By Ray Birch
ALEXANDRIA, Va.—With the deadline Monday for comments on NCUA’s risk-based capital proposal, the number of letters NCUA received Tuesday morning reached 2,167--more than the 2,054 submitted in response to the initial proposal.
But a CUToday.info review of the letters, in addition to interviews with analysts, suggest the feedback won’t drive much substantive change to the revised proposal.
During the initial comment period, a large number of well-thought-out, strongly argued and detailed responses led NCUA to rethink its plans and introduce a new proposal that many within the movement say is much improved, with risk weights that now place CUs on even footing with banks and their Basel rules—and not at a competitive disadvantage.
NCUA Friday reported that more than 1,700 letters had been recorded ahead of the April 27 deadline. Yet some analysts believe that much of the feedback to the revised risk-based capital plan are of the form letter variety, or simply state their opposition to the rule and call on Congress to play a role. A sampling of the letters by CUToday.info confirmed the assessment.
Many Detailed Answers
While analysts added that many letters are again detailed—like the eight-pager from the $1.1-billion Achieva CU in Dunedin, Fla.—and will provide NCUA with much to consider, they say the marked improvements in the revised proposal have led to some complacency within credit unions. Some CUs, too, are fed up with the process and are simply “voting no on RBC2,” like the $85-million Abbey CU in Vandalia, Ohio. Meanwhile, smaller CUs are struggling with finding the time to dissect what is in many ways a new rule (see related story).
Peter Duffy, managing director at Sandler O'Neill, New York, said reaction to RBC2 has been divided.
“If you step back and look at what the reaction of the industry has been, it is bifurcated,” said Duffy, noting the high number of brief comments. “Many credit unions are not commenting. You have comments from vendors and advisors who seem to be sympathetic to small credit unions, and you have the trade associations challenging the legal position of the agency to hand down a two-tiered system while questioning the need for a risk-based regime.”
Duffy said he has been monitoring comments closely and believes most of the large credit unions are not commenting this time, saying they did voice their opinions with the initial proposal. He attributes much of that to NCUA adjusting the risk weights and significantly removing the negative implications of RBC1.
“There are a few of the larger credit unions commenting and providing well-thought-out responses with good points,” said Duffy last week. “In my conversations with credit unions I can say that the overwhelming majority are very glad about the rule changes that have been made but wish there was an option for supplemental capital, with a growing number of them now recognizing that debt capital is not the answer.”
RBC1 A 'Disaster'
Duffy called the first proposal a “disaster” for CUs from a competitive standpoint with banks.
“But RBC2 is, essentially, parity with banks from a competitive standpoint, or darn close to it,” he said.
More short form letters, rather than detailed feedback, is what CUToday.info found in a sample of comment letters on NCUA’s website.
A look at the first 20 letters listed Friday morning revealed that only four provided detailed comments on how the rule would impact the credit union and two letters shared marginal details. The rest were simply brief form letters, some using the same template, most telling NCUA to withdraw the rule and that RBC can only come by way of legislation.
Randy Karnes, CEO of the Grand Rapids, Mich.-based CU*Answers, conceded that many credit unions this time may be sending in shorter letters. Karnes, who was one of the drivers behind the CU Voices initiative that sought to address that complacency and drive comments on the revised proposal, sees two groups of letter-writers.
“I think you have two basic camps this time, people who have accepted RBC as inevitable but still want to give good testimony,” said Karnes. “Then, you have people who think this is all inevitable and are pissed that they were not listened to the first time and are sending in comments to simply ‘vote no’ on the rule.”
Support For McWatters
Karnes added that those voting no may also be showing support for NCUA Board Member Mark McWatters, who has been outspoken in his opposition to the RBC proposal and who has vowed to “continue the fight.”
Dennis Dollar, principal at Dollar Associates in Birmingham, Ala., told CUToday.info that if the comments this time fall short of round one in number or in content, there are clear reasons.
"Historically a second comment period on the same issue will draw fewer comments the second time around,” said the former NCUA chairman. “The issue is not as fresh. The intensity of concern has often faded with the rising of other intervening issues. And, most importantly as it relates to how it drives the number of commenters, every RBC2 regulatory change in response to the first comment period removes a subject of potential comments during the second period.”
But Dollar stated that no matter where the final comment total lands, CUs are still focused on risk-based capital.
Significant CU Interest
“Make no mistake, while comments may not match the 2,100 comment letters from RBC1, any proposal that draws over a thousand comments reflects significant interest from affected stakeholders,” pointed out Dollar. “There is still a great deal of interest in the RBC2 proposal, but there were so many improvements in the provisions of the second version over the first that there is no question that has tempered the opposition somewhat.”
That, too, has shifted much of the debate, Dollar said, to focus on McWatters' dissent—on whether the rule is necessary and whether NCUA even has the legal authority to enact the proposal. Dollar, like Karnes, added that many CUs are simply resigned to what’s coming.
“Combined with NCUA's public comments during the RBC2 comment period that have clearly been intended to lower expectations of any additional substantive changes—when those same agency officials made a lot of statements during last year's RBC1 comment period about plans for major rule changes—the credit union community seems to be somewhat resigned to the certainty of a final RBC rule and what it will look like,” explained Dollar. “Basically, the NCUA message is that the final rule is going to essentially mirror RBC2.”
Bill Hampel emphasized that with comments at 1,700 and climbing, it’s hard to say credit unions are not engaged with the second proposal.
“Yet it is a different story in round two,” said CUNA’s chief economist and chief policy officer. “Because in round one we had a proposal that would have dramatically disrupted the operations of a large number of credit unions. There would have been a big change to the way CUs manage their capital. There would have been a very large increase in the amount of capital that many credit unions would have to hold to be well capitalized.”
Hampel noted that CUNA analysis showed that under RBC1, credit unions collectively would have had to hold about $7 billion in additional capital to be well capitalized. Under the second rule the total is about $500 million.
“That does not mean we would have had a very large number of credit unions undercapitalized with the first proposal. Most of the CUs needing to hold the additional capital have it. But the credit unions’ cushion above being well capitalized would have shrunk by $7 billion, which would, among other things, impact their ability to grow,” said Hampel, who noted that the marked improvement in several risk weights, as well, made the second proposal more palatable for CUs.
“For all of those reasons, when you talk to individual credit unions, they say they felt threatened operationally from the first proposal,” continued Hampel. “Their concerns over the second proposal are more philosophical or principled—the main one being the question of whether NCUA has the legal authority to impose a two-tiered risk based capital requirement.”
NAFCU Senior Vice President of Government Affairs and General Counsel Carrie Hunt told CUToday.info that many NAFCU members have been weighing in with detailed comments. She said while NAFCU provides talking points for its members, credit unions are urged to develop their own letters that tie the points to what’s happening at their own shops.
Addressing the appearance of many form letters this time, Hunt said, “Even form letters show the credit union cares about the issue and is taking notice. This rule is extremely detrimental to credit unions.”
NAFCU, along with CUNA, has been calling for NCUA to withdraw the proposal. And both trade associations restated that position in comment letters to the agency. The letters also outlined that if rule withdrawal does not happen, many aspects of the proposal need changing.
Michael Bell, attorney and counselor at Royal Oak, Mich.-based Howard & Howard, agreed that even form letters make a clear point.
"There certainly were plenty of ‘form’ comments made this time around. But the power of those comments should not be dismissed simply because they are forms,” said Bell. “However, as we approach the comment deadline the substantive comments are coming in. We have seen some poignant, sage and spot-on comments filed. When reviewing these comments it's clear that CEOs and their teams have closely reviewed and examined the implications of RBC2."