Category: NCUA

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One More Time: Why Risk Based Capital is a Bad Idea

In the June 2020 NCUA board meeting, Chairman Hood’s latest RBC proposal was withdrawn from the agenda at the last moment. It did not receive the light of day, so we do not know what was in it. Even so, outgoing board member McWatters indicated his opposition to any change in a June 29 credit union press release stating; “this was not the right time for a material diminution in the RBNW capital requirement for credit unions. . .”

Even though all three banking regulators ended RBNW as a valid approach for community banks in September 2019 and McWatters earlier opposed the rule as “illegal” it appears this destructive concept has somehow come back to life.

With that prospect in mind, I think it is useful to remember some of the reasons why the concept Is so flawed. The article excerpt below urged credit unions to comment on the second RBC proposal by NCUA in 2015. It looks as if the battle may have to be fought again.

Training Fleas and RBC
Escape the circus and live beyond the limits of the imaginary lid. (March 2015 Creditunions.com)

This YouTube video demonstrates how to train fleas. This column urges credit unions not to behave the same way when it comes to NCUA’s redrawn risk-based capital proposal.

The sequence of events the video illustrates are as follows:

  • The fleas are placed in a glass jar.
  • A lid is placed on the jar and left undisturbed for three days.
  • When the lid is removed, the fleas will never jump out of the jar; their behavior has been set for the rest of their lives.
  • Moreover when the fleas reproduce their offspring will follow their example.

Policy Lessons For Risk-Based Capital

The NCUA’s RBC #2 proposal lists more than 70 categories for which credit unions would be required to calculate capital according to their legally mandated rule’s risk weighting.

These weightings — like the lid on the jar — become the primary screen for filtering decisions such as what assets a credit union should hold, how loans should be priced, and the composition of the balance sheet.

This one-size-fits-all formula will reduce the diversity of credit union activity and in so doing, change the focus from serving members needs first, to meeting examiner expectations.

Two Comment Letters Address This Outcome

Chuck Bruen, CEO of First Entertainment Credit Union ($1.1B, Hollywood, CA) wrote this in his Feb. 13 comment letter:

“The NCUA’s risk-based capital rule is overly complex and inappropriate for credit unions and their business model. … NCUA’s risk-weights also experimentally incent and dis-incent credit union lending and investment behaviors in unprecedented and untested ways.”

This steering of balance sheet decisions was also a concern in a comment posted by Randy Karnes, CEO of CU*Answers:

“I believe the revised RBC rule penalizes credit unions for specific activities such as real estate lending, member business lending, and credit unions chartered to assist the un-bankable, by placing a capital tax on the resulting assets from low income or credit lending to the poor.

“We believe the end result will be thousands of homogenous balance sheets in 2025 that the NCUA can easily understand from a supervisory perspective. However, this current risk posture of the NCUA cannot but fail to lead credit unions to shy away from diversity or the cooperative reason for the charter and field of membership.

“This rule would ultimately force credit unions into potential areas of investment and lending in which the credit union lacks experience, or create industry-wide concentrations that could be impacted by similar economic variables. In and of itself, this rule creates more risk than it proposes to control.”

FDIC Vice Chairman Analyzes RBC And Finds It Flawed

These concerns are not theoretical. The banking industry’s reliance upon the RBC formula already shows how it creates results that do not enhance safety and soundness. The outcome can even undermine the critical economic value contributed by financial intermediaries.

FDIC vice chairman Thomas Hoenig noted this in a speech to the International Association of Deposit Insurers in April 2013:

“If the Basel risk-weight schemes are incorrect — which they often have been — this too could inhibit loan growth, as it encourages investments in other more favorably, but incorrectly, weighted assets.

“Basel systematically encourages investments in sectors pre-assigned lower weights — for example, mortgages, sovereign debt, and derivatives — and discourages loans to assets assigned higher weights: commercial and industrial loans.

“We may have inadvertently created a system that discourages the very loan growth we seek, and instead turned our financial system into one that rewards itself more than it supports economic activity.”

RBC Comments Needed More Than Ever

The second comment period is even more critical than the response to RBC #1. The debate now is not about risk weights, ratios, phase-in periods, etc., but whether this new rule is good public policy for cooperatives.

The impact of the rule will be to create behaviors contrary to credit unions’ purpose and their role in the market place. It will decrease diversity and increase asset concentrations.

Credit union leaders must not become fleas in a jar. Comments on RBC#2 are more critical than ever — or this new rule could become a lid on the future of your credit union and the credit union movement.

Source: Training Fleas And RBC | Credit Unions https://www.creditunions.com/blogs/chip-filson-on-credit-unions/training-fleas-and-rbc/#ixzz6T48VFVHt

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Getting the Best Leadership for NCUA: A Case Study

For the last decade the appointments, or repeats, to the NCUA board have been a total surprise to the credit union community. New names, no industry references.

After the fact, we learn the selections arose primarily from their Washington insider connections. Their lack of credit union cooperative understanding and/or management experience is glaring.

With no vision or expressed views on the unique role of credit unions, appointees instead swear an oath to safety and soundness. That mantra is used to justify whatever actions, regulations or policy changes are subsequently proposed.

Appointees lacking credit union experience has not always been the case. Until credit unions reassert their collective interest in NCUA board nominations, these three positions will continue to be consolation prizes for party loyalists seeking a government sinecure.

Appointing the First Federal Regulator

When the Federal Credit Union Act was passed in 1934, the responsibility for creating a new federal system was placed in the Farm Credit Administration (FCA). The concern of Roy Bergengren (a founder with Filene of the credit union system) was that there should be a single integrated movement, not dueling state and federal charter designs.

The Governor of the FCA asked his first assistant, Herbert Emmerich (who had helped draft the federal legislation and coincidentally, was a credit union member) to serve as interim director of the credit union division, until he hired an assistant to devote full time to this new responsibility.

Who did Emmerich ask for leadership recommendations? Roy Bergengren. They had worked together on the final legislation.

Bergengren knew that the new legislation must be implemented by a credit union advocate or end up stillborn. He gave Emmerich seven recommendations. Bergengren was in turn asked to determine each person’s interest.

The “Proper Credit Union Spirit”

Bergengren’s first choice was Claude Orchard, who when approached, said he would accept the $4,600 per year job. He thought Orchard had “the proper credit union spirit.”

In his July 17, 1934, response to Bergengren’s outreach, Orchard wrote: “I hope the “assistant director” will be permitted the chance to get out into the field to actually set up a few key credit unions and have the opportunity to train organizers both paid and volunteer. That would be a fine sort of job for me.” (Moody & Fite, page 167)

Once on the job, Orchard got Emmerich’s permission to actively encourage the founding of both state and federal charters. His main goal — to increase the number of credit unions in the United States — was a spectacular success. One example of his public advocacy is a speech to the New York Credit Union League in 1937 as reported in the New York Times.

Who Was Claude Orchard? Why was he so successful as the first Federal Regulator?

Claude Orchard began working at Armour and Company in Omaha, Nebraska in 1903. He was intimately acquainted with the financial problems of the company’s employees, many of whom were poorly educated blacks and immigrants working for 17-18 cents per hour.

He first heard about credit unions in 1929 from a lawyer sent by Bergengren to help organize credit unions in Nebraska. The two quickly organized the first Armour credit union which so impressed the company that management freed Orchard to travel to other Armour plants to organize more credit unions. By 1933 the number of Armour credit unions had grown to 70.

The Takeaway for Today: Speak Out

Ed Callahan, NCUA chair (1981-1985), frequently observed “people do what they know.”

Experience matters especially for those in positions of senior leadership. It frames relationships, brings life’s hard-earned lessons and shapes the values a leader follows in the job.

Two of the most sought-after outcomes in secular life today are money and power. But cooperative design is based on an inversion of these traditional market driven ambitions.

For credit unions to continue as a unique resource for America will require modern day Claude Orchards. These leaders must define and implement policies to bring renewed purpose to a movement whose regulatory institutions are desperately short of cooperative belief and understanding.

Isn’t it time for credit unions to SPEAK OUT before NCUA board openings are filled — rather than spending years trying to educate board members about the industry they supervise? Or more likely, to be totally dependent on the bureaucracy’s recommendations?

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Issues Bigger Than Regulator’s Rules

In 1978, Sangamo Electric Company announced the closing of its Springfield, IL manufacturing plant and head office to move to Georgia.

The company had its own credit union. I had been Illinois Credit Union Division Supervisor for one year. My dad had worked at the company in the 1950s, so I felt an interest in the situation. The issue: what should happen now to Sangamo Employees Credit Union?

For me, the answer was simple. The sponsor and all its direct support, plus the members’ jobs, no longer existed. The employer-based “common bond” was gone. Therefore, it no longer complied with the state’s chartering requirements . It should be closed.

That was not the view of my boss, Ed Callahan, the Director of the Department of Financial Institutions. His logic was that with the company’s closing, the members needed their credit union more than ever. Their jobs were gone. The credit union would be more vital to their future than before.

He suggested we find a way to modify the charter so that the members, not the company or the regulator, could determine their credit union’s future. And that is what we did ­.

Regulators and the Current Pandemic

This incident came to mind when a CEO sent me NCUA’s interagency joint announcement: “Examiner Guidance for Assessing Safety and Soundness Considering the Effect of COVID-19 Pandemic on Institutions.”

The purpose of its eleven pages: “to promote consistency and transparency across the agencies, examiners will continue to assign supervisory ratings in accordance with the applicable rating system. . . CAMELS.”

“. . .it is essential that examiners maintain a clear understanding of the financial condition of each institution.” And “. . .examiners will distinguish between problems caused by the institution’s management and those caused by external factors beyond management’s control.”

Why is NCUA Sending this “Guidance”?

The paper appears self-serving, citing circumstances familiar to everyone. It reads more like a warning notice, than “guidance.”

Its bottom line is “we are telling you, be careful.” Is this a prelude to circumventing normal supervisory due process, using the pandemic’s uncertainty as an excuse?

There are three concerns with NCUA’s forwarding this directive to “promote consistency and transparency across agencies.”

  1. Why did NCUA believe this bank-drafted warning message was even appropriate for credit unions?

Credit unions are different from banks in fundamental ways. Their cooperative design, tax exemption, “common wealth” and reserve/capital options are intentionally unlike privately owned firms created to profit shareholders.

Credit unions fulfill a different purpose, one of which is to be an antidote to the shortcomings of for-profit financial options. The CLF and NCUSIF’s designs incorporate these cooperative differences.

  1. At this time every other arm of government including Congress, Treasury, the IRS, SBA and even the FED are crossing all their traditional “red lines.” Why is NCUA joining bank regulators to announce “business as usual” contrary to the activities of every other government entity?
  2. This “examiner guidance” makes no mention of the special credit union role in times of economic distress. Every day credit unions are waiving fees, lowering rates, providing forbearance and other special accommodations for members. These actions reduce a credit union’s “normal camel ratio ” outcomes. That is what coops are supposed to do with their members’ collective savings.

A current example is how 15 Vermont credit unions have provided $385 million in member relief, so far. Isn’t this the special “guidance” NCUA should be highlighting?

Rising Above Rules

While hitching NCUA’s wagon to other regulators may seem to enhance NCUA’s image, it diminishes credit unions’.

Credit unions were well positioned financially entering this crisis. The cooperative regulator is most effective when knowing how to see beyond the letter of the law and support the spirit of the movement. That is the Sangamo lesson Ed Callahan helped me to see.

This instinct to put members first lives in most credit unions. In this time, shouldn’t NCUA’s “examiner guidance” be to promote this essential mission? And even co-develop special programs with the industry to help members recover financially?

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“Democracy Dies In Darkness”

As I listened to NCUA’s streaming Board meeting Thursday, June 25, I was reminded of this phrase on the Washington Post’s masthead : Democracy Dies in Darkness. The paper’s first slogan was aired in a 2017 super bowl ad.

The words convey a basic truth of democratic governance. They point to the powerful role of public information in discussion, analysis and decision-making, especially in regulation.

Listeners heard, as described below, that the agenda had changed with no explanation. Without transparency, actions become suspect. Trust is forfeited. Confidence lost.

An Email of Public Interest in the Meeting

A friend forwarded a copy of a credit union CEO’s email  to the NCUA Board prior to the meeting:

NCUA Board and Staff,

In 1867, Samuel Fay invented the paper clip. Originally Mr. Fay was trying to find a tool to easily attach tickets to fabrics. It worked and evolved its uses with the same foundational design to the tune of 11 billion purchased annually. 

 In 1899, Johan Vaaler tried to reinvent it. A different design to accomplish, in essence, the same goal. He went so far as to claim it better, campaign and erect sculptures in its honor, but the failure of this design was its impracticality. Many paper clip versions can be seen today but Fay’s original design, with the greatest history and track record of performance, leads the industry. Vaaler’s patent expired quietly.

The FDIC, FED and OCC have unanimously ended RBC requirements and all the work related to its calculation. . .From their September 2019 press release: “The leverage framework will greatly simplify regulatory determinations regarding capital adequacy and eliminate the need for qualifying community banking organizations to calculate and report quarterly risk-based capital ratios in their Call Reports.”

This (new leverage framework) capital adequacy standard is the same calculation that the credit union industry has been using for over 100 years and banking regulators have concluded there is no benefit and high cost burden to move to RBC.

I ask you to consider Vaaler’s paper clip and let RBC discussions and concept expire – for good. We have a proven model, like Samuel Fay. Moving away from the RBC discussion will allow NCUA to proceed with a refocused effort toward doing the work of helping credit unions find ways to help our members – especially in these unprecedented and trying times.

Withdrawing RBC from the Agenda

Opening the meeting Chairman Hood announced the RBC topic had been withdrawn. No reason given.

Was it because he did not have a second vote to discuss the issue? Was it concern the topic was insufficiently addressed? Of all the topics on the agenda, none had more immediate or long-lasting impact on the industry.

Credit unions are “in the dark” about Hood’s decision. At the prior monthly board meeting, the directors failed to second to move a topic forward, but then explained why they refused to do so. This time no discussion. Board members avoid presenting their points of view. There is darkness on both process and substance.

Credit unions are left to wonder what their politically appointed leaders are up to. Board members are subject to public confirmation so their expertise and view of their responsibility can be assessed by the Senate. Appointees embody the public interest in credit union oversight.

Board members’ role is to be publicly accountable for agency performance. Their collective silence prevents any assessment of NCUA’s latest thinking on this vital topic. It sidelines industry input and experience.

Most critically it fails to enlist credit union support for their action. Regulations become edicts imposed, not rules cooperatively and democratically generated.

How Freedom Is Lost

NCUA’s abrupt withdrawal of the RBC topic, deals a double blow to democratic governance. The board shirks its public accountability. Credit unions are denied information to make their voice heard. RBC, the most far reaching regulation ever proposed, lies in limbo.

As the industry speculates on this event, the incident shows the fragility of the public process meant to direct and control the administration of regulation. The board works in darkness; the industry has no light, and another democratic check and balance is minimized.

And that is how freedom is lost, one small step at a time.

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Awards and Institutional Culture

Most credit union associations, many credit unions, CUSOs and even some vendors present periodic awards to individuals or credit unions. These honor specific contributions and reinforce values the groups want to celebrate. Internally, awards reinforce the culture an organization is trying to cultivate.

NCUA’s Awards in 1977

My first recollection of industry awards for results was in a 1977 NCUA press release. Details are now vague. But I recall two specific recognitions.

The first was for the agency employee(s) who had helped charter the most new credit unions during the year. The second was for credit unions that achieved the highest amount of savings growth.

Both awards embodied the agency’s view of its mission and results. The contrast with today’s absence of new charters, promotion of mergers and idolatry of net worth is stark.

An Insight from Police Reform

The Denver Police Department’s decade long effort at cultural reform included reviewing its award ceremonies.

Prior to this effort, every year officers were recognized for “justified use of force,” that is deadly shootings in the line of duty.

The new award, honoring efforts to deescalate encounters, was named the “perseveration of life.”

Awards Say Who We Are

Whether the action be a lifetime achievement or a one-year recognition for outstanding results, awards publicize organizational mindsets.

For many years NCUA and state regulators have viewed their primary task as a mortuary for credit unions they supervise. The announcements come on Friday evenings after reporters have gone home of another “justifiable homicide.” IBEW Local Union 712 Closes; West Penn P&P Assumes Loans, Assets, Shares

Might a new recognition change this regulatory mindset? Is now the time for the credit union community to honor the regulator, supervisor or examiner(s) whose present actions best exemplifies cooperative innovation, credit union ideals and most importantly, sustainability?

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NCUA’s Mindset in Responding to Problems, Is the Problem

Every organization will experience problems. Some imposed by external events. Others by internal failures because all are run by imperfect human beings.

Internal performance shortfalls occur even with the strongest, well-documented corporate cultures: harassment, inappropriate comments, disdain for conflicts of interest, performance failures, improper expense claims or even showing up on time.

Unfortunately, the instinctive response by government is to spend more resources. Moreover, the situations are addressed in secret with no explanations or analysis, except for after the fact announcements of a “solution.” With no transparency, there is no accountability.

A classic example is NCUA’s approach is the response to the recent revelations of a corrupt General Counsel and an earlier IG report on questionable travel reimbursements for senior staff.

Throwing Money at the Issue

Instead of addressing issues head on, the NCUA Board reacted to the public revelations of these in-house shortcomings, by creating a new position: Chief Ethics Officer.

The salary range: $227,113 to $263,000 per year. However, this may be just the initial increased cost as the person’s duties include “direct(ing) the activities of the office, and assisting and advising subordinate attorneys and/or other staff on assignments”

A Leadership Failure, Not a Resource Problem

The Chief Ethics posting above also lists the follow requirements:

EXECUTIVE QUALIFICATIONS: you (must) possess all the executive qualifications listed below. (details omitted)

Leading Change.
Leading People.
Results Driven.
Business Acumen.
Building Coalitions/Communication.

These would be superb qualifications for a Board member. It is instructive that the Board did not believe these qualities existed within its own body or within the staff of the agency. One has to question whether these capabilities can be imported if they are not part of the culture.

Spending more resources when problems occur is a mindset that provides a façade but not real change. The “ethics issues” or other challenges will just come back in another guise. For effectiveness has to start at the top. It cannot be delegated. In most organizations it is called leadership.

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Let’s Put a Stake in the Concept of Risk-Based Capital

Like Dracula in a horror movie or Covid outbreaks, risk-based capital (RBC) keeps showing up on NCUA’s agenda.

It is again on this Thursday’s June 25th NCUA Board meeting. No details are provided, but hopefully this will be the decision to finally kill this burdensome, ineffective and most importantly, wrong-headed effort

Banking Regulators Repeal RBC

The most important FACT is that RBC does not work. Just ask the FDIC, FED and OCC which unanimously ended RBC requirements and all related calculations.

On September 17, 2019, the Federal Deposit Insurance Corporation passed a final rule providing community banking organizations under $10 billion in assets a simple, single capital standard. The new adequacy standard is the bank leverage ratio.

As stated in the press release: “The leverage framework will greatly simplify regulatory determinations regarding capital adequacy and eliminate the need for qualifying community banking organizations to calculate and report quarterly risk-based capital ratios in their Call Reports.”

Bankers Adopt the Credit Union Capital Adequacy Measure

This singular, clear banking capital adequacy standard is the same calculation credit unions have used in their 100 plus years of existence.

Since 2014 NCUA has brought this proposal forth, time and again. The final rule adopted, but implementation postponed several times, runs over 400 pages.

Credit unions have universally found fault and opposed it. One board member, McWatters, has questioned the legal basis for it. It will be important for Hood and McWatters to be aligned as board member Harper has defended the RBC rule in the face of all contrary evidence.

Now is the time to completely withdraw this totally flawed, burdensome and useless concept.

The banking regulators unanimously concluded there is no benefit, even in calculating the multiple ratios.

What more evidence does the Board need to end this costly effort? It has too long distracted NCUA and its examiners from the real work of helping credit unions better serve members.

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Who Is Kyle Hauptman?

Short answer: He is President Trump’s nominee to replace Mark McWatters on the NCUA board.

Real question: Why him?

Chairman Hood’s description: “Kyle has significant experience in the financial services sector as well as the public policy arena.”

Hauptman’s Resume

His politics: Currently he works for Senator Tom Cotton (R-Ark.) as the Staff Director for the Economic Policy Subcommittee of the U.S. Senate Committee on Banking, Housing, and Urban Affairs. He was a voting member on the U.S. Securities and Exchange Commission Advisory Committee on Small and Emerging Companies from 2016-2017. He served on President Donald J. Trump’s transition team in 2016.

Previous professional responsibilities: Executive Director of the Main Street Growth Project and Senior Vice President at Jefferies & Co; a bond trader for Lehman Brothers in New York City, Tokyo and Sydney.

Education: A master’s in business administration from Columbia Business School and a Bachelor of Arts from University of California, Los Angeles.

Personality: Insight to his interpersonal style and philosophy can be found in this Public Square Broadcast from 2016 discussing the book Confessions of an Economic Hitman.

Two Takeaways: Questions and a Lesson Repeated

  1. The Questions: Kyle is intelligent, a free market proponent and familiar with the Wall Street financial world. His republican orthodoxy includes low taxes, skepticism of government, and strong belief in the role of the free market.

He appears to have no experience with cooperatives or credit unions. An important purpose of cooperative design is as an antidote to market shortcomings.  How will his market orthodoxy align with credit unions’ unique role? Will he see them as just another species of financial institution with only a different pedigree? How will his worldly experiences and intellectual skills mesh with NCUA’s bureaucracy? How will he interpret the Board’s “management” responsibility of the Agency as stated in the FCU Act? What does his Main Street slogan “It’s time for Washington to do its job” mean for NCUA?

  1. The Repeated Lesson: At a time of multiple national crises, the trades and credit union system again failed to support a candidate with experiences and knowledge of the industry. The NCUA Board will have another stranger to the history, personalities and institutions that make credit unions who they are. Also lacking is any exposure to NCUA’s multiple institutional responsibilities and its track record, both good and bad, in carrying these out.

At a time when the three Washington DC based trades are sending daily emails about all the hard work they perform representing credit union interests, this appointment is a reminder of how limited their influence is.

The Need to Speak Up

The NCUA Board will still be composed of three persons whose appointments look like filling “jobs for the boys.” It would be refreshing if just once, the NCUA board had an executive who knew something about the industry, believed in its singular role and was committed to seeing it thrive no matter the circumstances. Until credit union people learn to speak up, their “representatives” in DC will continue playing their insider games.

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Do Credit Unions have Enough Capital to Weather Loan Losses from the Current Crisis?

That was the first question the reporter asked. Others followed. Will some fail? Would secondary capital options help?

My Answer and the Data

Yes, the system has adequate capital. Credit unions have total reserves of almost $193 billion and an average net worth ratio over 11%.

In 2019 the industry’s annualized loan losses were .63%. At March 31, 2020, 85% of all loans were secured and first mortgages backed 43% of the portfolio. Unsecured loans were under 10%. The allowance account was 150% of all delinquent loans.

In the Great Recession of 2009, the net loan charge off rate was 1.21%; and in 2010, 1.13%. The market value of homes securing mortgages was a major concern. That is not the case today.

In 2019, the industry’s net loan losses were $6.1 billion. However. credit unions added $6.5 billion to the allowance account and still reported $14.5 billion in net income. Credit unions could see their historical loss rate of .50-.60% grow by three of four times (double the 2009/10 experience) and still be very sound.

Two Capital Sources

Averages provide a macro context, but problems are micro, in individual credit unions. Might individual credit unions have higher than average losses?

A fact of the covid economic shutdown is that the impact on individual households is disparate. According to a Bipartisan Institute Survey, 42 % of households report negative effects on income from the dual crises. For Hispanic households, the result was 60% and for black homes, 54%. Over 59% of single parent households, regardless of race, saw income reduced or were forced to seek unemployment.

Individual credit unions will have differing proportions of members financially impaired. But that is why the cooperative system has two capital sources.

The primary reserves are each firm’s retained earnings. The second is the collective capital in the NCUSIF approaching $17 billion.

Cooperatives’ Collective Capital

Unlike the FDIC fund, the cooperative system’s insurance fund was redesigned in 1984 to be a ready source of capital assistance. This assistance is authorized by Section 208 of the Federal Credit Union Act.

When the FDIC is given a troubled charter by separate supervisory authority, its role is to close the institution by liquidation or sale. Providing FDIC assistance is considered inappropriate because of public policy concerns about the use of “public money” to restore private wealth.

Credit unions create common wealth. Their reserves are the collective savings of all the members. Members in turn send 1 cent of every share in a credit union to the NCUSIF to comply with the 1% deposit requirement.

These collective reserves, updated semi-annually, are always fully available to assist individual credit unions. In the premium model, funds must come from expenses charged to the insured banks.

NCUSIF assistance in the form of cash, subordinated debt or guarantees has been used since the fund’s founding in 1971. These actions not only minimize losses, but most importantly enable familiar service to members who may be caught in the same economic circumstances as their credit union.

Capital Is Not the Issue

The dollars of capital or the level of net worth is not the primary issue for the coop system. Important yes; but more critical is how the reserves are used by credit unions and NCUA. Is it just to expense away troubled credit unions, or to invest to restore sustainable operations?

Cooperative reserves, like all capital, can be underused or misused. In a competitive market system however, capital’s objective is to gain long term returns and create competitive advantage. Liquidation is always the costliest option, both in terms of immediate expense and the elimination of all future income.

Today credit unions are working with millions of members whose financial situation has been disrupted through no fault of their own. Standing alongside members’ transitions can result in years of fervent loyalty. Similarly, the welfare of the whole system is enhanced when credit unions suffering loses, can work to again be sound.

The National Effort to Save Jobs, Assist Consumers , and Support Businesses

Every covid emergency program passed by Congress including the CARES Act with its $600 unemployment weekly increase, $1,200 one-time payments to families earning less than $75,000, the PPP loan program with loan forgiveness, the Federal Reserve purchase of EFT’s with high risk bonds, and its Main Street loans to business are public expenditures intended to prevent corporate and individual financial failure. The goal is to restore the economy and consumers to full activity as quickly as possible.

However, some at NCUA may not have bought into this bipartisan, government-wide effort. Bound by a literal PCA mindset, the NCUSIF’s CFO announced a $60 million addition to loss reserves in the May Board meeting, even though every financial trend presented was in a positive direction.

In April the Inspector General in his semi-annual report to congress confidently predicted: “Given the economic impact of the COVID-19 pandemic, we anticipate an increase in required MLRs in the coming year.” A Material Loss Review is required in every circumstance where the cost of a problem resolution exceeds $25 million.

Chairman Hood has issued policies to give credit unions greater flexibility and time to work through financial downturns. The question is whether these policies will be just press releases or will they change staff behavior

For that to happen, the Chair will need to ensure operational performance. That oversight accountability, not the amount of capital, is the real test for the Agency’s leaders.

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Crossing Red Lines

“We crossed a lot of red lines.” That is how Federal Reserve Chairman Jerome Powell described the host of actions by the central bank responding to the COVID economic shutdown.

Actions included lowering interest rates to near zero, conducting unlimited bond purchases, implementing emergency lending programs to business, state and large city governments.

There are more steps planned, novel in scope and speed. These include the main street credit program to make at-risk loans to medium-sized businesses, buying corporate bonds and the debt of states and large cities.

The purchase of non-investment grade debt held by Exchange Traded funds was perhaps the most controversial. Included in the initial $1.3 billion purchases were bonds issued by Hertz, J.C. Penny, Neiman Marcus and Whiting Petroleum all of which have filed for bankruptcy. The US Treasury has been allocated up to $75 billion to cover potential losses on these non-bank, lending initiatives.

The Opportunity of a Crisis

But THE red line crossed that preceded all of these central bank actions was changing the internal mind set of the Federal bureaucracy. “We don’t do this. Where is the authority? We’ve never done this before. How will it work? What if we fail?”

With over one in four workers laid off, unemployment is expected to exceed 20% for May. Powell justified his innovative approach partly by the fact that the burdens of job loss are falling on those least able to afford it. They are lower paid service workers whose ranks are disproportionately women and minorities.

But changing long standing, institutional economic realities is hard. All governmental leaders find bureaucracies reluctant to move in innovative ways or at the pace of events. The easiest thing is keep doing what you have always done. The result, no real change occurs. The status quo remains.

The opportunities for transformational change can be fleeting. Public moods move quickly. Political and vested interests rise up. New approaches can be lost if not seized “in the moment” as Chairman Powell did.

He courageously decided to “cross all the institutional red lines.” Without taking that risk, the whole recovery momentum would be much more difficult.

NCUA’s Withdrawal from the Cooperative System

This crisis is an opportunity for NCUA to reverse the past decade’s pattern of unilateral, isolated and often self-serving regulatory responses in its relationships with credit unions.

Among all financial institutions, the cooperative model uniquely depends on collaboration. It is not just the basis for initial chartering, but also a singular operational advantage.

All elements of the system have a mutual responsibility for safety and soundness. Since the NCUA’s 2009 takeover of the corporate network followed by liquidation of four of the five largest corporates, it has failed to seek solutions cooperatively with credit unions and in members’ best interests.

The disruptions to financial performance by the crisis should be a turning point in this relationship. No regulatory rule or waiver, or congressional legislation, can “de-risk” the consequences of the financial toxicity caused by the pandemic and national economic shutdown.

The regulatory impulse to get rid of problems through mergers and selling member-owners to someone else when the going gets tough is a slow-moving death spiral for the industry.

Cooperative workouts are not presumed to be fast, especially when relying on retained earnings. They take time – sometimes years. They are messy. Each is unique, personal in the details. They require sweat equity and occasionally, 208/NCUSIF assistance.

The purpose of the 1% NCUSIF redesign was to keep credit unions and the system whole. Since the 2009 crisis NCUA has used the resources of this unique cooperative fund to broker problems away and avoid leadership accountability.

Crossing Red Lines to Avoid Red Ink

Jerome Powell has acted fast to help troubled industries, individual business, states and cities work their way through catastrophic revenue shortfalls and unknowable future trends. To keep the cooperative system whole while transitioning this crisis, NCUA must do the same.

The Board should establish an expectation that no credit union charter should be lost because of the current pandemic. Credit unions who work with their member-owners in this transition should expect no less than 100% support from their regulator.

This is not a legal, but a commonsense judgment. Similar to the Fed, the full range of credit union resources should be available whether this be 208 waivers and/or direct NCUSIF capital contributions.

This is a moment for NCUA to highlight the cooperative model in all its member focused uniqueness. It will require NCUA staff to grasp the opportunity for innovation by working with credit union leaders in the trenches. If that bureaucratic “red line” or mindset can be crossed, then the outcome should be a lot less red ink when this is over.