No Regulatory Capture in Corporate Failures: NCUA
Regulatory capture, a phenomenon where the regulated dominate the regulators and unduly influence their actions, did not play a role in the corporate financial crisis that eventually cost credit unions billions of dollars, according to the NCUA.
The question was raised after the Federal Reserve Bank of New York discovered its own lax regulatory enforcement and regulatory capture contributed to the 2008 financial crisis.
Instead, the NCUA said that when it rewrote the corporate credit union regulations in 2002, it neglected to address risk concentration adequately and allowed corporate credit unions too much authority in developing investment strategies, given how complex and little understood many of the investments were at the time.
“When (the) NCUA wrote new corporate regulations in 2002, Chairman Matz, then a Board Member, voted against the proposal, believing the crucial issue of risk concentration was inadequately addressed, and that the investment authority being granted was overly permissive,” wrote NCUA Public Affairs Specialist John Fairbanks in an emailed response.
Corporate credit unions had too much authority in setting investment strategy, “particularly given the complexity of the financial instruments being made available to the corporate credit unions. After the 2002 corporate rule passed via 2-1 vote, examiners had little authority to take enforcement actions against corporates that built excessive concentrations of potentially risky investments.”
The NCUA also referenced Material Loss Reviews that the NCUA’s Inspector General had filed about each of the corporate failures. These pointed to several structural deficiencies in NCUA’s supervision of the corporates – not regulatory capture.
For example, when discussing the failure of WestCorp, the inspector general’s Material Loss Review noted that the NCUA’s staff had not objected or stopped WestCorp from taking aggressive positions in mortgage-backed securities backed by riskier mortgages. NCUA staff had also not objected to the purchase of mortgage-backed securities backed largely by mortgages made in only California, or by one lender, Countrywide, because they lacked regulatory backing to do so, the inspector general found.
“As a result, OCCU examiners did not have the regulatory leverage to limit or stop the growth of WesCorp‘s purchase of privately-issued RMBS, which would have likely mitigated WesCorp‘s severely distressed financial condition and expected loss as a result of the extended credit market dislocation, and thus averted NCUA‘s ultimate conservatorship of WesCorp,” wrote the inspector general.
The inspector general reached similar conclusions about failures at other corporates.