The recent financial crisis taught the country several important lessons. For the credit union industry, the crisis demonstrated the need to redesign the oversight of the system’s cooperative insurance fund. The NCUSIF is not the FDIC. The financial designs, statutory contexts, authorities, and constituencies of each fund are fundamentally different. To restore accountable governance and make the NCUSIF a strong, advantageous system, rather than an open-ended liability, legislation is necessary.
Designed in 1984, the NCUSIF is a deposit-based fund and a source of collective capital for the credit union system. Unfortunately, during the recent crisis the NCUA has not used the fund as it was designed in three critical respects:
- Assistance to avoid liquidation, which is authorized in section 208 in the Federal Credit Union Act, has been lacking. The NCUA has instructed credit unions with losses, no matter how well they are managed, to downsize to fit their remaining capital. This is not following the flexibility explicitly stated for PCA in section 216 of the Federal Credit Union Act. More than $10 billion of credit union funds sit idly in Treasury deposits while credit unions close branches, cut staff and, more critically, reduce member loans and services that are vital to local economic recoveries.
- The NCUA Board has overcharged credit unions for NCUSIF premiums, reducing credit unions’ net worth and cash when most needed. According to NCUA Chairman Debbie Matz, the losses in 2010 for the NCUSIF were $223 million. In actuality, just $35.5 million of that total was for traditional failures from 27 credit unions. The remaining $188 million for St. Paul Croatian was a regulatory, not an economic, failure. In the fall of 2010, NCUA charged credit unions a $929.5 million premium. At year end, the total allowance account totaled $1.3 billion. That’s 37 times larger than the economic failures for 2010. (download a PDF of the 2010 credit union failures)
- NCUA’s reporting for the NCUSIF is not transparent. It is not responsive to the fund’s credit union owners, and it does not comply with statutory mandates by Congress and the President. For three consecutive years, the financial report has not been available by the April 1 deadline. The principles of effective governance that are expected of any organization — public or private, whether as trustees or managers — are lacking.
Legislation is necessary to resolve this situation and restore cooperative insurance to its role as a system resource, not a fig leaf for regulatory failure. The shortcomings are structural, not managerial. There is no check and balance on NCUA actions and there is no accountability to users, the administration, Congress, or the public.
Legislation should incorporate the following changes, which build upon the distinct structure and values of a cooperative system:
- Separate the NCUSIF from the NCUA Board and establish an independent organization similar to the FDIC and ASI.
- Establish governance through a board elected by credit unions with ex officio members from state and federal regulators.
- Provide examination and supervisory reports from the chartering authority to the fund’s staff, but give the staff the power to oversee a credit union once it has exhausted regulatory options.
- Structure the fund to resolve problems through capital assistance as well as traditional merger, liquidation, or purchase and assumption options. As cooperatives have no capital options, the key goal would be to sustain the role of the credit union that is experiencing temporary difficulties.
- Give credit unions the option of selecting FDIC insurance versus the cooperative model. Such a choice presents an additional incentive and comparison for effective fund performance.
Other Elements of Reform
This is just one element of reform. Pick up the April Callahan Report for an outline of the other institutional reform imperatives that would accompany this change in the NCUSIF. Click here for copy.