NEWPORT BEACH, Calif.—The National Association of Credit Union Service Organizations has told NCUA that it remains concerned with the “overall regulatory approach” being taken by the agency with its revised risk-based capital proposal.
In a comment letter to NCUA, NACUSO acknowledged improvements in the risk weights from the original RBC proposal, but said its view is that the process of making changes in rules is “somewhat arbitrary and, in our view, not based in fact.”
“We understand that NCUA, as administrator of the National Credit Union Share Insurance Fund (NCUSIF), would desire credit unions to retain as much capital as possible,” NACUSO said. “NACUSO likewise recognizes the need for credit union capital sufficient to offset institutional risk; however, in our view it is just as important to the long-term viability of the NCUSIF for credit unions to be as successful as possible in generating income through growth. In order to grow, credit unions need to free up capital and put it to strategic use. NCUA seems to have ignored the latter point in its approach to RBC. The regulatory process appears to have taken the form of a negotiation where NCUA's first bid was purposefully high with the expectation that through the rulemaking and official comment process the actual numbers would be where NCUA really wants them in a final regulation. This is not a reasonable approach to regulation in general, and certainly not regulation as far reaching as risk based capital.”
NACUSO wrote that NCUA’s “perplexing regulatory approach” lacks any “substantive presentation of industry study and quantitative analysis used to support this proposal.” The group said NCUA continues to avoid presenting actual quantitative justifications through empirical data and instead is simply negotiating the numerical risk weights upwards or downwards “in hopes of hitting some ‘happy median’ without clear industry performance data as justification.”
“In our view, this FDIC-based justification for the RBC rule overemphasizes the need for the regulation to be comparable to the other banking agency regulations,” NACUSO wrote. “Comparability is commendable where there are true comparability of institutions; however, we feel NCUA is missing an opportunity to take a unique approach to the risk based capital regulation of member owned credit unions and to emphasize that credit unions may be financial institutions but they are not banks. In fact, the fundamental structure – both in law and in reality – of credit unions as not-for- profit financial cooperatives is not comparable with the for profit banking system. Member owned credit unions generally have a different risk model than the profit oriented banks, so if anything credit unions should have lower risk based capital requirements than banks.”
Among NACUSO’s specific areas of concern:
- The counter-productive risk weight assigned to unconsolidated investments in credit union service organizations. “As we have stated in the past, CUSOs have been used effectively by credit unions for decades to reduce costs and generate income. Yet, NCUA continues to present anecdotal and unsubstantiated references to what it considers ‘substantial CUSO losses’ over the last decade as justification for over-burdensome CUSO regulations and now an overzealous risk weight to CUSO investments.”
- NACUSO said it is imploring NCUA to investigate the industry benefits of CUSOs and the relatively immaterial level of CUSO investment impact on the NCUSIF before it finalizes the current proposed risk weights for CUSO investments into a final RBC rule.
- The 150% risk weight assigned to unconsolidated CUSO investments is “arbitrary.” “On the one hand, NCUA justifies the risk assessment by noting its lack of enforcement authority over third-party vendors and, on the other hand, cites the historic losses to the NCUSIF supposedly related to CUSOs,” NACUSO said. “It would seem the agency cannot have it both ways. Either NCUA has the authority to gather sufficient data about CUSOs through the credit unions it regulates and insures or it does not. If it lacks the ability to gather such data, it would seem disingenuous to quote the amount of supposed substantial losses from CUSOs. If it has such data available, it would certainly bring into question the need for recent regulation to directly regulate and de facto examine CUSOs in order to gain such information.”
- NACUSO said it fails to see why third-party vendor authority is relevant to risk-based capital regulations. “We cannot find any references in the proposal that would account for the alleged risk posed by non-CUSO third-party vendors. Only CUSOs are singled out for their supposed risk. Surely, this is not justification for the risk weight assigned to a CUSO investment.”
The full comment letter can be found here, and in CUToday.info’s The Vault.