Monday, February 2, 2015

Do Credit Unions "Rat" on the Industry's Bad Actors?

It is often argued that the financing structure of the National Credit Union Share Insurance Fund incents credit unions to monitor each other.

In 1997, the Treasury Department wrote:
"Because their 1 percent deposit is at risk when other credit unions fail, and because the Share Insurance Fund may have to levy additional assessments on surviving credit unions, credit union managers have an incentive to alert federal regulators to unsound or illegal practices at other credit unions. Although credit unions cannot directly prevent excessive risk-taking by other credit unions, they can report undesirable practices by other credit unions to regulators, who can take remedial actions."

However, with the exception of a few credit unions objecting to an expansion in the business lending authority for credit unions, there appears to be a dearth of evidence regarding credit unions raising the alarm about unsound or illegal practices of bad credit union actors.

For example, did any credit unions raise alarms prior to the financial crisis regarding corporate credit unions doubling down on their bets on risky mortgage-backed securities?

Did any credit unions point out to their regulators the risk associated with Norlarco CU (CO) or Huron River Area CU (MI) making speculative residential loans outside of their market areas in Cape Coral (FL)?

I suspect not.

While credit unions probably know who are the bad actors in their industry, the concept of credit unions squealing on bad actors is probably a modern myth.


  1. You must have been really bored [or upset by the Super Bowl?] to go digging for an 18 year old Treasury comment like that. Two points to consider:

    [1] NCUA had examiners on site at Wescorp and US Corporate -- didn't do a lot of good, apparently, so not sure what another credit union contacting NCUA would have accomplished.
    [2] Since credit unions don't examine each others' loan portfolios [NCUA and/or the state regulators do that], I can't see how any other credit union would be in a position to contact the regulators about the risks of "speculative residential loans outside of their market areas."

    Do you also expect banks to do their regulators jobs for them?

  2. While the Treasury report is 17 years old, I still hear this argument being made.



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