The medical profession's oath to “first, do no harm” would be an apt principle for the financial industry's prudential regulators, including the NCUA, to follow. Unfortunately, the NCUA has released a proposed risk-based capital rule that would go quite the other way. It may just kill the patient.
Every credit union's field of membership, market, products, services and business plan are different. This proposal will, quite simply, put healthy credit unions out of business.
Under the framework of the proposed rule, some credit unions could be required to shoulder a disproportionate amount of the burden. In recent analysis, NAFCU determined that credit unions with more than $50 million in assets will have to hold a whopping $6.3 billion more in additional reserves to achieve the same capital cushion as before.
NAFCU analyzed the data and found that credit unions in all asset classes will be affected, well beyond the 200 or so credit unions that the NCUA online calculator indicates.
We believe “enough is enough.” Credit unions are already painfully overburdened by regulation, so the last thing we need is another “well-intended” rule. NAFCU supports a risk-based capital system for credit unions. We support less capital for low-risk and more capital for higher-risk credit unions. But we need Congress to make statutory changes to achieve a fair system.
NAFCU has called on the NCUA to join in advocating for legislative fixes that will give the agency the proper framework to effectively protect credit union members.
Specifically, NAFCU has outlined a legislative solution that will institute fundamental changes to the credit union regulatory capital requirements. This solution is presented in NAFCU's five-point plan for regulatory relief. The plan, as it relates to capital reform:
•Directs the NCUA, along with industry representatives, to conduct a study on prompt corrective action and recommend changes;
•Modernizes capital standards to allow supplemental capital and directs the NCUA Board to design a risk-based capital regime for credit unions that takes into account material risks; and
•For newly chartered credit unions, establishes special capital requirements that recognize the unique nature and challenges of starting a new credit union.
Of particular concern is the proposed rule's risk-weighting formula, which assigns rigid risk weights to many investments that, on close examination, represent much less risk than is suggested by the NCUA's proposed risk weights. These inappropriate risk weights will affect all federally insured credit unions because they will force institutions to make risk-management choices that ensure compliance with the risk-based capital ratio rather than manage the actual risk of the assets. This could have a chilling effect on many historically sound, well-managed credit union activities.
The proposed rule's individual minimum capital requirements also create a quagmire for credit unions and should be removed. The rule gives outsized deference to subjective examiner opinions. An examiner can increase – not decrease – a credit union's individual risk-based capital requirements based on subjective analysis during an examination. How are credit unions expected to appropriately manage risk according to the rule's framework if an examiner has the subjective authority to change the rules of the game?
The NCUA's online calculator for reviewing the impact of the proposed rule is also of great concern. In their zeal to make it easier for individual credit unions to understand how the proposed rule would affect them, NCUA has oversimplified a very complex measure. Also, having the calculator publicly available could lead to unfair reputational harm and general misunderstandings of a credit union's health, especially for those credit unions that would see a drop in their capitalization classifications under the proposed rule.
As noted above, a major issue with this proposed rule is the ability to access supplemental capital. That said, while supplemental capital is important, it is not a magic pill that will fix the fundamental problems of this rule. It should be noted that there are now more than 2,000 credit unions that have a low-income designation giving them the ability to obtain supplemental capital.
But there is a big difference between the authorization to raise supplemental capital and actual ability to obtain it. The proposed rule should have included provisions clarifying the efficient means by which low-income credit unions can obtain supplemental capital. This would be particularly useful for the time when all credit unions have this ability.
In the end, this proposed rule will create a legacy for the agency –a legacy of even more consolidation in the credit union industry.
Credit unions should be unequivocal in voicing their concerns during the comment period. Indeed, it would be difficult to overstate the need for credit unions to weigh in with the NCUA on this proposed rule and its significant shortcomings.
Dan Berger is president/CEO of NAFCU. He can be reached at email@example.com or (703) 522-4770.