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Part I showed how the changeover of NCUA board chairs has perpetuated a leadership vacuum at the agency frustrating effective policy development and positive relations with the industry. Following is a recent example of this challenge.
A classic case of ineffective pubic policy is the NCUA’s management of the corporate credit union crisis. It also demonstrates the embedded cultural mindset from the agency’s actions in this event.
This regulatory hangover continues whenever any corporate topic arises. Since 2009, NCUA’s attitude in supervising the corporate system could be described as, “If you don’t have a seat at the table, then you must be on the menu.”
The absence of market expertise at the NCUA board and staff level has created policy decisions by rote. Lacking different perspectives and professional insights, the existing culture plods on. When governmental backgrounds are the dominant experience senior officials bring to their roles, the disconnect with credit unions competing in the open market can become great.
Policy on autopilot
One example of this bureaucratic legacy is from the NCUA board’s January 2021 meeting. It approved by a 3-0 vote a final rule 704 permitting corporate credit unions to invest in the subordinated debt of natural person credit unions. However, this “loan” must be deducted 100% when computing a corporate’s net worth ratio.
The following is the logic for this rule from the board memorandum:
The NCUA claims open-ended authority: The FCU’s “broad mandate,” “plenary grant of regulatory authority,” and “an express grant of authority” can be exercised as “the Board deems appropriate.” The words are presented as unrestricted power to do whatever the board wishes. An unchecked authority.
“Under the FCU Act, the NCUA is the chartering and supervisory authority for Federal credit unions (FCUs) and the federal supervisory authority for federally insured credit unions (FICUs). The FCU Act grants the NCUA a broad mandate to issue regulations governing both FCUs and FICUs. Section 120 of the FCU Act is a general grant of regulatory authority and authorizes the Board to prescribe regulations for the administration of the FCU Act. Section 209 of the FCU Act is a plenary grant of regulatory authority to the NCUA to issue regulations necessary or appropriate to carry out its role as share insurer for all FICUs. The FCU Act also includes an express grant of authority for the Board to subject federally chartered central, or corporate, credit unions to such rules, regulations, and orders as the Board deems appropriate.”
It’s a loan: “Treating the purchase of such subordinated debt instruments as lending ensures consistent treatment between natural person credit unions and corporate credit unions.”
It must be fully deductible from the capital ratio: “The Board believes that fully deducting such instruments from Tier 1 capital ensures any potential losses do not affect the capital position of the investing corporate credit union. This measured approach strikes the right balance between providing corporate credit unions the flexibility to purchase natural person credit union subordinated debt instruments and avoiding undue systemic risk to the credit union system.”
The result: a nonsensical rule
This “updated” rule restores an activity, previously allowed but then revoked, to make a loan. But only if it is 100% deducted in calculating the required net worth ratio.
Loans are a credit union’s primary purpose. Few “loans” would ever be made on the condition that the institution must “write it off“ when calculating capital compliance.
In effect, NCUA confesses a lack of confidence in its own supervisory decisions. For NCUA must first approve all the subordinated debt issuance by natural person credit unions. The rule’s logic is that this approval and oversight are so suspect that the only prudent behavior is to write it off if a corporate purchases this loan debt. This is not mere risk rating; it is 100% reduction from capital when calculating net worth.
The write off is not proper accounting under GAAP. It is an imposition of regulatory accounting practice or RAP. There is no limit to RAP interpretations; see authority claimed above.
No facts were offered to support this claimed risk. Has any issuance of subordinated debt ever been written down or subject to a loss? What is the evidence to document this risk? Moreover, how important is this debt option for credit unions? If it is an important, why discourage its use this way?
If NCUA is so concerned about investments or loans used as capital by the recipient, then why aren’t credit unions required to write down their home loan bank equity requirements? Or closer to home, why aren’t the corporates required to write off their CLF capital investments. Are they not at risk?
The ultimate rationale is that this is the way we have done it before. The result is that past errors of policy, guidance, interpretations compound far into the future. The mind set continues.
“In addition, the February 2020 proposed rule included a requirement for a corporate credit union to fully deduct the amount of the subordinated debt instrument from its Tier 1 capital to ensure consistent treatment between investments in the capital of other corporate credit unions and natural person credit unions. Under the current regulation, corporate credit unions are currently required to deduct from Tier 1 capital any investments in perpetual contributed capital and nonperpetual capital accounts that are maintained at other corporate credit unions.”
This rule is not based on any assessment of actual risks, Moreover it perpetuates “confirmation bias” errors that have been extraordinarily costly to the corporate and credit union system.
Which leadership model will new Chair Harper follow?
He inherits a decade-long policy of top-down mandates. Former board member McWatters described the situation this way in a 2015 speech to Pennsylvania League’s Annual Meeting:
“The NCUA should not treat members of the credit union community as Victorian era children—speak when you’re spoken to and otherwise mind your manners and go off with your nanny—but should, instead, renounce its imperious ‘my-way-or–the-highway’ approach and actively solicit input from the community on the NCUA’s budget and the budgetary process.
“With the strong visceral response within the agency against budget hearings, it seems that some expect masses of credit union community members to charge the NCUA ramparts with pitchforks and flaming torches to free themselves from regulatory serfdom. I, conversely, welcome all comments and criticism from the community.
“I champion the right of the regulated to speak to the regulator on the record regarding the expenditure of their limited resources. . . It’s simply a matter of respect and professionalism evidenced through the lens of transparency and full accountability.”
‘Step down from the Ivory Tower’
McWatters also cautioned against the view that board nomination validates knowledge: “Regulatory wisdom is not metaphysically bestowed upon an NCUA board member once the gavel falls on his or her Senate confirmation. NCUA should not, accordingly, pretend that it’s a modern-day Oracle of Delphi where all insight of the credit union community begins once you enter the doors at 1775 Duke Street in Alexandria, Virginia.”
Duty vs. loyalty
The Chair’s approach to board leadership also affects how agency staff perceive their jobs. Is staff supposed to provide their professional judgment, or are they just expected to fall in line with the Chair’s approach?
This staff dilemma was described by former Chairman Rick Metsger: “As I told Mark Treichel, the then executive director of the agency when I became chairman when he offered his loyalty, I said I didn’t want his loyalty, but I did expect his loyalty to the mission of the agency and that he would offer unvarnished opinions and options to help me make the best decisions possible.”
Harper’s challenge: reset or more of the same?
Todd Harper was chief policy advisor to Chairman Matz. Her top-down leadership approach to policy is what prompted the above comments by board members and staff who worked with her.
Will Harper follow her leadership and policy example? Or will he embrace the widespread belief that there needs to be a reset in Agency and credit union relations?