Filson Finds Fault With Risk-Based Capital Plan
Chip Filson, co-founder of Callahan & Associates, said the risk-based capital system proposed by the NCUA is the wrong approach for credit unions.
“After nearly 25 years of risk-based efforts to set the right level of capital, there is a growing consensus among regulators, academics and expert commentators that RBC, and similar Basel efforts, do not work as well as a simple leverage ratio,” Filson said in a new Co-Ops for Change analysis.
“Banks have had risk-based capital requirements for nearly 25 years, but this approach neither prevented the latest crisis nor stopped significant failures in the banking system. Moreover, Treasury Secretary Hank Paulson modified the TARP bailout authorization and used money intended for the purchase of troubled home mortgages as supplemental capital that he injected into the banking industry. Credit unions required no such assistance,” Filson also wrote.
“Even the corporate stabilization funds were authorized as temporary funding rather than capital. NCUA relied on Wall Street rather than credit union financing while waiting for the pay downs from the longer-term investments seized from the five corporates in September 2010. NCUA has now estimated that the corporate stabilization assessments, which were meant for future losses, are now at least $1.9 billion in error,” he added.
The NCUA Board proposed risk-based capital requirements for credit unions with more than $50 million in assets at the agency’s monthly board meeting in January. The comment period ends on May 28.
Thomas Hoenig, vice chairman of the FDIC and former Kansas City Federal Reserve Bank president, also contributed to the Co-Ops for Change analysis. He said using tangible equity capital and total assets is a better way of assessing capital adequacy.
“Each new Basel standard attempts to correct the errors and unintended consequences of earlier versions. But instead of resulting in better outcomes, each do-over has been more complicated and less effective than the last,” said Hoenig. “Unfortunately, the weightings are more arcane than ever and therefore, even less useful.”
Filson also said tangible equity capital ratio and a simplified risk-weighted measure would be more effective.
“Credit unions start with no capital. Through time, a credit union accumulates reserves from its earnings by setting aside a certain percentage of income as collective savings for potential losses or other contingencies,” he said. “This 100-year-old financial design has underwritten a system that now has $1.1 trillion in assets.”