Late 5300 report fines aside, the NCUA showed commendable restraint at this month’s board meeting when it comes to exerting its powers over credit unions.
The good news: the NCUA’s final derivatives rule removed two very troubling items included in the proposal unveiled last May.
The controversial pay-to-play provision was removed from the final rule; that option, which was merely mentioned as a possibility in the proposal, could have charged credit unions a hefty application fee as well as ongoing fees to cover the cost of added supervision. That suggestion elicited howls from trade associations and large credit unions, although Credit Union Times Publisher and Editor in Chief Sarah Snell Cooke applauded the innovative idea.
One executive from a billion-dollar credit union made the good point that because the NCUA’s operational fees are based on asset size, large credit unions already pay the lion’s share of the regulator’s budget.
I can see both sides of the issue but, thankfully, the NCUA didn’t have to “go there” because it substantially reduced the authority’s projected costs by utilizing existing employees rather than hiring expensive consultants. Granted, the NCUA did add an asterisk to those costs estimates, saying it may yet have to hire some consultants; but overall, the agency appears to have listened to credit unions who said their current examiners could handle supervision of the rule’s simple derivative tools.
The NCUA also appeared responsive to criticism from NASCUS, which objected to the proposed rule’s authority over state-chartered, federally insured credit unions. The final rule only applies to federally chartered credit unions, which not only mended fences with state regulators, it also contributed to the authority’s lower estimated price tag.
The proposed risk-based capital rule wasn’t as painful as it could have been, either. Granted, the rule would raise the simple 7% net worth ratio for well-capitalized credit unions with more than $50 million in assets to a 10.5% risk-weighted ratio. But, the list of assets considered risky wasn’t as long as I had feared.
And, according to the NCUA, the proposal would only cause 10 credit unions to fall into undercapitalized status, requiring a collected $63 million worth of risk-based capital to achieve adequately capitalized status. Another 189 credit unions would fall from well capitalized to adequately capitalized. That leaves more than 90% of affected credit unions in compliance if the rule were to take effect immediately.
Now, if I ran one of those 200-some credit unions that would experience a capital category downgrade, I suppose I wouldn’t be fond of this proposal. But we’ve all seen how devastating the “manage to 7%” strategy can be, especially because those same credit unions are overall more willing to take risks.
Honestly, when Monday morning quarterbacking the financial meltdown, I can’t imagine how any credit union leaders managing asset concentrations in real estate, business loans and higher-than-average delinquencies would feel comfortable with just 7% net worth.
Sure, there are plenty of ways to mitigate those risks, but the vast majority of the industry thought the corporate credit unions had risk management covered less than 10 years ago, and look how that turned out. We’ve also seen too many natural person credit unions fail since 2007 due to unexpected credit losses in real estate and member business loans to argue that 7% is sufficient to protect against unexpected market events.
The supervisory self-control in Thursday’s rules almost makes up for the iron-fisted 5300 report fines announced last week. At the time, I took a zero-tolerance approach to late filers. All jobs require some overtime, I thought, and credit unions should be no different.
However, I’ve since heard an earful from friends and colleagues who say the NCUA’s online reporting system leaves little to be desired. Even one CEO who had no sympathy for late filers said the NCUA’s system isn’t Obamacare-bad, but it could use some improvement. Another CEO said his CFO spends 12 hours each quarter entering his credit union’s data into the NCUA’s system.
But everyone seemed to be baffled by the NCUA’s heavy-handed approach. Leave it to State Employees’ Credit Union CEO Jim Blaine to provide a great analogy: he compared the fines to killing an ant with a sledgehammer.
Well put, Jim.