Friday, August 05, 2016

What Are The Odds...?

Guess I should 'fess up that I am in Las Vegas (business of course!) which makes no sense at all for me, since gambling is the only vice I lack. 

Everyone I ask always claims that they "do pretty well at the tables" on their Las Vegas trips. I still wonder how those fabulous hotels can be built if folks are all doing "pretty well at the tables"?   Somehow that "analysis" doesn't seem to add up...

What Are The Odds ??      

Under-pinning the 
"sport" of gambling, 
most statistical analysis, interest rate risk measurement, and standard economic forecasting is some form of probability theory. 

Probability theory attempts to measure the degree of certainty - or uncertainty - which should be assigned to a given estimate.  How likely - or unlikely - is that forecast "to become true" ? How much confidence can one have that an analysis is valid?  In gambling and games of chance, understanding "the odds" can help limit your losses or improve your chances of success. We all also use probability theory in our daily lives: "it's 50-50"; "it's a slam dunk"; "it's worth the risk": 
"there's not a snowball's chance in..."  

Spin Doctors ??
Within the credit union world, we are being asked to perform ever increasing rounds of risk analysis and ALM modeling - consuming huge amounts of time and resources with little, if any, reliable gain in certainty or accuracy.  

But much is at stake in any challenge to the 
"all gnome-ing ones" from Big Blue. Putting "your cards on the table" can often become a "one-sided bet", a game of regulatory "roulette Russianne" - with a stacked deck and a rigged wheel of fortune !!

But whining aside, here's a probability question for you to pose to your examiner at your next exit interview...

Q:  Out of the full universe of statistical possibilities, what is the probability that the only folks who know how to run a credit union have all ended up working at the NCUA? 

A:  The probability of that occurring is...

Q:  Well then, what is the probability that no one at the NCUA knows how to run a credit union? (How did they learn?)

Kinda' gives a whole new meaning to
"risk-based exams", doesn't it!


Anonymous said...

Here is a good analogy for you. In ice hockey, the referees are people who are not good enough to be on a hockey team. At the NCUA, the examiners are people who are not good enough to ...

Anonymous said...

In banking, it is a common practice (career path) to start out as a Federal Reserve, FDIC or OCC examiner and "cut your teeth" in the industry before working at, and eventually running a bank. I wonder if the same can be said about working at NCUA as a career path for credit union leaders? Insights anyone?

Anonymous said...

Here we go again. All the experts heavy on the criticism but no one with answers or solutions. No one ever says what will make things better. Two major trade organizations with budgets for staff salaries in the millions of dollars and yet we get nada from them. They are two of the biggest PR firms on Capitol Hill. They can pump out letters, news releases, breaking news, magazines, web pages but no ideas on what to do. For fear of losing access the NCUA, rather than challenge and confront the two go along to get along buddies, all they do is invite them to speak, thank them for thinking about doing something and praise them for showing up at a board meeting. Get out the mirrors people and look into them. There in lies the problem. If you keep allowing your alleged leaders to do nothing, nothing will get done and all we will have is year after year of the same complaints. You get what you deserve and that is exactly where credit unions are today. And you wonder why the bankers snicker.

Jim Blaine said...

Fair criticism on lack of answers... what would you suggest?

Jim Blaine said...

In the past NCUA provided many fine - some of the very best- top leaders to the credit union movement. Hasn't been occurring over last decade, not likely to resume in the future... the skill sets needed for NCUA and the skill sets required for effective CU leadership have and continue to diverge.

Anonymous said...

Perhaps to start we need to define what leadership is? Is a true leader one that gives the regulated everything they ask for? Or is it someone who makes decisions based on their knowledge and experience and what is best for the common good? Is it someone who tempers regulation with good business practices understanding that yes there must be regulation but it cannot strangle and prevent the regulated to do what they are empowered? Is the industry able to recognize a leader when they see one? Based strictly on the decisions they have made for individuals to represent them before the regulator and Congress you must question their ability to do so. Rather than always trying to get their "guy" on the Board they should look to getting a leader who competent, fair and objective.

Mike Higgins said...

I read this blog a lot, so I'll step up to the challenge of lack of answers, and stick my neck out for everyone to attack (with my name on it). This is going to take a lot more than 140 characters because it involves a solution, and not just a simple criticism.

At the top of my list would be mutually agreed upon boundaries (between CU leaders and NCUA). Here are two specific examples that have been in the blog a lot recently.

1) Risk based capital is needed. Where the risk factors are set is clearly up for debate, but the concept would actually provide clarity for examiners and a defensible position for credit unions and their board members. In addition, it would show which credit unions are managing member net worth effectively and which ones are hoarding it away. Remember, the goal of RBC is to establish the correct amount of capital to hold, not necessarily increase it. Increasing capital requirements too far actually adds more risk to the system because credit unions have to reach (take risk) for earnings to maintain higher standards.

2) The concept of CECL (current expected credit loss) is necessary too. The backward looking view of establishing the reserve requirement should be blended with a forward looking view if, and I emphasize IF, concentrations, underwriting standards, and economic factors are materially different than historic patterns (this is just common sense). At the end of the day, there is a calculation to determine how high the wall of loan loss reserve needs to be to protect capital. CECL should not cause credit unions to hold more reserves, it should help them determine the right amount of reserves.

Coming to a mutual agreement in these areas would take away from the ambiguity that currently exists. How they are implemented is what needs to be hammered out in a sensible manner. The modus operandi of posting a rule for comment, taking comments, and then doing nothing about the comments is an exercise that patronizes and infuriates the participants. A more collaborative process, open communication and healthy debate is in order.

Of course, if RBC and CECL are taken care of in a fair and equitable manner, then we would not have very much to complain about -- what would we do with all of our free time?

Dennis Moriarity said...

Ok lets be realistic! NCUA wont change because it can't... The short terms of political appointees coupled with civil service rules that protect career bureaucrats make change virtually impossible. It is the makeup of government agencies that make change an impossibility. If we accept that change is indeed impossible we should lobby for merger with FDIC in order to at least realize some economies. Anything else is "pie in the sky". I prefer apple with ice cream.

Anonymous said...

Pie in the sky is even thinking a merger with FDIC will ever take place. It never will. Credit union can agree if they want a three or five member board. They can't agree whether to pursue MBL changes or not. They are divided on supplemental capital. You're stuck were you are so suck it up and get use to it.