Proposed RBC Delay a Product of Policy ... and Politics

When it was adopted in 2015, the NCUA board viewed its Risk-Based Capital Rule as a much-needed step to avoid drains on the Share Insurance Fund caused by “outlier” credit unions making bad decisions.

“The overarching intent is to reduce the likelihood of high-risk outliers among complex credit unions exhausting their capital and causing systemic losses—which, by law, all federally insured credit unions would have to pay through the National Credit Union Share Insurance Fund,” agency staff said, in a memo prepared for the October 2015 meeting, when the final rule was approved.

Now, four years later, the newly constituted NCUA board wants to delay the rule for another two years—to 2022 and possibly, make other changes to it.

And while agency officials point to changes in the financial marketplace and other reasons for the delay, another huge change appears to be driving at least some of the decision-making.

Politics.

As the political balance shifted, so too did the policy.

In those four years, the control of the NCUA board went from Democrats who wanted the rule implemented to Republicans who—at best—are lukewarm about the idea.

The agency first proposed the rule in January 2014 and received more than 2,000 comments about it. That prompted the agency to issue a new proposed rule in January 2015 before issuing a final rule in October 2015.

Throughout the process, NCUA Chairwoman Debbie Matz, a Democrat, battled board member J. Mark McWatters, a Republican, over the rule.

McWatters said he believed that the agency did not have the authority to enact an RBC 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 NCUA does not possess the legal authority,” to issue the rule, he said, in January 2015.

And it became personal between the two, as they traded accusations over a letter from the Paul Hastings law firm discussing the rule.

“With so many critical issues facing the credit union community today, the ongoing attempt by the Chair to discredit my efforts to provide meaningful transparency and inform credit unions of what is taking place within NCUA demonstrates a sad state of affairs at the agency,” McWatters said at the time.

House Republicans between 2014 and 2018 repeatedly attempted to enact legislation to require the agency to conduct additional studies before implementing the rule.

And while that proposal was included in several House bills, the Senate never considered it.

Most notably, shortly before the NCUA adopted its final rule in October 2015, the House Financial Services Committee approved legislation, 50-9 to require the NCUA to review the rule and report back to Congress on its expected impact.

The bill also would have required the agency to conduct additional research to determine whether the NCUA even had the legal authority to enact the rule—a question that remains even today.

House committee approval of legislation to slow the regulatory process did not stop Matz.

“The Federal Credit Union Act requires NCUA to update its risk-based capital standards to be comparable with the federal banking agencies,” Matz said at the time. “NCUA’s existing risk-based net worth rule is outdated, and analyses by both the Government Accountability Office and the agency’s own Inspector General have found the existing rule failed to adequately mitigate credit union losses as a result of the financial crisis.”

The board voted 2-1 to approve the rule, with McWatters dissenting.

The decision to move ahead incensed then- House Financial Services Chairman Jeb Hensarling, a Texas Republican and McWatters’s former boss.

“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 a contravention of the NCUA’s statutory mandate,” Hensarling wrote in a letter to Matz.

Unmentioned was the connection between McWatters and Hensarling; the NCUA board member was formerly a counsel on Hensarling’s staff.

The NCUA sent Hensarling a 288-page report that attempted to justify the rule.

In the report, agency officials said that they started working on an RBC rule in response to lessons learned from the Great Recession, in response to recommendations made by the Government Accountability Office and the agency’s Inspector General and cited the international adoption of new Basel capital accords.

In addition, other federal banking agencies had adopted new RBC rules and that “provided an impetus” for NCUA board action, the report stated.

“And putting safeguards in place before the next financial crisis occurs is good public policy,” the agency said at the time. “A modernized risk-based capital rule will help more credit unions avoid capital losses and reduce the losses to the Share Insurance Fund which all credit unions have to pay.”

And the agency said that it was giving credit unions more than three years before the rule was implemented.

Last year, as the Jan. 1, 2019 implementation date of the RBC rule approached, the NCUA board, which had two members, Republican McWatters and Democrat Rick Metsger, took another look at the regulation.

The board could have deadlocked, since McWatters was on record as opposing the rule and Metsger voted for it.

Instead, the two agreed that the board would delay the rule for an additional year, to Jan. 1, 2020.

And they agreed to increase the threshold for credit unions that must comply with from $100 million to $500 million. That increase, agency officials said at the time, would exempt an additional 1,026 credit unions from having to comply with the rule, agency officials said.

That’s where the rule stood while there were two members on the board.

Earlier this year, the Senate confirmed Republican Rodney Hood and Democrat Todd Harper as members of the NCUA board; alongside McWatters, it gave Republicans the majority on the board for the first time since the rule was adopted in October 2015.

That set the stage for this month’s NCUA board meeting, where the RBC rule was again on the agenda.

This time, with Republicans in control, the board agreed to seek comment on delaying the rule’s implementation until 2022.

“This delay will allow the agency to take a surgical approach to implementing this rule in a coordinated manner rather than incrementally,” NCUA Chairman Rodney Hood said, as the board adopted the proposed rule on a 2-1 vote, with Harper dissenting.

That division was expected, since Harper had worked for Matz when the RBC rule was first approved.

This time, Harper grilled NCUA staff for more than an hour and questioned whether the agency was forgetting the lessons of the Great Recession.

“We are forgetting the past repeatedly, just like the characters in ‘Groundhog Day,’” he added.