RegFlex and Credit Union Challenges for a New Millennium

Risk-based enterprises as a matter of course evaluate the level of risk involved in various categories of business they serve and underwrite each risk category accordingly. For example, life insurance companies require less documentation and even give lower rates to those who are younger or who do not sky dive as a hobby. The same approach applies on auto insurance for those with safe driving records. Physicians require office visits less often on patients with excellent health and family histories. Attorneys determine contingency or hourly fee arrangements based on the strength of a case. Even most credit unions have implemented risk-based loan policies. This begs a question. Why should NCUA as a regulator not do the same? As a safety and soundness regulator and certainly in our role as an insurer, we are a risk-based enterprise. Why should we not likewise consider effective risk management by those we regulate as a measure by which we can reward them with greater regulatory flexibility when they historically have performed well and therefore reduced our risk of their creating a loss to the insurance fund? NCUA can then appropriately allocate more of our regulatory efforts towards those credit unions with greater safety and soundness concerns and who therefore need more oversight, guidance and assistance from NCUA. This risk-based regulatory approach would not only be good business for a safety and soundness regulator. It is consistent with our statutory PCA mandate and would enable NCUA as an agency to better manage our limited resources by focusing more on the credit unions which need our help. At the same time, it could provide an incentive to credit union high performers to continue their exceptional level of financial performance. With the challenges of a new millennium facing both NCUA and America's credit unions, I think we should seriously examine such an approach and I believe RegFlex is the way to do it. RegFlex is an earned regulatory flexibility program based upon the realization that each credit union is different and therefore all NCUA regulations cannot be applied to each individual credit union in exactly the same manner. A "one size fits all" regulatory approach often results in less incentive to innovate in the member service arena and serves as a deterrent to extending service to folks from all walks of life. Because strong credit unions are hampered by some of the regulations put in place primarily to restrict activities which might be considered risky for those which are less strong, we recognize the need for some flexibility from the "one size fits all" approach by writing waiver provisions and pilot program language into many of our more restrictive regulations. But this is not the total answer because many credit unions refuse to pursue the time-consuming and often costly waiver process. Cumbersome process is many times within itself a regulatory deterrent to credit unions, and it is always costly in terms of the allocation of our own agency resources. In the dynamic marketplace of this new millennium credit unions must be able to respond rapidly and effectively to changing circumstances. Member demands are becoming more complex and the solutions offered by credit unions will likewise have to be complex, requiring both vision on the part of a credit union and flexibility on the part of its regulator. Credit unions cannot expect their members to demand fewer services simply because they are committed to cooperative credit. Let's face it. Members will demand more service and convenience. The credit unions will have to respond by providing it. NCUA must be pro-active by allowing it with only a minimum of regulatory red tape in those credit unions we regulate who have proven their ability to manage risk effectively. RegFlex is a regulatory policy which seeks to accomplish this purpose by establishing that credit unions who have earned a specified level of net capital strength (9% is the proposed figure) and have a proven risk management ability (CAMEL 1 or 2 for the past two exam cycles) should be given regulatory flexibility when dealing with certain non-statutory NCUA regulations that have minimal, if any, safety and soundness ramifications when applied to credit unions who meet those standards of performance. Among the non-statutory regulations with minimal safety and soundness risks which are under consideration for RegFlex eligible credit unions are the 5% fixed asset cap, certain limited investment restrictions, charitable contribution restrictions, limits on public funds and certain eligible obligation restrictions. RegFlex would provide strong credit unions with earned regulatory flexibility while at the same time providing an incentive to stay strong in order to maintain it. Just as unnecessary regulatory impediments can kill innovation, greater regulatory flexibility can empower innovation. The results of RegFlex will be an ever-growing number of well-managed credit unions with strong capital positions being empowered to expand their services to their entire field of membership with greater innovation, thus meeting the needs of all of their members much more effectively and with an ongoing incentive to remain RegFlex eligible so that they can continue to have this empowerment. Of course, should the ongoing examination and supervision process indicate downward trends in a credit union's performance, NCUA will have the right to pull their RegFlex eligibility in whole or in part at any time. Although admittedly the least popular aspect of the proposal, a diligent supervision program is essential to the success of RegFlex, as well as to NCUA's statutory charge to be effective as a safety and soundness regulator and as administrator of the share insurance fund. As always, we will maintain this as our top priority as an agency. Diligent supervision will continue - both as a vital safeguard as well as a powerful incentive for credit unions to stay strong. RegFlex will not change that agency commitment in any way. In fact, the standards for RegFlex eligibility are purposefully high, but they are certainly achievable. And as a safety and soundness regulator, NCUA should provide this type of well-reasoned and carefully studied incentive to encourage the credit unions we regulate to achieve and maintain these high standards. Studied internally at NCUA by a working group consisting of some of our best examination and supervision authorities, regional officials, legal and investment experts, RegFlex has been under careful evaluation for months. Focus groups from CUNA, NAFCU, NASCUS and the National Federation of Community Development Credit Unions have been involved in its inception. Without question, RegFlex has been one of the most intensely scrutinized regulatory initiatives in years, and its goal has always been to provide reasonable regulatory flexibility to as many eligible credit unions as possible within the always overriding and foremost commitment of NCUA to safety and soundness. Although we are seeking additional input to shape the best RegFlex regulation possible, I believe we are on the right track. At the proposed triggers approximately 3500 federal credit unions will be eligible for RegFlex, over 54% of which are under $10 million in assets. From these figures it is plain to see that RegFlex will benefit credit unions of all sizes and types. As members demand more from their credit unions in this dynamic marketplace, credit unions are faced with both a tremendous challenge and opportunity. So are we at NCUA. If we take a regulatory approach which is restrictive and inhibits the innovation necessary for credit unions to meet the needs of and extend their services to their members, NCUA might well contribute to the devolution of today's healthy and vibrant credit union movement into one that could unfortunately become recognized in the future as out-of-date in the member service arena. However, if we instead take the better approach of empowerment and even encouragement of credit union innovation through greater regulatory flexibility for those credit unions who have proven their ability to manage the risk involved, NCUA could open the door for a new era of credit union growth, viability and strength as the credit union movement reinforces itself in the forefront of the nationwide commitment to provide expanded access to quality financial services for all the folks who need them. RegFlex can be a significant and positive step in the direction of this much more desirable risk-based approach. The RegFlex proposal is presently under consideration by the NCUA Board and comments from credit unions are earnestly solicited and needed. We do not have all of the answers in Washington and those who are in the trenches of credit union member service each day can help us structure RegFlex in the most effective way to benefit credit unions while always emphasizing safety and soundness. Those who wish to officially comment on the RegFlex proposal may send their comments to Becky Baker, Secretary to the NCUA Board, 1775 Duke Street, Alexandria, Va. 22314 or may e-mail them to bbaker@ncua.gov. The official comment period ends May 21, 2000. This is a golden opportunity for America's credit unions to be involved from the ground floor in shaping a significant NCUA regulation. Take advantage and let us hear from you.