The financial system of the nation is at a very propitious point. Economic recovery is bringing business opportunities and with it the spring shoots of loan demand. Higher earnings will restore capital and, more importantly, “institutional self-confidence.” But the final shape of the system is still being debated.
In the Frank Capra classic movie It’s a Wonderful Life, the angel Joseph tells a potential angel, Clarence, that to earn his wings Clarence is going to have to return to Earth and help George Bailey. Clarence asks, “What’s wrong? Is George sick?” “No,” Joseph answers, “It’s worse than that. He’s discouraged.”
When confronted with adversity there can be two types of reaction: bitterness accompanied by resignation and flight; or transforming the situation with a new vision. For credit unions, and their regulatory and liquidity system, it has to be the second. In this way the promise of a new season can replace the uncertainty and bareness of the immediate past.
More importantly the timing is right. The opportunity to address a fundamental flaw in the cooperative structure is available, the options are actionable, and credit union energy is pent up, ready for action.
NCUA’s current combined responsibilities should be divided and reconstituted into three separate institutions:
A chartering, rule making, and examination body;
A cooperative insurance and collective capital organization funded as now with credit union deposits but managed by a Board with both regulatory and industry representatives; and
A cooperatively owned Central Liquidity Facility governed by the industry via an elected Board similar to that of the FHLB system and working with the corporate network for both distribution and aggregation of new system liquidity solutions.
The next two articles will focus on the CLF and the insurance roles. But below I take up the Board as regulator and the critical lesson from the shortcomings of the immediate past.
No Longer Up to the Job
In the 1970s and ‘80s NCUA changed as the credit union system itself transitioned to the new era of deregulation. The Agency emerged in concert with a nascent and growing movement. A three-person Board with a share insurance fund and newly created CLF under its management could effectively oversee the 1930s’ Congressional vision of a cooperative system of credit and self-help.
But the crisis of 2008-2010 strained NCUA’s capabilities to the point of dysfunction. It uncovered conflict of interest flaws that hobbled its effectiveness.
NCUA from the start ran counter to the nation’s principles of divided government. It controlled the “executive, legislative, and judicial” functions in that it chartered, regulated, enforced, and insured, and as well played the role of gatekeeper for system liquidity. In this, it was unique -- no other state or federal regulatory agency combines the executive examination oversight, insuring, and liquidity responsibilities in a single organization. And with good reason, as Lord Acton reminded us in his famous dictum about absolute power.
Combining all the powers of government in a single, three-person Board with no traditional check-and-balance of authority is a prescription for error as well as a barrier to allowing the best ideas to bubble up. We have seen this over the last three years.
As outlined in the following articles, the Central Liquidity Facility failed to carry out its statutory role for credit unions in the worst credit crisis of modern credit union history. Rather it was the Federal Reserve and FHLB that were the critical providers of liquidity. This was true even though Congress had appropriated more than $41 billion for the credit union system.
Similarly, the NCUSIF overestimated losses owing to the crisis by a factor of 10-20 times, thereby collecting excess insurance premiums and putting an expense on credit unions when it was most burdensome.
More than Management Judgments
NCUA is managed by human beings. Human judgment is imperfect and no organization should be expected to be right all the time. That is why due process, division of responsibilities, open discussion, and transparency are required, especially in a regulatory agency with coercive power to enforce its judgments. Decisions about system-wide issues are likely to be better, or at least more accepted, if the process is open and results not imposed.
Moreover, since 2008 questions such as the following arose about NCUA’s role conflicts: Should the CLF assist a credit union that the examiners have downgraded? Should the Inspector General disclose the exam ratings given to the corporates that were conserved at the same time the General Counsel is suing the Boards for failure to oversee the corporate business plan? Should 208-assistance be provided credit unions that have proven underwriting and risk management processes but are caught up in a local housing crisis?
Credit unions performed their counter-cyclical role by granting record amounts of credit during the peak years of the crisis ($525 billion in 2008 and 2009). Much more was both possible and requested from the Agency, but the Agency was and still is unresponsive. Throughout the 2008-2010 financial crisis, the assembled resources of the CLF and NCUSIF for just this situation were not used as designed by Congress and credit unions. These are examples of a structural problem, not merely a question of management judgment.
The Board as Regulator: Strains and Failings
The NCUA Board was organized with three voting members so that different points of view would be aired, the best ideas would bubble up, and conflicts of interest could be minimized. All these missions have broken down.
Board members other than the Chair frequently assume a sinecure role, traveling around the country until his or her term expires. Board meetings are scripted without meaningful policy discussion or even open dialogue. Board members do not appear to have the knowledge to question even the most extreme positions or estimates given by staff.
The Board has failed to meet its financial and statutory reporting requirements that would have provided timely information for assessment of Agency policy decisions or more robust consideration of options. For the third consecutive year the Board has not filed the Annual Report required by April 1 for Congress and the President. Audits for 2008 and 2009 were released 18 months after year-end and included the opinions of two different firms with multiple retrospective accounting “interpretations.”
Transparency even on the simplest of details is lacking, let alone on the major decisions affecting credit unions such as NCUSIF premium expense. The process for estimating insurance losses is not disclosed even as the numbers for loss reserves appear to be highly inflated. Disclosures of salaries are partial even though other regulatory agencies have provided full details of salaries and bonuses.
The Agency hired Porter & Novelli, a public relations firm, to prepare a campaign to promote the NCUA, but will not disclose the contract or dollars involved. Does a federal agency need a PR campaign?
Fortunately a model for a new regulatory structure exists. It’s that of the Office of the Comptroller of the Currency. The OCC is an independent unit within the Department of the Treasury with a single expert administrator appointed by the President -- with the advice and consent of the Senate -- for a five-year term. Its mission is to charter, regulate, and supervise all national banks. The Office is not subject to Congressional appropriation but paid for by assessments on the banking industry.
Creating an Office for Credit Union Administration (OCUA) within Treasury would provide a more accountable and clear structure for organizational performance, present an advocate for cooperative solutions as national policies are developed, and save significant dollars by eliminating the charade of Board control.
Credit unions would still be responsible for their own liquidity and insurance/capital needs, but in separate institutions under a new governance structure. As in the OCC model, a representative from OCUA or Treasury could also be an ex officio member of these new, industry-elected boards.
This change would have the benefit of better aligning credit union’s public policy-facing role with the country’s needs. From 2008 through today, as administrations have sought to increase liquidity, extend credit to consumers, encourage loan modifications, or most recently encourage economic growth and reduce government’s spending, NCUA actions have been contrary to these priorities. NCUA’s decisions have exacerbated the financial pressures on credit unions at the very time credit unions were most committed in their counter-cyclical credit-granting activity.
At a time when Washington is looking to save money, streamline government, and most importantly improve effectiveness, setting up an office that oversees cooperative financial institutions within Treasury would be a creative and positive step.
To support this reform process, send this article with your comments to your peers, to the credit union organizations to which you belong, and to Congress. Credit unions can once again evolve their cooperative model to better serve members and the country’s most critical financial needs.