Of the innumerable regulatory items (passed or pending) that have been causing headaches for credit unions, perhaps none raises more concern than NCUA's proposed risk-based capital rule.
It's a "far-reaching regulatory issue," said Dennis Dollar, an Alabama-based consultant and former NCUA chairman.
And that issue will be on the agenda of the regulator's monthly board meeting Jan. 15 when the credit union community will get its first look at the revised rule, almost a year after NCUA first proposed the controversial regulation.
The revised rule will be followed by a 90-day comment period.
Credit union experts and insiders expect the new proposal will include a longer period of implementation and revised risk weights for mortgages, investments, member business loans, credit union service organizations (CUSOs) and corporate credit unions.
CUNA President and CEO Jim Nussle thanked NCUA for slating the RBC discussion for the January meeting.
"CUNA will review and carefully evaluate the second risk-based capital proposal from the NCUA at the agency's Jan. 15 board meeting," Nussle said in a statement. "We remain deeply concerned regarding several aspects of the original risk-based capital proposal.
"We know some of the concerns we raised in our comment letter are being considered in the second proposal, including, but not limited to: the 10.5% requirement to be well capitalized, risk weights, ensuring a second comment period and the allotted time for the implementation period."
NAFCU said it is also concerned about the revised rule.
"NAFCU urges NCUA to give significant weight to the input it receives from credit unions on this second RBC proposal," said NAFCU SVP and General Counsel Carrie Hunt in a statement. "The 2,000 comments it received on last year's version are evidence that credit unions have serious concerns about NCUA's approach to revising the industry's capital requirements. NAFCU will continue to do whatever it takes to ensure that a fair, risk-based system is established for credit unions."
Late last year, NAFCU President and CEO Dan Berger wrote NCUA Chairman Debbie Matz a letter urging that capital reform include access to supplemental capital for all credit unions.
NAFCU supports a risk-based capital system that reflects lower capital requirements for lower-risk credit unions and higher capital requirements for higher-risk credit unions, according to Berger.
However, he said the trade group is still pushing Congress to make changes to the Federal Credit Union Act "to achieve a fair system."
Basel Accords for Credit Unions
Dollar noted that any RBC regulation implemented by NCUA would be the credit union community equivalent of the international Basel accords for commercial banks.
"These capital standards — both Basel and NCUA's RBC proposal — speak to the fundamental issue of the amount of reserves that must be retained and maintained based upon the structure of the financial institution's balance sheet," said Dollar. "Naturally, however much capital is required by regulation to be retained by any financial institution, that amount of capital is not available for investment in new products, services, branches, technology and other strategic needs."
Consequently, the higher the capital required to be retained and maintained, the greater the amount of earnings a financial institution must have before they can meet those higher standards and still have additional dollars to invest in their strategic growth goals.
RBC for credit unions — like Basel for banks — is designed to ensure the capital required matches up with the risk on the balance sheet. "However, if it is not balanced and weighted in the right way with appropriate thresholds, it could stymie the ability of credit unions to use their capital in a smart and managed way to foster necessary growth and to become even financially stronger," Dollar noted.
David Clendaniel, president and CEO of Dover Federal Credit Union, warned in testimony in front of the U.S House of Representatives last year that NCUA's RBC rule would make it more difficult for some credit unions to make loans to borrowers.
Indeed, Dollar added, statistics over the past decade clearly showed that prosperous credit unions are producing better numbers because of the economies of scale that such growth has provided them with, while their investment in member service equates to strong returns on that investment.
"RBC is good policy since matching the retention of reserves to the risk on the balance sheet is smart — and even necessary — from a regulatory perspective, but to make it work effectively the key is to balance those regulatory capital-retention requirements with the ability of a credit union to invest in continued and necessary growth from a strategic perspective," Dollar said.
But, the devil is in the details — and, in this case, the specifics needed some work.
To the agency's credit, Dollar conceded, it appears that NCUA is listening to the 2,100-plus commenters and considering some significant improvements in the proposed rule.
"If they adjust a number of the risk-weights and should they elect to lower the unnecessarily high threshold to be well-capitalized down to a more balanced range of 9%, this could produce a good system for both the credit unions and the regulator," he said. "Higher RBC standards can be healthy if they do not unnecessarily restrict the ability of credit unions to grow and invest in member service."
--Marian Raab contributed to this article.