As Prepared for Delivery on December 16, 2021
Since the founding of the credit union movement in this nation, I have been told that many credit unions, especially during the early part of the movement, were started with limited to no capital. While the credit union system has certainly advanced since the founding of this movement up until today, this is important to keep in mind as we discuss risk-based capital and the Complex Credit Union Leverage Ratio. The framing of the issue today is really about capital adequacy and if credit unions have shown through history, they have sufficient capital to serve members while facing various risks.
I do have some questions at this point:
- Would RBC have changed the outcome of the crisis with the corporate credit unions?
- With the taxi medallion losses, primarily caused by concentration risk, the National Credit Union Share Insurance Fund was able to absorb those losses, correct?
- So, let me be clear, would RBC have changed the outcome during the taxi medallion crisis?
I will readily acknowledge the Federal Credit Union Act requires the NCUA to maintain a system of prompt corrective action for federally insured credit unions that is based on an institution’s level of capital, that is, its net worth. Those levels are set in the act. The act also requires us to maintain a risk-based net worth requirement for those institutions that are deemed to be complex credit unions. We have that now with a risk-based net worth requirement.
The law gives this Board serious responsibilities, which we must faithfully uphold. But this does not mean that since the bank regulators established a risk-based capital regime, we must follow them. I worry that once we decree that 7 percent may no longer be adequately capitalized, then whether this Board or future Boards settle on 8, 9, or 10 percent net worth in the Complex Credit Union Leverage Ratio, as some say in North Carolina, the barn door is now open to that change. I worry that we have set an arbitrary standard above the law that a future board can change at any time.
Before 1998, there were no legal standards for a net worth ratio to be well capitalized. In 1998, the law raised well capitalized to 7 percent. The law instructed us to set a risk-based net worth requirement based on the portfolios and liabilities of credit unions for any material risks where adequately capitalized may not provide adequate protection. While it could be improved, we have that standard today with our risk-based net worth. That standard will be replaced by the RBC rule. The RBC rule is very complex and burdensome. And that is why we have a CCULR rule, which will be an offramp to RBC, so long as credit unions with $500 million or more in assets hold 9 percent or more in net worth and meet some other qualifying criteria. The RBC rule is so tragic that, yes, it needs an off-ramp.
While you will have individual instances of issues around risk-based capital on credit unions balance sheets, in my view, that is why you have examinations. We shouldn’t dictate that 9 percent or higher net worth is needed for complex credit unions over $500 million if they choose to opt out of RBC with CCULR. One way to think of requiring credit unions to hold more capital than is required by law is to consider it a regulatory tax. And whatever figure is set by RBC or CCULR, credit unions will generally want to have a cushion, so really, it’s going to be above the level set by Risk Based Capital or by the CCULR today. Credit unions are far less risky than banks by their nature and the more capital we put on the sideline, the less money credit unions can deploy for things we want them to do, like embracing fintech or DEI.
I would be derelict and feckless in my responsibilities if I did not support a risk-based net worth requirement for complex credit unions “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.” That, indeed, is what the law requires. But I do not agree with the premise that the current capital regime has proven inadequate nor that we should throw out the current risk-based net worth regime for risk-based capital.
In 2019, as then-Chairman, I worked with the NCUA Board to delay the risk-based capital rule for two years to holistically evaluate the NCUA's capital standards to insure they would serve as well in the future. This also was an opportunity to further study the impact of the risk-based capital rule. During that time, staff said there were three main additional considerations that were warranted: subordinated debt, the complex credit union leverage ratio, which we're now calling CCULR, and securitization.
While work remains to be done with securitization, we made profound progress in terms of the agency's view of capital compared to where we were in 2019. However, Mr. Chairman, my stance today remains the same as it did when the proposed rule was before the Board, so I contend that after serious study and consideration, my preference is to consider repealing the risk-based capital rule outright and fine tuning our existing risk-based net worth rule.
At this point, I have some questions:
- How many credit unions over the last five years would be covered by today’s RBC rule?
- Of these, how many credit union failures were there in the same time frame?
- And how much more protection would this have saved the Share Insurance Fund over the last five years?
Thank you. As I said during the proposed rule, the reality is risk-based capital should be a tool and not a rule and if it is effective in identifying risk, put it in the examiners toolbox, but the last thing I think the NCUA should do is impose it on credit unions as an operating model. The juice just isn't worth the squeeze for risk-based capital because this is a regulatory burden with, what I believe, is a limited benefit.
But I still just must say, I think risk is something that you manage every day. It's not a formula that you can run on your balance sheet.
I do have a few questions at this point:
- What are the largest five losses to the Share Insurance Fund over the last 10 years and what were these losses in specific?
- If the RBC rule was in effect, what would the losses have been?
- Were the events of these losses caused by internal or external events?
- How do we explain the fact that many credit unions, all of whom exceed the 7 percent well-capitalized level and many of them even have higher levels when they seem to be losing members and loans, and yet they can still meet our criteria for safe and sound?
- What is missing in the RBC model for these credit unions for managing this risk?
- For my last question, can we assume RBC will prevent a credit union failure?
While RBC may require higher net worth ratios at so-called complex credit unions over $500 million based on how we risk-weigh their activities, we cannot assume that RBC would prevent a credit union failure and we cannot assume since risk itself evolves that the risk weights are fixed and set for all of time.
If anything, RBC creates a moral hazard because we, as regulators, are weighting risk. We are simply giving a stamp of approval on the weights of risk, but we should recognize that since risk evolves, it's not stagnant. Risks will never be captured by formula to manage a balance sheet.
In closing, while I do not support the risk-based capital rule at this time, I'm also mindful that it is December 2021 and this date is relevant because the RBC rule goes into effect in January 2022, as it stands now. The final rule today does provide an off-ramp to RBC with the credit union leverage ratio, CCULR, which is indeed a small step, I think, in the right direction. Credit unions that are subject to RBC will be required to have a 10 percent RBC ratio to be well capitalized. The rule before us today allows credit unions who are eligible to opt into the CCULR framework with a 9-percent net worth ratio and would not be required to calculate RBC ratios. CCULR is a simple ratio that doesn’t have all the burdens and calculations required under RBC.
While I would have preferred the CCULR be set at 8 percent for the net worth requirement, especially when considering the CCULR analog for banks was 8 percent in 2020, 8.5 percent this year before finalizing their transition back to a 9 percent in 2022, setting CCULR at 8 percent is as just as arbitrary as setting it at 9 percent. However, the 9 percent net worth requirement that remains for CCULR is better than 10 percent net worth requirement required under the proposal and the regulatory burden RBC imposes on credit unions.
Because of the aforementioned factors, Mr. Chairman, I will begrudgingly vote for today's proposal. I think this Board, however, must monitor the outcome to see if this rule is really needed in the months and years ahead.