By Ray Birch
ALEXANDRIA, Va.—Before year-end credit unions can expect to see significant structural changes in NCUA’s risk-based capital proposal, including possibly removing portions related to interest rate risk and including that in a separate proposal.
The proposal has been a hot-button issue for credit unions and their trade groups, and has been the subject of objections, misunderstandings and congressional inquiries. After initially stating she expected significant changes to the rule but not so many that it would change the rule’s intent and therefore force another round of comment, NCUA Chairman Debbie Matz said she has now agreed to the additional comment period in order to be in compliance with the federal Administrative Procedure Act.
Below, Matz talks to CUToday.info about the road the agency has traveled to get to the new proposal, risk-weights, the 10.5% threshold for being well-capitalized, examiner authority to set minimum capital requirements, what might lie ahead, and more.
CUToday.info: You have agreed to a new comment period for the new proposal, after there have been reports that you were opposed to doing so?
Debbie Matz: Thinking I have been opposed to a new comment period is a misconception. I have not changed my mind. I have not, quote, ‘bowed’ to pressure. I have not backtracked. I have been consistent in saying we will make significant changes and would study these changes carefully to make sure we do not violate the Administrative Procedure Act. I have been very open about this and I hope people see that it has been my intent to be open about this. I was never intending to push the envelope and I wanted us always to be well within the parameters of the APA. When it became apparent that was not the case, we said we need to reissue this proposal.
And to be clear, this is not a second comment period. This is a new comment period on a new proposed rule.
CUToday.info: Was this decision driven in any way by the presence of two relatively new board members?
Matz: People may think I was lobbied by my fellow board members, but that is not the case at all. In fact Board Member (Rick) Metsger has been on record saying that he shares the sentiment that if we push up against the APA we would need to put a new proposal out for comment. In a nutshell, that is what it was all about—we did not want to even come close to violating the APA.
CUToday.info: You addressed putting out a new proposal due to significant changes and wanting to stay well within APA guidelines. But how much is a new proposal and new comment period aimed at getting an improved rule CUs will approve?
Matz: I don’t think a regulator should just continue to put out a rule for comment. That would set a bad precedent. Our goal is not to gain consensus. As a regulator, as chairman of this agency, I know we will never get consensus—and again, that is not our goal. Our goal is to be a good regulator that is addressing a problem in a fair way, preserving the safety and soundness of the credit union system.
CUToday.info: Have you been feeling pressure from Congress on this issue?
Matz: We have gotten very good feedback from the Hill, and I had many one-to-one meetings with individual members of Congress with very good dialog. When I explained the proposed rule and explained what we were doing and the rationale, we always received good feedback.
Consistently Congress has supported the concept for risk-based capital. They just wanted to make sure we were getting the metrics right and had a fair implementation period, and we are addressing those issues.
CUToday.info: What do you consider to be the most significant revision in the new RBC proposal?
Matz: There are a lot of revisions, so it is hard to really say what is most significant. One thing we heard loud and clear is that monitoring interest rate risk should be done through supervision. While nothing yet is concrete—and I am speaking on the assumption the board ultimately agrees to this—we would take interest rate risk out of the proposal, put out another rule on interest rate risk as well as guidance on it, and manage interest rate risk through supervision rather than through the RBC rule.
CUToday.info: What will be the lengths of the new comment period and implementation period?
Matz: I can’t discuss either, as those decisions are up to the board and we have not had a briefing on those matters as yet. I can say the implementation period will be sufficiently long, because credit unions need more time and NCUA needs more time. We need to revise our Call Reports—and based on credit union comments and on revisions to the proposal we will need time to do that.
CUToday.info: The risk weights appeared to take the brunt of CU comments with the initial proposal. The agency has stated it will make significant changes to those weights. Therefore, in the next comment period, will the 10.5% requirement to be well capitalized become a focus for the movement?
Matz: It is hard to speculate. The only thing I can say is we feel very comfortable in the way we have fashioned the rule, where there is a distinction between adequately capitalized and well capitalized. Whether we bring the 10.5% down somewhat . . . we are still discussing that.
CUToday.info: Do you still believe many credit unions, and the trade associations, do not fully understand the impact of the proposal, and in fact have overestimated certain aspects?
Matz: There has been a tremendous amount of misinformation about this proposal. What has particularly disappointed me is even after the agency has attempted to set the record straight, that misinformation continues to be disseminated. That is unfortunate. That misinformation has created a great deal of angst in the credit union community.
As we have stated, the $7-billion estimate (in loss of capital cushion shared by CUNA and NAFCU) far exceeds our estimate of less than $700 million in capital that would need to be raised from credit unions under the original proposal. We estimated that about 200 credit unions would be adversely impacted by the first proposed rule, a relatively small number.
CUToday.info: One of the biggest CU concerns was the rule giving examiners arbitrary power to set capital standards. I know you said this was never the intent of the original proposal—can we assume the language in this next proposal will make it clear examiners will not have such power?
Matz: They will not. The ability to set the individual minimum capital requirements is actually in the current rule, not the proposed rule, and it is set by the board. It has never been used. We intend to put on new procedural safeguards to further protect credit unions—and we will make it abundantly clear in the revised rule that only the NCUA board may set this revised capital level.
CUToday.info: Agro and taxi medallion CUs were very concerned with risk weights in the first proposal, some saying the rule would make it difficult to serve members. You said it was never NCUA’s intent to put CUs out of business. I assume this next proposal will have adjustments that possibly allow these types of credit unions to continue doing business as they are today?
Matz: Correct. One of the most important things the comment period has helped us with is pointing out some of the credit unions, chartered for the purpose of doing business loans, would have been very adversely impacted by the rule. Once we realized that we knew we had to make changes.
CUToday.info: Do you think the agency will get more than 2,000 comment letters again?
Matz: There is no way to know. But as many as we get, we will read them all.