Many CEOs, CFOs, and industry compliance professionals have weighed in on the nuances of NCUA's proposed regulation regarding risk-based capital. Despite the fact unsecured loans carry less weight than real estate loans and investments in CUSOs do not take into account the balance sheet of that organization, the new high rate of corporate perpetual capital could drive credit unions to bank with non-credit union organizations, potentially creating another corporate meltdown.
Concerns And Fears
The above areas highlight a few industry concerns, but they are not the ones we all fear. What is causing all the angst is the stipulations that allow an examiner to arbitrarily choose RBC weights or minimum risk-based ratios based on their findings. Credit unions who at the beginning of the exam are considered well-capitalized could by the end of the exam be immediately placed into a prompt corrective action (PCA) category.
A Tool (Spade) To Enforce Examination Judgments
The NCUA has outlined areas that allow the examiner to increase minimum capital but falls far short of describing the process for determining the number or a formula to determine how much more capital the credit union must maintain. Let's call a spade a spade. The RBC number is not about capital at all; it is about the NCUA putting a credit union into PCA so that all NCUA recommendations, regardless of whether they are to the benefit of the credit union, become backed by regulatory enforcement powers.
Regardless of the outcome of the comments submitted on the final regulation and coupled with the reality that our regulators make few changes based on credit union concerns, it would be prudent to assess the risk that a rogue finding on an exam could do exactly what has been described above.
A New Risk Category
Never in the history of NCUA rulemaking has it been necessary to classify a regulator as a risk to the credit union. However, we are not in normal times and the NCUA's actions over the past few years are indicative of a regulator who believes it needs to manage all of the perceived risk out of a credit union's operations. In the coming days Audit Link, a division of CU*Answers, will be publishing a more detailed analysis and risk assessment that will discuss proactive tactics to prepare credit unions when the regulation goes live in 18 months.
Jim Vilker is the vice president of professional services at CU*Answers. Vilker runs the CU*Answers compliance division referred to as AuditLink. His expertise revolves around evaluating regulations and designing technological tools to assist credit unions in meeting those requirements.