Just because you're paranoid, doesn't mean The Man isn't out to get you.
This overused saying nonetheless applies to all the announcements this past week by financial regulators seeking new authorities not only over entities they currently oversee, but over new ones as well.
Leading the pack for credit unions is the announcement by the NCUA in its September newsletter that it will ask Congress for new supervisory authorities over vendors. An NCUA requirement for vendors to submit financial statements isn’t a new idea. Other banking regulators already require such disclosures; the NCUA is one of the few that doesn’t. And, the NCUA was granted temporary authorities over vendors during Y2K.
But is it even necessary? NCUA Board Member Michael Fryzel told me in July he agrees with legal opinions he’s read that say the agency already has the legal standing to require CUSOs to provide financial information. Fryzel’s hang up isn’t over legal authority, but the costs involved: $1 million to launch the new rule and $500,000 per year to maintain it.
So why would the NCUA need to ask Congress for the authority?
And further, would the NCUA really make good use of the information? After all, the NCUA had examiners on site at corporates and was well aware Western Corporate Federal Credit Union was investing in mezzanine security positions. The Unrealized Losses blog was sounding the alarm bells well before the crisis, as were a number of credit unions. (It’s a shame those credit unions mistakenly thought the losses wouldn’t flow downstream.)
Bottom line: the problem wasn’t authority, but rather, that corporate examiners were slurping from the same Kool-Aid fountain as corporate executives and their volunteer boards. The red flags were there. The problem is that nobody wanted to see them.
On its face, the ability to anticipate the next financial crisis is a good one. However, that rationale alone should not be used to support the need for expanded supervisory powers.
Credit unions are already burdened with increased regulatory burden from the Consumer Financial Protection Bureau, which has yet to prove it is motivated more by a desire to prevent the next crisis than by a Quixotian idealistic crusade.
Fair lending laws are also in the spotlight, as credit unions not only have to deal with fields of membership that make them statistical outliers, but also the additional lending scrutiny disparate impact provisions require by law. (Unless the Supreme Court rules otherwise.)
On Sept. 18, Comptroller of the Currency Thomas J. Curry, who is also chairman of the Federal Financial Institutions Examinations Council, said he's pushing for more exam oversight of cybersecurity, noting recent DDoS attacks.
Large institutions with more than $1 billion in assets seem to have their cybersecurity defensive strategies in place, but Curry made a good point when he said hackers will increasingly target smaller, unprepared institutions.
More supervision may seem like a good idea, but where will it lead? Is it unrealistic to envision that someday all credit unions will be required to outsource all digital activities to service bureaus? Remember, these vendors would be included in the NCUA's request to regulate third-party providers. The move could reduce credit unions to just a friendly face.
One of the least controversial attempts at increased supervisory powers is the NCUA’s announcement that it is writing a proposed rule that would require the four credit unions with more than $10 billion in assets to file stress testing results. Because of sheer size, these credit unions already conduct stress testing, so it doesn’t appear that the requirement would result in increased costs or staff burdens.
Jim Blaine, president/CEO of the $27 billion State Employees’ Credit Union of Raleigh, N.C., said he supports the NCUA making the results of the stress tests public. Of course, Blaine’s position is no surprise; after all, he famously challenged the NCUA when he released his CAMEL rating. A positive stress test result would support Blaine’s position that his balance sheet is rock solid, despite comments by the NCUA that the regulator would ‘sleep better at night’ if he decrease his mortgage portfolio risk, despite the loans falling within regulatory standards.
The NCUA and CFPB aren’t the only regulators seeking new authorities. The Washington state regulator began conducting separate consumer compliance exams Sept. 11. Linda Jekel, director of the state’s credit union division, told Credit Union Times the new exams will ensure state chartered credit unions are compliant with CFPB standards, and as a result, reduce potential liability and fines.
It’s not the first time state regulators have been strong armed by federal rules. The NCUA's derivatives rule and troubled credit union rule already step on state regulatory toes.
I like a good conspiracy theory more than the average person, but I always hope they aren’t true. It stinks when the federal government acts in ways that support conspiracies. Quotes from folks like Rahm Emanuel, who famously said government should never let a good crisis go to waste, don’t help.
It’s no wonder credit unions continue to look over their shoulders, paranoid they’re in federal cross hairs.
- Heather Anderson Executive Editor email@example.com