To Disclose or Not to Disclose: Is that the Question?: Opinion
(Editor's note: This column and the accompanying column by Henry Wirz present differing views on whether the NCUA should disclose CAMEL scores.)
“To be or not to be…” That is a question with which Shakespeare has tormented every person who ever attempted to read this soliloquy from Hamlet without benefit of a modern translation. This is a real question that an examined life should attempt to answer. The question of disclosure of the CAMEL is not such an important question that requires much mental consideration.
It was back in the Connell or the Callahan time that some genius in the head shed came up with this profoundly stupid idea and forced the implementation over a chorus of well-thought out objections. It is suspected that their agenda was actually something more diabolical than transparency. Their hidden agenda will be discussed later.
Not since they discussed how many angels can fit on the head of a pin has there been such a more wasteful debate than to disclose or not disclose the CAMEL. Only at the request of the new publisher/editor-in-chief would a person actually participate in such a foolish waste of time. It is sophomoric thinking to believe that disclosure benefits anyone. The number is always out of context!
At best the CAMEL tool is full of sound and fury that signifies nothing. It is not doing anything to advance the cause of helping American solve real problems. It is a really model that proves the axiom “Garbage In, Garbage Out!”
How do I dislike thee? Let me count the ways! Let’s go through the CAMEL and review the assumptions about its virtue:
- Capital: It is clear that capital levels are different for different credit unions. The capital requirements for a sole employer credit union of a very profitable company should be less than for a community credit union in an underserved area. Credit unions that take on unnecessary risks by going into ill-conceived member business lending programs cannot have enough capital. Credit unions with unsound historic lending practices require more capital. There should be no fixed level that across the board indicates a well or not-so-well capitalized credit union. There are many subjective considerations concerning the appropriate capital level. One concept for years was a lean capital position. If you had more capital than necessary to cover losses and your regular reserve (Old Farts will remember this account!) and a cushion for several months of dividends for hard times you were over reserved. From the regulators’ view a 100% capital structure may be enough to protect the Share Insurance Fund, but not enough to give them comfort.
- Asset Quality: It is unclear that why we have this rating. If you have a properly funded allowance, it assumes the other assets are sound! There may be some room for argument that any loan may be mispriced and may affect one’s consideration of quality. If the credit union is holding the asset and not selling, than wondering whether it is mispriced is not that important unless it has a negative effect on earnings and capital.
- Management: A simple test of management quality is if the credit union is growing soundly and are the members benefiting from its decisions. Another view is to paraphrase John Wooden: “Don’t measure credit unions by what you accomplished, but by what you should have accomplished with your abilities.” Some credit unions have less-demanding management challenges yet they do not succeed. It is all about potential. NCUA uses this rating on what level of “I like you scale” you rate or are you a nice doggie scale. Stand up or do something off the NCUA playbook no matter what good in the long run it does for members and you will get a rating downgrade. For the record I always rated NCUA a 1, because the expectation for success based on their abilities was so low!
- Earnings: This rating seems to force credit unions to do things in violation of core cooperative principles. The credit unions earnings should be enough to cover expenses, provide for losses, pay a dividend and end up with ZERO. NCUA is forcing credit unions for the sake of a rating to earn more than is justified under cooperative principles. It is regulatory approved theft of members’ money pure and simple.
- Liquidity: This is the most difficult of ratings to understand. It is suggested that if you do have enough funds to cover normal and some reasonable degree of funds to handle increased withdrawal demand you are in good shape. No level of rating will help you understand the consequences of a full-blown run on the institution. A 5 rating if you are meeting normal fund flows means about as much as a 1 rating in the middle of a run. It’s very difficult to protect against a run, which is usually caused by issues beyond management’s control. Anything between a 1 and a 5 rating is over thinking when no run is happening.
For the above reasons and many more, one has to seriously question the benefit of disclosure. If you understood the real regulatory agenda, many would refuse to consider this rating as anything of value.
The truth is that this is an NCUA cathartic to purge them of troublemakers and leave only the peace-loving, brain-dead, grade-grubbing teacher pets that they wish to control with the assignment of a grade. The goodie two shoes will do whatever the regulator wants so they will get some questionable grade even if it works against the members’ interest!
You should grant yourself your privilege to not care what NCUA rates you! It is suggested if you are a code 4 or 5 you may wish to consider some change.
To accept the slings and arrows of regulatory misfortune is a choice. As a CEO I choose to resist and believe that members’ interests were better served. There are many CEOs who still choose to fight the battle.
I would not be surprised to see Ritalin prescribed in their next DOR. It is with regret that the CAMEL rating system makes cowards of so many, and turns them into self-compromised human beings. They choose compliant submission than appropriate action. It would have been so much better if Shakespeare used English when writing. We would have understood the answer to the question better!
Bill Brooks is a certified financial planner with CU Prosper in Rehoboth Beach, Del.