RBC Coverage: Pros, Cons Collide

Call for comment gains urgency as April 27 deadline approaches.

The April 27 deadline for commenting on the NCUA’s second version of its risk-based capital rule is fast approaching, and our organization has been among the industry voices urging credit union leaders across the country to make their opinions known.

So, this being a blog about industry news, I figured I’d take a look at media coverage of RBC #2.

My first impression: Lack of coverage beyond the credit union trade publications shows it’s a family fight, but one with far-reaching consequences, say those who think the RBC rule would seriously impede credit unions’ ability to lend in the way credit unions traditionally have, instead making them act more like banks.

Ironically, NCUA policy-makers have said they intended to model their approach on the FDIC, which instead has backed away from RBC in favor of a simple, leverage-based model. The NCUA hasn’t followed suit.

Here’s Credit Union Times’ story following the NCUA board’s Jan. 15 vote to send the revised risk-based capital rule out for comment ahead of an as-yet unscheduled final vote. In that piece, Chairman Debbie Matz cited a legal opinion the NCUA bought for $150,000 from a Washington lawyer that gave what appeared to be at best lukewarm endorsement to the legality of a two-tiered, risk-based net worth system.

To the legality, not the advisability, critics were quick to point out, and board member Mark McWatters has said publicly including on the NCUA’s own website he doubts the agency has that authority under the Federal Credit Union Act. He voted against it even going to comment.

Here’s the whole opinion, courtesy of CU Times, which posted it on Feb. 1.

That legal opinion and one funded by CUNA have spurred speculation about a possible lawsuit if the NCUA board approves the final rule. A story posted Jan. 22 by the Credit Union Journal noted that, and reported:

For now, despite the ongoing controversy, NCUA is sticking to its guns. In a webinar Wednesday (Jan. 21), officials said a multi-tiered risk-based capital standard is more forward looking’ than the leverage ratio since it does a better job of highlighting what they described as outlier credit unions that don’t hold capital sufficient for the risk on their balance sheets.’

The trade groups also have rallied against RBC, but not everyone hates it. A CUToday articleon Jan. 21 quoted some credit union CEOs who see the new iteration of RBC as workable.

And a former board member, credit union consultant Dennis Dollar, expressed support for the idea of risk-based capital as one but just one of what he calls the four crucial pillars of true capital modernization.

He also has been quoted several times lauding the NCUA for the changes it made from RBC #1 to RBC #2 and in a Jan. 19 article posted by CUToday said the agency should expect a lot of comments.

Either Way, State Your Piece

Not so much so far, however. A check of the NCUA’s list of comments late Wednesday showed people from 77 credit unions had commented, plus a handful of vendors, totaling about 250 comments, many of them form-letter repeats.

That’s a far cry from the more than 2,000 comments RBC #1 attracted, and that has some industry leaders calling for action. Chip Filson, chairman of Callahan & Associates (the owner of this website), says he’s concerned that many in the industry feel the rule’s passage is a fait accompli now that the rule’s been amended.

That doesn’t have to be the case, Filson says. All that’s needed is one vote on the board to change, and the proposed rule would be defeated. But credit union leaders and people who care about the future of the industry really must speak up once again.

Here’s an excerpt of one letter, submitted this week by Chris Howard, vice president of research at Callahan.

I am a member-owner of Arlington Community Federal Credit Union.

Last year’s proposal was a bad idea, poorly executed. We can argue whether all the revisions improve the execution, on balance and with some significant exceptions I’d say yes. I’d also say it doesn’t matter. The entire notion is still a very bad idea.

I appreciate the logic of risk-weighting assets: It is self-evident that some loans are inherently riskier than others and ensuring sufficient capacity to cover losses is a requirement of responsible lending. But,

  • Capital is a lousy tool for this expensive, inflexible, destructive to use, and impossible to target directly at whatever risk is creating concern.
  • Any systemic rule like this must be relatively simplistic and inflexible, but credit risk management is a complex and nuanced thing. It does not scale well.

Setting everything else aside, this rule serves no constructive purpose and can never work as advertised. A CUNA study shows that only one of the 189 credit unions that failed during the financial crisis would have been covered by this rule prior to failure. In effect, this is Security Theater a way for the NCUA to show the outside world it’s doing something.

Unfortunately, this farce isn’t free. It will cost credit unions and their member-owners millions and millions of dollars to comply with and it will deflect the attention of both credit union managers and supervisors from real problems.

And, finally, in the interest of full disclosure, here’s mine:

As a member of All South Federal Credit Union in Columbia, SC, I would respectfully ask the NCUA Board to vote against the risk-based capital proposal it now is considering. The NCUA itself has said it would follow the lead of the FDIC in regulating risk at financial institutions. That agency has rejected risk-based capital standards in favor of a simple, direct tangible equity to tangible asset formula.

I hope the NCUA will follow suit. Credit unions as a whole did not cause the economic crisis we’re now still recovering from, and certainly my credit union didn’t. Instead, it did the same thing it always has: provided good service with good rates and a sound banking option to many people in our community who might otherwise be underserved or unbanked. Please don’t make that job any harder for them.

Whether you’re for the new RBC rule or against it, your comment is your vote. Cast it here.

March 26, 2015

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