Matz-CUs Don’t Need No Stinking Buffer

June 2, 2014 at 9:35 am Leave a comment

When virtually every member of the House of Representatives signs a letter raising substantive concerns about one of your regulations, you can bet regulators take crafting an appropriate response seriously. So, I am bemused, confused and more than a little concerned by the NCUA’s response to Congressman King’s letter about NCUA’s risk-based capital proposal. Specifically, the NCUA’s position on capital buffers.
Remember NCUA has always argued that with over 90% of affected credit unions already “well capitalized” under its RBC proposal, most credit unions won’t be impacted. In contrast, the trades have argued that NCUA has overlooked the fact that many well capitalized credit unions will lose a good chunk of their capital buffers since most credit unions like to be well above a 7% PCA threshold.

In reality, we now know that NCUA doesn’t think buffers are all that important. Chairman Matz explained that she was “very concerned about the dissemination of misinformation about the costs of the proposed rule.” She went on to explain why these disseminators of risk weighted propaganda were so misguided:
“In reality, the decision whether to hold a capital cushion and how large that should be is a business decision that each credit union makes. I emphasize that the proposed rule does not require credit unions to maintain any specific capital cushion above the regulatory minimum standard for being well-capitalized.”
Wow. If NCUA’s position is that the maintenance of cushions of capital buffers to maintain well-capitalized status doesn’t raise safety and soundness concerns, then the agency is taking a position on examiner oversight vastly at odds with other financial regulators who are also implementing risk-based capital rules. For example, in the preamble to its final risk-based capital rules this past October the OCC explained:

“Consistent with longstanding practice, supervisory assessment of capital adequacy will take account of whether a banking organization plans appropriately to maintain an adequate level of capital given its activities and risk profile, as well as risks and other factors that can affect a banking organization’s financial condition, including, for example, the level and severity of problem assets and its exposure to operational and interest rate risk, and significant asset concentrations. For this reason, a supervisory assessment of capital adequacy may differ significantly from conclusions that might be drawn solely from the level of a banking organization’s regulatory capital ratios.

In light of these considerations, as a prudential matter, a banking organization is generally expected to operate with capital positions well above the minimum risk-based ratios and to hold capital commensurate with the level and nature of the risks to which it is exposed, which may entail holding capital significantly above the minimum requirements.”
Source:  Regulatory Capital Rules: Regulatory Capital, Implementation of Basel III, Capital Adequacy, Transition Provisions, Prompt Corrective Action, Standardized Approach for Risk-weighted Assets, Market Discipline and Disclosure Requirements, Advanced Approaches Risk-Based Capital Rule, and Market Risk Capital Rule, 78 FR 62018-01 pages 62042-62043.

Let’s take NCUA at its word. Since one of the primary reasons for risk-based capital was to put credit union capital standards more in line with banks, then why is NCUA adopting an approach toward safety and soundness so at odds with that of the other financial regulators? Is it really NCUA’s position that if an examiner spots a well-capitalized credit union with a noticeably decreasing capital cushion that credit unions can simply tell the examiner it is none of her concern? Somehow, I doubt it, and I hope the Chairman takes the time to explain her response when she meets with credit unions over the summer.

Entry filed under: Advocacy, Regulatory. Tags: , , , .

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Authored By:

Henry Meier, Esq., General Counsel, New York Credit Union Association.

The views Henry expresses are Henry’s alone and do not necessarily reflect the views of the Association.

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