WASHINGTON — Now that the risk-based capital rule comment period is over, and a record number of letters reached NCUA, the credit union community's two main trade groups say the agency faces the tough task of reviewing and responding to the collective points.
NCUA reported last week it has received more than 1,850 comment letters on the proposal, the most ever received on a single proposal. The previous record was set in 1995 when the regulator received 1,300 comments on the corporate CU rule.
Together, CUNA and NAFCU submitted a combined 82 pages in their own comment letters.
One of the reasons both CUNA and NAFCU waited to file their letters — NAFCU filing May 27 and CUNA May 28, the comment period's final day — is to make sure all of the key points raised by the credit union community the last several months are covered in their letters.
CUNA and NAFCU have been vocal that the proposed risk-based capital rule as drafted will be damaging to CUs, limiting their ability to compete, make loans and serve members.
Both trade association comment letters ask for withdrawal of the current proposal.
CUNA urges retaining the current system and seeking a broader approach that would require congressional and regulatory action to achieve a risk-based capital system. Both organizations also state that NCUA has not established economic or legal grounds as a basis for its proposed rule.
'Gargantuan Task'
While CUNA and NAFCU don't hold much hope for NCUA pulling the current proposal, CUNA general counsel Eric Richard said NCUA now faces a "gargantuan task."
"They have a real obligation to respond to the different arguments made in all of the comment letters. If they fail to do that they will be vulnerable to a legal challenge," said Richard, recognizing there will be a great deal of overlap in points raised among all comment letters.
Richard explained that a key reason the trade association decided to be "so comprehensive" in its letter is because NCUA is legally required to "review and respond to these criticisms [of the proposal]. When NCUA publishes the final rule in the Federal Register the agency has to include an explanation of why they made the decisions they did — which means they have to respond to all these main points raised [in the comment letters]."
Bill Hampel, CUNA SVP of research and policy analysis and chief economist, who will take over June 11 as CUNA interim president, added, "That puts substantial pressure on NCUA... making changes very likely."
In a previous interview with CU Journal, NCUA Chairman Debbie Matz was clear changes are coming; that the regulator is willing to make adjustments — as with any proposed rule — if the content of the comments is convincing.
"There is just a lot of angst because [the rule] is new to the system, and when something is new there is a lot of angst and concern," said Matz. "But when we come out with the final rule, a lot of the concern and trepidation will disappear."
Carrie Hunt, NAFCU SVP of government affairs and general counsel, hopes the changes are enough to secure the future of credit unions.
"This rule is so restrictive and will require credit unions to hold more capital," she reminded. "They won't be able to compete with other financial institutions. Even if NCUA were to go back and make changes after the final rule was in place, that won't be in time to save those credit unions that had to close their doors. That is what we are trying to prevent and why we have been so vocal and vigilant about this rule, trying to use every tool at our disposal to make sure this rule goes down the right path."
A major concern of both trade associations and credit unions is the rule's risk weights. Many within the CU community feel some of the proposal's risk weights are too tough — higher than those for community banks — and will restrict CU lending, particularly member business lending.
According to CUNA's 47-page letter, key problems with the proposal are:
- The well-capitalized risk-based capital 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 NCUSIF, nor does it effectively identify potential credit union failures.
CUNA's letter advocates for the current system to be retained alongside "positive and meaningful reform" related to capital and prompt corrective action.
The trade association also calls for allowing credit unions access to supplemental capital; giving NCUA the power to establish net worth levels that define Prompt Corrective Action capital classifications; and establishing a Basel-style system with appropriate risk weightings taking into consideration credit unions' operational history and organizational structure.
NAFCU's letter, as well, questions NCUA's legal authority to issue the rule as proposed and outlines several major concerns:
- NCUA's treatment of the regulatory process, including the refusal to extend the comment period and form an industry working group prior to releasing a proposed rule.
- NCUA's drastic understatement of credit unions that will be affected by the rule and whose balance sheets and business plans will need adjustment.
- The proposed risk-based capital ratio for well-capitalized credit unions set at 10.5%.
- NCUA's treatment of risk-weighted assets and the lack of explanation for deviation from similar banking risk weights.
- NCUA's incorporation of interest rate and concentration risk into risk-weighting for real estate, investments and MBLs.
- Supplemental capital authority is needed.
Hunt emphasized that a rule can't be overly restrictive, removing so much risk that credit unions can't compete.
"We disagree with the agency relative to what the level of risk really is and we have asked them to prove their case for why this approach is needed," said Hunt. "Ultimately there has to be some risk in the system for credit unions to survive and thrive."
Hampel, pointing out CUs' long history of solid financial performance — particularly during economic downturns when CUs outperform banks — and their current strong capital level, questions "why do we need to monkey with these (capital) rules at all?"
Hampel also addressed NCUA's assessment of the proposal's impact on credit unions being far different than what CUNA and other industry insiders project.
"In the supplementary information to the rule, NCUA talks about the rule having a $63 million price tag — $63 million of additional capital needed by credit unions rendered inadequately capitalized to be restored to capital adequacy."
Hampel said that conclusion ignores the $480 million of capital that would be required by 189 well-capitalized CUs, demoted to adequately capitalized under the rule, to return to a well-capitalized level. It also overlooks, he said, needing an additional $3 and $4.5 billion of capital for CUs whose capital cushions, above the well-capitalized level, would be reduced significantly.
The long-term scenario, said Hampel, is that having to maintain higher capital ratios for the long term would retard CU growth to the point credit unions would be "rendered inconsequential in the financial markets 20 to 30 years from now.
This would also place pressure on small CUs because it would make it harder for them to grow and achieve economies of scale."
With the comment period now over — one too short for many within the CU community but one of the longest in NCUA history — CUNA Deputy General Counsel Mary Dunn said it's time to focus energy on NCUA's Listening Sessions this summer and continuing to communicate with the agency.
"We want to keep activity up on thus rule, meeting with NCUA board members and key staff so that the oxygen in the room on this subject is not depleted. We want to keep the energy up until we have major changes (to the proposal)."
Adding that CUNA is encouraged by statements NCUA board members have made about adjustments to the rule that could be coming, and that the regulator will take all of the comment letters seriously, Dunn said, "Credit unions deserve more than this proposal."
