In less than two weeks, we’ll ring out 2013, a year we’ll long remember as the one where the credit union industry turned a corner and found a smoother path. In fact, the view through the windshield today is a whole lot better than the one in the rearview mirror.
For the first few years as the NCUA board chairman, I felt like my role was triage, asking questions that often required painful answers: Which credit unions are in critical condition? Which can be saved? Which need to be conserved? Even relatively strong credit unions had rock-bottom returns, record charge-offs and plummeting net worth ratios.
Instead of measuring a good day by what went well, it was a good day when something bad didn’t happen. That’s the environment we were living in even after we put the worst of the financial crisis behind us.
But as I said earlier, the industry turned a corner in 2013. Credit unions’ net worth is at its highest level since 2008. Membership has reached nearly 96 million, and loans have grown for 10 straight quarters. Charge-offs and delinquencies have steadily fallen from historic highs.
As a result, the NCUA has shifted its focus from putting out fires to preventing future fires. These changes follow the timeless advice contained in proverbs like, “An ounce of prevention is worth a pound of cure… A stitch in time saves nine,” and “The time to fix the roof is when the sun is shining.”
As the industry becomes more concentrated, credit unions grow more complex, and consumers’ needs are more sophisticated, we’ve retooled the agency for the new environment and recalibrated our operations.
The road ahead won’t necessarily be straight, and there will be some slippery spots—but we’re on a new path. Sometimes, regulators put the brakes on change. I have never believed that’s the correct approach for NCUA or for credit unions. Instead, we’ve decided to keep pace with change through new policies, new people, and a renewed commitment to modernizing regulations and reducing burdens wherever possible.
We streamlined exams for smaller credit unions and updated the definition of a small credit union—increasing the asset threshold from $10 million up to $50 million—to provide additional regulatory relief and support from our Office of Small Credit Union Initiatives. Now, two-thirds of all federally insured credit unions are considered “small” entities. Being small actually brings big benefits in terms of regulatory relief and eligibility for grants.
We saw where risk was being concentrated and created an Office of National Examinations and Supervision. This office ensures that the very largest credit unions will receive specialized oversight to remain safe and sound.
One of the sternest lessons of the financial crisis was the importance of adequate liquidity. So, NCUA created a rule requiring credit unions with less than $50 million in assets to have a liquidity policy, those with assets between $50 million and $250 million to have a liquidity plan in place, and those with $250 million or more to establish access to a federal source of contingent liquidity.
We also responded to potential risks posed by the growing importance of Credit Union Service Organizations, or CUSOs. The NCUA Board finalized a rule to increase CUSO transparency, giving NCUA access to important information about CUSOs and their operations to determine what risks they may pose.
That said, the most significant risk to the industry’s future continues to be from rising interest rates. Already, just the 100-basis-point rise in the 10-year Treasury rate has many credit unions seeing unrealized losses on their balance sheets as assets re-price. That’s why interest rate risk will be our top supervisory priority in the coming year.
It’s also why the Board proposed a rule on the use of simple, “plain vanilla” derivatives as a tool to help manage that risk. We expect to finalize the rule in the coming months. We are likewise working on a new rule to permit certain credit unions to securitize their assets.
Of course, we still have much work remaining to clean up the wreckage of the financial crisis. Part of that is our continued effort to hold responsible parties accountable. We’re seeking recoveries on 16 outstanding lawsuits over sales of faulty mortgage-backed securities to corporate credit unions.
Less than a month ago, we crossed another milestone with the $1.4 billion settlement from JPMorgan Chase. NCUA will use the settlement’s net proceeds to pay down a healthy portion of the Corporate Stabilization Fund’s outstanding borrowings at the U.S. Treasury. In 2014, for the first time since 2008, credit unions will not be required to pay an assessment.
While this settlement is wonderful news, it is also a reminder that there’s a long, rocky road behind us. There are still some lagging effects from that journey that we need to address. But the lessons we’ve learned along the way will continue to guide us as we map out the route to a brighter future.
Debbie Matz is chairman of the NCUA. SHe can be reached at (703) 518-6301 or firstname.lastname@example.org.