Monday, January 09, 2017

Size Doesn't Matter...

Nice rack!

Least most of us "normal" males hope so!

Probably a good time to stop and address the recurring reader comments which suggest that NCUA's budget should be compared to the budget of the FDIC, based on the asset size of credit unions vs banks examined.

The number of credit unions continues to fall year after year.


The thought being that since the FDIC spends substantially less "per dollar of assets examined" than the NCUA, then the NCUA is obviously "bloated, top-heavy, siloed, and inefficient" [to quote Jim Nussle talking about CUNA - btw, whatever happened with that?.]  

Let me suggest that "size truly doesn't matter" - in fact, size generally doesn't matter at all - in capturing the "risk" profile of a credit union.   Regulators examine to monitor the level of "risk" at an institution, not the volume of assets. Actually, it's pretty clear that the larger the credit union, the less likely the CU is to create a loss for the NCUSIF. The Agency's own data proves that fact:

NCUA Board member Mark McWatters has pointed out on several occasions over the last year, that the vast majority of recent NCUSIF losses have arisen from fraud losses at smaller CUs,
where controls and compliance more frequently break down. But, before we "run off half-cocked", do remember that less than 1% of all credit union assets are in credit unions rated "CAMEL 4&5", less than "safe and sound"

Small and large alike, credit unions pose little risk to the NCUSIF and no risk to the financial fabric of the Nation. But the NCUA is "in a bind" structurally and budget-wise, as the number of credit unions continues to plummet. 

Clearly if NCUA can't  shift the budget dialogue to "asset size = greater risk" then the Agency will have to face the unpleasant task of reducing its budget to reflect the statistical and economic reality that monitoring fewer, larger credit unions in an all electronic, cyber-digital world requires very few staff - and not the staff which the Agency currently employs.

But facing up to the reality that:

- too scary!

 CU Asset Size ≉ NCUSIF Risk

... requires...




Anonymous said...

I've been told the same thing my entire life that "size doesn't matter" but beginning to think I've been fibbed to for years. The NCUA, like CUNA, remains bloated, ineffective and unaccountable. It's time for Congress to directly weigh in some more, and hopefully the Trump administration will also make their oversight and feelings known.

Anonymous said...

You're kissing the point.
Has nothing to do with risk associated with size.

Taking the dollar's spent by NCUA for 10 years and dividing to come up with the dollar's spent per CU, per cu asset, and versus FDIC, number of banks (almost exactly the same number of banks as cus, btw), and bank assets allows us to look at a benchmark of similar us based depositories.

Then do it for FCUS for 10 years and you also make part of your argument about the OTR.

The bet here is when you compare the FDIC and NCUA it further exposes the ncua's "independent regulator rogue nation status.
Also helps you with the idea you floated over the weekend....remove the NCUSIF.

Jim Blaine said...

Assume we're talking about "missing" rather than "kissing" a point, so... let me be sure what I'm kissing, because I think I'm trying to acknowledge your point, but assert that using "assets" does not provide "the benchmark" of similarity you seek - and what's worse gives credence to NCUA senior staff who believe, as CU assets expand, so must the budget of NCUA!

Assets within and among CUs are non-complex and very similar (cars, homes, credit cards, "small dollar", consumer, retail vs wholesale, US-only based, limited investment types, little use of derivatives and commercial lending, etc) - homogeneous is the economic phrase.

If you compare to FDIC assets, you include the top 10 largest banks (which represent @ 60% of total FDIC assets) whose asset structure is highly complex and much, more difficult to monitor and regulate.

NCUA robusterians like to view themselves - in their silliest self-importance - as confronted by similar risks and complexity among CUs (the creation of the "ONES" being the most ridiculous example!). That ridiculous comparison of the "riskiness" of CU assets with the risk in large bank assets is an equation I believe you should steer away from. Because such an argument will be used to try to prop up an excessive NCUA budget and NCUA is trying desperately to tie its budget to the growth in CU assets! From NCUA staff point of view a CU industry growing at an 8-10% rate would require an equally growing NCUA budget - if CU asset growth = growth in risk to NCUSIF.

The real point is that as the number of CUs continues to decline and CU assets are held by fewer, larger credit unions with more resources, stronger controls, better compliance - the risk to the NCUSIF will decline, as should the budget/staff of the NCUA!,

Think it might be a purer, more accurate argument for the NCUA to acknowledge that the risks in CU assets are far smaller than those risks represented by FDIC assets.