Category: NCUSIF

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The Harm from an Absence of a Cooperative Policy Framework (Part II of II)

Yesterday (August 29) a press release from the North Dakota Credit Union League described NCUA’s turning a deaf ear to their request for their credit union members’ $10 million pro rata share of US Central’s AME surplus.

The final total may actually exceed $12.7 million based on NCUA’s March 2022 AME projected US Central distributions.

The NCUA’s Claim receipt states:  Upon final liquidation of the USC liquidation estate, this claim receipt will enable you to share  in the net proceeds, if any, to the extent of your PIC and MCA balances as of the record date.  No further action is required on your part to file or activate a liquidation claim.

The Dakota League’s title says it all: Time for NCUA to Do the Right Thing.  Its release points out Iowa credit unions are in the same situation. One might also ask how are all the corporate member shares of credit unions who were merged before AME payouts began being distributed? (example, Constitution Corporate)

Moreover, all credit unions  are still waiting for an update on the remaining $451 million of the reported $846 AME surpluses as of March 31, 2022.

These are just the most recent examples in which NCUA seems indifferent to its responsibilities to put credit unions and their members’ interests first.  This “me-first” approach is not lost on credit unions’ own activities.

Members’ Best Interests No Longer?

Lacking a cooperative policy framework, NCUA claims it is powerless when obvious conflicts of interest and direct subordination of fiduciary responsibilities by boards occur.   The members’ best interests becomes a forgotten standard.

For example, consultants overtly market “change of control” clauses for CEO’ contracts, a perverse interpretation of its real intent since coop CEO’s are the ones who initiate their own mergers.  The most recent example is a $750,000 payment in the merger of Global Credit Union. CEO contracts are a board responsibility.

A CEO and chair transferred $10 million of member equity to a private foundation they alone created upon merging.  The foundation is to be financed by another $2.5 million from the ongoing credit union-a clear conflict of interest. NCUA routinely approved this diversion of members’ equity to private party’s control.

Without a cooperative policy framework, the NCUA’s only test of a credit union’s sustainability is financial.  This is the “safety and soundness” mantra.

That standard is similar to saying that a person’s character and contribution is measured solely by their wealth. That is the value-agnostic success criteria that animates much of the capitalist system.

This policy vacuum undermines the unique advantages of the cooperative model and its long term safety and soundness.  Members become customers with profitability profiles.   A credit union’s resilience is nothing more than a quarterly tracking of net worth trends.

Soundness requires continual investments in members’ best interest, not merely fulfilling management’s personal ambitions.  A regulatory framework for cooperatives should be a collaborative effort.  It is not an NCUA internal task responsibility alone, like a budget, to be put out for comment.

Policy  would address current operational  issues that threaten the system’s character and integrity.  It will entail provocative conservations about current topics such as:

  • mergers of sound credit unions
  • the regulatory hurdles and lack of new charters
  • the suppression of members’ ability to vote for directors
  • the absence of member transparency on consequential decisions such as buying banks or adding ten-year debt/capital notes
  • reducing real regulatory burdens and enhancing NCUA transparency
  • the roles of CLF and NCUSIF-distinctly cooperative institutions reliant on credit union funding.
  • Increasing required disclosures for all credit unions including salaries for all federal credit union’s senior executives as is now required for state charters.

One outcome might even be a cooperative scorecard which would assess each credit union’s use of their charter’s unique abilities.

Not Perfection, but Setting Directions

A policy framework does not mean all the resulting regulatory judgments or approvals will be  uniform.   A regulatory framework should encourage better decisions  supported by objective data as well as the cooperative and legal documented processes of fiduciary oversight and care.  Conflicts of interest should be called out.

Experience suggests policy outcomes may be like the biblical parable of “weeds and wheat” grown together. That’s a risk but less so than the “anything goes” practices today.

Credit unions are and always will be a combination of good intentions and variable performance. They are run by human beings. Not all choices will be perfect. This mixed bag is the reality of freedom.

Both credit union leaders and regulators make mistakes. It is acknowledging when that happens.  Then  learning from the event, not defending the errors.

This mixed reality doesn’t mean regulators and credit unions can avoid the diligence and accountability that should characterize credit union decisions.  It’s not okay for self-interest to be the dominant standard for an action.

All are free to make mistakes and sometimes fail, but that does not mean there are no standards to be followed.

Cooperative assessments are important for another reason.  Credit unions, unlike their competitors, are not subject to the market’s daily judgments of management’s actions.   Coops lack bank’s  external check and balance on institutional performance whether through daily stock price fluctuations or the oversight of private ownership interests.

If cooperative standards are not part of the movement’s culture, then credit unions will tend to become just another financial option increasingly indistinct in a crowded marketplace. This will lead Congress to ask why this system should retain the tax exemption that would appear to be their only defining advantage.

The cooperative framework should enhance the never-ending task of credit unions becoming better cooperatives.  Nobody is perfect.  But reducing regulatory oversight to a standard that says  7% versus 14% net worth is better at meeting members’ needs is shallow and unhelpful.

Developing a Cooperative Policy Framework

In 1984 the credit union system redesigned its share insurance fund following 18 months of study, comment, and public dialogue about future options.  The recommended changes then required congressional approval.

This success was the product of extensive collaboration and interaction at every  level of the credit union system.  This effort was described in this brief introduction of NCUA’s implementation video by then chairman, Ed Callahan:

(https://www.youtube.com/watch?v=YjD0y6WRzOo)

A cooperative policy process should be collaborative, transparent and yes, controversial.  It should be democratic, public  and seek consensus on shared interests. Policy must encourage credit unions as communities of possibilities, not conformity.

An Alternative Path?

Without this policy framework, continuing examples of a “race to the bottom” business practices may put all credit unions on a path similar to the S&L industry with no turning back.

That does not mean credit unions (taxed or not) will disappear.   But it does suggest their separate regulatory apparatus will be absorbed by the FDIC, OCC and the FED. This is where the 602 institutions and $1.5 trillion savings industry is now regulated.

Why have a separate NCUA cooperative regulatory system if all it does is mimic the banking model?

 

 

 

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The Missing Framework for NCUA Success (part I of II)

It is an accepted truism for NCUA board members presenting their credentials  for Senate confirmation, or whenever the agency is justifying a new rule, reg or policy, to state their ultimate goal is “to protect the insurance fund.”

Current board members have even called that objective their goal or North Star.  Their primary job.

This assertion turns upside down the logic of means and ends.

What is NCUA’s End Purpose?

NCUA’s primary responsibility, its purpose,  is encouraging and sustaining the resilience and integrity of a cooperative financial system for American consumers.  The FCU Act states:

The term Federal credit union means a cooperative association organized in accordance with the provisions of this chapter for the purpose of promoting thrift among its members and creating a source of credit for provident and productive purposes

To achieve this end, NCUA was given multiple means in the law:  chartering, examinations, supervision, administration of charter changes, issuing regulations and providing expert guidance.   The tool least used, as it is rarely needed, is calling upon NCUSIF.

Most importantly, the FCU act specifically states the NCUSIF’s financial solvency is protected by the full faith and credit of the credit union system.   All members must deposit and maintain 1 cent of each share dollar in a credit union with the NCUSIF.  Every member is part of this collective guarantee ensuring all other member shares are indeed safe. This is a cooperative movement commitment, unique to the NCUSIF.  It is the law.

If all of NCUA’s every day tools ( the other “means”) are effectively managed, then the members should never be called upon to provide additional resources.  That is how NCUA protects the Fund.

The first four-decades of regulatory responsibility to maintain cooperative system integrity from 1934-1971 did not require the share insurance tool.

One aspect of “integrity” was certainly promoting credit union solvency as there has always been reserving and net worth requirements in the law.

But just as important, system “integrity” (as a source of credit) also included vital cooperative components to provide a distinct financial alternative for members.  These  include democratic governance, values such as education and collaboration, volunteer leadership (unpaid directors and committee members), access for all Americans regardless of financial circumstance (capital), focus on community (common bond), and contrary to the capitalist model, building common wealth versus private equity, to be used by future generations .

Over time additional characteristics have been developed including interdependence (corporates and CUSO’s) and system support augmenting the critical initial role of sponsors.

A Reward for Performance

When Congress approved the NCUSIF for credit unions in 1971, it was a reward for their performance.  As stated at that time, insurance was not due to financial problems with credit unions or the cooperative system.  Rather it recognized their growing contribution to the American economy and that they might not perceived by the public as the equal of their FSLIC/FDIC alternatives.

A Cooperative Policy Framework Is Lacking

For NCUA to faithfully fulfill its mission to protect the integrity of this cooperative financial alternative, an appropriate regulatory policy framework is necessary. Such a framework should be nonpartisan and multi-administration.  Past examples are the deregulation of shares by NCUA or the redesign of the NCUSIF.

Without a thoughtful and evolving framework, NCUA becomes a mishmash of regulatory justifications or each Chairman’s personal priorities.  What do the banking regulators do?  Or let the “free market” work its will.  Or elevating suboptimal tasks and agency operations  to define priorities.

Absent a policy framework, the unique role of cooperatives becomes increasingly confused with all the other financial activity in the marketplace.   No longer are the well-being and rights of member-owners front and center.  Bright shiny objects such as innovation and new technologies take center stage.

The ambitions of managers and boards seeking to outgrow their for-profit competitors become the industry’s defining priority.  Some credit union leaders chart success not by developing a better alternative to attract members, but rather using their decades of member reserves for buying out bank owners at a premium.

That activity would certainly seem contrary to the spirit of the Act.  And therefore worthy of public debate.

Credit union CEO’s, nearing retirement, game the system for personal enrichment  “selling their credit union” via merger.  They capitalize on the transfer of members’ accumulated wealth and loyalty for additional bonuses and extended payments beyond those merited as CEO.

In these transactions, the financial and relationship legacy, its goodwill, is turned over to boards and CEO’s with no prior connection.  And justified only with vague future promises that bigger is better.  The unique character of the charter and its local legacy and traditional focus are eliminated.

Tomorrow Part II, developing a policy framework.

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The $846 Million Missing Item From Thursday’s NCUA Board Agenda

While NCUA’s $350 million annual budget is the primary Board item, that is not the most important financial issue.   For there is unfinished business stretching back over a decade.  The agency owes credit unions an amount that is 250% greater than the budget it will be discussing.

Here’s the details.

In March 2009 NCUA Board member Rodney Hood along with Chair Michael Fryzel and member Gigi Hyland voted to conserve US Central Credit Union and WesCorp, the two largest corporate credit unions.

My hunch is that board member Hood never expected to be overseeing the continued distribution of US Central’s almost $2.0 billion surplus thirteen years later during a second term on the Board.

Credit Unions Due $846 Million

As of the March 2022 AME financial reports for the five liquidated corporates, NCUA projects over $846 million is remaining to be paid. The majority, $556 million, is from US Central’s estate.

When completed total AME payments to credit union member shareholders will exceed $3.2 billion.   As a comparison, the total capital of the eleven active corporates at December 2021 was only $2.5 billion.

Put bluntly, the collective funds returned by the four liquidated corporates is 132% great than all the equity in corporates active today.  Closing these solvent corporates was a catastrophic error in  judgment!

The March 2022 AME financials presents the total forecasted payments to the four corporate’s members and the remaining amounts due.

US Central:     $1.832 billion with $ 556 million due

Mbrs United:  $  622  million with $130 million due

Southwest:      $  613 million with $127 million due

Constitution:   $     48 million with $  32 million due

There are no payments for the $1.1 billion of credit union member capital at WesCorp.  NCUA projects a WesCorp deficit after all recoveries at $2.1 billion.  This is the only loss to the NCUSIF from the five corporate liquidations.  (from line B4-Due to Government March 2022 AME financials)

Total Corporate Surplus Now Tops $5.8 Billion

The above amounts do not include the $2.563 billion added to the NCUSIF when the TCCUSF surplus was merged on October 1, 2017.   Adding this amount brings total recoveries to almost $5.8 billion.

This surplus continues to point the need for an objective review of the entire corporate resolution effort.

When US Central was seized in March of 2009 NCUA Chair  Fryzel was quoted in a Wall Street Journal March 21 article:  “With us in control, we’d get honest numbers.”

If subsequent events have shown anything, it is that  “honest” numbers in an environment of uncertainty depends on who does the accounting.   Especially when the underlying process relies on valuation  models that claim to project the economic climate and related cash flows  years or even a decade into the future.

The Core Regulatory Failure

The problem is not the models or their incorrect assumptions, both of which were wrong.  The error is that predictions should not be the primary basis for resolution strategy.  All models are wrong; some are useful.

The required response is managing the daily dynamics as markets change.  Trying to predict the future  as the basis for today’s tactics led to disastrous decisions in NCUA’s  assessment of the corporate assets.

With NCUA’s ALM/NEV supervisory tests becoming more prominent in today’s rising rate environment, the limitations of financial modeling  is a much needed lesson to bear in mind.

The Need for a Look Back

But a look back is important for another reason.   Still today NCUA Chair Harper and senior staff use the apocalyptic estimates and conjectures thrown out in 2009 as NCUA  projected future events.  The hyperbolic forecasts were incorrect then; it is double injury to repeat them today when the actual facts are known.

In the same WSJ article above, Chairman Fryzel was quoted:  “regulators aren’t concerned about the health of any other wholesale credit unions besides the two brought into conservatorship.”  Yet just a year later when no longer chair, member Fryzel supported the liquidation of three more corporates, a decision that was devastating for the system and individual corporates.  Both Southwest and Members United are paying liquidating dividends on top of returning all their members’ capital shares.

By forecasting disaster, NCUA took unilateral action without any industry involvement except paying the bills.  There was no check and balance, no transparency and no alternative solutions developed.

Unfortunately, that unilateral regulatory mindset continues today.  It undercuts the unique cooperative advantage of collaboration represented in the common credit union funded resources  in the NCUSIF and CLF for individual turnarounds.

The most important takeaway from the corporate debacle is not estimation failures or the value of patience when resolving problems.  Rather it is NCUA’s failure to understand the unique cooperative capabilities when developing regulatory work out plans.

That lesson should include respect for the institutions in difficulty and a willingness to work together for solutions versus liquidating problems to make them go away.

The one board member who is best positioned to state the importance of this learning opportunity is Rodney Hood.  He was there at the Alpha and now hopefully, the Omega.

His counsel should be heard.  And credit unions should get their funds back ASAP. Enough delays!

PS:  I hope a board member will ask what the additional $10 million in liquidation expenses paid (outside the NCUA budget) in the first quarter from the AME recoveries was used for.

 

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When Less Is More: NCUA Board’s Mid-Year Operating Budget Review

This coming Thursday the NCUA board will review the agency’s midyear budget.  To do so thoughtfully, it is useful to put the operating budget’s long term and recent trends in perspective.

Below is a summary of the growth rate of NCUA’s operating fund budget from 1999-2001.  The first column shows the compound annual growth (CAGR) for the entire period; the second column for the most recent five years.   Note the annual growth rate is per year.

  Annual Growth of NCUA’s Operating Fund Expenses (1999-2021)

 

Account CAGR’99-’21 CAGR ’16-’21
Beginning Cash Balance $MN 11.47% 22.43%
Operating Fee Receipts $MN 4.27% 8.97%
Operating Expenses $MN 3.66% 9.48%
Net Fund Bal at Yearend $MN 16.92% 26.01%
Ending Cash Balance $MN 12.32% 21.33%

What the Recent Numbers Mean: Expenses Out of Control

During these 22 years, NCUA has transferred ever higher amounts of its operating expenses to the insurance fund.    This is via the Overhead Transfer Rate (OTR) process. That rate of expense allocation has been as low as 52% in 2008 and as high as 73.1% in 2016.   Currently it is 62.7% an increase from 2021.

This overhead transfer has exceeded 50% even though state charters have always had fewer than 50% of total insured shares this entire time.  NCUA is subsidizing its regulation of federal charters by shifting costs  onto state credit unions.

Following this arbitrary, open-ended expense transfer however, operating expenses still increased 3.66% annually or faster than inflation for the entire period.  Most recently in the five years 2016-2021 this annual growth accelerated to 9.84 % or three times faster than the overall 22 year average.

NCUA invented inflation five years before the rest of the economy could catch up.

After this OTR allocation, the Operating Fee charged to FCU’s exceeded actual operating expenses by an average of 104.5% for this entire period– some years more than 100% and others less. Since 2015 however, the NCUA’s the operating fee collected has exceeded actual expenses every year.

Building NCUA Cash  from Credit Union Funds

The result of these excess fees is that yearend cash on hand has grown from $13 million to $129.6 million (or ten times-1000% ) in this 22 year period.   During these same years, while  annual expenses grew by just 3.6%, NCUA grew cash balances at 12.3%, or four times as fast.

The 2021 year end cash balance of $129 million was 110%  more than that year’s total expenses, and  double the 46% average for the entire period.

NCUA held cash balances for the first 16 years of this analysis  between 30-40% of the actual expenditures.  Since 2016 NCUA has retained  more and more credit union funds.  Yet there has been no change in either the agency’s ability to assess its fee or in its operations to require this ever growing cash and fund balance.

The Latest Numbers: May 2022

As of end of May, cash balances are $191.8 million slightly higher than 12 months earlier.   Operating expenses for the first five months are $48.3 million exactly the same as the prior year.

The net fund balance (equity) is at an all-time high of $141.3 million for this time of year.  In 1999 the net fund balance was just $6 million.   The numbers and trends suggest that  $75 million or more of this excess cash could be returned to credit unions and NCUA still have more than enough to cover all operating expense.

The Board’s Budget Review

American author Edward Abbey observed:  “Growth for the sake of growth is the ideology of the cancer cell.”

This Thursday if expenses lag budget, the NCUA’s habit is to repurpose unspent funds  and/or approve new positions not in the original budget.

Normal business practice would be to reduce the budget, not find new ways to spend a surplus.

How will the board view this ever-growing cash hoard? The traditional government mindset is to spend all the money on hand, whether that is necessary or effective.  Staff is always fearful that if money is left over, it will justify reducing the budget request for the following year.

Chairman Harper has been very public in of his ambition to grow staff, the NCUSIF and the budget at every opportunity.

Will the rest of the board go along with this six-year pattern of uncontrolled operating expenses and buildup of excess cash? Or will they stop the spread of NCUA’s operating fund cancer?

After all this is the members’ money.

 

 

 

 

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A Review of the NCUA Board’s Oversight of the NCUSIF

NCUA’s open board meeting In May had only one agenda item, the quarterly staff update on the NCUSIF.

This was an opportunity to focus on many topics that have swirled around the management of the Fund over the past year.   These include:

  • The fund’s investment strategy especially in the rising rate environment;
  • The accounting confusions using  Federal not private GAAP presentation;
  • Projections for the fund’s operating outcomes later in the year;
  • Options to more accurately present the Normal Operating Level (NOL). The ratio now uses two separate accounting period’s data;
  • The prospect of lowering the NOL to its historic range of 1.2 to 1.3% from 1.33%.

The NCUSIF’s $22 billion  is its largest asset . The fund’s unique cooperative design means credit unions have a direct financial stake in its performance.  Credit unions  should receive a dividend in years of strong performance and pay a premium in the event of mismanagement or a catastrophic loss.

As noted by Vice Chair Hauptman in the meeting:  it’s a mutual asset of the credit union movement and NCUA. . . it’s worth reminding everybody that every dollar of that one percent contribution belongs to credit union members and no other.  NCUA has the obligation to credit unions and their members to manage that fund prudently and effectively.

Board member Hood reiterated:   The 1% capital deposit which comprises most of the Share Insurance Fund’s equity is also an asset of the credit union.  We should never forget this.

I would add that the unique coop design intended the 1% deposit be an earning asset for credit unions.

The Fed’s Response to the Current Economy

As reported by CNBS:  Minutes from the Fed’s June meeting, which were released Wednesday, revealed that the central bank is prepared to use even more restrictive measures to tame surging inflation. They indicated that July’s meeting would bring another rate hike of up to 75 basis points, and acknowledged that the economy could suffer a slowdown.

“Participants concurred that the economic outlook warranted moving to a restrictive stance of policy, and they recognized the possibility that an even more restrictive stance could be appropriate if elevated inflation pressures were to persist,” the minutes said. Treasury yields, meanwhile, continued to rise.”

This is not new news.   Since October 2021 the Fed has indicated that it would change its accommodative monetary policy in response to signs of growing inflation.   That intent became explicit in December with forecasts of interest rate hikes from the historically low levels engineered in 2020 to respond to the Covid economic shutdown.

The market’s response was swift.   Through this year’s second quarter,  bond  fund valuations have fallen almost 20% in market value. The NCUSIF has gone from a market gain of over $500 million in 2020 to a market valuation loss of $1.1 billion as of the April 2022 NCUSIF report.

The NCUSIF Staff”s Response to Rising Rates

The staff’s response to this dramatic change in rates was provided in May’s presentation:  Extend the investment portfolio further by going from a maximum term of 7 years to 10 years.   Rick Mayfield, capital market specialist. stated  this strategy would place approximately 10% of the portfolio in annual buckets over the 10 year range in a one to two year time frame.

The result would raise the average weighted duration from 3.5 years to almost 6 years—at a time when the overwhelming consensus and Fed intent is that rates will continue to rise.

The continuing decline in the NCUSIF’s market value in the past 18 months shows how far the portfolio is falling short of current rates.  This below market return is lost revenue in the tens of millions of dollars.  The continuing decline is a specific indicator of the portfolio’s performance gap from current market rates.

To mechanically continue  investing in equal “buckets” over ten years is a failure of  management.

This investment extension aligns with neither the current policy nor experienced investment judgment.   No objective data or analysis was offered to support this extension to a 5-6 year duration.

Extending a portfolio does not automatically bring higher rates.  Yield curves do not always slope upward.

As an example, when yield curves invert, that is the two year bond pays more than the 10 year,  how does purchasing the lower return 10 year bond “maximize yield” per fund policy?

Managing the portfolio’s duration is the most critical function to match the liabilities for which the fund is responsible.  These include  paying operating expenses, growing retained earnings in line with insured shares, and if necessary, covering insurance losses.   Those expense liabilities can be easily quantified and monitored monthly to align with investment earnings (yield) decisions.

For example, a 2% fund yield would generate $400+ million in revenue easily meeting the operating expense and projected equity growth goals.  A 3% earnings rate should result in a dividend to the owners if insurance losses are at, or below, long term trends.

This is the integrated ALM/IRR management NCUA expects all credit unions to practice.   This management responsibility is not a fixed formula followed routinely whatever the market conditions or future outlooks.  Rather modeling tools, forecasts and judgment are used to align asset returns and the cost of  liabilities as market events change.

No Free Lunch

Even more disappointing was the assertion by CFO Schied that the portfolio’s new extension to ten years would be initiated this quarter-despite the explicit forecast of further raises from the Federal Reserve.

“ . . .with respect to the investment portfolio and consistent with the existing board approved investment policy. the investment committee has decided last month to begin to extend the portfolio ladder out to 10 years.  This is not reflected in today’s quarter one presentation because the decision to do so does not show up until quarter two which will be evident in my quarter two presentation as well as our monthly reporting that we post on the website going forward.”

Naively extending investments to “chase yield” is a common examiner criticism of poorly documented credit union investing.  Such extensions  may produce a short term income jolt but at significantly increased ALM/IRR risk.

Vice Chair Hauptman remarked:   I can say as somebody who worked in fixed income markets for years you know there is no free lunch.  We can get more income by taking more risk and in no other fashion.

There was no data presented to justify a decision to extend from 7 to 10 years in a rising rate environment, an action contradictory to traditional sound portfolio practice.  This extension was also taken in the face of increasing market losses.  This mechanical approach underperforms in the current interest rate environment.

Making a fixed rate 10-year investment  in the face of inflation and other economic uncertainties, is extremely speculative.  It severely limits management options for responding to market events and any changes in credit union insurance needs. It results in  a fixed revenue cap for an even longer period than the current practice.

The result is that NCUA’s hands are tied responding to events during this extended average life of almost 6 years. The Fund becomes dependent on other sources for liquidity or revenue, a contradiction in the fund’s fundamental financial role.

This extension announcement doubles down even after the mounting evidence of NCUSIF investment management shortcomings.  The investment policy referenced has not been updated since 2013.   But most concerning is that there appears to be no ability to objectively evaluate investment practice.

Projecting the Equity ratio And Slowing Share Growth

In addition to presenting the current investment approach, CFO Schied’s projected the NCUSIF’s NOL to June 30, providing two interesting data disclosures.

The first is that he projects an operating loss of $68 million for the NCUSIF  in the second (June) quarter versus a net income of $54.4 million in the March quarter.  That is a $122 million reversal in operating results.

Since investment revenue more than offsets operating expenses, the only possible reason for such a reversal is insurance loss reserves.  Yet all the CAMEL results are positive.  There was no indication of any major unaddressed issues.  So why this dismal forecast?

Secondly Schied also gave the agency’s 12-month insured share growth forecasts for 2022.  Actual share growth was 9.3% for the March quarter.  The projections are  7% growth at June 30, year over year; and only 4.3% for the full calendar 2022.  A significant slowdown from the past two years.

A Board Meeting with Mixed Outcomes

 

The Agency’s mechanical NCUSIF investing in the face of dramatic rate changes and increasing portfolio devaluations was a disappointment.  Extending the investment duration to almost six years (versus current 3.5 years), will only reduce the Fund’s flexibility responding to changing rates and future industry risk events.

Both Chair Harper and CFO Schied downplayed or even denied there was any real risk to extending the portfolio. Here is the Chairman’s summary observation:

The changes in the value of these(investment) assets were expected. That is because as interest rates go up the value of these bonds go down. I learned that in my finance 301 class back in college.

These unrealized losses fortunately do not impact the equity ratio and do not increase the likelihood of a premium just as unrealized gains do not increase the equity ratio. What the unrealized losses signal is a change in the interest rate environment. We are moving forward to address this issue.   The NCUA is adjusting its investment strategy from a seven year ladder to a ten-year ladder. . .

This observation is incorrect in two respects:

  1. Extending the ladder increases the portfolio’s risks, especially as it relates to meeting its matching  liability/expense requirements.
  2. As the portfolio continues to carry underwater investments, that is returns below market, then the fund’s revenue is short changed. It is credit unions that may have to pay a premium for NCUA’s mismanagement due to potential  revenue shortfalls.

Confusing Financial Presentations

The staff continues to present financial information following Federal GAAP that both confuses and misinforms readers about the actual state of the NCUSIF.

The federal presentation of the balance sheet shows that both the assets and Fund equity  have fallen this year from yearend.  That is because the decline in market value is is subtracted from both investment assets and the cumulative results of operations (equity) on both sides  of the balance sheet.  This understatement is $1.1 billion as of April 30 and increasing each month as portfolio valuations decline further.

To the user of this information, the NCUSIF appears to be reducing in size and value.

The accounting category, year to date retained earnings, is not reported under Federal GAAP.  Calculating  the Fund’s NOL trends requires this number.  However it  is not  presented in the financial statements, but must be derived from the information presented.

Finally the issue of how the NOL is being calculated using numbers from two different accounting periods was again raised by Board Member Hood. He referenced the Cotton accounting firm’s review from  2021 and its reported description of several ways the 1% true up could be presented in the  Fund’s yearend financial statements.

CFO Schied’s response to Hood’s query was:

We are reviewing and doing the due diligence over alternative approaches including that pro forma idea that you’ve mentioned in order to have a complete picture of the relative costs and benefits and to understand any potential hidden implications of any alternatives. 

Because I’m not sure back then that they realized that the change was going to lead to the timing gap that we have today.  I would look forward to updating you on these findings over the summer.

Credit unions will certainly be looking for this review!

Overall  this single-topic open board meeting identified, but failed to resolve, these ongoing  issues of NCUSIF investment management, fund financial presentation and more accurate NOL calculation.

(Editor’s note:  Later updates corrected earlier spelling error of Vice Chair Hauptman’s name)

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“Protecting the Insurance Fund”

From NCUA board members’s statements in Senate confirmation hearings  to the examiner on the street, the most frequently stated goal stated by NCUA staff is  to “protect the insurance fund.”

This goal is repeated even though the NCUSIF is a means and not an end in itself.  The ultimate purpose of NCUSIF is to safeguard member assets.

The primary venue in which Board members demonstrate their responsibility to “protect the fund” is the quarterly statistical report  provided by staff and discussed in an open meeting.

The NCUSIF’s status was the principal topic of May’s board meeting.   I was unable to listen to the live broadcast.  All I have is the  slide deck from the agenda and posted board statements, not the actual live exchanges  that took place.

Questions on the NCUSIF’s  from the March Update

Here are some  initial questions from the  information presented.  I would hope that some or many of these would be  part of the dialogue in the Board’s duty “to protect the fund.”

  1. Since December 2021, total NCUSIF assets have declined by $130 million even after recording $578 million in new capital deposits receivable. The cumulative results of operations (equity) shows a decline of $727 million in the first quarter.  How did these declines occur?  How should users of this data understand Fund performance?
  2. The March report shows that the market value of the portfolio has fallen $806 million below cost or book value. What does this decline indicate about the management of the Fund’s interest rate risk?
  3. The Fund’s yield year to date is only 1.22% What is the required breakeven yield to cover the Fund’s operating expenses?  How large is the revenue loss in the next 12 months as indicated by the current and  continued decline in market value?
  4. How did the Fund’s investment committee modify their approach after  the rise in rates initially forecast last October/November  by Chairman Powell?
  5. How will the investment committee deploy the approximately $4.0 billion in funds arriving in the next 12 months from maturities, new capitalization deposits and interest payments?
  6. The Fund reported net income of $54.4 million in the 1st However Slide 13 shows estimated retained earnings of $4.792 billion, or an anticipated loss of $68 million in the current quarter.  That would represent a $122 million net operating decline for the June quarter.  How was this projected?  What is causing this loss?
  7. Insured savings growth is estimated at 7.1% at June 30, 2022, down from 14.2% at the June 2021 quarter. Actual twelve month share growth was 9.3% as of March 31, 2022. How much additional growth  slowdown is projected for this year?
  8. In Slide 13, the numerator and denominator use data from two different time periods to calculate the NCUSIF’s equity ratio (NOL).  If the same June 30 data were used for both parts of the ratio,  the resulting NOL would be 1.283 % versus 1.25 %.   This three basis point difference is over $500 million at the current level of insured shares.   Shouldn’t this more timely ratio be used in reporting the Fund’s actual financial position?

Fund Performance and Investment Policy

The NCUA’s immediate and ongoing opportunity  to “protect the fund” arises from its  management of its current $22 billion and  ever growing asset base.

The questions above are vital to understanding how NCUA staff implements the Board’s twin NCUSIF investment policy objectives  “To meet liquidity needs” and “To invest. . .seeking to maximize yield.”

The March financial statistics raise critical question of how the NCUSIF responded to the changed interest rate outlook over the past 12 months.  And, more importantly how it will respond going forward.

I will report on Board member’s interactions and assessments to NCUSIF’s   March information  when the May meeting video/ transcript is available.   That dialogue will be a useful example to learn how NCUA board members see their role  “ to protect the fund.”

 

 

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Today’s NCUA Board Meeting: an Opportunity for Insight into the NCUSIF

With only one agenda item, the NCUSIF’s March quarterly update, today’s NCUA board meeting presents an in-depth learning opportunity about the fund’s management.

With almost $22 billion in assets, the NCUSIF is the largest investment under NCUA’s control.

Because NCUA publishes monthly updates on its three major funds, credit unions are able to monitor how their members’ funds are being used.

The public board discussion is a vital part of this process for credit unions and board oversight.

What I Am Listening For

  1. There is much confusion caused by the NCUSIF’s use of Federal GAAP versus private GAAP accounting, the standard credit unions must follow. The Federal accounting terms, presentation and practice are different from private GAAP.

This is because Federal GAAP was intended for use by entities which rely on government appropriations.

Some examples.  Cumulative results of operations: Following SFFAS No 7 the NCUSIF recognizes interest on investments as “non-exchange revenue” which in turn means unrealized holding gains and losses are reported as part of revenue.

In contrast, credit union “available for sale” securities are reported at book value with unrealized gains or losses recorded in a valuation account, not as an income or expense.  This  account is not included when computing the net worth ratio.

Credit unions report retained earnings.  Federal accounting has no comparable account. This and other differences mean that NCUA staff transform NCUSIF Federal presentation into a private format, but then do not follow private accounting practice.

For example the 1% deposit true up (or refund) is treated as revenue in the NCUSIF; however credit unions record this adjustment as an investment asset on their books.

Will this confusion be addressed?   How will this affect the calculation of the 1% true up when presenting the NOL ratio for the fund?  Private GAAP recognizes the true up as a receivable or payable on the insurer’s books when the insured risk is reported triggering the required deposit adjustments.

  1. How has the NCUSIF investment committee responded to the rising interest rate environment? The market value of the NCUSIF’s investments may have fallen by as much as $1.5 billion from the peak in 2021.   What changes have been made in response?  How will the below market income stream from the fixed rate, lower earning. long-term bonds, affect the income of the fund and projections of the NOL in 2022?
  2. Credit union’s first quarter results have been summarized in Callahan’s Trendwatch. How does the first quarter’s 9.3% actual share growth compare with NCUA’s projections for the year? What impact, if any, will the rise in interest rates have on CAMELS ratings?
  3. What changes in NCUSIF investment policy and accounting presentation/practice is staff proposing? Or will be requested by the board?

Over the past 16 months, I have written several blogs about NCUSIF investing and accounting anomalies.   Here are selected observations and additional background for the questions that may be raised in today’s meeting:

I’ll follow up next week on the board’s dialogue.  Hopefully this will be a fresh start for improving the fund’s financial practices.

 

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Tantrums and a $10 Million Credit Union Loss

As interest rates continue their upward cycle to reduce inflation, credit unions will manage this year-long transition process with multiple tactics and product adjustments.

There is no one operational formula to be universally applied because every credit union’s balance sheet and market standing is different.

But a simple model was the core of NCUA’s response in 2013 and 2014 when Fed Chairman Ben Bernanke announced a policy change to reduce support for the recovery after the Great Recession.   The reaction to his June 2013 announcement was an abrupt rise in rates, referred by some writers as  a “market tantrum.”

The following  is one credit union’s experience as NCUA  pursued its own regulatory tantrum as recalled by the current CEO.

A Case Study from a Prior Period of Increasing Rates

Today’s rapidly increasing interest rate environment is very reminiscent of the 2013-2014  period when Federal Reserve Chair Ben Bernanke’s “Taper Tantrum” led to a great deal of market volatility.  While Bernanke’s comments in May of 2013 touched off the increase in rates, it really took until the next year for the full effect to be felt.

NCUA’s response to this period of rising rates was nothing short of a panic.  Any credit union holding bonds whose value declined due to the increase in market yields was heavily criticized for having too much interest rate risk.  This critique was despite the fact that most natural person credit union had more than adequate liquidity to hold the bonds. 

The use of static stress tests, which showed dire results from up 300, 400 or 500 basis points, was used as a reason to force credit unions to sell some of their holdings turning unrealized losses, with no operational reason to act, into realized ones.  These forced sales unnecessarily depleted capital, the very thing that an insurer/regulator should be trying to preserve.

Things got so heated at our credit union that the Regional Director called a special meeting. Only our Board of Directors could attend; management was forbidden to be there. NCUA lectured them about the evils of excessive interest rate risk.  This sent many of them and our CEO into a full-scale panic. 

We sought advice from outside experts but finally settled on the dubious strategy of selling bonds at losses as well as borrowing funds from the FHLB that we did not need.  These were done to bring the results of these static stress tests in line with the NCUA’s modeled projections.  We calculated these actions caused us unnecessary losses of over $10 million before we stopped counting.  These came from both the realized losses, the added expense of unneeded borrowings, and the lost revenue on assets sold.

In the aftermath of that debacle, the credit unions senior management and two board members travelled to Alexandria, Virginia to meet a top NCUA regulator to explain our frustration at the loss.  After waiting for hours for our scheduled appointment, he heard us out.  We never heard back; however, the Regional Director soon departed.  Perhaps our message had at least been partially received.

The Problem with Static Tests

Fast forward to today.  We find ourselves in the “extreme risk” rating at the end of the first quarter due to the rapid rise in rates.  The glaring problem with static stress tests is that non-maturity deposits (which make up a large part of most natural person credit unions’ share liabilities) are limited to a one year average life. 

Several third-party studies document our share’s average life to be in excess of ten years.  Despite this, the asset side of the balance sheet is written down while the long-standing member relationships, on which most credit unions’ balance sheets are built, doesn’t get much credit at all.  For example, if a two-year average life on savings and checking accounts were used, the results of the static test wouldn’t even put us in the high interest rate risk category. 

Closing Thoughts

While we have authorization to utilize derivatives (something we didn’t have back in 2014), this could help lower the costs of compliance if we are forced to take action. However, I’m adamant against doing illogical things just to pass a static stress test this time around.

I’ve wondered how it’s OK for the NCUSIF to hold similarly long-term bonds in their portfolios without any concern during periods of volatility like this. We have the strength of our core share relationships and capital positions to withstand periods of rising rates.  NCUA just keeps reporting growing unrealized  losses transferring their IRR risk to credit unions to make up any operating shortfalls.

I also believe that NCUA should really be much more worried about very low interest rate environments.   These periods of very narrow yield curve pickups are actually much worse for financial intermediaries to navigate than periods like the one we’re now in. Overall the industry’s net margin should generally benefit from rising rates, shouldn’t it?

Two Observations

1. One expert’s view of  the situation today:  As you know, but people often forget, there is no ‘unrealized loss’ if a bond or loan is held to maturity.  There is an interest rate risk component that needs to be managed.  But if I am holding some 4% mortgages 10 years from now, and the overnight rate is 4%, then I am not upside-down.  I just have some of my assets earning the minimum rate of return. 

This is why I prefer net income simulation over IRR shock.  We don’t live in a static world, it’s a dynamic one.

2. During the November 2021 Board meeting the following interaction took place on the agency’s management of the NCUSIF portfolio and stress tests:

Board Member Hood: Thank you, Myra.  And again, I do have another question and this is for the record.  Do we all have an interest rate risk shock test to the fund (NCUSIF)  like we do for our credit unions under our supervision rule?  And also, do we do a cash flow forecast on a regular basis as well?

Eugene Schied: This is Eugene Schied, and I’ll take that question Mr. Hood.  Yes, we shock the – we do perform a shock test and perform cash flow analysis for the share insurance fund.  These are both reviewed by the investment committee on at least a quarterly basis.  The investment committee looks at the monthly cash flow projections for the upcoming 12 months as part of this regular analysis.  That concludes my answer, sir.

Board Member Hood: Great.  Thank you, Eugene.  I would just say that as I consider our investment strategy, we should note that examining portfolios and managing investments in the portfolio are two separate and distinct skillsets.  The NCUA today has over $20 billion, with a capital B, in investments under management; so I think we should have an even greater focus on this during our upcoming Share Insurance Fund updates.

 

 

 

 

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What Are Credit Unions to do When NCUA Messes Up?

Many NCUA management actions have limited direct impact on credit unions.  But when mistakes are made in a critical system component, the NCUSIF,  they can cost credit unions dearly.

The NCUSIF’s sole source of revenue is the earnings on its $20.5 billion investment portfolio of government securities.

The objectives of the NCUSIF’s current investment policy are clear:

The investment objectives of the NCUSIF are:

  1. To meet liquidity needs resulting from the operations of the Fund; and
  2. To invest, on a daily basis, any excess cash in authorized Treasury investments seeking to maximize yield.

The Investment Committee has fallen increasingly short of these objectives for at least the past 15 months. Results  have been contrary to these clearly stated goals.

The Numbers: $10 billion in New Investments in Two Years

At December 2019, the NCUSIF’s portfolio size was $16.02 billion of which $5 billion matured in two years or less.   At February 2022, the portfolio had increased to $20.5 billion.

Since  interest rates declined to historic lows in March 2020 at the start of the national economic shutdown, the NCUSIF has invested more than $10 billion ( 50% of its current portfolio) following a robotic 7-year ladder.

Today these $10 billion investments are worth less than par.  They cannot be sold without incurring market losses constraining the NCUSIF’s liquidity options as stated in objective 1.

At February 2022, the portfolio reports a total unrealized market loss of $343 million, a decline in value of over $ 800 million since December 2020.   The current unrealized loss will increase as rates  rise.  These declines since December 2020, easy to  see from the monthly market value disclosure. They also indicate that the portfolio’s yield is increasingly  falling behind market rates.

A $45 Million Dollar Mistake and Still Growing

The most recent investment of $650 million on February 15, 2022 for seven years at a fixed yield of 2.01% continues this mismanagement in the face of unanimous market indicators and Fed statements pointing to rising rates.

Today the seven year T-Note is near 3% yield.   Not only is this investment from just 60 days earlier worth less than par, the loss of income over the seven-year term is currently over $45 million. That is 1% (or higher yield pickup) times $650 million times seven years.

Credit unions and their members will pay the cost for these and other misjudgments that have resulted in at least half of the NCUSIF’s portfolio below market.  With a 3.5 year effective price duration, the portfolio will continue to decline in value by 3.5% for every 1% increase in the yield curve going forward.

The NCUSIF Investment Committee

The Board’s Policy delegates the implementation of the its two policy objectives to four of the agency’s most senior staff including:

Director of Office of Examination and Insurance, Chair

Chief Financial Officer

Director, Division of Capital and Credit Markets

Chief Economist

One would have hoped given the first quarter’s “Rout in the Bond Market” (WSJ headline), the continued inflation projections, the Federal Reserve’s frequent announcements of policy change, that someone would have called a timeout on this robotic investing ladder. The declines in market value are in plain sight; but more critical are  increasing constraints on future income possibilities, objective 2.

What Can Credit Unions Do?

The reason for monthly NCUSIF financial disclosures is so the fund’s owners who rely on NCUA management, can see the results and raise concerns with the board.

Credit union’s first responsibility is to speak up.  Directly communicate your views of this performance failure.  For your members will pay the cost of these misjudgments ($45 million and higher) potentially for years.

The reported results fall way short of policy.  What will the board do?   The committee seems unable to follow market trends, its own NEV data or internal IRR analysis (if any), or even to be aware of different portfolio options.

In public board meetings, staff is dismissive of change calling alternatives “market timing” when in fact the real issue is simply “investment management.” This is a responsibility every credit union is expected to perform in all phases of the interest rate cycle.

Assuming the board is incapable of monitoring and implementing its stated policy, then Congress is the next recourse.

The Damage to NCUA and the System’s Reputation

 

When NCUA and senior employees are oblivious to market trends, the situation raises questions about competency in many other areas of operational assessments and regulatory approvals.

Supervision requires judgments.  Policies nor rules can prescribe detailed actions. Ratio calculations can be written down but determining the correct numbers entails seasoned analysis.

The economy is in an inflationary period which some say has not been experienced for 40 years.  The Federal reserve’s balance sheet and its increase in money supply has never been larger.   Short term overnight rates are priced in forward markets as high as 3% in a year’s time.

There will be significant adjustments as credit unions transition their balance sheets to the new environment and as member’s see rising rate options.

There will be lots of hyperbolic forecasts and many forebodings in forthcoming months. After all, “preaching negativity makes you an expert” as one colleague used to say.

But credit union’s track record in the most extreme crises has been one of patient, experienced adjustments even when markets seemed to have lost all logic.

As NCUA’s enters this new cycle of interest rates, will its ability to make reasoned adjustments match credit union’s own track record?  This initial response in the comparatively simple management of a treasury portfolio, with just two clear policy goals, is not encouraging.

Can the agency learn from its own misjudgments?

 

 

 

 

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Why Chairman Harper Will Merge the NCUSIF into the FDIC Before His Term Ends

Let’s be frank.  Chairman Harper has yet to be confirmed by the Senate to his new term.  Therefore he is keeping his most important initiative under wraps until he officially has the job

But he has made no secret of his “Commander’s” ambition when he proclaimed at the March board meeting, “NCUA will guide the credit union system through the economic uncertainty caused by inflation, rising gas bills, and continued supply chain woes.”

After the Senate approves his appointment, he will reveal his “guide” plan: merging the NCUSIF into the FDIC.  There are two ways this can be accomplished, which I explain at the end.

It is important to understand why Harper sees this as his top priority.  Even more critical is recognizing how much support this merger proposition will have from credit unions and all other system stakeholders.

Harper’s Idealization of the FDIC

Since his appointment to the NCUA board Harper has continued to tout the FDIC as the gold standard for regulators.  He has repeatedly spoken of their consumer exam prowess (see GAC remarks), the FDIC’s financial flexibility, its support of MDI institutions and even their subsidized employee cafeteria.

In brief, he has concluded that NCUA cannot compare with the FDIC’s competencies, so his solution is to join with them.

But there is more than Harper’s FDIC-envy motivating the plan.  His core belief is that scale matters and that larger size means greater competence.  With the FDIC’s scale and NCUA’s mission driven purpose, the success of credit unions is virtually guaranteed.

NCUSIF’s “Tall Tree” Problem

The “tall tree” phenomena refers to risk underwriting when an organization represents a disproportionate amount of exposure.

The other board members sympathize with Harper’s view that  “bigger-is-better.”  They know that Navy FCU’s assets are over eight times as large as the NCUSIF.  If Navy’s NEV fell near zero in an examiner  shock test, the NCUSIF would face a bigger problem than all the corporates combined in 2009.

Adding the FDIC’s $123 billion and the $5.0 billion NCUSIF equity, the agency need no longer worry about “tall trees”  whenever examiners’ IRR modeling shows a PCA solvency shortfall.

Harper has other reasons for the merger in addition to his scale ambitions.

  • FDIC’s insurance fund has a superior financial model. Its premiums are risk based, open ended and there is no cap on fund size;
  • FDIC has no 1% deposit, so there is no controversy about “double counting” the fund’s assets:
  • FDIC has no accounting issues about true-ups, proper reserving and no independent private audit:
  • FDIC examiners are better at consumer compliance, technical analysis and asset liquidation management;
  • FDIC is a superior, more recognized brand than the NCUSIF;
  • The five person FDIC board has a vacancy that Harper will request be reserved for the NCUA Chair going forward (similar to OCC membership).

Credit Unions will support the merger because:

  • Transferring NCUA’s insurance activities will reduce its annual budget by at over $200 million, or 62%, the current OTR rate, for insurance related expenses;
  • Credit unions’ 1% deposit will be returned so they can once again earn a market yield;
  • FDIC’s premium expense is currently only 3 to 5 basis points per year which could be paid out of the yield on the 1% returned deposit if rates reach 3-5%;
  • Buying banks will be much easier for credit unions with only one insurer’s approval required;
  • FDIC’s logo will show members that credit unions are really on a level playing field with banks;
  • All credit unions already comply with FDIC’s capital requirements thanks to RBC/CCULR;
  • Credit union mergers show their belief that scale is the most important attribute to achieve cooperative purpose;
  • FDIC’s solvency has in fact been guaranteed by the US government, whereas the only proof for NCUSIF’s backing is a sentence in NCUA’s press releases.

Members will support the move because:

  • They were told the NCUSIF coverage was the same as the FDIC;
  • The FDIC is a better known brand;
  • The 1 cent of each share dollar members now send to fund the NCUSIF will be returned to the credit union;
  • Members have been told that credit unions offer “better banking”-this confirms that belief;
  • It doesn’t make any difference–insurance has never been the reason they joined the credit union in the first place. For the first 60 years of financial cooperatives there was no share insurance.

Why the FDIC will support the plan:

  • The $4.9 billion in NCUSIF equity to be added via the merger is more than 2 X the risk being transferred in the total assets of all CAMEL code 4 and 5 credit unions;
  • Eliminates an embarrassing financial comparison for the FDIC ‘s 90-year-old premium based model and its habitual inability to achieve its normal operating level;
  • The FDIC’s monopoly of deposit insurance will expand its power and influence especially within the cooperative system.

State regulators and NASCUS will support the merger as it will strengthen the dual chartering system:

  • It ends debates with NCUA about whether their rules apply to state charters or just FCU’s. Going forward, SCU’s will have just their one state regulator;
  • NASCUS will no longer have to argue about the Overhead Transfer Rate which caused state-chartered credit unions to pay a disproportionate share of NCUA’s operating expenses;
  • It eliminates the need to expand the NCUA board to include a state regulator;
  • The FDIC’s largess for examiner training is superior to NCUA’s;
  • It will activate state charters’ interest in cooperative insurance options. Credit unions in WI, FL, IA, MI and WA will seek to restore a choice of insurer.

CUNA/NAFCU will support the merger:

  • It certifies the level playing field for credit unions-a long term goal;
  • There are expanded opportunities for Lobbying for their DC staffs.

Congressional Democrats will support the merger:

  • All three NCUA board members were appointed by President Trump but democrats now are the majority on the FDIC board.  The party believesTrump holdovers should not control an agency in a democratic administration.

Congressional Republicans will support the plan:

  • It simplifies government and eliminates a federal agency overlap (NCUSIF) for the same activity;
  • Credit unions don’t pay taxes but this will require them to help pay for the federal government’s future FDIC bailouts during the next banking crisis;
  • It will relieve representatives of having to chose between their banking and coop constituencies as both will be under a common regulatory system.

Two Paths for Implementing Harper’s Merger Plan

 

One approach is to propose congressional legislation.  As Chair, Harper has already communicated to Congress his requests to change the NCUSIF’s financial model and modify CLF’s membership requirements.

While the legislative path is always uncertain, this effort could have bipartisan appeal as it is unlikely to have any opposition from credit unions or the banking industry.

Should this approach not prove feasible, then Harper will follow the same process used to implement the NCUA’s CCULR capital rule.  The banking industry required congressional legislation to add this option to the FDIC’s capital requirements.   NCUA was not mentioned in this CCULR enabling legislation.

However, Harper went back to the original PCA requirement from 1998 that said credit union safety and soundness requirements must be comparable to banks’.  NCUA said that bank regulators were authorized to offer CCULR, ergo credit union regulators have the same authority.  All three board members agreed with this legal reasoning.

Using this precedent, NCUA can mandate FDIC insurance  for credit unions by a rule based solely on the PCA requirement of “comparability.“ For there could be no greater comparability than a common insurer for both credit unions and banks.  The implementation could be done quickly,.  Credit unions were given just 9 days to comply with CCULR once it was passed.by the board.

In conclusion

Readers.  It is April 1.

I am not saying that NCUA should merge the NCUSIF with the FDIC.

It would likely be a shock for market-shy cooperatives to be in the same league as the profit-driven banks.

I’m just saying that it could happen.

And that it almost certainly will happen.

Because Harper has shown he gets what he wants. Moreover, credit unions could really end up screwing the banks using their newly won FDIC emblems while  holding onto their tax exemption.

After all, different charters are just legal fictions anyway. All financial institutions do the same things.

FDIC’s scale will facilitate even faster credit union growth from more bank buyouts and ever larger mergers.

And members will have peace of mind knowing that all along the NCUSIF was no different from the FDIC.