The National Credit Union Administration (NCUA) in 2002 exempted federal credit unions (FCUs) that have demonstrated sustained superior performance as measured by CAMEL ratings and net worth classifications from certain regulatory restrictions through its Regulatory Flexibility (RegFlex) Program. The agency is now looking to rescind certain RegFlex authorities, because these activities pose a safety and soundness concern. NCUA should also revisit its net worth standard for participation in the program.
In November 2002, the criteria to achieve RegFlex designation were a CAMEL ratings of 1 or 2 for two preceding examinations and net worth ratio of 9 percent or more (200 basis points above the minimum regulatory standard for being “well-capitalized”).
In 2006, the NCUA Board relaxed the net worth portion of the RegFlex qualifications from a minimum 9 percent net worth ratio for one quarter to exceeding a minimum 7 percent ratio for six consecutive quarters. A seven percent net worth ratio is the minimum requirement for being well-capitalized.
This watering down of the net worth standard allowed more credit unions to qualify for RegFlex authority by by-passing certain safety and soundness restrictions. NCUA estimated that at the end of 2004 the change in the net worth standard would increase the number of FCUs qualifying for RegFlex authority from 3,457 to 3,919.
Given the agency's concerns about the risk posed by certain RegFlex powers, it would be appropriate for NCUA to look at raising the net worth standard above the minimum requirement for being well-capitalized and to require an FCU to meet a net worth duration requirement for RegFlex eligibility. This would demonstrate superior capital (net worth) management on the part of the FCU.
It is obvious from the issuance of the the proposed rule by NCUA that some FCUs, through their expanded authorities, have assumed excessive risk relative to their net worth positions.
By imposing a net worth cushion for RegFlex eligibility above the bare minimum for being well-capitalized should significantly reduce the risk to credit unions and the NCUSIF.
Nice that the credit union supervisor is conservative and/or cautions. It is why NCUA and credit unions are relatively untouched by the massive regulatory reform package now moving through congress.
ReplyDeleteUnlike the semi-solvent FDIC that has admittedly become part of the problem of our nation.
“We must recognize that not only did market discipline fail to prevent the excesses of the past few years, but the regulatory system also failed in its responsibilities. There were significant shortcomings in our approach that permitted excessive risks to build in the system”
--FDIC Chairman Sheila Bair, May 11, 2010
The ABA should be more insistent on having a first-class regulator for its member banks. It does not. Accordingly, ABA is failing in its mission, too.