Critics Assail RBC Rule, Regulator
Regulatory directives often elicit strong responses from those they influence, but few rules have caused the level of feedback and outrage generated by the NCUA's proposed risk-based capital rule as the May 28 comment deadline approaches.
Described variously as punitive and a tax on cooperatives in terms of the risk weightings it applies to credit unions’ long-term assets, critics say the rule as currently outlined could cripple credit unions’ competitive advantage. At the very least, the demand for significantly increased capital reserves for critical areas like CUSOs, mortgages and member business loans will restrict some credit unions’ growth and service to members.
“This is the case of the regulator in reactive mode,” said Mark Starr, president/CEO of the $559 million Florida Credit Union in Gainesville, Fla. “The proposed rule will limit the mix of our balance sheet over the next five to 10 years, making us less competitive in the marketplace and reducing our ability to serve members.”
Created to help offset potential financial problems like those that led to the 2008 recession, the NCUA's proposed regulation has standards stricter than the Basel III guidelines applied to the banking industry, which had a greater hand in creating the recession. Starr and others have spoken out in favor of adapting some Basel III criteria in place of NCUA's much heftier risk-weightings.
But outright application of the international monetary group's guidelines is not appropriate for credit unions and community banks, according to Michael Edwards, vice president and chief counsel for the World Council of Credit Unions in Madison, Wis.
“It is natural for credit unions to ask whether Basel III rules applicable to banks would make better sense than NCUA's risk-based capital proposal,” said Edwards, who has been working with the Basel Committee on Banking Supervision, based in Basel, Switzerland, to assure that the global financial body takes into account the nature and roles played by financial cooperatives worldwide in the guidance it issues. “A better question to ask is whether the NCUA's capital rules are even necessary given that U.S. federally insured credit unions’ high net worth leverage ratio requirement already demand higher capital levels than similarly sized banks.”
Basel III was developed for complex international banks, the smallest of which has $222 billion in assets, as a way to further monitor and control risk factors that could lead to another financial crisis, Edwards said. The same set of rules does not apply to credit unions, especially since more-stringent guidelines already exist.
“Federally insured credit unions currently have a leverage ratio at least double that of the Basel III ratio of 3%,” Edwards said. “In that case, risk-based capital becomes much less relevant to ensuring the institutions’ safety and soundness since a high leverage ratio requires credit unions to have a lot of capital no matter what they’re investing in.”
At least some elements of the NCUA's proposal were prompted by a directive from the General Accounting Office, issued largely in response to the meltdown of the corporate credit union system. However, no timeline for response was set and no distinct parameters were outlined in the directive.
GAO 12-247, issued Jan. 4, required the NCUA to document and verify corporate credit union losses, as well as define additional triggers for Prompt Corrective Action requiring “early and forceful” regulatory steps and recommendations for modifying PCA requirements to define those steps.
While some believe this directive has played a hand in the current proceedings, others note that the agency itself has been less collaborative and more adversarial in recent years, effectively helping stymie the very cooperation on which the cooperative movement is based.
“The NCUA's pattern over the last few years has been to increase the frequency, scope and amount of rulemaking, period,” said Chip Filson, chairman of Callahan & Associates, the Washington, D.C., consulting firm founded by the late Edgar Callahan, who served as NCUA chairman during the 1980s. “Whenever there is a perceived issue, the NCUA proposes a rule.”
The agency's increasingly dictatorial approach may be polarizing the movement to a degree that makes it hard for credit unions to effectively grow and provide member service, Filson said. Moreover, he said, a heavy-handed approach of imposing rules rather than managing individual situations may be punishing the many for the sins of a few.
“There is widespread concern that the NCUA board isn't fulfilling its role in manage the agency,” Filson said. “Why can't they deal with these issues one-on-one rather than passing a rule?”
The current risk-based capital rule is fraught with flaws, not only in its risk weighting for long-term assets, but also in its method and intent of application, said Filson.
Public concern over the rule is now reaching beyond industry borders. Washington lawmakers also have taken issue with the proposed regulation. As of May 13, nearly 75% of the U.S. House had joined Reps. Peter King (R-N.Y.) and Gregory Meeks (D-N.Y.), both members of the House Financial Service Committee, adding their names to a letter voicing concern over the proposed regulation.
Signed by 173 Republicans and 151 Democrats, the letter said the rules could force credit unions to charge more or eliminate some services. It added, “We encourage the board to 1) take into account the cost and burden of implementing new risk-based capital requirements beyond the current leverage ratio; 2) provide justification and more clarity as to why the proposed risk weights differ from those applied to other community financial institutions; and 3) give credit unions more time than the proposal's allotted 18 months to come into compliance after it is finalized.
The risk-based capital proposal is the single most significant rule credit unions have ever faced, according to Filson. While many have offered recommendations for adjustments that would make it more appropriate to financial cooperatives, the consultant sees little hope for a positive application of any variant of the rule whatsoever.
“The rule should be withdrawn, period,” Filson said. “If the NCUA believes that risk-based models are valid, then examiners should work with the tools within credit unions and take the experience back for evaluation.
“At this point they’re just pursuing a formula that has no validation, and they have no data to validate their assumptions.”