What percentage of the Deposit Insurance Fund can banks count as an asset on their books?

Larry Fazio: None.

Board Member Harper: None. So banks don’t count it. They have to write their premiums off as soon as they pay them, correct?

Larry Fazio: Yes.

Board Member Harper: In comparison, are credit unions allowed to consider any part of their assessments as an asset on the books?

Larry Fazio: Assessments, no.

Board Member Harper: How about their Share Insurance Fund?

Larry Fazio: So when they make a contribution to true-up the 1 percent deposit of insured shares, they count that as an asset.

Board Member Harper: But wouldn’t they keep 1 percent on their books and we technically only have 0.38 percent these days?

Larry Fazio: The 1 percent is the deposit and then –

Board Member Harper: So they keep some on their books and don’t have to charge it off, Larry, is the point I’m getting to.

Larry Fazio: Yes, but we don’t call those assessments.

On a Level Playing Field with Banks

In addition to seeking FDIC-like options for the unique NCUSIF, Harper frequently references bank regulation as the basis for similar credit union rules.  When commenting on a proposed combination rule to clarify the process for credit unions buying banks he stated:

The National Credit Union Administration Board recently proposed a rule that would guide credit union purchases of bank assets and liabilities. The proposed combination transaction rule is an important proposal and worthy of consideration. However, it exposes an important gap in the supervision of credit unions — former consumers of the acquired banks will not have the same level of consumer financial protection oversight in their new credit union. 

The Federal Deposit Insurance Corporation supervises many of the banks that are part of these deals for consumer compliance. That agency has a consumer compliance program that is more robust than the NCUA’s program.

Harper’s core defense of the agency’s RBC rule is because the banks did it–although they subsequently dropped the requirement.  Here is his plea for a level playing field:

Why should it take complex, federally insured credit unions with $500 million or more in assets seven or eight years longer to implement their comparable risk-based capital rule than it took for banks and thrifts to implement theirs? That’s an uneven regulatory playing field.

The risk-based capital rule brings us under BASEL, and provides comparability with other federal regulators as required by Federal Credit Union Membership Access Act.  And,

If banks didn’t get their RBC rules delayed, I have to ask myself why should credit unions? 

On Small Credit Unions

In December 2013 the NCUA Board passed in a 2 -1 vote a rule that would prohibit credit unions operating from homes.  Harper was Chairman Matz Senior Policy Advisor at this time.

The regulation’s stated goal: “the proposed rule intends to ensure all FCUs operate in a manner consistent with modern-day expectations for insured financial institutions.” The term “modern-day” was not otherwise defined.

Chairman Matz told the Credit Union Times in an April 7, 2014, article: “Times have changed, and financial institutions have changed as well and if you are stuck in the past, that means you are not growing, and you are not serving your members well and they would probably receive better services from a different credit union.”

The rule’s premise was based on inaccurate and misleading facts as noted in this critique: “NCUA asserts home-based credit unions are “stuck in the past,” but the fact these credit unions have an average charter length of 55 years and have survived the Great Depression, World War II, the Vietnam War, and the Great Recession tells a more meaningful story.”

On Transparency and Credit Union Input

Prior to the July 2015  House banking subcommittee hearing on NCUA,  CUNA noted: “it’s been six years since the last time NCUA held a hearing on its budget.”

In questions to the NCUA Chair, a committee member described the agency’s duplicity in providing information to the committee, misuse of FOIA to redact documents and failure to post the agency budget for public review.

Chairman Matz deflects all these “mistakes” to staff. When asked if it might be helpful to have direct credit union input and communication on the Agency’s budget, Matz replied, “it would not be effective.”

Excerpts of the hearing can be seen here with senior policy advisor Harper sitting behind  chairman Matz.

On Exaggerating Past Crises 

People tell stories about the past for the present in order to influence the future.  NCUA is especially good at creating these historical re-interpretations.

In the March 2021 NCUA board meeting staff provided “background context” to the 2008-2009  corporate crisis.  Presenters opened by stating there was a $50 billion difference between the book and market value of corporate investments at one point in the Great Recession. They proclaimed that if the agency had let those corporates fail, then this “loss” would have caused thousands of credit unions to also liquidate.

That possibility was never an option, but a wonderful hypothetical to justify any and all subsequent actions. In fact the agency’s auditor estimated the collective corporate TCCUSF potential deficit at yearend 2009 as $6.9 Bn in the opinion released in early 2010.  That proved to be much too high as well.

By dramatically magnifying risks of prior events, NCUA avoids addressing its mutual supervision and examination responsibility for these situations. By hyping potential prior losses, the need for more regulatory resources and unilateral action  is re-justified.

Harper continued with this fictional recreation in the September 2021 board meeting by making the potential disaster even greater:

As I recall, during the last financial crisis, had Congress not acted to create the Temporary Corporate Credit Union Stabilization Fund, we would have had to immediately write down 69 basis points of the one-percent capital deposit. That write-down could have led to a cascade of losses as credit unions trued up their capital deposits with the Share Insurance Fund only to have other credit unions getting into trouble and another true-up occurring.

Although publicly supported in an open board meeting, the NCUA has done nothing to review the corporate resolution: its actual causes, options considered and actions taken upon their liquidation.   In 2010 NCUA estimated the corporate resolution costs to credit unions between $13-16 billion.  To date over $6.2 billion in surplus has been earned by the five corporate liquidated estates (AME’s).

Rhetorical banging on past and future  “risk drums” is an unfortunately tempting political tactic.  It helps concentrate power in a democracy or in an independent regulatory agency.   When those in authority say things are either bad now or bound to get worse in the future, it legitimizes the exercise of arbitrary power, new authority and assessments for more resources. Due process and public comment is often forgotten.

On Financial Regulators and Climate Change

Todd Harper said “financial regulators, like the NCUA, have a responsibility to foster resiliency to all material risks to financial institutions, including those related to climate change. By measuring, monitoring, and mitigating such risks, the NCUA can fulfill its core obligations of maintaining the safety and soundness of credit unions, protecting consumers, and safeguarding the Share Insurance Fund.”

Temperament and Leadership

Changing one’s opinion when presented with conflicting evidence is one of the most valuable skills of the 21st century.  This is not an attribute demonstrated in Harper’s NCUA roles.

A useful example of Harper’s personal style and argumentative logic is from the June 20, 2019 board meeting when he interrogated NCUA staff about the agency proposal to extend the implementation of the RBC rule until January 1, 2021.

The full 120 minute board meeting can be viewed here.  Harper’s questioning begins at approximately 50 minutes in and lasts almost 70 minutes to the end.

The entire discussion of RBC is very helpful, but more relevant now is seeing Harper’s posturing as a minority board member.   He challenges and is condescending to staff.   He uses all of the bank comparisons referenced above to support his position.   If the answer to a question doesn’t fit his thesis about the urgency and impact of RBC, then he moves on, ignoring the answer.

If this is his approach as a minority board member, what will his manner be as Chair?  Will he compel staff to suborn their professional judgments to present hypothetical future failures or align with  policy views which lack factual foundation?

Two questions highlight this hectoring style. He asked staff if RBC would have lessened the impact of losses to the NCUSIF during the Great Recession, not including the corporate problem.  Fazio replies any impact would have been marginal. Harper ignores the undermining of his position.

A second issue which he brings up repeatedly are the insurance costs from credit unions liquidated due to taxi medallion losses.  Here are just two examples:

Board Member Harper: Great. And how effective was the current risk-based net worth rule in mitigating losses at the taxi medallion credit unions that recently failed?

Larry Fazio: So the answer to that question is that the risk-based net worth requirement, while it would require those institutions to hold more capital than the leverage ratio, those institutions held levels of capital well in excess of that requirement. And even with those high levels of capital still failed.  And again,

Board Member Harper: Sure. Did the current rule, the one that’s in place right now, provide adequate protection against losses at the taxi medallion credit unions?

Larry Fazio: It’s a judgment call. I think that’s a case of they – again, they held – so I mean, let’s put a little context around that. It was a situation where the value of the collateral declined precipitously and in a material way; I think a 90 percent decline in value from the peak. The cash-flows of the revenues that the borrowers could generate was materially affected by changes in the marketplace. And so when you had that confluence of events, even an institution with as much as almost 50 percent capital – net worth – couldn’t survive that. So –

Board Member Harper: You’re essentially describing an asset bubble, correct?

Larry Fazio: An asset bubble combined with a disruption in a market. And so, yeah…

There is much irony in Harper’s repeated use of the taxi losses to argue for immediate RBC implementation.   During the entire period of the taxi medallion disruption, Harper was the senior policy advisor to the two chairman who led the agency as  these credit union portfolios declined in value.

His repeated efforts tying this episode to the RBC discussion could be seen as a way to disassociate from his responsibility at the agency when these failures developed.  Was the wolf at Harper’s door as this $765 million loss developed and he failed to notice?

As a policy priority, Harper’s singular emphasis on capital in this June 2019 inquisition as the sine quo non for credit union soundness is extremely myopic.

There will always be failures.  That’s why there is a regulator and insurance-recapitalization fund. The only way to stop failure with 100% certainty is to make things so restrictive that NCUA regulates players out of existence, which some claim is occurring now.  Credit unions manage risk, not avoid it.  It’s too costly to avoid it 100% of the time.

Harper asserts in the meeting that a handful of outliers (5)  require a policy the masses must adopt.  A policy to address the outliers would be a more effective tool, a point Fazio makes several times.

Moreover, lessons were learned during the Great Recession and credit union underwriting has changed.  History is not repeating itself today. Risk today is more tied to collateral  than concentration.

There is current industry data from over two decades that reinforce why 7% is more than adequate as a minimum standard for well capitalized.  Outliers should be supervised with “outlier expertise;” the overwhelming majority of the industry has shown it can operate at a level that has stood the test of time.

Where Will Harper’s Positions Lead NCUA and Credit Unions?

This 70-minute harangue from the June 2019 board meeting shows Harper’s authoritative, even badgering manner.   His confuses historical facts and shows no recognition of the most basic differences between cooperatives and banks.

For example, credit union equity-capital is only from retained earnings.  Whereas bank capital includes numerous options including various categories of stock, qualifying subordinated debt plus retained earnings.  Even with this differences, Harper asserts the two system’s capital comparisons must be the same.

His confusion about the different financial systems, equating the cooperative credit union model’s  purpose with banking is an analytical and factual failing that leads to policy positions completely at odds with credit union history.   His frequent use of bank/FDIC examples unmoor his regulatory priorities from the world of cooperatives.

One result is that he is completely silent on critical issues confronting the system today.  These include the absence of democratic governance by members, the self-serving mergers of well capitalized credit unions, the hidden terms negotiated when credit unions buy bank assets, the complete absence of new charters, and the lack of any joint agency-industry efforts to develop new approaches for the CLF, to support MDI’s and to respond to new technology.

His focus is solely on the power, resources and authority of the agency.  When over 97% of credit unions are rated CAMEL codes 1 and 2 and capable of providing innovative solutions to strengthen the cooperative system, the agency is absent from this dialogue.

Credit unions have successfully navigated two of the country’ worst economic downturns over the past dozen years. Industry analysis suggests that the system is overcapitalized.

What is missing is regulatory leadership willing to encourage and celebrate the self-help role and financial independence many Americans seek from their member-owned cooperative.

Best Answers for Your New Job Interview

Covid has created a backlog of people stymied in seeking new opportunities.  Companies are finding it harder to hire and retain employees.  Hiring bonuses are rising.  Every day it seems a major company announces a higher minimum hourly wage it is willing to pay to attract applicants.

The vaccines promise to break this logjam for job seekers. Especially with organizations paying up and willing to offer flexible work environments.

Providing insight into this situation is a recent article by writer Jeffrey Harvey about how interviewees might to respond to five common interview questions.

He describes the challenge as follows:

You likely stride into your subsequent interview with a belly full of fire, and a brain stuffed full of all the right words to say, and the right ways to say them. You’ve carefully crafted your pitch so as to embody the can’t miss candidate; the person who will blend seamlessly into the corporate culture from day one.

And then you never hear back.

Five Likely Interview FAQ’s and Unforgettable Answers


His essay then describes how a job seeker should handle these questions so as to be memorable.   I will not spoil his insights by sharing his advice which is both humorous and spot on.  Question number 2 is a sample of his approach that is sure to  land your application on the top of the resume pile.

Even if you have no interest in seeking another job, this advice will enlighten your day!

Question #2: “Where do you see yourself in five years?”Answer: “Well, the parole ends in three, so provided we’ve survived the zombie apocalypse…”  And the explanation. . .

This question has torpedoed more first dates than The Rules, and it’s even worse in a job interview. In a world where companies and entire industries are changing moment to moment, not to mention the looming threat of the flesh-eating undead, it’s presumptuous to assume that the human race will still be solvent in five years, let alone a mobility aggregation start-up in Hoboken.

What you really want to convey is that you envision an upward trajectory for yourself, and anticipate the type of personal growth that will make you a greater asset to the company as time passes. Re-gaining the ability to travel out of state is a concrete example of how the attainment of a tangible personal goal will also make you a more valuable employee.

Your somber acknowledgment of the zombie apocalypse will demonstrate your willingness to grapple with unpleasant possibilities — an inevitability in every business. As the old saying goes, hope for the best, prepare for the worst, and stock up on canned meats and fish antibiotics for impending Armageddon.

Or they’ll think you’re joking and remember you for your irreverent sense of humor. At least until a zombie is munching their cerebral cortex.

The other four Q & A’s are just as irreverent.

New 2020 Census Data for Market Analysis and Planning

The US Census Bureau has just released a map with updated boundaries for the country’s 392 metropolitan statistical areas (MSA’s) and 547 micropolitan areas using the 2020 census.

These areas are the geographic marketing segments that companies and most other organizations use when tracking and analyzing consumer behavior.

America is the third most populous country in the world with over 333 million persons living in 20,000 towns and cities.  These statistical divisions separate this national market into city and regional clusters for local analysis.

This latest Census Bureau map is presented and analyzed in an article from Visual Capitalist, a firm that specializes in translating all forms of data into graphs, pictures and dynamic charts.

The article presents the ten largest MSA’s and links to the full list of 392 in descending population size.  It also shows the percent change in population in each MSA over the past decade.  An MSA is determined by having one population center of at least 50,000.

The article describes the smaller micropolitan regions as “the smallest areas measured on the map generally located further away from large cities, have at least one urban core area of at least 10,000 but fewer than 50,000 people.”  These micro segments may be more relevant for identifying credit union opportunities than the larger MSA’s.

Context for Strategy

This information can be vital for credit unions who want to understand the environment in which they are currently operating or might target for future expansion.   Some information such as the annual HMDA filings for all mortgage applications already provide data by MSA.

As both credit unions and banks report their branch locations (and local deposits) at least once per year, that information could also be assigned to these census bureau categories.  One could then determine which micro markets are less well served by existing institutions.

The challenge will be to find a firm which will incorporate these most recent population trends with branch and deposit data, HMDA reports and other federal statistics into their databases of credit union information.  Then convert this data into visual maps for use, ideally with a point and click capability information pop out per area.  Unfortunately, the Census Bureau map does not provide this mapping dynamic.  A pdf of the map can be seen here.



Good News from NCUA’s Board Meeting & an Overlooked Update

NCUA’s September board discussions provided much positive information about the state of the industry and the funds credit unions provide to manage the agency.

  • Credit unions are performing very well with net income running far ahead of 2020 and delinquencies/charge-offs at very low levels.
  • Code 4/5 credit unions continue to decline and account for just .5% of total credit union assets. Code 1/2 CAMEL-rated credit unions are 97.1% of assets.
  • There is a projected yearend operating surplus of $28.6 million from both this year’s budget ($15 million) and amounts unspent from 2020 ($14 million).
  • Staff projects a yearend NOL for the NCUSIF of 1.28% primarily due to a slowing of insured share growth and low losses.
  • Staff will publish the NCUSIF’s investment policy which is how the board oversees the $20 billion fund and its primary revenue driver, the portfolio’s yield.
  • Three agenda items were added to the October through December agendas to finalize open proposals.

However, a significant update was overlooked.  A result that benefits every credit union is the latest corporate AME financials posted on September 15.   Those numbers show a payout to credit unions of $3.158 billion, an increase of $33 million from the March update, or more than the just revealed 2021 operating fund surplus.  More details are provided below.

The Surplus Discussions

What will happened to the $28.6 operating fund surplus?  Part is being “reprogrammed” i.e. spent.  Seven new staff positions were approved which will have a full year’s impact of $1.9 million or $271,000 per position.

Of more significance, three of the positions are to enhance cybersecurity capability and three for the Office of Ethics counsel.  One might conclude that the agency sees the vulnerability from its internal ethics issues as equivalent to risks from cybersecurity bad actors.

The NCUSIF’s June NOL calculation of 1.23% continues to significantly understate the actual ratio.  As of July 2021 the NCUSIF’s retained earnings are $4.739 billion and insured shares at June 30 are $1.579 trillion. Dividing the two gives an equity ratio of .30 plus the 1% deposit true up required of all credit unions resulting in an NOL ratio of 1.30%. This continued underreporting of the NOL misleads both users and the public about the actual condition and trends in the NCUSIF.

A $176 Million “Cushion”

In several of the financial dialogues the word “cushion” was used to describe the accumulation of funds beyond those needed for operations.

Cushions are nice to have.  They bring comfort to hard surfaces or strict budget limits.   But credit unions have always worried that once their members’ money was sent to NCUA, it might not come back in NCUSIF dividends  or be managed wisely.

At the end of July, the NCUA’s operating fund had a cash balance of $176 million and total fund equity of $139 million. This equity is at the highest level ever.   The cash on hand is almost twice the annual operating expenses.   Both are the result of NCUA assessing federal credit union operating fees in excess of actual expenses in every year since 2015 when the fund equity was just $38 million.

The $176 million operating fund cash earns minimal interest on its Treasury deposits. If this surplus was held in credit unions, members and the system would have a much higher return.

NCUA has chosen to roll over surpluses instead of returning funds to credit unions, reducing the OTR charged the NCUSIF, or lowering the operating fee to the actual projected net cash outlays.  They have become a cushion for management undercutting effective control of both expenses and capital outlays.

Financial Cushions, Corporate Crisis, and Historical Myth Making

The NCUSIF’s current NOL cushion is even larger.   Because 80% of the NCUSIF assets are from the 1% credit union deposit, the primary responsibility for NCUA staff is managing the fund’s equity ratio of .2% to .3%.  This equity was originally caped at .3%.  This was a legal constraint so that NCUA would not spend unconstrained the money credit unions provided in their open-ended, perpetual underwriting role.  Amounts above the NOL cap must be returned as a dividend to credit unions.

CUMAA in 1998 gave the Board discretion to set a cap from 1.2% to 1.5%.  In 2017 the NCUA Board, for the first time ever, raised the cap to accumulate excess funds above 1.3% from the merger of the TCCUSF.  This was after the fund had expensed $748 million from the TCCUSF merger surplus to add to the NCUSIF’s loss reserve to liquidate two taxi medallion credit unions in 2018.

NCUA’s reasons for raising the NOL cap to 1.39% after this loss expense transfer were at best dubious and at worst, just made up.  Multiple commentators pointed out these flaws in their comment letters about the TCCUSF merger.

Today each basis point in the NCUSIF is worth $160 million.   The 13-year actual loss rate (2008-2020) per insured share is 1.51 basis points.   In every year since 2014 the actual cash loss in the NCUSIF has been under .5 basis points except for the taxi medallion liquidations paid in 2018.

Corporate Myth Making

The only push back against this actual loss record is referencing the Corporate debacle in 2009-2010.  Chairman Harper again used this recurring trope at Thursday’s meeting.  He stated that if Congress had not bailed out the NCUSIF, credit unions would have to write down their 1% deposit by 69 basis points causing a cascading problem in the industry.

Like myth makers in other areas of politics and society today, this fable continues even as facts completely contradict this historical story telling. Today the surplus  from the corporate “legacy” assets exceed $6.2 billion and counting. The histrionic 2009 loss projections, made decades into the future, were completely at odds with the external TCCUSF audit results at that time.

The exaggerations reflected the fear and the uncertainty rampant during the crisis, not a considered analysis of options or actual performance.  They were the result of “modeling myopia” arising from a complete misdiagnosis of the situation.

The State of the Corporate Resolution Today

Fortunately we know the outcome versus these hyperbolic forecasts. On September 15, 2021, NCUA posted the latest quarterly updates for the five corporate AME’s.   It shows total projected recoveries to shareholders of four corporates of $3.158 billion, an increase of $33 million from the March quarter.   As of June 30, $2.619 billion of the recoveries were still to be paid.

What is the cost of NCUA’s oversight of the AME’s?   The answer: $4.825 billion to manage the P&A’s and all other expenses from the NGN refinancing.  Subtracting the legal expenses charged each AME still leaves a total of $3.567 billion the agency expended administering the NGN’s and AME operations. In other words the net legal recoveries would just pay for NCUA’s liquidation expenses.

For comparison the total operating expenses for the NCUSIF from 2008-2020 were only $1.9 billion or half those of the corporate resolution program.

The TCCUSF surplus and fees paid into the NCUSIF over $3.0 billion and the $ 3.2 billion projected payments to shareholders, all come from the legacy assets.

The TCCUSF legislation provided no capital for credit unions.  It provided only temporary liquidity draws, all of which credit unions were obligated to repay. The TCCUSF merely set up a separate fund for tracking the corporate resolution and moving the accounting out of the NCUSIF.   However, all of the funding for any corporate losses and loan repayments came from a single source: credit unions.

Financial cushions  can encourage misjudgments in difficult situations. The challenge today is not the adequacy of the historically validated NCUSIF structure and an NOL of 1.3.  The real issue is the ability of NCUA to work mutually with credit unions when problems arise to resolve them in the most cost-effective manner.

The typical government instinct is that money can solve any problem.  Without effective constraints on spending, NCUA’s solution will be to liquidate  problems.  Unrestricted spending is the real lesson from the corporate resolution.  The results were catastrophic. How many more times must it be learned?






Experts Views on Why Risk Based Capital Fails

Following the 2008/9 Great Recession and financial crisis,  many commentaries and studies asked why the risk-based capital requirements did not prevent severe losses in banks.

The following are the conclusions from several regulators and studies.


Risk Based Capital’s Basic Flaw

Credit unions were very critical of both NCUA’s risk based capital proposed rules  in 2014 and 2015.   Among the major objections were:

  • Failing to document any objective need for the rule
  • Creating multiple shortcomings and inconsistencies in asset risk weightings
  • Establishing a competitive disadvantage  versus bank capital options
  • Undermining member value in  both costs to implement and higher capital levels
  • Providing open ended examiner authority to interpret circumstances and override the rule
  • Imposing a one-size-fits-all national formula for risk and capital adequacy for over 5,000 diverse institutions serving thousands of different  markets
  • Ignoring banking regulators’s experiences which led them to drop RBC in favor of a simple leverage ratio
  • Overlooking the negative impact of  RBC on the corporate system’s ability to serve members

The concept of RBC can be useful at an institutional level because decisions and reserves are based on specific experiences (delinquencies and returns) for an asset’s known historical performance.

However, what works locally does not scale up to a single national formula.

The Fundamental Flaw of The RBC Concept

No team in any sport would try to win a contest by only playing defense. To compete in any activity, an organization must have both offense and defense.

But a one-sided approach to financial soundness is what RBC mandates. It requires credit unions to reserve based on a formula for risk and ignores all factors for income or return.

Every cooperative succeeds by pursuing,  sometimes seizing, opportunity. Credit unions were begun as a solution for consumers that were not well-served by existing choices.

A formula that attempts to measure only risk means examiners and credit unions will be inhibited or even restricted in  responding to individual or unusual circumstances.   Especially members in a crisis.

Every credit union monitors risk daily when it prices loans or evaluates investment yields.  The projected return is balanced with an asset’s risk whether duration or credit, and in the context of the balance sheet’s overall ALM position. Using a single formula to evaluate these decisions distorts everyday business practice and experience.

Risk for an individual credit union is more nuanced than a simple formula that assigns  relative risk weightings for almost 100 asset classes. As any board or manager knows,  such an approach is not how asset strategies are developed.

RBC does not reflect pricing  to pursue market opportunities.  It imposes a single national risk profile to replace the accumulated financial experiences and judgments which managers now use in each of their  institutions.

Risk is not a bad thing. Risk is considered whenever a credit union makes a loan, a CUSO or other investment, or a fixed-asset purchase. The judgment in the decision is the opportunity to help a member or enhance the credit union’s financial management,  not how it conforms to a one-size-fits-all  rule.

Risk Based Capital Is A Tool, Not A Rule

The risk based capital rule is a mistake.

If there is any benefit in a single formula to assess a cooperative’s financial soundness, then NCUA should validate that  by using the risk-based analysis as a tool in examinations.

Imposing  a one-size-fits-all rule denigrates the knowledge and experience of credit union managers across the country. It is contrary to the purpose of the cooperative model.

If risk analysis were as simple as a single formula, then there would be no need for cooperatives — just one financial charter license, one common set of rules, and one way to serve the market.

Credit unions were started because the existing financial frameworks and ways of doing business did not meet the needs of member-owners or of their communities.

For more than 100 years, credit unions have used a reserving-capital process that requires they  set aside an amount or percentage of income as a cushion for difficult times and to meet minimum well-capitalized targets.

This approach has worked. It has well served  members, the regulators, and the American economy. Reserving  is a holistic judgment that balances opportunity and member need with the uncertainties inherent in any market economy.

RBC plays defense only by focusing on one very narrow factor in managing safety and soundness.   It adds nothing to the evaluation of specific opportunities or individual credit union business situations.

More importantly, if the complex formulas are wrong overall, or in respect of any asset category, that mistaken judgment could push credit unions over a cliff who followed the letter of the law.

Reserving beyond meeting the well-capitalized minimum leverage ratio of 7% is best done by the boards and managers who are directly accountable for their judgment, not government bureaucrats.


The Fallacy of Risk Based Capital

Vice Chairman Hoenig’s 2016 WSJ editorial reprinted yesterday described both the actual experience and logical failures when using RBC for measuring bank capital adequacy.

In October 2015 the NCUA board approved a new rule, in a 2 to 1 vote, imposing this standard on all credit unions over $100 million.  All the required risk based weights are in this two-page NCUA summary.

NCUA’s 424 Page Rule

The final rule is 424 pages.    Here is how NCUA estimated the costs to the 4,784 credit unions under $100 million not yet subject to the rule and the 1,489 who would be covered:

Additional one-time costs estimated by NCUA are $152,562 collectively, spread among 4,784 non-complex, non-covered credit unions, at an average of 1 hour for policy review and revision, for an average of $31.89 per credit union; and $1.9 million collectively, spread among 1,489 complex covered credit unions, at an average of 40 hours for policy review and revision, for an average of $1,275 per credit union. 

NCUA states it will only cost $1,275 for each credit union covered by the rule to implement it; and $31.89 each for the 4,784 credit unions not yet subject to review it.  These estimates cause one to wonder what operational world NCUA is living in!

The two page summary shows over 75 categories of risk weights with multiple subsets that would make each RBC calculation a spread sheet with over 100 different inputs with multiple percentage weights. Several risk weights for the same asset can vary from 100-300% of the asset’s book value.

The following are some examples of how NCUA would implement the rule.

Deductions from the numerator (net worth) of the RBC ratio include 100% of the NCUSIF capitalization deposit, all goodwill and any other intangible assets.   This treatment is contrary to GAAP accounting presentation and how credit unions report these assets in their financial statements for their members, examiners and the public.

FHLB capital  is risk weighted at 20% and the  CLF equity at 0%.     NCUA is  100% sure there is no loss in the CLF, assigns a 20% risk to FHLB stock, and 100% certain the NCUSIF deposit is at such risk that it has no value.  This reflects a complete lack of confidence in NCUA’s own supervision  of credit unions-even under RBC!

Off-balance sheet items, not yet  assets, are included in the denominator.  Unfunded draws under lines of credit are added to the denominator at various percentages of total value and then weighted at 100% risk.   All loans transferred with recourse are included at 100% of value, no matter the kind or amount of credit enhancement provided by the credit union.

A 19% RBC Ratio

NCUA’ s  impact analysis from Oct 2015 states the average RBC ratio for all “complex” credit unions would be 19%.  Only 16 new credit unions (out of 1,489) were determined to be  undercapitalized that had not already been identified by the existing RBNW rule.

Of the 1,489 cu’s  subject to the rule, 482 would report RBC greater than 20% with 110 of those over 30%.   This is  one example of the distortion and misleading impression created by RBC versus the easily understood and comparable  leverage ratio.

If in doubt about the negative impact of this burden, then review  the tables of risk weights to understand the complications when calculating the RBC ratio.   Or better yet, review the 424 page rule.

There is one primary reason this approach was dropped by the banking regulators.   The “juice is not worth the squeeze.”




Why Risk Based Capital Is Far Too Risky

The article below is an op-ed in the Wall Street Journal by the then Vice Chairman of the FDIC, Tom Hoenig in 2016.

In 2019, the FDIC replaced its RBC requirement with a simple leverage ratio.  Banks are no longer required to calculate or report it.

In July 2021 NCUA Chair Harper proposed a new rule to implement both the RBC rule, passed 2 to 1 in 2015, and an entirely new leverage option with a minimum of 10% to be well capitalized.  This new minimum is 43% higher than the current well capitalized, PCA-legislated standard of 7%.

As presented in the FDIC Vice chair’s editorial, RBC has no objective validation.   To impose this failed standard of capital adequacy on credit unions, would be a most onerous burden–with no documented benefit.

Hoenig states the correct approach to setting capital standards is: Regulators, relying on research and historical experience, requir(ing) investors to provide a minimum pool of capital to hold against a broad base of assets. 

NCUA’s proposed capital twins of RBC and CCULR are based on neither research nor historical experience.  It is a simply an edict imposed over unanimous industry opposition without any documented need.

His article is reprinted in full below:   

A risk-based system inflates the role of regulators and denigrates the role of bank managers.

By Thomas M. Hoenig

Aug. 11, 2016 7:21 pm ET

The risk-based capital system that was long used to judge the resilience of the world’s largest banks has been highly unreliable and contributed to the 2008 financial crisis. In its aftermath, the leverage ratio is used more actively and in conjunction with the risk-based measure as an important constraint on leverage. But as banks seek to bolster short-term returns, this leverage constraint is having an impact and the largest banks and some policy makers are working to undermine its role and return to the system that failed.

Under the risk-based system, regulators, and in some cases the banks themselves, assign weights to different classes of assets in a portfolio based on their calculated guess about future risks. This guess then defines how much capital should be held for each asset. Investors also look on these risk weights as an endorsement of financial safety.

But as we learned from the crisis, this measure too easily allows banks to conceal risk and amplify leverage. For example, regulators endorsed low-risk weights on subprime mortgages and highly leveraged mortgage securities before 2008 and banks then piled into these toxic assets, eventually causing havoc across the banking system.

Despite its failed record, the risk-based system is still pitched as a cure for slow economic growth. The Clearing House Association, a trade group for large banks, said in recent congressional testimony that a risk-weighting system is the only reliable way to judge bank capital. It condemned as “very inaccurate” the main regulatory alternative of a simple leverage ratio, which measures capital to total assets without applying different weights.

This is incorrect. The leverage ratio has proven most reliable principally because it does not pretend to judge future trends in asset quality. It simply measures how much loss from total assets a bank can withstand before it fails. When a bank is under stress, this is all anyone cares about.

Member countries of the G-20 are expected soon to propose weakening this capital standard further, even as some countries and their banks are vulnerable to financial and economic stress. While the largest U.S. banks have increased capital since the crisis, their capital is still lower than the industry average and inadequate for bank resiliency. Undermining the leverage ratio is not the direction we should allow these banks to go.

Let’s look further at the financial and regulatory record. The preponderance of independent research, including by the International Monetary Fund and Bank for International Settlements, demonstrates many of the weakness of the risk-based capital measures that contributed to industry problems. Risk-based capital schemes encouraged banks to use their financial engineering tools to increase leverage and reported returns associated with artificially low risk-weighted asset classes. Low weights were assigned to subprime mortgages, foreign sovereign debt, collateralized debt obligations and derivatives like credit default swaps. These asset classes ended up dominating the banks’ balance sheet, leading to massive losses. Unfortunately and surprisingly, these risk weights have changed little since the crisis.

Banking requires that managers be responsible for defining the business strategy, determining risk tolerance and analyzing assets. A risk-based capital scheme designed by regulators denigrates bank management’s responsibility. It inflates the role of regulators in allocating bank capital despite their poor record. It ignores that regulators are too slow to change risk weights as financial circumstances change and too often influenced by political agendas. (emphasis added)

While assigning risk weights may be useful when testing the quality of current bank assets under different performance assumptions, it has not proven a reliable means to allocate the placement of assets safely and productively onto a bank’s balance sheet. Regulators are no better than anyone else in predicting emerging risks.

A risk-based capital system makes bank regulators a partner with management in assigning risk weights, creating moral hazard by making regulators culpable when risks are misjudged. This makes it more difficult for governments to let the largest banks fail because they have had a hand in that failure.

As of December 2015, the largest global banks reported that on average only 45% of their assets carried risk. This is wrong on its face as it misleads the public by treating more than half of the assets of global banks as if they were risk free.

By comparison the leverage ratio is more useful. Regulators, relying on research and historical experience, require investors to provide a minimum pool of capital to hold against a broad base of assets. Management must then balance earnings goals, liquidity needs and appetite for risk—and make lending decisions accordingly. Regulators then use supervision and stress tests to judge a bank’s financial condition and the adequacy of its capital, holding management accountable for sound banking practices and performance.

Mr. Hoenig is vice chairman of the Federal Deposit Insurance Corp. and former president of the Federal Reserve Bank of Kansas City.

Fiscal Spending, Quantitative Easing and Inflation

In April 2014, Jim Blaine discussed the Fed’s policy of pouring money into the economy and the prospect of inflation.  His analysis seems relevant even more in today’s stimulus driven economy.

Chart This !!

Spent several days last week at an economics conference sponsored by the Federal Reserve Bank of Atlanta.  They hold it out in the north Georgia woods – a good distance from reality – which seemed appropriate.

There were a lot of really “scary smart” people at the conference including an economics Nobel laureate, several highly distinguished academics, global bank economists from the U.S., China, Spain, Japan, Chile, Italy, etc. and the leading economic theorists from government agencies such as the Fed, the FDIC, the U.S. Treasury, and the SEC.  You get the picture – the best and the brightest in quantitative economics. No one from NCUA was registered…

Never been bothered much about not being “the smartest person at the table”(that’s just the way life is); but it’s a bit unnerving when you have to honestly admit that you’re unquestionably and repeatedly “the dumbest person at the table”(it was that kind of group!).  Practiced being quiet a lot and trying to feign invisibility when the Q&A started soaring well above my head.

The Bernanke Solution !

What I found most intriguing was the open, heated debate among these very bright folks over the merits of the recent practice of “quantitative easing” by the Fed. Literally trillions of dollars have been injected into the banking system in an attempt to revive the U.S. economy.  Former Fed Chair Ben Bernanke colorfully labelled quantitative easing as the practice of “dumping helicopter loads of cash” on to communities all across America.

Much of the debate centered around the future economic consequences of reabsorbing this excess monetary stimulus as the economy gains strength.  It was somehow both reassuring and refreshing to hear the best and brightest profess profound doubt and concern over being in these uncharted economic waters – with highly arguable and uncertain outcomes. All in decided contrast to the “inerrant robusterians” at the NCUA, who remain resolutely and insanely certain, about the unfailing wisdom of their myopia.

To read his observation about how the Fed was using its monetary stimulus and his “image token” from the meeting click here.