D'Amours and Former FDIC Chair Attack CU Attempts at Risk-Based Capital as Dangerous

WASHINGTON-Once again, former NCUA Chairman Norm D’Amours is stirring up a whirlwind of controversy for credit unions. D’Amours recently teamed up with former Federal Deposit Insurance Corporation Chairman William Isaac to attack credit unions’ attempts at a risk-based capital system in a `Perspective’ appearing in the Feb. 1 American Banker. The former NCUA Chairman also just last fall spoke out against credit unions at a state bankers’ meeting. “We believe this would be very bad public policy. We sincerely hope the lessons of the savings-and-loan fiasco have not been so soon forgotten,” the pair wrote. According to D’Amours and Isaac, the 2% leverage ratio contained in the Credit Union Regulatory Improvements Act is “meaningless” and “would be virtually worthless as a supervisory tool.” “By dropping the leverage ratio to 2%, the Credit Union Regulatory Improvements Act would seriously diminish the NCUA’s ability to take regulatory actions before credit unions would become critically undercapitalized,” D’Amours and Isaac wrote. “Indeed, research into bank failures indicates that when the leverage ratio falls to 2%, the economic value of an institution’s capital is most likely negative.” NCUA Director of External Affairs and Special Assistant to the Chairman Nick Owens responded to the criticism, stating that though the 2% is the only required leverage ratio in CURIA, D’Amours and Isaac “make it seem as if that would mean any credit union with more than 2% leverage would have acceptable capital under CURIA. That is not the case.” He noted that NCUA Chairman JoAnn Johnson has urged Congress to implement a “well-capitalized” leverage ratio as well. She would lower this ratio from 7% where it currently stands, to 5%, equal to that of banks “given that credit unions assets are comparatively risk-averse.” “We have always acknowledged that there needs to be a leverage ratio for well-capitalized credit unions that works in tandem with a risk-weighted ratio, and that we are developing a specific proposal to accomplish that,” Owens stated. Former NCUA Chairman Dennis Dollar also rose to the occasion to defend the proposal that he initiated during his time as chairman. “Although he is certainly entitled to his opinion, if there were an academy award for being consistently wrong on credit union issues, my friend Norm would likely be known as Oscar D’Amours,” he said. Dollar also stressed that Isaac actually implemented a risk-based capital system for the banks while he was heading up the FDIC. “No sound thinking safety and soundness regulator with any experience can reasonably contend that the same one-size-fits-all reserve requirements should be applied to cash in the vault as a fixed rate 30-year mortgage,” Dollar continued. “Managing risk through appropriate capital accumulation commensurate with that risk is the lesson of the savings and loan crisis.” He suggested that Isaac and D’Amours were simply “throwing unwarranted fuel onto the bank versus credit union fire” for their banking clients. D’Amours and Isaac also wrote, “If the Credit Union Regulatory Improvements Act moves forward, Congress needs to be careful about granting too much discretion to the NCUA to define risk assets, as the bill currently proposes,” they wrote. “History has shown that the regulators have at times been hesitant to impose tough standards on the industry they regulate.” Dollar found this insulting to NCUA staff. “It seems to me to be somewhat arrogant for former Chairmen Isaac and D’Amours to imply that only the FDIC can administer a risk-based capital system. Such a claim is an insult to the outstanding professionals at NCUA who have never had to ask the taxpayers put a penny into bailing out the credit union insurance fund they administer.” The op-ed also stated that complex credit unions already have a risk-weighted capital system that NCUA can apply to them. “This fact makes us wonder if there is any real purpose behind the Credit Union Regulatory Improvements Act, beyond lowering the leverage ratio to a grossly inadequate 2% level.” This is apples and oranges, according to Dollar. The risk-weighted system that can currently be applied to `complex’ credit unions works upward for more complex operations, but not downward for cash on hand. “A risk based capital system for credit unions is needed for safety and soundness and risk management reasons, just as it is for the banking industry. Once they get past the bank versus credit union posturing which serves neither industry well, sound thinking regulators and legislators will see the benefit of risk basing the present capital structure for credit unions which inexplicably gives the same risk weighting for the ATM cash as it does for an exchangeable CMO in the investment portfolio,” Dollar concluded. [email protected]