SAN FRANCISCO (7/2/14)--The National Credit Union Administration will work as long as it takes to finalize practical regulations that govern asset risk at credit unions, Larry Fazio, NCUA director of the Office of Examination and Insurance, told a full house of credit union professionals Tuesday.
Larry Fazio, NCUA director of the Office of Examination and Insurance, tells a packed room of credit union professionals that the NCUA will use as long as it takes to get the controversial risk-based capital proposal right, adding that there is a lot of work yet to be done. (CUNA Photo)
The large crowd had come to listen to a panel discussion about the state of NCUA's controversial risk-based capital (RBC) proposal during a special general session at the Credit Union National Association's 2014 America's Credit Union Conference.
Answering a question about when the agency might finalize an RBC plan, posed during a Q&A with attendees that capped off the event, Fazio said, "There's a lot of work left to still be done." He added that the agency will spend "as long as it takes to get it right, and I don't know (how long) that will be because we're still in the re-engineering process."
Credit unions have been clear about their concerns over NCUA's RBC proposal, which would rewrite Prompt Corrective Action rules and replace the current system of risk-based net worth requirements with risk-weighted asset and capital requirements. The NCUA received a record number of comment letters before the comment period ended May 28.
A key problem, as CUNA's leaders have noted, is that the rule as proposed would force credit unions to build an incrementally larger buffer into their bottom lines to remain well-capitalized, a harsh penalty considering how responsible credit unions have been in their lending practices.
As CUNA Interim Chief Economist Mike Schenk illustrated during the RBC panel discussion, from the outset of the recession, only 25 credit unions failed as a result of taking on too much risk, while 450 banks of a similar size went under during that same stretch.
"On one level we had a real difficult time with why exactly this thing (proposal) was needed in the first place," Schenk said. "(Not only is this) a solution looking for a problem, but in our view it's a bad solution looking for a problem."
After its initial release, CUNA tested the proposal by running existing credit unions through the system, an exercise that produced several important and disturbing results, Schenk said.
Most notably, the rule led to very significant increases in capital requirements for thousands of credit unions throughout the United States, a dedication of resources which likely would impair their abilities to serve members.
"We have a problem with that," Schenk said.
Fazio acknowledged that the credit union system weathered the economic downturn well, but said the NCUA was tracking some credit unions who struggled with their assets, especially in those states hit hardest by the recession.
"I do think we have an opportunity to modernize our capital standards to bring them up to date, that's necessary," Fazio said, adding, "I think the trick, of course, is calculating it properly going forward--and certainly we want to get it right.
"A proposed rule is a place to start, it's not the end."
Reiterating comments made recently by NCUA Chair Debbie Matz, Fazio said all aspects of the proposal are still on the table for reconsideration.
"That doesn't mean we're going to make all the changes, but we're certainly going to take a fresh look at everything and continue to do research," Fazio said.
Mary Dunn, CUNA's deputy general counsel, also sat on the panel for the RBC session and outlined the specific recommendations CUNA has developed to improve the proposal.
The recommendations include lowering the risk-based capital component for well-capitalized credit unions, recalibrating risk-weights in a number of key asset areas, rethinking the definition of a complex credit union, and reconsidering a provision that would allow the NCUA to impose minimum capital requirements.
"We think this proposal is one of the most significant proposals credit unions are going to see perhaps in the next 10 years," Dunn said. "As a result of that, CUNA really wanted to pull out all the stops. We wanted to analyze this proposal as carefully as we possibly could."
Interim CUNA President/CEO Bill Hampel kicked off the session, laying out the significance of the RBC proposal, while General Counsel Eric Richard moderated, raising key questions for panelists to address. Senior VIce President of Legislative Affairs Ryan Donovan highlighted the significance of concerns raised by Congress and that NCUA has gotten out in front to support supplemental capital authority on Capitol Hill.
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