Last week, by a bipartisan margin of 50-9, the House Financial Services Committee sent an undeniable message to the NCUA: Take more time to review the law, assess the need for additional regulation, evaluate alternatives and consider the real impact now and into the future before moving ahead with the Risk-Based Capital 2 final rule.

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

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

Other regulators are undertaking studies and considering new approaches to regulation that will more precisely tailor rules to correct particular problems. The NCUA is looking at individual rules such as field of membership, member business lending and supplemental capital, but we should consider the impact of the broad range of rules and regulations imposed on credit unions as well by talking directly to credit unions through a formal advisory committee process.

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

Although I supported raising the asset threshold used in the definition of small entity under the Regulatory Flexibility Act to $100 million, I submit that the agency should also consider how the regulators of other financial institutions define this critical term. Regrettably, this analysis was sidestepped by the NCUA. As a result, banking regulators will consider the impact of new rules and regulations on banks with assets of up to $550 million, yet the NCUA will conduct an impact analysis under the RFA for credit unions with assets of up to just $100 million.

This regulatory imbalance creates issues of inherent unfairness and competitive disadvantage for credit unions with assets totaling between $100 million and $550 million. These credit unions surely compete against a wide array of banks and other financial institutions – not just against other credit unions. It is demonstrably unfair that credit unions will suffer an enhanced regulatory burden as a result of the NCUA’s refusal to acknowledge the obvious: Credit unions of up to $550 million in assets are small financial institutions, even though they are not necessarily small credit unions relative to the population of all credit unions. Small is small.

It is logically 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 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 and an enhanced regulatory burden.

We need to compare apples to apples by properly analyzing the regulatory burden placed on credit unions as members of the broader financial services community. These institutions – credit unions and banks – compete against each other in the financial services marketplace and, accordingly, should shoulder a distinctly similar regulatory burden absent objective evidence that a contrary treatment is justified. Small is small.

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

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

This means that the NCUA would afford no regulatory relief to credit unions with assets between $100 million and $550 million, even though banks with an identical asset base would most likely benefit from a regulatory protocol more astutely structured to incorporate and reflect the small entity status. While it is true that a small number of the NCUA’s rules afford relief for credit unions with assets of up to $250 million, this treatment is not routinely provided by the NCUA.

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

A three-tier regulatory system would afford meaningful regulatory relief to credit unions with assets of fewer than $550 million and, to a greater extent, level the regulatory playing field with community and other banking institutions. Why shouldn't credit unions with relatively straightforward balance sheets, and income and cash flow statements, receive regulatory relief from their regulators that is at least comparable to that afforded banking institutions? Significantly, the adoption of a small entity asset threshold of $550 million, together with a thoughtful, thoroughly vetted three-tier regulatory system, will not undermine or limit the work of the NCUA’s Office of Small Credit Union Initiatives 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 of its services to credit unions with assets of $100 million or fewer. In other words, an increase in the RFA cap to $550 million would not mandate that the OSCUI also increase the asset base of the credit unions it serves.

Further, the RFA requires the NCUA to describe the steps the agency will take to minimize the “significant economic impact” final rules and regulations have on small entities with the goal of encouraging the agency to afford special consideration to the ability of small entities to absorb the compliance burdens imposed by such rules and regulations. The RFA merely requires the NCUA to analyze the regulatory burden of proposed and final rules and regulations on small entities, and it certainly does not require (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 NCUSIF.

Regardless of whether a two-tier or a three-tier regulatory system is utilized by the NCUA, all rules and regulations promulgated by the agency – whether inside or outside the RFA asset threshold – must protect the safety and soundness of the credit union community and the NCUSIF. The RFA in no manner limits or impedes that mandate.

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

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

J. Mark McWatters

NCUA Board Member

Alexandria, Va.

Instant Insights /

Small Is Small: A New Approach to Credit Union Regulation

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