Round two: risk-based capital fight continues with comment period underway

Washington, DC (March 8, 2015) — For credit unions, the risk-based capital fight is far from over. RBC #2, the latest version of NCUA’s proposed rule, continues to work against what is best for credit unions … and it’s moving many to rally behind that central message.

Last year, after more than 2,000 comment letters, pressure from the industry and policymakers pushed NCUA to offer a revised comment draft in January. But many in the industry say there continues to be numerous problems with the proposed regulation. Now, the industry is beginning to speak up with a single message: There is no documented need for the RBC rule. Regulatory focus and resources are being misapplied. And revised or not, risk-based capital still doesn’t work for credit unions.

“It’s more important than ever that credit unions comment on NCUA’s second proposal,” said Chip Filson. “Whether your credit union will be immediately affected or not, the results of RBC #2 will put the entire economic system at risk. Plain and simple, RBC is the wrong measure for credit unions.”

Other credit union leaders are adding their voices via round-two comment letters:

Chuck Bruen, CEO of First Entertainment Credit Union ($1.1B, Hollywood, CA):

“The NCUA’s risk-based capital rule is overly complex and inappropriate for credit unions and their business model. … NCUA’s risk-weights also experimentally incent and dis-incent credit union lending and investment behaviors in unprecedented and untested ways.”

Randy Karnes, CEO of CU*Answers (based in Grand Rapids, Michigan):

“This rule would ultimately force credit unions into potential areas of investment and lending in which the credit union lacks experience, or create industry-wide concentrations that could be impacted by similar economic variables. In and of itself, this rule creates more risk than it proposes to control.”

According to Karnes, RBC #2 requires more than 70 asset risk weights; and while it may result in thousands of homogenous balance sheets in 2025 that the NCUA can easily understand from a supervisory perspective, it ultimately puts the credit union system at risk.

In fact, RBC is a measurement other regulators are rejecting. FDIC Vice Chairman Thomas Hoenig expressed as much in a 2012 speech to the American Banker Regulatory Symposium stating, “It turns out that Basel capital rules protected no one: not the banks, not the public, and certainly not the FDIC. The complex Basel rules hurt rather than help the process of measurement and clarity of information.”

And Hoenig reiterated his views in a 2012 The Financial Times article, writing that using tangible equity capital and total assets is a more conservative, more credible method of assessing capital adequacy.

Indeed, in 2014 Hoenig recommended switching to a tangible-equity to tangible-asset ratio. The full FDIC Board adopted that leverage measure at its April 2014 meeting.

Chip Filson, Chairman of Callahan & Associates, says these lessons from the FDIC are important for both credit unions and its Regulators to consider. Risk-weighting of every asset on a credit union’s balance sheet “incentivizes or disincentivizes” credit union lending and investment behaviors, in unprecedented and untested ways. It undermines the cooperative focus on the members’ needs, creates a one-size-fits-all capital model and, increases systemic risk by reducing the diversity of the industry’s 6,000 balance sheets.

With the RBC2 comment period now open through April 27, credit unions of all sizes and their supporters are submitting letters to the NCUA. To help facilitate this process, Credit Union Voices, an alliance of credit union organizations working to bring attention to critical issues affecting the industry, has created a website where commenters can file their letters.

Credit Union Voices is also hosting a booth in the Exhibit Hall at the CUNA Governmental Affairs Conference (GAC) next week. Attendees can learn more about RBC #2 from crowdsourced information and file comments via computer terminals linked to NCUA’s comment page. (Click here for schedule.)

For more information about the RBC issue, visit Credit Union Voices online.

About Credit Union Voices

Credit Union Voices is an alliance comprised of credit union organizations that are bringing attention to critical issues affecting the industry. Their mission is to provide information and education that encourage the credit union community to speak up on behalf of the 100 million-plus people who rely on their credit unions for financial services and support.

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