NCUA’s risk based capital – Numbers don’t tell the story

The assumption that a Call Report tells the full story of capital risk is both flawed and dangerous.  Never mind the philosophical assumption that all risks can be measured.  I’m really troubled by the push-broom sized way risk is measured when NCUA should be binging out their sharpest pencil.   We need differentiation and separation of credit union analysis… not broad oversimplified (and quite frankly, draconian artificial) limits. 

Easiest example – My cu has been making RE loans since we were large enough and we were formed in 1951.  We have never had a RE loss.  We are located in San Bernardino, a BK city.  We survived the great recession and all that.  Yet, because our members make lots of RE loans – We will be deemed risky.  Look at our call data.  Yes we have a large concentration of RE loans.  They are however, 15-year step up loans where the LTV is 70% or less.  That doesn’t jump off the Call Report.  I’ve got a lot of risk here according to NCUA.  Yes, we are under $50MM, but does anyone think it’ll be too long before someone tells us –“We think you should follow those guidelines as well.”  At the same time I could make 0.79% auto loans that have a 72 month term and LTV’s in excess of 120% and that’s not risky according to NCUA.  Why?  Simply because that risk is not disclosed on the Call Report.

NCUA needs to be less lazy here.  A Call Report will never disclose the full extent of any cu’s risk.  It’s also a little troubling, as some cu’s have found out, that NCUA remains the judge, jury, and executioner.  Where’s the checks and balance that America is so strong on?  Where is the appeal process?  How can a cu obtain a waiver of requirements when it’s shown that they are not a Telesis?

NCUA needs to empower, not squash our business model.  Since Ms. Matz is always brining up Telesis as an example, why not review the other umpteen cu’s that are doing MBL with no problems?  Why not find the ways that are working and write the rules to allow us to succeed with regulation…. Not in spite of regulation!  I’m sure the best practices are out there.  Why aren’t they included in the regulation instead of viewing every cu that offers MBL as if they are a Telesis?

Where are the offsets to the Asset Risk?  We keep hearing about rates up and all the dangers with that.  Does NCUA realize the repeal of Regulation Q at the height of inflation cause the S&L demise.  They were funding in a regulated rate environment that became unregulated overnight.  We aren’t experiencing inflation and we haven’t had a regulated rate environment for a very long time.  Rates up will bring back our bottom lines in a very short time.  NCUA seems focused on the “what will it look like next month”..  The entire Mark-to- market / liquidation mentality needs to be replaced with the going-concern approach.  I can prepare for an earthquake within CA and still function.  I can’t function, though if I have to constantly act as if an earthquake of 8 magnitude will happen right under my feet this very moment.  We are in a risk-taking and managing business.  We need to MANAGE that risk.  NCUA looks to be trying to eliminate all risk…

Similarly, their risk intolerance of investments terms has cost the industry $Billions!  In no book other than NCUA is an investment that is 3years and one day in term considered a long-term investment.  Credit unions have actually been forced to sell longer-term investments to reduce this perceived risk.  I’m sorry for those that did that a few years ago.  The assumption then and now is, rates will be going up any day, and we need to get ready now.  By taking the shorter term, they have given up current earnings that have yet to be replaced.  Every year this goes on makes it harder to recoup the lost income.

Consider – a long-term investment portfolio is now still earning above 2%.  The industry average has been at or below 1% for some time.

After three years and counting, the long-term investment portfolio had earned 6%.  The shorter-term portfolio, only 3%.  If rates go up next year (and it’s now predicted to be 2016 before the short end of the rate curve is to move), the short group will earn 3%+2% = 5%.  While the long term will earn 6%+2% = 8%.  Say they go up again and the short group is able to fully reprice, while the long group has no repricing:

5%+3% = 8% and the long group receive 8%+2% = 10%.  Staying short is not a very good strategy with a steep investment curve.  That’s where we earn income.  NCUA needs to allow us to MANAGE this risk with empirical evidence that’s sound, not the current “the sky is falling mentality”.   Credit unions have lost significant income year after year by following the flawed NCUA way of investing.  They are missing the time element in their analysis.    They are also missing the ability for sound investing to roll the curve.  A mortgage-backed investment does not roll the curve when rates change.  A fixed term bond does.  So, if I have a 5-year investment that is earning 3%, in two years I have a 3-year bond that is earning 3%.  Rates can increase and I’ll still have shorter-term bond further down on the yield curve.  And I’ll have booked the income in the interim!

NCUA needs to stop the current proposal and come back with a well-reasoned and comprehensive solution.  The current proposal is neither.

The thoughts are mine and may not reflect the those of all my cu members… But I think they would agree they are getting the stinky end of the stick with the current proposal.

Gregg Stockdale

Gregg Stockdale

Started out as an NCUA examiner in 1974. Not a good job-fit, but fell in love with CU's and worked for many in California. CEO - Master Printers Section CU ... Web: Details