Unsafe And Unsound...

The New York Times published an opinion piece recently (4/12/2015) headlined "Unsafe and Unsound Banks", but it doesn't take too much imagination to spot the equal threat to credit unions - except the threat is greater!

One classic example of
"a derivative" ...

The opinion piece is about the less than transparent manner in which American banks  [and credit unions!] account for those wonderful balance sheet instruments of mass destruction [to quote Warren Buffett] - derivatives!

This time the well-qualified critic of derivatives is

none other than Mr. Thomas Hoenig, current Vice-Chair of the FDIC and former long-term Federal Reserve president [Mr. Metsger is his equal on the NCUA Board].  Based on the just completed Fed stress tests, all TBTF banks passed with an average capital level of 12.9%.  Not so cautions Mr. Hoenig, who has released data which shows "those same banks actually averaged 4.97% capital at the end of 2014."   Not exactly a minor ["robust"] rounding error...

Mr. Hoenig

As the article states:  "The discrepancy is due mainly to differing views of the risk posed by the banks' vast holdings of derivative contracts used for hedging and speculation." The Fed uses American accounting rules while Mr. Hoenig believes that international accounting rules should be used. American accounting rules - in a highly Pollyannish fashion - assume everything "will work out" [net out], while international accounting requires higher capital "just to be safe".

"History favors Mr. Hoenig's approach.  Gains and losses may be offsetting when the economy is stable, but in the financial crisis American taxpayers were forced to hand the banks tens of billions of dollars to make good on derivative bets gone bad."

Not all federal government agencies
are "fully adept"...

So, why should you as a credit union leader be concerned? Because your members' deposits [the 1% - the $12 billion dollars - we've all anted up]  in the NCUSIF  is the first line of defense to pay for unexpected derivative losses... you do know you still have a fiduciary responsibility for this "third party vendor investment", don't you?

The greater risk to credit unions than banks?  Based on the corporate debacle and recent capital/risk (RBC) snafus, it seems apparent that NCUA does not have the expertise to either effectively assess nor intelligently monitor derivatives.  Unsure? Why not ask NCUA to disclose its derivatives expert(s?), credentials, and experience? 

After all, they are playing with your money....