NCUA isn’t doing enough to ensure credit unions survive coronavrius
Now more than ever, credit unions need the ability to put more resources toward doing what they do best: serving their 120 million members. As the coronavirus pandemic’s negative drag on the nation’s economy and businesses becomes more evident, it is critical that regulators take immediate action to ensure credit unions receive capital relief and reduce the examination burden.
Credit unions, as the financial services “good guys,” have a history of stepping in to help their members no matter the conditions and springing into action whenever necessary. Even before regulators and government agencies called for financial institutions to work with consumers as the coronavirus seeped into the news cycle, credit unions across the country began offering skip-a-pay programs, fee waivers, low-interest lending options and more. But credit unions are not-for-profit cooperatives that operate like a small business; the capacity at which they operate is at times contingent on the conditions around them. Meaning, a pandemic that is shaping up to be one of the worst we have seen in over a century and that is shaking the stock market to its core will undoubtedly present challenges to even the largest of institutions. Every tool we have in the toolbox must be used to help credit unions blunt the impact of the recession we’re beginning to enter. There is certainly no "Plan B" to rely on.
To date, we have seen some efforts from regulators to protect consumers and provide relief for financial institutions. The National Credit Union Administration, for instance, has announced that credit unions will now be able to hold their annual meetings virtually, which they’ve never been allowed to do in the past, along with a few other efforts.
These amendments certainly will help our industry navigate uncertain times while making sure American consumers are not penalized if they miss payments. However, we cannot overlook the very real capacity issues that have befallen credit unions everywhere. With the coronavirus impacting every state, some credit union staff members may be sick or unable to work, while other employees are devoted to examination prep. As the nation’s economy tightens its belt and more and more Americans go to their local credit union for help, is it not clear that we are facing a ticking time bomb?
Why capital relief matters
The latest iteration of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) affords community banks additional relief by reducing the community bank leverage ratio (CBLR) from 9% to 8%. Community banks that use the CBLR framework and maintain this new leverage ratio would be considered to have satisfied the risk-based and leverage capital requirements in the banking agencies’ generally applicable capital rule. The NCUA board has indicated that it intends propose a CBLR analog for credit unions that would be used to satisfy new risk-based capital requirements, which will go into effect in 2022. While a future rulemaking is much appreciated, immediate action is necessary to help credit unions assist members and businesses during the critical months ahead. Waiting to act could only forestall enhanced lending activity that is necessary to bring the economy out of a recession as quickly as possible.
Credit unions must gain additional capital flexibility now to address this economic crisis head-on. Banks are already benefitting from significant regulatory relief measures. For example, the Federal Reserve recently announced changes to its regulations that would temporarily reduce banks’ capital requirements and increase leverage-exposure capacity at holding companies by an estimated $1.6 trillion. Credit unions need the NCUA to provide parity by way of formalized regulation to ease leverage and liquidity requirements for CUs considering the extent of this outbreak, as the current crisis may lead to a temporary deterioration in net worth ratios at some shopss.
Credit unions, which have a history of making financially sound decisions, are uniquely positioned to provide safe harbor to their members at this time, but they should not be weighed down by outdated capital rules that are not suited for lifting the economy out of an economic crisis.
The benefits of examination relief
Does it make sense to test the fire alarms every day only to miss the growing leak in the kitchen sink?
Credit unions are hunkering down with limited resources and reduced staff, and they are already signaling that they’re having a tough time helping all their members due to the amount of time it takes for them to deal with examinations. It is certain that more challenges lay ahead for the industry the longer this pandemic impacts our nation’s ability to operate normally. That’s why there is no better time than right now for the NCUA to reduce operational stress on credit unions so that they can prioritize helping their members.
Providing a moratorium from examinations would alleviate administrative pressure. Giving credit unions the space to direct resources toward helping members with various requests, including securing emergency credit and modifying or deferring payments. While NCUA has indicated some flexibility with exams, we do not think it goes far enough.
The outcome of tomorrow will be decided by what we do today
The NCUA recently extended the comment period for the proposed combined transactions rule by 60 days, and also announced that it will not direct supervised institutions to automatically categorize loan modifications as troubled debt restructurings (TDRs). While these modifications are welcome, more must be done to solve the technical issues credit unions face that create additional operational hurdles. Credit unions need long-term guidance on TDRs, along with a clear statement from the NCUA regarding how it will handle a disruptive transition to the current expected credit loss (CECL) standard. Notwithstanding the standard’s delay to 2023, the NCUA has yet to address the impacts CECL will have on credit unions in the future. This uncertainty could have a near-term effect on lending activity today if credit unions seek to preserve earnings and capital to weather CECL’s future impact on net worth. It's inevitable – the coronavirus will leave a long road to recovery, which could carry in to 2023. We have entered unchartered territory and short-term fixes may not be enough to uphold the credit unions who are already grappling with these concerns today.
Credit unions must have access to all options that could promote liquidity at this time, and dedicating resources to implementing CECL will not only affect institutions but their members. We hope to never see the day a credit union, a champion for its members, is forced to choose between providing loan options for a member or pushing resources towards implementing a burdensome standard.
This is the tip of the iceberg for relief options NCUA could consider, but capital and examination relief must be top priorities – and now. While we may not know what exactly awaits us, we do know that we will be impeding recovery efforts long-term and doing a disservice to more than 120 million credit union members if we do not relax the strain currently on credit union resources. What we do now will have direct effects on how long economic recovery will take.
Credit unions have worked hard to keep serving their members the best they can – in good times and bad. The outbreak is already testing their bandwidth, as CUs work to ensure the safety and soundness of their institutions and members. Knowing we have a long road ahead, we must look to capital and examination relief if we expect to help credit unions and their staff from facing untenable circumstances.
There is no time like the present.