Mark McWatters, nominee for the NCUA board, said the possible overregulation of small credit unions and risk-based capital requirements are two of the greatest challenges facing credit unions that he wants to examine further.

Senate Banking Committee Chairman Tim Johnson (D-S.D.) had asked McWatters at the March 13 confirmation hearing what opportunities and challenges he sees for credit unions.

“I think the greatest opportunity for credit unions is to continue what they’re doing now – 96 million Americans in credit unions – they’re growing, and their loan base is growing,” McWatters told the panel. “One opportunity is particularly for low-income credit unions to expand their mandate to those Americans who are under-banked and unbanked. There's opportunity there. Those folks need financial services and they need financial services at a reasonable rate.”

McWatters, President Obama's choice for a Republican to replace NCUA Board Member Michael Fryzel, said the principal challenge is to look to the future and anticipate the next systemic shock to the financial system.

“If you roll the clock back six years, seven years, the talk about overconcentration of mortgage-backed securities on the books of a financial institution, the too-big-to-fails or the large corporate credit unions was largely non-existent,” McWatters said. “It was there. It was hiding in plain sight.”

However, the Texas attorney and business school dean warned against sounding the alarm on potential problems too early.

“If you’re always crying wolf you’ll be considered a flake, so you need to exercise judgment carefully and judiciously,” he said.

McWatters also highlighted the overregulation of small credit unions as another area of concern.

“NCUA has made some progress in this area – I think more work though needs to be done. If I’m confirmed for this position, it's an area I want to look into,” he said. “I want to talk to credit unions. I want to talk to the NCUA. I want to reach an independent analysis myself as to whether small credit unions are over-regulated or not.”

The NCUA proposed risk-based capital requirements at the agency's January board meeting. McWatters said a risk-based system makes sense philosophically for credit unions.

“The devil is in the details,” said McWatters, who added that he wants to look further into the issue.

Sen. Elizabeth Warren (D-Mass.) a member of the committee, expressed her full support for McWatters during the hearing.

“I worked closely with Mark on TARP oversight and he was always smart, thoughtful and principled and I strongly support his nomination to the credit union board,” she said.

McWatters told senators that he would bring a transparent regulatory perspective to the position.

“Lawyers and regulators need to take a step back and apply the law with impartiality and look at the larger picture. They need to think both tactically and strategically, considering not just the desired outcome, but potential unintended consequences,” he said.

“As such, my focus as a regulator will remain straightforward: Don't neglect the fundamentals of capital, liquidity and transparency, and always remember that the greatest threat to a financial system may reside where you least expect it—hidden within plain view,” he added.

McWatters thanked Senate Minority Leader Mitch McConnell (R-Ky.) for recommending him to President Obama for the open position on the NCUA Board.

“If confirmed, I will bring my 30-plus years of legal experience, accounting training, general understanding of the broader financial markets, an open mind, and a risk-based, market-oriented, targeted and transparent regulatory perspective to address the increasingly complex and sophisticated issues facing credit unions,” he said.

McWatters also told the committee he would balance competing viewpoints while maintaining the safety and soundness of the credit union system, safeguarding the Share Insurance Fund, enforcing consumer protection rules, and protecting taxpayers as well as credit union members from losses.

The committee did not announce when it would vote on the nomination. If he is approved by that panel, his nomination will then go to the full Senate.