Author: Chip Filson

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Words of Hope in this Season

Words often feel special this time of year.   The following poems were written during tragic personal circumstances of both authors.   Each still affirms hope.

The first was converted to a popular Christmas carol, sung often today. The other, translated from Russian, celebrates life’s fullness even as it is near ending.

An American Poet Writes in the Face of Personal Tragedy

The circumstances of Henry Wadsworth Longfellow’s writing I heard the bells on Christmas Day, are clothed in tragedy and personal depression.   His wife, Fanny, had been killed two years earlier in a fire started as she was sealing envelopes with hot wax when a flame caught her clothes.

He was too badly burned to attend her funeral, and wore a beard for the rest of his life to disguise the scars on his face from trying to put out the flames.

As a 29 year old widower, he had courted Fanny for seven years before they were married.  In their 18 years together, they had six children. For Longfellow, they were the happiest time of his life.

Two years later, in 1863, his oldest son Charlie enlisted in the Union army against Longfellow’s wishes. The poet was a strong abolitionist, but also a pacifist.  Charlie  wrote his father from DC where he had joined the 1st Massachusetts Artillery:

I have tried hard to resist the temptation of going without your leave but I cannot any longer, I feel it to be my first duty to do what I can for my country and I would willingly lay down my life for it if it would be of any good God Bless you all.  

He caught fever in June and took leave that summer to heal at home.  He rejoined the fight.  In November At New Hope, Va., he was shot, the bullet went through him from back to shoulder, just nicking his spine.

Longfellow brought his son back from DC to their home in Cambridge to convalesce, arriving on December 8th.  Listening to church bells ringing at that time of year he was moved to write his poem (original words below) combing his anguish of war and hope for peace.

I heard the bells on Christmas Day
Their old, familiar carols play,
and wild and sweet
The words repeat
Of peace on earth, good-will to men!

And thought how, as the day had come,
The belfries of all Christendom
Had rolled along
The unbroken song
Of peace on earth, good-will to men!

Till ringing, singing on its way,
The world revolved from night to day,
A voice, a chime,
A chant sublime
Of peace on earth, good-will to men!

Then from each black, accursed mouth
The cannon thundered in the South,
And with the sound
The carols drowned
Of peace on earth, good-will to men!

It was as if an earthquake rent
The hearth-stones of a continent,
And made forlorn
The households born
Of peace on earth, good-will to men!

And in despair I bowed my head;
“There is no peace on earth,” I said;
“For hate is strong,
And mocks the song
Of peace on earth, good-will to men!”

Then pealed the bells more loud and deep:
“God is not dead, nor doth He sleep;
The Wrong shall fail,
The Right prevail,
With peace on earth, good-will to men.”

The carol version often omits the middle stances about the war in which “hate is strong and mocks the song of peace on earth, good will to men”.

But despondency is overcome with the affirmation that “God is not dead, nor doth He sleep” and that ultimately there will be “…peace on earth, good will to men”.

The Burl Ives recording of the carol from 1966 is the shortened version omitting the Civil War context.

A Poem of Hope from Russia

Osip Mandelstam was a Russian poet and essayist who lived there during and after the revolution and the rise of the Soviet Union. Born in 1891 he was educated in St. Petersburg, France and Germany.   In 1937 Mandelstam was arrested and sentenced to five years in a corrective-labour camp in the Soviet Far East. He died that year at a transit camp near Vladivostok.

He is considered one of the most significant Russian poets of the 20th century. This poem was written in the camp shortly before he died.

And I Was Alive

Written by Osip Mandelstam

Translated by Christian Wiman

And I was alive in the blizzard of the blossoming pear,
Myself I stood in the storm of the bird–cherry tree.
It was all leaflife and starshower, unerring, self–shattering power,
And it was all aimed at me.

What is this dire delight flowering fleeing always earth?
What is being? What is truth?

Blossoms rupture and rapture the air,
All hover and hammer,
Time intensified and time intolerable, sweetness raveling rot.

It is now. It is not.

(May 4, 1937)

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A Season for Work Appraisals

Bosses Struggle to Respond to Burned Out Workers (Wall Street Journal, December 21, 2021)

“Workplace stress is rampant and resignations have risen; employers are trying four-day workweeks, mandatory vacation days and other new ways of working.

In the first 10 months of this year, America’s workers handed in nearly 39 million resignations, the highest number since tracking began in 2000.

Some want better jobs. Others, a better work-life balance. Still others want a complete break from the corporate grind. Almost two years into the pandemic that left millions doing their jobs from home, many Americans are rethinking their relationship with work.”

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A Season of Remembering and Joyous Sounds

One the joys of our annual cycle of religious and secular observances is how past memories are often rekindled.  They arise in personal stories and from music primarily played at this time of year.

Last Friday my wife and had dinner with a 90-year-old couple, still living in their home.   The husband is still active in the credit union community.   He was 11 years old when WW II broke out.

As we finished the meal with Greek cookies bathed in powdered sugar, they recalled a time as children when war cake was served for dessert. The ingredients include little or no milk, sugar, butter, or eggs, because they were rationed, expensive or hard to obtain. When his father received a 5-pound bag of sugar as a gift for Christmas one year, he immediately turned it over to his church lest he be accused of violating ration limits.

Remembering times past makes them special, no matter what our worries were then.

Musical Joys with New Words

Music is especially potent in calling up special moments. I remember the first time I heard a live performance of the Handel’s Messiah.  During the Christmas season I was at Boston Symphony Hall, senior year in college, on a date with a young lady whom I would later marry.

Years later I heard the familiar sounds, but with different words.   The oratorio was being sung in Russian, a banned work during the Soviet era.  This was one of the first recordings in that language.   Listening to words, unknown to me,  made it a wholly new experience.

En route to a holiday dinner years later while listening to the local classical music station, I heard a new CD that was also not in English.  But it was so buoyant, melodic, and festive that I looked up the station’s playlist to find the title of the CD, Karolju.

It is a suite of original Christmas carols for choir and orchestra by the America composer Christopher Rouse. The work was commissioned and first performed on November 7, 1991 by the Baltimore Symphony Orchestra

The composer modeled the work and its rhythmic variations after Carl Off’s Carmina Burana.   Here is how the composer explained his unusual choice of language.

As I wished to compose the music first, the problem of texts presented itself. Finding appropriate existing texts to fit already composed music would have been virtually impossible, and as I did not trust my own ability to devise a poetically satisfying text, I decided to compose my own texts in a variety of languages (Latin, Swedish, French, Spanish, Russian, Czech, German, and Italian) which, although making reference to words and phrases appropriate to the Christmas season, would not be intelligibly translatable as complete entities. It was rather my intent to match the sound of the language to the musical style of the carol to which it was applied. I resultantly selected words often more for the quality of their sound and the extent to which such sound typified the language of their origin than for their cognitive “meaning” per se.

Though the music of Karolju is original, the first and tenth movements of the work paraphrase the coda of “O Fortuna” from Carmina Burana. The third movement also quotes a four-measure phrase from The Nutcracker by the Russian composer Pyotr Ilyich Tchaikovsky, which itself dates back to an 18th-century minuet.

This is the link to all of the individual carols on the album.   Many languages are used but to capture the spirit of the season you might open with the Swedish carol #2, for 1:45 minutes.

Enjoy these original sounds of the season’s spirit. Listen as the words, even when not understood, create texture for each musical movement.

Please add your favorite choral sounds at the end of the blog.

 

 

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Reflections on December’s NCUA Board meeting

No exact count is available, but close to 1,000 pages of staff material including BAM’s, budgets, proposed rules and other supporting material were provided NCUA  board members for December’s meeting.  The material was for decisions having, I thought, great moment for credit unions’ future.

Discerning what matters in such an output in the 5-10 working days when staff’s final versions are delivered is an impossible task.  Decisions are made and priorities set, not by rational debate or objective facts, but fatigue overload.

The so-called “bipartisan” vote is cast because there is no way to develop alternatives. Process overwhelms the participants unless you’re the one in charge of the process.

Here are two reactions about the meeting’s outcomes:

From a longtime colleague:

The slow but steady March to oblivion continues.

There were 18,000 credit unions when I started. Are we under 5,000? And over 1/3 of them are under 50 million.  It used to be 80% of the assets in 20% of the credit unions. Is it 90/10 by now?

You’re 77, I’m 70. The question is “will credit unions outlive us, or will we outlive credit unions?” I’m going to eat well and go to the gym to increase my chances.

By Elon Musk:

Rules and regulations are immortal. They don’t die. And if more rules and regulations are applied every year and it just keeps growing and growing, it just takes longer and longer and it’s harder to do things. (from WSJ interview).

If I heard correctly during the meeting, one part of the new RBC rule dealing with goodwill has a 2029 expiration date. In this case immortality is only ten years.

If Only in My Dreams

My first reaction to the meeting was deep disappointment for both credit union leaders, their members and NCUA directors.  Decisions were disconnected from reality and relevant data.  Political agendas set half a decade ago were now being imposed by fiat, not need.

During this time of year in 1943 during WW II, one of the most popular songs was Bing Crosby’s  I’ll be Home for Christmas. It begins:

I’ll be home for Christmas
You can plan on me
Please have snow and mistletoe
And presents by the tree 

The final stanza:

Christmas eve will find me
Where the love light gleams
I’ll be home for Christmas

If only in my dreams

The melody is memorable; however, the meaning is quite somber. The reality longed for will be just a dream.  Until the bigger events involved are over and life can once again be lived on terms we are free to choose.

In our life’s most earnest commitments, usually work or family, we continue to long for the best. That “feeling of being at home” gives us satisfaction and meaning. We use our creativity to achieve this sense of purpose, where we truly feel comfort.

I slowly realized my and others’ disappointment with the Board’s actions were from my thinking NCUA was “home” for credit unions.

A Mortuary Is Not a Home

The “home” credit unions pursue is their side-by-side journey with the members. It is not a set of rules promulgated by a government agency.  NCUA is no home for credit unions.  Its primary role today is as the mortuary for credit unions.

Looking to NCUA to understand the aspirations of credit unions, their members’ longings and the power of cooperative design is “only in your dreams.”

Hope is intrinsic for life to have meaning.  That is what credit unions at their very best try to deliver in every member relationship.

My error was believing that NCUA leaders might also share that same goal. The meeting was a slap of cold water in my face, an important reality reminder.

For that I am grateful.  It is credit unions that bring members the “wonderful life” this time of year, and all year round.  As the angel Clarence says to George Bailey: “Each man’s life touches so many other lives, and when he isn’t around he leaves an awful hole, doesn’t he?”

NCUA’s primary capacity is creating  holes.

Credit union’s strength is because members believe this is their own financial home which they can trust.

That financial reality is not based on new rules, budgets or even a guardian angel fund.   Instead, it is created from loyalty and relationships built over decades, or what, at this time of year, we call Goodwill.

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A Nativity Play-Poem

Amid sheepish shepherds,
embarrassed kings, awkward angels
with their bent-coat-hanger wings –
my most unforgettable character
is the tender-hearted lad
assigned to play the innkeeper,
who undid the whole production
when he assured the wandering couple,
“You folks are so, so lucky.
We just had a cancellation.”

by J. Barrie Sheperd

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Today’s NCUA Board Decisions: Encouraging Credit Unions to Help Members Succeed or Adding More for the Regulator

There are two weeks left in the year.  But we already know that in the second year of pandemic pivots and uncertainties that credit unions have again and again responded to urgent  member needs.

Daily reports of year-end bonus payments and record levels of loan re-financings are adding  millions of dollars to member’s wallets.

While yearend NCUSIF numbers are not yet complete, it appears this will be a second year in a row of net recoveries and no insured losses.

But America is not out of the woods.  Covid continues to play havoc with well laid plans.  Interest rates will go up.   Both costs and prices are in a rising phase-no one knows for how long.

2022 looks to be another year of “transitions.”   To the office or not.  More virtual or hybrid meetings.  Continued efforts to find the right employees.  How can we save costs.

The Environment for Today’s Meetings

The notices below in the DC’s Union train station and a vending machine in a hotel capture what the ordinary person is dealing with in this uncertain economy.

These are glimpses of the  external context for  NCUA’s decisions that will set agency’s spending pattern and priorities for next year.

Will the board’s decisions inspire credit unions to do even more for their members especially those who are vulnerable still?

Will the last two years of virtually no NCUSIF losses encourage the board to adopt the historically proven 1.3% cap and reaffirm the NCUSIF’s long proven cooperative design?

Will the enormous burden and cost in member value of a CCULR/RBC implementation be paused or even tabled, while more data can be gathered about the benefits it is supposed to bring?

The NCUA board is facing hard decisions.  Will they recognize the unique challenges for credit unions to do more for members?  Or more for NCUA?

 

 

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“No Wonder We All Are Bored with NCUA Board Meetings”

This week I asked my good friend Randy Karnes for his perspective  on the upcoming NCUA board meeting (12/16/21). Here’s what he had to say:

Chip hoped that I might inspire the NCUA board to consider its agenda differently; to move away from the agenda’s details and towards activities that would craft a new expectation for us all.   

NCUA and its governance needs to focus on bigger issues. Issues that inspired owners. Issues that made business fun for those who derive  meaning from their efforts. Issues that extended value so that the everyday owners, and professionals reporting to them, would care about board meetings and NCUA’s  oversight functions.

He hoped the three politically selected directors would consider that we need more from the regulator.  We want a group that cares about our professions, our ideas for governance,  and our safety nets.  That the credit union-funded institutions at NCUA are still there to back our plays, our efforts, and our belief in the work ahead.

So I read Chip’s 12/13 blog as the inspiration for my comments, but only found the inspiration to declare I understand why no one gives a sh*t anymore.

Here’s what we’re looking at for Thursday; an agenda that claims we should be paying attention:  Got to wonder?

Multiple issues with the RBC/CCULR capital regulation, a topic of great concern that will affect the CU industry for years to come – a bureaucratic press headline and a staff that cries wolf.

    1. Lots of numbers (NCUA/FDIC) – far from any consequence for those locally looking for numbers that will sustain them.
    2. CU’s have already maintained enough dollars for last few “so called crises” – but who would waste a crisis yet to come?
    3. Is it credit unions  or the NCUA Board  who is focused on “change for change” to their own ends – we see no need for any capital change.
    4. Why trust their “ends” at all, no wonder we all are bored with NCUA board meetings, they are not for us and we hear no mention of us in their words or declarations.
    5. More reg burden for the sake of burden. Another option for NCUA to leverage their situational control of our members’ futures. These new tools are ineffective and simply clutter other work that screams for action.
    6. Confusing stats for the sake of stats, oil and water displays, confusion just to take our eyes off the ball – member value.
    7. Member faith in NCUA thinking is muddled by over wrought academic complexity.  No workman’s simplicity in this group, that would take experience; a care for the work.

Now shift to the budget item.

The next budget is just another edition off  an assembly line of budgets – cranking out ugly babies with no mirrors in sight. More spending wanted, when less would send a message of hope and clarity.

    1. Planners who expect a rising  curve of more money in this to the next year, to every year – void of awareness from past exploits or value adds.
    2. More people to pad our importance, to enhance processes now un-manned, and with no plans for when needed. We need more people without recognizing there are none to be had.
    3. The budget is not about the flow of our industry and the requirements for its sustainability.  It is simply to ensure the NCUA outlasts its ward, that the NCUA is the last group standing.
    4. The industry’s funds are always there to direct, and NCUA will always be  quicker, slicker, and quietly positioned to direct those funds from members’ activities to a bureaucratic engine fueled by money.
    5. Just give us more, we are hungry.

These are the “minutes” for the 12/16 NCUA Board meeting,  ahead of time, a template of expectations from a bored audience of the industry’s CU members – customer-owners who wonder why the value of ownership has lost its punch.

But the funny thing is we all really do still give a sh*t! We are hungry to believe, follow, and to give homage to the NCUA’s efforts if they would simply find the heart to sell us that they still have the will to deliver value to our members. The heart to simply believe in the work of cooperatives. The heart to inspire us with the simplicity of a local community’s effort to lift itself up by work well done.

I know that Chip wants me to declare that 12/16 is a day for us to rally our voices and take on these tactics from the agenda – to shout we give a damn about RBC/CCULR or the board’s broken budget processes, but I can’t.

The only goal I have for the NCUA’s board and bureaucrats is to work harder, and work smarter to bring back those days when we waited in earnest to read the press reports of an NCUA board meeting. To read the reports ready to smile with the effort and the intent that made us believe we had a valuable ally for our futures.

It’s not that America has given up on its institutions that ensure our success; rather we simply forgot how to promote  leaders for these institutions whose roles are to guard and foster our efforts. We need to change how NCUA board members rise to the occasions ahead.

Too many times these directors have started out as lame ducks….and it has nothing to do with their terms. Lame work is becoming the standard.

Tell Me Why I’m Wrong.

 

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Tomorrow’s NCUA Board Challenge:  A Turning Point of Just More of the Same?

Most individuals and organizations  realize at some point in their journeys,  that money does not guarantee success.  Nor happiness.

Thursday’s NCUA Board is, at first glance, all about money.  Tens of millions.  And how it is to be raised, allocated and spent.

Since all NCUA’s funds are from credit union members, it behooves we all pay attention. For NCUA has no other revenue. It is the steward of almost $400 million in annual costs paid by members.

The Board’s financial decisions on Thursday  include:

  • The size of NCUA’s annual and capital budget spending;
  • How these costs are allocated (OTR) between the CLF, NCUSIF and Operating Fee;
  • The limit, or cap, on the maximum relative size of the NCUSIF via the NOL, after which a dividend must be paid;
  • The disposition of the approximately $100 million in surplus retained in the Operating Fund from excess FCU annual fees collected over recent years.
  • Even the proposed CCULR/RBC rule is about money, not just burden. It would require credit unions to retain from revenue initially as much as $26 billion more in reserves that would otherwise be available for greater  member value and service.

All About Money, or Is It?

The justifications for the amounts NCUA is seeking, is that the regulator’s financial resources are what sustains a safe and sound movement.  More financial resources enables more effective supervision.

This leadership approach is a fallacy.  It is often used to explain NCUA’s and even many  credit union decisions.  Institutional strength or capability is measured by asset size, by net worth ratio or for NCUA, the annual spend or dollars on hand.

Resilience Not Resources

However, over and over again especially this year, events have shown that resilience is a leadership characteristic, not the amount of resource an organization controls.   Credit unions with double digit net worth, managing hundreds of millions, even billions, are routinely merging saying they lack the resources to cope with future challenges.  That is a leadership failing, not a resource gap.

Every credit union in existence today was started with no financial capital.  They survived, prospered, and thrived because of volunteer sweat equity, sponsor support, member self-help and shared belief in their purpose.  In other words, leadership.

These critical intrinsic motivations are being replaced with an assumption that more and more dollars are the key to survival.   The thought that resilience depends on more dollars cuts against the grain of what a coop financial system is and can be.

This reasoning is used by some CEO’s who end their tenure with mergers accompanied with large added retirement or financial bonuses.  Greed not gratitude becomes the hallmark career-end.

Who Will Credit Unions Become?

How the Board decides the issues before it tomorrow will send a clear message who they believe credit unions are today and what they will become in the future.  Will it be about more money for NCUA or an effort to inspire credit unions through careful stewardship of their resources and decisions based on objective data?

During the past two years of the pandemic credit unions have shown their best side.  Waving fees, making loan adjustments, lowering charges, and being with members or in person no matter the severity of the epidemic.   The growth in member savings and bottom lines have resulted in back-to-back record setting outcomes and zero NCUSIF insurance losses.

Daily credit unions are announcing bonus dividends to members to share their success in the millions.

The board’s decisions on resources will communicate their view of whether credit unions are special kind of financial service provider that warrants further inspiration, or just a minor-league version of banking.

Will the board present made up worries and projects lacking outcomes to support funding?  Will it succumb to temptation to offer unknowable future risks to retain unneeded reserves?  Will it affirm the idea that every credit union must stand on its own bottom—no system safety nets or mutual support in the event of problems?

All for One and One for All?

Credit union’s manage people’s money to promote other member’s financial opportunity. The well-being of one is linked to the well-being of all.   The same approach has, in the past, applied to credit union’s intra-dependent cooperative system design.

The result is credit unions are much stronger than individual numbers alone would ever indicate.  The member relationships, based on a premise that this financial community will help ones neighbors, creates goodwill and loyalty creating value that far exceeds  financial ratios.

Credit unions are a classic example of American innovation with leaders that have attracted  tens of millions of adherents or fans, called members.  It is self-help, self-financed and self- governed, formed from the grass roots and built on community respect.

A Contradictory Stance On Credit Union’s Role

The NCUA board has represented a different portrait of the system.  In the past decade, NCUA’s priorities suggest credit union’s meaning and value is measured primarily by how many dollars are on the  balance sheet and in net worth.

The whole theme is to get more.  There is no underlying recognition about the practical life of the members or their credit union’s role.  Such a world view cannot inspire the movement let alone feed the soul of  members.

NCUA’s increasingly dystopian views augmented by faulty analysis and misleading numbers blinds them to see what they can’t see.  NCUA no longer see credit unions as they are, because NCUA see things as they are.  They no longer seek information that would change their approach;  rather they look for a story that confirms what they already have in mind.

NCUA’s decisions rest on a simple falsehood that more is necessary rather than a more  complex reality.  Resilience and credit union success is not built on financial performance, but by leaders imbued with purpose and community well-being.

Inverting Common Sense

Even worse is the proposed RBC/CCULR rule.  It inverts the legal maxim that bad cases make bad law. In NCUA’s  view a bad loss requires an ever more complex rule.

When NCUA approves a generally applicable rule like RBC to counter an extreme outcome or circumstance, the risk is that all credit unions’ freedoms are now restricted by the behavior of a very few.

The burden of the RBC/CCULR rule will fall directly on the membership, in the initial proposal by at least $26 billion.

Will the NCUA board respond to the incredible credit union performance during the pandemic for members.  Will it say, “Job well done?”  Or now is our time to get more funds?  Will they respect and recognize the documented track record of the industry since 2008 (reported yesterday) or will they continue to present misleading analysis and mythical future outlooks?

Whatever the outcome, it will set the tone and direction for years to come.  It is unlikely there will be a better time or circumstance for the NCUA board to affirm its faith in the credit union system, the performance of cu leadership during COVID,  and to restrain the never ending instinct  to acquire more resources.

 

 

 

 

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Why the RBC/CCULR Should Be Dropped

The following observations ares from an expert who has worked financial institutions for years.   This academic-style analysis uses  NCUA and FDIC data.

The author sent this summary comment along with the charts:

Any increase in net worth regulatory requirement is a tax on asset growth. Credit unions must grow to maintain market relevance (i.e., they need income to invest in technology, security, regulation, product development, etc.). Adding to the burden just makes it more difficult for credit unions to fulfill their mission. This is a statement of fact.

The corporate credit union collapse was really a double-whammy to credit unions. Not only did they need to replace reserves due to loan losses, but they had to shoulder the burden of NCUSIF and TCCUSF expense/assessments. Had the system been only holding 7% net worth in the aggregate, it would have been able to overcome economic fallout from the Great Recession without falling below 6%. (see the stress test observation #3)

In any system outliers exist. There will always be a few that engage in activities that put themselves at risk (fraud, credit risk, concentration risk, interest rate risk, etc.). The role of the examiner is to identify those activities and enforce policy to make sure they don’t happen.

Asking everyone to hold more capital, because of a handful of outliers, does not fix the root problem; rather, it allows it to propagate knowing a safety net is in place. At the end of the day, it would be a lot cheaper (and more effective) to increase  examinations instead of asking credit unions to hold more reserves.

Observation #1: Sound underwriting protected credit unions during the Great Recession years.

The biggest threat to credit union reserves is loan losses because of the speed and magnitude in which they can occur.

The bars on the chart are net charge-offs as a percent of assets (to facilitate comparison with reserves which are also measured as a percent of assets).

In the five years prior to 2008 and the nine years following 2012, loan losses averaged 0.33% of assets with a small standard deviation, a sign of consistent and sound underwriting.

During a five-year stretch from 2008 through 2012, credit unions reserves were hit the hardest, due to economic fallout from the Great Recession. Loan losses averaged 0.62% of assets (almost double the normal rate). However, credit union losses were 37% lower than FDIC insured banks which averaged 0.99% of assets.

Observation #2: Credit unions added to reserves during the Great Recession years and the economic fallout resulting from COVID 19.

The line on the chart is income before net charge-offs as a percent of average assets. It represents the surplus available to offset loan losses and add to overall reserves (loan loss reserve or net worth). The bars on the chart are net charge-offs, also as a percent of average assets.

The difference between the line on the chart and the bars is the amount added to reserves. This chart includes NCUSIF and TCCUSF expense, to demonstrate the impact of the corporate credit union failure on the system.

Despite elevated loan losses and NCUSIF/TCCUSF expense, credit unions added to reserves every year, including the Great Recession years and during the COVID 19 aftermath.

Observation #3: A stress test shows that at 7% net worth, adequate reserves were present to weather the Great Recession and subsequent corporate credit union collapse.

The line on the chart is income before net charge-offs as a percent of average assets. It represents the surplus available to offset loan losses and add to overall reserves (loan loss reserve or net worth). The bars on the chart are net charge-offs, also as a percent of average assets.

The dots with data labels are the result of a stress test that set net worth at exactly 7% of assets prior to the onset of the Great Recession and subsequent corporate credit union collapse.

Under this real-world stress test, credit union reserves would have dipped below 7% well capitalized but would have exceeded 6% adequately capitalized, even after absorbing just over $8.4 billion in TCCUSF and NCUSIF expense from 2009 through 2013 – the equivalent of 0.89% of credit union assets.

Furthermore, credit unions would have built up ample reserves to absorb the shock to net worth in 2020 and 2021 due to stimulus activity that inflated the liability side of the balance sheet (not the riskier asset side via loans).

Observation #4: Credit unions have consistently maintained excess reserves beyond 7% well capitalized.

The line on the chart is net worth as a percent of assets. The dashed line is net worth plus loan loss reserve as a percent of assets (i.e., total reserves).

Credit unions have consistently maintained excess reserves beyond 7% well capitalized – and those reserves have been sufficient to offset loan losses resulting from the Great Recession, the subsequent corporate credit union collapse and the rush of stimulus dollars injected into the economy in 2020 and 2021.

Observation #5: An impact assessment shows that increasing the capital requirement would affect up to 651 credit unions greater than $400 million in assets requiring an additional $26.5 billion in net worth.

Proposed regulation would impact credit unions exceeding $500 million in assets. Credit unions approaching that threshold would also be impacted as they must prepare for crossing it. The impact assessment looks at the 808 credit unions who currently have more than $400 million in assets as of 2021 Q3.

The bars on the chart to the left represent a distribution of credit unions by net worth strata. There are currently 349 credit unions with net worth below 9.5%. The line on the chart represents the cumulative number of credit unions across the strata. There are 651 credit unions with less than 11.5% net worth.

Credit unions will always hold a buffer above the regulatory net worth requirement. System-wide, credit unions currently have a 3.2% net worth buffer (10.2% 2021 Q3 net worth minus 7.0% well capitalized equals 3.2% buffer). To evaluate the impact of an increase in regulatory net worth, an assumption that credit unions will hold a buffer of 1.5% is used. So, if the definition of well capitalized increases to 10.0%, then a credit union would hold 11.5%, a buffer of 1.5%.

The chart on the right shows the amount of additional net worth dollars required to reach a target net worth ratio. If the regulatory requirement increased to 10% then credit unions would hold 11.5%, requiring an additional $26.5 billion of net worth.

Regulatory net worth is a tax on asset growth. This is a statement of fact. It requires resources be directed to reserves held idle on the balance sheet, instead of being used for investment in credit union products and services, technology, security, wages to provide employees with a fair standard of living, DEI (diversity, equity, and inclusion) and community impact initiatives. Increasing the regulatory requirement erodes competitive position and makes it harder for credit unions to fulfill their chartered mission.

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A Pivotal Week for the Credit Union System’s Future

On Thursday, December 16, the NCUA board will meet to decide a slate of issues that will affect the credit union system for years to come, not just 2022.

The most consequential item is the proposal to approve and implement an entirely new RBC/CCULR capital regulation.

Tomorrow I will share one expert’s  analysis of the capital adequacy of credit unions since 2008.   All the numbers use NCUA and FDIC information.

The data, stress tests and bank comparisons demonstrate that credit unions created and maintained more than sufficient capital during the two most recent crisis, and the unprecedented growth in shares in 2020-2021.

The numbers are tested against actual data.  They clearly document credit union’s superior loan loss record versus banks.

The analysis poses the core issue: How does changing a tried, tested and proven system of capital sufficiency improve safety and soundness?   The rule provides no evidence that it would have in the past, or will in the future.

In fact the outcome is likely to be just the opposite.

If RBC/CCULR rule is implemented in any form, it will place a regulatory burden on credit unions that will be greater than any other rule ever passed.  Every credit union over $400 million (approaching the $500 million complex threshold) and above will have to maintain two different capital calculations under CCULR/RBC.  This occurs no matter which new standard a credit union  might wish to follow. For it will have to constantly monitor which is most advantageous for its circumstances.

Cross industry comparisons will become at best confused and at worst completely useless.   How do you compare a CCULR reporting credit union with one who has adopted the RBC approach with 8% net worth but a 19.5% RBC compliant ratio.

This new burden will fall directly on the members.   Members across the board will lose value for a rule that has no objective validation.

Budgets: Approving Spending Years into the Future

NCUA’s budget has a procedural flaw.  Estimates for the next year’s budgets are based on prior year’s budgets, not expenditures  or what was actually needed.  Therefore assumptions are carried forward, regardless of whether the circumstances justifying prior year’s requests  still exist.

For example one of the budget explanations  is a charge to the CLF as follows:

“total NCUA staffing includes five FTEs funded by the Central Liquidity Facility in 2022”

The CLF has not made a loan in over ten years.   Why should there be a need for any full time staff for an organization  that only manages a billion or more of credit union shares but has never developed a single program or made a loan to assist the credit union system for more than a decade?

Once a position is approved, it never goes away.

NCUA’s budget process is designed to justify spending rather than evaluate whether more resources are actually necessary to do the jobs at hand.

The major budget decisions include:

  • Increasing millions in additional spending charged to three funds plus capital spending;
  • Adding up to 48 new positions in addition to the seven approved at midyear;
  • Approving an allocation of NCUA overhead to the NCUSIF. Will it be based on the percentage of insured savings in state charters or some arbitrary number adjusted year to year without objective validation?
  • Setting the normal operating level (NOL) for the NCUSIF.

The question for the board is whether to direct staff to better manage the resources on hand or continue growing budgets unrelated to actual outcomes and efforts.

Each of these decisions will have significant impact in future years.   Will the NCUA board stop practices that are disconnected from actual facts and analysis, or will it just kick the can down the road?

Read the draft of the NCUA 2022-2023 budget here.