ALEXANDRIA, Va. The National Credit Union Administration approved a final rule on capital planning and stress testing at its open board meeting Thursday that contained some changes but maybe not enough to satisfy credit unions.
The rule, which is projected to cost federally insured CUs $5 million in the first year, did not pass unanimously, with Republican Board Member Michael Fryzel the lone dissenting vote. Chairman Debbie Matz and Board Member Richard Metsger, both Democrats, voted in favor of the rule.
In October, NCUA proposed to require all federally insured credit unions with assets north of $10 billion to develop and maintain capital plans and undergo annual stress tests.
The proposed rule stated that the stress test results might be made public, but the final rule said the results will remain confidential for the first several years.
The agency also adjusted the rule to possibly allow credit unions to do their own stress testing after three years. Third parties will be working with NCUA to conduct the initial stress tests.
"Countless hours have been spent putting the capital planning and stress testing rule in place. The industry has sent in comment letters suggesting ways they believe the rule could be written better, but while some changes have been made to the proposed rule, I believe the final rule to be voted on by the NCUA board is in need of further revision," Fryzel said.
Key to Fryzel's concerns was the cost to the National Credit Union Share Insurance Fund. He said it's estimated that each stress test for the five credit unions that meet the threshold for the tests could cost $1 million in the first year and $500,000 each year thereafter.
The National Association of State Credit Union Supervisors has warned that if results of proposed mandatory annual stress tests for institutions bigger than $10 billion in assets are made public, they could endanger the Share Insurance Fund by mistakenly promoting runs.
Michael Coleman, director of regulatory affairs at the National Association of Federal Credit Unions, shared concerns over the additional regulatory burden the stress test rule. "We have been arguing for less, not more, regulatory burden in our conversations with NCUA, other regulators and Congress," said Coleman about the final stress test rule. "This final rule significantly ramps up current burdens and increases costs for all insured credit unions."
"Although NCUA's final rule allows for credit unions to apply to conduct their own stress tests following three years of NCUA-run stress testing, the credit union will have already had to expend a considerable amount of money and time to switch their processes and systems to accommodate NCUA's stress tests. This provision provides little relief from the original proposal's requirements."
The estimated costs are for the NCUA to hire outside vendors to help it conduct the tests. Fryzel instead pushed for credit unions to continue conducting their own stress tests and then for the NCUA to verify the results.
However, Metsger said after seeing how the stress tests were conducted by the Federal Deposit Insurance Corp., it would be more "prudent" to hire an experienced outside vendor to establish confidence in the process.
"Once both the NCUA and covered credit unions are familiar with the process and on the same page, and there is confidence in the validity of the results, I believe we can and should transition to credit union-run stress tests, which the rule allows under NCUA supervision," Metsger said. "I believe that it is imperative that we develop the talent that we need here in house to run and supervise stress tests As an agency, we need to start preparing today for the risks we will be facing tomorrow."
The Credit Union National Association and the NAFCU, while appreciating the changes, still contend the rule is costly and unnecessary, with CUNA emphasizing the agency has yet to substantiate a need for the rule.
CUNA President Bill Cheney said in a prepared statement that his trade association acknowledges stress testing's benefits, but sees no need for the rule.
"Further, the agency has not sufficiently substantiated a need for the use of third parties to conduct stress testing of covered credit unions, rather than reviewing the assumptions and results of credit unions' own stress tests," Cheney said.
Cheney also pointed to the stress test costs, which will fall on the backs of federally insured CUs. NCUA originally stated the costs would be $4.2 million for the first year, now that number is $5 million. "We believe that is just too much," Cheney added.
In an interview with Credit Union Journal, CUNA Deputy General Counsel Mary Dunn, shared concern over Board member Metsger stating that NCUA may revisit the rule in the future and might make stress test results public. "We think that is troubling."
Common Bond Requirements
During the board meeting, NCUA also introduced for comment a proposed rule on associational common bond requirements. The rule would amend the associational common bond provisions of NCUA's chartering and field of membership rules.
Dunn told Credit Union Journal there are "positives" in the proposal. "However, we will scrutinize this carefully and want to work with NCUA to make sure this rule is not unduly burdensome for credit unions."
Dunn said CUNA will examine the rule to make sure it does not hamper credit unions' ability to grow and serve their communities.
NAFCU's Coleman said he is concerned about the proposal, adding the NCUA should be removing hurdles from its regulations instead of "making it more and more difficult to be a credit union.
"While NAFCU appreciates the proposal's efforts to streamline certain requirements for amending a federal credit union's field of membership, NAFCU opposes the incorporation of a threshold determination requirement," said Coleman.
Michael Bell, attorney and counselor with Royal-Oak, Mich.-based Howard & Howard, which works with credit unions on mergers and acquisitions, including those of banks, said the proposed rule on associational common bond requirements should be examined closely by the credit unions.
"Regulation of associations and FOM matters are certainly important," noted Bell. "That said, the NCUA needs to be diligent and protect the procedural and substantive due process rights of credit unions, associations and members. I see a risk for detrimental unintended consequences.