By Dan Berger
NAFCU Chair and SRP Federal Credit Union President and CEO Ed Templeton recently testified before the Senate Banking Committee on regulatory relief for credit unions.
He said while NAFCU and its member credit unions take safety and soundness extremely seriously, the regulatory pendulum post-crisis has swung too far towards an environment of overregulation that threatens to stifle economic growth– an especially fitting characterization of NCUA’s second risk-based capital proposal.
NCUA has cited lessons learned from the financial crisis as the catalyst for its second risk-based capital proposal. The agency has stated that had these rules been in place, many credit unions’ failures might have been prevented. This is a huge oversimplification of a very complicated issue. Capital is a cushion and only one part of the equation of how a credit union operates. Indeed, credit unions experienced many fewer failures than banks during the crisis, and banks were operating under a risk-based system similar to what NCUA had proposed at that time.
Additionally, NCUA seems to overlook one very critical element of the financial crisis. Credit unions continued to lend during the financial crisis, and this helped them stay healthy. Contrary to NCUA’s intention, the new proposal could imperil credit unions in the future by forcing them to hold more capital on the balance sheet and hamper their ability to lend and to innovate.
Costs Are 'Shocking'
While NCUA addressed several key concerns raised by NAFCU, credit unions and lawmakers in its second risk-based proposal, including the risk weighting and implementation period, we still strongly believe this proposed rulemaking is unnecessary. The costs associated with it are shocking given how extremely well-capitalized the industry is today.
NAFCU believes this proposal is an inappropriate use of credit union resources to address concerns about a few credit union outliers. The few-dozen credit unions NCUA says would be downgraded under the proposal would need to hold $53.6 million in capital — funds that might be used elsewhere for loans and services — to remain well-capitalized. We believe risk in credit union operations can be addressed on a case-by-case basis and not with a broad-brush regulation.
In the second risk-based capital proposal, NCUA has estimated the agency itself will need to spend $3.75 million to adjust its call report, update its examination systems and train internal staff to implement the proposed requirements. If this proposal were to be finalized, NCUA also estimates credit unions would incur an ongoing $1.1-million expense just to complete the adjusted call report fields. NCUA also conservatively estimates that it will only take 40 hours to completely review the 450-page proposal against a credit union’s current policies at a cost of over $5.1 million. We expect that the true costs will be much higher when credit unions have to comply.
'Significant Legal Concern'
This proposal also raises a significant legal concern. Under the second risk-based capital proposal, NCUA is attempting to promulgate a two-tier, risk-based capital regime for “well-capitalized” and “adequately capitalized” credit unions. This two-tier system could misclassify safe, sound credit unions and impose the unnecessary burden to raise additional capital to maintain their current capital buffers or avoid prompt corrective action. Prior to NCUA’s first risk-based capital proposal, the agency only interpreted the Federal Credit Union Act’s risk-based net worth requirements in a single-tier system. Based on the potentially negative impact of this new approach, NAFCU continues to challenge the agency’s legal authority to implement a two-tiered system.
Overall, NCUA’s second risk-based capital proposal goes too far in many ways and creates unnecessary burden for credit unions; it poses an extremely high cost, but the net benefit remains questionable.
NAFCU supports risk-based capital, but we believe it should be achieved through statutory changes. No single rule will be enough to achieve a truly comprehensive risk-based capital system for all credit unions. NAFCU wants credit unions to be healthy and thrive. We welcome a hearty dialogue during this new comment period and ask credit unions to make their concerns known. It has been 15 years since the last capital reform was tackled, so we need to get it right.
Dan Berger is president/CEO of NAFCU. For info: www.nafcu.org.