Credit unions have been steady and consistent contributors to their members' and America's economic recovery from the financial crisis. They originated more loans (over $525 billion) during 2008-2009, the worst years of the crisis, than during any other two-year period in their history. They were the only credit-granting system to work as designed when national and international markets froze up for normal transactions. They have continued to be leaders in mortgage modifications and refinancing for members right up to today.
But this positive result has not carried over to assessments of NCUA, their federal regulator. Within credit unions there is widespread dissatisfaction. Critiques are many. The daily blog of Jim Blaine (CEO of State Employees Credit Union, North Carolina) chronicles his thoughts about the regulator's foibles, inconsistencies, and illogical actions, both big and little. In the industry there is the increasing discrepancy between assessed costs and actual losses in the corporate arena along with a lack of timely and transparent reporting of the management of the seized assets.
Moreover, the liquidity safety net that successfully served the cooperative system has been dismantled. The Central Liquidity Facility and its $2.0 billion of credit union capital is in legal limbo. In both rule-making and examination practice, the regulator seems frozen in a mindset displayed in the unilateral actions and arbitrary valuations imposed on credit unions during the crisis.
Congress, too, has been critical of NCUA in public hearings with Representative Melvin Luther "Mel" Watt. The Committee on Government Oversight and Government Reform has highlighted NCUA's contingent legal contracts that violate administration policy. Instead of supporting the administration's economic priorities to increase credit, encourage loan modifications, eliminate government regulations, and reduce expenditures through wage freezes, NCUA has asserted its independent agency status and gone in the opposite direction.
Why Reform Is A Credit Union Responsibility
Among credit unions is a widespread desire to see a more effective NCUA. But the next questions raised are: What can my credit union, CUSO, or trade association do about it? Isn't reform the responsibility of Congress or the Administration—or even the NCUA Board members appointed by the President?
Each component of the credit union system is a creation of the member-owners. Volunteers created credit unions, the leagues, and trade associations. Together they supported the regulatory system that is in place—both at the state and federal levels. That "support" can be either active or passive.
All components of the cooperative system are responsible for its well-being. Vigilance and oversight are not the sole responsibility of the trades, the regulator, or even the Congress. Cooperative governance means member participation, individually and corporately, in issues of system sustainability and especially the collective use of pooled resources for liquidity and insurance purposes.
A system built on self-help by aggregating resources means there is mutual responsibility for every component of a cooperative system. Every participant has accountability for more than his or her own individual organization. The actions of NCUA are the responsibility of each institution that is part of the cooperative system.
Why Now Is The Time To Undertake Reform
Reform efforts will require both public and cooperative system support. The pro-consumer public policy mood and events such as Bank Transfer Day position credit unions well for initiating the debate to modify their regulatory circumstances. This positioning will augment the industry's openings for promoting reform at NCUA at this time:
By August, two of the three NCUA board seats will need to be filled. For some this may be the time to identify candidates who have both the vision and the ability to make change. More important, the appointment process brings the opportunity to publicly discuss the kind of policy and operational changes needed. "Without vision the people perish" is as true today as it was when first stated several thousand years ago. Credit union leaders must support and advocate candidates with a cooperative vision—men and women who can lead change—to those making for appointments.
The cooperative liquidity safety net, a 25-year partnership between the CLF and the corporates, has been dismantled. This essential pillar of system soundness urgently needs to be restored. Most crises start as a liquidity event and then morph into a solvency-capital shortfall as asset values fall. Credit union liquidity is now at the mercy of the same institutions that froze during the last crisis. Members are at risk of having loan options cut off at their time of most urgent need.
The arbitrary assessments for corporate costs continue to tax credit unions when the facts continue to contradict the need. Over $6 billion in insurance assessments plus hundreds of millions of dollars in administrative costs are creating a regulatory burden on credit unions that is unsupported. This premium expense harms credit unions' ability to serve members with competitive rates.
Credit unions' pivotal role in contributing to member, local community, and the country's economic recovery has been inhibited by rule-making and supervisory activity that frustrate the innovative and diverse ways cooperatives create member value.
Congress is watching. Individual members are aware of the need for a different kind of leadership at the Agency.
The trend toward national regulatory policy, as implemented by Dodd-Frank legislation in the CFPB and FSOC, makes NCUA more vulnerable to consolidation. The example is the fate of the much larger thrift industry and its loss of separate status.
The failure to follow cooperative principles in the use of the CLF and NCUSIF and the emulation of bank-like regulatory responses means the credit union charter's attractiveness is increasingly vulnerable. New charters are virtually non-existent.
Creating A 21st-Century Design For Cooperative Regulation
Credit unions were created by Congress to be agents of change. The existing banking options in the Great Depression weren't meeting vital consumer and community credit needs. The same critique of banking is widespread today. But can credit unions continue to evolve their model beyond "Bank Transfer Day" moments?
Preserving the status quo is comfortable for NCUA. Its actions during the financial crisis have solidified an agency pattern of conduct that lacks accountability to any arm of government, let alone the credit union system that created it. Meanwhile, credit unions, having recovered their financial momentum, may now feel less urgency to change City Hall/NCUA than when their own existence might have been at stake.
But that would be the wrong conclusion. Instead, the time to change is when circumstances are not forcing it. Which means now, not later. Many of the most important strategic issues sustaining credit union performance will run through the Agency. These include what assets can be on balance sheets, risk and capital measurements, market-facing roles, and, ultimately, the evolution of cooperative financial designs.
Credit unions have an opportunity to enhance the most attractive charter for serving American consumers and communities. An internal system change could facilitate a new era of cooperative solutions for America.
Accepting the regulatory status quo means the fate of the independent cooperative charter will be driven by unforeseen events, not co-operative design.