It's unlikely many would question the National Credit Union Administration's board if the group chose to lighten its load in coming months. After all, the board just wrapped up a long and bruising debate over risk-based capital, so agency officials could almost certainly use a break.
For the NCUA, though, it's a case of no rest for the weary. Its inbox is piled high with thorny topics, including some that promise to sharpen the credit union industry's already intense feud with banks. Given risk-based capital's acknowledged point is to nudge credit unions with higher risk profiles to hold more capital, the natural "next up" issue will likely be a rule easing access to sources of supplemental capital.
As cooperative institutions, net earnings are the only official source of capital for most credit unions. Current law mandates that only net income can be used to calculate net worth, credit unions' most important capital standard. But the NCUA has authority to let institutions tap other sources to meet risk-based capital requirements.
It's an issue NCUA's leadership appears determined to fast-track.
"As part of modernizing risk-based capital, we are committed to counting supplemental capital," NCUA Chairman Debbie Matz said Thursday. Though the particulars have yet to be revealed, work on a regulation is under way and it will be brought to the table "as soon as possible," she added.
Earlier this year, Matz formed a working group to study the subject.
Supplemental capital can't come quickly enough for Lucy Ito, president and chief executive of the National Association of State Credit Union Supervisors. That group "has long sought supplemental capital authority for credit unions as a tool for better managing risk and buttressing safety and soundness," Ito said Thursday.
Bank groups are likely to view any supplemental capital rule as a kind of Trojan horse, pushing an agenda aimed at winning legislative approval to count such capital toward a credit union's net worth.
"Supplemental capital could be used a kind of pilot program," Keith Leggett, a retired American Bankers Association economist and author of the "Credit Union Watch" blog, said. "If the industry can show they've used it in a responsible way, they can argue it should be counted as net worth."
The idea is not so far-fetched. Earlier this year, Rep. Peter King, R-N.Y., introduced a bill that would let credit unions accept uninsured deposits, which would then count as capital. He dropped his bill into the legislative hopper in February, and it quickly attracted the backing of the Credit Union National Association and the National Association of Federal Credit Unions.
NCUA director Mark McWatters did not mention King's bill Thursday, but he did tie supplemental capital to member business lending — another hot-button issue for banks. "A thoughtful, prudently constructed supplemental capital rule would afford the credit union community with a heightened opportunity to extend job creating small business loans thereby strengthening the economic viability of the Main Street business community," McWatters said.
Vice Chairman Rick Metsger, the third member of the NCUA's governing board, also declared his support for a supplemental capital rule. Such unanimity stands in sharp contrast to the sometimes bitter divisions that characterized the deliberations over risk-based capital.
After five years of stop-and-go study, three drafts and a hotly contested debate that failed to resolve the fundamental question of whether the National Credit Union Administration has the authority to act, the agency's board passed a controversial risk-based capital plan in a split vote.
McWatters was the dissenter in Thursday's vote.
Adding to the 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. The House is considering legislation to require the NCUA to study a series of issues tied 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 on Sept. 30. In a letter Tuesday, committee chairman, Jeb Hensarling, R-Texas, took Matz to task for disregarding what he termed "the express will of" the committee. He labeled the risk-based capital regulation as "flawed" and "misguided," while warning of difficulties for the agency's agenda in Congress — singling out its request for third-party vendor oversight authority.
Matz said the NCUA had 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 that her agency 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."
The last rewrite of the NCUA's risk-based capital regulations came in 2002, and officials assert that a revision was long overdue. They said that, 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 more capital. The NCUA estimated that only 16 credit unions would currently be required to add capital, but Larry Fazio, director of the agency's office of examination and insurance, noted that the 16 institutions have a combined $10 billion of assets.
Most of the discussion Thursday centered on the question of authority. Critics of risk-based capital have claimed that the Credit Union Membership Access Act bars the two-tiered capital structure established by the new regulation, but NCUA Deputy General Counsel Lara Rodriguez said on Thursday that the agency "clearly has the legal authority to create a risk-based capital system."
In explaining his dissenting vote, McWatters sided with the critics, arguing that the Credit Union Membership Access Act's language only allows for a single, adequately capitalized standard and bars the second, well-capitalized tier that was 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," McWatters said.
The regulation should have included a provision enabling credit unions to tap secondary capital sources to meet the new capital guidelines, McWatters added.
A new rule addressing the secondary capital issue is being planned, Matz said, though she did not say when it would be unveiled. She noted that the risk-based capital rule does not take effect until 2019, leaving the NCUA 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. Reaction to Thursday's vote from the industry's biggest trade groups was muted at best.
Jim Nussle, CUNA's chief executive, credited the NCUA for making significant changes to the regulation over three draft versions, but he added that it was a "solution in search of a problem."
Absent the association's efforts, "there is absolutely no question that the final rule would have been much worse for credit unions," Nussle said.
Dan Berger, CEO of the National Association of Federal Credit Unions, 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 his association would continue its fight against the rule as it is currently written. "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.
Industry observers say the NCUA's decision to go forward with risk-based capital in the face of lawmakers' concerns is a high-stakes gamble.
"Anytime 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 director, said in an interview Wednesday.
The Credit Union Risk-Based Capital Study Act of 2015 has yet to make it to the House floor, and industry sources said the fact that more than 200 members of Congress signed a letter sent to the NCUA during the comment period suggests that it is not just the will of the committee that the NCUA is ignoring.
While the actual fallout will be remains to be seen, Hensarling's letter to Matz offers a hint.
"I also find it troubling, though not surprising, that at the same time you have 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."