A Covid Test & The Paradox of  Bureaucracy

To ensure a safe Thanksgiving, my wife and I lined up Friday night for our Covid tests at the county recreation center. The test was free. The line took about an hour. Everyone stood six feet apart as the temperature got cooler as night came.

We were given clipboards to complete our registration—name, email, age, race. One of the staff helping with sign ins came by to ask the obligatory questions. Have you had any Covid symptoms? Been around anyone who has tested positive?

It was the last question that was memorable, however. She qualified it by saying “I think I know the answer, but I have to ask anyway. Are you pregnant?”

An NCUA Exam Risk Rating

The predictable routine of bureaucracy is an important factor in performance. We rely on formulaic responses especially by those in authority. But it can also result in actions that contradict common sense.

In a conversation with a CEO about how to respond to his most recent exam, this same anomaly was present.

The credit union has been a CAMEL 1 for almost two decades. It has navigated the pandemic with improving performance. Liquidity is 500% the policy minimum, delinquency is down and most loans in forbearance are back making payments. ROA and net worth are way above peer averages. A consistent track record of exceptional performance in the present and the past, through thick and thin.

So, I asked given these documented facts why the risk rating for “credit” and “liquidity” were judged “moderate” versus the “low” ranking on every other factor. The CEO’s observation was “It feels like we are being punished for what could happen in the future.”

The Culture of Bureaucracy

This is the difficulty with bureaucratic culture. When facts don’t fit a program’s priorities, the instinct is to assert future scenarios that do. This tendency is not limited to examiners. Listening to last week’s NCUA board meeting, two members confidently predicted the future financial downturn of credit unions in 2021 and with it, the necessity of collecting more money for the NCUSIF. This was after the staff updated the distribution of CAMEL ratings that showed the continuing reduction in code 4 and 5 classifications in both total assets and number of credit unions.

Facts will not deter the inevitable government instinct to always seek more money. This prediction of future NCUSIF premiums reflects a bureaucratic mindset similar to asking all males if they are pregnant.

After getting our Covid tests, we walked out by the admin line and everyone wished me a safe pregnancy. For I had answered yes to the question. We all enjoyed the humor of this bureaucratic incongruity.

Common sense, humor and a negative test. Good ingredients for a safe 2020 Thanksgiving. For it is my hunch that 2021 could be the best year credit unions and their members have ever enjoyed.

Chairman Hood’s House Testimony: Members’ Interest Only Matters When Selling to a Bank

In today’s cooperative system when a bank acquires a credit union, regulators require that a fully detailed, independently verified value be given members for the equity accumulated from their loyalty. There is no such protection for members in a credit union acquisition.

Chairman Rodney Hood’s House Banking Committee testimony on Thursday, November 12, 2020, included a summary of credit union bank purchases and credit union mergers. The import of his logic is devastating.

As outlined by Hood in his “state of the industry” presentation, the only way the agency will ensure members receive fair value for their equity is to be bought by a bank. The necessary action is self-evident: before any credit union board or CEO decides to end their charter and hand off their members’ future via a merger, contact a bank to determine what they think the credit union is worth. Otherwise, don’t count on NCUA ensuring members receive a fair deal.

The Chairman’s words

Bank acquisitions by credit unions were described as follows:

“. . .the number of credit unions purchasing banks is very small. Of the 36 NCUA-approved bank purchases by federally insured credit unions since 2012, 13 were banks with assets less than $100 million. Another 16 of the transactions involved banks with assets from $100 million to $250 million. Only seven of the approved transactions were banks with assets above $250 million.”

And these, he explained, are thoroughly regulated:

“The NCUA does not prohibit the transactions because credit unions are permitted by regulation to purchase banks. Additionally, bank-to-credit union transactions must also be approved by the Federal Deposit Insurance Corporation, per the Bank Merger Act, and the state credit union regulatory agency, for transactions involving a state-chartered credit union.”

In the reverse situation, where a bank acquires a credit union, it is carefully monitored to protect members’ interests:

“The NCUA has regulations to oversee the sale of a credit union to a bank. These regulations ensure the members’ equity is properly valued by an independent third party who establishes a market valuation of the credit union. The purchasing bank must pay the credit union at least that amount thereby ensuring the selling members are paid a fair value for their equity.” [emphasis added]

No Fair Value for Members in a Merger Acquisition

When one credit union acquires another through a merger, there is no such member protection. These acquisitions are merely a response to changing market conditions:

“. . .The majority of merging credit unions are comprised of smaller credit unions, and the most common reason for merging is to expand services, as larger credit unions tend to offer more complex products and services to their members. However, we have seen a growing number of larger credit unions use mergers and acquisitions as strategies to grow and increase market share.

Due to the pandemic, merger activity for federally insured credit unions has slowed, but may increase as conditions evolve. The NCUA will monitor these trends to ensure the continued consolidation of credit unions and system assets does not create new potential risks to the Share Insurance Fund.”

Members Short-Changed

NCUA’s monitoring of these intra-industry merger acquisitions does not include “ensuring members are paid a fair value for their equity.”

Wouldn’t credit union members be financially better served if their institution was sold to a bank for “fair value”? Then take their money and their savings to another credit union if they so choose? Or even purchase equity shares in the bank acquirer?

Mergers between credit unions are not “market-based transactions.” There is no transparency in the process. Those responsible negotiate their own self-interest behind closed doors. The opportunity for alternative “bidders” is not presented. No specific or meaningful benefits for members are detailed. Member voting is not a choice, but merely a request to ratify decisions that have already been made without their input.

A Weakening of the System

The first rule of safety and soundness is diversification, not putting all eggs in one basket. Concentration destroys diversification. The single strategy of the surviving firm replaces multiple ways of approaching the future.

While NCUA claims to monitor merger activity to verify that the continued consolidation of credit unions and system assets does not create new potential risks to the Share Insurance Fund, how it does so is a complete mystery. Even if the erosion of the industry’s soundness could be documented, what would the remedy be? Undo multiple mergers? Not practical. Stop mergers? Not realistic.

The three traditional solutions for a problem are to find a bigger healthy merger partner, liquidate, or sell to third party outsiders. Unless a more open, transparent, member-first merger process is created soon, future credit unions will reap the whirlwind of this growing short-term practice undermining system soundness.

Mergers and Growth: A Common Myth

The merging of sound, independently managed firms debases cooperative design, undermines member well-being and destroys credit unions’ reputation as the trusted alternative to market-driven financial options.

It also perpetuates the myth that somehow mergers enable growth and stronger competitive capabilities versus self-driven organic strategies. An analysis of credit unions with high profile merger efforts suggests just the opposite. This will be the focus of a later blog.

Bigger does not automatically create better value. Credit union mergers do not enlarge cooperative market presence. That requires innovative, purposed-based continuous management effort, a skill that atrophies when mergers become front and center.

A Ruinous Policy

The assumption in NCUA’s oversight of credit union acquisitions that credit union mergers are benign, whereas a bank purchase is predatory, is completely false. Multiple current examples contradict this belief.

The irony in Hood and NCUA’s differential regulatory approach to purchase acquisitions is disastrous. It requires a bank offer to activate NCUA oversight for credit union members to receive fair value. Only a bank bid brings real transparency to the insider’s merger games now being practiced. In either outcome, the members lose their credit union.

A Once-a-Decade Opportunity

This week there were two different, but distinctly connected public presentations.

The first was Callahan’s quarterly Trend Watch call which analyzed September 30 data for the credit union system. One takeaway from the slides http://bit.ly/3Q-2020) is the ongoing rise of credit union liquidity to $552 billion, a 45% increase over the past 12 months. This was driven by the historically high 18% pandemic-induced annual share growth. Most of this new liquidity is in cash and short-term investments. Credit unions are awash in liquidity.

Across town NCUA Chair Hood submitted Congressional testimony to the Senate Banking Committee.

His statement included a Central Liquidity Facility (CLF) update. He reported that the number of natural person regular CLF members was 340, up from 283 members in April when the CARES Act changes were passed. All eleven corporate credit unions became agent members in May. As a result 4,145 credit unions, or 80 percent of all federally insured credit unions, now have access to the CLF.

These new members increased subscribed capital stock to $989.8 million. The facility’s borrowing authority increased to $32.2 billion from $21.7 billion as a result of the Cares Act changes.

In his statement he had one legislative request. It was that the statutory changes providing the CLF greater flexibility from CARES Act be “extended for the length of the pandemic.” These four changes were the increase in the borrowing multiple from 12 to 16 times capital, relaxed agent membership requirements, a broader definition of liquidity needs, and greater discretion in lending authority.

What Was Left Out of Hood’s Testimony

What Hood did not mention was that there has been zero demand for CLF loans. The co-op system has record amounts of liquidity. Also credit union asset quality has remained stable with readily available market values, unlike the situation in the 2009/2010 Great Recession.

Even though 80% of credit unions may be members, the amount of subscribed capital stock (1/4 of 1%), suggests that they represent only 25% of the industry’s $1.547 trillion total shares as of September 30. In other words, most of the largest credit unions with three quarters of the movement’s total assets have chosen not to join.

What are the reasons the largest credit unions see the CLF as irrelevant? If there is zero loan demand now, and the most probable scenario going forward, why extend temporary “reforms” that have no practical purpose? Why should $1 billion of credit union funds be tied up in an NCUA-managed entity that is not providing value for credit unions?

The CLF’s Future: A Time for Transformation

The CLF enabling legislation was passed in 1977 when credit unions were outside the established financial system. They had no access to the Federal Reserve clearing system nor could they join the FHLB’s. The CLF was intended to be the third leg of the regulatory structure for an independent cooperative financial system when added to NCUA’s chartering/supervision and insurance responsibilities.

Since founding, the primary use of the CLF is to fund NCUA’s insurance regulatory needs, not credit union liquidity. In the aftermath of the corporate crisis and the liquidation of US Central, the partnership which covered 100% of the industry was ended and nothing replaced it.

The current “temporary” CARES Act changes are merely a deformed offspring of a partnership effort which NCUA terminated.

With the availability of FHLB funding and access to the Fed, the question is: does the credit union system need the CLF?

Hood described the CLF’s role in his Senate statement:

“The CLF is a mixed-ownership government corporation that provides the credit union system with a contingent source of funds to assist credit unions experiencing unusual or unexpected liquidity shortfalls during individual or system-wide liquidity events. The CLF also serves as an additional liquidity source for the Share Insurance Fund, which helps to ensure the credit union system and the fund remain strong. Member credit unions own the CLF, which is managed by the NCUA. Joining the facility is voluntary.”

How might this public-private voluntary partnership become more relevant for its owners and credit union members? What would real reform look like?

The Rare Opportunity for National Credit Union Legislation

Historically, significant federal credit union legislation happens only once per decade. The CLF/NCUA restructure in 1977; the NCUSIF redesign in 1984; passage of CUMAA in 1988; the TCCUSF in 2009; and today.

The only occasion when the impetus was not a national economic crisis was the Membership Access Act in 1998 following the Supreme Court’s decision to narrowly define FCU’s field of membership.

The current prospect of more pandemic legislative is another of these infrequent occasions. But the legislation needed is not a temporary extension “to the end of the pandemic,” but a rethinking of the role of the CLF in the cooperative system.

Such a reform would focus on the system’s total liquidity needs, not mere firefighting in a crisis. It would involve three areas of change:

  1. Broaden the purpose and scope of the CLF. The fund would be charged with improving access for credit union liquidity in both normal and extraordinary circumstances.
  2. Its operations would become a cooperative conduit to the secondary market much like Fannie and Freddie, not just an emergency source of cash.
  3. Its governance would be similar to the FHLB where the member owners would vote for a board of directors representing the membership. The board in turn would contract with NCUA and corporates on the management of the fund’s short term and extended lending authorities.

Such a CUSO-like redesign would incorporate cooperative principles and focus solely on credit unions to provide members better options in good and difficult times.

The time to do this is now. The 45-year-old legislative assumptions and structure of the CLF are no longer relevant to the operations of today’s credit union system.

To make this happen, current credit union and corporate owners should provide their transformative design and request NCUA support for the legislation to bring it about.

Working together a new CLF could truly become a Cooperative Liquidity Facility and help underwrite a new era of credit union safe and sound practice Real reform would make this legislative effort truly innovative and consequential, versus temporary and irrelevant.

NCUA Appointments in a Biden Administration

Several probable NCUA board openings mean there will be new leadership at NCUA during the next year. In the past decade the appointments have been without any apparent industry influence. In several instances the board member had no credit union or regulatory background.

To bring knowledgeable and capable candidates to the new administration’s attention, the effort should begin now, be public and stress the importance of credit unions’ role in serving America’s consumers.

Biden Transition Teams In Place

The incoming administration recently announced over twenty transition teams to advise on every major government department and activity. The teams total over 530 people and were formed during the campaign. The complete listing is here:


Their role is described as: “Agency review teams are responsible for understanding the operations of each agency, ensuring a smooth transfer of power, and preparing for President-elect Biden and Vice President-elect Harris and their cabinet to hit the ground running on Day One. These teams are composed of highly experienced and talented professionals with deep backgrounds in crucial policy areas across the federal government. The teams have been crafted to ensure they not only reflect the values and priorities of the incoming administration, but also reflect the diversity of perspectives crucial for addressing America’s most urgent and complex challenges.”

One Credit Union Leader as a Member

The most recent employment column shows appointees from law firms, universities, consulting businesses, Visa, banking, think tanks and the ubiquitous “self-employed.” Scanning the listings, I could find only one current credit union leader in the group under the CFPB team.

Consumer Financial Protection Bureau

Bill Bynum Hope Enterprise Corporation Volunteer

Credit Unions know Bill as the CEO of the $352 million Hope FCU in Jackson, MS.

The transition team charged with overseeing federal regulatory agencies is listed below. I do not know if any of these have cooperative or credit union experience or are even credit union members.

However, at least four of the institutional employers of these members have credit unions serving their community. It would seem useful if the CEO’s of these credit unions would make contact and ask if it would be appropriate to bring credit union needs to the committee’s purview.

Federal Reserve, Banking and Securities Regulators

The Federal Reserve, Banking and Securities Regulators group includes the Commodity Futures Trading Commission, the Federal Deposit Insurance Corporation, the Federal Reserve, the National Credit Union Administration, and the Securities and Exchange Commission.

Name Most Recent Employment Source of Funding
Gary Gensler, Team Lead Massachusetts Institute of Technology Volunteer
Reena Aggarwal Georgetown University Volunteer
Mehrsa Baradaran University of California, Irvine School of Law Volunteer
Lisa Cook Michigan State University Volunteer
Amanda Fischer Washington Center for Equitable Growth Volunteer
Andy Green Center for American Progress Volunteer
Campbell Haynes Virginia Coordinated Campaign Transition — PT Fund, Inc.
Simon Johnson Massachusetts Institute of Technology Volunteer
Dennis Kelleher Better Markets, Inc. Volunteer
Satyam Khanna New York University, School of Law, Institute for Corporate Governance and Finance Volunteer
Renaye Manley Service Employees International Union Volunteer
Lev Menand Columbia University Volunteer
Damon Silvers AFL-CIO Volunteer
Victoria Suarez-Palomo Orrick, Herrington & Sutcliffe, LLP Volunteer

It’s About Relationships

Credit unions’ competitive advantage depends on the relationship with its member-owners. Politics depends on relationships built on loyalty. Now is the time to reinvigorate existing relationships or establish new ones. Maybe we could start by asking Bill Bynum for counsel?

Leading by Example

From an early age, one learns that actions speak louder than words. This observation applies to institutional behavior as well as individuals.

NCUA Recognizing Credit Union Growth

A regulatory example supporting cooperative expansion is from the NCUA’s 1978 Annual Report (pgs. 26-27) under the Chartering heading:

“During 1978 , 348 new federal charters were issued. The combined potential membership of newly chartered FCU’s in 1978 was 1,081,953 persons. Most (225) new Federal charters were issued to credit unions serving occupational fields of membership . . .approximately 47% of the new charters were issued to groups in five state—Pennsylvania for 46; New York, 45; New Jersey 30; California, 22; and Texas 22. “

Propelling These New Chartering Successes (pg. 27)

“Under the Administrator’s Organizer’s Recognition Program, the Administrator (NCUA Chair) recognized the efforts of volunteers, trade association representatives and NCUA staff members for organizing new Federal credit unions. During the year 117 awards were issued under the provision of this program. Twenty-three certificates of were issued for fifth charters, 10 certificates were issued for tenth charters, and two special certificates for 25th charters. The remainder of awards (82) were given for first charters.”

Honoring Credit Unions Serving Family Members (pg. 27)

“In mid 1977 A Family Service Award Program was established to recognize those Federal credit unions that actively seek to provide financial services to all eligible family members. A total of 107 Federal credit unions received the Family Service Award in 1978.”

Supporting Cooperative Outcomes

Leading by example is harder than issuing new rules or pronouncements about expected performance. Leadership by example requires transparency and provides public accountability.

Imagine how those NCUA, League, and credit union employees must have felt about their personal recognition. And how others might aspire for the same. The awards confirmed the priority and value of these individual and institutional efforts. They celebrated important progress in the cooperative model’s expansion.

The question from these examples: How is NCUA recognizing cooperative achievements today?

NCUA’s Dire Warnings for NCUSIF: Credit Unions Must Pay Attention

At the September 17th NCUA board meeting, the three members responded with misleading statements, false comparisons, and dire warnings about the June 30, 2020 financial update of the NCUSIF. Their dialogue materially misrepresented the state of the NCUSIF currently and in the future.

All three implied the fund will need more money and new, FDIC-like flexibility in assessing potential premiums. Mark McWatters even suggested that the 1% NCUSIF deposit was double counting this credit union asset, unlike the FDIC which has no deposit base.

Before addressing the mischaracterizations, it is important to recall how the current NCUSIF, redesigned in 1984, still depends upon a most important innovation–the cooperative movement’s democratic foundation.

“It Is Your Fund”

As NCUA Chairman Ed Callahan stated in NCUA’s 1984 Annual Report (pg. 18) describing the NCUSIF’s restructuring: “We’ve said all along that it’s a better way, but it is also unique. . .It is unique because really it is your Fund.”

While much comment is properly focused on the radically changed financial structure of the NCUSIF from a premium to a deposit-based fund, often overlooked is the fact that the NCUSIF is a credit-union-owned fund. The redesign was built on cooperative principles. The fund is not “owned” by the NCUA or even the federal government. Rather, members send 1 cent of every deposit for its capital base, just as member shares are the basic capital of every credit union.

This democratization of the NCUSIF also entailed responsibilities that any member-owned institution requires. In the same 1984 article, Chairman Callahan laid out these duties: “It means you have an investment in your fund. . .Can you forget about it? Well do you ignore your other investments, or do you monitor them?”

He listed the safeguards created to monitor NCUA’s management of the fund. These included the withdrawable option of the deposit; the 1.3% cap above which a dividend must be paid; the monthly report by the NCUA board to track expenses and losses; and the annual external audit, as just some of the new guard rails.

He closed: “Don’t set it up and forget about it. It’s unique. It’s a better way. But just as important, it’s yours to monitor—it is your responsibility to keep it working—because if you don’t, it’ll go just like anything else the government touches. When government gets more money, it wants to spend more. Our goal is to spend less. You have to hold us to that promise.” His message is timelier than ever: that a democratically formed fund requires ongoing engagement, not passive acquiesce.

The industry supported legislative changes made in 1984 are still in place. NCUA’s commitments of self-restraint, transparency and responsive oversight that made this common effort possible are also still binding.

Before this congressionally approved redesign, the statutory NOL was 1%. NCUA had only premiums as its primary income. These premiums were not subject to credit union review or even consent. The new cooperative restructuring created checks and balances and institutional commitments so that NCUA would be accountable to the fund’s owners and the common good of the credit union system.

The NCUSIF Is Not the FDIC

The insured savings coverage of the FDIC and NCUSIF are the same. But that is where the similarity ends.

The two funds serve very different financial segments. The NCUSIF is for not-for-profit member-owned cooperatives based on self-help; the FDIC, profit making institutions. FDIC is a stand-alone insurance provider; NCUSIF is one aspect of a tripart regulatory structure. Reflecting the different purposes and “capital” options of the organizations served, the two funds have unique financial structures and constraints.

Finally, their histories and roles have evolved from very contrasting circumstances. The FDIC was created in 1933 in the middle of Great Depression and a national banking crisis; the NCUSIF in 1971 as a recognition of a vital economic role that warranted an option for a federally managed fund alongside the banks and S&L’s.

The Sept. 17th NCUSIF update mischaracterized the fund’s financial situation in emphasizing the decline in the operating level from 1.35% to 1.22% at June 30, an apparent fall of 13 basis points. This reduction appears close to the 1.2 lower limit, below which the Board is required to develop an eight year “restoration plan.”

This ratio calculation recognized all insured shares as of June 30 but does not include the required capitalization deposit contribution from credit unions’ net increase of shares as of the same date. This accounting receivable is only recognized “when invoiced” thereby creating an artificial lag in presenting the fund’s actual financial position.

As stated by staff when questioned, when invoices are sent in October the fund’s ratio will be 1.33% due to the added $1.5 billion in required capitalization deposits. The ratio is nowhere near the 1.2% floor. The headline portrayal of a precipitate decline in the ratio is significantly misleading. Moreover, staff forecasted that even before considering this accounting lag, the fund will be around 1.32% at year end.

Faulty Analysis and Comparisons

The NCUA’s board oversees the three legs of regulatory responsibility: chartering/supervision, liquidity, and insurance. FDIC is only an insurer. OCC (or state regulators) and the Fed have the other roles. The combined regulatory functions in NCUA should increase efficiency of operations. Instead, as shown on the enclosed spread sheet, NCUA has increasingly used insurance fund income to pay its agency-wide fixed costs of operations.

The FDIC and NCUSIF have totally different financial structures. FDIC is a premium-based fund. Its reserves come from charging banks an expense, plus the minimal revenue it earns on investments, to build its capital base.

This premium-based revenue stream has repeatedly been insufficient to align the fund’s base with fluctuations in insured deposits, unexpected loss events or even changes in interest rates. This was the same result for NCUSIF’s early “premium-based” years and why “a better way” was implemented in 1984.

The NCUSIF is a deposit-based fund which aligns its growth with credit union insured savings. This 1%, which is 80% of the 1.25 of the normal operating level’s midrange (NOL), increases the fund’s size automatically, every six months.

The FDIC reliance on premiums to keep pace with deposit growth means that

at an average annual fee of .08% of assets, approximately ten years would be needed to increase the FDIC’s balance to maintain its NOL ratio. By contrast, the NCUSIF’s structure accomplishes this increase in fund balances semi-annually with the 1% capital deposit adjustment.

The stability of the NCUSIF’s asset base means that both earnings and liquidity are more dependable than the premium-revenue model of the FDIC. Because its revenue is fee dependent, the FDIC requires a much longer time period to increase its core assets (unless fees are raised). This fact underscores the urgency for FDIC ‘s restoration plan when it falls below the Congressionally mandated 1.35%.

For the NCUSIF, the normal operating level is a range between the floor of 1.2 and cap of 1.3%, or 10 basis points of insured shares. The NCUA, using flawed logic, “temporarily” raised the NOL to 1.39% in 2017 when merging the TCCUSF. The board then failed, despite Chairman McWatters’ promise, to review these “temporary” justifications as the NOL came up for review in the following two years–most recently in December 2019.

We’ve Been Here Before

Board Member Harper asked staff if there was a precedent for the extraordinary share growth during COVID. He called it a “black swan event which we haven’t seen before or even thought about.” That assertion is dead wrong. For the three years following the 1% deposit restructuring in 1984, credit unions experienced double digit share growth. Not only did the fund stay in the 1.2-1.3% NOL range, there were no premiums.

The advantage of a range with a floor and a cap as the normal operating level means there is a surplus always available, apart from current income, to meet any extraordinary needs.

Today that 10 basis point range totals over $1.4 billion and grows proportional with the credit union insured base. There has never been an insurance loss that comes close to this NOL range. The NCUSIF’s historical loss rate for the past 12 years is just 1.727 basis points off for each $1 of insured shares or over 5 times this 10-basis point variation.

This 12-year analysis shows insured share growth of 5.6% CAGR. To maintain the NCUSIF’s NOL at 1.25% of insured shares with this long-term growth rate and also cover the average known loss rate (1.727 basis points), the fund must earn 1.14% on its investments. Today the NCUSIF’s yield in 2020 is 1.63% with an average weighted life of investments exceeding three years. There is over $620 million in unrealized gains on these investments. Given the Federal Reserve’s low interest rate policy, these gains should remain for years to come if needed to generate additional current income.

The Real Issue–Uncontrolled Spending

The misleading discussion of the NCUSIF’s resilience and the suggestion that legislative adjustments are needed should alarm credit union owners.

When asked to support the fund’s restructure in 1984, credit unions’ most worrisome concern was their open-ended 1% capital base funding obligation. How do we know NCUA won’t just spend the money, they asked again and again? There were built-in protections to ensure that members’ money was prudently managed. In addition to those listed in NCUA’s 1984 Annual Report, these included:

  • The elimination of special premiums;
  • An annual premium could not be charged to raise the fund above 1.3; rather an increase in the ratio can only come from retained surplus.
  • Monthly board reports on the NCUSIF’s condition;
  • Control of operating expenses, and especially the overhead transfer rate used to partially pay for NCUA’s operations

It is not insured losses that use up the NCUSIF’s revenue. In the last 12 years, NCUA has charged the NCUSIF $1.968 billion in operating expenses, while incurring cash insurance losses of only $1.888 billion. (see spread sheet) To increase these charges, the overhead transfer charges were raised from 33% in 1984 to 61% in the most recent calendar year.

So far in 2020, the NCUSIF has spent $94.1 million on operations and $34.5 million on loss reserve expenses. The core concern of credit unions addressed by Chairman Callahan decades ago has occurred. Absent management and supervisory effectiveness, the natural impulse of government is to implement oversight by just spending more.

In the September 17th NCUA insurance presentation, staff showed that the total amount of code 3, 4, and 5 CAMEL rated credit unions had declined. The one liquidation year-to-date was largely due to “fraud” and resulted in a minimal loss. This is the best measure for supervision responsiveness and creativity, not the amount of NCUSIF’s reserves.

Board members uniformly congratulated themselves for increasing the fund’s NOL to 1.38, a figure that has never been factually explained. All expressed apprehension about probable future losses. Each suggested a “restoration plan” needs to be anticipated, even though this has never been a close event in the fund’s almost 40 years since financial restructure.

Board members failed to mention that the fund might help credit unions transition through this downturn by providing temporary capital assistance. The NCUSIF is more than a fund to cover loss. More critically it is a source of supplemental capital, an historical activity inherent in its cooperative structure. In credit unions, unlike banks, no private owners’ investment is being saved, nor is “moral hazard” risk present. Both of these severely limit FDIC’s open bank assistance efforts.

Not a Money Issue, But a Time for Leadership

As shown in the spread sheet attached, the resources of the NCUSIF have always been more than adequate. It is disheartening to hear board member McWatters congratulate himself for creating a “sizeable safety net of reserves” when raising the NOL to 1.39% on erroneous data. He then opined that FDIC gets to count 1% as its own funds and that the 1% credit union deposit is double counting. He appears to have no knowledge of either fund’s accounting basis or an understanding of how the NCUSIF structure aligns with the cooperative self-help credit union funding model.

As evidenced in recent, unprecedented insured losses, the board also seems to think that problem resolution means holding fire sales to for-profit firms of member loans as fulfilling the agency’s obligation to member-borrowers.

Board Member Harper referenced the FDIC and its multiple options that he would like to incorporate in the NCUSIF’s oversight. These changes would require Congressional legislation. If adopted, they would destroy the remaining checks and balances credit unions relied upon when they agreed to an open-ended, perpetual capital funding commitment of the NCUSIF.

Harper’s view that we are in the “calm before the storm” and “we” should initiate legislation to put the fund on a “counter-cyclical” footing, is a misunderstanding of the NCUSIF’s fundamental financial structure. The semi-annual 1% deposit is an inherently counter-cyclical self-funding model. Unlike a premium system, it ensures resources are readily available at all times to assist credit unions.

The NCUA board referred the FDIC’s recent decision to initiate a restoration plan to restore its required 1.35% level (now 1.3%) after seeing the same double-digit run up in bank insured deposits. What each board member failed to note is that the FDIC board, based on an analysis of the environment and its staff’s recommendation, made no changes in its current assessments. As stated by the Chair Jelena McWilliams at the September FDIC board meeting:

In establishing a restoration plan, we explored a range of reasonable estimates of future insured deposit growth and future potential DIF losses. Based on these estimates, we project the reserve ratio would return to a level above 1.35 percent without any increase in the deposit insurance assessment rate schedule.

Mobilizing Cooperative Democratic Engagement

Hopefully, Chairman Hood will show the same confidence in the NCUSIF’s resilience (and NCUA’s supervisory capabilities) as the FDIC board demonstrated in assessing its fund’s outlook in the current environment.

Given the NCUA Board’s public dialogue, credit unions must mobilize their cooperative courage and assert their concern to keep the financial integrity and institutional commitments Congress and NCUA made in 1984. With the Board’s track record of unrestrained spending and alarmist projections, the necessity for credit unions to monitor their common investment in the NCUSIF could not be more urgent. That involvement, just as in 1984, is the key to this unique democratic fund’s survival.

Comments on Spread Sheet attached
Source: NCUSIF Audited Financial Statements 2008-2019

  1. Compound Annual Growth Rate (CAGR) insured savings: 5.6%
    CAGR: NCUSIF Operating expenses: 8.06%
  1. Cumulative NCUSIF Insurance loss rate per each dollar of insured savings:
    12-year average: 1.727 basis points
    One-year High: 6.95 basis points (2018)
    One year Low:  .127 basis points (2016)
  1. December Year End NOL level: Fund equity to insured shares
    Low 1.23 (2009)
    High 1.39 (2018)
  1. Overhead Transfer (OTR) as % of total NCUSIF Operating expenses: 92.5% twelve-year average
    OTR low rate: 52% (2008)
    OTR High rate: 73.1% (2016)
    Twelve-year numerical average OTR 62.01%
  1. Fiscal Year End allowance Loss as a % of following year’s actual cash loss
    Low year 117% (2017
    High year 1,349% (2014)

Numerical average of year end allowance divided by following year’s actual cash losses: 570% or the loss account expense is funded at a level almost six times the following year’s actual cash losses.

Part II: An Uncertain Future for Credit Unions

One Entrepreneur’s Effort to Create a New Co-op Model

“Encouraging the formation of new banks is another top FDIC priority. A key feature of any competitive industry is the ability for new startups to enter the market. In the banking industry, de novo banks are a key source of capital, talent, ideas, and ways to serve customers. They bring innovation and new energy to the industry.”

– FDIC Chairman Jelena McWilliams on June 12, 2019 at the CATO Institute

In the second part of this series, I share a case study of the regulatory difficulty cooperative entrepreneurs confront when trying to obtain and sustain a credit union charter. This contrasts with the FDIC’s very public effort to encourage de novo banks as a “key source of talent, ideas and ways to serve customers.”

Internet Archive Credit Union (2011-2015), while not set up by students, is perhaps one of the greatest missed opportunities for the American cooperative movement. Its demise is told in this video and article from the Internet Archive blog: http://blog.archive.org/2015/12/14/internet-credit-union-2011-2015-rip/

Leo Sammallahti, marketing officer for Coop Exchange, sent me his summary of this landmark effort:

Started by one of the founding pioneers of the internet age, Brewster Kahle, it attracted tech talent alongside experienced people from the financial sector. They had innovative ideas on how they could use technology to transform banking, motivated by a genuine passion to help people, not to make profits for themselves.

They managed to charter the credit union in 2011, but the regulations crushed it in 2015. Just one example – their total loan portfolio was restricted to $37,000 when they had $1,000,000 in reserve for bad loans!

I have only read their account of the events, simply because there is no one making the case that the regulations that crushed them were reasonable. Maybe someone knows something I don’t, and it makes more sense. But I’m afraid that is not the case. And if so, who suffers? Ordinary consumers – the same persons the regulations seek to protect but who now have a diminishing amount of choices where to put their money. 

But here’s one interesting thing the founders mentioned that might give some hope. They said that technology makes it “easier”, not harder to start a credit union than ever before. Sometimes the reason why new credit unions are not considered is partly due to technology – the reasoning is that once you need sophisticated software instead of pen-and-paper to run a credit union, it gets more expensive to start one. But according to the founder of Internet Archive, the opposite is true. 

American credit unions know how to lobby – they have had to defend themselves from attacks from the banks, perhaps one of the most powerful industries in Washington. Could some of that political power make it easier to charter new credit unions? From the average American’s point of view, it would hardly be an issue anyone would be opposed to, regardless of their political leaning. Can the movement afford to miss opportunities like the Internet Archive Credit Union?

FDIC Chairwoman McWilliams’ closing commitment to new charters at CATO:

“Finally we launched a nationwide outreach initiative focusing on de novo bank formation, beginning with a roundtable discussion in DC in December. We have since hosted similar discussions in each of our six regional offices, which have been constructive and thoughtful.”

Part I: An Uncertain Future for Credit Unions

Gen Z and the Movement’s Future: Users or Innovators? 

Every product, brand, business, service, and even non-profit institution has the challenge of engaging the next generation of users. Or risk going out of business.

Coca-Cola’s marketing focuses on this never-ending generational transition. The One Day Last Summer ad series (from 2018) targeted Gen Z with a series of Vimeo shorts about high schoolers’ summer fun before college.

More Than Product Marketing

Coca-Cola also tapped into this generation’s social activism with the initiative summarized in the following release:

Coca-Cola launched the “Dear Future [Community] Challenge” inviting Gen Z and young Millennials to be changemakers and better their communities. The beverage giant has identified 15 communities across the U.S. where the company has bottling centers and other community stakeholders to partner with locals and address their concerns. Individuals ages 18-24 can submit proposals on how to strengthen these areas, and for residents outside those selected locations, there is a national competition. To help bring their ideas to life, winners will receive a $30,000 grant from the company as well as support and guidance from former Coca-Cola Scholar Foundation recipients and other community partners. Caren Pasquale Seckler, Vice President of Social Commitment for Coca-Cola North America, explains the engagement approach saying, “We really want to write the next chapter together with ‘Dear Future’ by engaging consumers and doing something together, [as well as] engaging all of our local partners in identifying all of the issues that are truly meaningful to them.” Coca-Cola is spreading the word with a “Dear Future” ad, which features employees and former scholars, as well as print, social and TV spots.

One University’s Approach

Individual colleges will also thrive or slowly expire depending on their perceived relevance to each new cohort of students. George Washington University in the heart of DC has long attracted liberal arts and science majors while being in the nation’s capital. But like a number of leading universities, it found that prospective students were not just interested in learning, but also applying their passions to start businesses and social enterprises. Hence the founding of the GW Office of Innovations and Entrepreneurship.


The Office sponsors an annual New Venture Competition:


The winners receive significant cash, mentoring, legal and in-kind support to carry their ideas to the next stage. The summer showcase provides another opportunity for startups to garner resources and external interest through the University. The nine winners from this summer’s 2020 GWSSA program are linked below.

These 8-12-minute pitches are classic models of the “elevator speeches” honed to attract investors. They demonstrate the iconic American spirit of innovation and inspiration as well as the necessary business disciplines to succeed.

The Credit Union Challenge

The cooperative challenge is not merely honing the Coca-Cola skill of attracting the next generation of “customers” but more critically, captivating those members who want to be credit union “entrepreneurs.”

Those students who want to fashion the credit union model for the needs and virtual world of their generation, not copy what has gone before. The GW New Venture Competition awarded one of its prizes three years ago to a group of freshmen who proposed offering a credit union uniquely designed to serve the needs of fellow students far into the future.

Are Credit Unions Missing Out on the Next Generation of Entrepreneurs?

Those freshman winners are now entering their senior year. They are transitioning the project’s leadership to underclassmen to continue the chartering effort. The challenges are not technical or even financial. They have completed all the policies and projections and raised the minimum level of donated funds NCUA said was needed.

But NCUA’s chartering process is endless. There is neither encouragement nor transparency. NCUA’s attitude appears to be “no one has a right to a charter;” regardless of circumstance. The practice is to extend the process until people just give up and go away.

Public companies and private universities have made significant changes to attract generation Z’s loyalty. And to continue their institution’s relevance and sustainability. Will credit unions just attract Gen Z as users or can it also include those who aspire to create the next evolution of the cooperative model?

Tomorrow: The fate of one credit union entrepreneur.

Cotton Candy is to Food as NCUA’s EXIM Bank Announcement is to Policy

One of the late summer pleasures that has been cancelled around the country is the fair season. In some locales this is the state fair. In Montgomery County, MD, it is the Agricultural Fair.

These week-long events display the animals and products of an area’s farmers. “Livestock” ranging from cattle to rabbits compete for best of show. Winners are honored with blue ribbons on their stalls and cages. Exhibitions of colorful vegetable tables, bell jar canning displays, hand-made and knitted clothing remind spectators of a time when America was composed of smaller communities skilled in all the arts of self-sufficiency.

The Entertainment

In addition to animal races, judging contests and musical shows, there is the carnival of rides, 25-cent games of chance, and food.

The King of Fair Foods: Cotton Candy

Cotton candy and fairs are long time partners. But the product is only spun sugar. It is made by heating and liquefying sugar crystals. This liquid is then spun through minute holes causing the sugar to condense into fine strands. It is collected on a paper cone. Coloring and flavoring can be added to give the cotton-like texture a light blue or red shading.

Made on the spot with its gossamer texture, it is sometimes put in a plastic bag to keep up with demand. While superficially inviting, the product has no food value. Just hot air and a sweet taste.

Cotton Candy

NCUA’s New Policy Initiative

On June 9, NCUA Chairman Hood made a surprise announcement of the signing of a 3-year collaborative agreement “to bring small business and credit unions together and expand awareness about EXIM programs.”

The announcement was unprecedented. As the topic of Export-Import Bank of the United States (EXIM) lending was totally new, I FOIA’d NCUA asking for all agency documents for this unexpected “enterprise.”

The documents provided were already in the public domain: the Memorandum of Understanding, the June 9th press release, and Chairman Hood’s video statement the day of signing.

This “background” information included the following statements:

  • “the discussions that led to this agreement began many months ago”
  • “NCUA has had a long and constructive relationship with the Export-Import Bank”
  • “the collaboration will be a great help to many hard-pressed entrepreneurs”

Given these statements, I asked the agency to confirm that I had received all the relevant documents about this new program. On August 9, the agency reconfirmed they provided all they have.

What to Make of this Policy “Initiative?”

The documents show no agency or credit union data or research to support this program. There is no trade association or credit union interest expressed. There is no example of any credit union member, whether small business or natural person, inquiring about this possibility.

The NCUA board was not part of this event. It was a solo signing by the Chairman, even though former Chairman McWatters had been nominated to serve on the EXIM board by the President in 2016.

NCUA had nothing to show the relevance of this program or “the discussions that. . .began many months ago.”

The Context for This Announcement

At this same time, credit unions were in the midst of vital Payroll Protection Plan emergency lending to help businesses and members through the largest quarterly GDP economic downturn ever recorded (the second quarter of 2020).

According to the article “Credit Unions Help Save More Than 1.1 million Jobs Through PPP,”  credit unions in all 50 states and DC disbursed 11,424 loans exceeding $150,000 (1.73% of all loans in the $150K-$1 million category). Total balances of $3-8 billion had to be estimated because individual loan amounts in this size range were not provided.

For loans less than $150,000, credit unions granted 179,085 loans for a total of $4.67 billion. By number of loans, the credit union share was 3.29 percent, and by dollar balances 4.23 percent of all borrowers.

This analysis of Treasury Department data ends with the most active coop lenders:

Mountain America Federal Credit Union ($9.3B, Sandy, UT) originated more than 7,000 loans, more than any other credit union. Of these, more than 6,560 were less than $150,000. Greater Nevada Credit Union ($1.1B, Carson City, NV) originated the most loans of all credit unions in the larger loan category — almost 700 loans more than $150,000.

NCUA in This Time of Crisis

Credit unions are doing what they do best in a crisis: lending to members. As stated in the article, “credit unions played a larger role in lending to smaller companies, underscoring the movement’s commitment to Main Street business borrowers.”

By contrast in NCUA’s EXIM signing video, a bank spokesman says there “is nothing active now.” The banks chairman Kimberly Reed reported that the total financial assistance provided small businesses in 2019 was $2.3 billion. Credit unions, in the three months included in the Treasury data, extended over $9 billion in the critical PPP initiative.

NCUA has published nothing about this extraordinary effort. Instead, as this was being done, NCUA was spinning cotton candy. Irrelevant in both context and member need, this PR event was “just hot air with a sweet taste,” while credit unions soldiered on confronting the crisis at hand.

What Do Municipal Credit Union and the U.S Postal Service Have in Common? 

The following is an excerpt from Today’s Edition, a newsletter of current events:

While we should be concerned about the health of the Post Office, I do not believe that widespread alarm or panic is justified. Let me explain…

So, let’s start with a clear-eyed look at the challenges facing the Post Office. The Post Office is in trouble. It has been in trouble continuously since 2006. Why? In 2006, Congressional Republicans imposed a special rule on the Post Office. It requires the Post Office to account for its retirement obligations in a way that no other federal agency is required to do. As explained by the Institute for Policy Studies,

In 2006, Congress passed a law that imposed extraordinary costs on the U.S. Postal Service [that] required the USPS to create a $72 billion fund to pay for the cost of its post-retirement health care costs, 75 years into the future. This burden applies to no other federal agency or private corporation.

Nor does it apply to private corporations.

Since 2006, the Post Office has been on life support, beholden to Congress and the Executive for its continued sustainability because of a made-up accounting rule . . .

Government authority creating numbers to flim-flam decisions is not restricted to Congress and the Post Office. NCUA has made a habit of the same practice for over a decade.

The Situation at Municipal Credit Union, New York City

I have written about NCUA’s May 2019 conservatorship of Municipal Credit Union in three blogs. One described the reported $123 million loss for the June 2019 quarter. Another analyzed the equally unprecedented and outsized net income of $30 million achieved in the final three months of that year.

NCUA has provided no information about the conservatorship affecting almost 600,000 members in this $3.6 billion credit union. The only data comes from the quarterly call reports.

These highly unusual financial  results in conservatorship continue.

Extraordinary Return on Equity a Year Later

The June 30, 2020, call report shows a net income of almost $15 million as compared to the $123 million six-month loss in the prior year. This is certainly positive. More remarkable is the 54% gain in reserves from $104 million to $160 million in the year since June 2019. This is a return on equity of over 50%, an extraordinary outcome, perhaps unprecedented for a coop.

But these unusual financial results are not the results of operations. Rather, like the Post Office, NCUA imposed accounting “adjustments” for liabilities far into the future, in an attempt to justify its conservatorship. And NCUA avoids answering questions after examining the credit union for decades without requiring any such one-time “adjustments.”

Exaggerating problems to justify supervisory edicts does three things. It creates a public case for why regulators are needed, or as one NCUA chair explained: “to get honest numbers.” Secondly, this sudden discovery deflects questions about where the regulators were as the problems developed. Finally, it shifts the spotlight for responsibility by blaming (and sometimes suing) those in place, versus those examining.

Just prior to the conservatorship in March 2019, Municipal reported a well-capitalized net worth of almost 8%. NCUA had to justify taking over a solvent credit union in May and putting in its own management. So far, this action has resulted in 200 job losses, the closure of 7 branches and a reduction of over $150 million in loans outstanding. The allowance account has been funded to 223% of reported delinquencies, 50% higher than the industry average.

When Authority Goes Dark

Taking a credit union away from its members via conservatorship is the most serious action NCUA can take. Any credit union that reported going from a quarterly loss of $139 million to a quarterly net income of $30 million six months later would be highly suspect.

When government imposes pseudo-accounting write downs to seize control of an institution, both the organization and the government lose credibility.

NCUA has a record of dictating reserves which proved to be significantly in error and contrary to the judgment of experienced managers. This occurred in the five 2010 corporate liquidations, which the agency still defends, using exaggerated estimates of loss as recently as the June 2020 board meeting.

These staff statements continue  the practice of unfounded official projections.  For example during the NGN funding, NCUA published estimates of the  of the total estimated costs to credit unions that have proved to be more than $20 billion in error.

Municipal was not without problems. But the key question is, what did the examiners do or not do to assist the board in their oversight of this $3 billion firm? Also,, what is the plan now to restore the credit union to its member owners?  And, why has there been no explanation for the wild swings in financial results?

Lucidity in a Crisis

All crises involve uncertainty. Forecasts are no longer linear extrapolations from a settled environment. Responses must be flexible. Options are vital. Clear thinking is a must.

The issue of subjective estimates of future losses imposed by examiners is especially critical now. In past crises, examiners have dictated individual credit union’s allowance provisions,  reducing the credit union’s net worth and compromising its ability to serve members. And then, post recovery, the decisions have been found to be overly zealous.

Regulators are supposed to be where problems are. The track record in Municipal suggests their role has added to the difficulties of the credit union getting back on track. Unaccountable actions, no transparency and no one taking responsibility, is a debilitating, even dangerous, practice.

NCUA’s silence reinforces the impression that they cannot make a public case for their decisions with Municipal. There is no plan. And they hope no one notices the growing impression of regulators not up to the job.