ALEXANDRIA, Va.—When it comes to how to define “small,” should credit unions be measured against other credit unions, or against all financial services providers?
That question was at the heart of some discussion during the NCUA board meeting here during which the board voted 3-0 to put out for 60-day comment a proposal that would raise the definition of “small entity” to $100-million in assets from $50 million. The current definition covers approximately 65% of CUs; the increase to $100 million would cover about 77% of CUs, meaning they would excluded from the risk-based net worth requirements under NCUA’s Prompt Corrective Action rule, and exempt from the requirement to adopt and implement interest rate risk policies.
Debbie Matz, NCUA Chairman
During the board meeting, NCUA Chairman Debbie Matz asked a staff member about increasing the threshold to $550-million, while Board Member Mark McWatters said he supported a threshold of at least $250-million, and said $550 million would be even more appropriate.
McWatters noted that the FDIC and the Federal Reserve use the U.S. Small Business Administration’s definition of “small” for commercial banks, savings institutions and credit unions, which is $550 million.
In a Q&A with NCUA Chief Economist John Worth prior to the vote, Matz asked why the agency’s staff wasn’t recommending the higher threshold.
Worth noted the Regulatory Flexibility Act (RFA) does not set a “small organization” threshold and that the FDIC, OCC and others have used the SBA’s definition as a default. NCUA has been setting its own definition.
But what should be noted, said Worth, is that even though the bank and credit union regulator use different definitions, approximately the same percentage of each type of institution falls beneath the respective threshold. Worth said about 80% of banks have assets of less than $550 million, and 77% of credit unions have less than $100 million in assets.
Worth said that if NCUA did move to the $550-million threshold level, it would cover 93% of all credit unions and about 33% of assets.
“That would likely result in less regulatory relief, because in considering regulatory exemptions the board would have to consider a much larger percentage of assets which could pose a threat to the Share Insurance Fund,” said Worth.
Why Not Match IRR Threshold?
Matz also asked Worth about whether agency staff considered setting the RFA threshold at $250-million to match the top threshold in the interest rate risk (IRR) rule?
“That is an issue on which we certainly expect public comment,” responded Worth. “The working group considered higher thresholds, but several important issues led us to propose $100 million.”
Among those issues, according to Worth:
- Performance by CUs between $100-$250-million in assets, while there are “challenges,’ is better than the $100-million group/
- Raising the threshold to higher and higher asset levels runs the risk of diluting the concerns and consideration placed on smaller CUs. For example, at $250M, the RFA would encompass 87% of CUs.
Mark McWatters, NCUA board member
- Both the share of system assets and the loss experience between $100- $250 million suggests that there is more Insurance Fund exposure. Seven CUs between $50M and $100M (inflation-adjusted) failed between 2002Q1 and 2014Q2, with resulting losses of $52 million. In contrast, losses for CUs between $100M and $200M were more than triple that amount over the same period. Losses for CUs between $100M and $150M were double the amount for CUs between $50M and $100M.
McWatters, in a statement read during the board meeting, said that he believes the asset threshold increase now out for comment “doesn’t constitute meaningful regulatory relief for federal insured credit unions.”
“Federally insured credit union with assets of less than two-hundred-fifty million-if not five-hundred-fifty million- would no doubt constitute a small entity relative to the universe of financial service institutions in which it competes.” said McWatters. “Meaningful regulatory relief should assist federally insured credit unions in competing with the financial services community as a whole and not solely against other federally insured credit unions. In this analysis it is critical to compare apples to apples and not forget the obvious—credit unions compete against all providers of financial services and NCUA should structure its regulatory protocols accordingly."