​Congress Takes A Step Forward With Real Regulatory Relief

by J. Mark McWatters, NCUA Board Member

The call for regulatory relief from credit union CEOs, board members, and staff is more resolute than ever under the increasing heft of compliance burdens imposed by laws and regulations.

The sheer number of rules aside, one problem credit unions face is the double whammy of substantial capital requirements under prompt corrective action (including a new risk-based regime set to take effect in 2019) and prescriptive rules that raise operational costs for institutions as well as for regulators. Of course, banking institutions share similar problems as a result of the efforts of Congress and regulators to prevent the Great Recession from happening again.

Instead of trying to avoid the last crisis, federal financial regulators' role should be forward-thinking. We must fulfill our statutory mandate of prudent, but fair and accountable regulation. We must also provide well-managed institutions with reasonable flexibility to meet the financial needs of their members and customers. This objective has long been my highest priority. As I stated to the U.S. Senate Banking Committee during my confirmation hearing in March 2014, regulators of necessity focus on the adequacy of risk management. I noted, though, that in addressing these matters:

[R]egulators need to take a step back and apply the law with impartiality and look at the larger picture. They also need to think both tactically and strategically, always considering not just the desired outcome, but potential unintended consequences.

I am convinced that regulators should remain mindful that the root causes of seemingly intractable problems are often embedded not in the esoteric, but in the commonplace. As such, my focus as a regulator will remain straightforward: Don't neglect the fundamentals of capital, liquidity, and transparency.

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Additionally, my experiences in the private and public sectors have taught me valuable lessons on leadership and responsibility, including the importance of: finding common ground, paying attention to the fundamentals, earning trust, and never forgetting that real people are affected by your decisions.

That is why the comprehensive discussion draft developed by House Financial Services Chairman Jeb Hensarling could not be more significant. While the approach on a limited number of issues warrants further review, and leaving aside the complex matter of the too-big-to-fail banks, the draft Financial Choice Act contains nuggets, including repeal of the interchange fee provisions, greater accountability for NCUA, examination improvements, and others.

I cannot touch on all the provisions in the 498-page document. However, a key aspect of the draft is that it addresses the double jeopardy confronting credit unions and other financial institutions due to the combined effects of restrictive rules and prescriptive capital (net worth) requirements. Support for the general approach of simplifying capital requirements while considering meaningful regulatory relief for community institutions may be growing. Recent comments from regulators, such as Federal Reserve Board Chairman Janet Yellen and Federal Reserve Board Governor Daniel Tarullo, though not specific to the Financial Choice Act, support tailored regulation that is commensurate with risk.

Under the Financial Choice Act's approach, institutions that have a 1 or 2 CAMEL rating and maintain a 10 percent net worth ratio would be exempt from capital and liquidity rules, among others. (As currently drafted, the 10 percent net worth ratio appears to include the one-percent Share Insurance Fund deposit maintained on the books of federally insured credit union.) It is my understanding that additional exemptions could be considered. According to NCUA's last quarter 2015 report, net worth for the federally insured credit union system is well over the draft's threshold, at 10.92 percent.

For credit unions, the net worth ratio would continue to be determined by the numerator of retained earnings (low-income-designated credit unions could include supplementary capital) divided by the denominator of total assets. (I support broadening the definition of net worth to allow more credit unions to include supplemental capital.) There would be no separate risk-based capital requirement.

A number of the draft's provisions we can undertake without a change in any law. These include establishing a credit union advisory council and extending the examination cycle for well-managed credit unions. The draft also calls for a hearing on NCUA's budget; Chairman Metsger has already announced a budget briefing will take place in October.

While we are already reviewing our exam process and plan to implement more changes next year to extend the exam cycle, the draft bill would put into statute a requirement that NCUA conduct an extended examination cycle of at least 18 months for certain well-capitalized and well-run credit unions. I strongly urge wide participation from credit union stakeholders in these efforts. In these discussions, credit unions may also be able to convince lawmakers of the need to include other regulatory relief proposals in the package the House Financial Services Committee is expected to consider this fall.

The draft would result in other changes that would affect the Consumer Financial Protection Bureau and would raise the asset level that would subject an institution to CFPB supervision from more than $10 billion to more than $50 billion.

While Chairman Hensarling's draft does not guarantee relief, success of the magnitude credit unions need cannot be achieved without such an important first step. Meanwhile, rest assured, I plan to continue pursuing ways and measures that NCUA Board Chairman Metsger and I can undertake to give credit unions breathing space to deliver the services members expect and deserve.

At the very least, as I have said in the past, I think the NCUA Board should reconsider its final risk-based capital rule and will urge Chairman Metsger to support that effort.