Regulatory capture, a phenomenon where the regulated dominatethe regulators and unduly influence their actions, did not play arole in the corporate financial crisis that eventually cost creditunions billions of dollars, according to the NCUA.

The question was raised after the Federal Reserve Bank of New York discovered its own laxregulatory enforcement and regulatory capture contributed to the2008 financial crisis.

Instead, the NCUA said that when it rewrote the corporate creditunion regulations in 2002, it neglected to address riskconcentration adequately and allowed corporate credit unions toomuch authority in developing investment strategies, given howcomplex and little understood many of the investments were at thetime.

“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 inadequatelyaddressed, and that the investment authority being granted wasoverly permissive,” wrote NCUA Public Affairs Specialist JohnFairbanks in an emailed response.

Corporate credit unions had too much authority in settinginvestment strategy, “particularly given the complexity of thefinancial instruments being made available to the corporate creditunions. After the 2002 corporate rule passed via 2-1 vote,examiners had little authority to take enforcementactions against corporates that built excessive concentrationsof potentially risky investments.”

The NCUA also referenced Material Loss Reviews that the NCUA'sInspector General had filed about each of the corporate failures.These pointed to several structural deficiencies in NCUA'ssupervision of the corporates – not regulatory capture.

For example, when discussing the failure of WestCorp, theinspector general's Material Loss Review noted that the NCUA'sstaff had not objected or stopped WestCorp from taking aggressivepositions in mortgage-backed securities backed by riskiermortgages. NCUA staff had also not objected to the purchase ofmortgage-backed securities backed largely by mortgages made in onlyCalifornia, or by one lender, Countrywide, because they lackedregulatory backing to do so, the inspector general found.

“As a result, OCCU examiners did not have the regulatoryleverage to limit or stop the growth of WesCorp's purchase ofprivately-issued RMBS, which would have likely mitigated WesCorp'sseverely distressed financial condition and expected loss as aresult of the extended credit market dislocation, and thus avertedNCUA's ultimate conservatorship of WesCorp,” wrote the inspectorgeneral.

The inspector general reached similar conclusions about failuresat other corporates.