At NASCUS conference, October 22, 2015, a news summary:

Regarding the new risk-based capital rule, McWatters repeated the statement he made during the board meeting that he believes the final rule is “illegal.” “A future new NCUA board may take a different view (than the current board) with respect both to the legality and approach of the new rule.”

April 2016 from NCUA’s Newsletter: “NCUA and credit unions will need to keep an eye on the House Financial Services Committee, which is reviewing capital standards for community banks. NCUA will need to watch this process very carefully as it unfolds, and the board may need to reconsider our risk-based capital rule. . . I dissented to the adoption of this rule because I found many aspects of it were not justified under the Federal Credit Union Act. As credit unions for the most part are thriving without the rule, I continue to challenge this action, and nothing has dispelled my very serious concerns about its impact when it takes effect in January 2018.”

RBC Status

Today the rule is still on the books with the implementation date pushed out to 2022. (https://www.ncua.gov/newsroom/press-release/2019/board-proposes-delaying-risk-based-capital-rule-until-2022)

A reporter asked me what was Mark McWatters’ legacy of his six years on the NCUA Board.

My answer from a credit union point of view: “His promising potential was unmet, and he was a major disappointment in the way he led us on.”

However, there could still be an important lesson for Kyle Hauptman, should he wish to learn from his predecessor’s experience.

The Initial Enthusiasm

When McWatters came to the NCUA Board in August 2014, his critiques of agency practice and policies were well reasoned, documented and on target.

His concerns included a lack of transparency on NCUA’s budget, the OTR calculation, the failure to detect fraud resulting in NCUSIF losses, and the condescending approach of the agency and examiners.

He voted against the agency’s budgets and against the “illegal” RBC rule which were nonetheless approved 2:1.

His most stinging rebuke of NCUA’s leadership was in a May 2015 speech to the Pennsylvania League’s Annual Meeting:

NCUA should not treat members of the credit union community as Victorian era children–speak when you are spoken to and otherwise mind your manners and go off with your nanny—but should, instead renounce its imperious “my-way-or-the-highway” approach and actively solicit input from the community . . .With the strong visceral response within the agency against budget hearings, it seems that some expect masses of credit union community members to charge the NCUA ramparts with pitchforks and flaming torches to free themselves from regulatory serfdom. I, conversely, welcome all comments and criticism from the community.

Regulatory wisdom is not metaphysically bestowed upon an NCUA board member once the gavel falls on his or her senate confirmation. NCUA should not accordingly pretend that it’s a modern-day Oracle of Delphi where all insight of the credit union community begins once you enter the door at 1775 Duke Street in Alexandria, Va.”

Credit unions welcomed this honest assessment. It was their lived experience. At the 2015 GAC, he described his vision for NCUA as having “confidence, courage, and conviction to chart a regulatory path for the credit union community. . . based upon a transparent and fully accountable appreciation of the unique structure and attributes of the cooperative, not-for-profit business model.” He called on NCUA and the credit union community to work together in a new direction through a “collaborative and collegial process with the goal of building trust and inclusiveness.”

Upon being appointed Chairman by President Trump he said, “We best fulfill our obligation to protect America’s $1.3 trillion credit union community. . . by making the NCUA more efficient, effective, transparent and fully accountable.”

Good Intentions Not Realized

All of his intentions to change the agency’s culture were unrealized. Budgets increased every year even after closing two of six regional offices. The largest fraud ever discovered, the $40 million loss at CBS Employees FCU, was addressed only in an IG whitewash. RBC was not repealed, but just kicked down the road. Credit unions were closed and conserved without comment or explanation.

As for the promised annual review of the NCUSIF’s normal operating level, raised in 2017 to 1.38% as a temporary action using unsubstantiated numbers, two more budget cycles have passed with no efforts to reduce back to 1.3%.

Most importantly, when the opportunity came to close the TCCUSF and return up to $3.0 billion to credit union members, he instead kept the funds in the NCUSIF promising future dividends. This action was taken despite more than 2,000 comments opposing the proposal in whole or in part, and only 6 in favor. The era of Victorian Children and regulatory serfdom was fully back.

What Happened to McWatters’ Promise?

I believe two factors contributed to his leadership failures. The first was that his heart did not seem to be in the job. Twice his name was announced for other political appointments, once in a Presidential nomination for the EXIM bank board; and second, as a rumored director for the CFPB.

Throughout this tenure, the Washington Post reported he was working from home in Texas, traveling to DC only for Board meetings or testimony. He was in effect an absentee landlord.

Whether the result of his professional style, his philosophy of the board’s role or just ennui, he ended up adopting the agency thinking he had so decisively and accurately critiqued.

He defended selling 4,000 member loans to a hedge fund. When members showed up at a board meeting, they were shunted to a separate room (with their placards, not pitchforks). He waffled on rescinding the “illegal” RBC: “I concluded this was not the right time for a material diminution in the RBNW capital requirement for credit unions.” (June 2020) He publicly advocated for more resources: self-funding liquidity options for the CLF and a larger NCUSIF.

In August 2018 he spoke to the African American Credit Union Coalition: “ The NCUA has a statutory obligation to preserve minority depository institutions and encourage the creation of new ones, and that it is one we take seriously.” In his June 25, 2020 NCUA board meeting his recommendations for the future of MDIs were merger, merger and merger: “for example five $100 million MDI credit unions could consolidate into one $500 million MDI institution and economies of scale and market force.” So much for statutory obligation.

In leadership, he gave up. No efficiency, effectiveness, transparency, or full accountability achieved.

Why is open to interpretation. Mine would be that he lost any commitment to the credit union mission. His primary goal was protecting the agency and its resources. He became the bureaucrat he had initially challenged so eloquently in Pennsylvania in 2015.

What Kyle Hauptman Might Learn

There are critical questions Hauptman will have to answer that will influence his role as an NCUA board member. Bureaucracies do not like change. There will be constant pressure to conform to the traditional agency verities. That is the option McWatters took.

1. Is it a part-time or fulltime job? What is my personal commitment to the position?
2. How do I learn about the different approaches to board members’ responsibilities?
3. How do I learn most effectively about the history of the industry and agency I am regulating?
4. What kind of personal staff resources am I given and how do I select them?
5. To whom am I accountable for my decisions?
6. What role, if any, do I perform in overseeing the performance of agency staff? What duties are delegated, and which are retained by the board?
7. What is my view of credit unions’ mission? How do credit unions differ from banks?
8. How will I measure my effectiveness as a board member?
9. How will I interact with the industry?
10. What is my contribution to the agency’s agenda?

How Hauptman approaches his learning curve, the constituencies and resources he approaches and the lessons he takes away in the next six months, will likely determine the direction of the rest of his tenure.

In the June 2020 NCUA board meeting, Chairman Hood’s latest RBC proposal was withdrawn from the agenda at the last moment. It did not receive the light of day, so we do not know what was in it. Even so, outgoing board member McWatters indicated his opposition to any change in a June 29 credit union press release stating; “this was not the right time for a material diminution in the RBNW capital requirement for credit unions. . .”

Even though all three banking regulators ended RBNW as a valid approach for community banks in September 2019 and McWatters earlier opposed the rule as “illegal” it appears this destructive concept has somehow come back to life.

With that prospect in mind, I think it is useful to remember some of the reasons why the concept Is so flawed. The article excerpt below urged credit unions to comment on the second RBC proposal by NCUA in 2015. It looks as if the battle may have to be fought again.

Training Fleas and RBC
Escape the circus and live beyond the limits of the imaginary lid. (March 2015 Creditunions.com)

This YouTube video demonstrates how to train fleas. This column urges credit unions not to behave the same way when it comes to NCUA’s redrawn risk-based capital proposal.

The sequence of events the video illustrates are as follows:

• The fleas are placed in a glass jar.
• A lid is placed on the jar and left undisturbed for three days.
• When the lid is removed, the fleas will never jump out of the jar; their behavior has been set for the rest of their lives.
• Moreover when the fleas reproduce their offspring will follow their example.

Policy Lessons For Risk-Based Capital

The NCUA’s RBC #2 proposal lists more than 70 categories for which credit unions would be required to calculate capital according to their legally mandated rule’s risk weighting.

These weightings — like the lid on the jar — become the primary screen for filtering decisions such as what assets a credit union should hold, how loans should be priced, and the composition of the balance sheet.

This one-size-fits-all formula will reduce the diversity of credit union activity and in so doing, change the focus from serving members needs first, to meeting examiner expectations.

Two Comment Letters Address This Outcome

Chuck Bruen, CEO of First Entertainment Credit Union ($1.1B, Hollywood, CA) wrote this in his Feb. 13 comment letter:

“The NCUA’s risk-based capital rule is overly complex and inappropriate for credit unions and their business model. … NCUA’s risk-weights also experimentally incent and dis-incent credit union lending and investment behaviors in unprecedented and untested ways.”

This steering of balance sheet decisions was also a concern in a comment posted by Randy Karnes, CEO of CU*Answers:

“I believe the revised RBC rule penalizes credit unions for specific activities such as real estate lending, member business lending, and credit unions chartered to assist the un-bankable, by placing a capital tax on the resulting assets from low income or credit lending to the poor.

“We believe the end result will be thousands of homogenous balance sheets in 2025 that the NCUA can easily understand from a supervisory perspective. However, this current risk posture of the NCUA cannot but fail to lead credit unions to shy away from diversity or the cooperative reason for the charter and field of membership.

“This rule would ultimately force credit unions into potential areas of investment and lending in which the credit union lacks experience, or create industry-wide concentrations that could be impacted by similar economic variables. In and of itself, this rule creates more risk than it proposes to control.”

FDIC Vice Chairman Analyzes RBC And Finds It Flawed

These concerns are not theoretical. The banking industry’s reliance upon the RBC formula already shows how it creates results that do not enhance safety and soundness. The outcome can even undermine the critical economic value contributed by financial intermediaries.

FDIC vice chairman Thomas Hoenig noted this in a speech to the International Association of Deposit Insurers in April 2013:

“If the Basel risk-weight schemes are incorrect — which they often have been — this too could inhibit loan growth, as it encourages investments in other more favorably, but incorrectly, weighted assets.

“Basel systematically encourages investments in sectors pre-assigned lower weights — for example, mortgages, sovereign debt, and derivatives — and discourages loans to assets assigned higher weights: commercial and industrial loans.

“We may have inadvertently created a system that discourages the very loan growth we seek, and instead turned our financial system into one that rewards itself more than it supports economic activity.”

RBC Comments Needed More Than Ever

The second comment period is even more critical than the response to RBC #1. The debate now is not about risk weights, ratios, phase-in periods, etc., but whether this new rule is good public policy for cooperatives.

The impact of the rule will be to create behaviors contrary to credit unions’ purpose and their role in the market place. It will decrease diversity and increase asset concentrations.

Credit union leaders must not become fleas in a jar. Comments on RBC#2 are more critical than ever — or this new rule could become a lid on the future of your credit union and the credit union movement.

Source: Training Fleas And RBC | Credit Unions https://www.creditunions.com/blogs/chip-filson-on-credit-unions/training-fleas-and-rbc/#ixzz6T48VFVHt