Press
Nearly 75% of US House concerned about proposed credit union rule
324 members sign letter seeking change, clarification for ‘risk-based capital’ proposal
(May 15, 2014) — Nearly three-quarters of the members of the U.S. House have signed a letter seeking changes and clarifications to a proposed rule by the National Credit Union Administration (NCUA) on risk-based capital for credit unions.
In particular, the lawmakers urge the federal agency to ensure the proposal does not adversely affect small businesses and credit union members.
The letter was written and circulated by Reps. Peter King (R) and Gregory Meeks (D), both of New York and both members of the House Financial Services Committee.
“An overwhelming majority of the House – three in every four members — have come together in a bipartisan effort by Representatives King and Meeks to express concern over NCUA’s proposed rule,” said CUNA President and CEO Bill Cheney. “CUNA supports risk-based capital, — but not the way that NCUA has proposed it. The fact that so many members of Congress have added their voices of concern bolsters credit unions’ views that this proposal must be changed significantly.
“CUNA and the state leagues and associations thank the members of the House for speaking out on this key issue for credit unions – and we pledge to work with lawmakers to see that their concerns are addressed,” Cheney said.
At issue is a proposal by the NCUA to impose on credit unions with greater than $50 million in assets new standards that would restructure the agency’s current “prompt corrective action” regulation to involve calculation of a capital-to-risk-assets ratio, analogous to Basel III for community banks — although the risk weights would be substantially different for credit unions.
The NCUA proposal would change risk-based capital ratios and require higher minimum levels for credit unions with concentrations of assets in real estate loans, member business loans, or high levels of delinquent loans.
The 324 members (176 Republicans and 148 Democrats) expressed concern, urging NCUA to clarify why the risk weights in the proposal differ from those applied to other community financial institutions.
“The risk weightings include concentration-based weights which, at the higher levels, would be considerably higher than those applied under the Basel system for banks … we are concerned this portion of the proposal could unnecessarily hinder credit union lending to homeowners and small businesses,” the letter states.
In 2012, concerned members of Congress wrote to federal banking regulators with similar apprehensions about the new Basel III system proposed for community banks.
Significantly: The number of King-Meeks letter cosigners is more than double the amount that several letters on proposed bank compliance with Basel III capital requirements garnered in the House that year.
The King-Meeks letter asks NCUA to take into account the cost and burden of implementing new risk-based capital requirements the affecting credit unions and how the proposal would affect businesses and credit union members.
Additionally, the lawmakers encourage NCUA to give credit unions more time than the proposal’s allotted 18 months for compliance after finalization to ensure service to credit union members is not adversely affected.
“Because of credit unions’ limited avenues for raising capital, it is likely this proposal would force them to charge higher lending and financial services fees, reduce dividend payments to members, and deter new depositors. Before proceeding with a final rule, we urge the NCUA to consider the economic impact and consequences of reduced liquidity and financing for families and small businesses,” the lawmakers wrote.
The King-Meeks letter represents a vast array of members and includes a strong showing from members of the Financial Services Committee. According to CUNA’s analysis of the letter’s co-signers:
· The co-signer list closely resembles the partisan divide in the House.
o The partisan breakdown on the letter (54.3% Republican and 45.7% Democrats) very closely aligns with the overall partisan breakdown in the House of Representatives (53.9% Republicans/ 46.1% Democrats).
· The letter has strong support from the members of the House Financial Services Committee.
o 49 of the 60 Members of the House Financial Services Committee signed the letter, including 23 of the 28 Democratic members and 36 of the 42 Republican members.
You can view the signed copy of Reps. King and Meeks letter by clicking here.
Below is the text of the King-Meeks letter:
The Honorable Debbie Matz
Chairman
National Credit Union Administration Board
1775 Duke Street
Alexandria, VA 22314
Dear Chairman Matz:
The proposal on risk-based capital issued by the National Credit Union Administration (NCUA) Board on January 23, 2014 raises several concerns that we feel must be addressed before the Board adopts the rule in final form.
We are writing to encourage the Board to make certain changes and clarifications to the proposal to ensure that the rule does not unduly burden credit unions, and does not adversely affect healthy credit unions’ ability to meet the needs of their members.
Specifically, we encourage the Board to 1) take into account the cost and burden of implementing new risk-based capital requirements beyond the current leverage ratio; 2) provide justification and more clarity as to why the proposed risk weights differ from those applied to other community financial institutions; and 3) give credit unions more time than the proposal’s allotted 18 months to come into compliance after it is finalized.
Economic Impact, Impact on Credit Union Members, and Compliance with Current Law
During the financial crisis, natural person credit unions served as an important source of liquidity in local communities and the overwhelming majority of them successfully weathered the downturn. These cooperatives did not engage in the risky lending practices that led up to the crisis and nearly all maintained their well-capitalized status. In spite of this, the NCUA’s risk-based capital proposal imposes a higher risk-based requirement on top of the 7% leverage ratio credit unions are required to maintain to be considered well-capitalized. Since credit unions have limited ability to raise capital other than retained earnings, and the crisis did not provide evidence for greater capital reserves for natural person credit unions, this across-the-board approach seems burdensome and raises concerns.
As you know, the proposal includes a description of the impact that the Board believes the rule would have on credit unions. It notes that the 10 credit unions that would become undercapitalized as a result of this proposal would need to retain $63 million in risk-based capital in order to be considered adequately capitalized. However, industry representatives estimate that the collective impact of this proposal on all of the credit unions subject to it could be as high as $7 billion of capital drawn out of the economy. Because of credit unions’ limited avenues for raising capital, it is likely this proposal would force them to charge higher lending and financial services fees, reduce dividend payments to members, and deter new depositors. Before proceeding with a final rule, we urge the NCUA to consider the economic impact and consequences of reduced liquidity and financing for families and small businesses.
Risk-Weight Calibration
In your proposal, the risk weightings include concentration-based weights which, at the higher levels, would be considerably higher than those applied under the Basel system for banks. Although we appreciate the importance of supervising financial institutions for concentration risk, we believe that this proposal merits further review. We would therefore appreciate the Board’s perspective on how these proposed concentration-based risk-weights were calibrated, why they differ from bank risk-weights, and how they might affect mortgage and small business credit availability. We are concerned this portion of the proposal could unnecessarily hinder credit union lending to homeowners and small businesses.
Compliance Timeline
Finally, we have concerns regarding the implementation period proposed by the Board. The Board seeks to implement the proposed rule 18 months after it has been finalized. The Federal Credit Union Act significantly constrains both credit unions’ investment authority as well as their ability to raise capital from sources other than retained earnings. We are concerned that the amount of time the Board has proposed is much too short for credit unions to appropriately recalibrate their books without adversely impacting their service to their members. We strongly urge NCUA to give the stakeholders more time to comment on this proposal and credit unions more time to implement the final rule.
Applying risk-based weighting certainly has value, and we appreciate the NCUA for taking on this task. Thank you for taking our comments into consideration, and we look forward to your timely response to our concerns.
Sincerely,