What a new comment period means for RBC reform

September 30, 2014 at 9:02 am Leave a comment

Yesterday’s announcement by NCUA Chairman Debbie Matz that NCUA would Issue an amended Risk Based Capital Proposal and that credit unions would be given an additional comment period to respond to it has several important implications .

— The most important statement yesterday was not Chairman Matz’s but Vice Chairman Rick Metsger’s “As I have often said, I believe interest rate risk is important and must be addressed in the risk-based capital rule, but it should be addressed separately from credit risk. Weighting credit risk and interest rate risk with a single numerical value created conflicts that ultimately made it difficult to accurately weigh the risk of either.”

This is absolutely crucial news since many of the most onerous risk weightings, most notably dealing with mortgage concentrations, were designed to avoid interest rate risk by deterring credit union’s from holding otherwise sound financial products. NCUA tried to accomplish with a hatchet a goal for which it needed a surgeon’s knife. Hopefully its proposed revisions will provide a more nuanced approach to interest rate risk and risk-based capital.

— Chairman Matz has been about as reluctant to extend the comment period for risk-based capital regulations as the Patriots are to show up for practice this morning after getting destroyed by the Kansas City Chiefs last night. I thought it was telling that Chairman Matz said she made the decision in consultation with NCUA’s lawyer’s (Whenever you have to do something you don’t want to do it’s always convenient to blame the lawyers).

Under the Administrative Procedures Act, an agency may promulgate a final rule that differs from the rule it has proposed without first soliciting further comments if the final rule is a “logical outgrowth” of the proposal (Louisiana Fed. Land Bank Ass’n, FLCA v. Farm Credit Admin., 336 F.3d 1075, 1081 (D.C. Cir. 2003).   It’s safe to assume that NCUA’s proposal will contain some really big changes.

— Chairman Matz is no longer driving the bus when it comes to RBC reform. Not only did Board member Metzger apparently already secure changes he wanted to the RBC proposal but the newest Board member c J. Mark McWatters  has some serious doubts about the regulation. He issued a separate statement yesterday in which he explained that “the previously proposed risk-based capital rules are deeply flawed and merit substantial revision. The devil is in the details, and I await the details before I can pass judgment on the next draft of the proposed rules.”

— I’ve consistently said that one of the major problems with NCUA’s proposal is that it inadequately explained the rationale behind many of its individual provisions. NCUA should use this new round of proposed rule making to explain in greater detail why it decided on the weightings that it ultimately is proposing. There are times that regulations should be long and complicated because they deal with long and complicated issues: this is one of those times. The initial proposal was presented in such a cursory manner that a review of the proposal and its preamble, and nothing else, leads to the conclusion, rightly or wrongly, that NCUA didn’t know what it was doing.

— The process is by no means over.  Depending on how the second proposal Is drafted there are still legitimate legal questions as to whether NCUA is overstepping its authority and whether credit unions should do something about this.

— Comment letters matter. As someone whose job is dedicated in part to getting credit unions to respond to proposed regulations and not simply complain about implementing them once they are promulgated, NCUA’s decision provides the best example yet of how responding to regulations with a large volume of thoughtful critiques can and does influence the regulatory process. NCUA would not be announcing a new round of propose regulations but for the fact that credit unions showed how flawed its initial proposal was.

Lawsky comments on role of regulators

Benjamin Lawsky, the Superintendent of New York State’s Department of Financial Services, had some very provocative thoughts about regulation at a recent forum hosted by Bloomberg News. He said that what has surprised him the most about financial misconduct since he has been Superintendent is that the misconduct “doesn’t go away.” As a result, regulators have to look in the mirror and ask themselves if they are going about deterring misconduct the right way.

He suggests that instead of focusing so much on corporate misconduct greater emphasis should be placed on holding the individuals behind the misconduct responsible.

If he is right than big fines are a start but unless you couple them with sanctions against the individuals driving the misconduct than they will continue to be viewed as a cost of doing business.

Here is a link to the interview.  The portion to which I am referring starts at 2:10.

http://www.bloomberg.com/video/new-york-s-benjamin-lawsky-on-banking-regulation-XZFvgEuVRHaS5a8ooxvo8Q.html

Entry filed under: Compliance, Legal Watch. 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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