SAN ANTONIO–With today the deadline for NCUA’s revised risk-based capital (RBC) proposal, Board Member Rick Metsger told credit unions here he is surprised at the trade groups’ criticisms of what he called a “reasonable, non-partisan compromise proposed by Chairman (Mark) McWatters and I” that affects relatively few credit unions.
Moreover, in remarks to the Cornerstone Credit Union League’s Leadership Conference here, Metsger cautioned that efforts by the trade groups to lobby Congress to delay any RBC proposal may affect any action the NCUA board eventually takes.
NCUA put out for 30-day comment a revised risk-based capital proposal at its last meeting that raises the exemption to the rule to $500 million in assets from $100 million. The agency has not said when it might appear on the board’s agenda for a vote.
At the meeting in Texas, Metsger laid out each of four critiques of the proposal he has heard and responded to each. His comments were similar to those he made earlier this year at an NCUA board meeting when the rule was put out for comment.
The four critiques and Metsger’s response to each include:
Critique 1: An RBC Rule Is Not Necessary
Metsger quoted a CUNA comment letter that called the RBC rule “functionally unnecessary” and “a solution in search of a problem” by saying, “The truth is that without the multi-billion infusion of funds from the U.S. Treasury…the corporate credit union system would have failed during the Great Recession and its failure would have had a ripple effect that would have brought down many hundreds if not thousands of natural-person credit unions, and quite possibly brought down the entire system.”
Metsger noted every other federal and even major international financial regulator has since crated a risk-based capital requirement for the institutions they regulate. He added that those other regulators, too, including the FDIC, have multiple tiers of capital, risk-based insurance premiums, and no exemptions for institutions of any size, even though the CU proposal would exempt all credit unions over $500 million in assets, which is 90% of CUs.
“If I had a dime for every time I’ve been told the NCUA should not apply a one-size-fits-all approach to regulation, I could fund the Share Insurance Fund myself,” said Metsger. “Yet when you look at the argument that says credit unions don’t need a risk-based capital requirement, that argument essentially says a ‘one-size-fits-all-leverage’ requirement is good enough for credit unions. We know that’s not the case.”
Critique 2: A One-Year Delay Is Not Long Enough
“This argument is preposterous on its face,” said Metsger, noting CUs have already had five years since a risk-based capital proposal was first made. “No other rule in the agency’s history has given credit unions more time to prepare for its implementation.”
The time frame is also a moot point, said Metsger, who pointed out almost all credit unions already have more capital than they need under the proposal, and have had more capital than needed for years.
“Since 2015, when the final rule was adopted, the cumulative net worth of credit unions with more than $100 million in assets has grown by more than 25%, and that doesn’t even include the distributions we recently made from the share insurance fund,” he told the meeting. “On average, complex credit unions already hold more than 18% risk-based capital. That’s 80% more than the 10% required to be well-capitalized under the rule and a full 1,000 basis points over the 8% required to be adequately capitalized.”
Critique 3: Increasing the Definition from $100 Million to $500 Million Isn’t Enough—It should Be Increased to $1 Billion or $10 Billion
Metsger repeated his points that the $500 million threshold exempts more than 90% of credit unions and that no banks are exempt, regardless of assets.
“Increasing the exemption even further would put the Share Insurance Fund at greater risk,” Metsger said. “Remember that while $1 billion may not be large for a bank, it is large for a credit union and represents a significant portion of the assets of the Share Insurance Fund.”
Metsger dubbed as “thoughtful” one comment letter received by the agency that argued against an increase in the RBC exemption to $500 million from $100 million. The letter-writer pointed out that seven of the 10 most costly failures in CU history all involved credit unions that had assets between $100 million and $500 million.
Critique 4: No One Will Be Hurt If We Delay Or Repeal the Implementation of Risk-Based Capital
This argument doesn’t hold water, according to Metsger, because credit unions are “already paying for the lack of a meaningful risk-based capital requirement.”
He noted credit unions are already paying as NCUA has set aside $850-million in specific reserves for “probable” losses at a “handful” of credit unions—a likely reference to taxi medallion lender CUs–and there is another $100 million in general reserves for expected losses that don’t meet NCUA’s standard for specific reserves. Without the necessity of that near $1 billion in reserves, Metsger said the recent dividend paid to NCUSIF-insured CUs would have been even larger.
“This is the second time in about a decade that the sins of the few have been inflicted on the many,” Metsger said. “It is often said that those who forget the past are condemned to repeat it. We’ve already had two instances where a small number of extreme outliers have cost the credit union system hundreds of millions and, more likely, billions of dollars.”
Metsger said NCUA’s proposed RBC rule will require “only a very small number of credit unions” to hold additional capital.
A Note of Caution
Metsger cautioned credit unions that harm could come from efforts by the CU trade associations to “aggressively press Congress” for another two-year delay in implementation of the RBC rule, regardless of how the NCUA board votes.
Given the possibility of such a vote by Congress, Metsger told credit unions “there may not be good reason for the board to make substantive changes to the rule now and increase the exemption threshold from $100 million to $500 million at least until the Congress decides whether or not to act. Perhaps the board should wait to see how that plays out.
“If Congress does act, they will have affirmed the original rule with a two-year delay and the board should weigh that fact before deciding whether to go ahead with any changes to the rule threshold,” Metsger continued. “If they do not act then I would interpret that as a sign the Congress believes we are exercising our judgement properly and the board would consider our proposed amendment at that time.”