NCUA, CUs, RBC, IRR and the WSJ
Reading a recent Wall Street Journal article, you’d think credit unions were playing fast and loose with their loan underwriting and asset-liability management policies. It stated that credit unions were returning to pre-financial crisis lending policies — a financial crisis that natural person credit unions survived well because in general their policies were never overly “lax.”
WSJ wrote, “The increase comes as some credit unions are adopting lax standards for mortgage and home-equity loans and lines of credit reminiscent of those leading up to the financial crisis, according to interviews.”
Interviews with whom? It's shocking WSJ would make such a weighted statement without citing a specific source. Particularly when paired with a direct quote from NCUA Chairman Debbie Matz stating, “I am concerned that the message is either not getting through, or it's getting through and they are just choosing not to do anything about it.”
The NCUA said it did not pitch this article to the WSJ. It did provide the information for a chart showing a drop from more than $3 billion in unrealized investment gains in 1Q2013 to more than $2 billion in unrealized losses as of 1Q2014. The agency also pointed out that further down in the article, the NCUA said credit unions on the whole have a “relatively good credit quality record.”
Nevertheless, Paul Gentile, president/CEO of the Massachusetts, New Hampshire and Rhode Island leagues, lamented that the quote was very damaging. He pointed out the lost income opportunity credit unions would be facing, along with less capital, had they not made longer-term loans and investments over the past couple of years.
Despite its financial prowess, WSJ doesn't even mention risk-mitigating tools like balancing long term with short term, adjustable balanced with fixed, and callable bonds.
Matz's statement is also contrary to a press release the NCUA issued just two days before, which said credit unions’ fixed-rate mortgage originations plummeted to an annualized $42.6 billion in the first quarter, down from $102.9 billion in the first quarter of 2013. Is a 60% decrease in fixed-rate originations not enough?
The article continues, “Meanwhile, those banks and credit unions will have to pay depositors higher interest rates, otherwise those customers could move elsewhere.” Oh no! Credit unions might see some deposit outflows. When Bank Transfer Day took place three years ago, it was a blessing to the banks that needed to offload deposits from the Occupiers, who dumped them into credit unions. It wouldn't have surprised me if the banks orchestrated BTD to unload unprofitable customers.
The article also decries credit unions “piling into” longer-term assets and notes Pentagon FCU's current home equity offering, yet Pentagon holds 18% net long term to total assets – nowhere near the quoted average of 35%. For others that are at or above 35%, such as $58 billion Navy Federal, are they supposed to miss income opportunity for the rising rates that have been allegedly coming for a couple of years now?
Many credit union executives have survived various economic conditions, and are at least as experienced in dealing with them as the NCUA. Yet, Section 105 of the RBC proposal states that “appropriate minimum capital levels for an individual credit union cannot be determined solely through the application of a rigid mathematical formula or wholly objective criteria and that decision is necessarily based in part on a subjective judgment grounded in agency expertise.”
The NCUA is taking the risk out of the business and usurping the board and management's judgment for its own. Additionally with the arbitrary 35% ceiling for long-term assets, the NCUA is creating a check-the-box exercise for its examiners rather than thoughtful examination and oversight.
Fortunately, credit unions and trade associations I contacted said the article received little to no attention from consumers. A bit surprising because the article also stated credit unions were fighting a rule that could force them to maintain loss-absorbing capital if they take on assets regulators judge to be risky.
Credit unions already do that, but with Washington continuously reining in every revenue stream, the NCUA piling on additional capital requirements, and borrowing slow to recover, it's a matter of how long they can continue.
Sarah Snell Cooke is publisher/editor in chief of CU Times. She can be reached at email@example.com.