May 28, 2014

CONTACT: Vicki Christner, CUNA Communications/(202) 508-6754; vchristner@cuna.com


Retain current system, seek meaningful reform; recommendations offered

The National Credit Union Administration (NCUA) should not proceed with its proposed rule on risk-based capital (RBC) - given the flaws in the proposal and the damage it stands to cause to credit unions-but instead should retain the current system while seeking and achieving positive and meaningful reform related to capital and prompt corrective action, CUNA has written to the agency in its comment letter on the proposal.

In its 40-plus-page letter to NCUA on the proposed RBC rule, CUNA highlighted the disturbing disconnect between the proposal and the historical facts of credit unions' performance in times of fiscal crises, including the Great Recession. Credit unions have consistently performed better than banks in such stressful circumstances, CUNA's letter stressed, yet NCUA's proposed risk-based capital standards are in many ways more stringent than those for community banks.

CUNA's letter warned that, for credit unions, the proposal will lead to "stagnation by overcapitalization," consigning credit unions to an inconsequential role in the financial marketplace over time.

As a result, CUNA recommended that this version of the proposal be withdrawn, as the agency has not established the economic or legal grounds in support of reforming the current risk-based system as it has proposed.

"Credit unions have been subjected to a number of new rules in the wake of the financial crisis, but none of them is as potentially harmful as this proposal," the CUNA comment letter stated. "Indeed, the economic and legal issues spawned by the proposal are numerous, the policy questions are real, and, as evidenced by the overwhelming level of interest in this rule, the stakes for credit unions and their 99 million member owners could not be higher."

However, CUNA wrote, if the agency determines it must regulate in this area (and establishes an acceptable case for doing so), it should reissue a proposal, and consider a much broader approach that would require congressional and regulatory action (in a comprehensive, optimal approach) or - short of that - a narrower approach (with only regulatory action).

Withdrawing the current proposal, CUNA's letter stated, is vital given key defects it contains in statutory, public policy and operational areas, including:

  • The "well-capitalized" RBC requirements violate the Federal Credit Union Act, and are not well-tailored to produce appropriate levels of credit union capital;
  • The proposal would needlessly interfere with credit union operational capabilities to meet the credit needs of their communities, particularly in the areas of business and mortgage lending, and other financial necessities;
  • Contrary to a stated goal of the proposal, it does not significantly reduce losses to the National Credit Union Share Insurance Fund (NCUSIF), nor does it effectively identify potential credit union failures (without overcapitalization of other credit unions);
  • The rigorous health of credit unions in general, in addition to their historical financial performance, obviates a necessity for the proposal;
  • Overall, the negative impact of the proposal would reduce the size of the credit union movement over the long haul.

However, CUNA wrote that, after reviewing comments from credit unions and other interested parties, if the agency still believes a new rule is necessary under current law, and based on the financial condition of credit unions in general, NCUA should  reissue a proposal - but this time incorporate a number of recommendations outlined by CUNA in its letter.

Among the recommendations:

  • The strategy for capital reform should be more comprehensive and the goals far broader in order to protect the NCUSIF adequately, without limiting the ability of well-managed credit unions to meet the changing financial needs of their members.
  • More specifically: Broad reform would involve congressional and regulatory action, including:
    • Supplemental capital authority (NCUA to work with the credit union system in urging Congress to allow credit access to supplemental capital);
    • Leverage ratio requirements (NCUA to work with credit unions to amend the law and give the agency the power to establish net worth levels that define prompt corrective action (PCA) capital classifications, similar to those granted to banking regulators);
    • Basel-style risk-based capital system (NCUA to work with credit unions to establish a Basel-style system with appropriate risk weightings taking into consideration credit unions' operational history and organizational structure, with different RBC ratio levels to be either adequately or well capitalized).
  • In the absence of legislation, a regulatory-only approach should be taken, which would introduce a Basel-style RBC system for credit unions with the following characteristics:
    • The risk-based aspect of PCA would apply ONLY to whether or not a credit union has sufficient capital to be adequately capitalized. The identical risk-based requirement, coupled with a 7% net worth ratio, would apply to the well-capitalized classification.
    • The risk-based requirements would only apply to credit unions that are complex, and complexity should not be defined by asset size alone.
    • Credit unions would have authority to use supplemental capital to meet risk-based capital requirements.
    • Risk weightings would generally be similar to those applied to community banks in the US, taking into consideration the operational history and organizational structure of credit unions.
    • Risk weightings should be reconfigured to more adequately reflect credit union operations and historical performance; the NCUSIF deposit would NOT be deducted from the numerator of the Risk-Based Capital Ratio; goodwill would not be immediately deducted from the numerator of the Risk-Based Capital Ratio, but would be phased out over a 10-year period; there would be no Individual Minimum Capital Requirements.

Among the other recommendations CUNA made in its letter:

  • NCUA should continue providing a risk mitigation credit as under the current rule;
  • The agency should permit supplemental capital for RBC purposes;
  • Additional comments on a new proposal should be sought;
  • NCUA should give credit unions much more time to comply

"CUNA has historically supported risk-based capital but cannot support this proposal," the association's letter stated. "We urge NCUA to address the numerous fundamental issues we are raising by incorporating our recommendations and reissuing a new proposal for comments from the credit union system and other stakeholders."

The complete text of the CUNA letter is here .

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