NCUA Chairman Todd M. Harper during a meeting of the NCUA Board.
As Prepared for Delivery on July 18, 2024
Thank you, Gira and John, for your presentation on this proposed rule to implement the incentive-based compensation requirements of section 956 of the Dodd-Frank Wall Street Reform and Consumer Protection Act. More importantly, thank you for your work with the interagency team of federal regulators that developed this proposed rule. And thank you, Amanda and Ariel, for being available to respond to questions.
In just three days, we will mark the fourteenth anniversary of the enactment into law of the Dodd-Frank Wall Street Reform and Consumer Protection Act. And, this September, we will mark the sixteenth anniversary of the collapse of Lehman Brothers and AIG — both prominent events in the financial crisis and the Great Recession that followed.
The Dodd-Frank Act responded to those events and, among other things, called upon financial regulators to act on the issue of incentive-based compensation within nine months of enactment. So, it’s an understatement to say that this rulemaking is long overdue. It’s actually an incomplete assignment about which lawmakers frequently inquire of me at hearings. They want to know when we are going to finish our work. For me, the time to act is now.
Specifically, section 956 of the Dodd-Frank Act requires federal financial regulators, including the National Credit Union Administration, to issue joint regulations or guidelines requiring disclosure and reporting of incentive-based compensation for senior executive officers and significant risk-takers at financial institutions with more than $1 billion in assets. It also requires us to establish a mechanism for deferring income and clawing back ill-gotten gains resulting from excessive risk taking when an institution fails.
As noted earlier, the proposed rule we are considering today is identical to the proposed rule approved by the Federal Deposit Insurance Corporation, the Federal Housing Finance Agency, and the Office of the Comptroller of the Currency in early May.
This rule also re-proposes the regulatory text issued in June 2016 and seeks public comment in the preamble on certain alternatives and questions.
As in 2016, the proposed rule would establish a three-tiered system for covered financial institutions. Level 1 would cover institutions with $250 billion or greater in assets. Level 2 would cover institutions between $50 billion and $250 billion in assets. Level 3 would cover institutions between $1 billion and $50 billion in assets.
From the perspective of federally insured credit unions, the proposed rule’s impact is relatively small. As of the end of the first quarter of 2024, there were no federally insured credit unions in Level 1, two credit unions in Level 2, and 441 credit unions in Level 3. As such, the vast majority of credit unions — more than 90 percent — would be exempt from this rule.
Critics of this proposed rule will say that it shouldn’t apply to credit unions. But, the statute is clear: The rule must apply to credit unions with more than $1 billion in assets. Critics of the rule might also claim that credit unions were not responsible for the financial crisis or the Great Recession. The agency, however, cannot change what Congress required. Credit unions with more than $1 billion in assets are covered by the law. That point is clear.
Some may also claim that credit union compensation practices are different from other financial providers. That may be largely true, but there are clear examples of excessive incentive-based compensation contributing to the failures of corporate and consumer credit unions nearly 16 years ago during the financial crisis.
A prime example is the failure of the Cal State 9 Credit Union. That failure cost the Share Insurance Fund more than $170 million. Moreover, the material loss review of Cal State 9 found that, “an incentive compensation program that paid nearly $400,000 in bonuses to the credit union’s CFO between 2006 and 2007 based on net income generated by the credit unions’ home equity loan program” was one of, “…two factors that contributed significantly to Cal State 9’s excessive concentration of its assets in indirect home equity lines of credit” that eventually led to its demise.1
In another example, Western Corporate Federal Credit Union pursued a strategy of generating more interest income than would be available from the deposits it held. WesCorp used this income to pay high rates on its member certificates and to generate increased net interest income to support operational expenses, including providing substantial compensation increases for its executives. Between 2002 and 2008, the total annual compensation for the leadership team increased by an average of 88 percent. These executives pocketed enormous profits, while the corporate’s members and, ultimately, the credit union system bore the cost of WesCorp’s failure.
To help avoid similar situations in the future, the NCUA is required by Congress to issue a joint incentive-based compensation regulations or guidelines. And, that is what we are doing here.
Some may also assert that we have learned our lessons and what happened in 2008 cannot happen again in 2024. I wish that were true, but it is not. Just last year, we saw how excessive risk taking by certain banks rocked our financial markets. As noted in the proposed rule, a report on the failure of Silicon Valley Bank, for example, noted that the compensation packages of senior management were tied to short-term earnings and equity returns that did not include risk metrics.
That same report concluded that the bank’s managers had a financial incentive to focus on short-term profit over sound risk management. A consistent set of enforceable standards across financial regulators would level the playing field, avoid regulatory arbitrage, and help ensure that incentive-based compensation arrangements at covered financial institutions are not excessive and do not lead to material financial losses.
Lastly, some may assert that in passing section 956, Congress allowed the agencies to issue joint guidelines instead of a rule. That is correct, but guidelines are an imperfect solution in this instance as they are unenforceable. We cannot cite guidelines in documents of resolution. And, in the event of future financial failures resulting from excessive greed, we will lack the regulatory structure and authority needed to claw back excessive executive gains.
I know the need for these reforms from firsthand experience. As part of my work helping to draft this financial reform provision, it was clear then and it’s clear now that Congress — and the American people — want senior executives, wrongdoers, and fat cats at large financial institutions held accountable for any irresponsible and damaging business practices. Greedy executives should not earn excessive bonuses while taxpayers foot the bill when their institutions fail.
This rulemaking effort is about providing transparency and accountability. This regulatory effort will better focus the leaders of financial firms on the long-term health of the company instead of just their short-term personal gain. That’s good for the credit union system, and it’s good for our financial markets. For these reasons, I will strongly support this proposed rule.
That concludes my remarks. I now recognize Vice Chairman Hauptman.
1 National Credit Union Administration, Office of Inspector General, Material Loss Review of Call State 9 Credit Union, #OIG-10-03 April 14, 2010, page 14, available at https://ncua.gov/files/audit-reports/OIG201003MLRCalState9.pdf.