The regulator-as-risk concept emerged as yet one more concern that arose from NCUA's risk-based capital proposal, issued in January with a comment period that ends May 28.

Buried within the rule under section 105(c) "Standards for Determination of Appropriate Individual Minimum Capital Requirements" was a phrase that could arm NCUA examiners with the power to redefine credit union safety and soundness standards based on conditions found within each institution.

"This was completely unexpected and no one knows what it really means," Vilker said. "If this rule goes into play as is, we don't know how many credit unions could be affected."

Section 105(c), proposal 702.105(a) stated that "appropriate minimum capital levels for an individual credit union cannot be determined solely through the application of a rigid mathematical formula or wholly objective criteria and that decision is necessarily based in part on a subjective judgment grounded in agency expertise."

That means, Vilker said, that examiners will be able to arbitrarily define asset category risk weightings at the credit union level.

Moreover, he said, what once may have been points of discussion and disagreements between credit unions and examiners could escalate into mandatory edicts and thrust the institution into Prompt Corrective Action status.

"Once you're in PCA, examiners' directions suddenly become enforceable," Vilker said. "They then have the power to make credit unions do anything they want them to do."

Read more: Provision comes from corporate credit union failures …

The new initiative's origin stems from a General Accounting Office analysis of credit unions issued in the wake of corporate credit union failures.

In GAO-12-247, published Jan. 4, the NCUA was directed to "(1) provide its Office of Inspector General the necessary documentation to verify loss estimates and (2) consider additional triggers for PCA that would require early and forceful regulatory action and make recommendations to Congress on how to modify PCA, as appropriate."

In a news release also dated Jan. 4, the NCUA asserted that KPMG LLP's 2010 audit of the corporate credit union system had satisfied the GAO's first requirement. NCUA Chairman Debbie Matz described the second as an ongoing initiative.

Enforcement actions will be given broader license through proposal 702.105(a). But relying on examiner judgment as an absolute authority creates a dangerous precedent that's bound to have negative effects on credit unions that had indicated no signs of trouble, said Chip Filson, chairman of Callahan & Associates and a former NCUA executive.

"We're not in a crisis today and not in a situation where credit unions are unaware of risk, but this is a situation where arbitrary actions are being imposed on well-run credit unions," Filson said. "There's no need for the rule and it would be counterproductive to what the cooperative model is doing in society and for the economy at large."

Jim Blaine, president/CEO of $28 billion State Employees' Credit Union in Raleigh, N.C., was more pointed in his comments.

"Examiners are human and there is inconsistency in how we as humans view things," Blaine said. "You cannot run a business if discretion changes from exam to exam. It's like a highway patrolman stopping you and then changing the speed limit so he can write you a ticket.

"In reality there is no external appeal to these decisions," Blaine added. "I think that's unacceptable to most folks."

Read more: The NCUA responds to criticism …

The NCUA does not agree with this interpretation of the rule, Public Affairs Specialist John Fairbanks said.

"NCUA examiners are not empowered under the proposed risk-based capital rule to require credit unions to hold more capital," said Fairbanks, citing section 747.2006 of the proposed rule. "That decision is made by the NCUA board, and the proposed rule has a specific due process the agency must follow in order to do that.

That process requires the NCUA to give the credit union prior notice of the higher capital requirements, Fairbanks continued, saying it includes the specific minimum capital levels the NCUA board intends to impose.

The credit union also has the right of appeal to the board, he said.

"I think this is a distinction without a difference," Filson responded. "The rule clearly states on page 106 that the initiative is with NCUA staff – examiners – and that the appeal process is a self-contained, self-referencing event that offers no objective due process for any appealing party."

Filson referenced as an additional example the history of corporate credit unions "that were railroaded into liquidation based on secret analysis that NCUA still refuses to release, even after they admitted the estimates of loss were wrong by at least $6 billion."

Filson also pointed to the lack of an external ombudsman to mediate differences as a sign of the NCUA's inability to fully engage and understand the experience that credit unions have had with examiner behavior.

"There are multiple net economic value or 'price risk' examples of examiners imposing their own judgment overriding CPA audits, credit union expertise and outside professional evaluation and analysis to impose their own financial outlook on credit unions," Filson said. "The NCUA is the prosecutor, judge and jury."

Vilker agreed, noting that the directive allows examiners to act without restraint in defining those capital levels. Such a situation is not in the best interest of a credit union and its members, he said.

"The RBC regulation is not about capital at all," Vilker wrote in his white paper, The 10th Risk: Opinion and Guide to the NCUA's Proposed Risk Based Capital Rule.

"It is about the NCUA putting credit unions into PCA so that all NCUA recommendations, regardless of whether they are to the benefit of the credit union, become backed by regulatory enforcement powers," he added.

Read more: How credit unions can prepare for the new rule …

The white paper said first and foremost, regulator comments and queries should be measured against the other nine risk categories in light of any changes in the credit union.

Credit unions should address each area of discretionary examiner assessment for override and closely examine any disagreements over such risk areas as interest rate, liquidity, allowances for loan and lease losses funding, branching and mergers, Vilker said. Changes in the credit union strategic plan, product structure and the general market also should be considered with a closer eye. Prior exam recommendations also should come under closer scrutiny.

Over the next 18 months, prior to the approval of the final risk-based capital rule, credit unions can do a number of things to prepare for examiner evaluations, Vilker said.

Central to those efforts should be documenting any assessments and gaining early examiner buy-in and understanding of the credit union's conditions and strategies, he said.

Other steps can include educating boards of directors to the nature and issue of risk, understanding how the risk-based capital rules themselves may be a risk of the credit union's strategy, how management decision-making abilities will be affected by the new rule, and what requirements this places on the credit union's minimum ongoing earnings.

"No matter what the rules are, they will affect a credit union's ability to operate and provide services," Vilker said. "That means it will definitely affect the members."

An apparent lack of well-defined guidance for examiners armed with this new power concerns credit union industry leaders most, Vilker said. Given the GAO's guidance and changes that have made the agency less collaborative and more dictatorial, Vilker said he expects examiners won't be shy in exercising this new power.

"I think there will be a fair amount of chest-thumping about this one," he said.