By Ray Birch
BIRMINGHAM, Ala.—Credit union executives and analysts were quick to react to the risk-based capital rules NCUA has approved, with many still worried about how the guidelines will impact the future of the movement.
Concerns range from the agency “micromanaging credit unions” to creating a “cookie-cutter rule” to fears over how examiners will oversee credit unions exempt from the guidelines.
The with whom CUToday.info spoke said they appreciated NCUA’s commitment to supplemental capital and that the agency has listened to credit unions—again—in round two of RBC, coming up with better rules each time. However, many believe the changes have not gone far enough.
"While it still can be argued whether the rule is necessary with credit union capital levels so high, the final rule is basically the same as RBC2 with a couple of tweaks,” said Dennis Dollar, principal at Dollar Associates. “I am pleased that they improved the CUSO risk weighting, because the collaborative model of CUSOs is crucial to the ability of credit unions to innovate in a tough marketplace with much bigger competitors.”
The former NCUA chairman would have preferred to see NCUA lower the threshold to be well capitalized to 9%, with the agency leaving 10% as the required level. Overall, Dollar said the final rule is much better than the original proposal.
More Mergers Ahead?
But a concern among many executives is whether RBC will affect how examiners oversee credit unions of less than $100 million in assets, which are exempt from the rules.
“The real question is not only whether it will be applied with discretion to any credit union above $100 million that may have 7% net worth but less than 10% risk-based capital, but also whether examiners apply the standards de facto to credit unions below $100 million, because they begin to look at every balance sheet through that same prism of regulatory preference,” said Dollar. “If they do, it will drive even more credit union mergers than are already taking place at a rate of one per business day.”
Dollar emphasized that the $100-million asset exemption, which he thinks should have been raised to parity with banking regulatory levels for small institutions, must be heeded by NCUA’s field team.
Dennis Dollar
“It is truly important and must be implemented as a true exemption from RBC—not as a threshold to merely demand the same standards through the supervisory process," Dollar said.
Thomas O'Shea, CEO at the $184-million Aspire CU in Clark, N.J., is concerned over what examiners may ask of CUs, above the required 10% risk-based net worth ratio.
“Today we don't work to a 7% capital ratio. We want a cushion above that number, typically about 10%,” said O’Shea. “Similarly here, a 10% RBNW ratio is just the start. In fact, on NCUA’s charts today they have identified three tiers above 10%. They are 12%, 13.5% and 15%. My fear is that these tiers will become our new RBNW goals used in the field.”
Limited Rule Reach
O’Shea is not sold on the $100-million threshold now set for complex credit unions.
“I know of many credit unions over $100 million that are far from complex. So I believe the definition is very unnecessarily arbitrary and doesn't properly reflect true complexity,” he said.
O’Shea pointed out that NCUA has identified 16 credit unions that would be negatively impacted by the final rule, and among those only one would fall to undercapitalized. He questioned the money NCUA is spending to modify data processing systems to monitor an “insignificant number” of CUs, as well as the expense CUs impacted by the rule will have in developing a capital adequacy plan and performing a risk-based capital analysis.
“On a positive note, it's good to hear that NCUA will be developing a supplemental capital rule,” said O’Shea. “This rule should be adopted along with any RBNW rule. There would be no harm in deferring this ill-conceived RBNW rule until a companion supplemental capital rule is developed.”
Todd Fanning, SVP and CFO at the $2.8-billion University of Iowa Community CU in North Liberty, Iowa, had hoped the final rule would have changes to recognize CUs with a history of managing higher-risk assets well with low delinquencies and few charge-offs.
Greg Smith, PSECU
“The passage of the final rule appears to have little change from the second version released in January, other than changing a few of the risk weights,” explained Fanning. “Although it is much more aligned with the bank calculation, we believe the NCUA missed on the opportunity to give credit to those institutions that have historically shown success in managing balance sheets containing higher-risk assets yet have little or no charge-offs/delinquency. It seems only prudent to require more capital from those who have not and therefore pose a greater risk to the insurance fund.”
Weights Should Benefit Well-Run CUs
Fanning, too, said that a compelling argument can be made for those institutions that have been successful in terms of profitability to hold less in capital without simply basing the requirement on the complexity of their balance sheet.
“I believe, as well, some weighting should have been added for those credit unions with historically low profitability and higher charge-offs to appropriately hold them more accountable for the potential risk not only to the insurance fund but to their members,” said Fanning.
Fanning agrees that the Jan. 1, 2019, implementation date is appropriate given the rule’s complexity.
“We would, however, appreciate an equally time-sensitive solution to the supplemental capital issue,” he said.
A number of CU leaders have set their sights on an even later date, fearing the RBC rule in the long-term will hurt credit union performance.
“The new proposed capital requirements by NCUA will actually hurt credit unions in the long run,” asserted David Proffitt, president and CEO at the $197-million Alcoa Tenn FCU, in Alcoa., Tenn. “This second-tier capital requirement is evidence that they are not listening to Main Street credit unions that are trying to help our members. Most credit unions are just now recovering from the recession. This action will continue the slide to more micromanaging from the federal level.”
Proffitt insisted that each credit union’s capital issues should be handled on an individual basis, saying the one-size-fits-all approach has never worked and will not work with RBC. “Before this final rule was issued, I had hoped NCUA would listen to the practitioners and not the accounting elite,” he said.
Michael Moebs, Moebs $ervices
Long-Term Impact
Michael Poulos, CEO at the $766-million Michigan First CU in Lathrup Village, Mich., credited the agency for listening, yet is concerned for the future of credit unions.
“While it can truly be argued whether this rule is even needed, since credit union capital levels are so high and our regulatory standards for being well capitalized are already quite high, the final rule is about what we expected,” said Poulos. “It is basically the same as the second proposed rule with a couple of tweaks. They are good tweaks and the final rule is much better than the original proposal, but I still have concerns about its necessity and long-term impact.”
Greg Smith, CEO at the $4.7-billion Pennsylvania State Employees CU in Harrisburg, Penn., fears the rule will have CUs working toward a capital number as opposed to working to grow the credit union according to its own strengths and marketplace conditions.
“NCUA is trying to create a cookie-cutter standard that can be applied across all credit unions,” said Smith. “Measuring a credit union’s total risk cannot be distilled down to a range of ratios. To the extent that it is written that way in the final regulation, you’ll have credit unions working to that ratio, regardless of the real risk in their balance sheet.”
CUs Know Best
Michael Moebs, economist and CEO at Moebs $ervices in Lake Forest, Ill., shared a sentiment that’s the basis for what many CEOs say is wrong with the risk-based capital rule—that credit unions know how to run their own business better than NCUA.
“About 20 years ago I was in Kenya on an assignment from the State Department for two months. When I arrived there were 52 banks, building societies (S&Ls) and credit unions. Before I left there were 27,” explained Moebs. “There was a run on these depositories and 25 went out of business. This was in a poor country whose population was over 80% illiterate – could not read, write or sign their names.”
Interestingly, very few Kenyans lost a shilling, said Moebs. “Since by word of mouth every Kenyan knew where to keep their meager funds – in depositories that had double-digit capital – and where not to deposit money. There was no regulation on capital and no deposit insurance in Kenya.”
Moebs said the experience taught him that the marketplace knows much more than any attempts to establish rules and regulations.
“Many well-intentioned people have worked in Congress, the Fed, OCC, FDIC and NCUA to come up with regulations on capital and risk,” he said. “There are now more pages of information defining this and other depository regulations than in the U.S. Tax Code.”