The medical profession's oath to“first, do no harm” would be an apt principle for the financialindustry's prudential regulators, including the NCUA, to follow.Unfortunately, the NCUA has released a proposed risk-based capitalrule that would go quite the other way. It may just kill thepatient.

Every credit union's field of membership, market, products,services and business plan are different. This proposal will, quitesimply, put healthy credit unions out of business.

Under the framework of the proposed rule, some credit unionscould be required to shoulder a disproportionate amount of theburden. In recent analysis, NAFCU determined that credit unionswith more than $50 million in assets will have to hold a whopping$6.3 billion more in additional reserves to achieve the samecapital cushion as before.

NAFCU analyzed the data and found that credit unions in allasset classes will be affected, well beyond the 200 or so creditunions that the NCUA online calculatorindicates.

We believe “enough is enough.” Credit unions are alreadypainfully overburdened by regulation, so the last thing we need isanother “well-intended” rule. NAFCU supports a risk-based capitalsystem for credit unions. We support less capital for low-risk andmore capital for higher-risk credit unions. But we need Congress tomake statutory changes to achieve a fair system.

NAFCU has called on the NCUA to join in advocating forlegislative fixes that will give the agency the proper framework toeffectively protect credit union members.

Specifically, NAFCU has outlined a legislative solution thatwill institute fundamental changes to the credit union regulatorycapital requirements. This solution is presented in NAFCU's five-point planfor regulatory relief. The plan, as it relates to capitalreform:

•Directs the NCUA, along with industry representatives, toconduct a study on prompt corrective action and recommendchanges;

•Modernizes capital standards to allow supplemental capital anddirects the NCUA Board to design a risk-based capital regime forcredit unions that takes into account material risks; and

•For newly chartered credit unions, establishes special capitalrequirements that recognize the unique nature and challenges ofstarting a new credit union.

Of particular concern is the proposed rule's risk-weightingformula, which assigns rigid risk weights to many investments that,on close examination, represent much less risk than is suggested bythe NCUA's proposed risk weights. These inappropriate risk weightswill affect all federally insured credit unions because they willforce institutions to make risk-management choices that ensurecompliance with the risk-based capital ratio rather than manage theactual risk of the assets. This could have a chilling effect onmany historically sound, well-managed credit union activities.

The proposed rule's individual minimum capital requirements alsocreate a quagmire for credit unions and should be removed. The rulegives outsized deference to subjective examiner opinions. Anexaminer can increase – not decrease – a credit union's individualrisk-based capital requirements based on subjective analysis duringan examination. How are credit unions expected to appropriatelymanage risk according to the rule's framework if an examiner hasthe subjective authority to change the rules of the game?

The NCUA's online calculatorfor reviewing the impact of the proposed rule is also of greatconcern. In their zeal to make it easier for individual creditunions to understand how the proposed rule would affect them, NCUAhas oversimplified a very complex measure. Also, having thecalculator publicly available could lead to unfair reputationalharm and general misunderstandings of a credit union's health,especially for those credit unions that would see a drop in theircapitalization classifications under the proposed rule.

As noted above, a major issue with this proposed rule is theability to access supplemental capital. That said, whilesupplemental capital is important, it is not a magic pill that willfix the fundamental problems of this rule. It should be noted thatthere are now more than 2,000 credit unions that have a low-incomedesignation giving them the ability to obtain supplementalcapital.

But there is a big difference between the authorization to raisesupplemental capital and actual ability to obtain it. The proposedrule should have included provisions clarifying the efficient meansby which low-income credit unions can obtain supplemental capital.This would be particularly useful for the time when all creditunions have this ability.

In the end, this proposed rule will create a legacy for theagency –a legacy of even more consolidation in the credit unionindustry.

Credit unions should be unequivocal in voicing their concernsduring the comment period. Indeed, it would be difficult tooverstate the need for credit unions to weigh in with the NCUA onthis proposed rule and its significant shortcomings.

Dan Berger is president/CEO of NAFCU. He can be reachedat [email protected] or (703)522-4770.