By Michael Fryzel
One of the biggest problems with government regulation is that once put in place it never goes away and rarely is changed. NCUA proclaims that it reviews one-third of its regulations every three years in an effort to improve or change them. They also say that a regulation could be reviewed before its three-year time period if a problem is brought to the agency’s attention about that rule.
Scheduled or mandatory reviews are good. They allow for a fresh look at what has been put in place, how it has impacted an industry, and if it needs to be changed to improve why it was originally promulgated.
In 2008 we faced a financial crisis that threatened the survival of the credit union industry as we know it. The corporate credit unions, the institutions that provide all types of financial services to our natural-person credit unions, were on the brink of failure as a result of a poor policy of investing in mortgage backed securities. The capital credit unions had invested in the corporates was gone and thousands faced insolvency.
The actions NCUA took and the controls they put in place have shown to be the right decisions to have been made. The industry has survived and is as strong as ever. Tough decisions were made and they accomplished what needed to be done.
At the same time steps were being taken to stabilize the industry, NCUA drafted regulations that would ensure the corporates that survived the crisis would never again be able to put the industry in the precarious situation they did.
The regulations the NCUA Board passed were wide sweeping. They reined in the activities of the corporates, set standards on capital retention, and established deadlines for achieving the goals set for them. As a result of those stringent regulations we have fewer, stronger, better-focused and better-managed corporate credit unions.
It is now 2015 and having watched the transition of the corporates, the improvements in the economy and the strength of the credit union system as a whole, it is time to take a hard look at the corporate regulations and see how they may be improved to better serve the system.
'Never Again'
I am not suggesting a return to what precipitated the corporate crisis. As NCUA Chairman I lived that for an entire year and said we could never again allow that to occur. Never again should the industry and its regulator become so complacent as to risk devastating an industry founded on helping others. Sufficient standards and examination requirements now exist that if adhered to will prevent any such reoccurrence.
It is however the right time to take another look at what has been put in place, what it has achieved and what can be done to ease excessive restrictions and provide corporate credit unions a form of regulatory relief similar to what is being sought for natural person credit unions.
I urge the NCUA Board to review the corporate regulations and focus on those areas that in today’s environment call for change. They must look at those regulations that may be overly restrictive and modify them without sacrificing safety and soundness. Specifically, they need to reconsider the Permanent Contributed Capital limitations and determine what changes could be made. In addition, the proposed 120-day cap on indebtedness should be reconsidered. Greater flexibility is needed in dealing with the CLF to allow them to make bridge loans to credit unions if and when needed. A relaxing in those areas will allow the corporates greater ability to grow retained earnings and enable them to earn a greater return on their assets.
Know When to Restrict, and When to Retract
A regulator must know when to restrict and when to retract. Those that are able to achieve that timing balance provide their industry with the ability to grow and prosper while maintaining the safety and soundness required to maintain the system.
The best approach to regulation is to have as much as is needed and as little as possible.
At the corporate level, a little retraction is called for.
Michael E. Fryzel is an attorney and advisor to the financial services industry with offices in Chicago, Illinois. He is a past Chairman and Board Member of the National Credit Union Administration. He can be reached at meflaw@aol.com.