NCUA's Approach: It's The Four 'R's,' Says Chairman
SAN FRANCISCO-NCUA Chairman Debbie Matz last week compared the work done over the past year by NCUA with a massive overhaul project currently underway on the Golden Gate Bridge.
Matz's comments came during NAFCU's annual meeting, which was being held here.
"The financial crisis revealed the extent to which we-and I include NCUA in that "we"-needed to change to forge stronger, more effective, more resilient credit unions for the twenty-first century," Matz said.
To that end, she said NCUA's strategy has been one of "four R's": Resolution, Risk, Responsibility, and Revitalization.
Resolution, said Matz, is a reference to the corporate credit union crisis, including $50 billion in toxic assets, and an acknowledged inability to liquidate failed corporates. The latter has led to a series of 13 bond offerings known as NCUA Government Notes or NGNs that has led to raising $28 billion, which was the agency's goal.
"It may not be lemonade, but it's better than the lemons we were handed," said Matz. "Because we can now begin to wind down the bridge corporates, and you can move your money where it makes the most sense for you. You can freely charter new corporate credit unions or join other existing corporates. No longer shackled to a failed corporate, you can finally move past the corporate crisis. "
Matz said the "untold story" of the past two years was learning when she became chairman that several billion-dollar corporates were rated CAMEL 4 and were on the verge of failing. "I was horrified. I was nervous. And I was adamant. Failure was not an option," said Matz, who outlined the steps the agency has since taken.
Speaking to the issue of risk, Matz reminded her audience of a March proposal on interest rate risk and that the board is currently considering a rule on investment risk. "Both rules would implement lessons learned from the corporate crisis. One rampant problem in corporates was an over-concentration of high-risk securities in their portfolios, like mortgage-backed securities…A fundamental principle in investment is that diversification minimizes risk. So we began strictly regulating the concentration of high-risk securities corporates could have in their portfolios.
We realize that excessive investment risk in consumer credit unions represents a point of vulnerability as well. That's why we are considering a significant regulatory proposal aimed at limiting the riskiest investments in a credit union's portfolio."
Matz said "another significant risk to the credit union system comes from CUSOs" and told the NAFCU meeting, "In the near future, you can expect a proposed rule aimed at mitigating CUSO risk." She noted, however, NCUA has limited powers related to CUSOs.
Speaking to the issue of responsibility, Matz said the agency is seeking to balance effective regulation against excessive regulation. "If the events of the last two years have taught us anything, it should be that effective regulation has great value. Regulation that is too lax can be very costly," said Matz, adding that for "most credit unions there is no need to fear a tough regulator. In fact, a tough regulator can protect you."
Matz said that over the past two years had all the CUs rated CAMEL 4 failed it would have meant another $1.5 billion in losses to the NCUSIF.
Time For Revitalization
Finally, Matz said, the "biggest challenge" remaining is that final "R": revitalization. "Ultimately the responsibility for revitalizing credit unions falls to you," said Matz. "And it will require some new approaches to doing business. The most successful credit unions in the days ahead will be the ones that not only effectively manage their risks, but also effectively market to new members."
In particular, stressed Matz, that market opportunity lies with younger consumers. "A recent survey found a 30-point difference in satisfaction between members over age 65 versus those under age 30," said Matz. "This corresponds with research that shows Generation Y to be primarily concerned with convenience. They don't want a personal touch-they want independence and high-tech tools so they can personalize their own experience."