Let’s be frank. Chairman Harper has yet to be confirmed by the Senate to his new term. Therefore he is keeping his most important initiative under wraps until he officially has the job
But he has made no secret of his “Commander’s” ambition when he proclaimed at the March board meeting, “NCUA will guide the credit union system through the economic uncertainty caused by inflation, rising gas bills, and continued supply chain woes.”
After the Senate approves his appointment, he will reveal his “guide” plan: merging the NCUSIF into the FDIC. There are two ways this can be accomplished, which I explain at the end.
It is important to understand why Harper sees this as his top priority. Even more critical is recognizing how much support this merger proposition will have from credit unions and all other system stakeholders.
Harper’s Idealization of the FDIC
Since his appointment to the NCUA board Harper has continued to tout the FDIC as the gold standard for regulators. He has repeatedly spoken of their consumer exam prowess (see GAC remarks), the FDIC’s financial flexibility, its support of MDI institutions and even their subsidized employee cafeteria.
In brief, he has concluded that NCUA cannot compare with the FDIC’s competencies, so his solution is to join with them.
But there is more than Harper’s FDIC-envy motivating the plan. His core belief is that scale matters and that larger size means greater competence. With the FDIC’s scale and NCUA’s mission driven purpose, the success of credit unions is virtually guaranteed.
NCUSIF’s “Tall Tree” Problem
The “tall tree” phenomena refers to risk underwriting when an organization represents a disproportionate amount of exposure.
The other board members sympathize with Harper’s view that “bigger-is-better.” They know that Navy FCU’s assets are over eight times as large as the NCUSIF. If Navy’s NEV fell near zero in an examiner shock test, the NCUSIF would face a bigger problem than all the corporates combined in 2009.
Adding the FDIC’s $123 billion and the $5.0 billion NCUSIF equity, the agency need no longer worry about “tall trees” whenever examiners’ IRR modeling shows a PCA solvency shortfall.
Harper has other reasons for the merger in addition to his scale ambitions.
- FDIC’s insurance fund has a superior financial model. Its premiums are risk based, open ended and there is no cap on fund size;
- FDIC has no 1% deposit, so there is no controversy about “double counting” the fund’s assets:
- FDIC has no accounting issues about true-ups, proper reserving and no independent private audit:
- FDIC examiners are better at consumer compliance, technical analysis and asset liquidation management;
- FDIC is a superior, more recognized brand than the NCUSIF;
- The five person FDIC board has a vacancy that Harper will request be reserved for the NCUA Chair going forward (similar to OCC membership).
Credit Unions will support the merger because:
- Transferring NCUA’s insurance activities will reduce its annual budget by at over $200 million, or 62%, the current OTR rate, for insurance related expenses;
- Credit unions’ 1% deposit will be returned so they can once again earn a market yield;
- FDIC’s premium expense is currently only 3 to 5 basis points per year which could be paid out of the yield on the 1% returned deposit if rates reach 3-5%;
- Buying banks will be much easier for credit unions with only one insurer’s approval required;
- FDIC’s logo will show members that credit unions are really on a level playing field with banks;
- All credit unions already comply with FDIC’s capital requirements thanks to RBC/CCULR;
- Credit union mergers show their belief that scale is the most important attribute to achieve cooperative purpose;
- FDIC’s solvency has in fact been guaranteed by the US government, whereas the only proof for NCUSIF’s backing is a sentence in NCUA’s press releases.
Members will support the move because:
- They were told the NCUSIF coverage was the same as the FDIC;
- The FDIC is a better known brand;
- The 1 cent of each share dollar members now send to fund the NCUSIF will be returned to the credit union;
- Members have been told that credit unions offer “better banking”-this confirms that belief;
- It doesn’t make any difference–insurance has never been the reason they joined the credit union in the first place. For the first 60 years of financial cooperatives there was no share insurance.
Why the FDIC will support the plan:
- The $4.9 billion in NCUSIF equity to be added via the merger is more than 2 X the risk being transferred in the total assets of all CAMEL code 4 and 5 credit unions;
- Eliminates an embarrassing financial comparison for the FDIC ‘s 90-year-old premium based model and its habitual inability to achieve its normal operating level;
- The FDIC’s monopoly of deposit insurance will expand its power and influence especially within the cooperative system.
State regulators and NASCUS will support the merger as it will strengthen the dual chartering system:
- It ends debates with NCUA about whether their rules apply to state charters or just FCU’s. Going forward, SCU’s will have just their one state regulator;
- NASCUS will no longer have to argue about the Overhead Transfer Rate which caused state-chartered credit unions to pay a disproportionate share of NCUA’s operating expenses;
- It eliminates the need to expand the NCUA board to include a state regulator;
- The FDIC’s largess for examiner training is superior to NCUA’s;
- It will activate state charters’ interest in cooperative insurance options. Credit unions in WI, FL, IA, MI and WA will seek to restore a choice of insurer.
CUNA/NAFCU will support the merger:
- It certifies the level playing field for credit unions-a long term goal;
- There are expanded opportunities for Lobbying for their DC staffs.
Congressional Democrats will support the merger:
- All three NCUA board members were appointed by President Trump but democrats now are the majority on the FDIC board. The party believesTrump holdovers should not control an agency in a democratic administration.
Congressional Republicans will support the plan:
- It simplifies government and eliminates a federal agency overlap (NCUSIF) for the same activity;
- Credit unions don’t pay taxes but this will require them to help pay for the federal government’s future FDIC bailouts during the next banking crisis;
- It will relieve representatives of having to chose between their banking and coop constituencies as both will be under a common regulatory system.
Two Paths for Implementing Harper’s Merger Plan
One approach is to propose congressional legislation. As Chair, Harper has already communicated to Congress his requests to change the NCUSIF’s financial model and modify CLF’s membership requirements.
While the legislative path is always uncertain, this effort could have bipartisan appeal as it is unlikely to have any opposition from credit unions or the banking industry.
Should this approach not prove feasible, then Harper will follow the same process used to implement the NCUA’s CCULR capital rule. The banking industry required congressional legislation to add this option to the FDIC’s capital requirements. NCUA was not mentioned in this CCULR enabling legislation.
However, Harper went back to the original PCA requirement from 1998 that said credit union safety and soundness requirements must be comparable to banks’. NCUA said that bank regulators were authorized to offer CCULR, ergo credit union regulators have the same authority. All three board members agreed with this legal reasoning.
Using this precedent, NCUA can mandate FDIC insurance for credit unions by a rule based solely on the PCA requirement of “comparability.“ For there could be no greater comparability than a common insurer for both credit unions and banks. The implementation could be done quickly,. Credit unions were given just 9 days to comply with CCULR once it was passed.by the board.
Readers. It is April 1.
I am not saying that NCUA should merge the NCUSIF with the FDIC.
It would likely be a shock for market-shy cooperatives to be in the same league as the profit-driven banks.
I’m just saying that it could happen.
And that it almost certainly will happen.
Because Harper has shown he gets what he wants. Moreover, credit unions could really end up screwing the banks using their newly won FDIC emblems while holding onto their tax exemption.
After all, different charters are just legal fictions anyway. All financial institutions do the same things.
FDIC’s scale will facilitate even faster credit union growth from more bank buyouts and ever larger mergers.
And members will have peace of mind knowing that all along the NCUSIF was no different from the FDIC.