Stress Test Opposition
According to the credit union industry's two major trade associations, the NCUA's proposed stress test rule is unnecessary because the four largest credit unions in the nation already conduct their own tests.
Both CUNA and NAFCU also expressed concerns over the cost of complying with the rule.
“The agency [NCUA] will be conducting the stress testing and it's going to cost, according to them, $4 million just in the first year to conduct this stress testing—that's $1 million for each one of them,” said Mary Dunn, CUNA senior vice president and deputy general counsel.
“We think it's really unclear—where did this number come from? Why is it going to cost so much and why is it necessary that the agency actually be the entity that conducts the stress testing?” she said.
Dunn said the NCUA has continued to indicate that they have talked to the four credit unions with more than $10 billion in assets that are going to be subjected to stress testing from NCUA.
“We also are going to be talking to those credit unions because there are a number of concerns about the stress testing proposal,” Dunn said.
While she applauded NCUA Board Member Michael Fryzel for asking at the meeting what would happen if the test results conflict, Dunn said he did not receive a “great answer.”
Scott Hunt, director of the Office of National Examinations and Supervision, said if the results of the NCUA's test conflicted with the credit union's test, the NCUA's figures would be superior. However, Hunt said, examiners and credit union management would discuss the differences before determining a plan of action to address the risk.
Paul Gentile, executive vice president of strategic communications and engagement, downplayed the importance of the superiority of the NCUA's stress tests, saying CUNA does not support the need for the new regulation at all.
“Additionally, the proposed rule on stress testing is put forth by the agency even though the NCUA is aware that the largest credit unions already conduct stress testing on their own,” he said.
“All four credit unions that would be affected by this rule already do stress testing. We don't think the cost of stress testing is justified and that NCUA can monitor credit unions’ own stress testing and evaluate them without having to implement a new regulation that is expected to cost $4 million in year one,” Gentile said.
NAFCU also released a statement in opposition to the rule.
“While NAFCU understands NCUA's policy goals, two of the NCUA's actions today are symptomatic of the agency's regulatory plunge into areas where new regulations are simply unnecessary. The liquidity rule, for example, was issued despite the fact that credit unions already have access to multiple sources of liquidity,” said NAFCU CEO Dan Berger.
“Additionally, the proposed rule on stress testing is put forth by the agency even though the NCUA is aware that the largest credit unions already conduct stress testing on their own,” he added.
Carrie Hunt, senior vice president of government affairs and general counsel at NAFCU said her trade has a huge concern over the cost of complying with the rule.
“Inevitably, we always run into this issue with NCUA in terms of looking at cost,” she said. “We don't think that we need this whole new stress testing regime.”
Hunt said the four largest credit unions do their own stress testing to have a well-run operation.
“We have huge questions and concerns with creating a new regulation at an enormous cost to the credit union—it's not necessary,” she said.
The credit unions that would be required to comply are the $54 billion Navy Federal Credit Union in Vienna, Va., the $27 billion State Employees’ Credit Union of Raleigh, N.C., the $16 billion Pentagon Federal Credit Union in Alexandria, Va., and the $12 billion BECU in Tukwila, Wash. The NCUA's stress tests would be based on Sept. 30 financial data.
These credit unions would be required to maintain a stress test capital ratio of at least 5%, which is higher than the 4% minimum leverage ratio required of banks. The difference of 1% is due to credit unions being unable to capital in the form of stockholder equity.
“Navy Federal is aware that the NCUA is drafting a proposal requiring credit unions exceeding $10B in assets to undergo annual stress tests. Navy Federal remains well-capitalized, and we will be monitoring the progress of this proposal as it goes forward,” a Navy Federal spokesperson said.
In an interview following the October 24 board meeting, NCUA Chairman Debbie Matz said the rule is essential to the protection of the share insurance fund.
“Our share insurance fund is $11.7 billion, so there are four credit unions with assets over $10 billion. Three of those four are larger than our share insurance fund,” Matz said.
“So it's a very significant risk to the fund and there's no reason why a credit union of $10 billion or more should not be held to the same standard in terms of forward-looking testing that other financial institutions are held to.”
Peter Duffy, a managing director at Sandler O’Neill and Partners, which works with credit unions on balance sheet management issues like stress testing, said he is not surprised the NCUA proposed the rule.
“We expected the stress testing and capital requirements for credit unions to move toward a closer synch with community bank's regulatory expectations. The business models and balance sheets of larger credit unions and banks have evolved to be, according to the U.S Treasury's analysis and our own, difficult to distinguish from each other,” Duffy said.
“With some exceptions, the institutions are offering the same financial products to the same customers through similar distribution channels. The credit unions with assets greater than $1 billion have already begun to understand this and have been discussing this with us for the last five years. We have no reason to believe that any agency would conduct testing simply for gotcha purposes,” he added.