SAN FRANCISCO — NCUA's risk-based capital proposal is either "a solution looking for a problem" or "an attempt to modernize the capital system," depending on who's doing the talking.
With the regulator's RBC rule prompting unprecedented interest from credit unions this summer, CUNA ditched a planned session on the impact of the economy for a panel discussion on the proposal at its America's Credit Union Conference here Tuesday afternoon.
Larry Fazio, NCUA's director of the Office of Examination and Insurance, represented the agency. Bill Hampel, Eric Richard, Mike Schenk, Ryan Donovan and Mary Dunn, spoke on behalf of CUNA.
Schenk, the interim chief economist while Hampel serves as CUNA's interim president and CEO, pulled no punches about what he thinks about the rule: "This feels like a solution looking for a problem." He said the rule was unwarranted as there only were a small number of credit union failures during the financial crisis, and the insurance fund stayed above 1.2% — much better performance than the Federal Deposit Insurance Corp.'s bank fund.
"The more we looked at it, it is not just a solution looking for a problem, it is a bad solution looking for a problem," he said. "If enacted in 2007 it would not have resulted in a decline in the number of failures or a significant reduction in costs to the insurance fund, but it would have resulted in higher costs for credit unions."
The proposed rule does "not do a good job" of describing the overall impact, according to Schenk. It said 90% of credit unions would be in compliance, with 200 CUs dropping from "well capitalized" to "undercapitalized."
"The problem is, it ignores other effects," he said, adding it would increase capital requirement by $7.6 billion, not $63 million, as claimed. "We believe credit unions would need to raise $3.5 billion to $4.5 billion in capital."
Congressional Response
Ryan Donovan, CUNA's SVP of legislative affairs, said the trade association began meeting with members of Congress in January when the proposed rule first was made available, and again at CUNA annual Governmental Affairs Conference in February.
CUNA made efforts to get members of Congress to weigh in, which resulted in a letter supported by 75% of the House of Representatives.
"No one in Washington can remember a letter getting such support," he told a packed conference room.
According to Donovan, the letter raised concerns in implementing a rule that will impact credit unions and their ability to operate, especially regarding the risk weights assigned to different categories. Also, the implementation time period was questioned.
"The Congressional response has been outstanding and I expect it to continue," said Donovan. "There is a lot of interest in this rule."
Mary Dunn, CUNA's SVP and deputy general counsel, acknowledged "NCUA has a job to do," but quickly added, "They are trying to do their job, but we disagree with how they are doing their job."
Dunn said the RBC proposal is "one of the most significant" rules credit unions will see in the next 10 years. The trade group has spent an extraordinary amount of time on the rule because, "We don't want any issue to come back and bite us later," she added.
"I do not think we have ever coordinated so well on comment letters," Dunn said. "The latest number is 2,058 letters, a record and an unprecedented number. We will continue to meet with every official at NCUA that had anything to do with developing this proposal. Our efforts now are pivoting toward a productive discussion with NCUA on improving this proposal. We are urging the agency to lower the threshold for a well-capitalized credit union [currently 10.5% RBC], and revise the risk weightings."
'A Proposal Is Just That'
Fazio displayed a sense of humor, quipping, "We are glad we could help you achieve a record" before he turned to more serious matters.
He said the genesis for the proposed rule dates back to 1998, when Congress required prompt corrective action and issued a directive for risk-based capital. In 2009 when the Stabilization Fund legislation was before Congress for the corporate CU crisis, NCUA was asked to review the system. The final push came when the FDIC finalized its latest capital rule in last year.
"We also learned some lessons throughout the crisis," said Fazio. "Other than the corporates, the credit union system did pretty well. We have an opportunity to modernize our capital system. We want to get it right."
One of NCUA's talking points during the past few months is that CU should not be overly concerned until the final rule is out. On Tuesday Fazio stated: "[A] proposal is just that, it is not the end. We have worked closely with the system through the comment process to get the devil in the details right. We have made some substantive changes to previous rules."
"We are listening," he told the audience. "We are not going to make all the changes [that are being suggested in comment letters] but we will continue to do research, including listening sessions. We are getting good feedback."
Rush Job
During the Q&A portion, Teresa Freeborn, president and CEO of $851 million Xceed Financial FCU in El Segundo, Calif., said her takeaway was "the whole thing is rushed."
"What is the rush? What is the panic? Over 2,000 letters is pretty amazing. Why not rewrite the rule and give us a chance to comment one more time?"
Replied Fazio: "Even before the GAO study in 2010 we had on our agenda a desire to modernize the capital rules. The timeline of proposal to final will be as long as it takes to get it right. We have a lot of analysis to do. There were ideas we have not thought of. Once we do have a final rule, implementation will be an appropriately long time period. It is not lost on us you all need time to adjust your strategies."
Fazio said he did not know if there will be such substantive changes to the rule that NCUA would need to re-propose. "Probably not, at this point, but I do not control that."
In response to a question from an unidentified audience member regarding the final rule being calibrated so risk can be defined by shop, not by association, Fazio said capital standards are presented in four levels of complexity. "The challenge is for us is to calibrate right so it creates a uniform minimum standard while creating a system that allows supervision of individual credit unions," he added.
Another questioner asserted every CU would be "managing its balance sheet for benefit of the regulator rather than the benefit of the member." He asked if CUs are required to increase capital requirements, would they be offered new ways of raising capital.
"We have supported supplemental capital," said Fazio. "Our objective was not to raise capital requirements on a wholesale level."
Receptive to Concerns
After the session, Freeborn told Credit Union Journal it seemed to her NCUA is "actually receptive" to the concerns being expressed by CUs.
"I really think something as important as this needs more time," she said. "If so many changes are made that it is a completely different proposal, we should be allowed to comment again. It will affect a lot of credit unions now and even more in the future."
Steve Kelly, president of $57 million Metrum Community CU, Centennial, Colo., said he submitted a 25-page comment letter to NCUA. On Tuesday he still had more to say.
"It is unnecessary to have that much capital, and that was proved during the financial crisis," Kelly said. "The 1998 Membership Act set the cap at 7%. Back then there was a reason to be 40% higher than the banks. Risk has gotten greater since then, but our ability to manage it is more than adequate. We don't need to hold more capital to manage it."
He added the proposed risk weightings were, in his opinion, chosen in an "arbitrary manner without statistical basis."
Laura Leuze, CEO and board treasurer for $45.9 million Mill Town CU, Everett, Wash., said the proposed rule would not affect her credit union because it is less than $50 and its capital is at 24%, "But I am following the issue and I submitted a comment letter because we are near [the $50 million threshold]. I worry about some of the risk weightings."
Jill Nowacki, president and CEO of the Credit Union League of Connecticut, said she is encouraged NCUA is going to listen to CU concerns and appeared committed to some revisions. She said she agreed with Freeborn's assertion the regulator should consider a new release and a second opportunity to comment.
"Regardless of revisions made, the length of time for implementation needs to be longer," she said, noting the proposal's 18 month period is significantly less than the 36 months attached to the FDIC rule. "Credit unions will need time to get into compliance," she added.
