What Does the Changing of the Guard at NCUA Mean?
NCUA Board Member Richard Metsger, whose term expired in August 2017, leaves shortly. Two board members, Harper and Hood, will fill the Metsger “democratic” seat and the vacancy that has existed since Debra Matz resigned in 2016.
NCUA’s role is unique and consequential. No other organization in the cooperative system has the influence and resources to affect the direction of the entire credit union enterprise as does the regulator.
This three-person turnover in the Agency’s leadership is an opportunity to assess the past and to consider what the new board members may need to address. This new leadership configuration should be at the front and center of everyone’s attention who believes a course change is necessary.
Metsger’s nearly six-year tenure is important because for that time he was effectively “in the majority.” He was the automatic second vote for Chairman Matz until her departure in early 2016; he served as chair from May 2016 to January 2017. And as the only other board member with Chair McWatters, he was effectively co-chair for any decisions requiring Board approval, for his veto would mean nothing gets passed.
While facts do not always tell their own story, they are an important place to start when evaluating a person’s leadership contribution. Some of the outcomes during Metsger’s term include:
- A 33% increase in NCUA’s budget from $251.4 million in 2013 to $334.8 million for 2020, the second year of the most recent two-year approval process.
- A reduction in NCUA staffing from 1,261.5 FTEs to 1,173 and closure of two regional offices.
- A total of 935 federal credit union charter cancellations since 2013. The total decline in NCUSIF insured state and federal credit unions was 1,443, or 21% of the industry numbers at the end of 2012, the year prior to his arrival.
- Granting 4 de novo federal charters in the same six years.
- Reporting the first ever loss in the history of the NCUSIF in 2017 of $229.1 million.
- Recording the single largest cash payout by the NCUSIF for natural person credit union resolution in 2018 of $1.165 billion. The previous highest cash payout was $349 million in 2012.
- Approving the “merger” of over $3.1 billion of TCCUSF surplus into the NCUSIF in 2017 despite the Congressional language accompanying the enabling legislation which stated: “These provisions are intended to ensure that the activities of the Fund are restricted to resolving problems in the corporate credit union system and not used for other purposes, such as for dealing with natural person credit union problems.”
- Raising the NOL of the NCUSIF for the first time since the fund was restructured with the 1% deposit in 1984, despite comments from credit unions in which only 12 of 663 (1.4%) respondents were in favor. As pointed out in credit union comments, the numbers presented by staff were fictional, not related to any real data or historical validation, and contradicted by auditors’ own comments about contingent liabilities.
- By raising the NOL to 1.39 and “merging” the TCCUSF surplus, Metsger admitted in a December 8, 2017 speech that staff analysis “reinforces why we needed to increase the fund’s normal operating level this year, to account for any significant losses that otherwise might have required a sudden and significant premium charge to credit unions.” The statement confirms the intent to circumvent the FCU Act’s premium restrictions when the NOL was above 1.3% of insured shares and use the TCCUSF for natural person losses.
- Passage of the 400-page risk-based capital rule despite overwhelming evidence that that the approach was intellectually flawed and legally dubious. This was the most burdensome, lengthy and intrusive rule ever imposed on insured credit unions. This action continues even though the FDIC’s own experience as stated repeatedly by Vice Chairman Tom Hoenig’s is that “a more dependable measure of capital strength is the tangible leverage ratio” or in credit union terms, the net worth ratio.
Even Metsger’s description of the $160 million NCUSIF 2019 “dividend” as the second highest in fund history is a misstatement. NCUSIF retained the entire $3.1 billion TCCUSF surplus, the ongoing earnings on that amount plus NGN fees—all intended by Congress to go back to credit unions. NCUA still owes the industry $2.2 billion before any return could accurately be called a “dividend.”
One might counter the above summary with the industry’s continued growth in assets and members despite the decline in charters and increasing NCUA burdens. I believe a more accurate assessment would be that credit unions have succeeded in spite of NCUA, not because of their oversight.
Two Steps Back?
If Metsger’s departure is a step forward, what about the two NCUA returnees in Harper and Hood as board members? Will they just rely on previous experience to continue past practice or will they see a need for change, and if so where and how? How would they interpret the trends above?
One point of commonality among all three is that the terms cooperative system and cooperative design are almost never used or referred to. The term “cooperative association” is in the first paragraph of the FCU Act. It is the most important factor distinguishing credit unions from other financial firms. It characterizes credit unions’ singular responsibility to the member-owner.
Cooperative design also creates a different regulatory agenda from banks where there is an ongoing challenge of balancing shareholder interests, with fair consumer treatment and with the public’s backstop of insurance and liquidity safety nets. Instead of regulators trying to align private wealth with public purpose, credit unions create common wealth that can be “paid forward” to benefit future members and communities.
Expectations of a Board
The Federal Credit Union Act is clear on the Board’s role in that it uses the term “manage” the agency. That word can have a lot of different interpretations. But there can be no doubt that this is where the buck stops, not matter how responsibilities are assigned by the Chair.
Unfortunately, in their board role, members most often present themselves as performers at public meetings, reading scripts, and never discussing real policy or “management” options. The role of the board to ask thoughtful questions and/or to challenge prepared positions and data never occurs. Staff’s assessments and conclusions are accepted without meaningful dialogue.
Instead of leading, the board merely endorses the staff’s interpretations and in-house views. No outside perspective from the members, policy perspective or even board expertise is provided. Board members become merely voyeurs going through pre-staged motions of accountability.
Can either Hood or Harper learn from versus repeat these past experiences?
So, will McWatters stay the course charted with Metsger? Or has he been biding his time to make real change until he has a second vote?
McWatters’ initial participation in 2014 as a minority board member was very encouraging for credit unions. He was bright, willing to listen, unfailingly polite and responsive to issues brought to his attention. His dissents around NCUA budget processes and substance, the risk-based capital rule and other interpretations of authority (think corporate capital rule) were positive contributions on critical topics. He openly challenged the “regulatory aggression” practiced by the agency on credit unions after the Great Recession including the then Chairman’s very public feud with State Employees Credit Union in North Carolina. Or even the agency’s self-justifying so-called appeals process.
McWatters repeatedly showed, while in the minority on the board, the competence to challenge the regulatory status quo. His long essay style, legal briefs of dissents were a level of effort and insight never seen at the board level.
But somehow those positions dissolved once he became Chair. Was this because he felt checkmated by having only one other board member? Or that it was not his role, but staff’s, to initiate change? Was his assessment that personal circumstances did not allow him to “manage” the agency, so he must revert to a role that credit unions refer to as a “knife and fork” director?
One role of a Chair is to help define the contribution expected of other board members in their collective capacity to lead the NCUA. Can he recover from a period of passive leadership where bipartisanship seems the only justification for action? Can he break the cycle of hyperbolic spending through the NCUSIF’s manipulation of numbers to underwrite off budget expenses? Can he rise above the Orwellian use of “safety and soundness” to justify any and every regulatory event? Will he articulate the unique value of cooperatives in the American financial system and re-energize the entrepreneurial spirit that animated almost 50,000 charter creations in the 20th century but almost none in the 21st?
I don’t know what the answers to these questions will be. But what I believe is that credit unions are running out of runway to correct the trends that Metsger inherited and then dramatically extended. If these trends continue, the endgame is becoming clear. An independent cooperative financial choice for the next generation will just be an episode for economic history texts, much like the S&L system which expired in the last century.
About Chip Filson
A nationally recognized leader in the credit union industry, Filson is an astute author, frequent speaker, and consultant for the credit union movement. He has more than 40 years of experience in government, financial institutions, and business. Filson’s breadth of experience makes him an authority on a range of topics, including analysis of credit union trends, credit union public and market-facing opportunities, and strategies for enhancing member value. His contributions to the cooperative movement have been demonstrated with his analysis and advocacy for the corporate credit union system, NCUA’s Corporate Stabilization role, and the need for regulatory reform.
Chip co-founded Callahan & Associates. Filson has held concurrent positions at the National Credit Union Administration (NCUA) as president of the Central Liquidity Facility (CLF) and Director of the Office of Programs, which includes the NCUSIF and the examination process. He holds a magna cum laude undergraduate degree in government from Harvard University. After being awarded a Rhodes Scholarship, he earned a master’s degree in politics, philosophy, and economics from Oxford University in England. He also holds an MBA in management from Northwestern University’s Kellogg School in Chicago.