After five years of stop-and-go study, three drafts and a hotly contested debate that failed to resolve the fundamental question of whether it possesses the authority to act, the three-member National Credit Union Administration Board of Directors passed a controversial risk-based capital plan in a split vote Thursday.
Board member J. Mark McWatters cast the dissenting vote.
Adding to the sense of uncertainty surrounding the freshly enacted regulation, the very act of approving it appears to have created a reservoir of significant ill-will on Capitol Hill, where the House of Representatives is still considering legislation that would have required the agency to study a series of issues related to risk-based capital and report its findings to Congress before taking any action on risk-based capital.
The so-called “Stop and Study” bill cleared the Financial Services Committee in a 50-9 vote on Sept. 30. In a letter Tuesday, committee chairman Jeb Hensarling (R-Texas) took the NCUA’s chairman Debbie Matz to task for disregarding what he termed “the express will of” committee. Hensarling went on to label the risk-based capital regulation “flawed” and “misguided” and warned of difficulties for the agency’s agenda in Congress – singling out its request for third-party vendor oversight authority.
For her part, Matz said NCUA has already closely studied the issues raised by the “Stop and Study” legislation and promised to provide lawmakers with a detailed report “within the next few weeks.”
She added NCUA is complying with existing law, “which requires the NCUA Board to design a risk-based capital system that is “comparable” with the federal banking agencies.”
Vice-Chairman Rick Metsger blasted critics who suggested NCUA had rushed its vote. “In reality…we’re probably too late rather than too early,” he said, referring to an earlier mention of credit unions that had failed during the financial crisis of 2008-2009. “Those who are asking us to stop and study probably haven’t read our preambles and rules – or they really want us to stop and bury.”
The last re-write of the agency’s risk-based capital regulations came in 2002. Officials say revision is long overdue. They said if the current rule had been in place during the financial crisis, it would have required eight of the nine credit unions with more than $100 million of assets that ultimately failed to hold more capital.
The rule is designed to target “risky outlier credit unions” with higher-than-average risk profiles to hold additional capital. NCUA estimated that only 16 institutions would currently be required to add capital, but Larry Fazio, director of NCUA’s office of examination and insurance, noted the 16 hold a combined $10 billion of assets.
Most of the discussion Thursday centered on the question of authority. Critics of risk-based capital have claimed the Credit Union Membership Access Act bars the two-tiered capital structure established by the new regulation, but on Thursday NCUA Deputy General Counsel Lara Rodriguez said it “clearly has the legal authority to create a risk-based capital system.”
In explaining his dissenting vote, McWatters sided with the critics, arguing CUMAA’s language allows for only a single, adequately capitalized standard and prohibits the second, well-capitalized tier also provided for in the new regulation.
“If Congress had sought to design a two-tier risk-based net worth system for credit unions, it would not have undertaken to accomplish this goal by only referencing the ‘adequately capitalized’ category,” he said.
McWatters added that the regulation should have included a provision enabling credit unions to tap secondary capital sources in order to meet the new capital guidelines. According to Matz, a new rule addressing the secondary capital issue is being planned, but she did not give a timeframe as to when it would be unveiled. She noted also that the risk-based capital rule does not take effect until 2019, leaving the agency plenty of time to act.
The long-running debate over risk-based capital produced a huge number of comment letters from credit union executives, most of whom opposed it, fearing the regulation would require them to hold more capital and inhibit lending. As a result, reaction to Thursday’s vote from the industry’s biggest trade groups was muted at best.
CUNA CEO Jim Nussle credited NCUA for making significant changes to the regulation in the course of preparing three draft versions, but he added that it was “solution in search of a problem.
“Without our advocacy efforts, there is absolutely no question that the final rule would have been much worse for credit unions,” Nussle said.
NAFCU CEO Dan Berger sounded a similar note.
“Given NCUA’s insistence on moving forward with this rule, NAFCU has worked steadfastly to make a bad rule better,” he said.
Berger said NAFCU would continue its fight against the rule as it is currently written to Congress.
“We and our members are unwavering in our view that a legislative solution is required to create a true risk-based capital system for credit unions,” he said.
Observers are likening NCUA’s decision to go forward with risk-based capital in the face of lawmakers’ concerns a high-stakes gamble.
“Any time you ignore the will of a fairly broad section of the House Financial Services Committee, you do so at your own peril,” Geoff Bacino, a former NCUA board member, said in an interview Wednesday.
The “Credit Union Risk-Based Capital Study Act of 2015,” passed the House Financial Service Committee by a bipartisan, 50-9 vote on Sept. 30, and while it has yet to make it to the House floor, sources say fact that more than 200 members of Congress signed a letter sent to NCUA during the comment period suggests it’s not just the will of the House Financial Services Committee that NCUA is ignoring.
What the actual fallout will be remains to be seen, but Hensarling’s letter to Matz offers a hint.
“I also find it troubling, though not surprising, that at the same time you chosen to disregard the clear wishes of Congress, you are also seeking vast new regulatory authority for NCUA, as evidenced by your Oct. 2nd letter requesting that the agency be granted direct oversight of all third-party vendors doing business with credit unions,” Hensarling wrote. “Under the circumstances, NCUA has not demonstrated that it can be entrusted to exercise such broad new authority responsibly.”
