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:

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.

How to Achieve Increased Participation in NCUA’s Annual Voluntary CU Diversity Self-Assessment

Few credit unions have completed this voluntary form. NCUA makes repeated requests for more participation. At the July NCUA board meeting one member suggested that credit unions should have an incentive, such as lowering their operating fee. The August 3 NCUA letter to credit unions (20-CU-23) is the latest reminder.

The form is long with five sections. It combines data, qualitative comments and even asks for stories. Check it out here:

Given the wide range of interpretations possible from the information, one can understand the hesitation to complete it, especially if the forms are public.

How to Increase Participation

With heightened concern on implementing truly equal opportunity, this self-assessment could be a useful tool for any organization trying to identify ways to respond. Two suggestions to gather more credit union data;

  1. Use the filings to give annual awards highlighting credit union leaders in this effort. The subtitle of the form is: “Best Practices for Demonstrating a Commitment to Diversity and Inclusion.” Awards would validate the relevance of the form. They would spotlight best efforts. Most importantly, credit unions would have to participate to win! The awards would showcase leadership and promote winning credit unions’ employer reputation. Much like the many Best Place to Work recognitions given out in localities around the country.

An example of this approach is the Departments of the Army , Navy and Air Force Distinguished Credit Union of the Year Awards. Four credit unions were honored using each military Department’s selective criteria.

  1. NCUA should complete and publish its own copy of the voluntary diversity report as an example for credit unions.

From the Field: Will New Leadership Change NCUA?


(A response to What NCUA Nominee Kyle Hauptman can learn from McWatters’ NCUA Tenure)

“I’m sure you are familiar with the story of Passover. At the beginning of the Seder, the children ask the famous 4 questions. It begins with the phrase “Ma Nistanah”. Why is this night different from other nights? Among Jews, family members, we use the phrase as a question: why will this be any different? So if your wife’s mother does the same silly thing again, and you say to your wife “Ma Nishtanah”- you both get it. Sometimes the reference is more serious and that’s unfortunately what I would say about a new NCUA Board Member. Chosen by the same patronage process, using the examples of behavior of the existing board members, and being trained by the same existing staff. “Ma Nishtanah”- why should we expect anything different?”

Should NCUA Create a Credit Union Advisory Board?

I am skeptical about whether a politically chosen advisory board is an effective venue for credit unions to influence NCUA. Both the Federal Reserve and CFPB have advisory boards in which credit unions are members.

Whether these forums are more than a public relations event is difficult to determine. Therefore, I thought listening to an actual proceeding of the FDIC’s Advisory Committee could be useful.

A Four-Hour Advisory Board Experience

On July 28, the FDIC held its semiannual meeting of its 18-person Advisory Committee on Community Banking. Established in 2009, the representatives are CEOs from stock, mutual and private community banking firms. Due to the Covid situation, the meeting was held virtually with video so anyone could watch. Normally the dialogue would be private.

The meeting began with the CEOs’ descriptions of the state of their institutions and local economies. Reports were from smaller communities in New Hampshire, North Carolina, Kentucky and Iowa, to name a few. These five-minute updates were impressive. These senior executives talked about internal responses to Covid shutdowns, the distribution of PPP loans, buildups of cash savings, requests for loan deferrals and other shared experiences in the current environment.

The CEOs were articulate and prepared. Their firms ranged in size from $100 million to just over $1 billion in assets. Three specifically mentioned credit union competition. The North Dakota CEO gave the example of a credit union making a $1 million commercial real estate loan for a property in foreclosure at a rate of 1%. “We can’t compete with that.”

Many spoke of margin compression from the declines in market rates. This revenue loss being partially offset by loan origination fees, especially mortgages, and gains on investment sales.

Each gave updates on their local economies: the loss of revenue from tourism, the prospects for good crop harvests, the decline from local unemployment peaks and one example of refinancing a loan to their local municipality thus saving the city over $500,000 in interest.

Several offered recent exam experiences, one with the new “remote” process. Comments on FDIC policy were suggested. For example, a request the agency keep a moratorium on new ILC banking charters for firms like Walmart.

All in all, these brief financial, economic and management summaries were thoughtful, detailed and eloquent testimonials about community bankers’ multiple roles in the current climate.

Then Two Hours of Agency Updates

The rest of the four-hour meeting was centered around FDIC briefings including:

  • An economic outlook with a focus on commercial real estate and agricultural sectors;
  • A report from a subcommittee on Minority Depository Policy;
  • Updates on deferral accounting changes mandated under the CARES act, the lowering of the bank leverage ratio requirement from 9% to 8%, loan appraisal deferrals and related call report revisions;
  • A CECL update by a FASB board member;
  • FDIC’s diversity and inclusion program information;
  • Changes in how the FDIC insurance fee would exempt CARES Act loans;
  • A description of the Rapid Prototyping Project. The goal is to make the current call report process obsolete by using the latest technology. There were 30 companies invited to provide concept papers, followed by a 90-day period to develop a demo, and another 90 days to prototype the new model.

Was the Advisory Board Example Instructive?

The most informative or “real” part of the day for me were the bankers’ conversations. The FDIC presentations were dry, general policy updates with little interaction. They elaborated on decisions already in place. They were staff briefings. There was little give and take. The two hours of staff slides were a useful reminder of how regulatory “burdens” do not lessen even in a pandemic.

My assessment was that the bankers were more in touch with the realities in their communities than what the FDIC presented. Each FDIC update, even the pandemic “accommodations,” ended with the same caveat: “subject to proper risk management.” Even though the CEOs had spent several hours demonstrating their management competencies, the FDIC’s focus was on more rules or reinterpretations of existing ones.

The proceedings were polite. Both sides  appreciated the event. But the impression I was left with was while the FDIC might hear, they do not listen. This was not a democratic or collaborative process.

I don’t believe this is a model for credit unions. For the NCUA has a different structure, oversees a unique financial design, and manages cooperative resources meant to benefit the industry.  To be a meaningful process, it would have to be collaborative in both design and outcomes.

However even if an advisory board were  just for show, a live virtual open meeting could still be an eye opener for viewers.




Effective and Ineffective NCUA Leadership in Crises: Case Studies for the Current Pandemic Challenges

What works – and what doesn’t – is the subject of virtually any study of organizations, whether political, business or nonprofit. The topic of governmental leadership is even more critical in a crisis. Survival of an organization or even a movement could be at stake.

Many sectors of American society face existential challenges now. Can credit unions navigate these events with their mission and system intact?

Two Case Studies of Crisis Response

The word “change” traditionally signifies something new. But the ultimate irony is that transformation, what today’s protesters might call “real change,” most often occurs not when something new begins, but when something old falls apart.

In addressing current economic, pandemic and financial uncertainties, understanding how credit union regulators reacted in two previous economic downturns is enlightening.

The first economic disruption, 1981-1985, accelerated the deregulation of financial services. This change occurred in the midst of double-digit inflation and unemployment. Interest rates reached the mid-teens, their highest level since establishment of the Federal Reserve in 1913. Voters chose new national political leadership.

The second event was the Great Recession in 2008-2009. This was characterized by a bubble in home prices exacerbated by investment products (CMOs) leveraging unsustainable spikes in property values. Again Presidential political leadership changed.

Two Different Outcomes

In the first case, credit unions came out winners. In the decade 1979-1989 the industry achieved compounded annual growth in shares of 12.9%; in capital, 10.9%; and steady member expansion, 3.9%.

For the decade ending 2019, the annual compounded growth was much lower: shares, 5.3%; capital, 6.8%; and membership, 2.8%.

Why this difference in outcomes following these two economic downturns? What can they teach us about responding to current events?

Case I. Regulatory Leadership and Deregulation (1981-1985)

Ed Callahan became Chair of NCUA after a career as an educator and an administrator in the Illinois state government. From 1977-1981 he was Director of the Department of Financial Institutions. The Credit Union division supervised the largest number of credit union charters in any state.

Working cooperatively with Illinois’ 1,000 credit unions, the industry navigated the regulatory and economic changes characterized as “deregulation.” Callahan understood the old system of legacy guidelines and rules wasn’t working. The regulator had to let go of traditional thinking to give boards and managers the responsibility for their own business decisions.

When Callahan left the state for NCUA, the Illinois Credit Union League presented him with a framed slogan characterizing his tenure which read: We Don’t Run Credit Unions.

Chairman Callahan took the words and philosophy to NCUA in October 1981. The traditional regulatory system wasn’t working there either. “Survival” during these unprecedented economic events was the most pressing concern for the entire industry.

Deregulation–putting responsibility for business decisions in the hands of boards and managers, those closest to the member–meant doing away with the old rule-making concepts. In one short paragraph, the agency in April 1982 eliminated all prior rules and practices controlling the rates and terms on all share accounts. The agency reinterpreted the common bond to be more flexible and inclusive, participated in and endorsed a capital adequacy study by CUNA, and eliminated dozens other regulations accumulated over the years.

Two Institutional Makeovers

In his prior educational and state leadership roles, Chairman Callahan was regarded as an outstanding administrator. He enjoyed managing people and institutions even in bureaucracies enveloped by politics and patronage. He transformed organizations to be more effective and efficient.

At NCUA this management emphasis resulted in two major priorities.

The first was a multifaceted effort at transparency and continuous dialogue with credit unions. So that credit unions could see the agency at work, board meetings were taken on the road to cities in each of NCUA’s six regions. The NCUA Video Network was created to send credit unions video updates on major issues or policy changes.

Open press conferences were held after each Board meeting. Senior agency personnel spoke at credit union conferences across the country. The agency’s publications were issued with full details of key events for the three areas of NCUA’s responsibilities: the CLF, NCUSIF, and FCU chartering and supervision.

The pinnacle of this cooperative industry engagement was the December 1984 credit union conference in Las Vegas organized by the Agency. Over 3,000 attendees including state and federal regulators and examiners, and credit unions from all over the country joined to hear and attend breakouts on multiple topics of industry importance.

Callahan knew that for NCUA to succeed with deregulation, credit unions must step up and assume responsibility for their future.

Reforming the Agency

Callahan’s second priority was to upgrade all aspects of the agency’s internal administration and restructure critical functions. Ed practiced careful stewardship of credit union resources which fund all the agency’s activities.

The agency instituted an annual exam cycle of all FCUs. Operational responsibility for exams and supervision was put in the hands of the regional directors; and headquarters staff were transferred to support field operations. External audits by CPA firms were started for all three agency funds to ensure accurate reporting. Call reports were collected from all credit unions and the information formatted into peer analysis for each credit union. The agency’s internal operations were automated. Operating expenses were reduced annually, and the operating fee scheduled for FCUs was lowered four consecutive years.

Two of the agency’s most important functions were reconfigured to make them more responsive in the deregulated era. Through a partnership with the corporate network, the CLF was organized so that all credit unions would be members. The NCUSIF was capitalized emulating the member owner cooperative model. Every credit union now sent 1% of member share accounts as a capital deposit in the fund.

By eliminating the regulator’s traditional “controlling” mindset, credit unions were free to make their own decisions of how best to serve their members. The change initiated a growth boom for the cooperative system.

As the first financial sector to fully deregulate deposit rates, credit unions had a head start in the art of setting rates based on market pricing. The result was a five-year compounded annual share growth of over 15% from 1982 through 1987. Banks and S&Ls were not given this full freedom until 1987.

This period of transformative change through effective public leadership rested on two pillars: the efficient management of agency resources and continuous, open communication to enlist credit union support.

Case II. Responding to the 2008-2009 Great Recession

NCUA responded exactly opposite in the next economic crisis, the Great Recession of 2008-2009. Because of uncertainty about the ultimate value of investments by corporates, the entire corporate network was required to sign a single letter of understanding and agreement with NCUA, effectively putting them under government control.

The agency conserved the two largest corporates in April 2009 and appointed their chosen managers reporting only to NCUA staff. This approach resulted in the liquidation of five corporates in September 2010.

Multiple extra premiums for the NCUSIF and the newly created TCCUSF were assessed to pay for liquidations and ever-increasing agency budgets.

Staff and agency expenditures grew without limit, justified by the economic emergency. A new CPA firm was brought in for the NCUSIF to modify the accounting standard to avoid private sector disclosures mandated by GAAP.

The agency’s supervisory actions were unilateral. Workout plans were developed behind closed doors for the $100 billion in the five liquidated corporates. Credit union expertise and interests were shunted aside. New corporate rules were imposed that neutered the network’s critical roles in aggregation, payments and liquidity.

The CLF was eviscerated. A new liquidity rule was passed to substitute for the prior system-wide CLF safety net. A 400-page risk-based capital rule was imposed in 2016 over the widespread objections of the industry.

Instead of transformation, the agency forced its determinations on the industry. Individual credit unions were required to implement examiner dictates or merge. The agency believed money, not management, solved problems. Even after the crisis was long over, the agency doubled down on its regulatory fiats.

In the great recession, the agency ignored the critical lesson from the 1981-85 crisis: members’ relationship with their credit unions are the foundation of sustainable success, not government diktats. NCUA imposed its judgmental certitudes even when faced with contrary facts and better options. Resolving problems through patient workouts was not acceptable. Instead of the CLF and NCUSIF partnerships helping credit unions, the industry learned that credit unions were on their own when it came to addressing problems.

Two Crises, Two Contrasting Outcomes

At the core of Callahan’s philosophy, “We Don’t Run Credit Unions,” was a deeply held belief about human nature. Freedom is a powerful motivator. It enables innovation and sacrifice. It affirms purpose for those with leadership responsibilities. The results are much more positive than when government dictates solutions. The data prove it.

Public leadership is more than good management. Political regulatory appointments involve a relationship between persons in authority and those they supervise. Effectiveness means both are positively transformed by their interactions. Productive democratic governance requires reaching consensus among groups with different perspectives and interests.

The best example of how this process works is an excerpt from NCUA’s first Video Network presentation on deregulation. The 24-minute discussion features Ed Callahan in conversation with a panel of credit union industry representatives.

Jim Barr, CUNA, to Chairman Callahan: How much input will the credit union response actually have to your [deregulation] proposal?

Callahan: It will have everything to do with what we ultimately do on this subject. While I am philosophically opposed to government making these business decisions, should the majority of credit unions say they want things to stay the way they are, I’ll support them and I’ll back them. In fact, I will read every single letter credit union people send to me addressing this subject. (Source: The NCUA Review, February 1982, pg 6)

I believe the results of these two regulatory approaches offer a startling contrast. One positioned credit unions to prosper for the next 25 years. The second severely hurt the industry’s capabilities.

In this crisis the future of a distinct cooperative financial system may be at stake, depending on how NCUA decides to interact with the industry.

McWatters’ Legacy: Comments as Chair at the February 2017 GAC Conference

“The agency should diligently work to preserve small credit unions, as well as minority and women-operated credit unions. In addition, the agency should require all merger solicitation documents to provide, without limitation, a discussion of any change-in-control payments and other management compensation awards and agreements, and that such disclosures are written in plain language and delivered to voting members in a reasonable time prior to the scheduled merger vote.”

A First Reaction to NCUA’s July Board Meeting

Has NCUA heard of Zoom? The July meeting with audio presentation and downloads does not seem technically up to date.

As churches, schools, book clubs and even families have mastered the art of live video conferences, it would seem the minimum skill for a government agency which overseas a $1.6 trillion credit union system.

Maybe  credit unions could offer to set up a system for them? Makes one wonder what the remote exam experience is like…