RBC Rule Favors NCUA, Not Credit Unions: Callahan
NCUA’s pending risk-based capital rule, intended to provide credit unions greater safety and soundness by creating regulatory parity with banks, will have the opposite effect if passed as is.
That was the message delivered by presenters during a 70-minute webinar streamed Wednesday by Callahan & Associates.
As structured, presenters said, the rule serves the needs of the regulator first, with seemingly little regard for credit union members.
“This is the single most consequential rule that credit unions have ever faced,” said Chip Filson, chairman of Callahan and the key webinar presenter. “If passed in its present form, the rule will have all sorts of unintended consequences for credit unions.”
Through unrealistic and illogical weighting of risk factors with little or no regard to credit union strategic goals and objectives, the rule will penalize credit unions despite the industry’s good performance during the recent recession, said Filson and other presenters.
The rule’s current version requires greater credit union reserve ratios than those of banks, despite the fact that risks within the cooperative model have been significantly less than those among their for-profit counterparts, in effect applying a “risk tax” to credit unions.
During the recession years 2007-2013, the FDIC lost $2.30 per $1,000 insured, while NCSIF lost about one-tenth of that amount, Filson noted. CUNA estimates that loss to be 26 cents per $1,000 insured, whereas Callahan’s analysis places the loss figure closer to 21 cents.
The rule would assess higher levels of capital through a variety of risk-weighting measures more stringent than those applied to banks. There is virtually no margin for considering the credit unions’ own asset-liability measures, Filson said.
“The rule would override board and management judgment as to what constitutes adequate capital,” Filson said. “It’s a rule that has been created for the benefit of the regulator and not the member.”
Three major areas of concern were addressed by Filson and co-presenters Douglas Alldredge, CFO of $402 million First Credit Union in Chandler, Ariz., and Jim Vilker, vice president of professional serves for CU* Answers, a Grand Rapids, Mich., consulting firm. Broad concerns about the rule and its application led a list that also included inequitable asset risk weightings and possible alternatives to the rule.
The complexities of RBC and its one-size-fits-all approach will create inherent problems for the 200 or so credit unions with more than $50 million in assets that will be affected by the rule, along with however many other credit unions will feel the trickle-down effects from their various field examiners, Filson said. The variables within the rules, including 10 classifications multiplied by 50 assets categories and other iterations, equal an estimated 3,200 possible number combinations to consider, most of which change daily.
The rule’s inequitable risk-weighting was one of Alldrege’s top five concerns, the credit union CFO told the more than 200 webinar participants. Describing the risk-weights as punitive and inconsistent, Alldredge decried the rule’s bias against longer-term fixed-rate securities and its lack of consideration of how interest rate risk is balanced against the credit union’s ALM.
He also challenged the elimination of a credit union’s NCUSIF deposit from the rule numerator, effectively robbing the institution of a valid asset that would be immediately returned if the credit union converted to a bank.
“The rule, as proposed, misses the mark,” Alldrege said. “It would place credit unions at a competitive disadvantage and require far more capital than what is required for the banks.”
Vilker, a former state examiner himself, agreed with the CFO’s assessment, adding that with this rule NCUA has now become one of the very risk factors against credit unions must prepare themselves.
“Never in the history of NCUA rule-making has it been necessary to classify a regulator as a risk to the credit union,” said Vilker, quoting an op-ed piece he wrote previously for Callahan. “However, we are not in normal times.”
He cited a hidden clause in the rule that empowers examiners to adjust criteria based on their own judgment. The rule passage states “appropriate minimum capital levels cannot be determined solely through the application of a rigid mathematical formula or wholly objective criteria, and … the decision is necessarily based, in part, on a subjective judgment grounded in agency expertise.”
“In other words, they’re saying, you may pass both capital tests, but our subjective judgment and agency expertis’ tells us you still aren’t performing to our standards,’” Vilker said. “Therefore, we are going to tell you what to do and impose higher capital requirements.”
In order to mitigate regulator risk, Vilker suggested credit unions take whatever steps necessary to avoid the risk, build a solid logic base for use in examiner reviews and educate the credit union board in the necessary actions to avoid the risk.
All three presenters stressed the need for credit unions to submit letters of concern to the NCUA by the agency’s May 28 deadline. Share those concerns with staff and speak candidly with examiners about what lies ahead with the rule and your concerns, they said.