By Ray Birch
Former FDIC Chairman Sheila Bair
WASHINGTON—A proposal that calls for allowing regulators to exempt community financial institutions from new and existing regulations has sparked debate within credit unions as to how the concept might be implemented and what might actually transpire if it ever were.
NAFCU, CUNA and NASCUS have all indicated support for the concept, advanced recently by former FDIC chairman Sheila Bair. But that’s where the agreement starts to end, with various sources telling CUToday.info that the idea will work only if regulators can also define common criteria for community FIs, others saying they’re uncertain regulators would use such authority, and one person saying the true solution remains Washington crafting legislation to reduce the regulatory burden facing small institutions.
Calling Bair innovative and creative, and stating that the former FDIC chairman’s concept has merit and would benefit credit unions, CUNA Deputy Chief Advocacy Officer and Senior Counsel Mary Dunn pointed out that the CFPB already has authority to carve out regulatory exemptions for classes of financial institutions.
CFPB Has Exemption Authority
“The CFPB has exemption authority now and has not used it sufficiently,” explained Dunn, who said that same situation might occur with NCUA if the agency were granted authority to exempt CUs from new or existing rulemaking.
Mary Dunn, CUNA
“Even if the authority is provided that prudential regulators have more authority to exempt institutions, it does not mean the regulators will necessarily use that power,” said Dunn.
Dunn said regulators will face a great deal of pressure from consumer groups that will argue consumers should be afforded the same protection rules no matter where they bank.
The “real solution,” said Dunn, is for Congress to “own this issue” and develop legislation that reduces the regulatory burden on credit unions and community banks.
At the National Association of State Credit Union Supervisors (NASCUS), President and CEO Lucy Ito said a strong case can be made for regulatory right-sizing. “Treating $250-million institutions as if they are $10-billion institutions makes no sense,” said Ito.
Ito said the concept of allowing regulators to define a community institution merits further exploration and research. Ito explained that the community institution concept recognizes that credit unions at $200 million or $1 billion in assets are less complex and pose less systemic risk than credit unions and banks that are greater than $10 billion in assets.
Define Community FI
Lucy Ito, NASCUS
“Because state regulators typically have oversight over a variety of players in the financial services marketplace, they have firsthand knowledge across big banks, community banks, credit unions, and other financial service providers,” said Ito. “This array of experience gives state regulators the ‘street smarts’ or insight into what activities are truly complex and pose greater systemic risk. By giving power to define a community institution to the chartering authority—state regulators for federally and privately insured credit unions—state-chartered credit unions would have greater assurance that they are being held to a consistent definition alongside their community bank peers.”
A big question is whether and how the federal credit union regulator would utilize the authority to exempt community institutions from regulatory burdens that are designed for more complex and systemically risky financial institutions, added Ito.
“Any framework for regulatory relief should include a built-in mechanism for assuring analogous regulatory relief across different but similarly sized financial institution models—that is, credit unions and community banks. Necessarily, credit unions and banks should be subject to the same overarching asset thresholds and defining activities.”
In Arlington, Va., NAFCU President and CEO Dan Berger expressed his support for Bair’s concept.
Dan Berger, NAFCU
“Congress enacting a provision giving regulators the flexibility to exempt all credit unions from new and existing regulations could provide meaningful regulatory relief for the credit union industry,” wrote Berger in a letter to Congress. “NAFCU could also support providing this exemption relief to community banks, while still maintaining the necessary regulatory requirements for larger ‘too-big-to-fail’ institutions.”
The letter was sent in late February to Senate Banking Committee Chairman Richard Shelby and Ranking Member Sherrod Brown and House Financial Services Committee Chairman Jeb Hensarling and Ranking Member Maxine Waters. Members of the U.S. Senate and U.S. House of Representatives were copied.
Like CUNA’s Dunn, Berger noted that such authority is not “unprecedented, as Section 1022 of the Dodd-Frank Act already grants the Consumer Financial Protection Bureau (CFPB) the authority to provide exemptions from various rulemakings. NAFCU, however, believes that the CFPB has failed to utilize this authority to provide meaningful exemptions for credit unions from new regulatory burdens. NAFCU hopes that enacting a broader exemption authority would encourage the CFPB, and allow other financial regulators to provide greater relief for community financial institutions.”
While also citing there have been similar concepts previously proposed, Ryan Donovan, CUNA’s chief advocacy officer, said it would be wise not to dismiss Bair’s proposal, as the idea could gain traction.
“I would not foreclose on anything right now,” said Donovan. “There will be discussion in Congress about how regulatory relief can be provided to credit unions and small community banks. It is too early to tell, but I think this proposal will be part of the discussion.”
NCUA Backs Regulatory Flexibility
For its part, NCUA said that it has consistently supported the idea of regulatory flexibility.
“We have specifically spoken about the need for Congress to provide regulators with flexibility,” said spokesperson John Fairbanks, citing the testimony of Larry Fazio, director of Examination and Insurance, delivered to Congress last fall.
Fairbanks explained that NCUA calibrates its rules, where appropriate, “such as the rule on liquidity risk, which has different requirements as a credit union grows its assets and the interest rate risk rule, which includes an exemption up to the small credit union threshold, then scales various requirements for credit unions at higher asset thresholds.”
Fairbanks noted that NCUA has in place a three-year rolling review of its regulations, and that the agency, while not required to perform the regulatory review under the Economic Growth and Regulatory Paperwork Reduction Act, “does so voluntarily, as it aligns perfectly with Chairman Matz’s Regulatory Modernization Initiative.”