NCUA Board Member Harper’s Uninformed Stance on Risk-Based Capital (RBC)

It is one thing to be uninformed on a critical issue of public policy. It is another to open one’s mouth and remove all doubt. And then compound the folly by writing a public editorial after losing a 2 to 1 vote at the most recent NCUA Board meeting.

Harper’s Rationale for Implementing Risk Based Capital Rules

The core logic in his December 16 press release follows: (

After the Great Recession, the Federal Deposit Insurance Corp. and other banking regulators moved promptly to update and implement their risk-based capital standards. Yet the NCUA wants to delay implementation for a second time. Why should it take complex, federally insured credit unions with $500 million or more in assets seven or eight years longer to implement their comparable risk-based capital rule than it took for banks and thrifts to implement theirs? That’s an uneven regulatory playing field

Pursuant to the Basel Accords, which sets international best practices, no modern financial institution’s regulatory system operates without a meaningful risk-based capital component. Not only would the 2015 RBC rule finally bring the NCUA into greater compliance with the Basel framework, it’s required by law in the Credit Union Membership Access Act. That’s 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.

The Argument is Dead Wrong

Apparently, Board Member Harper and his staff have been so busy that they have failed to note that on September 17, 2019, the FDIC eliminated all risk-based capital requirements for community banks with assets less than $10 billion. The policy was supported by the OCC and Federal Reserve.

Banks are no longer required to calculate or to report the ratio. They will be considered well capitalized under PCA if they meet a simple leverage ratio.

This simple leverage ratio is the PCA model for credit unions. The banking regulators have endorsed the credit union’s current and historical approach to capital adequacy measurement.

Harper now wants to impose this failed system on credit unions. The banking regulator’s actions acknowledged that RBC is not only burdensome, but more importantly, it does not work in practice. As one banking analyst Tom Brown observed as early as 2014:

We’ve already seen that the risk-based approach does not work. It’s obvious that neither man nor model can adequately assess a given asset’s risk under all circumstances before the fact. It doesn’t make sense to spend a lot of time trying. It does make sense to have a minimum leverage ratio, but it should be the same for banks of all sizes.”

Source: A Loss of liquidity, not inadequate capital, is what often dooms banks., April 22, 2014

Similarly, Harper’s references in his editorial to Basel, the taxi medallion failures and the role of capital in credit unions are inaccurate. More importantly his reference to an “uneven regulatory playing field” demonstrates a complete failure to grasp cooperative design, its distinctive strengths versus for-profit financial models, and the unique role of the NCUSIF’s pool of credit union capital.

The Failure of NCUA Board Leadership

When NCUA board members appear so oblivious to the realities of their responsibility, other leaders must step up. Call out the erroneous facts and logic. Present reasonable solutions. And if that fails, go to Congress and the press.

This public bumbling undermines the public reputation of the NCUA board and the cooperative system it regulates. It calls to question the ability of the board members to oversee their responsibilities not just for policy but also for basic tasks of examination, supervision and funding oversight.

The track record described below suggest the current NCUA board has a long way to go to overcome a growing list oversight failures.

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