A Lesson from the Latest FDIC Premium Assessments on Banks

Last Friday the four largest banks in American announced their  4th quarter and full year financial results.

All had one new, significant expense in the 4th quarter.  Here are the numbers from the New York Times article: Biggest Banks Earn Billions, Even after Payments to the FDIC Fund-(January 13, 2024)

Bank                         $ FDIC Payment

JP-Morgan                  $2.9 billion

Bank of America        $2.1 billion

Wells Fargo                 $1.9 billion

Citigroup                     $1.7 billion

These premiums are necessary to cover the costs for the FCIC’s losses on bank failures earlier in 2023.   FDIC’s reported  loss expense through the first three quarters of 2023 was $19.7 billion.

The FDIC is collecting approximately $16.3 billion in this fourth quarter assessment. The four largest banks will pay the $8.6 billion shown above  or 53% of the total.

Premiums comprised more than 81% of the FDIC ‘s total revenue through the first three quarters of 2023.  Interest income from the FDIC’s investments, the other revenue source, would cover FDIC ‘s operating expenses.  But the $600 million excess would not even begin to cover the almost $20 billion in estimated  insurance losses.  (all data is through September 30, 2023).

FDIC Premiums and Insured Deposits Not Connected

There is no relationship between premiums and FDIC’s insurance coverage of $250,00 per account.  Instead premiums are calculated on  a bank’s net assets which is called its “assessment base.”  At September 2023 this was $20.7 trillion versus just $10.7 trillion of insured shares.

FDIC’s revenue is no longer based on its stated goal to protect depositors’ savings but rather the FDIC’s  role in stabilizing  the entire industry’s balance sheet.   When banks succeed, shareholders win.  When banks fail, everybody pays.

FDIC’s Complex Pricing Structure

The FDIC may set the premium at whatever level it deems necessary to achieve its minimum ratio goal of 1.35%.  The fund recorded an approximately $10 billion operating loss through the September quarter putting the ratio  at just 1.13%.    The $17 billion new assessment is needed cover this shortfall and grow the fund’s ratio target.

Moreover premium rates can vary from 2.5 to 42 basis points  depending on bank size, that is whether an institution is more or less than $10 billion in assets. The final rate is based on each bank’s CAMELS rating plus, for larger firms, a scorecard which measures  “complexity.”

The assessment rates are so complicated  that the FDIC  posts three different calculators for banks to determine what amount they must pay.

This premium system provides virtually no check and balance on pricing, except the rule making process.  It is frequently “updated” and always open- ended in amount. There is no incentive or check and balance on FDIC effectiveness in its oversight or problem solving roles.  Banks must bear the costs not only from institutional failures but also from FDIC’s supervisory effectiveness, good and bad.

The Cooperative Alternative in the NCUSIF

By comparison the NCUSIF is simple to understand, administer and monitor.  Statements are posted monthly.  Public board  updates on investment returns and overall financial trends are presented at least quarterly so credit unions can track their cooperatively designed fund.

The 1% deposit underwriting means premiums are extremely rare, assessed only four times in 40 years since the 1984 redesign went in effect.   Dividends have been paid out over a dozen times.

When the 1% deposits totals are added to the retained earnings, the investment portfolio remains relative in size to the insured risk at all times.  Investment income has proven adequate to  meet all of the fund’s operating expenses and sustain a stable operating level between 1.2 and 1.3% of insured savings.  Based on the latest November NCUSIF financial report the fund’s equity should be at or above the long-time upper cap of  1.3% at yearend 2023.

With NCUSIF equity at the high end of the .2-.3 range, it means there is over $1.7 billion in additional  reserve for any contingency.  In the October NCUSIF update the CFO reported the five-year loss average since 2017 was only .1 of 1 basis point.  The net actual cash loss so far in 2023  was just $1.0 million in the same update.

With over 40 years of data from all economic cycles, financial crisis and evolving credit union business models, there are decades of real data to validate the NCUSIF’s financial design.  This record shows that to maintain a stable NOL a yield  on investments of 2.5-3.0% would sustain the fund through virtually any growth or economic cycle and any operating contingency.

This historical 1.3 % cap is due for Board review in February based on 2023 yearend earnings.   This decision is an important commitment  of  NCUA  to the credit unions who  underwrite the fund.   Unlike the FDIC’s premium dependency, the NCUSIF’s investment portfolio return has proven to be a reliable,  predictable and sufficient model-in all environments.

Therefore, when net income exceeds the NOL cap, the credit unions are paid a dividend on the excess income recognizing their overall sound performance.  This return is a critical element of the cooperative design.

The FDIC’s premium model is unpredictable, subjective and arbitrary,  and most importantly unrelated to the actual insurance coverage per account.

Why the NCUSIF Design Works

The credit union model is based on the historical operational and cooperative  values on which credit unions are founded.  All participants are treated equally.  Risk and expenses are shared alike for all.  It is democratic and accountable in its structure.

The redesign was accomplished with industry-wide  collaboration and participation.  It required congressional approval. It was based on the oldest of cooperative concepts: self-help.  No government assistance or funding was sought or necessary.

Instead the credit unions put themselves in the law as the underwriters of the fund’s resilience, no matter the circumstance.  This is how they intend to maintain their independence as a separate financial system.  For example the S&L’s were merged with the banks and the FDIC when their system collapsed.   Unlike the for-profit, stockholder owned banking system, the moral hazard examples of excessive risk taking by management are extremely rare in the cooperative model.

Understanding NCUSIF’s unique history and design and why it fits credit unions so well is especially important whenever a new board member comes to NCUA.  It will be especially critical Tanya Otsuka be informed of NCUSIF’s special character and long term performance, as much of her professional background is within the FDIC.

The February NOL setting will be the first of many opportunities she will have to show her understanding of the differences between bank and credit union regulation.  Credit unions should be communicating that distinction now.





Credit Union Shareholders Receive $16 Million; NCUA Receives Judge’s Reckoning

Yesterday the Dakota Credit Union Association announced that NCUA had agreed to pay more than $11.9 million to the former credit union members of Midwest Corporate Credit Union.  Their pro rata share of US Central’s capital, along with a similar recovery by Iowa credit unions, will bring the total payments to over $16 million.

This outcome culminates efforts commenced in 2021 by the two Leagues and their members.  Ultimately legal suits were filed when NCUA rejected the credit unions’ repeated recovery efforts.

In his October 2023 ruling the Chief Judge of the US District Court District hearing the case wrote: “simple logic and hornbook property law support construing the FCUA as including automatic transfer of assets.  In general, assets do not simply evaporate when the owner is unable to collect; rather the property must go somewhere.

Consequently, a credit union’s asset likewise do not cease to exist come the last day of a wind-up.  Instead, the most logical conclusion is that the assets vest in the credit union’s shareholders.”

A Three-Year Bureaucratic Slog

According to an August 29, 2022 statement by the Dakota League challenging NCUA “To Do the Right Thing”, the Agency had actually been ready to release checks in 2021. NCUA changed its mind when informed that the (federally chartered) corporate had been voluntarily liquidated years earlier.

North Dakota’s two Senators wrote NCUA Chair Harper concerning the nonpayment. He replied on September 2, 2022 that “After careful review and legal consideration, the liquidation agent determined that because Midwest no longer exists no distribution can be made to Midwest or its former shareholders.”

The League tried the administrative claims process. Again NCUA denied the request.   President Olson’s response to this final effort in February 2023 showed his frustration: “This is a clear case of obstruction through bureaucratic hurdles and complicated language where the process is the punishment, and does not provide justice.”

The North Dakota League filed its lawsuit in April 2023.  This was followed in June when 63 of Iowa’s 75 credit unions sued the NCUA for $4.2 million to recover their U.S. Central claims. Joining in the lawsuit was the Iowa Credit Union League, its foundation, political action committee and an employee benefits company.

A Lesson in Bureaucratic Obstinacy and Blindness

These years long efforts included all three branches of government.  The Dakota league attempted to play NCUA’s administrative game in which it learned that “the process was the punishment.” It requested and received support from North Dakota’s  two senators.  Chairman Harper stonewalled the appeal from the legislature.

The last remedy was the judiciary. The judge explicitly rejected NCUA’s logic.  “The fund’s vest in the credit union’s shareholders.”

It is not a comforting example of regulatory judgment when common sense or “doing the right thing” apparently had little role in NCUA’s decision.  When dozens of staff lawyers and three “independent” board members see only one position, this raises concerns about the agency’s deliberative processes and/or the competency of the advice being given.

CooperatIve Action in the Members’ Interest

The good news is that cooperative efforts, especially at the league level, persistence and advocacy did prevail.  It is hard for an individual credit union to counter an NCUA position.  Collective action is a credit union advantage even in regulatory judgments.

The credit union shareholders, the members of Midwest and Iowa corporate, have received their just due.  And that standard, what is in the members’ best interest, should  be the determining one.

Thank you to the cooperative leaders in these two states that stood by their members.

(Editor’s Note:  I first wrote about the situation in February 2023, urging NCUA to do the right thing.






January 1985: An Historic Turning Point for Credit Unions

For forty years, the NCUSIF has maintained  not only its own financial integrity but more importantly, the trust and confidence of the credit union system’s members. This record of stability began in 1985 and continues unabated through 2023.

Over the same four decades the FSLIC, the separate S&L fund, failed and merged into the FDIC.  The FDIC has had negative net equity on several occasions requiring an explicit government guarantee.  It has constantly modified  its premium model to accommodate numerous industry crisis.  These  include multiple premium levels, risk based pricing, an expanded assessment base for premiums, differential pricing according to institution size and other financial or accounting maneuvers. It’s equity to insured deposits has fluctuated from negative to 1.1% at June 30, 2023.

During this same period of national economic and interest rate cycles, the NCUSIF’s unique cooperative design allowed it to remain strong. The fund’s yearend equity level  of 1.2-1.3% of insured shares has always been met.  Premiums have been necessary only four times in this four decades.

“D” For Deposit Day

This fundamental  redesign was a two-year industry wide effort.

This priority came to fruition in January 1985 when the first 1% credit union deposit underwritings for the new insurance model were delivered to NCUA.  The event was pictured in NCUA’s 1985 Annual Report (pg 21):

(caption:  NCUA Staff Member Wayne Robb accepts a hand-delivered capitalization deposit in the unheated Washington lobby of the NCUA.)

The Chicago Tribune described this historic change in an article later that year:

“The solitary messenger clutched a plain brown envelope as he picked his way carefully across a deserted, icy sidewalk near the White House.  In- side was a check for $13 million.

“It was inauguration Day, 1985, a morning most memorable for the raw cold that forced cancellation of a parade and drove President Reagan inside to take his second oath of office.

“But for the messenger, and for the trio huddled around an electric space heater waiting for the check, it was also the deadline for credit unions to deliver payments to the new-look federal insurance fund that backs the deposits of 51 million credit union members.

“The $13 million check, the largest single payment, was from the huge Navy Federal Credit Union in Washington.

“The little-noticed transaction–one of more than 7,000 totaling $480 million that frosty January weekend–illustrates how the nation’s 15,000 federally insured credit unions have quietly put their house in order.

“Edgar  F. Callahan Chairman of the National Credit Union Administration said credit union’s willingness to embrace a new approach to shoring up their insurance fund was just one example of how the industry has recovered from the hard times of 1981.  

The challenge for his successor, Callahan said, is to keep Congress and other policy-makers aware that credit unions are unique.

“You’re in an industry this often grouped with banks and S&L’s and there’s a tendency to get painted with the same brush,” he said.  

“There is a danger to getting sucked into that atmosphere.  My successor will need to maintain that credit unions have been ahead of the problem curve and need not be grouped with other financial institutions.”

The Workup for Change

The NCUSIF was created in 1970, with no government-provided startup capital.  The Fund’s design mimicked the premium base of both the FDIC and FSLIC each which had a 35-year head start accumulating retained earnings.  But from 1979 onward the premium approach, even with doubling assessments,  did not prevent the Fund’s equity ratio from decline.

In April 1983 the NCUA presented a Report to Congress on the Credit Union Insurance Fund.  The Report was over 130 pages in seven chapters responding to specific Congressional questions and making four recommendations:

  1. All credit unions, federal or state, should have a choice of insurer;
  2. Capitalize the NCUSIF with a 1% deposit of insured shares;
  3. Authorized at least one uninsured share per member as capital;
  4. Keep the  insurance fund independent from FDIC/FSLIC due to the unique nature and role of credit unions.

The Report included direct quotes from leagues, private cooperative insurers, credit unions along with a history of credit union stabilization options prior to NCUA insurance.

Following the publication of this Report, NCUA and credit unions working in partnership developed an alternative to the traditional premium model describing it as, A Better Way.  It drew upon the two decade experiences of private insurer alternatives.  It rested on the fundamental cooperative concept that members should own their own fund.

The financial logic and analysis was summarized in a video sent to all credit unions and interested parties on the NCUA’s Video Network.  The following is an excerpt from this longer analysis,  A Better Way:


This redesign was achieved by challenging long time conventional governmental practice.  The alternative was drawn from cooperative experience and principles.

Trust in the Fund was not due to more regulation or open ended premium assessments.  It was constructed on mutual commitments including frequent and audited financial transparency, accountability for expenses and legislative guardrails.

This capacity to “imagine differently” resulted from collaboration and open communication at every step.  The historical financial analysis (above) and future forecasts were public, for all to review and refine.

The effort was not a sudden epiphany. Rather it resulted from hard work, shared viewpoints, a desire to create something better and courage to change.

The First Year’s Bottom Line

At the end of fiscal 1985, the fund held $883 million in 1% deposits.  Earlier in the year each credit union received a pro-rata equity distribution (in excess of the Fund’s .3% equity) of $80 million to meet the January 1% funding obligation followed by a $30 million cash dividend at yearend.

This 12.5% return on the 1% capital deposits was on top of fact that this was the first year since the Fund opened in 1970 that no premium was charged. (page 5, 1985 NCUSIF Annual Report)

In future blogs I will present how the fund  navigated specific economic and industry challenges.

Continued success does not rest on design alone.  Credit unions must also exercise continuous oversight of NCUA’s vital  responsibilities for fund management and supervisory oversight.


The “Goldilocks” Interest Rate Curve

Yesterday the treasury market closed at these yields for the maturities listed:

Yield           Maturity

5.50%        Overnight

5.55%         One month

5.46%        Three month

5.24%        Six month

4,80%        One Year

4.33%        Two Year

3.95%       Ten year

This inverted yield curve, where short term rates exceed long term, can be an ideal time for asset management.

This is because return and liquidity are both optimized by staying short.   If an asset or investment  manager is matching with specific liabilities, the prospect of a duration gap between asset and liabilities can be minimized.

This is a Goldilocks ALM environment where return and liquidity are both optimized.   By going long now, an investment manager will have a lower return versus staying short.  That might seem like a surefire market bet as Chairman Powell has forecast several  rate reductions this year.   That is until inflation possibly comes back, and further reductions put on hold.

The Credit Union Opportunity

An additional advantage, besides reducing ALM mismatches,  is that it allows balance sheet management to remain agile.   Shorter maturities provide more opportunities to respond to market and/or liability changes.

A prime example is NCUA’s management of the $22 billion NCUSIF investment portfolio.  The fund continued its 7 year ladder as rates went to near zero in 2019-2021.   When the market turned, the entire portfolio was underwater, burdened with an average duration of almost three years.

Through October 2023, the year-to-date return on the Fund is 1.92% and the portfolio reports a $1.7 billion unrealized loss.

When looking at historical trends, a yield on the NCUSIF portfolio of just 2.5% would result in a breakeven, that is stable, equity ratio in almost all years.

Recognizing this liability target for asset returns, makes NCUSIF investment decisions easy in this rate environment.  By moving from overnight to maturities up to two years, the yields would be more than sufficient income to maintain the Fund’s equity ratio at or above 1.3% for any scenario.

Many investment managers were surprised by the Fed’s rate reversal to counter inflation.  Today’s interest rates provides a rare moment for stabilizing both liquidity and return for credit union portfolios and the NCUSIF.







Today’s Vital NCUA Board Meeting-Will it Be Productive for Credit Unions?

December’s NCUA board meeting will set the spending budget for 2024.  What will be the guiding star in the voting, to borrow words from yesterday’s post We Three Kings?

Is the guiding star one that illuminates the unique design and resilience of cooperatives? Or will it enhance bureaucrat resources as the number of credit unions falls to its lowest level since before the passage of the 1934 FCU Act?

Rodney Hood’s Credit Union Service

Hood has served as an NCUA board member during three tumultuous financial decades.  The first (November 2005-August 2009) saw the Great Financial crisis unfold.  The second  from April 2019 included the Covid national economic shutdown and the highest inflation since the 1980’s.

This meeting may be his final one as his current term ended in August. His two tenures over 18 years provide a unique perspective on the board. He brings a shared history of an important era for the cooperative system. 

We can only understand and celebrate the present when we appreciate how it came to be.  In the words of historian David McCullough, “history is who we are and why we are the way we are.”

Hood’s Focus as a Board Member

Relevant for today’s meeting is his support for the long time, traditional NOL cap on the NCUSIF of 1.3%, full transparency for all financial calculations including reserves, and most urgently, a more meaningful presentation of the fund’s equity ratio using current data in both the numerator (the 1% deposit) and denominator (insured risk.)

As chairman he oversaw the only year in NCUA history since 1984 that recorded an actual fall in NCUA’s expenditures. He has supported returning to credit unions the increasing surplus cash built up in the Operating Fund.

Another example of his expense focus is that his office is  the only one of over 25 NCUA budgets to request a lower amount in 2024, by 1.8%, versus the current spending level.  NCUA’s  2024 overall operating budget projects an 11% growth.

An Honorable Gentleman

The first time I met Rodney was at a credit union meeting in New York during the emerging financial crisis.   He was and still is a true gentle man, unfailingly polite and easy to talk to.

His manner at NCUA board meetings is always respectful.  Even when staff’s answers to his questions might be non-responsive, he never publicly challenged the presenter.

In his voting, he rarely dissents even when he disagrees with the motion or policy.  He would explain his vote as either deference to the Chairman’s role or to promote bipartisanship.  These acts of corporate courtesy were not the practice when he was chair.

As a board member in 2008 he approved an NCUSIF dividend when the NOL exceeded 1.3%.  That was the last time a dividend was paid.  This is a legal commitment intended to reward credit union’s perpetual 1% deposit underwriting. Last year he succeeded in urging the board to reduce the cash stockpile in the operating fund by giving credit on the FCU operating fee for 2023.

His approach to budgeting and board decisions to set meaningful agency  guardrails reflects the experience and wisdom of his years of credit union service.

Should this be his last official board meeting, his perspective  will be missed.  As Pearl Buck’s observed “if you want to understand today you have to know yesterday.”

In recent Board meetings, Rodney has tried to raise important issues and seek meaningful data. What might he propose today to recognize credit union’s exceptional performance this year?  Tune in at NCUA.gov at 10:00.

The Question in The Three Ships Carol

To recognize the pivotal nature of today’s many board votes, I believe the lyrics of the carol I Saw Three Ships are most relevant.

Here are some pertinent stanzas:

I saw three ships come sailing in
On Christmas Day, on Christmas Day
I saw three ships come sailing in
On Christmas Day in the morning

And what was in those ships all three
On Christmas Day, on Christmas Day?
And what was in those ships all three
On Christmas Day in the morning?



The Three Kings

Tomorrow is the last NCUA open board meeting this year.  And possibly Rodney Hood’s final one.

This is the most important Board event as it sets the spending limits for the agency all of whose funding is from credit unions.

The key question is whether the public will learn anything about the board’s ability to limit the staff’s desire for ever more spending?  Has all the deal making been completed and the questions and answers fully scripted out, or will real board dialogue actually occur?

The meeting is critical because decisions are made about the NCUSIF’s normal operating level (NOL), the overhead transfer rate(OTR), and how the agency will be funding itself from FCU’s operating fee.  Each of these directly affects credit union’s funding.

Budget Questions for 2024

Some of the issues that might be asked include the following;

  • Why does the “missions support” functions in the 19 DC offices need a 17.4% and 19 person staff increase, whereas the examination and field staff, the front line workers, gain only a 5% and 9 person increase?  Where does the real work of supervision take place?
  • How is it that the highest paid staff in the nineteen DC offices are those in the 8-person Chief Economist with annual compensation of $329,000 each ?
  • Are two completely separate legal offices needed, one the 46-person general counsel’s office and the second the 8-person staff for business ethics?
  • Numerous other personnel additions would benefit from more information such as  in the ombudsman, CURE or OCEO offices.
  • An explanation of why every office seems to require “contracted services” such as $44.5 million being spent by the Information Office, an increase of $3.5 million (8.6%). Is the agency in that much need of PR?   What firms are benefitting from this largess?
  • There are three different offices serving the Chairman: his office, the office of the Board and a newly established office of the Executive Secretary with a staff of two but then increasing in the out years.  Why is the new office needed given all the other support in place?
  • Why are key  units left out of the pubic budget package, that is the details of the CLF’s ever expanding spending and the separate NCUSIF direct charges?

The Role of Democratic Debate

The composition of the board where only two may be of the same party, is intended to encourage discussion and the airing of different approaches to policy and oversight.  This has not occurred with the current board.  Bipartisanship, or deferring to the chair, is used to explain the lack of meaningful dialogue or alternative positions being put forward.

But debate is what makes democracy work well.  Without a loyal opposition, the understanding of important options is lacking.

Gold, Frankincense and Myrrh

From wikipedia: “We Three Kings“is a Christmas carol that was written by John Henry Hopkins Jr. in 1857. At the time of composing the carol, Hopkins served as the rector of Christ Episcopal Church in Williamsport, Pennsylvania, and he wrote the carol for a Christmas pageant in New York City. It was the first widely popular Christmas carol written in America.”




A Special Time of Year

Ed Callahan as both Director of the DFI in Illinois and as Chair of NCUA, had a post-Thanksgiving practice to recognize the December holiday spirit.  He would find a local radio station that  played holiday music as its full time programming through Christmas.  In  Washington the classical FM stations used to follow this practice.

He kept the volume low, but still  enough to acknowledge the special spirit and joy this time of year can bring.

But work does not go away.   December is the month that the NCUA board will make very consequential decisions on the amount of credit union funds it proposes to spend.

The budget agenda includes how much is spent, the normal operating level (NOL) for the insurance fund, the Overhead Transfer Rate (OTR) taken from the NCUSIF,  and how the full year financials for  three credit union funded operations were managed.

December’s posts will imitate Ed’s practice by presenting music of the season.   At the same time, I will preview some of the data and issues for NCUA’s upcoming budget approvals, along with other observations.

This is a season of joy and beauty, sometimes beyond our understanding.  But amid these moments of glory the real world events  of power used and misused continue.

Angels We Have Heard on High

This French Christmas hymn was translated by James Chadwick and is performed by a traditional choir.


NCUA’s Budget Creep: Growing from a Specialist to an 8-Person Office

On February 10, 2020 NCUA ‘s IG published an investigation  titled Misuse of Official Time, Illegal Drug Use, Time and Attendance Fraud.

In a March 9, 2020 post, I wrote of the personal indiscretions by Michael McKenna, NCUA General Counsel (July 2011 to November 2019) and his Deputy General Counsel Lara Daly-Sims.

The IG report detailed strip club visits and drinking while on the job from February 2017 through the beginning of the investigation in November 2019.  The General Counsel is the Agency’s senior legal officer providing interpretations and support directly to the NCUA Board and Chair.

Besides replacing the Agency’s two top lawyers, what else did the Board do about this high level leadership failure?   On April 22, 2020 NCUA announced that in a March closed meeting the Board decided to hire a “chief ethics counsel.”

Supervised by the chairman, the press release stated: “The Office of Ethics Counsel will certify the agency’s compliance with relevant federal ethics laws and regulations, promote accountability and ethical conduct, and help ensure the success of the NCUA’s ethics programs.” This responsibility had been under the General Counsel’s office.

This personnel performance failure was resolved by expanding staff, a classic bureaucratic response to a problem. This new position was necessary to inform three board members, their personal policy advisors, senior staff including the executive director and deputy, the general counsel and deputy, and the human resources office the difference between right and wrong behavior!

The real problem was actually a failure of administrative oversight, not understanding morality.  The hiring was a political act to divert responsibility from all the senior staff who worked closely with these people during the episodes described in the IG’s investigation.

But is there any downside for another pair of eyes reviewing the agency’s personnel actions.  There is. It quickly became much more than one pair of eyes.

The 2024 NCUA budget increases the Office of Ethics Counsel to 8 full time staff with an average salary of $293,000 each.  This 15.2%  increase pushes the total 2024  expenditures to $2.449 million.

Some believe that problems are solved by government  spending more.  In this episode of personal indiscretions, the solution has grown from a “chief ethics counsel” to a separate, new legal department of  8 full time employees.

This is the pattern across NCUA’s ever expanding budgets for 20 separate “Offices” and three regions.

Harper and Hood both approved this solution (McWaters was replaced by Hauptman).   Is now the time to assess this ever-growing cost to determine whether there are more efficient ways to address the Agency’s ethical climate?

If safety and soundness is the Agency’s primary purpose how does an 8-person Ethics Office contribute?  These positions are in addition to the 44- person legal department and 47 employed in human resources.  Are ethics of the NCUA staff really that big a problem?




Abundance and Gratitude

The initial Thanksgiving story celebrates abundance.  The timing still coincides with the regular rhythms of bountiful harvests which have filled farmer’s storage elevators to capacity.

Times are good. The American economy grew the fastest of any major country in the third quarter.  Unemployment remains at historical lows and inflation is sinking.  Job openings still exceed available workers.

This harvest holiday combines services of Thanksgiving with opportunities to share  with those in need in our communities.  Locally, families who may participate in an early morning turkey trot race can then go to a food kitchen to serve others  in the afternoon.

It is important for our future together as Americans to see our society from a perspective of abundance, rather than an economy of scarcity.  Even when our consumer driven culture constantly tells  us we need more.

Perspective Matters

Abundance does not mean prosperity is equally or equitably shared.  But without a sense of our own well being, serving others easily becomes secondary.

Recently Callahans Trend Watch presented a 60+ set of data slides with commentary on the state of credit unions as of the third quarter.

The message repeated throughout was that the industry is sound and that trends are normalizing from the exaggerated levels due to COVID.

However not all listeners had the same interpretation.  The headline in one credit union report about the call was Callahan Shows Sharp Drop in Q3 Earnings for Credit Unions.   This news story of the one hour briefing included multiple use of the words down, fell or fell sharply, far below and lower.  The overall tone was one of angst:

Credit union’s loan balances grew. . . but the growth rate was down. . . One way credit unions have coped with tighter liquidity is through borrowing, which has tripled in the past two years. It still accounts for a small portion of assets, but that portion is growing.

This was  the opposite interpretation the presenters gave.  Here are some of the headlines from the data slides:

The loan to share ratio is returning to prepandemic highs

Credit union market share is growing in key areas

Share draft account penetration climbs steadily

Quarterly loan originations are on a par with previous levels

Repricing drives record increasing total revenue

Capital ratios improve from slower asset growth

Operational efficiency improves. . . etc.

“Never Enough”

There is a belief created by America’s market driven, consumer led economy that one can never have enough.  Consumerism in its extreme forms becomes an addiction where spending becomes a way to cope with all of life’s shortcomings.

It unfortunately  appears to be the logic of NCUA as it prepares its budgets for its role with credit unions.  In the NCUSIF board  update dialogue last week, the fact that the actual losses are less than $1.0 million, fund reserves at a level of four to five times the last five years actual total losses, made no difference.   Board members observed the CAMELS trends are negative and Black Swan events could be just around the corner.

The NCUA’s budget for the next two years shows increases of double digit spending.  It is driven by the belief that there are never enough resources even with a declining number of charters.  Spending, like consumerism, becomes an addiction not a response to reality.

A Story of Gratitude

How does one respond in a society whose marketplace messages are constant efforts to make one dissatisfied with their current situation, whether personal or with an organization’s future outcomes?

In February 1982 my family and I moved to Bethesda, MD from Illinois to serve at NCUA alongside Bucky Sebastian and Ed Callahan.

At that time one of Bethesda’s local residents was called the “bag lady.”  She walked pushing her shopping cart filled with plastic grocery bags, cardboard and  personal possessions throughout the downtown area.

When the weather was cold, raining or she just need to stay indoors for a night, she would somehow find a way into a church, right next to her downtown journeys.

Our family could walk to this local Bethesda Presbyterian church, where I sang in the choir on Sundays.  The bag lady’s frequent overnight visits were a topic of conversation about the church’s security.  The questions was, how did she always find another way to get in?  Weren’t we locking all the doors?

One Sunday morning as I came early for choir rehearsal, the minister was in the sanctuary placing the offering plates on the alter for the service.  I noticed as he put the top plate to one side of the cross he took something out and put it in his suit coat pocket.  I asked. “Oh did somebody forget to take the offering?”

I will never forget his response:  “No, that’s just the bag lady.  Every time she stays here she puts something in the offering plate. She has left hairpins, political campaign pins and even clothing buttons.”

This lady had little to none of the world’s possessions. However she still had one of the greatest gifts anyone can ever receive: gratitude.

When we celebrate the varied and numerous  blessings which we all enjoy, may we experience the gratefulness this person knew and shared.


Wisdom: On Regulation


Share Insurance & Regulatory Choice

“The fact that there is an insurance option-private insurance for state-chartered credit unions-assures that the NCUSIF will be different from the premium based FDIC fund, that it will be funded with deposits from credit unions, and can be counted as an asset on the books of credit unions.  The fact that there is an insurance option guarantees there will be a charter option, and thus a regulatory option.

This is to the good for everyone.  A single regulator is sooner or later bound to become a lazy or an arrogant regulator.  The best ideas will not bubble up; the regulated will not flourish to their maximum potential.  But with two regulatory options, competition is going to allow the best ideas to come to the fore and allow the dynamic credit unions to expand.”  (pgs 46-47)


Note: From the Coach’s Playbook,  a collection of  Ed Callahan’s observations.  These are a summary of operating values for the credit union system. Ed began his professional career as a high school math teacher and football coach.  His thirty years in credit unions included Chairman of NCUA (1981-1985), co-founder of Callahan & Associates, and CEO of Patelco from 1987 through 2002.

Government and Investment Portfolio Management

In a Marketplace analysis yesterday, the daily financial update reported how the Federal Reserve’s management of its multi-trillion dollar portfolio can reduce or increase the government’s overall operating deficit.

As reported, for the last 15 years the Fed’s been making about $100 billion a year a profit sent right to the Treasury which, as revenue, reduces the federal deficit.

The “profit” comes from the net spread between what the Fed earns on the trillions of  bonds and mortgage-backed securities that it began purchasing during the financial crisis of 2008 under the policy of “quantitative easing.”

This macro economic policy continued and expanded during the Covid shutdown.   The cost to carry these interest earning assets in the Covid era was near zero.  The majority of funding was from the excess reserves banks kept with the Fed which was paying less than 1%.

Today that spread is upside down as the cost of funds has risen to nearly 5.5% on overnights.  Rates on the portfolio are mostly fixed and at much lower yields as securities were purchased in a much different part of the interest rate cycle. Interest expense is now greater than interest income with the result that “the Fed has lost on the order of $100 billion since last fall,”

Here are the Fed’s total balance sheet holdings as of October 18, 2023 showing almost $8 trillion in total assets.  Tables show that the majority of assets have maturities beyond ten years.

When the Fed has a loss, it files the loss away until it can pay it back once it’s making a profit again. This year’s “loss” will equal about 5% of the total government deficit.  So instead of lowering the shortfall as in prior years, it adds to it.

The NCUSIF Analogy

The largest asset managed by the NCUA is the NCUSIF’s $22 billion investment portfolio.  As of August 30, $4 billion was invested overnight with a yield of 5.4%.  The remaining $18 billion was invested in maturities as long as seven years with a combined yield of 1.4%.

At month end the portfolio’s market value was $1.5 billion less than book.  As short term investments become a greater portion of the total, the duration has declined slightly to 2.64 years.  This is the approximate time that it would take the cash flows from the maturing investments to be at  market–should the current yield environment become the new “normal.”

If the NCUSIF’s portfolio yield were 5% or greater, the fund’s total revenue would exceed $1 billion. This would result in dividends to the fund’s credit union owners. When the portfolio is below market for an extended period this shortfall comes out of credit unions’ pockets.

Time for Credit Unions to Be Alert

It will be critical for credit unions to monitor the monthly updates of the fund. The Agency’s upcoming investment decisions are critical. Its interest rate risk management and duration will  have a critical impact on the Fund’s future.  This includes total revenue, its financial soundness and credit unions’ bottom lines.