Today ends the 90-day comment period for the National Credit Union Administration’s risk-based capital proposal. The proposed rule adds a new, complex capital standard and an additional hurdle beyond the legislatively net worth ratio at which NCUA considers credit unions well-capitalized — a risk-based capital ratio of 10.5% and higher.
There have been more than 880 comments from nearly 480 credit unions and their members, and even a letter from congress signed by more than 320 members, expressing concerns with the proposal.
“This proposal could have a larger detrimental effect on credit unions than even if we were subject to Federal taxation,” says Doug Fecher, CEO of Wright-Patt Credit Union ($2.8B, Beavercreek, OH).
Fecher sees the proposal as a tax levied on credit unions based on the types of assets they choose to put on their balance sheets. But because credit unions are not-for-profit and respond to different incentives than banks, Fecher sees the risk-based capital rule as going too far with unnecessary and crippling oversight.
Unlike banks, credit unions respond to the needs of members, not the wallets of their shareholders. That cooperative model, which is driven more by a specific service mission rather than churning risky, quick profits, is one reason why credit unions generally didn’t suffer the kind of losses that banks did during the financial crisis. As a result, credit unions need their own process of measuring and accounting for risk, one that reflects the cooperative model rather than the Basel-style methods used for regulating banks.
“Since 1930, credit unions have performed better than the for-profit banking sector,” Fecher says. “So it leads to the question, why is this rule even necessary? The impact will be credit unions making decisions based on their risk-based capital ratio, instead of how something impacts members.”
Fecher believes the rule will lead to higher fees, lower dividends, and fewer services for members because the credit union’s focus will be on maintaining this arbitrary risk-based capital calculation based on this proposed rule.
“These risk weights that they put out there are arbitrary. We see no empirical evidence that the risk weightings have any corresponding relation to actual risk or losses the credit unions have suffered,” Fecher says.
Fecher thinks a different solution is needed instead. He recommends that NCUA consider the rule or something like it as a model only. Credit unions already use models and shock tests for other types of metrics, such as interest rate risk. Turning this rule into a model will encourage regulators and credit unions to have an important dialogue during the examination process.
“As a rule, it proposes that it can estimate actual risk on a balance sheet; as a model, it identifies areas of potential risk for a further look by the examiner,” Fecher says. “It creates what I think would be a much better regulatory environment, a discussion with your examiner.”