Presidents and Credit Unions

There have been two noteworthy moments when Presidents have saluted the credit union movement.

One was by democrat and the second a republican president, 46  years apart.

“We might do something to push this. They are popular”

Here is President Roosevelt’s “shout out” in 1936:

From 1934 through 1940, there were 4,793 new federal charters issued.  A rate of 600 per year.

Since NCUA’s three person board was established in 1978, there have been 1,958 additional charters.  A rate of only 45 per year.  In the last decade that number has fallen to  two per year.

“I want to congratulate you. .. “

The White House,

November, 17, 1982:

Dear Ed:

I want to congratulate you on the progress  you have made as Chairman. . .

It was refreshing for me to learn of the accomplishments of the Board and the 17,000 federally insured credit unions across the country. . .there has been remarkable progress toward self-help solutions to the problems facing the credit union industry.   I applaud your efforts to meet the growing competition among financial institutions through the reduction of unnecessary regulations, decentralization, and improved communications.

I especially want to note the way your were able to guide the credit union movement toward restoration, on its own initiative, of the financial health of the National Credit Union Share Insurance Fund. . .  (emphasis added) This effort illustrates a basic tenent of our administration, that, given the leadership and the opportunity, individual citizens acting together can often find solutions to their problems and need not turn to the government to bail them out.

Keep up the good work.

Sincerely,

Signed Ronald Reagan

Source:  NCUA’s 1982 Annual Report page 4

In April 1982, NCUA had completely deregulated the savings rules controlling all federal credit unions.  From 1982 through June 1987,  the credit union system’s share growth exceeded 15% annually.

In this same six years, 511 new federal charters were granted, a rate of of almost two per week.

The rules controlling bank and S&L deposit products were not fully ended until June 1987.  The April 1982 NCUA board action gave credit unions a five year head start competing in the new era of deregulation.

Friday Nite Film Time

Redeeming Uncle TomI follow   Jared Block’s blog.  He was involved in the documentary described below.   Looks like a special event for this evening.  Let me know what you think.

Hey friends,

In addition to my thrice-a-week Surviving Tomorrow column, I also publish booksand direct documentaries.

One of those films is about an unbelievable hero that almost no one knows about:

  • The Prime Minister of Great Britain threw him a surprise banquet.
  • Earl Grey offered him a job.
  • The Archbishop of Canterbury wept after hearing his story.
  • President Rutherford B. Hayes entertained him at the White House.
  • Queen Victoria invited him to Windsor Castle.
  • He won a medal at the first World’s Fair in London.
  • He was the first African American to appear on a Canadian stamp.
  • He was a Methodist Episcopal elder with a 300-mile district under his care.
  • He rescued 118 slaves, including his brother.
  • He helped build a 500-person freeman settlement, called Dawn, which was known as one of the final stops on the Underground Railroad.
  • Inspired by his story, Harriet Beecher Stowe wrote a novel that helped spark the Civil War and led to the Emancipation Proclamation.

But before all that, Josiah Henson was a slave for 42 years.

The film is called Redeeming Uncle Tom, and it’s narrated by Danny Glover.

This Friday night, the Indiana State Museum’s Levi & Catharine Coffin House is hosting an online digital screening of the film on Zoom. I’ll be introducing the film and doing a director-led Q&A afterward.

Register: Right here

Cost: $8

Date: Friday Feb 18th

Time: 6:00-8:30PM EST

Zoom link
Meeting ID: 857 5744 1006
Passcode: 326677

See you there!

Bon Mots V: Human Motivations

Whole bank purchases:

“We’ve heard from clients that the offers from credit unions are better in many cases,” Silvia says. “One of the most important things to think about is what is the best thing for the shareholders, which is generally getting the highest price.”

Not only do credit unions often offer the highest price, he says, they will likely pay in cash.” Garret Reich The Financial Brand

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Buying things is an installed habit, especially for Americans. I have friends who use shopping as a kind of therapy, and their homes are filled with trash.

And, as a result, we have a lot of stuff, stuff we really don’t need.

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Ockham’s razor (rule): Given multiple choices, the simplest explanation is usually the correct one. It’s also known as the principle of parsimony and is an academic’s way of saying, “When you hear hoof beats, don’t think zebras.”

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People can foresee the future only when it coincides with their own wishes.” George Orwell

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We are all quite capable of doing “horrid things,” especially in horrid situations. But before we do a horrid thing we must be quite certain that we actually are in a horrid situation.

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I’m convinced all of us, in one way or another—have an intense resistance to change. We like predictability and control. That’s one of the reasons addicts find it easier to have a relationship with a process or a substance rather than with people. Unlike objects, people are unpredictable.

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“The human person grows more, matures more and is sanctified more to the extent that he or she enters into relationships, going out from themselves to live in communion with God, with others and with all creatures.”  Pope Frances

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I write entirely to find out what I’m thinking, what I’m looking at, what I see and what it means.” Joan Didion

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This Weekend’s Reading:  The story of why the Howard Johnson (28 flavors), America’s most popular roadside restaurant company, disappeared.

 

 

RBC/ CCULR: “The Fruit of a Poisonous Tree”

One commentator on the rule which went into effect on January 1, wrote me:

“Regulatory net worth is a tax on asset growth. It requires resources be directed to reserves held idle on the balance sheet, instead of being used for investment in credit union products and services. . .

Increasing the regulatory capital erodes competitive positioning opportunities and makes it harder for credit unions to fulfill their chartered mission.

The other factor is the low interest rate environment.  You can’t accrete capital fast enough by just growing assets anymore. . .   This regulation is a death warrant for credit unions between $400 million and $1 billion.  . . .”

How much is this initial tax to be CCULR compliant?

Between $30-40 billion  of sequestered existing reserves or required new capital to be at 9%.  That assumes no capital buffer is added.  This total will be approximately double the industry’s total net income in 2021.

Two others wrote after reading Three Strikes a RBC/CCULR Should be Out:

Why didn’t someone sue?

I’m not hearing a peep out of CUNA or NAFCU over this change.

The Grass Roots Effort in 2015

The December 2021 RBC/CCULR rule was the fifth formal rule-making effort spanning an eight-year period.  The initial proposal was so badly put together the agency concluded that: After carefully considering the comments of stakeholders, Chairman Matz in September (2014) announced that the agency would make significant structural changes to the proposal and issue a revised proposed rule for a second comment period.” (NCUA 2014 Annual Report pg 12)

The final rule was proposed in January 2015.  At that year’s GAC convention, credit unions were urged to Raise Their Voice in opposition to the rule.

With a booth encouraging action:

Despite widespread, continued credit union opposition, the Board approved RBC in a 2 to 1 vote  in September 2015 with McWatters opposed.  Ironically, NCUA’s 2015 Annual Report’s theme, “The Year of Regulatory Relief” was a PR fantasy.

So onerous was the rule that implementation was deferred  for more than three years until January 1, 2019 to: provide ample time for affected credit unions to choose to generate more capital while continuing to maintain their current portfolios, reduce risk, or execute some strategic combination of the two.”

In October, 2018, the Board approved a one year further delay in implementation. It raised the definition of complex in the rule from $100 to $500 million in assets, removing 1,026 credit unions from its requirements.

In 2019 the Board passed another delay of two years until January 1, 2022, described as a “win for credit unions.

The fifth time was the charm.  By a vote of 3-0 in December, 2021, the board passed RBC and CCULR with only a nine-day lead time before becoming effective on January 1, 2022.

The Illusory Truth Effect

One of the realities of public discourse is that when something is repeated often enough, people begin to think it is true.  Especially if the misstatements are by persons in authority.

Credit unions filed 2,056 comments in opposition to the 2014 proposal. They filed just 21 responses to the new CCULR/RBC rule.

Was the low response due to regulatory fatigue?  Did NCUA just outlast the widespread industry opposition? Perhaps.

I believe the pattern of reissuing, modifications and extensions all created the impression that the rule was both necessary and legal.  It was neither.

It is an example of an “illusory truth effect” created by NCUA’s off and on again eight-year rule making campaign.

The agency had five different chairs in these eight years with no consistent policy process. This elongated effort created a regulatory “myth” distorting credit unions’ true capital adequacy and  full compliance with  PCA requirements.

Under 22 years of RBNW guidance, the agency summoned credit unions’ self-determined capital management,  The  result was a 3.5% average net worth ratio above the 7% minimum.  RBC/CCULR imposed a new, higher 9% standard by fiat.

The New Rule’s Failings

  • The agency provided no “substantial objective evidence” that the system’s capital levels were inadequate under RBNW. Staff admitted that only one failed credit union in the past ten years would have been subject to RBC’s additional capital.
  • The agency wrongly used the “comparable” standard to implement a clone of bank regulations. This approach clearly contradicted the statutory intent that RBNW cover only a select small group of credit unions that represented unusual risks. As staff stated in its board memo: A special note that most, if not all, of the components of the CCULR are similar to the federal banking agencies’ CBLR.
  • There was no statutory authority for a CCULR option.
  • Nine days for implantation violates the “reasonable period of time” requirement for a change in PCA capital levels.
  • Harm to members will be real. Over 500 credit unions will now be burdened with immediate RBC compliance.  They must limit asset growth or charge members more to take the so-called CCULR “off ramp.”
  • The compliance burden is immense. Completing the final five pages of information in the revised 32 page quarterly call report is required to compute this one RBC ratio.

Who Will Raise the Issue Now?

Credit unions’ initial response could be to give up any effort to change.  Just attempt to live with it.  Or merge.  The reporting and tracking burden is so intense that NCUA has launched a 90-day period of  industry webinars, examiner training and printed guidance.  It has waived late filing fees for March.

At a time of rising interest rates, inflation, cyber worries, members’ economic uncertainty and continued technology disruption, credit unions are learning to fill out a new form.  Five pages of data to calculate a single ratio.

Once this one ratio result is known, credit unions must then decide how to conform all of their decisions to this rule that rates the risk of every asset choice they make.

This rule was a leadership failure from the top down. To change will require action from the grassroots up.

First Stop: GAC

A rule promulgated  to enhance the future viability of the credit union system will have just the opposite effect.  It reduces competitive options immediately.

Every credit union attending GAC can inform and rally peers, trade spokesmen, congressional contacts and the press about this unwarranted burden.  Examples are critical; do the homework. Know your ratio and the choices you now must make to counter the rhetorical myths others may use to support the rule.

Press your case publicly-see the booth picture above.  Privately, ask NCUA board members to see the consequences and change the rule before more harm is done. Board members Hood and Hauptman stated their responsibility for the rule’s consequences:

Hauptman: The Board intends to monitor the impact of CCULR and RBC on credit unions and the Share Insurance Fund going forward. I look forward to working with my Board members next year and the year after on quantitative analysis on a cost and benefits of our current approach to RBC and CCULR.

Why not begin this year?

Why This Matters

One of the unique features of credit unions is their democratic governance. Whether in the oversight of the credit union via the board or in interactions with the regulator, democracy is fragile.  It requires constant practice, renewal and involvement.

This rule is so obviously wrong from  many perspectives that it is hard to understand how it got this far.  But the internal appeal of governmental authority is strong, especially clothed with good intent.

The authority asserted in this rule is total, every asset and maturity decision now comes with a regulators’ risk rating.  NCUA staff and board seem blissfully unaware of how this will impact credit unions.  Somehow it is supposed to make the insurance fund stronger!

Changing this outcome will require an all hands and all voices effort.  But then democracy was never meant to be a spectator sport.

And I will continue to do so!

Uber and Taxis: Competitors or Partners?

The first question Hawaiian League President Dennis Tanimoto  asked following  my zoom speech to a conference in late November, had nothing to do with my talk.  It was about an event two years earlier at NCUA.

His question:  Do you think NCUA’s sales of the taxi medallion loans was a fortuitous decision?

NCUA had announced the sale pf the medallion  borrowers’ loans on February 19, 2020 to Marblegate Asset Management LLC a hedge fund specializing in buying  “distressed assets.’

I called the sales of these 4,500 loans a betrayal of  the borrower-members in a post four days later.  NCUA refused multiple FOIA requests for information the board claimed to have used when approving the decision. The cash payment for the portfolio’s book value I estimated at 31 cents per $1 from  numbers in a WSJ article.

Marblegate received the discounted loans, NCUA got cash, the NCUSIF (credit unions) were charged for the difference ($700-800 million) and the borrowing members, nothing.  Just more payments, at the loans’ remaining value.

NCUA’s McWatters said the agency would follow up to make sure the “winning bidder works with the taxi medallion loan borrowers in a transparent, good-faith manner and in full compliance with all applicable consumer protection laws.”

McWatters is gone. No such efforts were reported.   NCUA declined multiple FOIA requests to provide the documents used in  their decision.  One month later,  March 2020,  Covid closed down the economy and  with it virtually all transportation needs.

I assumed that was the context for the question.  Did NCUA in retrospect make the right decision?

My response had two parts.  The first was from whose point of view was it fortuitous?  NCUA’s in exchanging cash for assets of uncertain value in the insurance fund?  The borrowers, who were hit by the economic shutdowns?  Marblegate, the purchaser?

I also responded that any assessment depended on what period of time you evaluate the outcome ?  Here’s why.

In early November 2021 an agreement between the city, taxi owners and Marblegate was reached as reported in the press:

NYC taxi workers celebrate after medallion debt relief agreement reached; hunger strike over

Under the new agreement, Marblegate will restructure existing loans to a principal of $200,000, with $170,000 as a guaranteed loan and the remaining $30,000 as a grant from the city and a 5% interest rate. The restructured loans will be on a 20-year plan with scheduled monthly payments, which will be capped at $1,122 for “eligible medallion owners.” The city has said they will act as a guarantor for the principal and interest — a longtime demand of the NYTWA — and will negotiate with other lenders to work out the same agreement.

The bailout applies to owners of fewer than three medallions.  For those, Marblegate has gained an earning asset worth  at least $200,000. This consists of a New York city guaranteed loan for $170,000, a $30,000 cash payment, and a fully collateralized earning asset at 5% for 20 years.

NCUA refused to disclose any details about the portfolio’s sale, but a Wall Street Journal article suggests the loans were sold at an average price between $75 to $100,000.

If accurate, Marblegate doubled their money in about 18 months while earning some interest and principal pay downs on top of this in the meantime.

These  borrowers now have a reasonable opportunity to pay off their loans and own the medallion outright.

Only NCUA and credit unions are left with no upside. The NCUSIF  loss remains fixed at $750 million in return for $350 million in cash earning  25 basis points (.25%) for assets with a face value of over $1.1 billion.

The hedge fund owners, not the members, received the benefit of this discounted loan sale.

The NCUSIF  underwrote the deal in which the Wall Street purchaser more than doubled their money while putting  member-borrowers’ fates  in the hands of the same for-profit firm.

Credit unions had asked to manage the portfolio on behalf of borrowers, the industry and  NCUA.  McWatters response:  The agency carefully considered a proposal for a public-private partnership to purchase the loans; however, with a firm offer already in-hand and no assurance when, if ever, the proposed partnership might be able to act, the agency could not risk losing its qualified bidder.

Credit unions have seen this picture before.  It is direct from the corporate credit union playbook.   The industry was denied the chance to resolve its problems as NCUA sought Wall Street financiers to take the responsibility off their hands.

 Why Review This  Decision Now?

Credit union and NCUA can learn how ignoring options can cost hundreds of millions in recovery potential when selling at the bottom of a market.  NCUA continues to miss out on the critical advantage of cooperatives when resolving problems.

Cooperative structure allows time and patience so  better options can be developed as markets change and cycles of value recover.  As Warren Buffet noted:

“The true investor welcomes volatility. A wildly fluctuating market means that irrationally low prices will periodically be attached to solid businesses. It is impossible to see how the availability of such prices can be thought of as increasing the hazards for an investor who is totally free to either ignore the market or exploit its folly.”  (emphasis added)

But if we extend the window out farther, might taxi owners still lose the “solid business” battle and the medallion ownership still remain devalued?

The competition in the on-demand public ride and delivery market is intense. Taxis are in a market disrupted by UBER/Lyft,  among others. Can medallion owners compete with these billion dollar unicorns, venture-backed technology platforms relying on hundreds of thousands of gig workers to produce revenue?

One long time CEO medallion lender said the issue will be decided by the drivers, not institutional financial power.  He suggested a way to think about the future is to ask: if given a choice between being an owner or an employee, which option would you choose?

UBER’s Yearend Financial Report

His question resonated as I reviewed the latest Uber financial updates as of December 31, 2021.

Uber’s mission statement is now generic, not just ride share: “to create opportunity through movement.” The following are some operating and financial highlights from the report:

  • Cannabis pick-up: Announced an exclusive partnership with Canadian cannabis retailer, Tokyo Smoke, to provide consumers with the ability to place orders from Tokyo Smoke’s catalog and unique accessories on the Uber Eats app. Tokyo Smoke is the first cannabis merchant to list itself on the Uber Eats platform.
  • Membership: Officially launched Uber One in the U.S. in November as our single cross-platform membership program that brings together the best of Uber. For $9.99 per month, members have access to discounts, special pricing, priority
  • Monthly Active Platform Consumers (“MAPCs”) reached 118 million: MAPCs grew 8% QoQ and grew 27% YoY to 118 million.

While interesting examples of the firm’s operating efforts, UBER has never made a profit and accumulated total operating losses of $23.6 billion.

From the company’s unaudited December 31, 2021 Balance Sheet

Accumulated deficit:  $23.6 billion

Stockholders equity:    $14.5 billion (total stock issued $38.6 billion)

Goodwill as an asset:    $ 8.4 billion

Loss from operations in 2021:  $3.834 billion

And one of UBER’s latest  innovations to reach profitability?

Uber Taxi

Local taxis at the tap of a button

 No need to try to hail a taxi from the curb. Request a ride from your phone with Uber Taxi.

  • Licensed, local taxi drivers
  • Pay with cash or card
  • Track your ride

That’s right, they now want to partner with the taxi drivers in various cities.  I clicked on the button to see if any of the over 100 cities listed included a taxi option.  I could not find an example.  Or maybe they are just trying to hire the drivers, and lure them to abandon the quest to own  their own medallion.

So if you can’t beat them, why not join them?

One further thought with this taxi  partnering  effort.  To whom do you think Marblegate will try to sell their fully performing, guaranteed 3,000 to 4,000 medallion loans, to make another quick gain on the restored book value? UBER still holds over $4.0 billion in cash.

O Black and Unknown Bards

The author of this poem is perhaps best remembered as the composer of  Lift Every Voice and Sing, often referred to as the black national anthem.

This 8 minute version by the students at Pearl-Cohn entertainment magnet high school in Memphis is a very contemporary arrangement with rap.

Weldon’s poetic spirit is combined with his love of music in the stanzas  below calling out spirituals.

For me spirituals have a wholly different feeling than most other music.  When sung, they are communal,  emotional and revelatory.  They tell of hope or longing.  And they invite everyone into the experience.

This poem celebrating these songs from the soul was published in 1922.

O Black and Unknown Bards

by James Weldon Johnson – 1871-1938

O black and unknown bards of long ago,
How came your lips to touch the sacred fire?
How, in your darkness, did you come to know
The power and beauty of the minstrel’s lyre?
Who first from midst his bonds lifted his eyes?
Who first from out the still watch, lone and long,
Feeling the ancient faith of prophets rise
Within his dark-kept soul, burst into song?

Heart of what slave poured out such melody
As “Steal away to Jesus”? On its strains
His spirit must have nightly floated free,
Though still about his hands he felt his chains.
Who heard great “Jordan roll”? Whose starward eye
Saw chariot “swing low”? And who was he
That breathed that comforting, melodic sigh,
“Nobody knows de trouble I see”?

What merely living clod, what captive thing,
Could up toward God through all its darkness grope,
And find within its deadened heart to sing
These songs of sorrow, love and faith, and hope?
How did it catch that subtle undertone,
That note in music heard not with the ears?
How sound the elusive reed so seldom blown,
Which stirs the soul or melts the heart to tears.

Not that great German master in his dream
Of harmonies that thundered amongst the stars
At the creation, ever heard a theme
Nobler than “Go down, Moses.” Mark its bars
How like a mighty trumpet-call they stir
The blood. Such are the notes that men have sung
Going to valorous deeds; such tones there were
That helped make history when Time was young.

There is a wide, wide wonder in it all,
That from degraded rest and servile toil
The fiery spirit of the seer should call
These simple children of the sun and soil.
O black slave singers, gone, forgot, unfamed,
You—you alone, of all the long, long line
Of those who’ve sung untaught, unknown, unnamed,
Have stretched out upward, seeking the divine.

You sang not deeds of heroes or of kings;
No chant of bloody war, no exulting pean
Of arms-won triumphs; but your humble strings
You touched in chord with music empyrean.
You sang far better than you knew; the songs
That for your listeners’ hungry hearts sufficed
Still live,—but more than this to you belongs:
You sang a race from wood and stone to Christ.

A Prayer on Sunday Morning

Praying is a mysterious human activity. It can be experienced in many ways.

Sometimes more happens than listening to words whether said aloud or thought silently.  There can occur moments of new awareness.

My internal concerns are intwined with a greater reality.  In that larger space beyond our ego’s view, we find meaning.  Perhaps purpose.  Maybe a feeling referred to as Thou.

Last Sunday listening to a broadcast service and the morning prayer, I was moved.

The minister lifted the daily events we all share into greater hope.

Reading words apart from their live context may not be as poignant.  I believe these below are worth a moment of your attention.

                      Prayers of the People

God in our future, we come before you each week reminded that we are not as we wish to be, reminded that we do not yet live in the world you desire. We pray each week, “Thy kingdom come.”

Free us from our illusions that we are separate from other people, from the earth, and from you. Teach us a new way. Let us hear the old lessons one more time. Call us into your work, together.

God in our past, we bring with us today all the hurts we carry and all the hurts we caused. Help us, in our own time, to put them down. Show us what we need to heal. Give us the courage to mend what we have broken.

Remind us that we have more to give the world than the worst things we have ever done. Let us be humble enough to think ourselves worthy of your presence. Deliver us from our false notion that anything we could do could make us any less deserving of grace, of care, of forgiveness, of redemption.

God in the news cycle, God in the aftermath, be with all those in crisis this morning. Keep watch over hospital rooms and under bridges. Bear divine witness on borders and in prison cells. Carry your people into another day when their burdens are not so heavy and their hope does not seem so far.

God in history repeating itself, God in unprecedented times, strengthen all those who try to help; who work in sixteen hour shifts to turn the power back on, who hold the hands of those who suffer, who cry out for accountability and against injustice. Let all of us who are inspired by and indebted to their courage also find it within ourselves to do what is right, to help where we can.

God in our midst, you see your church and you know who is missing. You search our hearts and you know whom we are missing. This morning, we lift up the blessed memories of those this community has lost. We lift up Sally Hansen. We lift up Howard Kay. We lift up Vincent Lee. We lift up Jim Roche. We lift the names of all who dwell in our hearts. Strengthen their memories in each of us. Let all who were touched by their lives carry their legacies always. Grant all of us – those who are grieving and those who are gone – peace.

Thank you, God.

Amen.

 Harvard Memorial Church – Sunday, February 6, 2022 by Cheyenne Boon, MDiv II

Three Strikes and RBC/CCILR Should Be Out: Failing the Test of Comparability

My earlier posts described how NCUA ignored two of the three explicit criteria in the PCA law when imposing RBC/CCULR rules on credit unions.

Before looking at the third constraining feature, “comparability,” there is a procedural violation in NCUA’s actions. The agency’s Federal Registration filing for CCULR and amended RBC was December 23,2021; the act took full effect on January 1, 2022.

The PCA act directs how these changes are to occur:

Adjusting net worth levels -Transition period required

If the Board increases any net worth ratio under this paragraph, the Board shall give insured credit unions a reasonable period of time to meet the increased ratio.

Credit unions were given 9 days to comply with CCULR’s 29% increase (from 7% to 9%)  to attain a well-capitalized rating.

The Third Criteria for PCA Implementation

At its core, NCUA has only one explanation for its new RBC/CCULR joint rules:

Harper: The final rule is a balanced approach that gives complex credit unions a risk-based capital framework comparable to those developed by other federal banking agencies.  

The combined rules’ minute details and hundreds of risk weightings are explained with multiple variations of one idea: “to ensure comparability with the banking industry.”

Nowhere is comparable defined.

If comparable means “the same as,” credit unions’ 10.6% net worth ratio at December 2021 already exceeds either banks’ core capital leverage ratio of 8.86% or equity capital ratio of 10.06% as reported by FDIC in their September 30 quarterly report.

Must credit unions now reduce their capital level to be comparable to banks’ average?

Obviously not.   NCUA’s intent is that credit union net worth be measured with the exact same accounting details as the bank’s follow.  Except banks have many more capital options for the numerator.

The rule’s 70+ risk weighting formulas, and multiple variations, applied to credit union assets were lifted directly from the banking model.

The rule duplicates bank regulations at every point even though the asset composition and financial roles of the two systems are drastically different.

This literal interpretation of comparable accomplishes one goal—NCUA now controls credit unions with the same power bank regulators enjoy.  This should be no surprise as Chairman Harper has repeatedly praised FDIC bank regulation as the de facto standard he intends for credit unions and the NCUSIF.

This approach was followed ignoring the two system’s different histories, legislative purpose, financial design and most importantly, financial performance.

What did comparable mean when Congress mandated this new cooperative capital standard in 1998?

For 90 years credit union capital adequacy was based on a flow concept, setting aside a required percentage of total income before dividends, rather than a balance sheet, net worth ratio, measured at points in time. This  new ratio standard was significantly different from credit unions’ prior practice of building reserves over time as a percentage of total income.

The Act explicitly required NCUA to “design the system, taking into account” the not-for-profit  cooperative structure which cannot issue capital stock and relies only on retained earnings for reserves. When requiring a balance sheet ratio test versus a set aside from revenue, NCUA’s process must consider the listed differences in reserve structure and even the board volunteer composition.

The second change under PCA for credit unions  is in a different section of the act:

d) Risk based net worth requirement for complex credit unions.

The agency is directed to include ” a risk-based net worth requirement for insured credit unions that are complex.”

Banks have no call out for complex.  Risk based weightings are universal for all banks.

The new coop PCA  model required a risk-based factor (weighting) for a defined set of complex situations whichtake account any material risks against which the net worth ratio . . . may not provide adequate protection.”

These words clearly establish a different PCA model for credit unions than required of banks.

Cooperative PCA standards are clearly intended to be different.  To assert that comparable means to duplicate, copy or be the same as banks practice is a misinterpretation of the Act.

Twisting a Law Reducing Burden to Impose a New Regulation

The most recent example of this misinterpretation of NCUA’s authority is Chairman Harper’s description justifying the CCULR option  proposed by NCUA in July 2021, five months earlier.

Harper: We must, however, also recognize several legislative, regulatory, and marketplace developments since the NCUA Board approved the final Risk‑Based Capital Rule in 2015. For example, in 2018, Section 2001 of the Economic Growth Regulatory Relief and Consumer Protection Act directed the other federal banking agencies to propose a simplified alternative measure of capital adequacy for certain federally insured banks. The result of that effort became known as the Community Bank Leverage Ratio framework which became effective in January 2020.

There is a supreme irony citing President Trump and the Republican-sponsored Main Street Relief Act, to reduce regulation burden.  Then to expand its application to NCUA’s rule making authority over credit unions.

Here is a summary of the reference Harper cited:

Title II Regulatory Relief and Protecting Consumer Access to Credit

Section 201. Capital Simplification for Qualifying Community Banks. This section requires that the Federal banking agencies establish a community bank leverage ratio of tangible equity to average total consolidated assets of not less than eight percent and not more than 10 percent. Banks with less than $10 billion in total consolidated assets who maintain tangible equity in an amount that exceeds the community bank leverage ratio will be deemed to be in compliance with capital and leverage requirements.

There is no mention of NCUA anywhere. NCUA had not even implemented RBC when the bill was signed in May 2018.  There was no basis for credit unions to ask for regulatory relief from a rule not in effect and deferred three times at that point.

The congressionally enacted CCULR option was a banking industry effort for an alternative to a flawed and burdensome RBC rule.   FDIC’s  vice chair Thomas Hoenig had been a long standing vocal critic of RBC.

Further evidence that this section 201 did not include NCUA is that NCUA is specifically named in two other parts of the bill that explicitly provide regulatory relief for credit unions:

Section 212. Budget Transparency for the NCUA. This section requires the National Credit Union Administration to publish and hold a hearing on a draft budget prior to submitting the budget.

Section 105. Credit Union Residential Loans. This section provides that a 1- to 4-family dwelling that is not the primary residence of a member will not be considered a member business loan under the Federal Credit Union Act.

To claim NCUA’s authority for CCULR, Harper refers back to the 1998 PCA bill.  He then uses the “comparability” reference to presume authority in a bill passed twenty years later and in a section specifically omitting any reference to NCUA .

The result of this newly found authority is to increase credit unions’ restricted capital. As stated in the Board memo:  ”The Board believes that a CCULR of nine percent is appropriate because most complex credit unions would be required to hold more capital under the CCULR framework than under the risk-based capital framework.”

A False Narrative

NCUA was not given CCULR authority.  It is a false narrative permeating RBC/CCULR that credit unions’ rules can exactly copy bank rules.

This duplication-interpretation overlooks the two-decade reality that credit unions were fully compliant with their PCA risk based net worth (RBNW) model and repeatedly surpassing banks in financial performance under it.

The staff perpetuates this duplicating justification in its board memo: A special note that most, if not all, of the components of the CCULR are similar to the federal banking agencies’ CBLR.

The Consequences of Unconstrained Regulation

There are immediate and long-term unfortunate consequences when authority is improperly interpreted and asserted.  This erroneous RBC/CCULR precedent will undermine the credit union system’s unique role and diversity, directly contrary to PCA’s intent to respect cooperative character.

It sets an example of agency interpretation independent of fact, statutory language and prior compliance precedent.

Board Member Hood pointed out this long-term risk in his December board comments:

We now have (PCA compliance) with our risk-based network requirement. This law gives this board serious responsibilities which we must faithfully uphold, but this does not mean that since the bank regulators established a risk-based capital regime, we must follow them.

I actually worry that once we decree that 7% may no longer be adequately capitalized, then whether it’s this board or a future board that settles on an 8%, 9%, 10% net worth in the complex credit union ratio, as some say in North Carolina, the barn door is now open to that interpretation or that change.

I worry that we may have set an arbitrary standard above the law that a future board can easily change at any time.

There is much more at stake from RBC/CCULR than approximately  $30-40 billion of forced sequestration and newly required credit union capital. And the rule’s faulty legal standing.

The central issue is whether the NCUA board is willing or able to support the continuing evolution of a unique cooperative financial system in its regulatory actions.

CCULR/RBC Unconstrained by Statute: An Arbitrary Regulatory Act

The new RBC/CCULR rule must meet two administrative procedural tests, as any other rule, when NCUA claims to be implementing a law.  The first was outlined yesterday:  Was there substantial objective evidence presented to justify the rule?

As I described, NCUA presented no systemic data or individual case analysis whatsoever. In fact, the credit union performance record  shows an industry well capitalized and demonstrating prudent capital management over decades.

In the December board meeting Q&A , staff confirmed that in the last ten years, only one failed credit union would have been subject to RBC.  But today 83% of the industry’s assets and 705 credit unions are now subject to its microscopic financial requirements.

The second test is whether the rule conforms to Congress’s legislative constraints when giving this rule making “legislative” authority to an agency.  The PCA law was very specific in this regard when extended to the credit union system.

NCUA’s PCA implementation must meet three tests: that it apply only to “complex” credit unions, “consider the cooperative character of credit unions,” and be comparable to banking requirements.

NCUA had already passed these PCA implementation tests before. In 2004 GAO reviewed NCUA’s risk based net worth (RBNW) implementation of the 1998 PCA requirement and concluded:

The system of PCA implemented for credit unions is comparable with the PCA system that bank and thrift regulators have used for over a decade. and,

. . . available information indicates no compelling need. . . to make other significant changes to PCA as it has been implemented for credit unions.

At that time the risk based capital (RBC)  requirements had been in place for banks since 1991.

Today  NCUA’s new RBC/CCULR rules clearly fail all three of these constraining criteria.

A “Simple” Interpretation of “Complex”

NCUA 2015 RBC rule declared that the complex test include all credit unions over $100 million.  After the full burden of the rule was apparent, in 2018 the board changed complex to mean only credit unions over $500 million in assets.

Some credit unions clearly undertake operational activities or business models that are more involved than what the majority of their peers might do.

Examples could include: widespread multi-state operations, conversion to an online only delivery model,  lending focused on wholesale and indirect originations, high dependence on servicing revenue, using derivatives to manage balance sheet risk, funding reliant on borrowed funds versus consumer deposits, innovative fintech investments, or even the recent examples of credit unions’ wholesale purchases of banks.

The agency did not define “complex” using its industry expertise and examination experience to identify activities that entail greater risk.

Instead, it made the arbitrary decisions that size and risk are the same. In fact, most data suggests larger credit unions report more consistent and resilient operating performance than smaller ones.

In changing its initial ”complex” definition by 500%, it demonstrated Orwellian logic at its most absurd.  Complex turns out to be whatever NCUA wants it to mean, as long as the definition is “simple” to implement.

Universal for Banks; Targeted for Credit Unions

For banking PCA compliance, RBC was universally applied.  Every bank must follow, no complex application was intended.

By making size the sole criterion for “complex” the board reversed the statute’s clear intent that its  risk-based rule be limited in scope and circumstance when applied to credit unions.

The absurdity of this universal, versus particular,  definition is shown in one example. The rule puts $5.6 billion State Farm FCU, a traditional auto and consumer lender with a long-time sponsor relationship, in the same risk-based category as the $15.1 billion Alliant, the former United Airlines Credit Union. Alliant has evolved into a branchless, virtual business model with an active “trading desk” participating commercial and other loans for other credit unions.

NCUA’s “complex” application of the PCA statute is totally arbitrary based on neither reason nor fact.

Capital design: the most important aspect of “Cooperative Character”

The PCA authority additionally requires that the Board, in designing the cooperative PCA system, consider the “cooperative character of credit unions.” The criteria, listed in the law are that NCUA must take into account: that credit unions are not-for-profit cooperatives that:

(i) do not issue capital stock;

(ii) must rely on retained earnings to build net worth; and

(iii) have boards of directors that consist primarily of volunteers.

The single most distinguishing “character” of credit unions is their reserving/capital structure. Virtually all credit unions were begun with no capital, largely sweat equity of volunteers and sponsor support.

The reserves are owned by the members. They are owed to them in liquidation and even partially distributed, in some mergers.

These reserves accumulate from retained earnings, tax exempt, and are available for free in perpetuity-that is, no periodic dividends are owed.  Many members however can receive bonuses and rebates on their patronage from reserves in years of good performance.

Most products and services offered by credit unions are very similar to those of most other community banking institutions. The most distinctive aspect of the cooperative model is its capital structure, not operations.

Cooperative Capital Controlled by Democratic Governance

This pool of member-owner reserves is overseen by a democratic governance structure of one-member one- in elections.  The reserves are intended to be “paid forward” to benefit future generations.  This reserving system has been the most continuous and unique feature of cooperative “character” since 1909.

This collective ownership forms and inspires cooperative values and establishes fiduciary responsibility.  Management’s responsibility for banks is to maximize return to a small group of owners; in coops the goal is to enhance all members’ financial well-being.

This capital aspect of the cooperative charter is so important that if credit union management decides to convert to another legal structure, a minimum 20% of members must approve this change. No other financial firm has the character of a coop charter with its member-users rights and roles. Not even a mutual financial firm.

Bank’s Capital Structure Very Different from Cooperatives

For banks, capital funds are raised up front, usually from private offerings or via public stock. Owners expect to profit from their investments. Dividends are paid on the stock invested as part of this anticipated return. Today shares represent about 50% of total bank capital.  In credit unions, it is zero.

Bank capital stock, if public, can be traded daily on exchanges. The market provides an ongoing response to management’s performance.

This capital is not free as most owners expect a periodic dividend on their investment.  As an example, in the third quarter of 2021, the banking industry distributed 79% of its earnings in dividends to owners.

There is no connection between a bank’s capital owners, and the customers who use the bank, unless customers independently decide to buy shares in the bank. In credit unions, the customers are the owners.

The remaining component of bank capital is retained earnings. However, every dollar of earnings before  added to capital, is subject to state and federal income tax. Credit union retained earnings are the only source of reserves as noted in the PCA act.  These coop surpluses accumulate tax free.

In design, accumulation, use and governance credit union reserves are of a totally different  “character” than bank capital. Their purpose is to support a cooperative financial option for members and their community.

Bank capital is meant to enrich owners through dividends and/or future gains in share value.  Credit unions’ collective reserves are to benefit future generations of members.

Credit unions are not for profit.  Banks are for profit.

In a capitalist, private ownership dominated market economy, the cooperative’s capital structure is the most distinctive aspect of credit unions.  This is not because of its amount or ratio.  It is its “character,” from its origin, perpetual use and  oversight by members.

Nothing in the CCULR/RBC rules recognizes this especial “character” of credit union capital.  By not addressing this issue, the rule ignores this constraint of the  PCA enabling law.

The historical record demonstrates that  credit union reserves are not comparable to bank capital.  Rather they are a superior approach tailored to the cooperative design.

Tomorrow I will look at the third test, whether RBC/CCULR conforms to the PCA’s requirement of comparability.

RBC/CULR: The Most Destructive, Unsupported Regulations Ever Passed by NCUA

(Source for quotes below: the December 16, 2021 NCUA board video:  https://www.youtube.com/watch?v=zstCJgfdYTM)

In two prior blogs I outlined several problematic aspects of the new CCULR/RBC rules:

  • The instant implementation, nine days after posting, raising the “well capitalized” standard by 29% on January 1, 2022
  • The immediate imposition of three capital tests replacing one, long-standing, easy to understand 7% leverage ratio. The RBC tools are not yet available for credit unions to know where they stand.
  • The inane rationale justifying CCULR as a regulatory “off ramp” from the admitted draconian compliance burden of RBC
  • Imposing additional capital requirements in the $ billions on credit unions below the new 9% standard
  • Restricting credit unions’ use of their  reserve buffers, created over decades, above 7%. If every CCULR eligible credit union elects this 9% well capitalized minimum, they must sequester over  $26.8 billion in spending for member benefit.  To regain control, they must submit to RBC.
  • The abrupt disruption of long approved credit union plans by these new financial constraints
  • The financial downgrade of hundreds of credit unions from their previous “well capitalized” net worth standing

Combining RBC/CCULR in one package is the ultimate regulatory hubris.  NCUA’s  new higher capital requirement, was  to mitigate the extraordinary burden of the RBC.  Both remain. As Board member Hood commented:  The RBC rule is so tragic, that yes, it needs an off ramp.

Only a myopic, closed bureaucracy, completely indifferent to its impact on credit unions, could create such a convoluted compliance outcome.

Never in the history of NCUA has so great a regulatory burden been imposed on so many credit union members with such groundless reasoning and data.

The Absence of Substantive Objective Data

When implementing a statutory requirement as NCUA claims to do with these intertwined deformities, the federal administrative procedure process requires there be substantial objective data to support the action.

The legal principle is simple: if the government is going to restrict the choices people are making under their own agency, then the regulation must document the harm either taking place or to be prevented. In this case ,the issue is the credit union system’s safety and soundness.  One board member stated the regulatory requirement in December this way:

Rodney E Hood:  The framing of the issue today is really about capital adequacy and if credit unions have shown through history that they have sufficient capital to serve member-owners while facing various risks.

Have the financial outcomes of credit unions failed to meet NCUA’s safety and soundness standards  prior to this?

NCUA presented neither past failures nor current inadequacy to support these increased capital changes.  Credit unions’ track record since the implementation of PCA in 1998, following the RBNW (risk-based net worth) rule, is one of increasing safety and soundness even during the peak of the Great Recession.

Unnecessary, Unjustified and Unneeded

For 110 years credit unions’ reserving results, in good years and bad,  have proven prudent, adequate and responsive to changing market risks.

In the traumatic GDP drop during 2020’s first quarter’s national economic shutdown (the largest fall on record) and the subsequent multiple economic uncertainties due to COVID, the NCUSIF recorded zero net cash losses in both 2020 and 2021.

Credit unions achieved record two-year share growth, increasing levels of capital, and even stronger performing loan portfolios during this unprecedented crisis.

Throughout the last two decades credit unions have maintained a reserve buffer of over 300 basis points above the required well capitalized 7% standard, as pointed out by Vice Chairman Hauptman in his comments about the rule.  The following chart shows the capital levels during these two decades, including the years of the Great Recession.

Only One Credit Union Failure in the Last Ten Years Would Have Come Under RBC

The most critical fact about why the rule is unnecessary was given by staff in response to a question by board member Hood.

Rodney E. Hood: . . . what have been the largest five losses to the Share Insurance Fund over the last ten years, and what were those losses to be specific?

Kathryn Metzker (staff): When reviewing credit union losses of natural person credit unions in the last — I actually looked back about ten years . . .The risk-based capital framework would only apply to one of the (five) failed institutions as mentioned earlier, one credit union over $500 million as the remaining four have assets less than the complexity thresholds.

Earlier in the dialogue, she identified the additional capital requirement shortfall under RBC in this one case as $77 million.

Hood’s other comments on the rules are illuminating and cogent:

After serious study and consideration, my preference is to consider repealing the RBC rule outright and fine tuning our existing risk based net worth rule.

The reality is that RBC should be a tool and not a rule, and if it is effective in identifying risk, then it should be put in the examiner’s toolbox.

But the last thing I think the NCUA should do is impose it on credit unions as an operating model. The juice isn’t worth the squeeze for risk-based capital, because this is a regulatory burden with what I believe is limited benefit.

 I think risk is something that you manage each and every day.  It’s not a formula you can run on your balance sheet.

Chairman Harper’s Defense of CCULR

Chairman Harper is the author of this action. He asserts that RBC/CCULR is required under his interpretation of the PCA statute.  To defend his support of a 9% CCULR minimum versus his original 10% proposal, he cites Goldilocks and the Three Bears’ logic.

Harper: Our biggest decision in finalizing this rule was at what level to set the CCULR. In reaching a consensus, we looked at the lessons of the famous children’s story. Some wanted the leverage ratio to be 8%. I view that as too soft. I wanted the final CCULR level to rise over time and reach 10%, a level that others considered too hard, so we compromised and permanently set the CCULR at 9%. That ratio turned out to be just right. While lowering a credit union’s capital risk‑based compliance requirements, CCULR actually increases the system’s capital buffer.

The RBC complex burden was so clear even to NCUA that it proposed the CCULR “off ramp.” The 9% “just right” number was selected because the Board did not want to make it too easy “to move between the two capital options” or what it called “the potential for regulatory arbitrage between the two frameworks.”

From both a macro and a micro data perspective, there are no facts to support raising the credit union system’s capital requirements. The RBNW approach with the long standing 7% minimum required by PCA and has proven sufficient time and again.

The absence of objective data is important for future corrective action.  Once this rule becomes embedded in NCUA and credit union  actions, there could be reluctance to give up this expanded financial comfort cushion, no matter how damaging to members it might be in the meantime.

A Fast-Burning Fuse of 500+ pages of rules

Both in substance and process these rules are an extraordinary and unprecedented immediate regulatory burden.

The rules were approved with a short burning fuse of just 9 days.  If the 10% standard in the proposal had been adopted, it would have been with a two-year phase in.  But 1% lower, no phase-in needed.

There was no recognition that the only source of credit union capital is retained earnings which are only built up over time. There was no crisis or need for immediacy.  RBC was first proposed in 2014, seven years earlier.

RBC/CCULR is a failure of regulatory discretion and judgment.  NCUA’s RBNW rule had been in effect for over 20 years. It embraced limited certainties from observed experience.

The new rules present unlimited certainties about every asset’s potential risk.  These risk weightings are projected into the indefinite and unknowable future.  It did so ignoring all “substantive objective evidence” of the cooperative system’s capital adequacy and sound performance under the existing RBNW.