Standard Tailored to Credit Unions “Makes Sense for Today and Tomorrow”
BOSTON, Mass. (July 12, 2013) – Calling the agency’s one-size-fits-all capital requirement “outdated and insufficient,” National Credit Union Administration Board Chairman Debbie Matz said NCUA will build a “new risk-based capital framework” tailored to protect the industry and consumers from losses.
Matz spoke to the National Association of Federal Credit Unions annual conference here today. She said the current seven percent leverage capital standard, set by Congress in 1998, “was really just a best guess” at future requirements to protect safety and soundness. The recent financial crisis and industry changes, she asserted, require a modern approach.
“Job one is preventing another crisis,” Matz said. “One of the most important things we need to do to ensure a sound future is to revisit capital requirements. Our challenge is to make sure that, in the future, credit unions that choose to take on higher risks will be required to meet higher capital standards.”
While reaffirming that Basel III is not right for the credit union industry, Matz noted NCUA has a responsibility to ensure the agency’s safety and soundness standards evolve along with credit unions.
“The one-size-fits-all credit union capital regime is outdated and insufficient,” Matz said. “For many, if not most, credit unions, seven percent of assets may still be appropriate. For higher-risk credit unions, it can be a prescription for disaster when the next crisis hits. We need a flexible, forward-looking standard that makes sense for today and tomorrow.
“Seven percent would remain the floor, as required by the Federal Credit Union Act. However, credit unions with assets over $50 million would be subject to improved risk-based capital requirements to better correlate required capital levels to risk. The result would be higher capital levels for credit unions with high concentrations of risky assets.”
Matz used contrasting cases from the housing bust to illustrate her point. Two high-risk credit unions in California held up to nine percent capital during the housing boom, but that proved insufficient when the real estate market collapsed, and NCUA had to liquidate both credit unions. Another federally insured credit union in Nevada, heavily invested in real estate at the same time, survived because it held 13 percent capital.
Matz reminded her audience that credit union failures are not isolated instances, because credit unions pool their risks.
Matz added that this matter is not just an issue for credit union officials and regulators. “This isn’t just about us,” she said. “This is also about public trust. Members depend on their credit unions, and we need to ensure that their confidence will always be well-placed.”
The full text of the Chairman’s speech is available here.
NCUA is the independent federal agency created by
the U.S. Congress to regulate, charter and supervise
federal credit unions. With the backing of the full
faith and credit of the U.S. Government, NCUA
operates and manages the National Credit Union Share
Insurance Fund, insuring the deposits of more than 96
million account holders in all federal credit
unions and the overwhelming majority of
state-chartered credit unions.