NCUA will release its revised risk-based capital rule this week. One way to evaluate the agency’s approach to assessing minimum capital requirements is to ask whether NCUA has learned from the experience of other regulators.
At the July listening session held in Washington, DC, Chairman Debbie Matz said during a response to a question that she was not familiar with the views of Thomas Hoenig, vice chairman of the FDIC and former president of the Kansas City Federal Reserve Bank.
In a September 14, 2012, speech entitled “A Better Alternative to Basel Capital Rules,” Hoenig made the following points:
“The poor record of Basel I, II, and II.5 is that of a system fundamentally flawed … It turns out that Basel capital rules protected no one: not the banks, not the public and certainly not the FDIC … The complex Basel rules hurt, rather than helped the process of measurement and clarity of information. (emphasis added)
He suggests an alternative: “A capital rule must be simple, understandable and enforceable. The measure that best achieves these goals is the tangible equity to tangible asset ratio. It does not tier the measure into any number of refined levels. There is not government ex-ante endorsement of risk assets or capital allocations … It provides a consistent and comparable measurement across firms.”
He concludes: “Basel III will not improve the outcomes for the largest banks … nor improve the condition of small- and medium-sized banks. It continues an experiment that has lasted too long.” (emphasis added)
All three federal banking regulators unanimously passed a tangible equity-leverage rule in 2014. Banks have adopted the credit union model of a simple leverage ratio to set minimum capital standards because their own risk-based approach has been shown to be fundamentally flawed.
Credit unions should expect some recognition of and response to Hoenig’s critique — whether they agree or not with his conclusions — but does the redrafted RBC rule do this? Does the revised rule benefit from the banking regulators’ experience?
What Does RBC Mean For You?
Explore the changes to NCUA's proposed risk-based capital rule and the potential impact it will have on the credit union industry during this webinar with Callahan chairman Chip Filson and senior analyst Andrew Bolton.