Tuesday, November 29, 2016

Secondary Capital... Part 2

Wanted to repeat that I haven't found anyone yet who doesn't agree that another level of capital (in this instance "secondary capital") enhances the safety and soundness of both credit unions in general and the NCUSIF in particular.

Recent "small victories" aside, the long absence of access to secondary capital by credit unions is a glaring neglect of priorities by NCUA under the Federal Credit Union Act.

But here's the rub, Check this link out and you'll find the existing rules (from the NCUA Examiner's Guide, section 16-4) on secondary capital for low-income credit unions - been in place forever! Yet the NCUA "Secondary Capital Working Group" continues to study its navel "on what to do next"?!?  There is a serious accountability, competency, and transparency issue here - and an unnecessary risk to the American taxpayer created by the NCUA.

Yet, take a look at the secondary capital presentation [here's the link] made by NCUA senior staff to the NCUA Board at its October meeting. You'll note on page 29 that 2,297 credit unions (over one-half of all credit unions), holding over $325 billion in assets  (@ one third of all CU assets!) can issue secondary capital now under existing NCUA rules. 

$188 million in CU secondary capital is issued
No Clue...?
and outstanding in the marketplace.
Is NCUA senior staff admitting that they have no clue on how that secondary capital was issued? I just don't get why the NCUA staff continues to fail to deliver on this safety and soundness issue?

And, just to make matters worse...

Take a look at the four concerns that NCUA's senior staff listed as "Top Supplemental Capital Considerations" with moving ahead on secondary capital (it's on page 15 in the link above):

1) Securities law - you mean the $188 million in existing CU secondary capital is in violation of securities law? The issue has never been checked out?  NCUA just decided to ignore this question in the past when it gave approval? Really?

2) Insurer's Ability to Count as PCA - whether or not NCUA, in all its wisdom, decides to count secondary capital as capital "for PCA" is irrelevant to both the capital structure of a credit union and to the safety and soundness of that credit union. As so clearly shown in the RBC rule debacle, NCUA as usual overestimates its importance - and perhaps its relevance. True safety and soundness is a market structure, regardless of the regulatory fiction called "PCA".

3) Tax Exemption - All 2,297 (again over half the industry) existing credit unions which can issue secondary capital are no longer tax exempt, or have placed that status at risk? Have we let Keith Leggett and the ABA know to start the celebration? Did you know that the IRS issued a private opinion letter on this issue in 2001 - indicating no effect on the tax status of a credit union? 

4) Utility of Supplemental Capital - Isn't that a question for credit union members, CU Boards, and the marketplace to decide? And, every dollar of additional capital, whether "PCA'ed" or not) provides another layer of protection, a greater buffer for the NCUSIF!

One begins to suspect that the NCUA senior staff 
is just not up to the task...

[Perhaps NCUA could get some outside help on some sort of contingency contract basis... just an idea!]



Anonymous said...

A different perspective...

What if melrose, Montauk, progressive etc, were allowed to and issued secondary capital over the last decade?

Melrose, for example, instead of $1.5 BILLION medallion loans on $2BILLION in assets, perhaps could be $2.25BILLION in medallion loans on $3BILLION in assets!

Then, because it doesn't matter how much capital a lender has when the lender AND the supervisor are derelict of duty, OUR ASSESSMENTS would be even more than they're going to be!!
Yes, that's a GREAT idea.

How about secondary capital for well run credit unions with a different supervisor?

Cause, as wescorp and USC PROVED, and CUNA AND HAMPLE DENIED, you can't overcome dereliction of duty.

Jim Blaine said...

A great comment a well worth considering, but remember that secondary capital holders are uninsured and take losses first, before the NCUSIF.

Guess one other point is that the "cost" of capital (the interest rate the CU must offer to sell the instrument) will be determined by market perceived risk. Secondary capital will serve as a control on inappropriate CU growth - the open market is a better determinant of risk than a regulator and has greater incentive to be correct in its analysis. An examiner's incentive is always to go with worst case- especially when untrained. An examiner is never penalized for predicting disasters that never occur - only for failing to predict those which do occur. Think it's called the "Chicken Little" Syndrome!

Anonymous said...

Secondary capital investors are at risk but that doesn't SOLVE the derelict of duty issue on its own.
What investor does the derelict CU, regulated by the supervisor more concerned about self preservation than being (in your parlance) ACT COMPLIANT, issue capital to?
Is the investor a member?
Is the investor another credit union, corporate, cuso or vendor?
Or, is the investor a bond fund, pension fund, insurance company?
If the proposed investor is a "professional", the credit union probably can't afford the cost.
If it's any of the others, it's a potential reputation risk nightmare for credit unions.

Best left to regulators who are experienced at supervising this and institutions with less likelihood of debacle.
As melrose and wescorp proved, size doesn't equate to smart in credit unions.
That's why you need an experienced regulator.
Not this one.

Jim Blaine said...

You may misunderstand the fundamental concept of a credit union as a cooperative... the members whenever possible should be on the risk! Deposit insurance makes member-owners "risk lazy"... and as you've pointed out the regulators have never been able to forsee a major crises!

Let's go back to "trusting the people"... that's a better model... and what we have doesn't work!

Haven't you noticed that Americans have just voted against the "noblesse oblige" of an unresponsive, entrenched, "we know better than you" federal bureaucracy?

Or did you miss that...

Anonymous said...

Oh, so put the members at risk like the saving as and loans.
Executed by you, yes.
Executed by wescorp and melrose?
Good luck with that.

The "market" of members/consumers don't have the time or inclination to Bette the difference between you and bob siravo.
That's why there's a distinction between professional and non professional investor.
Right now, a CU member with deposit below $250,000 has nothing at risk.
An investing member in secondary capital has every dollar at risk.
And, no amount of disclosure will help, just ask all the homeowners duped into mortgages they didn't understand nor could pay on.

Keith Leggett said...

Quoting John Allison, former CEO of BB&T:

“I don’t know a single time when federal regulators—primarily the FDIC—actually identified a significant bank failure in advance. Regulators are always the last ones to the party after everybody in the market (the other bankers) know something is going on.”

I guess you could add NCUA to the list.

Jim Blaine said...

Hate to agree with "the good Doctor", but everytime we mention Corporates, s&l's, or Bankageddon 2008... the regulators were there in force... unfortunately mainly to pick up the pieces !

Why don't we get the federal government off the hook by lowering the deposit cap back to $100K or even $50K? Re-share the risk with the consumer, make them spread funds around if concerned, perhaps even revive the opening of small, limited purpose community banks and credit unions with locally knowledgeable and accountable boards of directors?

Anonymous said...

"Revive the opening of small, limited purpose banks..."
There is already more banks and credit unions than depositors need.
That's why none of us have margins.
That's why most of us don't produce enough revenue to be competitive with services and products without relying on fee income.
Let alone afford the compliance requirements and tech needs.

Also,, I think, except in NCUA case, that regulators knew there were problems but were politically corrupted by the cancer inside the beltway.
Read how FHFA tried to reign in Fannie and Freddie only to have bfrank Dodd and others call the reg to the hill for a lecture to back offf, while,they accepted campaign er bribe funds.

Anonymous said...

A reason why many credit unions and their regulator shouldn't be issuing secondary capital...
...to avoid leveraging up on medallion loans...now 30 cents on the dollar coming by way of assessment to your hometown soon.

Nice job NCUA.

Waiting on congress.

Jim Blaine said...

Medallion loan losses will not be that great.... vey manageable. Why harp on it... the risk is identified and understood?

Wouldn't take a bankruptcy filing value as definitive... or where do we all go to see how your "sky is falling" estimates are derived?

Jim Blaine said...

There are plenty of smaller institutions which are suffering margin pressure because of government manipulation of interest rate markets to save the big banks.

Great strategy: kill off the smaller institutions to save the TBTF guys... that's fair - right? And, we continue to have the TBTF problem...

Guess you're right... what America needs is more Wells Faegos!!!

Anonymous said...

If we get secondary capital we look even more like banks and will likely lose our tax exemption. Well managed credit unions don't need secondary capital especially when we have the NCUA who has proven to be ineffective at regulating the weak credit unions. Then we have our trades that are also responsible for missing the weak links, most specifically CUNA and Bill Hampel.

Greg said...

Secondary capital is a great idea for credit unions. Without the ability to raise capital quickly like banks do by selling more of their stock, secondary capital gives credit unions a chance. The question is why is there so little of it being utilized by low income credit unions at this time? My guess is the NCUA has no clue how to handle it, therefore avoids it.