RBC Legal Challenge Is a Waste
During the Jan. 15 NCUA board meeting, Board Member J. Mark McWatters argued that the proposed risk-based lending rule is illegal.
McWatters’ prepared remarks were so dense with legalese, I was bleeding from the ears after just a few paragraphs. Thankfully, a couple of lawyer friends dumbed it down for me: The gist of the argument was that the Federal Credit Union Act only allows for a single-tier net worth requirement.
Technically, that may be true, but pursuing a legal way out of risk-based capital is a waste of industry resources. Between the NCUA, CUNA, Callahan & Associates and others, it's probably a low estimate the industry spent a quarter of a million dollars fighting or supporting the regulation.
And for what?
Does anybody really think credit unions can win a battle when the almighty Basel Committee on Banking Supervision is involved? I think it's a miracle credit unions have managed to avoid Basel's risk-based capital standards this long.
The Basel Accord requires member countries to implement the group's guidelines. Credit unions have already seen liquidity and stress test rules, standards that were outlined in Basel III. Basel IV will impose even tougher standards. It's the stuff of which conspiracy theories are made, this mysterious group in Switzerland that effectively outranks national governments.
Personally, I’ve never understood why people fear globalization. Blame a childhood greatly influenced by the first Star Wars trilogy. In space, nobody cares if you’re American or Chinese or Persian. You’re just another ugly human.
For big banks, consistency in global regulations makes sense. Ratings agencies and the international investors they serve need apple-to-apple comparisons.
Credit unions, however, don't compete much in global financial markets. Investments are limited and most can't accept secondary capital from domestic investors, much less foreign.
Credit unions also struggle to abide by the guidance because it's written for for-profit institutions. This is nothing new. Just ask World Council President/CEO Brian Branch, who has pressed that point to international regulators and groups like Basel and the International Accounting Standards Board so many times he can probably do it in his sleep.
Occasionally, World Council wins a credit union exemption. Most of the time, however, credit unions are forced to make the regulation work. Risk-based capital is one of those times.
Either credit unions have a seat at the grown-up table or they don't. As much as we would like to have our own special set of cooperative rules while competing in the financial services marketplace with the big boys, it's not realistic. Most of the time, parity with banking rules makes sense. Again, this is one of those times. It's also tough to fight a legal battle against a regulator. When you fight the law, the law usually wins, even when it's wrong.
CUNA President/CEO Jim Nussle admitted to his board a legal challenge would be a long shot, saying in a letter that accompanied the release of the trade's legal opinion that it's rare for a court to reverse regulatory authority.
So why solicit a legal opinion in the first place? For lobbying purposes, apparently. I’m not sure I follow Nussle's logic that CUNA's legal opinion pressured the NCUA into lowering the proposed rule's minimum capital requirement and easing risk weights. The NCUA said it would do those things when it first introduced the rule. And the new proposal, while more palatable than the original, doesn't seem to be any closer to meeting the legal requirements argued by its detractors. However, Nussle has a heck of a lot more experience crafting law and policy than I do, so I’ll take his word for it. I’ll also trust that the money CUNA and others spent on those legal opinions produced enough positive changes in the rule to make those trade dues worth the cost.
Despite all the legal sabre rattling, the risk-based capital rule will be finalized this year and life will go on.
But a bigger question remains unanswered: How much does the credit union charter hamper financial cooperatives? If credit unions have to abide by bank rules and offer commoditized products and services, why even bother fighting the uphill battle of trying to jam a not-for-profit square peg into a round regulatory banking hole?
And, if credit unions are forced to transform their charter into something more like a mutual bank, will consumers even care? America has changed. The world has changed. Perhaps it's time to update the credit union charter, too.
Heather Anderson is executive editor of CU Times. She can be reached at firstname.lastname@example.org.