2014 has begun and the credit union system is analyzing a sizable and complicated proposed rule from NCUA that would implement a risk-based capital requirement for natural person credit unions. That NCUA has proposed capital rules, including an elevated risk-based capital requirement, should not come as a surprise to anyone, as state, federal, and international financial regulators continue to evaluate capital standards in the wake of the financial crisis.
Worldwide, regulators have been responding to the Basel III accords by evaluating and generally tightening capital requirements for financial institutions. Notwithstanding speculation that the international commitment to increasing capital standards may be wavering (just this past October, Standard & Poor's was citing "worrisome cracks" and a "fraying consensus" on the "global push to strengthen" capital standards), the fact is that capital remains king, and the global expectation is that capital standards will rise.
As NASCUS noted in its Dec. 31, 2013, comment letter on NCUA's proposed stress testing rule, it makes sense for regulators to evaluate the appropriate level of capital in their insured institutions. The primary issue in both the stress testing rule and the risk-based capital rule will be in right-sizing the regulation and ensuring a thoughtful discussion of the issues. For the risk-based capital rule in particular, right-sizing the risk weightings and ensuring that even credit unions with higher risk balance sheets have reasonable options for growth while managing risk, will be essential. Equally critical will be ensuring that the final rule provides credit unions with some level of certainty as to the regulatory expectations.
For more than a decade, NASCUS has urged the NCUA and leaders of the credit union movement to join our efforts to modernize credit union capital requirements. Today, it is more important than ever for credit unions to be given the requisite tools to generate regulatory capital. Just as credit unions must tailor capital levels to reflect risk, regulators must tailor regulation to reflect the nature and structure of regulated institutions. In conjunction with the 90-day comment period for its proposed risk based capital rule, I would urge NCUA and the credit union system to engage Congress to pass legislation that provides expanded capital tools for healthy, well-managed credit unions.
Given the pace of Congress, however, we cannot wait solely for a legislative fix. We should be working to identify regulatory improvements that will facilitate credit unions' ability to provide capital. As new regulatory safeguards come on the books, we should move expeditiously to repeal antiquated or overly burdensome regulations that hinder credit union growth.
It makes sense for NCUA to evaluate whether stress testing, capital planning or risk-based capital will benefit the credit union system. It is equally incumbent upon NCUA to engage with all stakeholders to avoid unnecessary regulations and identify the appropriate balance between risk and regulation when promulgating these rules. After all, if a credit union carries more capital, there should be less of a need to overly restrict its activities.
Mary Martha Fortney is the president and CEO of NASCUS, the National Association of State Credit Union Supervisors. She can be contacted at
