Just a Member

It is one thing to be uninformed on a critical issue of public policy. It is another to open one’s mouth and remove all doubt. And then compound the folly by writing a public editorial after losing a 2 to 1 vote at the most recent NCUA Board meeting.

Harper’s Rationale for Implementing Risk Based Capital Rules

The core logic in his December 16 press release follows: (https://www.cujournal.com/opinion/ncua-a-day-late-and-a-dollar-short-after-delaying-capital-rule

After the Great Recession, the Federal Deposit Insurance Corp. and other banking regulators moved promptly to update and implement their risk-based capital standards. Yet the NCUA wants to delay implementation for a second time. Why should it take complex, federally insured credit unions with $500 million or more in assets seven or eight years longer to implement their comparable risk-based capital rule than it took for banks and thrifts to implement theirs? That’s an uneven regulatory playing field…

Pursuant to the Basel Accords, which sets international best practices, no modern financial institution’s regulatory system operates without a meaningful risk-based capital component. Not only would the 2015 RBC rule finally bring the NCUA into greater compliance with the Basel framework, it’s required by law in the Credit Union Membership Access Act. That’s why the risk-based capital standard is consistent with the cooperative nature of the credit union system and provides comparability to the other federal banking regulators.

The Argument is Dead Wrong

Apparently, Board Member Harper and his staff have been so busy that they have failed to note that on September 17, 2019, the FDIC eliminated all risk-based capital requirements for community banks with assets less than $10 billion. The policy was supported by the OCC and Federal Reserve.

Banks are no longer required to calculate or to report the ratio. They will be considered well capitalized under PCA if they meet a simple leverage ratio.

This simple leverage ratio is the PCA model for credit unions. The banking regulators have endorsed the credit union’s current and historical approach to capital adequacy measurement.

Harper now wants to impose this failed system on credit unions. The banking regulator’s actions acknowledged that RBC is not only burdensome, but more importantly, it does not work in practice. As one banking analyst Tom Brown observed as early as 2014:

We’ve already seen that the risk-based approach does not work. It’s obvious that neither man nor model can adequately assess a given asset’s risk under all circumstances before the fact. It doesn’t make sense to spend a lot of time trying. It does make sense to have a minimum leverage ratio, but it should be the same for banks of all sizes.”

Source: A Loss of liquidity, not inadequate capital, is what often dooms banks. Bankstocks.com, April 22, 2014

Similarly, Harper’s references in his editorial to Basel, the taxi medallion failures and the role of capital in credit unions are inaccurate. More importantly his reference to an “uneven regulatory playing field” demonstrates a complete failure to grasp cooperative design, its distinctive strengths versus for-profit financial models, and the unique role of the NCUSIF’s pool of credit union capital.

The Failure of NCUA Board Leadership

When NCUA board members appear so oblivious to the realities of their responsibility, other leaders must step up. Call out the erroneous facts and logic. Present reasonable solutions. And if that fails, go to Congress and the press.

This public bumbling undermines the public reputation of the NCUA board and the cooperative system it regulates. It calls to question the ability of the board members to oversee their responsibilities not just for policy but also for basic tasks of examination, supervision and funding oversight.

The track record described below suggest the current NCUA board has a long way to go to overcome a growing list oversight failures.

Read more from the blog:

• The Cost of Not Learning from Our Brethren’s Mistakes 
• A Credit Union Member Takes a Stand After a $40 Million Loss
• Where is the Transparency for NCUA’s Actions at Municipal Credit Union?

In May, NCUA became conservator of the $3.0 billion Municipal Credit Union in New York City.

In the June call report, 45 days after the conservator took over, Municipal reported a $123 million YTD loss. This appears to have been caused by the termination of a defined benefit plan triggering a required funding of the shortfall. This loss reduced the credit union’s net worth ratio to 3.41%, or undercapitalized, from over 7% the quarter prior to NCUA’s becoming conservator.

The September 2019 Update

The most recent call report implies that the credit union had net income of $10 million as the YTD loss has been reduced to $113 million. Comparing June and September call reports shows total membership declined by 35,000 and total employment reduced by 104 (to a total of 591) in the three months ending September.

The average salary and benefits are $369,000. Total salaries and benefits have increased to $163 million from $62 million for the previous year. This extraordinarily high number suggests the credit union is paying out the terminated defined benefit program.

The professional services expense is running almost three times greater than the prior year: $18 million versus $6.9 suggesting the consultants are well compensated, or is there another explanation?

The credit union’s loan originations are down significantly at $378 million from $615 million in 2018. Shares declined by $76 million in the quarter. Delinquency is .85% and the allowance accounted is funded at 227% of total delinquent loans. Net worth is 3.87%, or still undercapitalized.

What is Going On?

What is the purpose of all of these very expensive charges? Why close out the retirement fund now when liabilities will stretch decades into the future? Why were over 100 employees let go? What is the reason for the decline in lending? Is this tied to layoffs? Who is responsible for these decisions? Is anyone overseeing this rundown of the credit union? What is the plan?

Most importantly, whose interests is the conservator serving. Is it. . .

• The employees who are taking the brunt of the layoffs?
• The members whose numbers fell by 35,000, shares by $76 million, and loans by $24 million in the September quarter?
• The conservator’s reputation and/or compensation?
• The NCUA’s desire to protect its public standing?
• The credit union system’s trusted role in New York City and the state?
• The cooperative option in the nation’s financial system?

No Transparent Goals

No one knows, because NCUA has not provided any information that would give all stakeholders insight into the goals of this regulatory seizure.

Without any goals, it is easy to defend whatever outcome occurs. (“We tried our best.”)

Options are not debated. Critical constituencies are left out of the deliberations. The result is that confidence in the outcome will always be open to question.

Operating in secret will only create further uncertainty. Is the goal a turnaround to return the credit union to its owners and the community? Or is this just a dressing up exercise to sell off this 100-year franchise and branch network to the highest bidder? And thereby let NCUA wash its hands for its responsibility in this situation?

The silence of NCUA board members, some of whom have been before congress twice in the past ten days, is deafening. It is easy to talk about future visions and past activities, but who is dealing with the here and now? Not even Municipal’s website mentions the NCUA’s takeover.

Chairman Hood, this is occurring on your watch. Are you a CEO on the bridge or one sleeping in your cabin?

Who is Affected by Municipal’s Conservatorship?

The field of membership from the web site:

Who Can Join?

You can Join MCU if you are:

• • • An employee of the City of New York
    • An employee of a hospital, nursing home, health facility, or their affiliates located in New York State
    • A Federal employee who works in the five boroughs
    • A State employee who works in the five boroughs
    • All students enrolled in a college, university, school, or institution, in the City University of New York (CUNY) education system
    • All students enrolled in St. John’s University who are attending campuses located in New York State
    • An employee working for agencies operating within the City of New York metropolitan area and which are at least in part funded by the City of New York or the State of New York
    • A retiree receiving a pension or annuity from one of the organizations that qualify for membership in MCU
    • An employee of an insurance company that offers health related insurance in the State of New York
    • An employee of companies that produce and/or supply hospitals in the State of New York with medical and other types of healthcare products
    • An employee of the City of Yonkers or Mount Vernon
    • An employee of a private college located in the City of New York
    • An employee of a private or public college in the counties of Nassau, Suffolk or Westchester
    • An employee of the Archdiocese of New York or Brooklyn
    • A member of certain private employers or industry groups
    • A family member of a member or individual who is eligible for membership. Eligible family members include those related by blood, marriage, adoption or living in the same household, including spouse, parent, stepparent, child, stepchild, sibling, stepsibling, grandchild, grandparent, or great grandparent. “Household” means living in the same residence and maintaining a single economic unit.

There seems to be a lot of confusion, intentional or otherwise, about why credit unions cooperatives exist.

For some, buying banks is just another “voluntary, market-based transaction.”

One NCUA board member has asked that credit unions be subject to more rigorous consumer exams, just like the banks have.

For others, having greater capital and balance sheet options is necessary to “level the playing field.”

A Reminder of the Difference

At a time in the past when credit unions were in the words of the NCUA Chairman “on a roll”, he reminded them of their most important characteristic:

“Your future is brighter now that it has been ever before. You have the flexibility to do things you were never able to do. Plus you have the most important ingredient of all-the element missing in banks and S&Ls: your relationship with your members. You are cooperatives first and financial institutions second.” – Chairman Ed Callahan, NCUA 1982 Annual Report, pg 10.

From Senator Sherrod Brown’s (D-OH), opening statement at the February 14, 2019 confirmation hearings for NCUA’s nominees Harper and Hood:

“Mr. Hood previously served as an NCUA Board Member from 2005 to 2010. Mr. Harper worked in the NCUA’s office of Public and Congressional Affairs and served as the chief policy advisor to the Chair from 2011 to 2017. Both nominees possess a deep understanding of credit unions and the issues that affect them.” [emphasis added]

From Senator Brown’s questioning of NCUA Chairman Hood at Senate Banking Committee hearing, December 5, 2019:

“I just am not sure you understand what an independent regulator is.”