Rate Your Regulator

Prior to Thursday’s NCUA board meeting featuring the release of the redrafted RBC proposal, I posted three articles about what to look for in the meeting. Here are my first impressions.

Debate Versus Process

In What To Listen For When The NCUA Board Discusses The Revised RBC Rule, I addressed why it is important to understand if board members are willing to participate in a debate or opt to stand behind the rule-making process.

This was an unusual board meeting in that board member Mark McWatters objected on legal grounds to the issuance of the proposal.He read his seven-page critique aloud and cited not only statutory interpretation but also NCUA’s own internal documents from 2007. He did not comment on the substance of the rule because doing so before the legal issue is determined would have been premature. Read McWatters’s statement.

Vice chair Rick Metsger spent much of his response outlining procedural activities, citing comments, listening sessions, and more than 1,000 pages of staff working papers plus more than 100 questions asked and answered for the board.

Once again, NCUA is hiding behind a legal opinion, challenged by both McWatters and its own documents.

We have listened, he said, using the numerous changes in the revised rule including the new definition of a complex credit union and the removal of the individual minimum capital requirement as examples. He also said credit unions have a five-year timeframe to prepare for and implement new guidelines: The NCUA began the process in 2014, it will issue the final rule at the end of 2015, and credit unions will have until 2019 to implement it.

To support his approval of the revised RBC rule, Metsger relied on assertions like this: The system is broken and needs to be fixed.His proof: Two credit unions failed the current net worth test, which one could argue is proof the system is indeed working. Metsger repeatedly focused on process by implying NCUA could have proceeded with a final rule following the last comment period but instead elected to issue a new rule for more comment. Read Metsger’s statement.

Chair Debbie Matz introduced the rule and used the changes to support its viability. I was surprised by her extended reference to asking the law firm Paul Hastings for an outside counsel’s opinion on the NCUA’s authority to issue the rule, how NCUA chose the law firm, the work NCUA asked the firm to complete, and the cost. NCUA paid $150,000 out of its General Counsel fund. The kicker, though, is that she was prepared to release the opinion, but Hastings asked her not to.

So, once again, NCUA is hiding behind a legal opinion, challenged by both McWatters and its own documents, to assert its authority to issue a rule when the statute is unclear. Unless NCUA releases the opinion, the idea that this was a public board process is a charade. Read Matz’s statement.

Grade: C. McWatters raised two substantive points: the legal foundation for this rule and the fact that an advance notice of proposed rulemaking (ANPR) approach would have been less costly and more effective in identifying issues. Metsger defended the process. Matz pointed to tactical changes that make the rule more compatible with banking regulations.

Practitioners Council

In What Role Did The Practitioners Council Play In NCUA’s Revised Risk-Based Capital Rule? I noted that if NCUA implemented the role of the practitioners in the spirit of member participation, then the precedent could be an important milestone in how the agency works with credit unions.

Unfortunately, it appears the practitioners council played no role in revising the RBC rule.

Grade: F. No board member referred to the practitioners or their contribution, if there was any. Staff made a cursory reference in a list of activities it had taken to solicit comment. However, the proposal is400 pages. Somewhere in that document there might be a contribution from the council, but no one mentioned it in the public discussion. This grade is subject to revision.

The Experience Of Bankers

In Will NCUA’s Revised RBC Rule Benefit From Banking Regulators Experience? I reference the important insights offered in a speech by the vice chair of the FDIC. The banking industry regulators have been universal in their assessments of the shortcomings of the Basel risk-based capital formulas. To again quote Thomas Hoenig:

In response to this assessment, in 2014 all three banking regulators unanimously adopted a tier one capital requirement as the best way to address the shortcomings of the Basel approach.

NCUA board members repeatedly referred to the banking experience when justifying certain risk weightings Matz for testing for the comparability of NCUA’s RBC rule and Metsger as an obligation to be followed.

Since McWatters challenged the proposed rule’s authority, he did not comment on the issue of the effectiveness of RBC rules.

For five years credit unions will be in limbo about whether there will be a rule, how it might be applied if passed, and whether to wait until 2019 to comply or continue, as is, for three more years.

No staff or board member responded to the failure of RBC as cited above, nor did anyone provide a reason why NCUA’s rules would not have this same fundamental flaw.

Grade: 2 Fs, 1 Incomplete.RBC is not over; in fact, the rule is even more in play. McWatters raised a whole new issue for comment. Does the agency have the authority to make this rule? The reporting complexity for credit unions will increase because some asset categories are not in the 5300 Call Report. It adds a new definition for regulatory capital. The rule would risk rate every current and future balance sheet asset the same way for every credit union everywhere.

The idea that a rule would take five years from draft to implementation for a system Metsger alleges is broken is not a tribute to procedural or supervisory effectiveness.Rather, it is a symptom of a critically flawed approach to regulation.

For five years credit unions will be in limbo about whether there will be a rule, how it might be applied if passed, and whether to wait until 2019 to comply or continue, as is, for three more years. Credit union boards and managers face continued uncertainty as to their autonomy in decisions about the structure of their balance sheet. This will inhibit credit union forward planning in meeting member needs, responding to market challenges, and investing in changes for the future.

Your comments are more important now than ever.