I attended NCUA’s third listening session held last Thursday in Alexandria, VA. My observation is that if credit unions are to have a real hearing on their issues, these forums are not where that will occur.
NCUA responded to every concern with one of two tacks:
NCUA was either going to respond to the issue in the final rule, e.g., changes in weightings; or
It was not going to change course, e.g., have a second comment period.
I felt NCUA was conducting a PR event, not engaging on the substance of questions. But if NCUA was not listening, credit union owners should be. The risk-based capital (RBC) proposal has attracted so much commentary because it will fundamentally alter the primacy of the member-owners’ governance role and make examiners and regulators the arbiters of every cooperative’s financial structure.
Two Passionate Remarks
The two most passionate remarks were by John Fenton, CEO of Affinity Credit Union, and the chief investment officer of Navy Federal Credit Union.
Fenton asked why NCUA did not conduct listening sessions to engage the whole industry before it proposed the rule. Credit union performance shined throughout the crisis, so why is there such a rush to get this done?
Chairperson Matz replied that the process could go on forever and the role of the regulator is not to try and get a consensus. Moreover, the agency is now working with a group of 10 on the final rule.
The irony of her answer, that NCUA is now working with 10 select credit unions on the proposal, was typical of NCUA’s responses during the session. NCUA backpedaled as attendees pointed out numerous inconsistencies, inaccuracies, and errors, but it did not recognize that the avalanche of concerns suggests its whole approach is flawed.
Navy Federal Credit Union's spokesman went right to heart of the concerns. He said he did not wish to debate the many technical issues that had been raised in prior sessions. Instead, he addressed the fundamental reason why there were so many comment letters and attendees at the listening sessions: The rule will hurt not only Navy FCU's 1 million members but also the almost 100 million credit union members nationwide. The rule will require credit unions to hold more capital instead of loaning it out. The rule will take money out of members’ pockets. The rule will interfere with the credit union’s ability to serve its members.
The spokesman's second point was equally direct. He stated that a second comment period was vital, not because it might or might not be required legally, but “because it is the right thing to do.”
Matz reiterated the general position that the rule will protect the industry and the Inspector General and Government Accounting Office had said it was necessary. Every other regulator has adopted it. She also reiterated that there would be no second comment period.
Deafness About The Cooperative Model
The member-owner, the core for Navy FCU’s comments and the distinctive feature of the cooperative model, was absent from NCUA’s responses. When explaining his rational for weightings, NCUA’s Larry Fazio repeatedly referred to the banking industry’s Basel requirements, or the fact that NCUA rules were to be comparable to the FDIC, or to the shibboleth of protecting the fund.
During the discussion about subtracting the 1% NCUSIF deposit from net worth, Tom O’Shea of Aspire Credit Union pointed out that it is an asset and, as cooperatives, “the NCUSIF is our money.” Credit unions can get it back if they convert charters. He said his credit union was looking for a conversation, not a consensus, and he had major concerns about the unintended consequences of the rule.
Mary Green, CEO of the $3 million St. Ann’s in Arlington, VA, noted that credit unions are distinct from other financial institutions. In asking for a reduction in regulatory burden, she pointed out that if she did not provide small-dollar loans to her members, their only option would be predatory lenders.
Two CEOs — Chuck Purvis from Coastal FCU and John Fenton from Affinity FCU — both based their comments on the exceptional resilient performance of the cooperative system during multiple crises. At no time did NCUA acknowledge this exceptional performance or the implications for regulatory oversight of the unique member-owner cooperative design.
The Issue Of The Need For A Capital Buffer
In her opening comments, Chairperson Matz said that according to NCUA’s calculations using the current proposal, credit unions would need to raise $700 million to be adequately capitalized, not the $7.0 billion figure cited by CUNA. Matz explicitly stated, “a buffer is not required.”
Three speakers challenged this understanding of capital adequacy. Tom O’Shea of Achieva Credit Union said 7% is not enough under the reality of the "exam culture." Another speaker said boards and CEOs choose higher levels because of risk assessments and because they want to take advantage of future opportunities. A third identified the disconnect between what NCUA's head office says is policy and what examiners impose in the field concerning capital adequacy.
Specific Concerns Also Raised
Attendees raised concerns about the elimination of goodwill from the net worth, saying it would discourage mergers. NCUA said this should be priced into future merger proposals, but current goodwill might be grandfathered.
When asked about specific risk weightings on mortgage serving rights (250% weighting) or adding back the allowance account, NCUA spokesperson Fazio said that was the banking model’s approach.
In response to numerous points made about inconsistencies in weightings for interest rate risk (IRR) between investments and loan products as well as the failure to incorporate the liability offsets, Fazio said the agency would look at a more "comprehensive, holistic approach” in the final rule.
NCUA’s Mind Is Made Up, Don’t Confuse Us With Facts
Throughout the session, NCUA responded in general terms. What was missing was a sense that the two board members and staff were learning anything from the comments. When attendees raised inconsistencies and the lack of factual logic, NCUA responded by implying it would take these issues into consideration in the final rule.
NCUA made no statement about what problem the rule is trying to resolve or what was supposed to be different about the industry’s balance sheet as a result. The regulator justified the rule by repeatedly saying that IG and GAO reports had directed it or that the law required it. According to NCUA, the risk-based net worth approach now in effect is not sufficient, but NCUA offered no reason as to why it was not adequate.
Most critically, NCUA provided no information about how it is going to be more adept than banking regulators in imposing a single national formula that accurately measures risk for more than 6,000 institutions let alone what happens if the formula turns out wrong. NCUA dismissed the banking regulators’ unanimous embrace of a simple leverage ratio at the FDIC hearing in April 2014 and cumulative negative experience with risk-based capital (“an experiment that has lasted too long”) with the comment that the law requires NCUA to do this.
NCUA was well practiced for this session. Even board member Metsger in his summing up by singling out and acknowledging the points made by the speakers gave the impression that his mind is made up. He will rubber stamp whatever staff recommends. According to Metsger, NCUA doesn’t want a Basel I, II or III; it wants to get it right the first time. He did not explain how NCUA would be more expert than the bank regulators in this exercise.
Even if NCUA’s session was primarily a PR exercise versus a learning event, that doesn’t mean credit unions shouldn’t be listening and learning. The event should be a wakeup call that NCUA wants to follow an ineffective banking model when in fact the cooperative approach has proven time and again to be superior. This rule isn’t about capital; it is about the imposition of authority for credit union evolution by regulatory decree and not by the will of the member-owners. That is not what Congress, credit union leaders, nor their members ever intended.