ALEXANDRIA, Va.—Credit unions and trade groups, as well as Board Member Mark McWatters, have challenged NCUA’s legal authority to create a two-tier risk-based capital rule. NCUA Chairman Debbie Matz readdressed that issue Thursday.
“The banking agencies maintain a two-tier risk-based structure, with a 10% tier to be well capitalized and a lower tier to be adequately capitalized,” said Matz. “There are those who continue to claim that NCUA only has authority to design a single risk-based requirement to be adequately capitalized — without the higher tier to be well capitalized.”
Saying the issue is fundamental to the risk-based capital framework, Matz reminded that the agency requested an independent legal opinion from an outside counsel to analyze NCUA’s authority.
“I personally solicited 11 law firms that specialize in financial services statutes and regulations,” said Matz. “I ultimately chose the practice of Paul Hastings in Washington.”
Matz: Legal Opinion Favors NCUA
Matz said that if the opinion found that NCUA did not have legal authority to propose a risk-based threshold to be well capitalized, the agency would have re-proposed the rule.
“However, the Paul Hastings opinion stated that the statute ‘does not prevent NCUA from imposing higher requirements on well capitalized credit unions to provide greater protection against risks. Thus the opinion determined that NCUA’s proposed rule would withstand a court challenge,” said Matz, noting that Paul Hastings said other lawyers may present conflicting interpretations of the statute.
Among those lawyers is NCUA Board Member Mark McWatters, who has repeatedly stated he believes the Paul Hastings’ opinion letter does not provide the legal underpinnings that Matz has suggested it does. McWatters has said it is his opinion NCUA lacks authority to issue a two-tier RBC rule. A complete copy of McWatters’ analysis can be found here.
Matz, however, stated during the meeting that the ambiguity of that opinion letter provides NCUA with the authority to move forward.
“Therefore Paul Hastings noted that this demonstrates the statute is ‘ambiguous with respect to the statutory authority of the NCUA to implement a two-tier risk-based net worth requirement for complex credit unions, as the language can be interpreted in multiple ways,’” continued Matz.
“And wherever the statute is ambiguous, Paul Hastings concluded that the agency’s rules ‘will be given controlling weight unless they are arbitrary, capricious, or manifestly contrary to the statute’ . . . So we are finalizing this rule on solid legal ground.”
Some within credit unions have suggested that a legal challenge to the rule will only come after the agency has finalized the rule, which it has now done.
Opponents 'Misinterpreting' FCU Act
Before the RBC vote, NCUA’s Office of General Counsel addressed claims made about the FCU Act only providing legal authority for the agency to set a single risk-based threshold for “adequately capitalized.”
MCUA's Lara Rodriguez noted many of the opponents of the proposal misinterpreted the FCU Act to argue that Congress’ use of the term “adequately capitalized” limits NCUA’s authority. The “plain language” of section 216(d) does not support that interpretation, she said.
“Section 216(d)(2) requires that the board ‘design the risk-based net worth requirement to take account of any material risks against which the net worth ratio required for an insured credit union to be adequately capitalized may not provide adequate protection.’ This simply identifies the types of risks that NCUA’s risk-based net worth requirement should address: specifically, any material risks not already addressed by the statutory 6% net worth ratio requirement to be adequately capitalized,” she said.
Rodriguez said Congressional intent is clear on NCUA’s authority to proceed as it has, and that NCUA’s legal authority to issue a risk-based net worth requirement on both well capitalized and adequately capitalized credit unions is further supported by the other banking agencies’ PCA statute and regulations.
Rodriguez also said that despite Congress’ use of the singular noun “requirement” in section 38 of the FDIC Act, the other banking agencies’ PCA regulations, which went into effect before Congress passed the Credit Union Membership Access Act, have long required that their regulated institutions meet different risk-based capital ratio levels to be classified as well capitalized, adequately capitalized, undercapitalized, or significantly undercapitalized.