by George Santayana in 1894
This Jim Blaine classic post is an analysis of the distortion of the Federal Credit Union Act by NCUA when imposing Risk Based Capital on credit unions. Board Member McWatters voted against the proposed and final rule stating NCUA lacked the authority for the regulation.
These critiques are even more relevant as NCUA continues to expand its interpretation by adding a CCULR capital option to RBC in December 2021. The lack of legislative authority to do so was detailed in this analysis.
These critiques are important if future corrections are to be undertaken to credit union’s RBC/CCULR regulatory morass. The following is Blaine’s original critique.
Risk-Based Capital: Commenting on Your Future -OVERRIDING CONGRESS!
|Really can’t believe this !|
Little different tack today in terms of reviewing NCUA’s member-punitive and professionally embarrassing proposed, risk-based capital (RBC) regulation.
We have taken a look at how NCUA’s “we-know-better-than-everybody-else-despite-our-track-record” approach to RBC will 1) deter member mortgage lending, 2) damage MBL lending, and 3) severely limit safe CU investments, forcing unnecessarily lower savings returns on CU members. All proposed with utter disregard for the new, lower RBC standards now already in place for all other federally insured depository institutions.
Today let’s look at how NCUA has decided to independently override the U.S. Congress and federal law with the new RBC proposal. Have always noted how proud NCUA was of being “an independent agency of the Federal government”, but it had never occurred to me that NCUA believes it is independent of Congress – and above the law.
|Congress is such a bother to
an independent federal Agency!
Here’s how NCUA intends to override Congress. In Section 216 of the 1998 Credit Union Membership Act (“HB 1151”), Congress specifically and purposefully wrote into the Federal Credit Union Act (FCUA) a series of mandatory “net worth” categories and prompt corrective action (PCA) requirements. Congress defined statutorily that a credit union was “well capitalized” if its net worth was >7%, “adequately capitalized” if its net worth was >6% but <7%, etc – five categories in all. Congress wrote into the FCUA statute a very, very clear definition of “net worth” – nothing accidental nor haphazard about what Congress meant by “net worth”, nor how it was to be used to determine CU capital levels.
|NCUA is becoming
thoroughly Pinnochioan …
“The proposal would change the title of Sect. 702.102 from “Statutory net worth categories” to “Capital classifications”. NCUA believes that replacing the term “net worth” with the general term “capital categories” better describes the combined “net worth ratio” and “risk-based net worth” measurements that make up the five categories listed in the statute. Moreover, the term “capital” is generally more inclusive of all accounts available to pay losses than the term “net worth” and is more commonly used in the financial services industry. No substantive changes to the requirements of Sect. 216(c) are intended by these changes in terminology.”
“[Several sections of 216] of the
Federal Credit Union Act (FCUA) use the term “risk-based net worth” requirement, NCUA believes that replacing the term “risk based net worth” with the functionally equivalent term “risk-based capital” in the proposed rule would better describe the equity and assets the requirement would measure. No changes to the requirements of the statute are intended by the alternative term…”
|NCUA’s RBC comes with
strings already attached…
Now I’m sure that didn’t make any sense at all to most of you, because you’re nice, reasonable straight-forward kind of folks – unlike the folks who wrote this proposed regulation. So, let’s break it down…
Under current law: Credit unions with net worth > 7% are “well capitalized”. Under the current risk-based net worth (RBNW) formula, if a credit union is determined to be “complex”, it may be required to hold additional capital (none of even the 25 largest CUs are required to hold capital above their statutory net worth and most are not complex under current RBNW standards).
Under the proposed reg: NCUA unilaterally has 1) decreed that all CUs with assets > $50 million are complex! No test, no evaluation – as now required by the FCUA – to determine if a CU is simple or complex. NCUA simply changes a Congressionally approved law to make you complex regardless of your balance sheet risk; and then since you are complex(!), NCUA imposes its new RBC regime requirements on your CU.
|Weaseling Congress !
(… robustly !!)
Here’s the weasel, NCUA is attempting to change the Congressionally legislated definition of “well capitalized” to:
“To be well-capitalized a credit union must maintain a net worth ratio of 7% or greater and, if a complex credit union, (which NCUA has defined as all CU with assets >$50 million) must have a risk based capital ratio of 10.5% or greater…”
NCUA’s proposed RBC reg flies in the face of express Congressional intent under the FCUA. You can always spot a weasel when you read phrases like:
1. “… replacing the term “net worth” with the term “capital categories” better describes…” – That’s a Weasel!
2. “… no substantial changes … are intended…” – That’s a weasel!
3. “… replacing the term “risk-based net worth” with the functionally equivalent term “risk-based capital”… – That’s a weasel!
4. “… the term “capital” is generally more inclusive… and is more commonly used in the financial services industry …” – That’s a weasel!
5. Changing “if you are complex” to “you are complex”… – That’s a weasel!
6. “… no changes to the requirements of the statute are intended…” – That’s a weasel!
(by Jim Blaine)
Must be the high season for letters of recommendation – those succinct summaries of superlatives for men and women of distinction. This time around the injured party is Maurice Ravelle Smith. The pantheon of choice: The Cooperative Hall of Fame sponsored by the National Cooperative Business Association (NCBA) and its’ international arm, the Cooperative League of the USA (CLUSA).
For those not in the know, NCBA/CLUSA is the 106 year-old trade/advocacy organization for all forms of cooperatives – producer, consumer, worker, purchasing, service, and social cooperatives, including credit unions. At heart the members of NCBA/CLUSA are an eccentric, motley crew of die-hard idealists, with an organizational vision “to build a better world and a more inclusive economy”. Well, they certainly have their work cut out for them!
As you might imagine, NCBA/CLUSA does not accept any run-of-the-mill folks into the Cooperative Hall of Fame. Leaders of the usual sort need not apply, something more is expected – statesmanship, lasting achievement, cooperative advancement, distinct recognition. Exceptional leadership is the standard – the real thing.
“Deifying” the Movement
Maurice Smith is the real thing. While Mr. Smith’s service as CEO of Local Government Federal Credit Union – and in numerous leadership roles at CUNA, Co-op Bank and on the boards of his local university, hospital and church – is remarkable; what is exceptional about Mr. Smith is his success in “deifying” the credit union movement. The Bible has its “Ten Commandments” and until recently the credit union movement had its “Seven Cooperative Principles”. Now it has eight! The fault lies with Mr. Smith.
The eighth cooperative principle for credit unions is: “Diversity, Equity, and Inclusion” (DEI) – a disruptive idea fraught with complex challenges in a world stubbornly fractured by loyalties to clan, tribe, sect, nation, class, and heritage. Suspicion is often the norm. Is this an opportunity or a problem? Fresh or “woke”?
The path forward, off-road, but on track, is awkward, tense, and uncertain – a tight wire perhaps, without safety net. Who in his right mind would lead us purposefully out over the abyss? Only a man of conscience, a noble and courageous leader, with a strong sense of justice. DEI will definitely challenge most of us, challenge us to cooperate, challenge us to change.
Tack and Tact
One sailing against the prevailing wind must tack, a leader fomenting change must have tact. Always courteous, considerate, and polite, Maurice Smith was able to achieve this revolutionary credit union change without uprising or revolt, because he is trusted by his peers and respected by all for his integrity.
Life is not the way it is supposed to be, it’s the way it is. Just take a look around. The way you chose to deal with life and people makes all the difference.
It’s unfortunate our best path forward at this time is DEI. Too bad we can’t simply honor and accept each other for who we are. But at least in the short run, DEI will force us to focus on our differences, in hopes that in the long run we will recognize we aren’t.
You have noticed that all those different colored M&M’s all taste the same, haven’t you? Perhaps in the future, the eighth cooperative principle will become “dignity, equanimity and intelligence”, which are higher human standards and an apt description of Maurice Ravelle Smith!
Maurice Smith grew up in Southport, North Carolina. I have known him for over 40 years as a colleague and friend. He is a model of good manners. His mother – he still calls her daily! – and his father reared him to honor his roots and to always sow seeds for the future. The success of their lessons is apparent. Maurice Smith is an exceptional human being – the real thing.
Mr. Smith, through his DEI-fication of credit unions, has sowed the seeds for the continued success of our cooperative movement…let’s hope it is a bountiful crop!
And it will be, if you and I cooperate…
Let’s go forward courageously; and forthrightly deal with the most important issue confronting the Credit Union Movement. No, it’s not taxation, the banks, CFPB, nor the NCUA. Our most pressing challenge is “dress down Fridays” or “business casual” if you prefer.
Business-casual – actually “business sloppy” is a good bit more descriptive – has become a fashionable idea in some credit union circles. Many progressive Boards and managers, who support the wind whichever way it blows, have adopted this new benchmark for professional attire. The “new look”fits well on the revisionists’ list of “new age” credit union principles – few, of which, are worth dying for.
Proponents assert that the new dress standards create a more relaxed work environment; make employees feel more comfortable; boost morale; and are strongly supported by the membership. Yeah, un-huh! I guess the best that can be said for this type of slender logic is that it’s only mildly “robust”!
It truly comes as a surprise to some of us that we are supposed to feel all “cozy and comfy” at work and should treat our duties in a relaxed, casual manner.
Maybe we have misunderstood all along the realities of the modern workplace. We really must have things backwards! False Assumption Number One must be the belief that “our” job actually belongs to the credit union – and its membership. False Assumption Number Two must be the belief that we are employed and paid to do what is necessary and required, not what’s convenient and comfortable. False Assumption Number Three must be that we are engaged in an extremely competitive, take no prisoners service business. And, False Assumption Number Four must be that our members expect, and are demanding, more from us – not less.
Old Fogey! Old Fogey! I can hear you crowing all the way from here! But, let’s compromise. If dressing down is truly good for the Credit Union Movement, let’s really go for it! Let’s take it to the limit with the ultimate Dress Down Day – Naked Fridays! It could work wonders with the membership! For example, Naked Fridays will definitely build member traffic; grousing about long lines will decline; and no one will ever again notice if a teller fails to smile.
This idea was broached recently with our staff.
Their reaction broke down into two distinct groups: those who were indignant and those who were very indignant! There were some surprises, however, among the actual responses. Older employees, figuring they had more to gain than lose, unanimously supported the proposal. Female employees were particularly difficult to convince. They did not object, in general, to the concept; but argued forcefully for a pay differential since they felt they added greater value. Equally disruptive, the female staff adamantly refused to pledge not to giggle around their male co-workers!
One previously ardent advocate for “business sloppy” became particularly incensed when she was asked how she would feel about coming to work on Fridays naked. It was an innocent enough question; but she became enraged; started yelling wildly; and pointed her finger decisively at me. I won’t tell you what she said, nor which finger she was pointing; let’s just say it wasn’t very pretty!“Communications” around the Credit Union were, at least, “really good” for a week or so…
Although a final decision has not been made, we probably will not go forward with the “Naked Friday” idea. There are just too many unresolved questions. Y’know the devil is always in the details. For example, would it be appropriate to ask or comment about a co-worker’s previously unrevealed tattoos? Does failure to look a co-worker in the eye constitute sexual harassment? Should items dropped on the floor be picked up? It all just gets too complicated! Besides, the Accounting Department started cautioning about higher heating and maternity leave costs. They’re always so drudgingly practical! The Internal Auditors did feel, interestingly, that the absence of pockets might help improve internal controls.
And, Marketing – bless their hearts – tried to stay upbeat with slogans such as: “We’ll give you the shirt off our backs” and“No Hidden Fees; No Hidden Costs; No Hidden Anything!”
We did have a couple of “King Solomons” who proposed several “simple solutions”. One was the “just blue jeans alternative”. But it was quickly killed, because most of us are of such an age that we are painfully aware of how we now look in blue jeans. We understand that we are the reason that overall denim sales have soared while the number of pairs sold has remained constant.
Another alternative suggested was organization-wide leisure suits (lime green, no less!), but fortunately clearer thinking prevailed.
Others called for “Theme Days”, when we would all dress alike around a common idea. This suggestion held much support until the wags began calling for Lady Gaga Mondays, Tacky Tuesdays, Dress-in-Drag Wednesdays, and No Bath, No Makeup Thursdays. And, lastly, for what it’s worth, I tried not to take it personally when that outraged employee, previously mentioned, called pointedly for “Idiot Days”.
Oh, well, who knows? Maybe we will eventually find an answer. Until that time, I guess we’ll continue to operate as though each of us truly needs our job; as though what each of us does is vital to the success of the Credit Union; as though being fashionably average is not good enough; as though Credit Unions are not a competitively protected class; and as though we’re here to raise the standard, not “lower the bar”.
Old fashioned? You bet, ’cause “this ain’t no party, this ain’t no disco, this ain’t no foolin’ around…”
Sometimes important, well-conceived ideas do not at first succeed. But if they truly inspire, sooner or later the vision will be fulfilled.
Leonardo da Vinci was a Renaissance master, a student of almost every area of knowledge being practiced. A painter, architect, designer of war machines, statues and inveterate keeper of notebooks recording every area his curiosity took him.
In 1482 he was commissioned to create a bronze horse statue by the Duke of Milan to be a gift to the Duke’s father, Francessco Sforza. The statue would be the largest ever cast requiring over 70 tons of bronze and standing 26 feet high.
Leonardo prepared by writing a treatise on horses’ movements, their anatomy and how he might balance a figure in motion, with just two of the four legs on the ground. In 1493 he made a full size clay stature of his design. He developed a unique engineering process recorded in his notes. The statue was to be cast in two halves and then joined together.
Unfortunately, his patron gave the bronze collected for the sculpture to the Italian defenders of the city of Milan after it was attacked by an invading French army. The Italians lost, the clay model was used for archery practice by the French, and subsequently destroyed by weathering.
End of Story?
No, 500 years later a United Airlines pilot and art collector Charles C. Dent read about Leonardo’s vision in the September 1977 edition of National Geographic. He founded a non-profit to bring da Vinci’s vision to reality for his hometown of Allentown, PA. He died before the vision could be realized. His nephew took over the foundation and hired an experienced animal sculptor, Nina Akuma, to explore da Vinci’s drawings to create a fully realized instantiation. Two full size casts were made, one placed in Milan, Italy and the second commissioned by Frederik Meijer. (additional details)
It was this second horse I saw on a visit to the Frederik Meijer Gardens and Sculpture Park in Grand Rapids, MI.
Although based on decades of Leonardo’s artistic work, it is today named the American Horse. The sight is truly majestic with the entire bronze weight supported by only the two opposite hooves. Its monumental standing is accentuated by the grass and tree sheltered green amphitheater which it alone inhabits.
The Promise of a Vision
Today the credit union vision is just over a century old. There have been almost 50,000 state and federal charters issued, of which 4,950 are still active. The challenge as in the artistic effort to recreate Leonardo’s horse, is what is core to the vision today? What is timeless in cooperative design as it evolves in subsequent environments?
And is the design more than a single expression or does it require a “system” (as in Leonardo’s workshop) to support individual credit unions?
The commission that inspired Leonardo’s vision lasted long after its creator and sponsor left the scene. However the vision was so well conceived, that new artistic pioneers were motivated to fulfill the work, albeit in a contemporary context.
There is I believe a parallel with cooperative design. It is well conceived by founders, but requires contemporary architects to ensure its relevance and sustainability for future generations.