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NCUA Board Member Todd M. Harper Statement on the Advance Notice of Proposed Rulemaking on Capital Requirements

January 2021
NCUA Board Member Todd M. Harper Statement on the Advance Notice of Proposed Rulemaking on Capital Requirements

As Prepared for Delivery on January 14, 2021

Thank you, Myra and Tom, for your briefing on this advance notice of proposed rulemaking related to complex credit union capital requirements. Though not yet February, it sure feels like Groundhog Day. Yet again, some are seeking to delay and diminish the NCUA’s sensible risk-based capital rules with this proposal.

I have long held that all financial institutions backed by federal deposit insurance, including credit unions, should hold capital equal to the risks held on their balance sheets. In the case of federally insured credit unions, if a credit union with greater risk fails, risk-based capital would help to minimize losses to the Share Insurance Fund. That additional money would protect surviving credit unions, their members, and taxpayers.

With respect to safety and soundness, the NCUA’s supervisory efforts should focus on the institutions and activities posing the greatest risk to the Share Insurance Fund—like concentration risk. Recently, several federally insured credit unions that concentrated heavily in taxi-medallion lending led to sizable losses for the Share Insurance Fund. According to the NCUA Inspector General’s recent material loss review, just three of these failures resulted in an estimated loss of $765.5 million. That is money that surviving credit unions ultimately could have used to increase consumer lending, lower interest on loans, or increase member dividends.

After the Great Recession, the FDIC and other banking regulators moved promptly to update and implement their risk-based capital standards. Yet, nearly a decade later, the NCUA continues to drag its feet. Why should it take complex, federally insured credit unions with $500 million or more in assets significantly longer to implement their comparable risk-based capital rule than it took for banks and thrifts to implement theirs? That is an uneven regulatory playing field.

Capital is the last line of defense that protects the Share Insurance Fund from losses. Capital also protects U.S. taxpayers from having to shore up the Share Insurance Fund, as they did during the Great Recession when the NCUA had to ask Congress for a temporary multi-billion dollar line of credit from the U.S. Treasury.

Pursuant to the Basel Accords, which sets international best practices, no modern financial institutions regulatory system operates without a meaningful risk-based capital component. Not only would the 2015 risk-based capital rule finally bring the NCUA into greater compliance with the Basel framework, it is required by law in the Credit Union Membership Access Act. That is why the risk-based capital standard is consistent with the cooperative nature of the credit union system and provides comparability to the other federal banking regulators.

Because the NCUA’s existing risk-based, net-worth requirement is ineffective, now is the time for the NCUA to move ahead with implementing its already approved risk-based capital standard. This advance notice of proposed rulemaking, however, is a big step backwards. The notice mashes two separate ideas together. One of those ideas is bad. The other has some merit. I would like to start my analysis with the bad idea.

This notice proposes an entirely new concept called the Risk-Based Leverage Ratio or RBLR for short. RBLR sounds a lot like rubble, and therein lies the rub. Regulators want an effective capital system to stand on a strong foundation, not on rubble.

We only need to look at the Marina District in San Francisco to understand what a bad idea this is. Much of the area is built on landfill, which is susceptible to soil liquefaction during strong earthquakes. In 1989, a sizable earthquake caused considerable damage to the community. Knowing that it is a bad idea to build on landfill created from rubble, why would we want to build a new capital system for federally insured credit unions based on the same concept?

There are at least four problems with the rubbish capital concept. First, the contemplated risk-based capital level would be too imprecise and would likely lead to some credit unions holding less capital than is safe and sound. This, in turn, could lead to greater losses to the Share Insurance Fund, which all surviving credit unions would need to pay. It would also lead to some credit unions holding more capital than desirable. This, in turn, could lead to a pull back on lending.

Second, if the new proposed capital levels are not comparable to those of banks, the agency will face litigation risk. While our standards for risk-based capital do not need to be identical to those of the other federal banking agencies, the Federal Credit Union Act requires that they be at least comparable. A RBLR system, which is really just a leverage capital requirement on steroids, fails that test.

Third, most of the rest of the international financial system follows the Basel capital standards, including financial institutions in developing countries. If the NCUA is going to present itself as a world-class regulator, then we should apply comparable capital standards as the rest of the financial world.

Finally, the NCUA staff have put in a decade worth of work into the risk-based capital rule finalized in 2015, the subordinated debt final rule adopted by this Board in December, and the Complex Credit Union Leverage Ratio proposal conceptualized in this notice. Absent a compelling reason to dismiss that hard work, the agency should not divert course to a capital simplification project. The RBLR concept serves as little more than yet another attempt to delay the implementation of the 2015 risk-based capital rule. As a safety and soundness regulator, I cannot abide that.

Now, I want to focus on the second part of this notice related to creating a Complex Credit Union Leverage Ratio, also known as CCULR. While not ideal, this concept has some merit. Section 201 of the Economic Growth, Regulatory Relief, and Consumer Protection directed the other federal banking agencies to propose a simplified, alternative measure of capital adequacy for certain federally insured banks.

While I would prefer that all credit unions hold capital in proportion to their risk, I also know that the Federal Credit Union Act requires us to develop comparable standards. Therefore, I am willing to consider implementing a similar option in the credit union system for those complex credit unions meeting certain tests.

The other federal banking agencies adopted their standards more than a year ago. We have plenty of information on which we could have issued a notice of proposed rulemaking to advance the matter now. Yet, in issuing this good idea in conjunction with a bad idea as part of an advance notice of rulemaking, we are needlessly delaying the rulemaking process.

In closing, I cannot support this notice because the RBLR idea is rubbish. And while I am cooler to the CCULR concept, we should have moved directly to a notice of proposed rulemaking. Doing so would have allowed us to provide some simplification of capital standards, as Congress intended, and bring the NCUA’s rules into greater conformity with the capital standards of banks more quickly.

Thank you, Mr. Chairman. I have no further comments.

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