NCUA Stress Test Proposal Roasted by Trades
Credit union trade associations have filed comment letters critical of the NCUA’s proposed stress test rule.
The rule, introduced during the NCUA board’s October meeting, would require credit unions with more than $10 billion in assets to maintain a stress test capital ratio of at least 5%, and submit to stress testing by the NCUA.
“Although we absolutely agree that it is important for the largest credit unions to determine they have sufficient capital to withstand a range of economic conditions and that NCUA has an important role in working with these institutions in this area, our overarching concern is that we do not agree a new regulation such as the one NCUA is proposing is necessary to ensure these credit unions will conduct robust stress tests and comprehensive capital planning, since it is in their own best interests, and those of their members, to do so,” wrote CUNA Senior Vice President and Deputy General Counsel Mary Dunn, commenting on the proposed stress test rule.
Dunn said CUNA does not think the NCUA has demonstrated why a stress test rule is needed.
“The fact that Congress under the Dodd-Frank Consumer Protection and Wall Street Reform Act did not include NCUA among the agencies directed to implement capital plans or stress testing for the largest institutions they regulate supports our view that a new regulation is not the best course of action,” she wrote.
NAFCU Senior Vice President of Government Affairs/General Counsel Carrie R. Hunt agreed with Dunn regarding the omission of credit unions from Dodd-Frank stress testing requirements.
“The NCUA’s efforts to achieve parity with other financial industry regulators with respect to stress testing are neither necessary nor designed in a way that reflects the unique nature of credit unions,” Hunt said. “Congress had the ability and opportunity to include a mandate in the Dodd-Frank Wall Street Reform and Consumer Protection Act that the NCUA perform stress testing alongside the Fed, FDIC, and OCC, but notably chose not to do so,” she said. “The NCUA should acknowledge Congress’ decision and not force regulatory parity where it is not necessary.”
Hunt said NAFCU was also concerned about the potential impact of bifurcating the credit union industry through this rule, and the precedent it would set for future rulemaking.
CUNA also said the NCUA should release more information about the cost of compliance with the rule if it is ultimately approved.
Scott Hunt, director of the Office of National Examinations at the NCUA, said during the October board meeting the cost for the NCUA to conduct the tests would be $1 million or less per credit union to establish the program, and approximately $500,000 per year for each additional annual test.
“NCUA has not shared with credit unions how it arrived at the $4 million level, and we feel the agency should have provided more information regarding these cost figures,” Dunn wrote. “In addition, NCUA has not said that implementation of the rule will cost no more than $4 million, so even though the estimate is a high one, there is no guarantee that promulgation of the rule once adopted would not cost much more well into the future.”
The credit unions with more than $10 billion in assets affected by the rule would be 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 rule would require these credit unions to maintain a stress test capital ratio of at least 5%.
NASCUS President/CEO Mary Martha Fortney said the NCUA has failed to right size the rule.
“NCUA should limit the requirement for a federally insured credit union to submit a formal capital plan to a threshold more comparable with the Federal Reserve capital plan submission threshold of $50 billion,” Fortney wrote. “Simply put, requiring submission of capital plans by credit unions with assets that are $10 billion or greater disadvantages credit unions in the $10 billion to $49 billion assets size in relation to a like-sized bank.”
NASCUS also said the results of the NCUA's stress testing should be confidential. Matz said the NCUA board would delay the decision of whether or not to make stress tests results public until after reviewing the proposed rule’s public comments.
“Generally speaking, the rationale for making stress tests of a financial institution public are compelling,” Fortney wrote in her comment letter. “However, in this instance, the inexperience of the credit union system administering a formal stress testing regulation, the uniqueness of credit union structure, and the example set by the Dodd-Frank mandated large bank stress testing suggest the stress test results be treated as confidential examination product.”
CUNA urged the NCUA to issue guidance in place of a rule, which could be administered through the agency’s annual examination of the largest credit unions.
“We believe this approach will accomplish the agency’s objectives to help protect the NCUSIF particularly under adverse economic conditions, while minimizing costs to NCUA and credit unions alike. It would also avoid sanctions for credit unions and allow them some flexibility in implementing their capital planning processes,” Dunn said.