Name Withheld by Request

A healthy regulatory environment requires transparency, member representation, and member participation, all lacking today. The movement should take a hard look at the current situation determine what is not working and how repairs might be made.


Two strengths of the cooperative model are member participation and representation; they are fundamental to the democratic, common ownership. More important, public and open dialogue helps assure responsive performance at all levels of the cooperative system.

Ultimately the strength of cooperatives -- their competitive position and their safety –depends on the soundness of the decision-making process. Cooperation can look messy when compared to a top-down dictated policy. But without open dialogue, credit unions, trade groups, CUSOs, and regulatory agencies can become absorbed with self-perpetuation. In NCUA’s situation, this can result in the agency becoming a law unto itself.

Over the past year there has been increasing worry about NCUA’s regulatory activities. Industry concern has been focused on the continuously escalating costs of NCUAimposed actions on the corporate system. The $6.4 billion audited loss estimate, released in July 2010, more than tripled weeks later with an imposed plan costing more than $20 billion. Specific instances of incompetence (St. Paul Croatian FCU’s $200 million loss on $240 million of loans) and arbitrary actions (such as Arrowhead’s conservatorship) have also fed growing concerns about arbitrary behavior.

Going Public

These concerns, often voiced in private meetings, conversations, emails, and blogs, are now becoming public. In some cases, the writers are asking that their names be withheld for fear of retribution. In other cases, individuals voicing their concerns are being chastised for allegedly dividing the movement, threatening the future independence of NCUA, or even provoking a congressional lack of confidence in credit union regulation.

This growing public debate comprises two separate but related issues. The first is the process of the public debate and how change can be mobilized by those who seek a more effective system. The second is the focus on the lack of accountability. On the first issue, I believe that open, widespread and public dialogue is not only a credit union virtue, but also the best way to see that multiple solutions are evaluated.

But more important, public debate can be a vital indicator of an industry’s confidence and belief in its future. When senior managers and volunteers, their institutions, or even individual members sit passively by or react with resignation, we are abdicating leadership. Future success is given to no one; it must be earned.

The Central Issue: A Faustian BargainM

The central issue dominating comments is the lack of accountability in NCUA’s actions. While there will be many points of view about specifics, whether for or against a corporate plan, a new rule, or even a specific credit union, there is a growing uneasiness that NCUA is answerable to no one.

Faust is the protagonist of a classic German legend. The highly successful young scholar makes a deal with the devil exchanging his soul for unlimited knowledge and worldly pleasures. The legend is now a widespread cultural motif about “tradeoffs” in return for favors.

The credit union system has become locked in a Faustian bargain with the regulator. Credit unions provide all NCUA’s financing in return for responsible oversight and to ensure that the errant are identified and reined in.

Instead, the “deal” has turned into open-ended assessments on system resources with no collaborative processes. The historical achievement of credit unions in creating a unified (three functions-under-one-board) NCUA regulatory structure has now become the industry’s biggest detriment. At its conception, the single structure was designed with cooperative principles and collaborative values. These have now been eclipsed.

The most serious failure was the September 24, 2010, corporate nationalization plan imposed with no industry consultation or even review. Instead NCUA is paying some of the same investment bankers and selling the credit union system’s assets to Wall Street firms that were instrumental in creating the corporate investment problems.

Why Regulatory Accountability is Critical

Regulators have wide ranging power to penalize those who do not comply. Regulatory accountability is complex because there are multiple stakeholders and multiple objectives. NCUA’s activities are not subject to the direct checks and balances as are the legislative, executive, or judicial branches of government. Unhappily, over the past several years, NCUA has become more and more like an unelected fourth branch.

Some persons have asserted there is a tradeoff between accountability and regulatory independence. In reality, well-structured accountability is fully consistent with and supportive of good governance and independence.

Accountability rests on basic principles:

  1. Independence is never absolute.
  2. Accountability is not synonymous with control. While no one may directly control an independent agency, it must remain “under control.”
  3. Accountability and independence are complementary. A trusted reputation can be built only by publicly explaining views and policy presumptions so that actions have legitimacy. That trust is absent today.

Regulatory decisions can be coercive. They affect not only individual rights and property but also the common wealth credit unions established in the NCUSIF and CLF to the benefit of members. With billions of dollars of member funds under their daily management, as well as the futures of all credit unions and millions of members affected by NCUA’s decisions, transparency in both policy and facts are essential. Neither such transparency has been met, especially with respect to nationalization of the corporate network. One result is the widespread unease with future credit union involvement in the corporate model now being imposed by NCUA.

Designing New Accountability Arrangements

NCUA accountability has two critical components, expressed here in the form of questions. First, to whom is NCUA accountable? Second, what form should the accountability take?

To the first question, we can say that NCUA should be accountable to five groups. The first are the three branches of government -- executive, judicial, and legislative. The other two are the credit union system, including its members stet and the public at large.

Although NCUA has statutory reporting obligations to the three branches, in recent years its minimal submissions have been observed more in the breach than the observance. Required reports have been neither timely nor transparent. Actions have been taken that negate congressionally granted powers. Other executive agencies such as Treasury or the FDIC, which NCUA claims to have consulted, have provided no public information; or the consultations have been merely pro forma with no meaningful involvement.

Judicial review of NCUA actions has been minimal. Plaintiffs bear all the burden of resources in challenging agency actions. Courts have been reluctant to provide review of specific actions, choosing instead to rule on agency authority.

And Congress just passed SB 4036, which passed Congress unanimously on December 2010 with no hearings, legislative record or even industry consultation. In this so called technical amendment are open-ended phrases such as “assess a special premium. . .to make any pending or future expenditure” which is “reasonably calculated;” and amended the net worth definition to include assistance to “facilitate a least-cost solution consistent with the best interests of the credit union system.” Nowhere is the need for, or definition of what these changes intend, explained. This is from an Agency that just implemented a $20 billion “least cost” corporate plan after auditors had said the contingent liability was $6.4 billion!

Therefore the critical group to promote accountability must be the credit union system. Today in Washington, D.C., in the midst of broad economic, fiscal, and international challenges credit unions are far down the list of executive and legislative agendas. Even within the debate around implementation of financial service reform, credit unions have been seen as either minor players or having “self-contained” issues.

The responsibility for documenting both the lack of NCUA accountability and potential solutions falls to credit unions. And it is serious business. The issue is much greater than an intramural dispute between regulator and regulated. NCUA’s failures have also compromised the critical public policy roles of cooperatives in providing credit for members and enhancing the pace of economic recovery.

More important, in dismantling the corporate system, NCUA has critically undermined the most vital pillar of system soundness: its internally funded liquidity capability in a crisis. Credit unions’ counter-cyclical credit-granting role in the future is now an open issue.

The Critical Accountability Criteria

Three broad criteria provide the ultimate source of democratic accountability for both credit unions and the general public:

  • Transparency (see our section on the Freedom of Information Act (FOIA))
  • Participation
  • Representation

All three are missing in the current situation, and the form they might take in the weeks and months to come is now part of the public discussion. Historically, cooperatives believed that a unitary structure, that is, three functions and one board, reflected their values and commonly owned capabilities. Reforming that structure is now critical to the system’s collective future.

Credit unions were founded as outsiders to the existing financial system and its governmental oversight. In 1934 the Federal Credit Union Act was part of a “new deal,” a new approach. Credit unions were disruptive innovators with their member-owned and funded business model. This difference by design was because the old banking models weren’t working.

While it may be an “inconvenient truth” to state that the regulator has now become the problem, doing so should not suppress the question of what a better design would be. That question should at least nudge the system in the direction of searching for the right answer. And during that search, people should not fear signing their names to a public statement concerning regulatory actions.




Jan. 1, 2011


  • would be even more itneresting to see the formulas