On Monday evening I decided it would be nice to do a little light reading. Instead, I started in on NCUA’s 197-page Proposed Rule on Prompt Corrective Action—Risk Based Capital. Let’s just say I didn’t make it all the way through that evening. I did, however finish up on Tuesday and, over the past couple of days, have taken in a series of other articles through the trades and from financial analysts.
The most important reading on this topic I have done, however, has been the emails that I have received from the CEOs of a few of NJCUL’s affiliated credit unions (along with several direct conversations). As has been documented in those aforementioned trade press articles, opinions on this rule vary and there are unique circumstances related to the application of the new measures depending on the credit union.
NCUA’s description of the proposed rule is, of course, logical and favorable. As I mentioned to those CEOs who emailed, their input provides necessary context when reviewing the information. As the state association for credit unions here in N.J., it is important to receive such emails and have the direct conversations I’ve had as well.
This is not a comment letter (although NJCUL will submit one) and the concerns with this proposed rule will be more universally fleshed out during the 90-day comment period and, certainly, during the CUNA GAC in a few weeks, but here are a few initial thoughts.
On page 14 of the draft (available here) it states that “Operating a credit union involves taking and managing a variety of risks…” Credit unions have shown that relative to other financial institutions, managing risk is a strength. While there is certainly room for adjustment to measurement of Risk Based Net Worth, this approach seems to significantly impair credit unions’ ability to take and manage risk in a way that will allow credit unions to grow. Furthermore, the proposal is heavily focused on concentration risk and doesn’t appear to take into consideration risk mitigation tools such as, but certainly not limited to, put options or rate structure.
I also find it interesting that the proposal also states, relative to potential additional requirements for individual credit unions, on page 86, that “(the rule) would provide that the appropriate minimum capital levels for an individual credit union cannot be determined solely through the application or a rigid mathematical formula or wholly objective criteria, and that the decision is necessarily based, in part, on a subjective judgment grounded in agency expertise.” Agreed, although there should also be consideration of the subjective judgment of the individual credit union’s management expertise in what could be a very sound risk-based approach that may or may not fit the rigid mathematical formulas and wholly objective criteria imposed through this proposed rule.
See what I did there?
The other part of the section that is bothersome is that, while subjectivity should certainly be an aspect of any major decision, what parameters will be in place to be sure that this subjectivity does not result in additional measures being imposed as the rule, as opposed to the exception? And whom, in particular, will have discretionary authority over whether or not additional requirements are necessary?
I could go on, but I won’t as there is still much discussion that needs to take place to fully understand the ramifications, pros, cons, etc. of this proposal. We’ll stay on it here at NJCUL and will more formally communicate relative to this issue in the coming weeks.
While I’m on the topic, you may have read in Tuesday’s Daily Exchange that I was recently appointed to the American Association of Credit Union Leagues’ (AACUL) Regulatory Advocacy/Compliance Advisory Committee. I am very pleased to be selected for this particular committee, noting that regulatory burden is a chief concern of nearly, if not all credit unions. I am looking forward to being the voice of New Jersey credit unions in this area and hope to positively impact the regulatory and compliance process through my involvement on this committee.