Risk-Based Rule Replaces Reason With Reaction
I have a confession to make that could end up in eggs on my car windshield or a horse head in my office. After hearing about the NCUA’s risk-based capital rule, I was scratching my head to figure out why credit unions were belly aching so much.
On its face, loans should be weighted according to the risk they bring to the institution. I didn’t understand why, after spending years griping about the likes of Telesis and CalState 9 and Texans, that credit unions were now complaining that the federal regulator was attempting to get a better read on exactly what was going on inside of credit unions.
My first impression was that credit union executives were whining because it was all of the other credit unions, and not theirs, that were a problem. On its face, risk-based capital is a beneficial concept for everyone, particularly in a cooperative industry.
Never has the old adage, “Never judge a book by its cover,” held more true. I had started reading the rule when I also began interviewing credit union experts about why credit union executives were so uptight. And without the slightest of spoiler alert, they launched into the last few pages of the regulation. SECU (N.C.) CEO Jim Blaine, in his blog, aptly likened the regulation to a cheap, dime store paperback in which one can flip to the last chapter and find the predictable ending. Of course the NCUA once questioned the safety and soundness of SECU, so he might be jaded.
Let’s not be so tawdry and get right to the point. Beginning on page 195 of the 198-page rule is the who-what-when-where-why-how of the rule. That’s known as burying the lede in journalism. Part 727.2006 is titled Review of order imposing individual minimum capital requirements. (That’s IMCR if you’re inclined to text it to a colleague, OMG.)
What that mouthful means is that despite all of the risk-weighting and 7% leverage ratio, the NCUA can require whatever the hell it wants of your credit union’s capital—your members’ money. My reading of the section is that it even states that a credit union that the NCUA intends to subject to the IMCR “must file a written response…[explaining] why it contends the IMCR is not an appropriate exercise…”
But don’t worry: The IMCR-threatened credit union can always appeal the decision to the NCUA-employed ombudsman. Ombudsmen can serve positive purposes internally, but there are obvious conflicts of interest at play in this type of situation. The NCUA cleared an NCUA executive of lying in the situation regarding SECU’s safety and soundness despite recorded evidence.
Aside from the twist ending, there are other details in the plan that will be problematic for credit unions. The NCUA’s proposal takes into account interest rate risk and concentration risk in addition to credit risk, which is what Basel 3 for small banks focuses on, CUNA’s Bill Hampel explained.
So, while a business loan for a bank is risk-weighted the same, no matter how many loans it makes, the NCUA’s rule ups the risk-weighting ante after a credit union reaches 15% and 25% of assets in business loans. Additionally, he pointed out that all real estate loans—not just the fixed-rate mortgages carry a hefty risk-weight and that weighting is increased at a 25% concentration. Check out page 9 of the proposed reg for the specifics.
In part, credit unions have brought this on themselves. Credit union executives have invoked the ghosts of Telesis and Norlarcos past, providing the agency the legitimacy it needs to bring up a proposal such as this. The agency is not wrong to make this proposal, despite its many issues.
Do not leave it up to just CUNA, NAFCU and NASCUS to carry the voice of credit unions regarding the problems with this proposal. You are the ones on the ground. Write the NCUA about your concerns and how this proposal will affect your business, whether it will result in fewer mortgages for troubled members or less funds for business loans when a newly single mother decides it’s best if she works out of her home.
Despite the fact only 10 (or 11, according to Tom Glatt Jr.) credit unions would be extremely detrimentally affected by the proposal as is, the problem is much greater than just a handful of credit unions. It’s the disconnect between the regulator and the credit unions. Hampel said it succinctly: “The NCUA is using capital rules as a substitute for sophisticated examination.”