As Prepared for Delivery on December 16, 2021
Thank you, Mr. Chairman. Thank you, Tom, Rachel, and the rest of the staff who worked so hard on this rule.
I think we can all agree that more capital is good thing. In my confirmation hearing I called capital the holy grail and I meant it. But capital levels must be appropriate. Excess capital in a credit union comes at the expense of services, dividends, and fees to member-owners — people whose hard-earned money already funds this agency and the share insurance fund itself. As member-owners, they are part of the credit union system. I am mindful that our actions directly affect their access to financial services.
Our first duty is the safety and soundness of the Share Insurance Fund, but it must be balanced with the needs of credit unions and their 128 million members. It’s no secret I’m not a huge fan of risk-based capital, even though I’m obviously aware some assets will be riskier than others. The issue with the RBC regime is the way it is derived:
- It is political process, by definition, with political appointees from various countries advocating for whatever risk-weightings most advantage that country’s institutions
- Risk weights appropriate for one institution may not be suitable for others
- It forces capital decisions today based on risk weights that may not be appropriate for the future
- It often doesn’t work and even produces the opposite effect we want, such as in the European Debt Crisis when banks were incentivized to hold the very bonds that were the kryptonite that caused the crisis in the first place, and banks were incentivized not to hold less-risky assets that would have lessened the damage of the crisis
Having said all that, I’ll confess that I don’t have an easy solution to offer, except to say that some level of capital, computed in a simple manner, should be enough to allow a credit union to bypass the hazards inherent risk-based capital. One of my first requests as a board member was for the agency to do what our colleagues at the FDIC did and create an alternative to RBC. Today we have before us the Complex Credit Union Leverage Ratio, (CCULR) which is intended to provide a meaningful RBC alternative for well-capitalized, complex credit unions. I am sincerely grateful to the E&I and OGC members who contributed to this effort, including Tom Fay and the capital markets team as this was a very difficult process – and I know that I didn’t make it any easier.
Although the final CCULR isn’t exactly what I had envisioned, it does offer a choice. As of September 30, 2021, 71 percent of credit unions subject to RBC have a net worth ratio greater than 9 percent and would be eligible (notwithstanding other eligibility requirements) to opt into the CCULR framework.
I share the concern of some that the creation of this new CCULR number will ultimately force credit unions to hold more capital than needed. Although the definition of well capitalized is 7 percent, the average credit union has a cushion of roughly 3 percent. As of the third quarter 2021, the aggregate net worth of the credit union system came in at 10.23 percent. I believe we will see a similar scenario play out with CCULR. Although I see 9 percent right here in black and white, in practice will that mean 11, 12, 13 percent?
Although we got CCULR finished this year, we have a duty to understand the cost of implementing Risk Based Capital and CCULR against the benefits to the credit union system. The NCUA Board intends to monitor the impact of CCULR and RBC on credit unions and the Share Insurance Fund going forward. I look forward to working with my fellow board members in 2022 and 2023 on a quantitative analysis of the cost and benefits of our current approach to RBC and CCULR.
Thank you, Mr. Chairman. I have a few questions.
Question: With this final rule, how does the CCULR differ from the bank CBLR?
Question: How has the treatment of goodwill changed in this final rule versus the proposed rule?
Question: Of credit unions that are affected by RBC & CCULR, about what portion will no longer use 7 percent as their most important capital standard?
Question: Tom, NCUA data for the third quarter shows that credit unions currently average 10.2 percent net worth, which is about a 3-percent buffer over the current 7-percent standard. Does it make sense that credit unions will continue to have a similar buffer of, say, 3 percent?
Thank you, Mr. Chairman. That concludes my remarks.