In the Aug. 12 issue of Credit Union Journal, Jerry Cross, CEO of One Credit Union in Vermont, suggested that federal and state examiners ought to spend some time working in credit unions before they start examining them in order to "get a feel for all we do." It's an intriguing proposition.
But one state regulator thinks there's another side of the issue to be considered.
"Do I think examiners would benefit from dealing with operational issues in a financial institution? Yes," said John Kolhoff, director of the Office of Credit Unions in the Michigan Department of Insurance and Financial Institutions. "But you have to remember the role of the regulator. A healthy relationship is a tug of war between the entrepreneurial nature of the institution and the risk-averse nature of the examiner. That's healthy to have. You do not want an institution that is too risk-averse and an examiner who is too entrepreneurial. You also don't want an examiner saying, I would normally say 'You ought to do this, but I know what's involved and the costs so I'm not going to say that.' And if we do that, we need to have credit union executives working in the regulatory agency. The reality of closing a financial institution is sobering."
The Two-Way Street
Kolhoff shared the observation with me during the recent NASCUS meeting in Idaho. Among other thoughts shared:
* What role can examiners play in assisting CU growth, if any? "We try not to run our financial institutions. The relationship I hope to have is a two-way street, and it certainly is not acrimonious. I do think examiners can play a part in circulating best practices. They might say, 'I can't tell you exactly how to do this but you ought to think about X.' Or, 'I have seen this financial institution do this and you ought to talk to X.' What we don't want to do is push down creativity. But we do try to point an institution in the right direction. At the end of the day I hire safety and soundness examiners who can determine how viable the institution is."
* Is Michigan's economy finally bouncing back? "In Michigan, most of our management teams are used to a cyclical economy. We never experienced the bump in real estate, because a lot of people had been leaving the state. Because there was no big bump up, there was no big fall down."
* What about the cost of compliance from a government agency point of view? "Compliance increases costs. If I have to hire more examiners, supervisory fees go up. The individual institution has to hire people and the price of their product goes up. There's no stop. If [government] was just updating these kinds of issues, it would be one thing. But all of this just gets added and the old rule never gets taken out. There are lots of new rules out of the CFPB on consumer protection that are not about safety and soundness."
* The issue of the regulatory burden also being a regulator burden was discussed in this space in the Sept. 23 issue from the perspective of the individual regulatory agency. Looking at the broader response, Mary Martha Fortney, CEO of NASCUS, sounded like a CU CEO when she said, "The question is where will it all end? It doesn't sound like there will be any relief. The state regulators and NASCUS have come together on a project, or working group, on exam efficiencies. It's to help both the agency and the credit union to be more efficient."
Kolhoff added, "We also have a formal working group looking at best practices in other states. We are already getting something out of that. NCUA has not been part of those discussions, but if we come up with something NCUA could be."
* A frequent criticism of regulation is it always "solves yesterday's problem." Perhaps the fastest-evolving challenge for regulators is technology, so I asked Kolhoff how he and his agency keep up to date. "In Michigan we have an IT working group responsible for IT exams in all our repositories. They participate in all kinds of training and certifications. I was formerly an IT examiner. Sometimes the complexity of a transaction is overstated because it is electronic. For instance, as examiners we used to have [paper] files with members' names and Social Security numbers and personally identifiable information and sometimes we took that off-site. That's a lot more dangerous than an encrypted laptop. Obviously, we're looking at mobile and related things, but as examiners we need to step back and ask what is the big picture here? It's not just about specific security protocols."
It's All About Choices
A long-standing NASCUS concern is pre-emption of states' rights by the feds, and Kolhoff said that remains the case. "Any watering down of the ability of states to be that testing ground is [detrimental]," he said. "So much innovation is the result of the state system. Homogeneity is not good. The competition between the charters makes sure that we maintain an appropriate perspective."
Frank J. Diekmann can be reached at email@example.com.