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| "Notionally", I'm a sheep.... |
Requiring "risky credit unions" to directly and "on balance sheet" reflect the actual level of risks being taken with insured member savings deposits enhances transparency - and, at least with NCUA, transparency has and always will be of paramount importance.
"Off balance sheet", notational capital immediately raises the legitimate concern of "moral hazard"- whereby a "risky credit union" can play "heads we win, tails you lose" with the NCUSIF. When the NCUSIF loses, your members lose.
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| Housing Finance: Fan/Fred style... |
Which, of course, leads us back to the fact that the "risky assets" which need to be "derived away" by risky credit unions are most often 30-year fixed rate mortgages. And, why would NCUA want to help keep the undeniably riskiest financial
product on the planet - which was the core source of the recent financial collapse and subsequent Great Recession - alive by putting the entire credit union movement "in play"?
Rather than having "risky credit unions" opt-in for derivatives, is there any way for the "other 95%" of credit unions to opt-out?
5 comments:
30 year fixed mortgages are the bane of the devil and has caused more financial problems than they have solved. Only in a stable interest rate environment, something that has not happened since the mid 60's, have they actually worked.
If I correctly understand the issue, NCUA is allowing some very large credit unions to make and hold 30 year mortgages above an reasonable amount, but not to fear NCUA is going to allow them to use derivatives to mitigate the risk.
Rube Goldberg would be proud!
Can the risk be carved out for the CU that uses derivatives? For example, the NCUSIF is made unavailable in an amount equal to the total derivatives purchased?
One suggestion for a "carve out" has been to require credit unions using derivatives to place an additional 1% to 2% on deposit with the NCUSIF to serve as an additional buffer against loss. A true "pay to play" fee.
But before we jump off that cliff, remember that the proponents of drivatives assert that derivatives reduce - not increase - risk; so they might suggest that their NCUSIF deposit doesn't need to be increased; nor should they be required to pay the suggested assessments proposed in the rule by NCUA - why would you charge a CU a fee for reducing risk?
Both sides can't be right can they... The real truth is that derivatives are not simple, straightforward, easy to monitor and manage financial instruments... which is a tremendous risk to all CU's.
I suggest that you error on the side of real truth and protect the innocent credit unions that see no need for this risk reducing tool.
Fire has some great benefits, but I don't give children matches.
I say let's go all in. What is the worse that can happen? A couple of big players go kaput. The remaining credit unions pay assessments to cover the mess. We did this once before with WesCorp, MembersUnited, USCentral. The NCUA has experience in cleaning up a mess once they realize they incompetently allowed the mess to unfold.
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