Over the last several years, financial institutions have continued a slow climb from a deep economic downturn with mixed expectations for recovery.
However, the credit union system, regulators and industry have a valuable opportunity to realign our regulatory framework in a way that supports and enhances the movement into the future. Such realignment will not be easy, as these are difficult times for both CUs and their regulators.
In addition to managing unpredictable economic conditions, credit unions now face a regulatory landscape saturated with new regulations. In just the past two years, we have seen a flurry of regulatory activity including the Dodd-Frank Act, three corporate credit union rulemakings, the Secure and Fair Enforcement for Mortgage Licensing Act (S.A.F.E. Act), changes to Regulation Z, interchange rules overdraft rules, interest rate risk proposals, proposed CUSO rules, and many more.
It is probable that many view these new rules simply as burdens. However, they were not promulgated for the purpose of burdening credit unions. Rather, these rules were promulgated in response to poor practices and even malfeasance by some that exposed gaps in regulation.
Regardless of one's view of the wisdom or burden of a new rule, you cannot dispute that within the broad financial services industry, things went wrong with near disastrous repercussions within the past five years.
This brings us to the burden borne by regulators. Regulators have the unenviable task of ensuring a safe and sound system through vigorous supervision. Not only in the aftermath of economic turmoil, but also during good times, regulators are tasked with divining unsafe and unsound practices and curtailing them. Against this mandate, regulators must also balance the need to provide the industry with a viable operating environment.
What Corporate Situation Has Taught
Though NASCUS and state regulators have long said that you should not "regulate to the lowest common denominator," to some degree this is what is happening post-crisis. And at this point, it is uncertain whether layering on regulation is the most effective way to mitigate material risks to the credit union system.
For instance, let's look at the corporate credit union system. Although not discussed that often, there were corporates (while operating under the less restrictive and now former corporate credit union rules) that remained safe and sound and provided operation-critical services during the economic crisis. This raises the question, is saddling new regulations productive from a regulatory and operational viewpoint?
Herein lays our grand problem. There will always be institutions that operate soundly. There will also be those that -when presented with flexible regulations-will push the envelope in an unsafe and unsound fashion. If you don't regulate to the lowest common denominator, if you don't carefully and specifically prescribe all activities, how do you control those outliers from a regulatory perspective? There is only one way: regulatory discretion.
In that case, our challenge is: How do we refine our regulatory approach going forward that allows regulators the discretion to enforce broad flexible rules, while providing credit unions the comforts of both understanding expectations and protection against regulatory whim?
One of the ways NASCUS has tried to bridge that gap is by our structure, which thrives on robust, candid-and most importantly-meaningful discussion between the regulator and regulated. In working together to address a regulatory concern, regulator and industry must first understand the issues presented. From a regulatory perspective, it makes little sense to start by presuming something is bad. That isn't always the case. rom industry's perspective, it makes little sense to start from a perspective of "don't issue a regulation," as sometimes regulators have been directed by Congress to do so. So, how do we take a mandate or directive and fit it into the credit union system in a way that makes sense? By having meaningful and candid discussion and dialogue.
'We Must Reboot'
That is how NASCUS and state regulators approach these issues, and I believe that is how we must reboot the regulatory relationship for the system to survive into the future. The regulators and the regulated need a "regulatory reset" going forward. It will be increasingly difficult for credit unions to thrive if we continue to regulate to the lowest common denominator without recognition of the increasing regulatory burden and impracticality of excess regulation.
NASCUS and state regulators look forward to discussing a regulatory approach that provides flexibility, yet allows regulators to take appropriate action when necessary. For those of you that are part of our dialogue as NASCUS members, we thank you. For those of you that are not, we welcome your input in how to reset our regulatory approach into the future. We are all, regulator and regulated, in this together.
Mary Martha Fortney is president and CEO of NASCUS. She can be reached at email@example.com.