Good afternoon. Thank you, Antonio, for the kind introduction, and thank you, Jim, for inviting me to speak before the CUNA Governmental Affairs Conference. I would also like to express my appreciation to President George W. Bush for his remarks this morning.
Likewise, please allow me to thank President Trump for appointing me as the Chair of the National Credit Union Administration. I am honored by his confidence in me.
Just as I regard my service as NCUA Board Chair as an honor, I also consider this opportunity to address you today as a great privilege.
When I spoke with you last year, I laid out 15 priorities, from re-setting the Share Insurance Fund’s equity ratio to meaningful regulatory relief and reform to streamlining our budget and budgetary process to improving the transparency and accountability of the agency to enhancing the efficiency and effectiveness of the examination process. We have made great progress in each of these areas, yet our work continues.
Meanwhile, as you know, the credit union system, along with the rest of the country’s consumer-oriented financial services sector, is undergoing significant change. That change presents new challenges and opportunities. The NCUA has worked to keep pace, to address the challenges presented and to create a regulatory environment that allows credit unions to take advantage of opportunities according to their business plans, all within the letter and spirit of the Federal Credit Union Act. A credit union system that continues to grow, thrive, and prosper in a responsible manner helps ensure the safety and soundness of the National Credit Union Share Insurance Fund and protects credit union members as well as the taxpayers.
There have been some major accomplishments over the past year, all of which were achieved with bipartisanship among the NCUA Board members:
- We closed the Temporary Corporate Credit Union Stabilization Fund, four years ahead of schedule, and in our most recent Board meeting, approved a final rule to provide you with greater transparency regarding how we will calculate the projected Share Insurance Fund distribution.1 The prudent management of the Stabilization and Share Insurance Funds and the early closing of the Stabilization Fund accomplished two significant goals:
- First, they avoided the credit union community having to pay a Share Insurance Fund premium of approximately 13 basis points, or about $1.3 billion, to build up necessary reserves and restore the fund's equity ratio to 1.30 percent, the statutory limit for premium assessments under the Federal Credit Union Act.
- Second, they allow credit unions to receive a distribution of surplus equity of about $736 million, estimated for payment in the third quarter of 2018.2 As the risk to the Share Insurance Fund dissipates from the retirement of the NGN Notes, we anticipate the payment of further distributions.
Yesterday evening, I learned from Bruce Leighton, the President and CEO of Members First Credit Union in Manchester, New Hampshire that his credit union will donate 100 percent of their distribution to charity, including a homeless shelter and an opiate addiction and recovery center. Mr. Leighton has challenged others to follow his example of “People helping People.” Thank you, sir, for your generosity and leadership.
- We restructured the agency for greater efficiency and cost effectiveness, re-thinking how we deploy our resources. This includes consolidating five regional offices into three by next January and eliminating 80 percent of the agency’s leased space. We have incorporated into our budget additional cost-saving measures like an extended examination cycle and a smaller agency footprint in credit unions.
- We have initiated an agenda of regulatory relief built on our existing practice of regular reviews of our regulations and conforming to the goals of the administration’s Executive Order 13777, directing agencies to set up task forces to identify outdated and unnecessary rules and regulations.
- We have made the agency more transparent and accountable and are crafting tailored and targeted rules and guidance. We again held a public briefing on our proposed budget, and we asked for your comments on our budget, our plans for improving the Call Report, our methods and procedures for electronic data collection, and, of course, our proposed rules and regulations.
These efforts are ongoing, and I am pleased to report we have made substantial progress in a spirit of collaboration that does not compromise our role as regulator, supervisor, and insurer of credit unions. In fact, Congress mandated such collaboration under the Administrative Procedure Act by requiring agencies to propose regulations for public comment and analysis prior to finalization. It’s that spirit — that philosophical approach to the regulation of financial institutions — I now wish to discuss.
I grew up in a household where you had to justify your actions. My parents were open to fresh and creative ideas if you could articulate and defend your position around the kitchen table.3 I learned that reasonable minds may differ on occasion; agreeing to disagree often serves as an appropriate resolution to a principled debate, and good-faith compromise reflects integrity and confidence.
This perspective instilled in me a keen respect for the fundamental precepts of individual freedom, individual initiative, individual responsibility, and individual introspection. I learned that when people trust you with authority, particularly the authority to govern or to regulate, you need to listen, to answer questions, to think through intended and unintended consequences, and to work cooperatively to discharge your responsibilities in an entirely collegial, professional, and principled manner.
I incorporated this philosophical approach into my professional life, adopting the ancient mantra of “Come now, and let us reason together” as one of my core guiding principles. Let the parties come together and state their cases, let them negotiate and deliberate in good faith, and let them reach an amicable accord through non-partisan compromise and, as appropriate, reconciliation. In the final analysis, the best ideas must prevail, and those ideas are most often forged in the caldron of reasoned and honest debate. At the NCUA, we will continue to strive for the best ideas in crafting and revising regulations, incorporating regulatory relief, and supervising, examining, and insuring credit unions.
I am convinced the best way to fulfill these responsibilities is through a policy of inclusiveness aimed at finding the simplest, most straightforward, solution to each issue. In drafting regulations, conducting examinations, and managing the agency, I have encouraged the NCUA staff to follow Occam’s Razor, the concept embodied by William of Occam, a 14th century philosopher and theologian, who argued, in essence, that the simplest solution is often the most elegant and effective approach to addressing a complex matter.4 Like William of Occam, a similar concept is attributed to Professor Albert Einstein who noted, in effect, “everything must be made as simple as possible, but not one bit simpler.”
In this spirit, I challenged our staff to break down silos that often develop within organizations; to remain open to fresh and innovative ideas and approaches; to weigh, measure, and test those ideas and approaches; and to present their recommendations for further analysis and vetting by the NCUA Board before submission for public comment.5
Regulation, supervision, examination, and enforcement should derive from transparent, fully accountable, tailored, and targeted rules and procedures that respect the ability of credit unions to make their own business decisions while allowing for innovation and growth that strengthens the credit union system and, as such, the Share Insurance Fund itself. After thoughtful analysis, the NCUA Board will make the final decisions, but the Board’s due diligence process should consider the shared wisdom of the credit union community. While we may agree to disagree on certain issues, please understand your voices are heard, both as specifically prescribed by the Administrative Procedure Act and as a matter of our governing philosophy. We will continue to welcome your ideas and approaches and will discharge our responsibilities in a measured, deliberate, and transparent manner.6
In a similar fashion, it’s worth considering whether the credit union and community banking communities could benefit from a “come now, and let us reason together” approach to create opportunities for addressing their differences as well as the common challenges facing these essential Main Street financial institutions in an evolving consumer-driven marketplace. Working together in good faith with mutual respect for the other reflects strength, not weakness.
Diligence, prudence, transparency, and respect for competing ideas has a practical effect. Millions of Americans, from all walks of life, have placed their financial well-being with credit unions.7 In some underserved communities, including low-income and minority communities, credit unions may be the only source of federally insured and affordable consumer-oriented financial services.8 We have a responsibility to offer all credit union stakeholders and the taxpayers the results of our best thinking.
Let me close where I began. This has been a year of significant growth in the credit union system and significant progress at the NCUA in terms of tailored and targeted regulatory relief and other change through a transparent, accountable process that respects diverse points of view. I am absolutely confident we can build on these accomplishments together while complying with the letter and spirit of the Federal Credit Union Act and ensuring the safety and soundness of the Share Insurance Fund and the credit union community. I am looking forward to the year ahead.
I will close by wishing each of you, as the leaders of the credit union community, the very best success in your meetings and conferences this week.
1 See the NCUA’s Stabilization Fund Closure webpage.
2 In a nutshell, the early closing of the Stabilization Fund transformed a projected premium assessment into an anticipated distribution while materially increasing the necessary and appropriate GAAP reserves for potential future Share Insurance Fund losses and maintaining a normal operating level necessary to protect the Share Insurance Fund’s equity ratio from falling below 1.20 percent in a moderate recession as determined by stress test analysis conducted pursuant to Federal Reserve methodology.
The NCUA is currently preforming and validating the data necessary for the distribution calculation and developing software for the transactions. The agency cannot vouch for the accuracy of any estimated share insurance distribution provided by another organization and expects to notify credit unions later this year of their respective distribution amount. We anticipate distribution checks will be issued in the third quarter.
For a discussion of the closing of the Temporary Corporate Credit Union Stabilization Fund and setting the normal operating level at 1.39 percent, see my statement issued at the September 2017 meeting of the NCUA Board.
“There are three key risks to the equity ratio for which the 1.39 percent normal operating level accounts. Specifically, the 1.39 percent level accounts for the following:
- Four basis points to reflect the risk posed by the remaining obligations of the Corporate System Resolution Program;
- Two basis points to reflect the projected decline in the equity ratio through 2018 that will occur even without a recession; and
- 13 basis points of protection for risks to the equity ratio posed by insured credit unions.
“When combined, this means that 19 basis points above the 1.20 percent statutory minimum—an equity ratio of 1.39 percent—is currently needed to protect against a moderate recession.
There is an objective, transparent basis underlying each of these three numbers. The calculations and methodology were thoroughly and transparently described in staff’s presentation to the NCUA Board at its July 2017 open meeting, in the request for comment published in the Federal Register, during a webinar the NCUA hosted on this subject in August 2017, and in all the related materials that are posted on the NCUA’s website. I will reiterate them again here.
“First, closing the Stabilization Fund in 2017 will expose the Share Insurance Fund’s equity ratio to any change in the remaining obligations of the Corporate System Resolution Program. This risk to the equity ratio derives from the remaining legacy assets that cannot be sold until the corresponding NGNs they collateralize mature, for the most part not until 2020 and 2021. The NCUA engaged BlackRock to model the impact on the projected cash flows of the legacy assets based on the Federal Reserve Board’s economic stress scenarios. This analysis concluded that a moderate recession would reduce the value of the Insurance Fund’s claim on the corporate credit union asset management estates by roughly $400 million, which would equate to a reduction in the equity ratio of four basis points. It is critical that the Insurance Fund maintain a sufficient amount of equity to cover potential changes in the value of the claims on the asset management estates of the failed corporate credit unions.
“Second, current trends and factors separate from the management of the Stabilization Fund’s assets and liabilities are straining the equity ratio of the Share Insurance Fund. The equity ratio has been declining over the last several years. We anticipate it will continue to do so, even without an economic downturn. This decline is due to continued strong growth in insured credit unions’ shares and low yields on the Insurance Fund’s investments, which are limited by law. Even somewhat optimistic projections indicate a decline of two basis points in the equity ratio is expected to occur before the remaining NGNs begin to mature in 2020 and the exposure to the legacy assets can be reduced. Holding the additional two basis points in the Insurance Fund now will help ensure there is sufficient equity to account for the potential decline in value of the claims on the asset management estates and avoid future premiums.
“Third, a moderate recession is projected to produce a decline of 13 basis points in the equity ratio due to the effects on the three primary and customary drivers of the Share Insurance Fund’s performance: insured share growth, interest income on the fund’s investment portfolio, and insurance losses. The decline of 13 basis points is derived through an analysis that looks at historical relationships to link the three main customary drivers of the Share Insurance Fund’s equity ratio to the economic variables contained in the Federal Reserve scenarios. The projections for the drivers are then used to simulate how the fund would perform under an economic stress.”
3 My parents had no patience for equivocation or ill-considered and dubious plans. They valued thoughtfulness and encouraged my brother and me to form and articulate our convictions in a forthright and collaborative manner that could withstand their inquiry, scrutiny, and skepticism. They were particularly unimpressed by a scorched earth approach to negotiating that yielded little but enmity and distrust among the parties.
4 William of Occam, 1287–1347. Occam’s Razor, see https://www.merriam-webster.com/dictionary/Occam's%20razor.
5 That’s why we put our budget, our strategic plan, our plans for changing the Call Report, and our proposed regulatory reform agenda out for comment well in advance of action by the Board. This is also how we as an agency have approached the job of modernizing our examination process, reforming regulation to reduce needless burden, and building our annual budget.
6 The NCUA will discharge these duties and responsibilities with the goal of seeking the most transparent, fully accountable, tailored, and targeted solutions to the issues presented while complying with the letter and spirit of the Federal Credit Union Act and ensuring the safety and soundness of the Share Insurance Fund and the credit union community that so many Americans depend upon for their financial services.
7 These include individuals, families, small business owners, veterans and members of the military, blue-collar and white-collar workers, members of the services sector, and public servants.
8 Nearly half of all federally insured credit unions have the low-income designation, giving them access to resources aimed at improving services to these communities. See the NCUA’s Q3 2017 Quarterly Data Summary Report. The U.S. Treasury Department’s Community Development Financial Institutions Fund has certified approximately 300 low-income credit unions as Community Development Financial Institutions, further expanding the resources available to them. There are also approximately 580 credit unions designated as minority depository institutions, specifically providing financial services to minority communities.