NCUA Board Members Debate Small CU Definition
The NCUA Board’s decision to increase the definition of a small credit union from less than $50 million in assets to less than $100 million seemed to lack controversy on its face. However, the Thursday decision lit a firestorm of debate among the agency’s three board members during and after the group’s monthly meeting.
NCUA Chairman Debbie Matz praised the move, noting that as recently as 2012, the threshold was just $10 million.
The increase gave 733 additional credit unions regulatory relief under the Regulatory Flexibility Act, increasing the total number of credit unions exempted from some NCUA rules to 4,690. That represents 76% of all federally insured credit unions.
However, Board Member J. Mark McWatters challenged that threshold wasn’t large enough. He advocated increasing the small credit union definition to less than $550 million in assets, putting credit unions on par with banks. The FDIC, OCC and Federal Reserve all use the Small Business Administration's asset threshold of $550 million for determining small entity status under the RFA.
Following are statements from Matz, McWatters and Vice Chairman Rick Metsger on the topics of credit union competition, the Regulatory Flexibility Act and retaining an separate credit union regulator.
“To me, just as compelling as the economic analysis and legal rationale are small credit union officials who urged us not to dilute the Regulatory Flexibility Act analysis by including almost every credit union in the country. I took those concerns seriously. Redefining ‘small’ up to $550 million would mean 93% of all credit unions would be considered ‘small.’ I haven’t spoken to any small credit union officials who think a $550 million credit union is truly small.
“The law does not permit (the) NCUA to consider banks when defining small credit unions. The Regulatory Flexibility Act requires NCUA to conduct economic analysis in considering relief for small credit unions – and the banks’ threshold of $550 million could not be justified with credit unions’ economic data. In every key metric, credit unions up to $550 million are performing much better than credit unions under $100 million.
“(The) NCUA’s Office of General Counsel advised us to limit our definition of ‘small’ to a subset of credit unions, rather than considering the entire financial services industry. The law requires (the) NCUA to consider ‘differing compliance or reporting requirements or timetables that take into account the resources available to small entities....’ In order to follow the law, ‘differing compliance or reporting requirements or timetables’ can only be considered within the federally insured credit unions to which (the) NCUA’s regulations apply.” - Matz
“If (the) NCUA sets the RFA small entity threshold at, say, $550 million (like the FDIC), (the) NCUA's Office of Small Credit Union Initiatives may nevertheless limit the provision of its services to credit unions with, for example, assets of $100 million or less. In other words, an increase in the RFA cap to $550 million does not mandate that OSCUI also increase the asset base of the credit unions it serves.
"Second, (the) NCUA generally adopts a two-tier structure for the application of its rules and regulations. So, for example, credit unions with assets of $100 million or less may be exempted from a rule or regulation, but credit unions with assets of greater than $100 million would be subject to the full force of the rule. This means that credit unions with assets between $100 million and, say, $550 million are afforded no regulatory relief where banks with an identical asset base would quite possibly benefit from a regulatory protocol more astutely targeted to their small entity status. Regrettably, the agency has refused to create a three-tier regulatory structure where, for example, credit unions with assets of $100 million or less are fully exempted from a rule or regulation (regulatory relief), credit unions with assets greater than $100 million but less than $550 million are subject to a rule specifically tailored to their small entity status (regulatory relief), and credit unions with assets of over $550 million are subject to a rule that properly assesses their relative threat to the safety and soundless of the share insurance fund. Why is the agency wedded to a two-tier approach where a three-tier approach (while perhaps more demanding to draft) would afford meaningful regulatory relief to credit unions with assets of less than $550 million and, to a greater extend, level the regulatory playing field with banks? That is, why should credit unions with their relatively straight-forward balance sheets and income and cash flow statements not receive regulatory relief comparable to that afforded banks.
"As a reminder, the RFA requires (the) NCUA to describe the steps the agency will take to minimize the significant economic impact on small entities of proposed and final regulations with the goal of encouraging the agency to afford special consideration to the ability of small entities to absorb the compliance burdens imposed by new rules and regulations. The RFA merely requires the NCUA to analyze the regulatory burden of proposed and final rules on small entities. It certainly does not mandate (or even suggest) that the agency enact irresponsible rules that could adversely affect the safety and soundness of either the credit union community or the share insurance fund. All rules and regulations promulgated by (the) NCUA – whether inside or outside the RFA asset threshold – must protect the safety and soundness of the credit union community and the share insurance fund.” - McWatters
Since credit unions compete against banks and other providers of financial services, it's important that the agency's rules and regulations not place credit unions at an inappropriate disadvantage to their competitors (provided, of course, there's no threat to the safety and soundness of the Share Insurance Fund). Needless (and costly) regulatory pressure placed on credit unions relative to that applicable to banks – exacerbated by setting the credit union RFA threshold far below the $550 million asset level afforded banks – could place credit unions at a competitive disadvantage in the financial services marketplace and serve as a threat to the safety and soundness of the credit union community and the share insurance fund. While, in my view, credit unions are best served by having a regulator that understands the cooperative business model, it's ironic that that regulator – the NCUA – has undertaken to treat the credit union community in a potentially more burdensome manner than if the community was subject to regulation by the banking regulators. A credit union with assets of less than $550 million is a small financial institution as is a bank at the same asset level. It's irrelevant that a $550 million credit union is larger relative to the pool of all credit unions than a $550 million bank is to the pool of all banks. They are both small financial institutions and the statistical aberration created by having the large money-center banks included in the pool of bank assets serves as no justification for burdening credit unions with a lower RFA asset threshold. Small is small. – McWatters
“If credit unions were regulated by the FDIC, then lumping them in with banks might warrant a $550 million threshold. But credit unions are not regulated by the FDIC, they are not subject to the FDIC's risk based capital rules or it's risk-based insurance premium system, among many other rules. Credit unions are regulated by the NCUA and thus what is relevant is the universe of institutions regulated by the NCUA, not the FDIC. As I mentioned during the board meeting the FDIC's definition of a small entity encompasses 6% of banks. If you apply the same 6% standard to credit unions the credit union threshold would only be $58 million not the $100 million we approved Thursday when we doubled the existing threshold, only two years after it was last increased. We need to compare apples to apples and not apples to oranges.” - Metsger
Capitol Hill considerations
“During the discussion on the small credit union threshold it was said that banks and credit unions compete in the same space and thus ‘they should be treated in the same way.’ Banks, of course, have been trying to convince the Congress for years that credit unions are just like banks and should be treated as such. I could not disagree more strongly, credit unions are not like banks, which is why they are subject to different rules and regulations, and have their own regulator.” - Metsger