NAFCU to NCUA on RBC2: Exit on the Right
From the NCUA’s release of its first introduced risk-based capital proposal in January 2014 up through this year’s revised version, NAFCU’s core position hasn’t wavered: The credit union industry does not need this rule, and the NCUA must withdraw it immediately.
The first proposal was fundamentally flawed. The second, while addressing some credit union concerns, still is unnecessary and will only impose more regulatory burden on an already extremely well-capitalized industry. Contrary to NCUA’s stated intent, this risk-based capital proposal will imperil credit unions in the future by forcing them to park more capital on their balance sheets rather than allowing them to grow and lend within their communities.
NAFCU wants to be clear – we support an RBC system for credit unions that would reflect lower capital requirements for lower-risk credit unions and higher capital requirements for higher-risk credit unions. The NCUA, however, cannot accomplish the task alone – Congress needs to be involved.
The NCUA’s comment period on its second proposal closes Monday. NAFCU has encouraged the credit union industry to submit letters and comments to the agency. NAFCU submitted its comment letter to the agency on April 23. While our comment letter details myriad issues with the proposal, including our staunch disagreement with NCUA’s legal authority to promulgate the rulemaking as proposed, our top concerns are as follows:
- cost to the industry;
- definition of complex credit union;
- competitive disadvantage.
While our 22-page comment letter offers detailed recommendations for how the NCUA can improve the proposal, NAFCU and our members fundamentally believe this rulemaking is unnecessary and will unjustifiably constrain credit unions’ ability to grow and serve their communities.
NAFCU has spoken individually with many of our members about how the proposal will affect the compositions of their balance sheets and the products they currently provide to their members.
For example, one well-capitalized credit union with about $500 million in assets has indicated that it will likely be unable to pursue safe, sound and effective growth opportunities, which could result in reductions to its employee benefits plan and overall lending capacity. This credit union serves more than 50,000 members and employs more than 150 people. To balance rising health-care costs for its employees, this credit union is considering establishing member business lending and loan participation programs, but under the NCUA’s proposal, such investments would cause the credit union’s risk-based capital ratio to drop by almost 5% – leaving the credit union with a tough decision to make that will likely impact its employee benefits plan.
Another NAFCU member, with about $200 million in assets and located in the Northeast, may have to reduce the number of much-needed home equity lines of credit to its members. This credit union has many members that depend on its offering of HELOCs to make winter-weather-related repairs to their homes. Because of the elevated concentration thresholds in the NCUA’s risk-based capital proposal, this credit union may not be able to build the necessary capital required and will have to limit the help it can offer to its community.
These are real-life examples of how this proposal will hurt the credit union industry and its 100 million members. The NCUA estimates that 19 credit unions would be downgraded if the proposal were in place today, but the impact of this proposal will spread far beyond those institutions. Why put an entire industry at risk for just a few credit union outliers? NAFCU believes risk in credit union operations can be addressed on a case-by-case basis and does not warrant a broad-brush regulation.
Again, NAFCU supports a fair, comprehensive system of capital for credit unions, but this is not the rule that will get us there. For a fair system to be accomplished, changes to the Federal Credit Union Act — from both legal and operational perspectives – are required; congressional engagement is necessary.
NAFCU will continue to do whatever it takes – both legislatively and on the regulatory side – to achieve a fair, balanced risk-based capital system for credit unions. For now, the NCUA should withdraw this proposal and work with NAFCU and Congress so we get capital measures that reflect true risk. It is not too late for the NCUA to get off the highway.