Look, generally speaking, I'm an unabashed supporter of the NCUA. I've defended its role to preserve and protect the credit union way. I've energetically defended its mission and purpose as an independent regulator and as the sole federal insurer/custodian of the National Credit Union Share Insurance Fund (NCUSIF), even as others have challenged the dual role. I had the opportunity in 2013 to convey to former FDIC Chair Sheila Bair that credit unions would be lost in the mix at FDIC. Unlike some, I admire the heavily lifting that was done to manage the corporate credit union crisis. I like the people there, many whom I have known for years; I admire and respect their public service. And, in the grand scheme of things, managing a fund just shy of $12 billion dollars against a pool of over $1 trillion in credit union combined assets should cause some careful reflection, especially among mostly conservative credit union management and volunteers.
So why the major dust-up, myself included, over NCUA's risk-based capital proposal and the recently released sequel? Here are six reasons, in my humble opinion, why reasonable credit union management and volunteers are dissatisfied with the process that led us here and what acceding to NCUA's revised proposal might represent.
1. NCUA officials admit that the original proposal was not what they thought was really needed and that they would have to negotiate down. This approach breeds distrust just as the public does not hold used car dealers in high esteem. Once you signal that this is a game, you lose some of your integrity and it's hard to know where the numbers should fall. NCUA should have represented what it really thought was needed and we could have worked transparently from there.
2. In a statement that I find somewhat disrespectful to credit unions, NCUA indicates that the initial proposal was a bit of a blunt-instrument approach that was necessitated to ease complexity. All the calculation could be done using the existing 5300 call reporting; but at what cost to holding capital that could be used to serve members? In an additional bit of dissembling, in a recent NCUA conference call, a questioner revealed that banks' risk-weight rates on investments in subsidiaries at under 10% of capital were at a lower rate than the new proposal for credit union CUSOs. The response again, was that the bank formula for calculation was too complicated and surely credit unions didn't want that option.
3. NCUA is using Treasury and GAO studies and arguments to justify more capital for credit unions. In 1990, I was a budding new member of the NAFCU Board that was presented with information that Treasury insisted to Congress that we write-off our NCUSIF deposits. It was serious enough that CUNA actually agreed to it initially (sorry to open old wounds). NAFCU lobbyist Bill Donovan, however, informed us that Treasury didn't have the lift in Congress to get it done without our consent, and so we opposed it. CUNA wisely reversed its position and after a good public policy debate we retained the NCUSIF. Clearly, if NCUA now chooses to follow Treasury's views without sufficiently defending the differences, there likely will someday be no NCUSIF or NCUA for that matter. This, by the way, is not pandering to the industry; it's understanding the differences.
4. Without getting too technical, NCUA's unwillingness to defend the NCUSIF deposit and treat it as having value is a capitulation that the banking industry and Treasury will be happy to take. If your credit union decides to disband, sell the assets and return the deposits, assuming par or better, you'll have your NCUSIF deposit returned. Granted, in a stressed scenario, NCUA won't hand it over to help with your credit union's recovery, but nonetheless it is the members' capital. Not saying it's an intentional slight-of-hand, but by placing the credit union NCUSIF deposit in both the numerator and the denominator, they're essentially removing any credit for that asset. Even if there were some exit fee in place, shouldn't NCUA at least assign some reasonable risk weight to the NCUSIF deposit in the denominator? NCUA's responsibility is to educate, inform and persuade national policy makers at large that credit unions are indeed different, and our system of mutual accountability has worked well, even through the financial crisis.
5. NCUA should take care in how it interprets statements like "substantially similar to other banking agencies", "equivalent in rigor", "comparable" and "parallel in substance though not necessarily identical in detail." There's a substantive error in even using "other banking agencies"-e.g. NCUA is a credit union agency, not a banking agency. Credit unions are significantly different in structure and purpose with the accompanying strengths and weaknesses. NCUA should recognize and highlight those differences and avoid an amalgamation into bank-think.
6. Speaking with then-Assistant Secretary of the Treasury for Financial Institutions Rick Carnell during the PCA debate in 1997 regarding why credit unions would need 200 basis points in capital beyond that for banks to be well capitalized, he opined that we need it because we couldn't quickly raise capital in the markets the way banks could, and since he didn't like that we accounted for our NCUSIF deposit on our books and it was also part of the NCUSIF. Treasury had a strong hand to play in our securing the votes for HR 1151. Nonetheless, we can and should take issue with the logic. Credit union assets have historically been far less risky than our banking counterparts, so why do we even start at par? At a World Council of CUs meeting in Ottawa two years ago the Deputy Secretary General of Basil told us over a beer that he was hoping to have European banks hold four! And why would regulators be so confident that a bank that is struggling would be able to quickly or easily raise additional capital anyway? As for the accounting treatment of our NCUSIF deposit, see the section above. Just because it is different doesn't make it worse (or necessarily better—but we did handle the financial crisis by recapitalizing our own insurance fund). Premium-based funds like the FDIC's have their own problems when stressed banks are asked to pony up premiums, often in the worst of times.
It's rarely a good idea to oppose your regulator; much less publicly in Congress or in the courts. They have a point about some outlier credit unions that could imperil the NCUSIF if they take too much risk without enough capital. But if they are, in fact, outliers, why not just implement or ask for the tools to deal with these outliers? Burdening the entire industry with a new game of "let's raise capital whether we need it or not" is not the answer. Notably, even if we trust, respect and admire the current leadership at NCUA, the precedent to unilaterally raise capital requirements matters for the future.
Entering my 33rd year in credit union management, I've seen my fair share of challenges and change. We've tackled and survived each. I also believe that a fair and rational system of risk-based capital can work. While I'm sure NCUA (and credit unions) are now frustrated with the process, it remains important work that must be completed well by an engaged and inspired credit union movement in coordination with a responsive NCUA.
Marcus Schaefer is President & CEO of Truliant Federal Credit Union in Winston-Salem, N.C.