HERE WE GO AGAIN...
One has to wonder how the NCUA, who got it
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| A New Direction? |
Yes, "they" missed it that badly in 2014 and then compounded the problem by belligerently defending the indefensible - until they were literally "stoned to death in the forum" by public opinion, Congress, and common sense.
One thing you can say about NCUA's "robust" capital market specialists is they were "magnificent" in 2014! In the sense that when they got it wrong, the capital markets folks got it magnificently wrong! RBC #1 was an unforced error of remarkable scale, all of their own making .
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| All they had to do was "Get On The Bus"! |
U.S. banking regulators published and implemented those RBC ("Basel III") standards for banks way back in early 2013. All NCUA had to do was take the well researched work of their regulatory peers and adopt the metrics and logic. But NCUA, using its internal staff expertise and complete absence of independent research, decided instead to flunk "an open book exam with answers provided". And to fail it "robustly".
The worst example of the inanity by NCUA's staff was that despite a well fought out RBC model
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| High risk !!! At least, so says NCUA ! |
Under bank RBC standards, the risk weight for the FED is 0% !!!
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| FED up yet!? |
MAKE SENSE TO YOU?
Will they be wiser, smarter this time around?? Why? What has changed?
Will they be wiser, smarter this time around?? Why? What has changed?
15 comments:
This is an absolute absurdity. If I am understanding this correctly risk based weights are intended to reflect the real value of an asset factored for the relative likelihood that asset will fail to be realized as a future asset. So your risk based capital would need to be greater for your assets with a riskier characteristics. It makes sense that a loan portfolio should have a risk based weight because it is irresponsible to assume that 100% of that portfolio will be realized in the future, and a credit union that has a bad loan portfolio is a risk to the credit union movement as a whole. The risk weights offset (in a perfect world), at a macro level, the risk of the entire credit union’s loan portfolio, so that incorrect optimistic expectations of the future don’t cripple the movement. It can also be used to see which credit union’s have riskier portfolios and need more attention to prevent said crippling. So the goal of assigning risk based capital requirements is not to punish, or allow certain actions, but to prepare for turns for the worst, so that a bad situation doesn’t compound into a failed institution.
Using this assumption and the NCUA’s 20% criteria, assets held in the federal reserve have a 20% chance of not being there at all, will definitely depreciate 20%, or will do a combination of both resulting in a 20% markdown in the value of the asset. If the NCUA has credible, empirical evidence that this is in fact the case, then forget the credit union movement; America’s financial system is in grave jeopardy. The potential harm to credit unions would be a drop in the bucket compared to the effects of a Federal Reserve system that can’t pay its deposit base. If this is the case then the NCUA should focus its efforts on convincing the people in charge to fix the system that is resulting in a 20% risk, rather than worrying about offsetting it with capital in the portfolio. More likely however this is just a way for the NCUA to classify more credit unions as risky and therefore implement more controls and enforce higher capital reserves.
While all other parts of the proposal you have talked about so far have dealt with situations that DO HAVE risk and they are just being more conservative than the for-profit banks. If they believe that a more conservative approach is required than our counterparts then that opinion could be validated with fact and evidence. Our for-profit friends have been grossly wrong about things before so challenging their assumptions is not inherently wrong. However, As you have illustrated in previous posts it seems unnecessary, overbearing and not based in empirical evidence, but at least there is risk in those areas and they are just off on the degree. In this instance they are assigning risk to something with an all but 0 risk factor, and when that risk does result the effect would likely not be offset but larger capital reserves.
This is a major problem with their premise and is far more troubling than just having a more conservative mindset (even if its for self interested reasons) on an issue. The claim that deposits in the Federal Reserve pose a significant risk is absurd and can’t be justified. Any entity that can make such a significant error in evaluating the simple dynamics around them simply can’t be trusted to do so in the future. The fact that this entity is at the head of a movement like that of the credit union’s is disconcerting to say the least.
That all being said, if I have any assumptions about the situation wrong please feel free to correct me. I would love to be wrong about all of this.
Don't be so dramatic. NCUA only put the 20% RW in so they could take it out in the final rule and make it look like our opinions matter to them. I predict CUNA will call getting the 20% down to zero and a few other changes like that a big "win".
Let's hope CUNA CEO BC can get this 20% risk kicked out of the final rule so he can at least say he accomplished something after 4 years at the CUNA throne. His taking credit for maintaining our historic tax exempt status is hysterical!
Sure don't feel like the first commenter is in error with the analysis.
Think it wise of the commenter to point out that NCUA has presented no empirical evidence (told by a "source who wished to remain anonymous" that it was little more than "little boys playing with tinker toys" around a big table on Duke St. - I hope that isn't true!) concerning their analysis.
Many of us with some experience are very sure that NCUA is extremely weak in this area… do I need to mention the Corporate fiasco again to anybody… no didn't think so! Or note the recent self-confession that they don't have the internal expertise to manage derivatives nor the "stress tests" on larger CUs?
Given the lack of analytical abilities at the NCUA, would have to go with the banks weightings… far less likely to be totally wrong as occurred with NCUA and the Corporates...
NCUA's Capital Market Specialists put ANAL in analysis!
Good morning Jimbalaya. This is the week that was. RBC in the forefront as NCUA's introduces its do over.
Interesting to note that NAFCU proudly announced that it is meeting with NCUA today to discuss RBC. They never met to discuss the budget but it is ok for this rule. So what do you think? Greasing the skids to try and get the Bergermeister to be kind with his comments or an attempt to tell NAFCU to talk nice or again feel the wrath of a Metsger Monologue berating anything they may say.
You know the risk weights will changed so NCUA can say they listened. And there is bound to be a IRR adjustment of sorts.
It's show time so they are carefully coordinating what is said to whom and when. The press and trades are being allowed to video tape the meeting, staff has planned a briefing afterwards to answer questions and "spin" the press and the C and VC are preparing their before and after statements to box in the Professor.
The board meeting episode this month is titled 'Let us entertain you" and it should be enjoyable to watch. Will the Professor steal the show? Will the C try again to scold him and put him in his place? And will the VC provide the necessary reinforcement to silence the scholarly minority spokesperson?
And when it is over and the revised rule is presented what will the reaction of the trades be? Will CUNA and NAFCU try and pull victory from the jaws of defeat and claim because of them it is a changed and better rule? Or will they be bold enough to say that the rule is not needed, the millions spent in staff time and outside legal expenses needs to stop now, the cost to credit unions will be far more than NCUA claims and that again NCUA has exceeded their authority? We can only hope they do what is right.
NCUA erred the first time out of the box but they are incapable of admitting they made a mistake and did something wrong. Mea Cupa are not words in their vocabulary.
Few times does anyone get a "do over" in life. NCUA has that chance. Will they make the best of it?
As you say, correcting the metrics is not a victory... that mess should never have happened... heads should have rolled on that one!
The "gross negligence" of RBC #1 did unfortunately obscure the real issues as you have observed... needed?, secondary capital? transparency? IMCR? external appeals process? self-admitted, lack of capital/ risk analysis expertise at the Agency; absence of structured research and analyses for the reg? no second comment willingness and lack of CU input as part of the decision process.
Have some faith that one trade is strong enough to step up...
Both trades will probably act like they fought a great battle but this new and unimproved version was the best that they could do! Heck! They got the 20% Fed rating dropped to maybe as low as 10!
They will probably claim that they did not want to sacrifice the good that is in the regulation while never identifying any good or necessity.
If the trades were lead by people of any integrity, they would stand up and say not just NO! but HELL NO!
Don't expect a Charlie Hebdo comment coming out of the NAFCU meeting
"Je ne Suis Pas, Charlie!" Dan Berger.
Make a good point about 1) whether this RBC change is needed at all... "the leverage ratio" is the key focus of other regulators and CUs already have a higher required leverage ratio than the boinks w/o any changes required and 2) the trades need to help CUs discuss whether "the other hidden changes" obscured in the rule need to be handled outside a one-sided rules maker.. and directly and democratically through Congress.
The trades unfortunately have appeared to be very passive - in a wait and see mode - over the last 4/5 months... with a view that their role is to react to what NCUA proposes, rather than to help shape CUs understanding of what is needed for the betterment of CUs and their members.
The trades don't appear to be focused on providing that "next level" of leadership ... could this be "regulatory capture" in reverse?
Always reaction, never action? A handmaiden always awaiting the needs of her mistress?
So you think the trades will hold up signs at Thursday's NCUA Board meeting saying:
"Je suis ROBUST, aussi?"
Je suis ROBUST, n'est pas!
Their sign with read
"Je suis POULET!"
By the way long time CU guru Bill Brooks has an interesting opinion piece in CUTimes today on RBC..well worth a read.
Comparing some of NCUA's risk safeguards to having kids duck under their desks in the event of a nuclear attack is hilarious... and dead-on accurate!!!
The trades will temper their remarks for fear they will be denied access and meetings with the C.They enjoy telling their members they are meeting with the C, VC or BM. Makes them look important. If they are too critical in what they say they will be like Jimbo. Persona non grata.
My comment was not acceptable to CU TIMES... "Let's see, no Thank-you from the regulated. Well how about a YOUR WELCOME for us pointing out the errors of your flawed 1st RBC. No cap on MBL -- Gee, what could go wrong here? Hello to Telesis II and church loan III."
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