RBC 2 Reality Check
The son of a good friend of mine just got braces. He’s been complaining about it for the last week, which is understandable since the contraption will inhabit his mouth for the next 18 months. But a couple of days ago my friend told him the pity party is over, it is time to move on.
NCUA’s second risk-based capital proposal (RBC 2) has been out a little more than a week now and it is time for the industry to have a reality check. Over the past week, I’ve heard questions raised about the legality of the proposal, criticisms of the amount of money it’s going to cost credit unions to comply, and questions raised about why we even need RBC reform in the first place. It’s time for the industry to get serious though. There will be risk-based capital reform and rather than get mired down in the weeds of legal analysis or generic gripes about the cost of implementing this proposal, the industry’s time could be better spent coming up with constructive improvements to NCUA’s regulation which will, whether you like it or not, provide a framework for a more sophisticated RBC framework.
First, there is the legal argument. We have both a current and former member of the NCUA Board questioning the legality of NCUA’s decision to impose requirements for credit unions with $100 million or more in assets to be well-capitalized as opposed to just establishing requirements for complex credit unions to be adequately capitalized. As readers of this blog will know, I love to delve into questions about regulatory authority. But before anyone in the industry rushes out to start a lawsuit, let’s keep in mind that long before NCUA came out with its original RBC recommendation, the industry had been begging NCUA to establish an RBC framework. Rather than roll the dice on a lawsuit that credit unions could very well lose, the industry should be continuing to develop a truly workable and beneficial RBC framework.
And let’s not forget that credit unions have already accomplished a great deal in the area of RBC reform. Since the second proposal is understandably more complex, it’s too early to make definitive judgments as to just how much better it is than the original. However, the more and more I look at RBC 2, the more and more I realize that this is one of the rare situations where the sequel beats the original. (Anyone who tells me that Godfather 2 is better than the original is a philistine: case closed.) For example, one of the things I underestimated in initially commenting on NCUA’s plan was the extent to which adjustments to risk weightings helped even those credit unions with concentration risk concerns. Most importantly, by creating a category of commercial loans and collapsing concentration tiers, there are many credit unions that were literally devastated under the original proposal that will be able to continue to specialize in member business loans. This is particularly true since these credit unions will have three years as opposed to eighteen months to phase in new capital requirements.
Does this mean that the proposal is perfect? Of course not. During a webinar the other day, one caller suggested that NCUA consider further refinements to its weightings of CUSO investments by creating an aggregate threshold on investments that below which CUSOs wouldn’t be singled out for negative treatment. In addition, NCUA has to clarify precisely how much power it intends to give itself to require individual credit unions to maintain capital buffers beyond the minimum threshold established under these regulations.
There are a lot of legitimate questions that need to be answered, but let’s start from the premise that there will be RBC reform and that the industry can constructively make it even better than it already has.