What a new comment period means for RBC reform

Yesterday’s announcement by NCUA Chairman Debbie Matz that NCUA would issue an amended Risk Based Capital Proposal and that credit unions would be given an additional comment period to respond to it has several important implications.

The most important statement yesterday was not Chairman Matz’s but Vice Chairman Rick Metsger’s “As I have often said, I believe interest rate risk is important and must be addressed in the risk-based capital rule, but it should be addressed separately from credit risk. Weighting credit risk and interest rate risk with a single numerical value created conflicts that ultimately made it difficult to accurately weigh the risk of either.”

This is absolutely crucial news since many of the most onerous risk weightings, most notably dealing with mortgage concentrations, were designed to avoid interest rate risk by deterring credit union’s from holding otherwise sound financial products. NCUA tried to accomplish with a hatchet a goal for which it needed a surgeon’s knife. Hopefully its proposed revisions will provide a more nuanced approach to interest rate risk and risk-based capital.

Chairman Matz has been about as reluctant to extend the comment period for risk-based capital regulations as the Patriots are to show up for practice this morning after getting destroyed by the Kansas City Chiefs last night. I thought it was telling that Chairman Matz said she made the decision in consultation with NCUA’s lawyer’s (Whenever you have to do something you don’t want to do it’s always convenient to blame the lawyers).

Under the Administrative Procedures Act, an agency may promulgate a final rule that differs from the rule it has proposed without first soliciting further comments if the final rule is a “logical outgrowth” of the proposal (Louisiana Fed. Land Bank Ass’n, FLCA v. Farm Credit Admin., 336 F.3d 1075, 1081 (D.C. Cir. 2003).   It’s safe to assume that NCUA’s proposal will contain some really big changes.

– Chairman Matz is no longer driving the bus when it comes to RBC reform. Not only did Board member Metzger apparently already secure changes he wanted to the RBC proposal but the newest Board member J. Mark McWatters  has some serious doubts about the regulation. He issued a separate statement yesterday in which he explained that “the previously proposed risk-based capital rules are deeply flawed and merit substantial revision. The devil is in the details, and I await the details before I can pass judgment on the next draft of the proposed rules.”

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