As Prepared for Delivery on July 21, 2022
My views on this topic have evolved since this rule first came before the Board in February as a proposed rule. My views have evolved in part because of comment letters we received in addition to other external engagement that I had with the industry and other individuals where this issue was subject to conversation. So, to the public listening today, your comments matter and they do indeed inform my views.
We are here today because large credit unions experienced significant share growth due to the pandemic, outpacing the Office of National Exam Supervision’s ability to supervise all natural person credit unions over $10 billion in assets with its current authorized staffing levels. In reality, the advantage of raising the threshold for credit unions transferring into ONES is the ability of the regions to provide insight and supervision to credit unions and use the incredible depth of talent in the regions to supervise these larger credit unions. It also gives the regions a voice and view into the data program ONES has created. The regions have talent to bring to the table and raising the threshold helps accomplish this. Scott, do we have your commitment that ONES will bring the regions into the discussion and decision making of what data to collect and how to present it?
Thank you. As a safety and soundness regulator, a regional structure does not have a single point of failure in the supervisory process. We have seen the risk of having a single point of failure at the NCUA during the corporate credit union crisis, and we have hopefully learned from it. I will add that the ONES supervisory program is overseen by E&I for quality control purposes, but I am not sure this goes far enough to remove the single point of failure concern from the ONES program.
At this point, I think it is appropriate to walk down memory lane. The ONES office was created in 2012 following the creation of the Federal Stability Oversight Council in Dodd Frank.
Let me ask a question for the record. Has FSOC ever designated a credit union as too big to fail?
So while we do not have any systemically important financial institutions at the NCUA that would result in posing a risk to U.S financial stability, the NCUA Board in 2012 decided that we needed to follow suit and create a ONES office as they believed the nation’s largest credit unions were systemically important to the share insurance fund.
I want to be clear that there are some advantages to having a ONES office. For one, there is a consistent treatment and supervision regimen over all large credit unions. The office allowed for the agency to adopt supervisory standards specific to larger credit unions. Since inception, we have adopted capital planning and stress test regulations to instill supervisory expectations that credit unions plan for future risks and assess capital beyond simplistic PCA standards, we have created a continuous monitoring process, and we have prioritized the concept of governance as critically important. For context, the OCC and FDIC have large bank programs apart from supervision of smaller banks. But the way the ONES office is structured does have disadvantages including that the program lies in one office. Perhaps better stated, there is a single point of failure risk, notwithstanding the E&I’s role in the process as previously mentioned.
At this point I do have some other questions:
- Another issue is the significant increase in supervision hours ONES gets compared to the regions. Scott, how can the Board have more accountability, monitoring, and reporting of hours? I think prudent leadership in this regard is important.
- Is there more risk at a $10 billion credit union relative to a small credit union?
- So you would agree that while more dollars may be at risk at a large credit union, it is not at a higher risk, correct?
- Since the creation of the fund, smaller credit unions are at higher risk of costing the NCUSIF in losses, correct?
- When the ONES office was created, a $10B insurance payout would have nearly depleted the fund, correct? How does that relate to today?
- The largest credit unions – let’s say over $500 million – are all performing better financially, correct, relative to smaller credit unions?
- Safety and soundness is safety and soundness regardless of the size, would you agree?
Thank you for indulging me. Also, it is worth pointing out that we now have a Risk Based Capital regime in effect. Chairman Harper and others have said that the RBC is supposed to identify complex credit unions–that is large credit unions with over $500 million in assets–with an unacceptable level of risk as determined by this ratio. Since we now have a monitoring tool in place with RBC, despite its many flaws, you could easily make the case we should be using these lower ratios to focus our exam teams and thus should restructure our examinations. We have a monitoring tool in place. We can use lower RBC ratios to focus on risk, and not size. While RBC and net worth are lagging indicators, how does RBC impact the need to have a ONES office?
But with the continued consolidation in our industry, and with credit unions becoming more and more complex, today’s rule does not go far enough for the risk we have as an agency if the ONES office grows too quickly. Additionally, I wish this rule provided additionally regulatory relief to credit unions in terms of capital planning. I learned from one credit union that these requirements will cost them nearly $1 million a year. I would have preferred that this rule provide further relief to our capital planning regime as the state of the share of the insurance fund has changed significantly since the financial crisis.
While I have serious reservations and believe the rule does not go far enough with the continued growth and consolation in the industry, I plan to support it since this rule ultimately protects the NCUA regional structure without undermining our ability to regulate the largest of credit unions in ONES. I believe it is worth considering having a large regional program to ensure a smooth transition to ONES for the largest and most systemically important credit unions; and, to enhance the quality of supervision for the largest credit unions. And I think it is safe to say that the $15 billion threshold is too low for what is considered a systemically important credit union.
I have no further comments or questions.