Changing the Regulatory Dynamic

A special message from Mary Martha Fortney, President and CEO,
February 2012

If credit unions are feeling overwhelmed, it is completely understandable. They have had to manage unpredictable economic conditions, absorb the cost of the corporate credit union resolution and navigate a shifting, and ever increasing, regulatory landscape. In just the past two years, we have seen a flurry of regulatory activity stemming from Congress, the National Credit Union Administration (NCUA), other federal agencies and in some cases from the states.
The increasing regulation might be frustrating to credit unions, but it should not have been unexpected. Given the volatile nature of the economic crisis, it was inevitable that pressure would build on regulators to respond to the crisis with additional regulations. Certainly some of these new regulations were promulgated in response to poor practices or even malfeasance by some that exposed gaps in regulation.

Regulators have the un-enviable task of ensuring a safe and sound system through vigorous supervision. Not only in the aftermath of economic turmoil, but also during good times, regulators are tasked with divining unsafe and unsound practices and curtailing them. Against this mandate, regulators must also balance the need to provide the industry with a viable operating environment.

Though NASCUS and state regulators have long said that you should not “regulate to the lowest common denominator,” to some degree this is what is happening post-crisis. And at this point, it is uncertain whether layering on regulation is the most effective way to mitigate material risks to the credit union system.

Herein lies our grand problem. There will always be institutions that operate soundly. There will be those that when presented with flexible regulations, will push the envelope in an unsafe and unsound fashion. If you don’t regulate to the lowest common denominator, if you don’t carefully and specifically prescribe all activities, how do you control those outliers from a regulatory perspective? There is only one way: regulatory discretion.

If that’s the case, our challenge is this: How do we refine our regulatory approach going forward that allows regulators the discretion to enforce broad flexible rules, while providing credit unions the comforts of both understanding expectations and protection against regulatory whim?

One of the ways NASCUS has tried to bridge that gap is by our structure, which thrives on robust, candid, and most importantly meaningful discussion between the regulator and regulated. From a regulatory perspective, it makes little sense to start by presuming something is bad. That isn’t always the case. From industry’s perspective, it makes little sense to start from a perspective of “don’t issue a regulation,” as sometimes regulators have been directed by Congress or their state to do so. So, how do we take a mandate or directive and fit it into the credit union system in a way that makes sense?

By working together, we must find a way to strike a balance. In this context, the dual chartering system is invaluable. It provides different regulatory environments where various approaches can be tried and evaluated. The dual chartering system also has historically provided a check on overregulation by way of the cooperative competition between the state and federal charter.

Within this context, the continued preemption of state laws lessens the differentiation between the charters, and consequently weakens the ability to provide for a regulatory environment for innovation. For more than 100 years, state charters have acted as a laboratory for innovation (share drafts, field of membership, etc.). A homogenization of the system is not in credit unions’ or regulators’ best interests. Regulatory diversity enhances safety and soundness. NASCUS strives to ensure the state and federal regulator cooperative working relationship remains strong. We need strong regulators on both sides working toward a common goal of a vibrant credit union system.

That is how NASCUS and state regulators approach these issues, and I believe that is how we must reboot the regulatory relationship for the system to survive into the future. It will be increasingly difficult for credit unions to thrive if we continue to regulate to the lowest common denominator without recognition of the increasing regulatory burden and impracticality of excess regulation. We have a valuable opportunity to realign our regulatory framework in a way that supports and enhances the system into the future. Such realignment will not be easy, as these are difficult times for both credit unions and their regulators. I encourage you to contact me with your thoughts at