Sometimes, it just comes down to “doing the right thing.” NCUA’s ongoing use of NCUSIF funds to subsidize federal credit union regulatory costs is a case in point. In just the last five years, the NCUA has allocated $343 million of NCUSIF earnings to the Operating Fund to cover “insurance related” activities performed by examination staff. These annual allocations ranged from a low of $50 million to a high of $88 million. Title II of the Federal Credit Union Act authorizes the NCUA to charge the NCUSIF for insurance related activities. NCUA’s basis for determining the amount of these allocations is an internal time study of how much each examiner’s time is spent on insurance related activities. The solution is for the credit union system to determine what is “insurance related activity” and what is the responsibility of the credit union regulator. Many state regulators and state-chartered CUs believe that NCUA has overreached in its interpretation of “insurance related activities” and has overcharged the NCUSIF. State-chartered CUs are therefore being overcharged for share insurance, all federally insured CUs are denied a true accounting of their examination and insurance fees, and the NCUA is risking a “solution” to this issue being imposed by Congress. What are these “insurance related” activities? Answer – they are whatever NCUA says they are, because federal credit union regulation and NCUSIF administration are nearly indistinguishable. NCUA has allocated virtually the entire cost of FCU safety and soundness examinations to the NCUSIF. This is wrong, and NASCUS urges NCUA to do the right the thing, and resist using the Fund to subsidize FCU examinations. A reading of the FCU Act shows Congress never intended NCUSIF as the primary source of funding federal credit union regulation and examination. Do you think NCUA would accept such a mingling of disparate functions and funds in one of the federal credit unions it regulates, or, for that matter, in one of the state-chartered credit unions NCUSIF insures? Assuredly, that state regulators would not. But, what about the NCUA’s latest version of the overhead transfer formula? Yes, the latest formula acknowledges the value of the work being done by state regulators and begins to focus on insurance related versus chartering functions. It’s an improvement in the previous methodology, and we appreciate this NCUA Board’s efforts over the years to better identify insurance and regulatory functions. The fundamental problem remains the underlying assumptions: The internal study begins by assuming that all NCUA activities related to safety and soundness are done solely to manage NCUSIF risk. This begs the question: What examination and supervision activities would NCUA, as the primary chartering and regulatory agency for FCUs cease doing if it stopped administering the Fund? The likely answer is – not a single one. Why? Because the FCU Act requires NCUA to conduct federal credit union regulatory examinations so they can be used for share insurance purposes. Similarly, NCUA is also directed to use examinations done by state regulators, to the maximum extent feasible, in managing NCUSIF risk. As CUNA’s Legal Ddepartment said in an October 2, 2001 study commissioned by NASCUS, “NCUA’s role as supervisor of federal credit unions was not subsumed by its administration of the NCUSIF.” This seems obvious to those of us in state regulatorsy agencies. We do not administer insurance funds, but I assure you that, as financial institution regulators, the safety and soundness of our state-chartered credit unions is our preeminent concern and the primary focus of our resources. The argument that the entire safety and soundness examination of a federal credit union is only an insurance related function, and should be charged to the NCUSIF, means that Congress would have intended for state-chartered credit unions to pay their state regulator the entire cost of a safety and soundness exam, and then subsidize the cost of the entire federal credit union safety and soundness examination program. Given Congress’ inclusion of the “nondiscriminatory” provision of Section 211 of the FCUA prohibiting the discrimination against state-chartered credit unions for the benefit of federal credit unions, this supposed congressional intent seems unlikely. How long will NCUA continue to look away? What must happen for it to take the proper steps to correct this fundamental flaw in its design? NASCUS hopes that steps are taken now to correct it, before change is foisted on the NCUA from without. No one wants that. The NCUA is a strong federal credit union regulator, and the NCUSIF is capitalized by credit unions, and both should remain independent. Neither the NCUA nor the NCUSIF should be folded into any other regulatory agency or another insurance fund. NASCUS firmly believes the NCUSIF should remain within the NCUA and that NCUA should remain an independent federal agency. This is a leading topic for discussion between NASCUS and NCUA Board members and senior staff. The agency’s new formula rightly gives recognition to the work done by the states, but the underlying assumptions are inaccurate. The real problem remains; the NCUA has overstepped its authority to apportion expenses to the NCUSIF. How can the NCUA determine the rightful cost of deposit insurance and federal credit union regulation when it refuses to identify and separate its supervisory and insurance-related functions? It cannot or will not. NCUA’s recent regional restructuring shows the agency capable of accomplishing a major organizational change. Further change, separating the regulatory and insurance functions, must be initiated. While change can be unsettling, ignoring the need for it only makes for more, and possibly, greater problems later on. This nation recently felt the shock waves from massive corporate accounting fraud, manipulated stock prices, crony capitalism, Wall Street greed and recently, scandals in the once staid mutual fund industry. Congress swiftly strengthened corporate governance law, the Financial Accounting Standards Board issued new guidelines, and the SEC and at least two State Attorneys General settled multi-billion dollar lawsuits and extracted fee reductions for investors. These changes were unthinkable a few years ago but new protections are now in force. The financial world was not thrust into chaos. Which brings me to our modest NASCUS proposal for restructuring the NCUA: * NCUA should internally separate NCUSIF insurance responsibilities from chartering, regulation and examination of federal credit unions. * NCUA should create a Division of Insurance whose director reports to the Board, and activities related to the Fund should be placed under that director. * Regulatory exams of FCUs should be relied on by the Fund to the same extent as regulatory exams of state-chartered federally insured credit unions. That is, these institutions are examined, they pay for that examination and those exams are forwarded and reviewed by the Insurer, and when necessary, the Insurer might choose to examine a given institution itself. The above-suggested changes are from the NASCUS study titled “Restructuring the NCUA” published in November 2003. The complete study is available in pdf format on the NASCUS Web site at www.nascus.org and I urge everyone to read it. We do not claim to have the perfect solution, but it is a good start.
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