Study Sees CUs On Short End of the Capital Stick

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COLLEGE PARK, Md.-An extensive new study from an unlikely source asserts that credit unions and banks aren't on a level playing field when it comes to capital requirements and Prompt Corrective Action.

The report, "Implications of Prompt Corrective Action for the Credit Union Industry," was authored by Clifford Rossi, a Tyser Teaching Fellow and Executive-in-Residence in the Center for Financial Policy at the University of Maryland's Robert H. Smith School of Business. Among Rossi's conclusions in the nearly 50-page study are that "current capital requirements stifle lending and economic growth, limiting the ability of credit unions to serve as a countercyclical source of credit."

What makes Rossi a surprising source, however, is that prior to joining the university in 2009, he spent nearly 25 years in the banking industry, working chiefly in risk management for the likes of Citigroup, Washington Mutual and Countrywide Bank.

Rossi said that despite coming from the opposite side of the financial services spectrum, "I have years of experience in financial services to weigh in with a fresh pair of eyes; I have no axe to grind one way or the other." He holds a PhD from Cornell University as a financial economist

Faulting GAO's Limited Scope

One of the main areas of focus in Rossi's study is a 2004 report from the GAO that concluded credit unions have not had sufficient problems with capital to warrant changing the regulatory capital requirements. That report examines only 2000-2003 and "I totally find fault with them for that," said Rossi, whose own study examines data from 1980-2009.

"What the GAO found was that in the one single period that they were looking at, credit union growth rates were increasing faster than those at banks," said Rossi. "And so from that point they came to the conclusion that growth rates are strong and we didn't need to worry about credit unions by changing the regulations on how capital requirements are applied."

As a result of his own study's longer timeline, noted Rossi, "you see these periods where the credit union industry in aggregate has more countercyclical behavior-during a downturn they're pumping credit into the marketplace while the banks are going in the other direction," he said. "By and large, it seems to be that in recessionary periods you could make the claim that the credit union industry is more or less countercyclical to the banking industry."

One potential solution, he said, is for Congress to "give NCUA the same regulatory flexibility to define Prompt Corrective Action as their brethren" in the banking industry. He noted that NCUA Chair Debbie Matz has testified that current PCA and capitalization regulations don't make sense, but that her hands are tied. "So give her and her agency regulatory flexibility," said Rossi. "I'm all about a level playing field, and right now it looks like" there isn't one.

A Need To Revisit

Rossi said that there has been no indication that the GAO plans to revisit its 2004 study. "I'm guessing that at this point the GAO has their hands more than full with all of the various things going on within banking."

But, he added, "Good public policy has to be predicated on hard facts" and while he disagrees with the GAO's findings, he said he would be willing to support the agency's conclusions "if the facts were there…but it doesn't seem like they did their homework."

Rossi said he has no plans to delve further into the subject, but might if the GAO re-examined its 2004 findings.

"The data, in my mind, says that there's a need [for the GAO] to go back and revisit this," said Rossi. "Some could argue that based on all the various things going on in the financial services industry, this isn't the biggest issue…but at the end of the day, within this particular industry, it could be a very important issue."

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