All signs indicate that NCUA will get it right with RBNW revisions

The credit union system is rightfully concerned about NCUA’s proposed Risk Based Net Worth proposal, but the groundwork has been laid for the agency to make effective revisions and get it right.

While the agency is often criticized for promulgating burdensome regulations in recent years, let’s consider the total picture:

• Since the financial meltdown, all financial regulators have been under pressure to ensure it doesn’t happen again. We all know credit unions didn’t cause the meltdown, but NCUA, like all financial regulators, is not immune from the push for stricter regulation. Also, some of NCUA’s newest regs were driven by Dodd-Frank.

• NCUA has a long history of listening to the system. The NCUA Board has consistently encouraged comment letters so it can consider that feedback in any revisions. NCUA’s loan participation rule changed significantly from the original proposal. The first draft limited loans from one originator to 25% of net worth—that was increased to 100% in the final proposal. The agency’s derivative regulation is another good example of a regulation that was substantially changed from the original proposal. NCUA Chairman Debbie Matz has consistently said on record how important the comment period is in assisting the NCUA in getting it right. Here’s what she said last year in one of her first speeches touching on the RBNW proposal:

“…..we do listen carefully to your comments and make adjustments in final rules, wherever warranted, to produce good public policy. We wouldn’t have it any other way, because it’s important for us to get it right. With your help, we will.”

         —Debbie Matz

The chairman is committed to good public policy and a RBNW system that hinders credit unions’ ability to serve its 96 million members doesn’t fit. NCUA has repeatedly encouraged credit unions to help consumers and has done its own consumer outreach through MyCreditUnion.gov. An effective risk based structure will help CUs do even more for consumers. A restrictive system hurts members.

• NCUA also has a good track record of working with Congress, so the agency will carefully consider Congress’ views given the importance of this proposal. At the time this article was written, more than 285 members of Congress had signed on to a “Dear Colleague” letter asking the agency to carefully consider changes to the original proposal. In that Dear Colleague letter, members of Congress are asking the agency to give the rule a fresh look and consider the impact on consumers. They write:

“Because of credit unions’ limited avenues for raising capital, it is likely this proposal would force them to charge higher lending and financial services fees, reduce dividend payments to members, and deter new depositors. Before proceeding with a final rule, we urge NCUA to consider the economic impact and consequences of reduced liquidity and financial for families and small businesses. “

NCUA will certainly consider the concerns of Congress as it has historically done.

• Another factor playing in the favor of a more effective revised rule is “consistency” in comments from credit unions. The concerns over the proposal are not a mystery. The system has already been very clear about the key areas that need improvement. In general, the rule is not aligned with Basel III, although the agency says it is designed to create a standard more in line with the banks. The proposal does not effectively consider the liability side of the balance sheet, something many CUs have already pointed out. The weightings on investments, CUSOs, real estate, and others are all being pinpointed by credit unions. In general, the NCUA will have clear consensus from the system on the areas that need reconsideration. There will be little debate about the key areas of concern.

• NCUA also has a great opportunity to revise the proposal based on good work it has already done with interest rate risk. The agency last year passed a derivatives regulation that gives credit unions $250 million and larger a tool to manage interest rate risk. It also passed a regulation requiring CUs to have an interest rate risk policy and program to manage the risk. The proposed rule does not have to be so heavily weighted to IRR based on the agency’s work in recent years.

• There also seems to be flexibility in the statute. Consider the following from the Senate Banking report on HR 1151 and the statute itself:

“…the NCUA should, for example, consider whether the 6 percent requirement provides adequate protection against interest-rate risk and other market risks, credit risk, and the risks posed by contingent liabilities, as well as other relevant risks.  The design of the risk-based net worth requirement should reflect a reasoned judgment about the actual risks involved.”

—Senate Banking Committee

Clearly, interest rate risk is a part of it, however, “reasoned” judgment certainly must come into play. Also, the statute broadly cites “material” risks—not specifically pinpointing interest rate risk. The statute states:

“The Board shall design the risk-based net worth requirement to take account of any material risks against which the net worth ratio required for an insured credit union to be adequately capitalized may not provide adequate protection.”

Clearly, interest rate risk falls under “material risk” but the language is far from a mandate for strict interest rate risk requirements, again, especially given the good work NCUA has done on interest rate risk already. The door is open for the agency to make adjustments on the heavily weighted IRR weightings.

• NCUA also knows that many in Congress and the regulatory world understand very well that it was not credit unions that caused the financial crisis and that credit unions performed very well during that period. Consider the below comment from Richard Cordray of the Consumer Financial Protection Bureau. During a town hall meeting with NCUA Chairman Debbie Matz, Cordray said the following:

“You’ve had very few foreclosures, even during the worst financial crisis of our lifetime. Almost certainly we will not see market conditions like that any time in the foreseeable future. And if you performed well through that crisis you’re going to perform well in a more normalized atmosphere.”

         —Richard Cordray

The head of the CFPB clearly recognizes that credit unions were good actors and that they performed well during a crisis that we’re unlikely to see “any time in the foreseeable future.” That’s a powerful recognition of the strength of credit unions, and recognition that we don’t need to be over-regulated to protect the public.

The path is clear for NCUA to make significant changes to the Risk Based Net Worth proposal so that we won’t be left with a regulation that unduly limits the ability of credit unions to serve their members, while still giving the agency a better picture of where risk is in the system. An effective Risk Based capital system will serve the system well for years to come and NCUA has all the building blocks in place get it right.

Paul Gentile

Paul Gentile

Paul Gentile is President and CEO Cooperative Credit Union Association. The Cooperative Credit Union Association represents the credit unions in Massachusetts, New Hampshire and Rhode Island. The credit unions of ... Web: ccuassociation.org Details