The new RBC/CCULR net worth rule is the most comprehensive, intrusive and costly regulation ever passed by NCUA.

The agency’s staff’s initial estimate of the funds now restricted from increasing member value is over $24 billion. From  their December 2021 board presentation:

Under the CCULR, if all 473 credit unions opted into the CCULR and held the minimum nine percent net worth ratio required to be well capitalized, the total minimum net worth required is estimated at $111.8 billion, an increased capital requirement of $24.3 billion over the minimum required under the 2015 Final Rule. 

This is a minimum 30% increase of capital, restricting its use for members, and imposed just nine days after the rule’s printing in the Federal register.

RBC/CCULR is both procedurally and substantively deeply flawed. Instead of implementing the  legislative intent that PCA be applied to a limited number of “complex” credit unions, the regulation passed covers 85% of all credit union assets.

But what can be done especially as the NCUA board composed of different philosophies approved the rule 3-0?

A Future Opening

The recent Supreme Court 6-3 ruling in the West Virginia v. EPA case suggests there is another opportunity to withdraw the rule or to challenge its validity.

The EPA case is about much more than regulating pollution.  The 89 page opinion is here.

As summarized in a New York times article:

It . . . signals that the court’s newly expanded conservative majority is deeply skeptical of the power of administrative agencies to address major issues facing the nation and the planet.

Chief Justice Roberts, employing the phrase for the first time in a majority opinion, said it applied in cases of unusual significance and was meant to address “a particular and recurring problem: agencies asserting highly consequential power beyond what Congress could reasonably be understood to have granted.”

Another account of the decision in The Hill explains the broader significance of the Court’s reasoning:

In reaching its conclusion, the court relied on the controversial “major questions doctrine.” The major questions doctrine is a relatively new interpretative maxim that directs courts to presume that Congress does not intend to vest agencies with policymaking authority over questions of great economic and political significance.

Only Congress’s “clear statement” that it did intend to confer the claimed authority can overcome this presumption. When a court employs this maxim, it reads statutes narrowly, stripping the agency of the power to address the major question that the statute, on its face, gives the agency the authority to address.

Unsurprisingly, the main focus of the media, scholars and the public is on the consequences of the court’s move for the size and contours of the federal administrative state.  . . 

The impact of the court’s ruling on federal agency authority and power cannot be overstated.

A lawyer friend when asked,  opined: “what I’ve read about it suggests the Court is going to take a very restrictive view when assessing agency claims of regulatory authority (effectively dispensing with Chevron deference).  When the authority to regulate is clear, I have no idea how much discretion the agencies will be afforded when exercising that authority.  I’m not sure what category the RBC rules fall into.”

The  RBC/CCULR rule’s flaws include the following;

• The agency provided no “substantial objective evidence” that the system’s capital levels were inadequate under the existing RBNW rule. Staff admitted that only one troubled credit union in the past ten years would have been subject to RBC’s higher net worth ratio.
• The agency wrongly applied the “comparable” standard to implement a clone of bank regulations. This approach clearly contradicted the statutory intent that RBNW cover only an identified small number of “complex” credit unions that presented unusual risks. As staff confirmed in its board action memo: A special note that most, if not all, of the components of the CCULR are similar to the federal banking agencies’ CBLR.
• There was no statutory authority for a CCULR option which Congress, in legislation, authorized only for banking regulators.
• Nine days for implantation violates the “reasonable period of time” statutory requirement for a change in PCA capital levels.
• The rule imposes significant financial harm to members by reducing the value they receive,  beginning with the $24 billion staff estimate. That is just the initial number. It will grow every year.
• The compliance burden is unreasonable. It mandates a one-size-fits-all mathematical capital formula for every credit union independent of hundreds of individual risk circumstances.

A Way Out of the RBC/CCULR Morass

Credit unions can sue the agency for the substantive violations noted.  But that takes years and the harm done members will just continue in the meantime.

The most feasible course of action will be for a more informed NCUA board, responsive to the needs of credit union members, to use this Supreme Court precedent to withdraw the rule entirely.

That will require leadership, courage  and insight from current or future board members.   The first test is to ask the sitting members their views on this deregulation opportunity.

What would Hood, Harper and Hauptmann say in response to this Supreme Court interpretation?

In two weeks, credit unions will be able to calculate their newly imposed capital ratios.  Three different calculation requirements are now in effect.

Using yearend 2021 data, there are 212 credit unions over $500 million that will likely have to use RBC (risk based capital) because they had net worth below 9% at December 31.  Another 45 credit unions between $400 and $500 million reported net worth below 9%.  They will be subject to RBC when their total assets exceed $500 million.

This total of 257 credit unions is probably the minimum number as credit union share growth is usually seasonal, concentrated in the first four months of the year.  That is, assets will increase faster than capital can be earned at the same pace.

RBC’s Impact

RBC has still not hit home for some. These credit unions are telling members they are well capitalized because they exceed the 7% net worth level. Those so doing often fall short of the new 9% minimum.

The impact of RBC is best described with the boiling frog analogy.  A frog put in boiling water will immediately jump out. But put the frog in a pot of cold water, slowly raise the temperature and the frog will hot-pot to death.

Many large credit unions view RBC similar to  a pond Kermit.  As the RBC multiplex calculations slowly engulf quarter by quarter many will find themselves in unfathomable amounts of  creeping normality.

Some will immediately jump to the seeming sub debt life preserver to stay above the 9% threshold.   Soon they will realize that  option itself requires more leverage just  to  breakeven.  Sub debt  just made the water deeper and harder to jump out of the pan.

RBC and NCUA’s Record of Risk Analysis

In an April 30, 2010 speech to the Illinois Credit Union League 80^th Annual Convention Chairman Matz  offered these remarks on the corporate crisis:

“Let me start by assuring that I fully recognize the legitimate anger many of your feel.  The anger has come through loud and clear. . .I have heard directly about the pain you have felt. I know that many of you blame NCUA: After all, two examiners were on-site at US Central and WesCorp.  NCUA definitely shares some of the blame (and then comes the big qualifier) but there is plenty of blame to go around.”

What she forgot is that the regulator’s role is because crises are to be expected.  And when they occur, to be managed prudently.

The Irony of the RBC rule which is supposed to “protect the insurance fund” is that NCUA is often the source of the problem.  As one veteran CEO observed:

“All the losses -excluding a relatively low level of cu management  fraud – that NCUA has incurred is the result of errors in risk analysis by NCUA. They don’t like to acknowledge that fact, but the logic is inescapable.

By decreeing that most assets are now in complex credit unions, the industry is far more subject to the whims of a less than stellar team of NCUA executives who are increasingly enthralled by the “predictive” accuracy of astrologically and phrenologically based statistical models.”

The most catastrophic error in risk analysis is the Corporate crisis referred to by Chairman Matz. NCUA is now projecting a minimum of $5.7 billion in recoveries from the corporate AME’s.  Over $1.2 billion is still due shareholders of the four corporates.

This is the exact opposite result projected for years after the conservatorship when total costs of $13.5 to $16 billion  were estimated by NCUA.  The agency never revealed their analysis always referencing the results of their “engaged securities expert, Black Rock.”

 Learned Helplessness and the Actions of Others

With RBC it is easy to slip into a state of “learned helplessness.” That is  behavior exhibited when a person is repeatedly exposed to negative stimuli beyond their control.  Think regulatory burden.

The term describes experiments in which humans subject to loud noises, did nothing. seemingly helpless to change.

Not all the human participants responded the same way. Many blamed themselves for “failing,” but others blamed the way the experiment was framed. They knew it set them up for failure. In other words, not everyone is equally susceptible to learned helplessness.

Those who do not become passive when confronted with apparently uncontrollable situations are because they see others act with courage, overcoming difficult odds.  These leaders actions inspire others not to give up.

There is an initial segment of 257 credit unions who will be subject to the sophistry and real burden of RBC.  Some will throw in the towel, some will try to comply, and others will look for an “out” such as RBC or shrinking the balance sheet.

The hope is that most will have the courage and resilience to persevere until wiser heads prevail in Alexandria.