As the voices of concerned stakeholders, both the biased (regulated credit unions and trades) and the unbiased (more than 320 U.S. House members) grow louder and more compelling, the NCUA Board and its chairman, Debbie Matz, must now do the only prudent and reasonable thing. That is, the proposed risk-based capital regulation needs to be completely discarded and a new process should begin.
The process should include NCUA's trademark "listening sessions" as well as action that follows those meetings. And for a regulation this important, there is no compelling need to move with the current speed of implementation. NCUA needs to take the time to get this right. "Haste makes waste" as they say. And in this case what gets wasted are the effectiveness of — and possibly the future existence of — thousands of credit unions that may be forced to merge or that will slowly fade out of existence due to conservative business models.
RBC Proposal Is A Mistake
Just as great companies and other organizations sometimes find it necessary to admit mistakes and abort product development activities or recall faulty products, the same is true here. The current proposed regulation deserves the "F" grade recently assigned by the respected CEO of our nation's second-largest credit union, Jim Blaine. That suggests that the authors of this critically-important plan need to do what any good student would do in this situation when facing the need for a better grade — crumple up the page and start over.
This is true for several reasons.
First, risk-based capital regulation is supposed to create a more accurate measure of net worth and help reduce capital burden, not increase it. Banks have long operated with an RBC framework that achieves this in order to encourage more appropriate risk in lending and the associated economic stimulus.
The most fundamental example is the 50% risk weighting for mortgage loans that NCUA summarily discards by failing to recognize that many credit unions operate with much more than 25% of their assets in first-mortgage loans and many of these loans have terms of 15 years or less or adjustable rates, which significantly reduces interest-rate risk exposure. Bank RBC guidelines do not attempt to regulate interest rate risk on mortgage loans or concentration risk on small business loans in as Draconian a manner as the NCUA proposed regulation does. Such concepts quash incentives to expand capital for affordable mortgage loans and essential small business loans, both of which are already under pressure in numerous ways and badly needed in our struggling economy.
Creating More Pressure Than Relief
As NCUA attempts to regulate interest rate risk, concentration risk and CUSO investments with this proposal, the agency essentially fails at providing regulatory relief from current unnecessary regulatory net worth requirements that disadvantage credit unions relative to banks. In doing so, the agency creates even more serious pressures that will drive more mergers and higher costs to the NCUSIF. More liquidity (less lending) and less CUSO collaboration will result from this regulation — both very bad things for our industry and those it serves.
There is also a glaring flaw in the proposal that penalizes credit unions that do purchase-and-assumptions of troubled CU assets. The proposed regulation would put a damper on future mergers and would almost certainly increase costs for the NCUSIF when large credit unions become insolvent with fewer willing bidders.
No Incentive For Taking Risk
Second, and related, the credit union not-for-profit model does not incentivize appropriate risk-taking like the bank model does. That is both a good thing and a bad thing. But right now, with most credit unions operating with loan-to-asset ratios at 60% or less, and delinquency rates under 1%, our industry needs more encouragement to take lending risk, not less. Our regulator should not focus solely on the protection of the NCUSIF (already at record-high reserve levels), but rather should encourage more lending and economic stimulus, especially for mortgage and small business loans. That is why a clean slate that will give more parity with banking RBC regulations and not disadvantage the credit union charter by creating an even greater disparity in credit union vs. bank regulatory net worth requirements is necessary.
Third, and related, the credit union charter is under attack by bankers, lawmakers and regulators. We are winning the fight to preserve our tax-exempt status and we are winning some battles on regulatory relief. Kudos to outgoing CUNA CEO Bill Cheney, state leagues and their members for these successes. But the existence of the CFPB with its new mortgage regulations and other burdensome regulations are increasing costs and creating more conservatism in all financial institutions, including credit unions. Our regulator claims to be focused on regulatory relief (i.e., NCUA's General Counsel's recent Congressional testimony), but the agency isn't "walking the talk" with the RBC proposal.
I don't believe for a moment that Jim Blaine or most of his larger credit union colleagues have any desire to move to a bank charter. But they are right when they say that if the regulatory pendulum swings too far, some credit union leaders will not only recommend a bank charter conversion but conversions will also be much more salable to the members if these charter disparities are allowed to be created by our regulator. This would be a regulator-driven diminishment or destruction of our industry in my opinion.
'Great Leadership Under Fire'
Chairman Matz has shown numerous examples of great leadership under fire. This was evident during the corporate CU crisis and during our most severe national economic recession. I believe she will soon leave a legacy as an effective regulator during extraordinarily difficult times. But that legacy is threatened by this current proposal that could do so much harm to the industry that she — and so many others — work hard to cherish and protect.
This is another moment of truth for the NCUA Board. And I believe that they will do the right thing and scrap this badly flawed proposed regulation and create a new one that offers much-needed regulatory relief instead of piling on even more growth-inhibiting shackles for credit unions.
Truly great organizations recognize strategy and product flaws early enough to change course before devastating damage is done. Our industry's future success hinges on this important decision by the NCUA. I believe NCUA is listening. Now, it's time for action.
Dave Adams is CEO of Michigan Credit Union League & Affiliates.
