Hensarling Questions NCUA Use of Reputation Risk
House Financial Services Chairman Jeb Hensarling (R-Texas) wrote to NCUA Board Chairman Debbie Matz expressing concerns over the agency’s use of reputation risk in its supervision of credit unions.
“I have become concerned that in conducting their safety-and-soundness supervision, some regulators may be relying not only on the largely objective CAMELS indicators but also on subjective judgments of what constitutes reputation risk,” wrote Hensarling in the letter.
“Under the CAMELS supervisory framework, reputation risk is not a standalone indicator that, on its own, can warrant a recommendation by your agency that a depository institution cease providing a particular product or serve,” he also wrote.
Hensarling, who sent similar letters to the FDIC and Federal Reserve, said reputation risk could presumably be invoked to compel an institution to sever a customer relationship with a small business, which follows all applicable laws but whose industry has deemed it reputationally risky.
“The introduction of subjective criteria like reputation risk into prudential bank supervision can all too easily become a pretext for the advancement of political objectives, which can potentially subvert both safety and soundness and the rule of law,” he wrote.
Hensarling asked the NCUA to reply in writing with specific information, including the legal basis for the agency’s consideration of reputation risk and an explanation of the data used to determine the effect of reputation risk on an institution’s safety and soundness. The agency has until June 12 to respond.
House Financial Services Committee Ranking Member Maxine Waters (D-Calif.) was copied on the letter.