As Prepared for Delivery on July 22, 2021
Thanks to the staff for all your work on this.
The chief benefit of the proposed Complex Credit union Leverage Ratio (CCULR) rule is that it allows some credit unions to bypass a risk-based capital approach. For me, the point of this simpler leverage ratio is that it protects both credit unions and the National Credit Union Share Insurance Fund from the inevitable problems associated with risk-weightings.
As I said in my nomination hearing, capital is the holy grail. When a recession hits, the first thing I’d want to know about any deposit-taking institution is how much total capital they have.
However, the problem arrives with implementing risk-based capital, even though we all agree that some assets are riskier than others. In fact, the exact same asset can be riskier in the hands of one credit union versus being held by a different credit union, partly due to differences in loan servicing. It seems, at least to me, that the historical problems with risk-weightings stem from two factors.
Number one, humans make the risk-weightings, and humans are imperfect, especially when it comes to using the past to predict the future.
The second problem is about which humans are setting the risk-weightings. They are set by political appointees (with the best of intentions) while credit unions assess risk every day. The official risk-weights are set in a process that is, by definition, a political process and removed from the day to day reality in which credit unions operate. Ask anyone who has been to the meetings in Basel, Switzerland. Basel is a small city that is known for two things: it’s Roger Federer’s hometown and it’s where governments gather to talk about risk-weightings. The various political appointees often advocate for things that benefit their home constituencies.
To pick just one example: European governments wanted low risk-weightings on, you guessed it, European government bonds. And then, during the European Debt Crisis (opens new window) (You will be leaving NCUA.gov and accessing a non-NCUA website. We encourage you to read the NCUA's exit link policies. (opens new page).) , those same risk-weightings wound up increasing risk: The market shifted rapidly, the risk weightings did not. Greek bonds fell to junk status and Greece needed an IMF rescue (opens new window) (You will be leaving NCUA.gov and accessing a non-NCUA website. We encourage you to read the NCUA's exit link policies. (opens new page).) . Meanwhile, supposedly more-risky assets performed much better. To be clear, I’m making a comment about the risk-weighting process, not critiquing the individuals involved, who probably did the best they could at the time.
And for anyone who is fortunate enough to not be aware of the Basel risk-weighting process, here’s one final example from outside finance. Decades ago, governments around the world wanted to reduce the risk of fatalities caused by fires, so they promoted the use of asbestos. And they were right. Asbestos is useful at preventing fires. But as we know, it created new problems such as thousands of deaths from cancer. Those same governments rightly mandated its removal from schools and other places, but often chastising, without the slightest bit of contrition or self-awareness, the people who had followed their government’s lead in using asbestos.
I know that’s not a perfect analogy and obviously we need building safety standards, just look at the recent condo collapse in Miami. My point is merely an obvious one: that governments aren’t perfect and, wherever possible, we should find solutions that don’t rely on waiting for political appointees to make nearly impossible judgement calls.
So, all of that is an (admittedly long) way of saying that a simpler-yet-higher capital standard isn’t just useful because it saves time and effort. It’s also a way of protecting the system from the problems inherent in any risk-weighting process.
In conclusion, we can argue about exactly how much capital is appropriate for switching to a simpler capital ratio – and I’m aware that is no small matter. But so long as we must prepare for the possibility of a world with risk-based capital, I encourage everyone to submit comments on today’s proposals, including the issue of how to treat the 1 percent of credit union assets that sit in the Share Insurance Fund.
That concludes my remarks.