Fractured Examination System In Need Of Fresh Thoughts
I read with great interest Frank Diekmann’s editorial in the July 21 issue on NCUA and the current losses being experienced in the NCUSIF. A couple of items to note:
1) While I avidly support the dual chartering system, I think the federal regulator is not as apprised of state-chartered credit union situations in their areas until they become problematic. I don’t believe there is a good “early warning” system out there to quickly sort out the ones that are “high risk” (this could probably be said of federal credit unions at times also).
2) Simply calling the regulator into question over failures seems like we are casting a wide net. Wouldn’t it be more prudent to understand what causes catastrophic failure and focus in on institutions that demonstrate similar behavior? Florida real estate in and of itself is not wholly problematic; providing speculation loans to developers in Florida when you are in Colorado and don’t understand that market could be highly problematic. Most of the larger problems I’ve seen tend to be when the whole institution becomes “lopsided” or “one-sided” in a single area. Now, some institutions do a great job with a single area of focus, but I’m speaking more of situations that seem to “spring up” overnight and may not be as well thought out or understood.
3) We need to forge a better dialogue system between credit unions and the regulator. Too often the dialogue is one-sided (the regulator wins) and credit unions are left with DOR items that are meaningless or really do not help mitigate any area of risk; it just makes the examiner feel better, that’s all. There really is no venue where credit unions and the regulator come together to talk about problematic or questionable examination practices and try to work to better understand one another (at a national level). Maybe the reason NCUA and state-level financial departments have never facilitated such a discussion is, if they did, it would highlight the desperate need of meaningful reform.
4) What about the inconsistencies from region to region, state to state, and examiner to examiner? How do you take a system that is deployed by so many individuals and make it wholly singular in focus and delivery?
The Right & The Rogue
5) The historical NCUSIF loss numbers indicate that most credit unions are doing the right thing. Some might say that our regulator has done a great job in ensuring there are no losses; but I would say, equally, that many of the credit union managers (presidents/CEOs) and boards have done a great job in avoiding losses. Is it the “rogue” or unlimited risk-takers that need to be ferreted out? How do we ensure NCUA focuses on that mission and not seek to penalize most institutions that have been doing the right thing all along?
6) Most of the losses I’ve seen occurred rapidly, in large quantity, and with very little warning. How do we continue to give credit unions the latitude to take risk (which is needed if we are to survive), yet understand how to contain the risk so losses are manageable at the back end if something goes dreadfully wrong? Is this something we should even try to do? If we do it, who gets to decide which are the right and wrong risks?
These were some of my thoughts as I read the article about asking hard questions. It seems to me the examination system is fractured, sometimes ineffective, and in need of fresh ideas. If credit unions, NCUA, and state oversight agencies really begin to have conversations back/forth, maybe we could come up with thoughts around risk taking and measurements of risk management that are effective and do not jeopardize the whole.
I believe all CEOs (even those in the failed institutions) really want to do the right thing; so if NCUA wants a good end-process and credit unions want to be doing the right thing – why wouldn’t we come together to make that happen? I know we talk about the objective nature of the regulator, but having discussions about how to measure/manage risk (from both sides of the equation) never seems like it removes objectivity. Of course, at the end of the day, the regulator still has the last say.
Jeffrey Hendrickson, President/CEO
Dow Louisiana FCU, Plaquemine, La.(c) 2008 The Credit Union Journal and SourceMedia, Inc. All Rights Reserved.http://www.cujournal.com http://www.sourcemedia.com