Last week, by a bipartisan margin of 50-9, the HouseFinancial Services Committee sent an undeniable message to theNCUA: Take more time to review the law, assess the need foradditional regulation, evaluate alternatives and consider the realimpact now and into the future before moving ahead with theRisk-Based Capital 2 final rule.

This is a message I welcomed and championed in my writtendissent (available on the agency’s website) to the issuance by theagency of its proposed RBC2 rule last January as contrary to aplain reading of the Federal Credit Union Act.

I think the agency would do well to heed this message for othermajor regulatory issues as well, most notably how the agency dealswith the growing regulatory burden confronting credit unions,particularly small credit unions. The increasing number, scope andcosts associated with regulatory requirements, not just from theNCUA but from all agencies, that credit unions must manage is aconcern that the NCUA must take more seriously and devote moreresources toward addressing in a meaningful way.

Other regulators are undertaking studies and considering newapproaches to regulation that will more precisely tailor rules tocorrect particular problems. The NCUA is looking at individualrules such as field of membership, member business lending andsupplemental capital, but we should consider the impact of thebroad range of rules and regulations imposed on credit unions aswell by talking directly to credit unions through a formal advisorycommittee process.

We should also more rigorously address the dramatic losses, yearin and year out, to the National Credit Union Share Insurance Fundcaused by fraudulent activity committed by a limited number of badactors within the credit union community.

Although I supported raising the asset threshold used in thedefinition of small entity under the Regulatory Flexibility Act to$100 million, I submit that the agency should also consider how theregulators of other financial institutions define this criticalterm. Regrettably, this analysis was sidestepped by the NCUA. As aresult, banking regulators will consider the impact of new rulesand regulations on banks with assets of up to $550 million, yet theNCUA will conduct an impact analysis under the RFA for creditunions with assets of up to just $100 million.

This regulatory imbalance creates issues of inherent unfairnessand competitive disadvantage for credit unions with assets totalingbetween $100 million and $550 million. These credit unions surelycompete against a wide array of banks and other financialinstitutions – not just against other credit unions. It isdemonstrably unfair that credit unions will suffer an enhancedregulatory burden as a result of the NCUA’s refusal to acknowledgethe obvious: Credit unions of up to $550 million in assets aresmall financial institutions, even though they are not necessarilysmall credit unions relative to the population of all creditunions. Small is small.

It is logically irrelevant that a $550 million credit union islarger relative to the pool of all credit unions than a $550million bank is to the pool of all banks. They are both smallfinancial institutions, and the statistical aberration created byhaving large, money-center banks included in the pool of bankassets serves as no justification for burdening credit unions witha lower RFA asset threshold and an enhanced regulatory burden.

We need to compare apples to apples by properly analyzing theregulatory burden placed on credit unions as members of the broaderfinancial services community. These institutions – credit unionsand banks – compete against each other in the financial servicesmarketplace and, accordingly, should shoulder a distinctly similarregulatory burden absent objective evidence that a contrarytreatment is justified. Small is small.

Credit unions are best served by having a regulator thatunderstands the not-for-profit, cooperative business model. It isironic that their regulator – the NCUA – has undertaken treating alarge segment of the credit union community in a potentially moreburdensome manner than if the segment was subject to regulation bythe banking regulators. Even though the NCUA’s latest small entityrule is final, the agency can nevertheless retool how it developsand applies future rules and regulations – on virtually all issues– that will be consistent with the FCUA, the RFA, safety andsoundness and better risk management.

It is significant to note that the NCUA generally adopts atwo-tier regulatory structure when designing the implementation ofits rules and regulations. Under a two-tier system, for example,credit unions with assets of $100 million or fewer would be exemptfrom a rule or regulation, but credit unions with assets of greaterthan $100 million would most likely be subjected to the full forceof the rule or regulation.

This means that the NCUA would afford no regulatory relief tocredit unions with assets between $100 million and $550 million,even though banks with an identical asset base would most likelybenefit from a regulatory protocol more astutely structured toincorporate and reflect the small entity status. While it is truethat a small number of the NCUA’s rules afford relief for creditunions with assets of up to $250 million, this treatment is notroutinely provided by the NCUA.

To address this regrettable imbalance, the NCUA should increasethe small entity asset threshold under the RFA to $550 million,like the FDIC, and endeavor to implement a three-tier regulatorystructure. For example, credit unions with assets of $100 millionor fewer are fully exempt from a rule or regulation (regulatoryrelief), credit unions with assets of greater than $100 million butless than $550 million are subject to a rule or regulationspecifically tailored to their small entity status (regulatoryrelief), and credit unions with assets totaling more than $550million are subject to a rule or regulation that properly assessesand thoughtfully targets the relative threat of these credit unionsto the safety and soundness of the NCUSIF.

A three-tier regulatory system would afford meaningfulregulatory relief to credit unions with assets of fewer than $550million and, to a greater extent, level the regulatory playingfield with community and other banking institutions. Why shouldn'tcredit unions with relatively straightforward balance sheets, andincome and cash flow statements, receive regulatory relief fromtheir regulators that is at least comparable to that affordedbanking institutions? Significantly, the adoption of a small entityasset threshold of $550 million, together with a thoughtful,thoroughly vetted three-tier regulatory system, will not undermineor limit the work of the NCUA’s Office of Small Credit UnionInitiatives or pose a threat to the NCUSIF.

If the NCUA would set the RFA small entity asset threshold at$550 million, the OSCUI could nevertheless limit the provision ofits services to credit unions with assets of $100 million or fewer.In other words, an increase in the RFA cap to $550 million wouldnot mandate that the OSCUI also increase the asset base of thecredit unions it serves.

Further, the RFA requires the NCUA to describe the steps theagency will take to minimize the “significant economic impact”final rules and regulations have on small entities with the goal ofencouraging the agency to afford special consideration to theability of small entities to absorb the compliance burdens imposedby such rules and regulations. The RFA merely requires theNCUA to analyze the regulatory burden of proposed and final rulesand regulations on small entities, and it certainly does notrequire (or even suggest) that the agency enact irresponsible rulesthat could adversely affect the safety and soundness of either thecredit union community or the NCUSIF.

Regardless of whether a two-tier or a three-tier regulatorysystem is utilized by the NCUA, all rules and regulationspromulgated by the agency – whether inside or outside the RFA assetthreshold – must protect the safety and soundness of the creditunion community and the NCUSIF. The RFA in no manner limits orimpedes that mandate.

A three-tier regulatory system (with an embedded understandingthat small is small) is certainly not the only approach toregulatory relief available to the NCUA. However, I can see onlybenefits for credits unions and the NCUA if the agency moves beyonda two-tier regulatory structure to a better design that allows formore flexibility for credit unions while furthering the agency’skey objective of safety and soundness.

That is how we should do our job, and that is how we shouldregulate.

J. Mark McWatters

NCUA Board Member

Alexandria, Va.