Category: NCUA

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The Fallacy of Risk Based Capital

Vice Chairman Hoenig’s 2016 WSJ editorial reprinted yesterday described both the actual experience and logical failures when using RBC for measuring bank capital adequacy.

In October 2015 the NCUA board approved a new rule, in a 2 to 1 vote, imposing this standard on all credit unions over $100 million.  All the required risk based weights are in this two-page NCUA summary.

NCUA’s 424 Page Rule

The final rule is 424 pages.    Here is how NCUA estimated the costs to the 4,784 credit unions under $100 million not yet subject to the rule and the 1,489 who would be covered:

Additional one-time costs estimated by NCUA are $152,562 collectively, spread among 4,784 non-complex, non-covered credit unions, at an average of 1 hour for policy review and revision, for an average of $31.89 per credit union; and $1.9 million collectively, spread among 1,489 complex covered credit unions, at an average of 40 hours for policy review and revision, for an average of $1,275 per credit union. 

NCUA states it will only cost $1,275 for each credit union covered by the rule to implement it; and $31.89 each for the 4,784 credit unions not yet subject to review it.  These estimates cause one to wonder what operational world NCUA is living in!

The two page summary shows over 75 categories of risk weights with multiple subsets that would make each RBC calculation a spread sheet with over 100 different inputs with multiple percentage weights. Several risk weights for the same asset can vary from 100-300% of the asset’s book value.

The following are some examples of how NCUA would implement the rule.

Deductions from the numerator (net worth) of the RBC ratio include 100% of the NCUSIF capitalization deposit, all goodwill and any other intangible assets.   This treatment is contrary to GAAP accounting presentation and how credit unions report these assets in their financial statements for their members, examiners and the public.

FHLB capital  is risk weighted at 20% and the  CLF equity at 0%.     NCUA is  100% sure there is no loss in the CLF, assigns a 20% risk to FHLB stock, and 100% certain the NCUSIF deposit is at such risk that it has no value.  This reflects a complete lack of confidence in NCUA’s own supervision  of credit unions-even under RBC!

Off-balance sheet items, not yet  assets, are included in the denominator.  Unfunded draws under lines of credit are added to the denominator at various percentages of total value and then weighted at 100% risk.   All loans transferred with recourse are included at 100% of value, no matter the kind or amount of credit enhancement provided by the credit union.

A 19% RBC Ratio

NCUA’ s  impact analysis from Oct 2015 states the average RBC ratio for all “complex” credit unions would be 19%.  Only 16 new credit unions (out of 1,489) were determined to be  undercapitalized that had not already been identified by the existing RBNW rule.

Of the 1,489 cu’s  subject to the rule, 482 would report RBC greater than 20% with 110 of those over 30%.   This is  one example of the distortion and misleading impression created by RBC versus the easily understood and comparable  leverage ratio.

If in doubt about the negative impact of this burden, then review  the tables of risk weights to understand the complications when calculating the RBC ratio.   Or better yet, review the 424 page rule.

There is one primary reason this approach was dropped by the banking regulators.   The “juice is not worth the squeeze.”

 

 

 

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Are Credit Unions Being Treated Like Bananas?

What does the fate of bananas have to do with credit unions?

In 2016 BBC news reported on the potential death of the world’s favorite fruit:

For decades the most-exported and therefore most important banana in the world was the Gros Michel, but in the 1950s it was practically wiped out by the fungus known as Panama disease or banana wilt.

Banana growers turned to another breed that was immune to the fungus – the Cavendish, a smaller and by all accounts less tasty fruit but one capable of surviving global travel and, most importantly, able to grow in infected soils.

Do we need to worry about banana blight?

The story was updated in 2019 when the Cavendish itself became subject to blight:

While there are more than 1,000 varieties of bananas, which come in different colours, shapes and sizes, just under half of global production is the Cavendish type. While the fungus is not harmful to humans, it has the potential to eventually wipe out Cavendish bananas, according to experts.

Millions of people around the world rely on bananas and plantains as a staple food and as a cash crop.”The potential for devastation if it does reach them is almost total.”

“The world would carry on if we lost bananas but it would be devastating for those who rely on it economically and very sad for those of us who enjoy eating them.”

The Fungus Problem

The disease is “a serious threat to banana production” because once it is established, it can’t be eradicated, the UN says. And fusarium fungus can remain in the soil for 30 years.

It has been spreading for decades through Asia, Australia and Africa. It has now been detected in Latin America, which supplies the bulk of the world’s bananas grown for export. No other types of banana are yet ready for cultivation on a commercial scale.

If one plant is susceptible to a disease, all of its offspring will also be susceptible.

Monocultural crop

The Cavendish was brought in as a monoculture crop after “banana wilt” all but wiped out the world’s previous favourite dessert banana, the Gros Michel, in the 1950s.

According to Prof Kema, the main problem stems from the over reliance on Cavendish varieties for export, which he describes as a “monoculture”.

“We have to diversify banana production,” he said. If there is only one type of banana plant being grown, resistance to infection is lower.

There are trade-offs between the costs of containing it and the profits from growing bananas, he said.

Small producers may not be able to afford the mitigation measures, he added.

People in the UK eat 10 kilos of bananas per year, on average, or about 100 bananas.

So the market is there, but will Cavendish bananas be in the future?

The Credit Union Lesson

The critical issues in the potential extinction of this popular banana product include:

  • The need to diversify the varieties of bananas grown;
  • The tradeoffs between costs and benefits when fighting the fungus;
  • The disadvantage of smaller producers when using mitigation efforts;
  • The monocultural approach to new varieties;
  • The time needed to cultivate new strains;
  • The consumer need remains, but will there be an option?

In just 120 days NCUA’s oft-deferred RBC rule takes effect, unless the board acts.

The agency’s Risk Based Capital rule has every issue associated with the banana example. A single risk assessment applies to all firms; the lack of cost- benefit analysis; new approaches are discouraged; and credit union are encouraged to follow a “monocultural approach” to business practice.  Buy a bank here, merge a credit union there, and embrace the isomorphic actions of one’s peers to hide in the crowd.

If you question the banana parallel, the Financial Times printed the following assessment about how the US banking problems had been “resolved” during the Great Recession:

Will credit unions following NCUA’s RBC rule become another example of a banana plan?  Or will common sense prevail before the January 1, 2022 deadline?

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“The Best Damned System in the Country”

NASCUS members’ Annual State Summit meeting  begins today.  It includes a “fireside” chat with new NCUA Chair Harper.  Hopefully this dialogue will be enlightening.  For two of his recent proposals pose an existential threat to the dual chartering system.

The first would fundamentally alter the legal framework of the unique, cooperatively designed NCUSIF, by removing all the guardrails on expenditure.  Harper defends these changes by reference to the FDIC, a premium based fund that has failed repeatedly since the NCUSIF 1984 redesign.

The second Harper initiative is a new three-pronged capital structure for all NCUSIF insured credit unions.  Some credit unions would be allowed to follow the current risk based net worth (RBNW) model. Others would be required to follow the 2015 risk based capital (RBC) rule, yet to be implemented.  A third group of so-called complex credit unions could elect a new CCULR ratio that would raise their well-capitalized requirement by 43% from the current 7% to 10%.

All of these capital changes would take effect on January 1, 2022, or in five months, if Harper is able to get a second board vote.

The End of Dual Chartering

Aside from the lack of any substantive basis for these proposals, the outcome would effectively end the dual chartering system.   Risk based capital would throw a single regulatory blanket over every asset and liability decision made by an NCUSIF insured credit union.

NCUA would be the single hegemonic regulator for all coop charters. This single lens for risk evaluation would create a homogenous cooperative balance sheet.  Instead of increasing safety and soundness, if this uniform approach to risk analysis is wrong, it could lead the cooperative system over a cliff.

The One Sure Defense: Choice

This prospect of NCUA dominance was foreseen decades ago.   The following is a timely and timeless reminder of this threat in a speech by former NCUA Chair Ed Callahan in 1986.   The excerpt of these remarks to the Association of Credit Union League Executives is under three minutes. https://www.youtube.com/watch?v=cTMGvXPnVa8

“The insurer is the regulator.  The system only works when there are choices.”

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Mergers: Can’t We Do Better than This?

At last week’s Senate Banking Committee hearing, Senator Warren challenged banking regulators about their oversight of bank mergers.

Warren told the FDIC and OCC leaders the data indicate the regulators have “no credibility” when it comes to merger supervision.

“This has turned into a check the box exercise where the outcome is predetermined,” said Warren, who plans to introduce legislation to revamp the bank merger process.

“Our regulators have a job to do and it’s our job here in Congress to make sure they do it,” Warren said.

Her observations/questions included the following as reported in the CUToday article:

“Community banks are being gobbled up. The market is being dominated by big banks. There is more concentration, higher costs for consumers, and greater systemic risk, and it is happening in plain view of the federal agencies whose job it is to keep our communities safe.”

In a question directed at the FDIC Chair McWilliams: “The FDIC has a searchable database of all merger applications received since 2013, and there have been 1,124 such applications. Out of those, how many has the FDIC denied?” The total number of denials for any reason whatsoever?”   Before McWilliams could respond, Warren said, “It’s zero.”

Is the credit union system vulnerable to this political critique?

Here is a current case.  The $52 million South Division Credit Union has called a special members’ meeting on August 30 to approve its merger with Scott Credit Union, both Illinois state charters. Is this just another “ordinary” merger announcement?

The Credit Union’s Website Promises

Since 1935 South Division Credit Union, headquartered in Cook County, IL, has been guided by these founding principles:

To meet the financial expectations and needs of the Members by providing the highest quality products and services, delivered with a sense of professionalism, friendliness, and respect for the individual Member and their common financial bond with one another. The Next Evolution in Personal Banking

Member-Focused Attention Meets Diverse Banking Options

As an open-to-the-public, not-for-profit institution, our unique focus is on you, the consumer. Our end goal is to provide service that’s customized uniquely to you, backed by offerings that address all of your banking needs.

Our credit union offers a complete array of products and services to our Members —checking, savings, debit and credit cards, vehicle and consumer loans, money market accounts and certificates of deposit, along with a variety of mortgage products. 

Member Ownership 

Unlike at a bank, you’re not just another “customer” at South Division Credit Union. You’re a Member with a say in everything that we do. And what we do is strive to add more value for our well-deserving Members. As a nonprofit, rather than pocket any profits, we pour them back into the institution to provide better rates and additional benefits for you.

SDCU is owned and democratically operated by our Members, who elect our all-volunteer Board of Directors. In turn, the Board represents our Member-owners’ interests in credit union policymaking.

Open to Anyone — Become a Member Today!

What South Division is Telling Members Now

In the July 14, 2021 Notice of Special meeting sent to members, the credit union gave the following explanation for going out of business:

The directors of the participating credit unions have concluded that the proposed merger is desirable for the following reasons: South Division Credit Union has not grown in size or membership participation for several years and has been faced with increasing operational, regulatory and compliance expenses; lack of managerial expertise, aging Board of Directors and no effective succession plans. We believe a merger would offset these trends by offering South Division Credit Union’s members access to an array of new services, more modern account management systems, improved remote electronic access for lending programs, better savings and loan rates, and additional facilities.

Voting by Proxy: A Foregone Outcome

The Notice continues: The merger must have the approval of a majority of members of the credit union who vote on the proposal. . .Illinois permits voting on merger proposals only at the meeting or by proxy. If you DO have a proxy on file at the credit union, to vote in FAVOR of the merger, you may attend and vote in person at the meeting or, do nothing and the Board of Directors will vote in favor of the merger in your stead.

To vote AGAINST the merger, you must either attend in person and vote at the meeting. . . If there is no proxy enclosed with this notice, you have a proxy on file with the credit union, and to vote NO, you must revoke that proxy by giving written notice to the board secretary. . .

What is Left Unsaid

Scott Credit Union is a $1.5 bn, strong performing credit union located in Southern Illinois.  Its main office is 240 miles, a five-hour drive from South Division’s headquarters in Evergreen Park.

Scott founded in 1943 at Scott Air Force base, sits across the Mississippi river from St. Louis.  Its multi-county southern Illinois charter is in a very different economic, social, demographic and political environment from the Cook County, Evergreen Park-based credit union.   The combination would appear to be an act of charity by Scott.  The four small branches of South Division are anything but a viable foothold in the greater Chicago market.

In addition to South Division’s board and management confession of their leadership shortcomings—aging board, no succession plan, managerial inexperience-there is the question of their fiduciary oversight.

In 2020 the credit union reported a loss of almost $2.0 million reducing the net worth from 14% to 8.4% in just one year.   The major reason for the loss was an increase of over $1.0 million in salaries and benefits above the $1.2 million of the prior year.   What were these payments for?   Was staff helping themselves to the net worth prior to announcing a merger where such payments would have to be disclosed?

A Challenge for the Credit Union System

Both the Illinois credit union supervisor and the NCUA regional director signed off on this merger.   Are they OK with the $2.0 million loss in 2020, and therefore welcome to another credit union taking this emerging problem off their hands? Were local credit unions approached and turned this “opportunity” down?   How did Scott Credit Union end up with the short straw?

Where are the other components of the credit union system as this 85-year old credit union decides to close: the league, the vendor business partners, the sponsors?  Are there no other leaders or groups in the community willing to step up to this challenge?

The promises on the credit union’s website recruited over three generations of members.  Is this legacy of failure the best option the cooperative system can devise for these members, their children and grand children?  Because of the Board’s proxy voting process, the members will have no say in this dissolution.

When Collaboration is Most Needed

The credit union system was founded and built by collaboration.  No credit union would exist today without sponsor support, volunteer effort, member loyalty and system provided solutions.   But when it comes to ending a charter, collaboration seems nonexistent.   Without all-hands-on-deck  participation in these decisions, the ability of members to trust and respect their credit union’s choice to dissolve, is suspect.  Leaders at every level of the system are abandoning this charter at a most critical time.

This merger is based on a guilty plea of incompetence.   The 2020 salary payouts raise a question of integrity.  The process is devoid of “any respect for the individual Member and their common financial bond with one another.” (web site purpose statement)

Mergers in circumstances like this undermine the cooperative system’s reputation for acting in the member’s interest.  These credibility stains cannot be washed away no matter how competent or well-meaning the continuing credit union’s intent.

One more credit union charter gone, one more hole in the cooperative boat.  Will the sinking ever end?  How will Senator Warren or other members of the committee react when they see this example of a cooperative merger?

 

 

 

 

 

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What Credit Unions Can Learn from the Norwegian Women’s Beach Handball Team

While the Olympics are over, the stories of international sporting lessons are not.  These sometimes transcend individual athletic feats and tell of hard-fought life challenges.  One of these stories is about the Norwegian Women’s Beach handball team.

The team was fined $1,500 euros for wearing “improper clothing” in the sport’s Euro 2021 tournament.

The European Handball Association’s Disciplinary Commission fined the players for their protest in refusing to wear the regulation bikini-bottom to go with midriff-baring tops.  The rules require the bottoms be “a close fit and cut on an upward angle toward the top of the leg” and a maximum side width of 4 inches, according to International Handball Federation regulations.

Male players are allowed to play in tank tops and shorts no longer than 4 inches above the knee.

“It’s not [appropriate clothing for] the activity when they are playing in the sand,” stated Norwegian Handball Federation President Kåre Geir Lio.

Norway’s Ministry of Culture upon hearing of the fine said: “This is completely ridiculous! How many attitude changes are needed in the old-fashioned international patriarchy of sports?”

Old-fashioned Patriarchy

The belief that those in authority have the exclusive right to set the rules is not limited to sport.

Scholar, teacher Dr. Beatrice Bruteau (1930-2014) wrote about this human failing as follows:  The theme that explains many of our political shortcomings is domination. We see it in the way decisions are made in our families; in the way orders are given at work; in the way social life is structured in our city by gender, race, and wealth; in the way our industry or profession relates to its competitors or its market or its clientele; in the way governmental agencies function. . .

Domination is a relation that does not work the same in both directions. One commands, the other obeys. One shows respect, the other accepts it but does not return it. One gains privileges from which the other is excluded. 

Positions of power, whether elected, appointed or even earned, can distort an occupant’s assertive self-assurance.  Once in office it is easy to presume wisdom inherent with the responsibility.  The next step is exercising authority without consulting or even acknowledging the various constituencies most affected by the leader’s decisions.

Think no further than NCUA Chairman’s Harper’s recent requests for changes to the legal structure of the NCUSIF, expanded legislative authority for the CLF, or a new complex three-part capital structure for credit unions.  All were proposals drafted without consultation or even demonstrated need by those most affected.

One only hopes that the courage and spirit of the Norwegian women beach handball resides somewhere in credit union land. Otherwise, credit unions may all end up wearing the same  “close fit, cut at an upward angle, with a maximum width of 4 inches” uniform rules justified by nothing more than “old fashioned patriarchy.”

 

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Conserved Municipal CU Shows “Progress”

Surely the biggest human failure is not learning from failure. 

The turnaround of Municipal Credit Union, which NCUA took over two years ago, continues with a six-month ROA of 3.65%.  This strong bottom line raised the net worth from 4.42% to 6.32% over the past year, even while total shares grew 14.2%.

Kyle Markland is the third CEO NCUA has put in the credit union since appointed conservator  by the  New York regulator in May 2019.  He is the only interim leader with a previous credit union CEO track record.

NCUA’s Conservatorship Actions in 2019

On May 17, 2019 NCUA conserved Municipal shortly after it reported a first quarter net worth ratio of 7.6%, delinquency of .77%, and an allowance account funded at 150% of total delinquencies, positive ROA—and no taxi medallion loans.

Just 45 days later in the June 2019 call report, the newly arrived NCUA conservator reported a $123 million YTD loss reducing the net worth to 3.41%.  No reasons were provided.

By the end of 2019 the credit union had undergone a miraculous turnaround.  It reported a $30 million net gain in the 4th  quarter alone and a total improvement of over $40 million since the  June 2019, $123 million loss.

The June 2021 Results in Context

NCUA’s third CEO selection arrived in mid 2020. The recovery remains steady.   So how did this extraordinary performance in the first six months of 2021 compare with earlier activity?

The credit union has grown to $4.2 billion in assets at June 2021, continues to add new members, and has over 50% of its assets in investments with ¾ less than one year maturity.  Loans are flat and delinquency continues to decline to .54%.

Two other numbers suggest a slightly more modest assessment.   For 63% of the net income is due to significant changes in expenses from the prior year. The provision for loan loss shows a net reduction of $12.6 million for a total reversal of $22.8 from the expense reported the prior year’s first six months. Miscellaneous expense also shows a recovery of $15.4 million a $24.5 million reversal versus the expense of the prior year.  Perhaps a bond claim payment?

Together these two “reversals” contributed 63% of the bottom line.  Without these, the ROA would have been 1.3% still excellent, but not as spectacular.

When Transparency is Lacking, Credibility is Forfeited

Since NCUA’s conservatorship in May 2019, Municipal has reported operating results ranging from the sublime to the ridiculous.  These include a quarterly loss of almost $130 million to a $30 million positive net two quarters later.  The two expense “reversals” totaling $47 million in 2021 are not as spectacular, but raise questions about how such dramatic change happens.

Without clear public explanations the impression is that the performance numbers are either entirely uncertain, or subject to great variation not seen in any other credit union this size.  Either option raises the issue of what is the credit union’s real operating capability versus seemingly arbitrary changes in accounting valuations.

So the good news is that Municipal is on the way back.  The unfortunate news, no one knows how or why. If we cannot learn from failure, one thing is highly probable, there will continue to be more failures.

When the causes of problems are hidden then the possibility of others making similar mistakes becomes greater.

Is Municipal’s turnaround the result of skillful management interventions?  Or just adjustments to exaggerated loss estimates?  Was conservatorship a means to cover up years of ineffective supervision?   Is the current CEO, Kyle Markland, free to make long term decisions to position the credit union, or are all his leadership decisions subject to NCUA approval?

The inability to learn from failure is a human shortcoming.  But NCUA’s lack of institutional transparency is a defect undermining confidence in its oversight and judgments.  Municipal is just the latest of a long series in which NCUA hides behind a practice of not commenting on problem cases.

That silence harms the credibility for NCUA’s actions; but more importantly it undermines the regulator’s reputation for the safety and soundness of the cooperative system with members and the public.

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NCUA Reduced Expenses $64 Million During 2020 Pandemic

During the 2020 virtual exam and work-from-home administration, NCUA reduced its total NCUSIF and Operating expenses by over $64 million. This result certainly deserves a shout out to the NCUA board which oversaw this.

The million dollar question is whether these efficiencies and exam oversight improvements will be sustained? Or might the instinct to make up for “lost expenditures” take over?

The Numbers Total $64 million

The agency’s operating expenses, after OTR transfer, fell by $3.2 million from 2019. However, the $116.3 million total was still $40.6 million, or 54% higher, from five years earlier. At least for one year this inexorable upward trend was reversed.

The greater savings were in the NCUSIF. Administrative expenses fell by over $10 million to $181 million which is the lowest level since 2014.

The largest amount was in the net cash losses (payments less recoveries) for credit union failures. Net cash losses are a more accurate reflection of real performance as the provision expense has shown little or no correlation to actual losses for the past 13 years.

In 2019 the NCUSIF reported net cash losses of $41 million. In 2020 there was a net recovery of $10 million, the first time this has occurred in the past 13 years. This positive recovery was in a year of the worst economic downturn since the Great Recession.

These NCUSIF savings due to a $51 million loss turnaround, plus $10 million in administrative expense reduction added to the $3 million in lower operating costs, together total $64 million.

Sustaining Success by Incorporating Lessons Learned

These numbers are a tribute to credit union resilience and the ability of all segments of the cooperative system to pivot to virtual management. The critical test is whether these virtual gains can be incorporated as ongoing activities so they are maintained when the COVID adjustments are over. Doing so would mean lessons learned that can bring benefits for years to come, even from a crisis. $64 million is a solid achievement not to be lost.

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Before NCUA’s “Regulatory Backlash”

In my Credit Union Museum video, I described NCUA’s approach to credit unions since 2009 as an era of “regulatory backlash.”  The term summarizes the unilateral imposition of rules, premiums and new examination tests after the Great Recession crisis. The agency repeatedly asserted it was an “independent” ruler and  treated credit unions as their subjects.

One example is the creation of the 424-page risk based capital rule which is so burdensome that it has been postponed for almost 8 years.  Meanwhile the FDIC has dropped this as a required calculation.

One reader disagreed.  He said the backlash began in 1998 with the imposition of PCA on credit union net worth assessments as part of the Credit Union Membership Access Act.  (CUMAA)

However NCUA’s record suggest this is not the case.   When the Supreme Court ruled 5 to 4 in 1998 that the field of membership of a federal credit union could only be a single group, a substantial portion of new members added by FCU’s would have been thrown out if CUMAA not been passed.  It was Treasury, not NCUA, that imposed the PCA, in return for their not opposing this legislative change.

NCUA’s Support for the Credit Union System

The following are brief highlights from NCUA’s 2000 and 2001 Annual Reports demonstrating multiple ways the agency continued to support the credit union system beyond its traditional examination and supervision roles after PCA.

This cooperation began in the deregulation era of the 1980’s.  This early effort culminated in the passage of Congressional legislation redesigning the NCUSIF along cooperative principles in 1984.

Chairman Ed Callahan described this Great Victory in this 1.5 minute NCUA Video Network excerpt from 1984.  His central point is how everyone contributed to achieving this unique result.

The Key Themes of a Cooperative Regulatory Approach

The Annual Report excerpts that follow demonstrate the agency’s efforts at cost control, financial transparency, joint assistance programs, and an overt willingness to support cooperative expansion.   NCUA  recognizes and supports the diverse and unique nature of all credit unions, large and small.

They acknowledge their accountability to the credit union system (stakeholders) in their communication efforts and their stewardship of credit union resources.

This was the culture developed in the three decades following deregulation. These are only a few of many mutual efforts that had characterized this most critical cooperative system relationship in this period.

That mutual respect  is what was lost during the Great Recession and is missing in NCUA’s approach to its role today.

From the 2000 Annual Report

Student Internship Program

The OCDCU 2000 College Student Summer Internship Program was the most successful to date. The program creates partnerships between low-income designated and other credit unions (large or small) and college juniors and seniors to train and develop a pool of potential future credit union managers. The students selected are business, finance or marketing majors.

With technical assistance grant stipends, the 2000 summer intern program matched 29 college student interns with 58 different credit unions. Stipends provided the interns totaled $72,500 in 2000 compared with $67,500 in 1999 for 27 students.  Pg 16

National Small Credit Union Program

The NCUA Board adopted the National Small Credit Union Program (NSCUP) in March 1999. The NSCUP exists to:

  • Promote credit union service to people of modest means;
  • Increase access to credit unions for individuals in underserved communities by fostering a regulatory environment where small, newly-chartered and low-income designated credit unions can provide appropriate and needed services to members;
  • Promote successful, financially healthy small credit unions through appropriate technical and financial assistance; and,
  • Facilitate a regulatory environment that empowers small credit unions.

Nearly 500 credit unions voluntarily participate in the program. The NCUA has committed 74 field staff — 13 economic development specialists (EDS) and 61 small credit union program specialists (SCUPS) — located throughout the nation to carrying out the NSCUP objectives.

These specialists focus on increasing access to credit unions and credit union management development through training and mentor relationships. Recognizing the uniqueness of small credit unions and the necessity to maintain an informed staff, OCDCU conducted two EDS/SCUP training workshops during 2000. The workshops focused on increasing access to credit unions, business development, information technologies and alternative capital sources.

Reducing the Operating Fund’s Balance

The 2000 budget projected a $7.4 million net loss to the Operating Fund as the agency continues efforts to reduce the fund balance. However, because of budget savings from vacant staff positions, the net loss for 2000 was approximately $4.1 million. As a result, the Fund balance at year-end 2000 was $2.2 million.  Pg  31 (note: it was $136.3 million at December 2020)

From the 2001 Annual Report

The Board itself demonstrated its commitment to more responsive accountability for agency operations and finances by conducting NCUA’s first ever Public Forum and Budget Briefing, which resulted in stakeholders having a better understanding of the agency’s budget and operations.

Likewise, the NCUA initiated an internal Accountability in Management self-study, which presented opportunities to streamline operations, reallocate resources and improve the overall efficiency of the agency. These important initiatives are being implemented and will remain a high agency priority in 2002.  Pg 5

As part of NCUA’s strategic planning and as requested by Chairman Dennis Dollar, via his Accountability in Management (AIM) initiative, all areas of agency operation are being reviewed to determine efficiency and effectiveness. NCUA’s 2002 budget incorporated many recommendations attributed to that purpose and one result was the consolidation of several central offices.

Consolidation coupled with regional staff reductions, due in large part to the new flexible examination schedule, results in a projected 3.4 percent reduction in staff by the end of 2002 and positions the agency to achieve at least a 4 percent staff reduction by the end of 2003.

Just as the credit unions NCUA regulates and insures continually plan for the future, we will continue to review both the central and regional office structure with an eye toward boosting efficiency and saving cost. We expect many cost saving changes in 2002 — risk-focused examinations, flexible examination scheduling for qualifying credit unions and accountability in management initiatives — will result in an improved examination program and continued good stewardship of agency resources. Pg 8.

In the Future

During my first year as executive director, we made a commitment to establish open, frequent lines of communication with NCUA’s stakeholders. Chairman Dennis Dollar’s groundbreaking idea to conduct NCUA’s first open budget briefing and public forum provided an excellent opportunity for timely, direct input from our key stakeholders. Due to the success of this approach, you can be assured that NCUA will remain committed to providing open forums for gleaning input, which allows for an optimal decision-making environment

NCUA News was produced by PACA and sent to more than 10,000 credit unions and related organizations. NCUA News is often the voice of NCUA for credit union officers and volunteers, those who need to know what is happening in and around the agency. Responding to media inquiries, issuing press releases, advancing media contacts, writing the NCUA News and Inside NCUA, an internal newsletter for NCUA staff, monitoring and updating the NCUA web site and producing the annual report comprise the core public affairs responsibilities of PACA.  Pg 11

Small Credit Union Program

The Small Credit Union Program (SCUP), which is monitored by OCUD, is operated by the regions to promote successful, financially healthy small credit unions (those under $5 million in assets; in operation less than 10 years with under $10 million in assets; or low-income designated credit unions). This is accomplished through appropriate use of technical and financial assistance (e.g., on-site contacts and workshops).

The NCUA Board has committed 78 specialists —17 economic development specialists and 61 small credit union program specialists—to this program. There are 4,381 credit unions that fall within the SCUP criteria that are eligible to participate in the program. At December 31, 2001, there were 721 credit unions participating in the program. During 2001, the regional specialists performed 705 on-site visits providing one on one, on-the-job training.

Another aspect of SCUP is group training, where germane topics are addressed with program credit union officials and staff members. Outreach was in high gear during 2001, with the regions completing 43 workshops. More than 2,100 credit union officials attended these workshops.  Pg 16

 

 

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The Cost to Members of Overcapitalization

The concept of an “overcapitalization bias” in the credit union system was the topic of yesterday’s post.

One comment from financial consultant Mike Higgins showed how to calculate the cost-that is money taken from members’ pockets.  Here is his analysis:

I’d like to bring some specific concerns to the table for discussion on raising credit union capital.
The proposed regulation establishes a phased-in 10% net worth floor.  We all know that credit unions will carry a buffer to avoid going below the floor – most likely in the 1.0% to 2.0% of assets range.  So, the new net worth standard from a practical basis will be 11.0% to 12.0%.
This creates a huge safety reserve, before any consideration for CECL.  Recall that loan loss reserve is effectively net worth too, just specifically earmarked to cover anticipated loan losses.
For perspective, there are 600 credit unions with assets greater than $400 million that have net worth below 11% as of the 3/31/2021 call report.  I specifically included credit unions greater than $400 million because they will have to prepare for the higher capital standards as they approach the $500 million threshold.
The current low interest rate environment is making it difficult to accrete capital via asset growth.  This fact must be considered as part of the discussion.
Any net worth requirement is a tax on asset growth.  Raising the net worth requirement increases the growth tax.  For example, a credit union growing 10% per year with an 8% net worth target must produce a ROA (profit taken from members) of 0.80% to maintain its net worth ratio.  If the net worth requirement increases to 11%, that same credit union must now produce a 1.10% ROA.
Credit unions that cannot produce the higher ROA to support the new net worth target will have their ability to grow and serve new members stifled.  It will also make it more difficult to invest in the cooperative to maintain market relevance.
In a perverse twist, credit unions may have to take more risk because of the proposed regulation to produce the higher ROA necessary to maintain net worth.
Ultimately, a higher net worth requirement harms the people credit unions are designed to serve.
I am genuinely concerned this regulation is a gift to the competition because it erodes the advantages credit unions currently hold in the marketplace.  The concept of evaluating risk to determine necessary reserves, especially in outlier situations, is important, but I agree with Chairman Hood, it should be used as a tool and not a rule.
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The Overcapitalization of the Credit Union System

Twenty-five responses were filed responding to NCUA’s request for comments on the appropriate NOL cap for the NCUSIF.  One provided an insightful context for their remarks.

This excerpt from the Ohio Credit Union League  points out a larger industry bias.  This observation is especially relevant in view of NCUA’s proposal to raise the well capitalized standard for credit unions over $500 million in assets.  This new net worth option called CCULR, would raise the well capitalized compliance standard 43% in two years, from 7% to 10%.

Here is their partial comment:

. . .we wish to register a general objection to the notion of unnecessary over-capitalization of the credit union system wherever such an idea takes root. Except for a relatively small proportion of outliers, where ordinary supervision serves as an appropriate intervention, credit unions themselves are strongly capitalized to the extent that the primary buffer (natural-person credit union capital) against shocks to individual credit unions or the credit union system, is deep and broad.

Prior to the pandemic (December 2019) the average total capital ratios for U.S. and Ohio credit unions were 11.87% and 11.89%, respectively. As the pandemic began receding (March 2021), these metrics remain thoroughly robust (10.51% and 10.53%, respectively) despite the tremendous stresses of a global pandemic, global recession, and stimulus-driven ballooning balance sheets. The abundantly healthy capital levels and ratios in credit unions served the intended purpose quite effectively and in essence, shielded NCUSIF from material impact.

The regulatory process, perhaps beneficially, engenders a bias for more capital at the credit union level (seemingly, ever-stronger balances and ever-higher ratios). Yet this bias must be tempered by business discipline to ensure that capital balances in credit unions and in the NCUSIF remain strong but not excessive, so the various costs of capital are reasonable (even supportable).

To the extent that we witness what appears to be strong NCUA bias for more capital (unnecessarily larger balances and unnecessarily higher equity ratios) and noting the nexus of this concern to NOL strategy, we draw attention to the potential disruptive and costly over-capitalization of the credit union system at the credit union level, in NCUSIF, and particularly in combination. In this context we reiterate our call for the return of the NOL to its previous strong and proven level of 1.30%

Amen