By Ray Birch
ARLINGTON, Va.—Is NCUA exempting CUs $100 million in assets and smaller from risk-based capital rules another step in the agency bifurcating the credit union community? And is the agency headed toward the same fate as the now-defunct Office of Thrift Supervision?
Analysts interviewed by CUToday.info have some intriguing views on those issues. Some say the rising number of regulatory asset categories, along with new NCUA offices established to manage the different asset classes, is the correct response to how credit unions have evolved, and is the best way for NCUA to oversee CUs.
Some argue that the increasing number of silos is not the right approach to regulating the movement, and that risk is often not best assessed by asset size. Others say all the regulatory asset categories make it difficult for NCUA to effectively oversee the industry, and will take the agency a step closer to being rolled into the FDIC.
By NCUA’s rulemaking, there are about 2,000 low-income designated credit unions (LIDs); the liquidity and hedging rules cover credit unions with $250-plus million in assets. There’s NCUA’s Office of Small Credit Union Initiatives, but also the Office of National Examinations and Supervision for CUs $10-billion and above. Most recently, NCUA changed language in its much-debated risk-based capital rule to exempt credit unions of $100 million in assets and below.
Carrie Hunt, NAFCU
NCUA says its decision to exempt credit unions of $100-million in assets and below from RBC is not another step toward bifurcating CUs; instead it’s another means to provide targeted regulatory flexibility and needed reg relief (see related story).
Tale Of Two Movements
NAFCU SVP/General Counsel Carrie Hunt does see the industry as becoming a tale of two movements, but also believes what’s important is determining how that affects credit unions.
“At first blush, the industry is bifurcated,” Hunt told CUToday.info. “But then you have to ask, ‘What does that mean? Does it mean that credit unions that don’t have to follow the same rules as their larger counterparts will be able to grow more, get stronger? Or does it mean that credit unions approaching that line in the sand are not going to want to grow past that line and fall under additional regulation?’ ”
Hunt said that, overall, the structure of the industry’s regulation raises questions. “Again, NAFCU thinks regulations need to be very risk-focused and not just about putting credit unions into an easy category.”
Henry Wirz, CEO at the $2-billion SAFE CU in North Highlands, Calif., does not see parsing regulation by asset size as the best means to manage risk within credit unions.
Henry Wirz, SAFE CU
“NCUA has bifurcated the industry with different regulatory enforcement depending on asset size,” said Wirz, adding that NCUA’s regulatory framework appears to be underpinned by a belief that risk increases as asset size grows. “That premise is wrong. Worse yet, NCUA’s assumption that risk increases with asset size is not supported by the losses incurred by the insurance fund. The risk in a credit union depends on the business plan, the quality of management, and whether or not the credit union has appropriate internal controls to manage the risk, and if those controls are operating and are effective.”
Wirz believes that if the NCUA examination process was effective, the agency would be “awash in evidence” that internal controls and the quality of management increase as asset size increases.
NCUA Not Accurately Assessing 'M' In CAMEL
“NCUA has come to a different conclusion, because their examination process does not accurately assess the ‘M’ in CAMEL—the management quality—nor does it accurately assess the internal control environment,” Wirz said. “I think NCUA’s focus on asset size is wrong, because it assumes that larger credit unions pose more risk to the insurance fund. That isn’t the case.”
Wirz pointed out NCUSIF loss statistics show that internal controls are far better in larger credit unions.
“NCUA is confusing exposure to risk with riskiness,” contended Wirz. “Larger credit unions have more exposure to risk in terms of having more products, more services, more members and more shares. But larger credit unions have far better internal controls and therefore represent less risk. That shows up in lower losses per insured share dollar for the insurance fund in larger credit unions and a higher loss ratio in smaller credit unions.”
Dennis Dollar
Wirz reiterated that NCUA’s examination process is not good at assessing the ‘M’ in CAMEL.
“The assessment of management quality should include an assessment of the credit union’s internal controls and whether they are appropriate given the risks in the credit union’s business plan,” said Wirz. “NCUA is not good at identifying the business risks and the controls that are in place to mitigate those risks. In fact another premise in NCUA’s oversight of credit unions is that what you do determines the risk rather than how well you do it. That premise was evident in the (RBC 1) high risk-based capital weights assigned, higher than those assigned by banks. The examination doesn’t test internal controls to determine they are operating or that they are effective.”
NCUA Making Right Moves
But not everyone agrees, including a former NCUA chairman. Dennis Dollar, principal at Dollar Associates in Birmingham, Ala., feels NCUA is taking the correct steps based on the evolution of credit unions.
“NCUA has a balancing act that is not easy to manage,” said Dollar. “Over 80% of credit unions are below $100 million in assets, but over 95% of the assets are in the other 20% of credit unions over $100 million. I personally don’t think their focusing on various asset sizes with differing approaches is necessarily a bad thing or some attempt to bifurcate the industry.”
Dollar believes the agency is trying to focus its resources where the NCUSIF has the most dollar risk, while at the same time monitoring the 5,000 credit unions below $100 million in assets where there are fewer resources for compliance and more risk for fraud and abuse.
“Again, a tough balancing act,” he said.
Peter Duffy, Sandler O'Neill
With big increases in NCUA staff over the past five years, Dollar feels the agency should be able to manage both the large number of small credit unions and the huge amount of assets in the larger credit unions.
“But it does require some strategic planning on the part of the agency to make sure both areas of responsibility are effectively supervised,” Dollar said. “It is my belief that their categorization of credit unions, while some may argue as to where the thresholds are drawn, is more a workload and resource allocation effort on the part of NCUA than it is an attempt to bifurcate the industry. The numbers are the numbers, and NCUA is trying to focus its resources on those numbers.”
Tough To Manage To Differences
However, Peter Duffy, managing director at Sandler O'Neill, New York, contends that the general “bifurcated nature” of credit unions makes it difficult for NCUA to manage to the differences.
“The RBC discussion continues to illustrate the bifurcated nature of credit unions and the extreme difficulty that advisors, associations and NCUA have in managing to the cleavage,” said Duffy, pointing to LID CUs, new hedging rules, the RBC threshold and the NCUA offices to manage large and small CUs. “Credit unions are at least three industries in one.
“How does the agency write regulations and supervise the small number of credit unions with assets greater than $250 million in a comprehensive way that fits, somehow, with the fundamentals of supervising the smaller ones that have not evolved their business model?” questioned Duffy. “The smaller ones are not growing precisely because they haven’t adapted as the larger ones have. The larger credit unions have evolved to where they are difficult to distinguish in the eyes of the consumer from community banks in terms of product offerings and distribution channels.”
Duffy pointed out that the many RBC detractors think the risk-based capital proposal, and other recent NCUA initiatives, go too far in treating credit unions like banks.
“Yet large credit unions tell us they want business lending powers, capital access and customer base access on the same basis as banks, so that they can continue to build their market presence,” said Duffy.
Marvin Umholtz
Marvin Umholtz, president and CEO of Umholtz Strategic Planning & Consulting Services in Olympia, Wash., contends the continuing “hailstorm of burdensome rulemaking debris” from that Dodd-Frank Act, especially from the CFPB, is what is bifurcating credit unions.
“Credit unions are being forcibly split into two types: Those with the resources, and wherewithal, to satisfy the Dodd-Frank Act’s insatiable compliance-driven regulatory appetite, and those that don’t,” said Umholtz.
Terming NCUA and state regulator supervision and rulemaking “not inconsequential,” Umholtz emphasized the CFPB is now credit unions’ primary regulator.
“And the CFPB’s often-irrational, compliance-driven rulemaking and law enforcement approach, is antithetical to the relationship-based business model traditionally used by credit unions,” he said. “In 2015, credit unions are being crushed under the CFPB’s regulatory burden. Regardless of size or charter type, they are not getting exemptions or special treatment.”
Congress May Step In
Umholtz said CUs still have the NCUA to contend with, noting that the agency is increasingly promulgating “bank-like rules.”
Duffy thinks the final decision on how credit unions are regulated will be made by Washington.
“Perhaps, as some are asking for, Congress will intervene with a legislative solution and smooth out a choppy process,” said Duffy. “Choppy in many respects because there is no single regulatory solution for the way credit unions have evolved and there hasn’t been for a while.”
Umholtz sees that day coming.
“Specialized credit union supervision now exists in name only. That is very bad for the credit union industry, and especially bad for those credit unions that are dependent on receiving credit union-customized treatment,” he said. “It is only a matter of time before the NCUA meets the same fate as the Office of Thrift Supervision. I expect that it will happen sooner, rather than later.”