BIRMINGHAM, Ala.—Nothing has generated more discussion and debate among credit unions this year than NCUA’s risk-based capital proposal.
With a revised rule coming, along with a second comment period, credit unions are anxiously waiting to see what the next round brings.
Former NCUA Chairman Dennis Dollar, who now leads his own firm, Dollar Associates, has predicted a second comment period for several months, largely driven by the considerable congressional interest that could bring about future congressional hearings, and by the overwhelmingly negative stakeholder comments that could potentially bring legal action against the final rule.
Dollar now predicts that the focus of the second comment period will be the 10.5% threshold, more than the risk weights NCUA has indicated in public comments that it is open to significantly changing.
“If NCUA is indeed going to significantly amend the proposed rule in an effort to make RBC a legacy issue that serves the agency and the industry well from a safety and soundness perspective, they will want to strengthen their position—politically and legally—as much as possible,” said Dollar. “This second comment period is wise and makes total sense if the agency truly wants the rule to last through future administrations without attack from Congress or in the courts. I believe the changes in risk weights NCUA has hinted about over recent months will improve that part of the proposal considerably and therefore turn the focus of the second comment period to the unnecessarily high threshold of 10.5% to be well capitalized.”
Greater balance
Dollar sees a great deal of improvement in the eventual final rule.
“I believe the agency has listened and the next version of the proposal will be considerably more balanced with reduced risk weights on business loans, mortgage concentration, longer-term investments, CUSOs, mortgage servicing and even possibly secured consumer loans. That will be a great improvement and will deserve commendation for positive steps in the right direction because, basically, the concept of risk-based capital is sound.”
Dollar noted that the “devil is, as always, in the details. Most credit union leaders will support a well thought and balanced plan if NCUA gives some credence to the stakeholders who face the marketplace and regulation every day. If NCUA works hard to get it right where credit unions are not at a disadvantage versus a community bank under Basel, the challenge of two comment periods will have been worthwhile for both the regulator and the regulated.”
However, Dollar says the second proposed rule still won’t be universally praised.
“With NCUA's changes being discussed, the new proposal will be viewed as closer to workable and so much improved over the initial proposed rule that there will be a sigh of relief among credit unions with many fewer negative comments and even some positive during the second comment period,” he added.
“But the 10.5% trigger to be well-capitalized is going to become the target because it seems to be an arbitrary number that is so high it removes too much of a credit union's strategic capital cushion and forces those hard-earned retained earnings into regulatory reserves that cannot be invested in growth and enhanced number service,” continued Dollar. “That puts credit unions, in their view, at a competitive disadvantage with community banks that only have recently been increased to 8% capital in order to be well-capitalized and have other supplemental capital sources to help them meet their lower threshold."
No arbitrary powers
Dollar also predicts that one of the biggest CU concerns with the proposal—giving examiners the ability to arbitrarily set risk weights—won’t be part of the final rule.
“I have confidence the examiner discretion provision will be removed, even though some risk—such as interest rate risk and concentration risk—will be specified to be managed primarily by NCUA though the supervisory process rather than trying to do so in a one-size-fits-all imprecise approach through the RBC risk weights,” said Dollar. “This, along with a three-year implementation period to give credit unions time to adjust their balance sheets, will be well received by credit unions.”