Practitioners Council On RBC Could Be A Step In The Right Direction

The credit unions on NCUA’s risk-based capital panel have an opportunity to make a difference for the cooperative system.

The NCUA has selected eight industry representatives to participate in chairman Debbie Matz’ practitioners council to review the proposed risk-based capital rule:

  • Kevin Cole, CFO, Maps Credit Union ($495M, Portland, OR)
  • Sean Gaven, CFO, American Airlines FCU ($5.7B, DFW Airport, TX)
  • Wallace Murray, CEO, Greater Nevada Credit Union ($490M, Reno, NV)
  • William Raker, CEO, US Federal Credit Union ($967M, Burnsville, MN)
  • Bret Rigby, CEO, Deepwater Industries FCU ($84M, Deepwater, NJ)
  • Susan Streifel, CEO, Woodstone Credit Union ($90M, Federal Way, WA)
  • Keith Sultemeier, CEO, Kinecta FCU ($3.3B, Manhattan Beach, CA)
  • Terry West, CEO, VyStar Credit Union ($5.2B, Jacksonville, FL)

Their efforts could benefit not only NCUA staff’s review of the RBC proposal but also all credit unions. In the short term, and given their positions described below on the proposal, they might be able to substantively alter the rule’s scope. In the longer term, if NCUA does reconcile the practitioners’ stated concerns, then it will set a precedent for a better process for the next proposal.

The Potential For Change

Seven of the eight panelists filed written comments on the proposed rule. For Sean Gaven, president Angie Owen submitted a letter as a representative of his viewpoint. A letter from Deepwater Industries did not appear on NCUA’s listing of the more than 2,200 comments.

From the commentaries of the seven, it is clear NCUA did not pick practitioners that support the rule. Because of their detailed and publicly published positions, their selection provides a ray of hope that NCUA staff will listen to their concerns. Moreover, the professional reputations and credit union accomplishments of each representative suggests none of them would settle for becoming stand-ins for an NCUA public relations process.

3 Key Success Factors

How can these eight people add value to a process that generated more than 2,000 public comment letters, resulted in three public listening sessions, engaged the attention of members of Congress, and received a minute critique from Jim Blaine CEO of SECU of North Carolina via his blog Jim Blaine on Credit Unions? How can these eight offer insights as senior leaders of the cooperative system to change the bureaucratic instinct to impose NCUA’s mindset on credit unions?

First, group members should communicate among themselves by sharing their written, public positions on the rule. Each letter includes both general critiques and specific concerns; moreover, the insights from their experiences speak well to the collective wisdom of the group.

The summaries below provide each credit union’s overall position on the rule, but their individual insights are valuable, too. For example, page 6 of VyStar’s letter discusses how the 250% risk weighting for mortgage servicing rights would discourage credit unions from retaining servicing. This is an important member service and competitive advantage for many credit unions and Kinecta’s mention of it illustrates the credit union’s generic concern that NCUA’s rule will attempt to dictate the product and services members need.

Second, each panelist presents a common concern about NCUA’s lack of documentation and financial or economic facts to justify its proposal. These critiques cover all categories of the risk weightings up to the most consequential number of how NCUA chose 10.5% as the RBC well-capitalized benchmark.

All of the commentators offer data, financial performance, and analysis to contradict NCUA’s proposals and assumptions. If these practitioners can base their dialogue with NCUA on published data and analysis, then there will be a factual foundation to assess the rule. Without this information, the conversation becomes an exchange of opinions and NCUA can ultimately assert that it knows best.

Finally, the panelists can demonstrate how the rule will affect members and the credit union’s responsiveness to member needs. As cooperatives, credit unions’ fundamental distinction from banks is the role of the member-owner. NCUA’s focus is exclusively on the institutional performance of the credit union.

CEO Wallace Murray of Greater Nevada Credit Union summarizes this myopia in his letter in which he first recounts the credit union’s experiences under PCA. The top of page 3 states, These (PCA mandates) were all required by agency employees whose sole charge as they understood it was to protect their insurance fund’ and the risks they perceived our credit union represented to it. There was little concern ever uttered by those teams about how the resulting reductions in service by our credit union were likely harming consumers at a time when they needed our assistance more than ever before.

If the cooperative model loses this core responsibility to the member-owners, then there is little to separate credit unions from other financial providers.

As the panel and agency staff work through the rule, they might not be able to reach an agreement on key issues. In those circumstances, the eight should urge the staff to present their view to the board for a final level of review. Seeing the full NCUA board debate dissenting views in open session could enhance the reputation of the board in the credit union community.

The General Position Of The Panel On The RBC Proposal

NCUA did not choose panel members who supported the rule. In fact, no member of the committee endorsed the proposal as presented and several were strongly against the entire effort.

Greater Nevada CEO Warren Murray presents a grounded comment based on firsthand regulatory experience. He opened his 11-page letter with a description called Pertinent Background of what life was like under NCUA’s prompt corrective action (PCA) demands for three years in the latest crisis. He concludes his opening narrative by saying:

However, even with the plethora of issues we found ourselves having to address during that timeframe of more than three years, without a doubt our most substantive challenges we faced came from our federal insurer, the National Credit Union Administration (NCUA).

Murray then details some of the extreme measures that NCUA resorted to in its examination practices. On page 3, Murray presents his position on the rule as an ill-conceived proposal and respectfully request(s) that the NCUA Board immediately and permanently withdraw this proposed regulatory amendment.

The opening statement of Maps Credit Union CFO Kevin Cole reads in part: Unfortunately as proposed, the risk based net worth rule provides little relief to credit unions, while imposing arbitrary and inconsistent capital requirements that attempt to impose the biases and flawed analysis of the regulator on the industry in a way that is detrimental. (page 1)

Kinecta CEO Keith Sultemeier’s initial comments state: there is insufficient evidence to support NCUA’s position that the current risk-based framework is inadequate and that a more restrictive one is warranted to ensure the safety and soundness of the credit union system the new model fails to provide a more accurate assessment of risk at individual credit unions. While we can appreciate NCUA’s objectives, we feel that this attempt to capture the myriad of risks faced by credit unions with a single blunt tool is imprudent and potentially unsafe. (page 1)

American Airlines’ Angie Owensopens her letter with a statement of opposition and closes with a summary on page 5 for this view:

AAFCU opposes the wholesale replacement of the risk-based net worth model in use today with a complex and unproven model as proposed. . . In a time of overwhelming regulatory demands, increasing competitive pressure from both regulated and un(der)regulated entities, and no pressing need to drive the wholesale changes to a model which proved itself superior in the most recent economic environment, we respectfully request the agency reconsider negatively impacting the credit union industry and the millions of Americans who depend on it with an unproven and unnecessarily complex and expensive regulation.

The initial statement of Susan Streifel, CEO of Woodstone Credit Union, reads in part: While we are open to a more comprehensive risk based capital design, one that accurately identifies risks AND provides for the opportunity to generate capital through means other than retained earnings, this proposal falls short on many fronts. (page 1)

VyStar’s opening is equally succinct: From our perspective, the proposed rule is unnecessary and we encourage NCUA to reconsider adopting and implementing it. (page 1)

US Federal’s positioned outlined on page 1is similar: the NCUA’s proposal is not the right approach for our members specifically, nor for the credit union industry in general.

Panelists with such views assure the agency is getting the benefit of committed, thoughtful, and documented objections to the RBC proposal. Even in their detailed comments, this group did not hold back in their critiques of the rule’s details.

Harm To Members And The Cooperative Model

In addition to their general positions, many of the comments provide insight about the incongruity of risk-based capital for cooperatives.

VyStar summarized this concern in saying: this rule as presently structured will add an unnecessary regulatory burden to many credit unions that are well managed and will eventually impact their abilities to continue to serve their members well, add new products and services, and compete effectively in the ever changing financial services arena.

VyStar gives an example of this cooperative advantage: Retaining mortgage servicing rights is fundamental to the principles of credit unions whose mission is to serve the financial needs of their members. Credit unions generally retain servicing and thus accumulate a mortgage servicing asset not for financial gain but to provide members with high quality service and the safety of knowing that their loans, while they may be sold, are all serviced by the credit unions that they trust. During the Great Recession, having held the servicing rights to mortgage loans enabled many credit unions to work directly with members impacted by the recession and help them remain in their homes with reasonable troubled debt restructures.

This is from a credit union whose state was on the front line of the mortgage lending meltdown.

VyStar offers another example on page 5: It would appear that risk-weight categories 9 and 10 are intended to dissuade credit unions from investing in CUSOs A one size fits all approach to CUSO’s with such a high risk-weighting would force many credit unions to reevaluate their CUSO operations and perhaps discontinue a value added service for members.

Under the page 2 heading Consistency of Approach Does Not Recognize Credit Union Industry’s Uniqueness, American Airlines FCU outlines the inappropriateness of NCUA’s goal to make cooperative capital requirements more consistent with the risk based capital approach used by banking regulators.

Greater Nevada’s Wallace Murray was outspoken in his defense of the credit union capital model: The proposal is modeled on concepts derived from the Basel III framework. That framework was designed to address capital issues in the global banking industry, not the U.S credit union movement, which has an entirely different capital model. In fact experience now shows that the credit union capital model served its purposes far better than did the banking capital model during the crisis.

After presenting the facts supporting this statement, Murray concludes on page 4: Given this set of facts, not only should there be no rush by NCUA to mimic the banking capital model, agency officials should instead be simultaneously praising and vigorously defending the existing credit union model both publicly and privately due to its inherent strength and demonstrated ability to withstand immense economic pressures.

The Cooperative System Difference

These panelists’ public comments show the widely shared concerns each has about the RBC proposal. Their shared concern should empower them to hold to their articulated positions and not be used by the agency in a check-the-box exercise.

NCUA has demonstrated repeatedly during the past crisis, and since, that it cannot develop the expertise needed as fast as necessary. Instead, it has relied on bank regulatory models and outside experts and consultants with no experience with the cooperative model. NCUA then endorses those experts that support the positions it wants to take.

The credit union practitioner comments and professional experience demonstrate the benefit of cooperative experts intimately involved in rule making discussions. If the council cannot resolve all issues, which seems likely given the RBC letters, hopefully NCUA staff will report all unadopted positions to the board for final resolution.

As drafted, RBC installs a whole new level of regulatory compliance over every asset a credit union puts on its books. It diverts business priorities from serving member-owners to an open-ended regulatory capital compliance model open-ended because the requirements can be changed any time by individual examiner interpretation or by the agency with new rules.

This pervasive power, as the panelists clearly state, jeopardizes the future of the credit union system. It is not lack of capital that would cause the credit union system to fail but rather the elimination of the comparative advantage promised by cooperative design. The thrift industry didn’t go away; today thrifts are just called banks. Might credit unions not be so lucky?

Click on the links below to read the comment letters.

Kevin Cole, CFO, Maps Credit Union ($495M, Portland, OR)

Sean Gaven, CFO, American Airlines FCU ($5.7B, DFW Airport, TX)

Wallace Murray, CEO, Greater Nevada Credit Union ($490M, Reno, NV)

William Raker, CEO, US Federal Credit Union ($967M, Burnsville, MN)

Susan Streifel, CEO, Woodstone Credit Union ($90M, Federal Way, WA)

Keith Sultemeier, CEO, Kinecta FCU ($3.3B, Manhattan Beach, CA)

Terry West, CEO, VyStar Credit Union ($5.2B, Jacksonville, FL)

August 7, 2014

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