By J. Mark McWatters
As I have advocated many times over my tenure on the NCUA Board, the agency should tailor and target its regulations to the “risks actually presented” to the National Credit Union Share Insurance Fund (NCUSIF) and the credit union system. By following this approach we can appropriately lessen the regulatory burden on the credit union community without creating a safety and soundness risk.
In proposing and finalizing any regulation in accordance with this regulatory philosophy we endeavor to objectively and transparently analyze the “risks actually presented” by the regulation.
Formidable Challenges
During stable economic times, this approach presents formidable challenges to board members and the NCUA staff. Within the agency, my office debates the intended and unintended consequences of any proposed regulation until a responsible, prudent balance is achieved between safety and soundness and regulatory relief. After all, our principle duty at the NCUA is one of safety and soundness and all of our actions are measured against that standard.
During challenging economic times as presented today by the continuing coronavirus pandemic, it becomes exceedingly difficult to assess the “risks actually presented” by any proposed regulation. The agency’s outside experts, along with the analysis of other members of the scientific community as reported on a daily basis in The Wall Street Journal and The New York Times, among other media, expect the most likely scenario is for another wave of coronavirus to begin within the immediate future (if it hasn’t already done so) and continue to spike through the fall until reversing towards the end of the year. That’s the science as we know it today and I am not aware of any analysis from the scientific community that indicates this scenario is materially off the mark.
The profound uncertainly and risk to the United States economy and the credit union community from another wave of the coronavirus made it problematic for me to analyze the “risks actually presented” from the proposed Risk-Based Net Worth (RBNW) rule that was withdrawn at the beginning of the June 25th NCUA board meeting.
Not the Right Time
I concluded that this was not the right time for a material diminution in the RBNW capital requirement for credit unions even if the safety and soundness risk appears relatively modest today. The truth is, we can’t properly calibrate the intended and unintended consequences of the withdrawn RBNW capital rule because the intermediate to long-term economic fallout from the coronavirus pandemic is significantly unknowable at this time. As a safety and soundness regulator, we must acknowledge that the economic environment has changed dramatically over the recent past and is continuing to rapidly evolve today.
For example, reports indicate that active mortgage forbearance plans have jumped over the last few weeks as economic anxiety and unemployment rates continue to climb. It’s also significant to note that the Federal Reserve has directed banks to suspend stock buybacks and cap dividend payments after recent stress tests have indicated that some banks may approach minimum capital standards due to the coronavirus pandemic.
Simply put, the economic uncertainty created by the continuing coronavirus pandemic does not serve as an appropriate foundation for the loosening of the agency’s RBNW capital standards and potentially decreasing overall capital to the NCUSIF and the credit union system.
A Preference
I would have preferred for the agency to have proposed (or to have at least indicated that a proposal is forthcoming) a Credit Union Leverage Ratio (CULR) rule that affords similar regulatory relief to credit unions as that already offered by the Community Bank Leverage Ratio to community banks.
I have long advocated for this rule because of the inherent regulatory relief offered to qualifying credit unions under $10 billion from not having to comply with a RBNW requirement. Further, if structured properly, a CULR rule should not create a safety and soundness risk because the aggregate capital in the system should remain stable or, perhaps, even increase.
In concluding, although I appreciate that reasonable minds may differ, we should remain particularly mindful of the “risks actually presented” to the NCUSIF and the credit union system from any regulations proposed during the time of the coronavirus. As always, the best ideas must prevail.
J. Mark McWatters is a member of the NCUA board.