http://www.newyorkfed.org/markets/statistics/dlyrates/fedrate.html

I was an examiner during the late 70s and early 80s. The greatest challenge credit unions faced was caused by the Federal Credit Union Act because it mandated a 12% loan rate and a 7% dividend ceiling. Only a handful of credit unions with over investments in GNMA (sold as having a 7-year life not recognizing interest rate extension) had trouble. The NCUA handled the situation by providing 208 Assistance and most credit unions came through the problem cause by the rate shift – no fire sale of assets. I never bought into the irrational fear of a 3% interest rate shock because of this experience.

A greater than 3-point shift in interest rates is not a black swan event. It happened once since the end of the Vietnam War. Actually close to a 5% shift. This dramatic shift was followed by a drop almost immediately. So the 3 point shift that is sustained, which is the base of NCUA paranoia about ALM, seems to be over blown! There was only one other close to 3-point pop in interest rates during that time period. Also, rates fluctuated wildly from about 9 to 20 going up and down within the same year during this time period.

What is interesting is the NCUA seems to regulate and examine based on poor historical analysis. The truth is interest rate shocks will give management poor performance headaches until balance sheet catches up. The greatest losses to the NCUSIF were cause by the NCUA's overreaction to short term interest rate fluctuations by dumping investments opposed to managing investments. It would have been better for the NCUA to support the portfolio by intervention with 208 assistance and removing and replacing poor performing officials. The NCUA elected panic dumping of the portfolios on the market taking extra large losses while enhancing Blackrock and PIMCO's bottom line.

Somewhere in the mid to late 80s there was a shift in regulatory thinking. The bank regulators got in trouble for what was believed to be their overuse of what became known as forbearance. Regulatory alternatives which could be used by the NCUA to address problems with credit unions under 208 of the Act were shelved.

There is a fundamental difference with forbearance in a bank regulatory structure and a credit union structure. Forbearance in banking can clearly lead to unjust enrichment to insiders and shareholders. Forbearance in a credit union can assist a credit union with a temporary issue if the credit union has reasonable prospects for a sound future. In credit unions, forbearance gets a troubled credit union to that future. Failure to use 208 or forbearance, if you will, has cause greater losses to the NCUSIF and the industry.

The NCUA also wastes an amazing amount of regulatory energy forcing credit unions to evaluate the impact of a dramatic and sustained movement in interest rates. This is a phenomenal waste of time and does not lead to improved performance of credit unions doing this type of study. I suspect the NCUA cares more for making work for examiners than reducing expenses to credit union members for the NCUA's bloated budget.

If a true dramatic shift in interest rates happened you are just plain screwed!

As a child I attended St. Gabriel's elementary school about three miles from the Washington Monument, which was ground zero for a nuclear attack during the Cuban Missile Crisis. The well-intended Sisters of Holy Name would practice for a nuclear attack by running the children to the basement lunch hall and hiding us under heavy wooden tables. We all appreciated their concern, so we did not tell them that this was a waste because every child knew we were screwed.

There is a slight difference between the NCUA's overreaction and Mother Superior's overreaction. The NCUA wastes member money. Mother Superior just gave children a temporary relief from classroom education. The Sisters promptly made up for it during the next hour.

Credit unions are now faced with a questionable regulatory over reach concerning the debate of risk based capital. This is nothing more than the NCUA trying to nationalize the credit union part of the American financial services industry. The new credit union motto will become “Member owned, NCUA controlled!” Why is there a need for a board and management of a credit union with the NCUA attempting to manage credit union remotely through regulations like RBC?

RBC regulation is based on a defective historical prospective. A narrative that the regulator wants to believe opposed to what actually happened. It is based on the defective assumption that arbitrary capital levels are good for everyone and only the NCUA can determine the correct arbitrary level of capital for a credit union. The Federal Credit Union Act seems to be dammed.

Will any level of logic prevent the NCUA from defending (promulgating regulations) against monsters under their bed? It is time that credit union members demand real factual justifications prior to accepting the yoke of regulatory activity based on paranoia.