Pre-Funding Hypothetical Future Losses: A Lesson From Hurricane Katrina

The NCUA does not need to keep credit union corporate bailout money, if the past is still prologue.

The images of flooding, devastated landscapes, and people who have lost everything from hurricanes Harvey, Irma, and Maria fill the airwaves.

Loss of life and property damage in the billions continue to mount. One credit union economist has stated that Harveys destruction in Texas (before Irma) could cause losses to the NCUA.

As if the regulator needs encouragement to overestimate risk as it makes plans for the billions it wants to hang on to from the corporate credit union bailout rather than return to the credit unions who have funded this bureaucratic largesse.

Also from Chip Filson: Dont Let The NCUA Take Your Members Millions (Again) and Credit Unions Rally To The NCUAs Side: Will This Prove A Good Decision?

There is an unfortunate human tendency to believe dystopian forecasts: Negativity makes one sound like an expert, as the saying goes.

This approach was used by NCUA staff during the financial crisis and Great Recession. In a Sept. 22, 2009, memo to the NCUA board based on a stress test from the Treasurys Supervisory Capital Assessment Program the following was reported: The baseline analysis produced an allocation of $32.6 billion in losses resulting in 38 failures with a maximum exposure to the NCUSIF of $577 million. The more adverse scenario projected 519 credit union failures and a maximum NCUSIF exposure of $15.5 billion.

Neither happened. Not the baseline, much less the worse scenario. Such apocalyptic projections can compromise peoples sense of responsibility and accountability for creative problem solving. Instead the solution becomes just finding enough money.

I know. Because, in this 2005 article, I made just such an error when analyzing the impact of Hurricane Katrina on credit unions and the NCUSIF in 2005.

The Katrina Losses That Didnt Happen

Katrinas flooding was so devastating that two weeks after the storm moved on, NCUA listed on its website 69 credit unions in and around New Orleans with assets of $284 million that were nonoperational and/or unable to be contacted. Hundreds of thousands of people were evacuated, many never to return. Homes and autos were destroyed; there were only uncertainties about when and if there would be a future for the Crescent City.

There were 54 more credit unions in Orleans Parish with assets of $1.1 billion that were partially operational. The NCUA identified a further group of credit unions with hurricane damage, raising the total exposure to more than $3.4 billion.

Using the NCUA lists and the June 30, 2005 call report data, it was easy to calculate the probable insolvencies. One had only to compare the savings balances less recoverable assets (investments) and assume all secured loans (mortgages and autos) and even unsecured lines of credit would be totally lost. I estimated a $100 million shortfall (loss) on the 54 credit unions in New Orleans to as much as $500 million when adding the parish credit unions.

The article made specific industry suggestions such as a recovery czar to coordinate relief and a special CLF loan program to minimize potential losses. My September 2005 article also projected the possibility of a premium if the higher-end credit union insolvencies occurred. ContentMiddleAd

The Share Insurance Fund Weathers The Storm

What happened? Just four months after Katrina, the NCUSIF reported net income of $74 million for 2005, a loss provision expense of just $20 million, and no premium necessary.

In an August 2010 article that looked back at my 2005 article, we report that the credit unions in the hurricanes direct path had grown from $959 million to $1.12 billion. There had been mergers, and credit unions did take direct write-offs of uninsured losses, but the catastrophic outcomes that the hurricane wrought on the greater New Orleans climate and infrastructure did not wreak the same havoc on the member-owned financial cooperative system.

Why? There are multiple reasons. One of the most important is the resilience and creativity of credit union leaders and members. One story documented a CEO in Texas with a pilots license who flew cash into the New Orleans area on his own. Credit unions partnered with unaffected peers to provide offsite facilities, temporary offices, and even homes for employees.

More importantly, analysts work only with numbers, not human efforts. The core of credit union strength, the reason for their success, is their members. They did not desert their own institutions, but helped regenerate the cooperative model for future New Orleans residents.

A Lesson For Today

No one can predict the future. Yet future facts, often supported by elaborate models, are produced to support real expenditures and costs today.

History does not neatly repeat itself, but human nature does. The experience of Katrina does not mean there will be no credit union insolvencies from this hurricane season. What it does suggest is that we should be very careful about the need to pre-fund contingencies.

Leadership is the art of responding to unpredictable, and sometimes unknowable, future challenges. These uncertainties do not require hoarding present-day funds for unknown tomorrows. Rather it requires creative people who are confident in their own abilities and in the ability of their communities to step up when it matters.

That is the same confidence that led people to start credit unions with no capital dollars, only common purpose and a shared passion. Why should we expect these qualities to be any less in the future?

September 22, 2017

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