Category: NCUA

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 25^th 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?

At the September 17^th 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. 17^th 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.

• 2019 NCUSIF Performance Spreadsheet_AJ1 (PDF)

• 2019 NCUSIF Performance Spreadsheet_AJ1 (Excel)

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 17^th 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

• 2019 NCUSIF Performance Spreadsheet_AJ1 (PDF)

• 2019 NCUSIF Performance Spreadsheet_AJ1 (Excel)

1. Compound Annual Growth Rate (CAGR) insured savings: 5.6%
   CAGR: NCUSIF Operating expenses: 8.06%

2. 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)

3. December Year End NOL level: Fund equity to insured shares
   Low 1.23 (2009)
   High 1.39 (2018)

4. 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%

5. 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.

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.

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: https://cudiversity.ncua.gov/

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.

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

 

(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?”

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.

 

 

 

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.