Why I Can't Support the Final Stress Test Rule
Capital planning and stress testing are important tools for credit unions to use as part of an overall risk management process and are essential for maintaining the health of the NCUSIF. Equally important is the method by which these stress tests are conducted.
The financial health of a credit union is paramount to its success. When a credit union is strong it is able to maintain service to its members and continue to grow and prosper.
There are many ingredients to achieving strong financial health. Strong capital levels, a well-balanced loan portfolio, defined policies on asset liability and interest rate risk combined with marketing and member service skills are some of the most important.
As important as having those fundamentals in place is also making sure programs, methods, procedures and guidelines are not only followed but also reviewed, critiqued and tested.
Although other financial institutions are required to conduct stress tests, Congress did not include in the Dodd-Frank Wall Street Reform and Consumer Protection Act, a mandate that NCUA perform stress tests on credit unions. However, NCUA believes that such tests should be conducted on its insured institutions with over $10 billion in assets and proposed a rule putting in place the requirements for such tests.
The rule mandates the conducting of stress tests on these institutions by NCUA or its contracted vendors, to ensure that the institutions are financially healthy.
For some time now, most of the credit unions impacted have conducted their own stress tests acknowledging their size and unique complexities while fully understanding that performing such tests are a good, common sense way of running a financial institution of their size.
It is also sensible for the insurer of these credit unions to likewise feel comfortable with each institution’s safety and soundness for the sake of a strong insurance fund, as well as peace of mind for the entire industry.
Countless hours have been spent putting the capital planning and stress testing rule in place. The industry has sent in comment letters suggesting changes and ways they believe the rule could be written better. While some changes have been made to the proposed rule, I believe, the final rule to be voted on by the NCUA Board is in need of further revision.
Perhaps, one of the most important considerations is the cost to the Share Insurance Fund. By the time NCUA implements the testing, five credit unions could be over $10 billion in assets. Each test is estimated to cost $1 million in the first year and $500,000 each year thereafter. These costs are for outside vendors, firms with the knowledge and experience to conduct these tests.
NCUA does not have the internal expertise to conduct the comprehensive capital planning and stress testing required in the proposed rule. Currently, most credit unions in excess of $10 billion in assets engage in some form of stress testing and capital planning. In my opinion, the first course of action the NCUA should implement is to accept the test performed by the credit union and follow the Ronald Reagan philosophy of trust but verify. Verification of credit union conducted tests, under parameters dictated by NCUA, would drastically reduce the cost to the credit union system.
It was originally intended that the drafting of the stress test rule would encompass a constructive dialogue between NCUA and the four credit unions impacted by the rule. Everyone agreed with the concept and the need for stress tests. All that was necessary was for all parties to come together on the mechanics of getting it done.
The process started out well. Meetings were held and discussions took place. But then somewhere in the process, the working together hit a road block. There were miscommunications, misunderstandings and a cooperation collapse. All four credit unions affected, and even the fifth to soon become part of the program, in the last week, either wrote letters or communicated to NCUA requesting the rule be delayed to allow further meetings to be held to ensure that this rule is accurate, fair, balanced and reliable. It seemed only reasonable to honor such a simple request. There is no need to hurry the process. Why do it wrong when you can get it right? This is an expensive proposition not only for the credit unions in the program, but all federally insured credit unions. In addition, there has been no discussion on how these tests will impact a credit union’s CAMEL rating nor any guidance developed and shared with the credit unions impacted.
After the financial crisis of 2008 occurred, additional regulations were needed. All financial institutions, including credit unions, have had to learn to live under a barrage of new regulations not only from their regulator, but also the CFPB and other government agencies. Almost every month there is a new regulation that a credit union must make part of their everyday life.
I believe, the time has come for regulators to take a step back and look at what has taken place since Dodd-Frank. To review what new regulations are really necessary and how the burden on financial institutions can be reduced so credit unions can go back to running their own business, making loans and providing needed financial services. We are not in a crisis mode. We are not dealing with failing corporates. Instead, we have four strong credit unions that are cooperating with their regulator to implement a program that will benefit everyone. These institutions were only looking for additional time to get it right. There should be no rush to judgment.
I think it is time NCUA, rather than follow its sister agencies, show that it can lead and use guidance and the examination process, rather than more regulations to accomplish its objectives.
The final rule needs additional work and the best way to have improved this rule was to work with the industry, implement the guidance needed and resolve credit unions concerns and the ambiguities in the rule. That is the direction I believe is required and accordingly is why I cannot support this final rule.