In two weeks, credit unions will be able to calculate their newly imposed capital ratios. Three different calculation requirements are now in effect.
Using yearend 2021 data, there are 212 credit unions over $500 million that will likely have to use RBC (risk based capital) because they had net worth below 9% at December 31. Another 45 credit unions between $400 and $500 million reported net worth below 9%. They will be subject to RBC when their total assets exceed $500 million.
This total of 257 credit unions is probably the minimum number as credit union share growth is usually seasonal, concentrated in the first four months of the year. That is, assets will increase faster than capital can be earned at the same pace.
RBC has still not hit home for some. These credit unions are telling members they are well capitalized because they exceed the 7% net worth level. Those so doing often fall short of the new 9% minimum.
The impact of RBC is best described with the boiling frog analogy. A frog put in boiling water will immediately jump out. But put the frog in a pot of cold water, slowly raise the temperature and the frog will hot-pot to death.
Many large credit unions view RBC similar to a pond Kermit. As the RBC multiplex calculations slowly engulf quarter by quarter many will find themselves in unfathomable amounts of creeping normality.
Some will immediately jump to the seeming sub debt life preserver to stay above the 9% threshold. Soon they will realize that option itself requires more leverage just to breakeven. Sub debt just made the water deeper and harder to jump out of the pan.
RBC and NCUA’s Record of Risk Analysis
In an April 30, 2010 speech to the Illinois Credit Union League 80th Annual Convention Chairman Matz offered these remarks on the corporate crisis:
“Let me start by assuring that I fully recognize the legitimate anger many of your feel. The anger has come through loud and clear. . .I have heard directly about the pain you have felt. I know that many of you blame NCUA: After all, two examiners were on-site at US Central and WesCorp. NCUA definitely shares some of the blame (and then comes the big qualifier) but there is plenty of blame to go around.”
What she forgot is that the regulator’s role is because crises are to be expected. And when they occur, to be managed prudently.
The Irony of the RBC rule which is supposed to “protect the insurance fund” is that NCUA is often the source of the problem. As one veteran CEO observed:
“All the losses -excluding a relatively low level of cu management fraud – that NCUA has incurred is the result of errors in risk analysis by NCUA. They don’t like to acknowledge that fact, but the logic is inescapable.
By decreeing that most assets are now in complex credit unions, the industry is far more subject to the whims of a less than stellar team of NCUA executives who are increasingly enthralled by the “predictive” accuracy of astrologically and phrenologically based statistical models.”
The most catastrophic error in risk analysis is the Corporate crisis referred to by Chairman Matz. NCUA is now projecting a minimum of $5.7 billion in recoveries from the corporate AME’s. Over $1.2 billion is still due shareholders of the four corporates.
This is the exact opposite result projected for years after the conservatorship when total costs of $13.5 to $16 billion were estimated by NCUA. The agency never revealed their analysis always referencing the results of their “engaged securities expert, Black Rock.”
Learned Helplessness and the Actions of Others
With RBC it is easy to slip into a state of “learned helplessness.” That is behavior exhibited when a person is repeatedly exposed to negative stimuli beyond their control. Think regulatory burden.
The term describes experiments in which humans subject to loud noises, did nothing. seemingly helpless to change.
Not all the human participants responded the same way. Many blamed themselves for “failing,” but others blamed the way the experiment was framed. They knew it set them up for failure. In other words, not everyone is equally susceptible to learned helplessness.
Those who do not become passive when confronted with apparently uncontrollable situations are because they see others act with courage, overcoming difficult odds. These leaders actions inspire others not to give up.
There is an initial segment of 257 credit unions who will be subject to the sophistry and real burden of RBC. Some will throw in the towel, some will try to comply, and others will look for an “out” such as RBC or shrinking the balance sheet.
The hope is that most will have the courage and resilience to persevere until wiser heads prevail in Alexandria.