Let’s Pursue Capital Reform Together
The impact of the Wall Street meltdown and the Great Recession it caused is still being felt on main streets across America. New laws and regulations continue to be proposed to help with the nation’s recovery and to prevent another crisis. A proposal by the NCUA regarding risk-based capital has gotten much attention.
It has been well-reported that CUNA believes this proposal should be withdrawn. The remarkable resiliency of credit unions now and during the recent, severe financial crisis indicates to us that there simply isn’t a need for a major increase in capital requirements. This is also a view shared by numerous industry groups and associations, 324 members of the House of Representatives, several senators, former Senate Banking Committee Chairman Alfonse D’Amato, and former Speaker Newt Gingrich.
While we support risk-based capital, we strongly disagree with NCUA’s interpretation that the RBC proposal will only affect a few credit unions (as most recently reported in the Wall Street Journal on June 6).
Make no mistake, this reform will spread deep into the credit union system and consumers as well as credit unions will bear the burden. In its current form, the proposal is just too costly, and frankly, it’s unnecessary.
So what’s next?
It seems clear there is NCUA board support for a final rule. The task before us now is to move this process forward in a positive way. We are encouraged by statements from agency officials over the past several months that they intend to make significant changes based on input from credit unions and other stakeholders. They have described the publication of the proposed rule as the opening of a discussion. We look forward to continuing that discussion with the goal of a final rule that truly identifies the limited number of credit unions that may need additional capital while allowing well-managed credit unions to serve consumers and small businesses without unreasonable and unnecessary costs.
In our view there are two possible courses of action. The first and most ideal would require congressional action. In this preferred course we believe that:
- The strategy for capital reform should be comprehensive and the goals far broader than NCUA has outlined in order to protect the NCUSIF adequately, without limiting the ability of credit unions to meet the changing financial needs of their members.
- More specifically: Broad reform should include supplemental capital authority, lower leverage ratio requirements and a Basel-style RBC system.
Short of that, since current law limits NCUA’s ability to set capital requirements, our recommendations for reform in light of this narrow scope include introduction of a Basel-style RBC system for credit unions with the following characteristics:
- The risk-based aspect of prompt correction action would be no higher for well-capitalized credit unions than for adequately capitalized credit unions. That is what the law requires. Thus, the identical risk-based requirement, coupled with a 7% net worth ratio, would apply to the well-capitalized classification.
- The risk-based requirements would only apply to credit unions that are complex, and complexity should not be defined by asset size alone.
- Credit unions would not be subject to arbitrary, case-by-case additional capital requirements beyond what is needed to meet regulatory requirements.
- Credit unions would have authority to use supplemental capital to meet risk-based capital requirements.
- Risk weightings would generally be similar to those applied to community banks in the United States, but reconfigured to more adequately reflect credit union operations and historical performance.
- And credit unions should have at least three years to implement the RBC rule if the agency adopts CUNA’s recommendations; five years should be provided if substantive changes are not included in the final rule.
As cooperatives, we are proud to work for the singular benefit of the almost 100 million people who rely on their credit union for financial services and security. It is a mandate we take seriously and it is why we are so engaged on this critically important issue. We look forward to working with NCUA in the coming months as officials there listen and respond to our concerns. It is vital that we get this right. After all, it is about what is in the best interests of credit union members.