Three years ago, NCUA Board Member J. Mark McWatters was the lone vote against the agency’s Risk-Based Capital rule.
Now, five months before the rule goes into effect, McWatters is chairman of the agency’s board and perfectly positioned to kill the rule, which he contends violates federal law.
The controversial rule was adopted in 2015, amid opposition from credit unions and some members of Congress. It requires a “complex” credit union that becomes undercapitalized to take prompt corrective action to restore its net worth. A complex credit union was defined as one with $100 million in assets.
And it was adopted even though House Financial Services Chairman Jeb Hensarling (R-Texas) asked the board to delay the vote in order to study the plan more extensively.
Hensarling was incensed following the vote.
“It is deeply troubling that you would utterly disregard the express will of this committee and rush to adopt a misguided rule that risks undermining the safety and soundness of credit unions in contravention of the NCUA’s statutory mandate,” he wrote to then-NCUA Board Chairman Debbie Matz.
House members this summer have tucked a two-year RBC rule delay into several pieces of legislation, ranging from a bill to reorganize the Committee on Foreign Investment in the United States to the annual bill funding financial services programs.
But the Senate has yet to accept the RBC delay; and it remains unclear whether it will.
And so, the NCUA board with McWatters, a former Hensarling aide, at the helm, is taking things into its own hands, proposing to delay the rule for a year and increase the asset size to $500 million.
The move was made possible because a Republican now sits in the White House and the NCUA board is likely to be controlled by the GOP.
Democrats, on the other hand, have argued that the rule is vital to ensuring the health of the credit union system.
“A major principle of financial regulation is that all risks are not equal, and one size does not fit all,” Board Member Rick Metsger told Oregon credit union CEOs in December. “That is why the U.S. and all major industrial nations have risk-based capital standards. We seek to minimize the risk that a few credit unions that want to gamble with other people’s money will lose their bets and pass the costs onto other credit unions and their members.”
But McWatters said the NCUA board did not have the authority to adopt the rule.
“Based upon my 30-plus years of experience as an attorney who has worked on many intricate issues of statutory and regulatory interpretation, I am of the view that the NCUA does not possess the legal authority under the FCUA to adopt a two-tier RBNW regulatory standard,” he said in October 2015.
Metsger disagreed in his October speech.
“But, trade groups seeking to repeal the rule completely ignore the fact that the adoption of a risk-based capital rule is both required by federal law and good public policy that protects credit union members,” he said.
And he cited the potential need to bail out credit unions that are heavily invested in the taxi industry as evidence of the need for a strong RBC rule.
Credit union trade groups have sided with McWatters, contending that federal law does not allow the NCUA board to establish a two-tier method for determining the health of credit unions.
“The agency really overstepped the Credit Union Act,” in setting a risk-based standard to determine whether a credit union is well-capitalized, Monique Michel, CUNA’s senior director of advocacy and counsel, said.
“The NCUA being open to a delay for its RBC rule is very positive, but we still plan to request additional changes,” NAFCU President/CEO B. Dan Berger said.
Berger added he would like to see the complex credit union threshold be even higher.
“We’ve long argued that asset size doesn’t equate to risk,” he said, adding, “We’d also like to see a decrease in the percentage of capital credit unions are required to hold.”
“I think increasing the threshold is a good step,” Michel said. “Even $500 million is too low.”
While credit unions bristle at the notion of a RBC rule, bankers said such a regulation is essential.
“These rules should not be delayed, both because doing so places the taxpayer-backed insurance fund at risk for losses, and because it places banks – who already have a competitive inequity because of the taxpayer subsidy provided to the credit union industry – in an unequal position in the marketplace,” James Ballentine, EVP for congressional relations and political affairs at the American Bankers Association, wrote in a May memo to members of the House Financial Services Committee.
He added, “Except among credit union executives, there is nearly universal agreement (the) NCUA’s existing rules are antiquated and need modernization.”
The future of the controversial rule remains unclear. The proposed one-year delay will be open for comment after it is published in the Federal Register.
However, Republicans will have the majority on the NCUA board if and when Rodney Hood, President Trump’s nominee to replace Metsger on the board, is confirmed by the Senate.
And the RBC rule could then be placed on the permanent chopping block.