The Opportunities at the Change of NCUA Leadership

Every new leader brings some elements of change.  But in credit unions today, the confirmation of Deborah Matz is especially timely.  The state of things, as characterized by one CEO, is that the credit union family is dysfunctional.

The rift and accompanying frustration between credit unions and NCUA prevents all parties from creating solutions that help members, and at the same time might avoid encumbering the industry for years on end with unnecessary burdens.  Moreover there are many positive trends on which to build:

• The appointment of a new regulator, the first by the Obama administration at a depository institution agency, suggests the Administration’s desire for new approaches.
• Matz’s potential tenure of almost six full years gives her time to implement long term solutions, not short term reactions;
• Credit union performance at June is extraordinarily resilient with record levels of liquidity, ROA of 53 bps, the highest amount of loan originations for any six-month period and continuing share growth of almost 10%.
• The economy is improving, confidence is returning and many are sticking their heads up out of their “foxholes” asking where should we be going?
• The resources in place are more than adequate to structure patient resolution of both individual and system-wide problems.

Every CEO’s Top Three Questions

A change at the top of any organization entails an assessment addressing three questions:

1. What do we need to stop doing?
2. What do we need to start doing?
3. What are the challenges I would like to know for certain, but cannot; that is being certain about the uncertainties in critical events, such as loss estimates on investments.

New leadership bring  choices.  There will immediately be crossroads about whether to continue as is with Agency activities or to identify new paths.

In a government agency, the leadership challenge has an added dimension versus the private sector.  A regulatory agency’s approach is built around principles and formal rules.  One example is the mantra of “safety and soundness” to support new programs.  Another is the Advance Notice of Proposed Rulemaking process, for example to  architect the future structure of the corporate system.  Private sector metrics of ROI, cost-benefit or other criteria are often less important than following bureaucratic procedures.

Because of these institutional “processes” the immediate impulse is to look for a new set of rules to add to the regulatory “tool kit” for example, to prevent institutional failures.  By now, hopefully all have learned that even with PCA as law, rules “prohibiting” failure, dedicated examination resources, the fact is failures do occur—sometimes from internal shortcomings and in other circumstances from events outside anyone’s control.

The critical challenge is resolving, at least cost, problems that inevitably arise even in the best of times with the most well thought out regulatory structure. 

Rules have a role, but to repair the rift that now exists, there needs to be a new engagement with the industry.  This priority is urgent.  Credit unions have been burdened with uncertainty and expense at the very moment Congress intended for cooperatives to be most active.

Credit unions are not driven by expectations of stockholder returns.   This means they can focus on their only mission, which is improving the well being of their members.  Continuing to lend in the current economic downturn is the “counter-cyclical” role the country, the administration and members most need at this time.  NCUA’s actions have inhibited, not enhanced, this public policy commitment.

The first priority then is listening, restoring real communication and mutual respect with the industry.    The outcome could be a better understanding, perhaps a shared vision, of the positive difference credit unions are making while leading America through this period of change. 

Some Questions for Reflection

So as the Chair assembles her leadership team, the following are some of the questions that could be a foundation for industry dialogue:

1. How can the credit union system better support the country’s need for real estate loan modifications and other solutions to keep members facing hardship in their homes?
2. How can the industry’s resources be better utilized to help credit unions in areas of continued economic challenge through access to capital notes; with this temporary capital they can continue to meet member needs and not shrink the balance sheet by reducing  loans.
3. What are different ways that the credit union story can be told so that the public, the press, other regulatory agencies and all organizations seeking new financial partners know about the option of cooperative finance?
4. In the current regulatory reform debate, how can the existing system of CLF and corporates be designed so that credit unions have access to secondary markets and long-term liquidity through their own structures?
5. What are ways that the Agency in its own communications can be more open, transparent and willing to listen to views that may not reflect the internal consensus of staff?
6. Why have the audits of the NCUSIF/US Central been delayed?  What is the nature of the uncertainty and how can the owners of these agency managed resources be assured that decisions are being made in their interests?
7. How can the member-first practices of credit unions be amplified so the industry’s role in providing fair and reasonable credit is more widely understood in a time of concern with consumer protection?
8. How can confidence in the corporate network be re-established so that the credit union system does not lose a critical component of its distribution and liquidity capability?
9. What steps can be taken to enhance the unitary structure of CLF-NCUSIF-Charter at NCUA to avoid the path of the thrift industry that had their common structure split asunder?

Many Issues: Better Solutions

Every credit union organization may have other priorities for a dialogue with the Chair.   Perhaps the most fortunate aspect of the leadership change is that credit unions are not in crisis; the general concern about a systemic failure in the financial services has largely passed.   Workouts, however, still need to be implemented.

For cooperatives, time is an ally.   Capital comes through earnings.  Earnings come through lending and serving members.  Many other financial institutions must still worry about priorities other than their customers. 

While short-term problems still exist, the Agency can participate in a mutual effort to create a credit union system for the 21st century.   That priority would be a refreshing start.