Comparisons to bank regulators abound at NCUA budget briefing

Regulators for the for-profit banking industry were top of mind during the National Credit Union Administration's public budget briefing Wednesday as industry groups pushed back against ongoing spending increases at the agency.

NCUA's operating budget, which comprises the lion’s share of its overall budget, is expected to be $316.2 million for 2020, a 57% increase over where it stood a decade ago even as the number of CUs the agency oversees has shrunk by 32%. The regulator has taken heat from some in the industry for continued budget increases while the Federal Deposit Insurance Corp. cuts costs.

“We are much more transparent than our peers,” claimed Rendell Jones, NCUA's chief financial officer. “Other federal [banking] regulators have very little on their websites. One of them I saw this morning had about a 10-page memo and some charts, but none of them also do a public briefing.”

Agency representatives on Wednesday defended its spending measures, noting that costs as a percentage of industry assets are lower than for institutions insured by the FDIC.

NCUA statistics show a roughly 74% increase in industry assets between 2010 and 2020 projections, rising from about $880 billion at the start of the decade to an expected $1.5 trillion by the end of next year. Board member Mark McWatters noted that in 2010 the agency spent roughly $227 per $1 million of industry assets, and for 2020 that figure is projected to drop to $206 per million thanks to efficiencies of scale and a growing industry.

“Our budget relative to asset size has dropped about 9%, which is a point that I think is missed by some,” he said.

By comparison, the Federal Reserve, Office of the Comptroller of the Currency and FDIC currently spend about $245 per million, according to NCUA. While McWatters noted some of the largest banks are significantly more complex than credit unions and there is some overlap as a result of three regulators that increases costs, that amount “is materially less than the $209 amount … for 2019 for NCUA.”

In subsequent remarks, Curt Long, chief economist at the National Association of Federally-Insured Credit Unions, pushed back on the agency’s budget rising along with industry assets.

“Asset growth alone does not mean the industry is more complex or that the budget is more efficient,” he said.

Long also emphasized the need for additional look backs at NCUA programming, noting that the cost of the agency’s forthcoming MERIT examination system has risen from $20.8 million to $36.6 million over the two-year implementation period. He called that increase “alarming” and said a “robust cost benefit analysis” is needed as to its efficacy.

While the pace of rulemaking has slowed in recent years, Long added, examination burdens for credit unions have increased, which he said “raises questions as to the extent to which the agency is circumventing rulemaking through the implementation of tougher, experimental examinations.”

Long also suggested the current budget justification doesn’t adequately itemize cybersecurity-related expenses for 2020 and 2021, which he said creates a fear that budget increases may be taking place without adequate evidence.

New consumer compliance focus?

Parts of the budget briefing also touched on board member Todd Harper’s proposal to add oversight for larger credit unions by increasing consumer compliance examinations at CUs from $1 billion to $10 billion in assets. That proposal is still out for public comment and, though supplemental to the budget, would create three new positions at the agency.

Mike Schenk, chief economist at the Credit Union National Association, said while Harper’s proposal is well-intentioned, “altering the agency’s risk-focused examination process and substantially increasing examination-related expenditures is not warranted,” particularly when the regulator has not made the case that credit unions’ consumer compliance risk management is a problem.

“I believe a focus on a separate consumer compliance rating outside of Camel ratings can help” bring attention to issues that need to be addressed, Harper said in later remarks. He added that some state-chartered CUs have also suggested to him that consumer oversight from NCUA could also help better prepare them for CFPB oversight once they cross the $10 billion-asset threshold.

Lucy Ito, CEO of the National Association of State Credit Union Supervisors, also offered comment, though she noted that her organization’s concerns were less focused on the budget than on cost allocation — specifically NCUA’s overhead transfer rate, which has long been a key issue for NASCUS. She also touched on the agency’s ongoing push for third-party vendor oversight, suggesting those costs should not wholly be paid for out of the National Credit Union Share Insurance Fund.

“We do not agree that 100% of the time and costs associated with NCUA’s supervision of CUSOs and third parties is insurance-related,” she said. “We recommend that NCUA allocate at least 25% of its CUSO and third party workload hours to its safety and soundness responsibility as charterer/prudential regulator of federal credit unions.”

Bank regulators do it better?

NCUA will accept public comment on the budget and Harper’s new oversight proposal until Dec. 2, and the budget will be get a vote during the regulator’s December board meeting.

Harper, the panel’s lone Democrat, has frequently been the dissenting vote since joining the board, but suggested Wednesday he has not yet decided how he will vote. He confessed to apprehensions about spending cuts that could inhibit NCUA’s ability to be a prudent steward for the industry. He claimed the budget was cut too much at the start of the last decade and as a result the agency “was caught flat-footed” when the financial crisis hit.

McWatters noted that he was a dissenter for his first two budget votes at the agency — at which time he was the panel’s only Republican — but subsequently came around after reforms were made to open up the budgeting process and increase transparency.

Despite frequent comparisons to bank regulators, CUNA’s Schenk cautioned the board not to hew too closely to the model of FDIC and other agencies.

Credit unions are different entities with different business structures and risk profiles than traditional banks, he noted, adding that CUs haven’t racked up $300 billion in fines since 2009 the way American and European banks have.

“The NCUA, we believe, would be wise not to concede ground to the bank regulators as somehow ‘doing it better,’” he said.