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.

One commentator on the rule which went into effect on January 1, wrote me:

“Regulatory net worth is a tax on asset growth. It requires resources be directed to reserves held idle on the balance sheet, instead of being used for investment in credit union products and services. . .

Increasing the regulatory capital erodes competitive positioning opportunities and makes it harder for credit unions to fulfill their chartered mission.

The other factor is the low interest rate environment.  You can’t accrete capital fast enough by just growing assets anymore. . .   This regulation is a death warrant for credit unions between $400 million and $1 billion.  . . .”

How much is this initial tax to be CCULR compliant?

Between $30-40 billion  of sequestered existing reserves or required new capital to be at 9%.  That assumes no capital buffer is added.  This total will be approximately double the industry’s total net income in 2021.

Two others wrote after reading Three Strikes a RBC/CCULR Should be Out:

Why didn’t someone sue?

I’m not hearing a peep out of CUNA or NAFCU over this change.

The Grass Roots Effort in 2015

The December 2021 RBC/CCULR rule was the fifth formal rule-making effort spanning an eight-year period.  The initial proposal was so badly put together the agency concluded that: After carefully considering the comments of stakeholders, Chairman Matz in September (2014) announced that the agency would make significant structural changes to the proposal and issue a revised proposed rule for a second comment period.” (NCUA 2014 Annual Report pg 12)

The final rule was proposed in January 2015.  At that year’s GAC convention, credit unions were urged to Raise Their Voice in opposition to the rule.

With a booth encouraging action:

Despite widespread, continued credit union opposition, the Board approved RBC in a 2 to 1 vote  in September 2015 with McWatters opposed.  Ironically, NCUA’s 2015 Annual Report’s theme, “The Year of Regulatory Relief” was a PR fantasy.

So onerous was the rule that implementation was deferred  for more than three years until January 1, 2019 to: “provide ample time for affected credit unions to choose to generate more capital while continuing to maintain their current portfolios, reduce risk, or execute some strategic combination of the two.”

In October, 2018, the Board approved a one year further delay in implementation. It raised the definition of complex in the rule from $100 to $500 million in assets, removing 1,026 credit unions from its requirements.

In 2019 the Board passed another delay of two years until January 1, 2022, described as a “win for credit unions.”

The fifth time was the charm.  By a vote of 3-0 in December, 2021, the board passed RBC and CCULR with only a nine-day lead time before becoming effective on January 1, 2022.

The Illusory Truth Effect

One of the realities of public discourse is that when something is repeated often enough, people begin to think it is true.  Especially if the misstatements are by persons in authority.

Credit unions filed 2,056 comments in opposition to the 2014 proposal. They filed just 21 responses to the new CCULR/RBC rule.

Was the low response due to regulatory fatigue?  Did NCUA just outlast the widespread industry opposition? Perhaps.

I believe the pattern of reissuing, modifications and extensions all created the impression that the rule was both necessary and legal.  It was neither.

It is an example of an “illusory truth effect” created by NCUA’s off and on again eight-year rule making campaign.

The agency had five different chairs in these eight years with no consistent policy process. This elongated effort created a regulatory “myth” distorting credit unions’ true capital adequacy and  full compliance with  PCA requirements.

Under 22 years of RBNW guidance, the agency summoned credit unions’ self-determined capital management,  The  result was a 3.5% average net worth ratio above the 7% minimum.  RBC/CCULR imposed a new, higher 9% standard by fiat.

The New Rule’s Failings

• The agency provided no “substantial objective evidence” that the system’s capital levels were inadequate under RBNW. Staff admitted that only one failed credit union in the past ten years would have been subject to RBC’s additional capital.
• The agency wrongly used the “comparable” standard to implement a clone of bank regulations. This approach clearly contradicted the statutory intent that RBNW cover only a select small group of credit unions that represented unusual risks. As staff stated in its board 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.
• Nine days for implantation violates the “reasonable period of time” requirement for a change in PCA capital levels.
• Harm to members will be real. Over 500 credit unions will now be burdened with immediate RBC compliance.  They must limit asset growth or charge members more to take the so-called CCULR “off ramp.”
• The compliance burden is immense. Completing the final five pages of information in the revised 32 page quarterly call report is required to compute this one RBC ratio.

Who Will Raise the Issue Now?

Credit unions’ initial response could be to give up any effort to change.  Just attempt to live with it.  Or merge.  The reporting and tracking burden is so intense that NCUA has launched a 90-day period of  industry webinars, examiner training and printed guidance.  It has waived late filing fees for March.

At a time of rising interest rates, inflation, cyber worries, members’ economic uncertainty and continued technology disruption, credit unions are learning to fill out a new form.  Five pages of data to calculate a single ratio.

Once this one ratio result is known, credit unions must then decide how to conform all of their decisions to this rule that rates the risk of every asset choice they make.

This rule was a leadership failure from the top down. To change will require action from the grassroots up.

First Stop: GAC

A rule promulgated  to enhance the future viability of the credit union system will have just the opposite effect.  It reduces competitive options immediately.

Every credit union attending GAC can inform and rally peers, trade spokesmen, congressional contacts and the press about this unwarranted burden.  Examples are critical; do the homework. Know your ratio and the choices you now must make to counter the rhetorical myths others may use to support the rule.

Press your case publicly-see the booth picture above.  Privately, ask NCUA board members to see the consequences and change the rule before more harm is done. Board members Hood and Hauptman stated their responsibility for the rule’s consequences:

Hauptman: The Board intends to monitor the impact of CCULR and RBC on credit unions and the Share Insurance Fund going forward. I look forward to working with my Board members next year and the year after on quantitative analysis on a cost and benefits of our current approach to RBC and CCULR.

Why not begin this year?

Why This Matters

One of the unique features of credit unions is their democratic governance. Whether in the oversight of the credit union via the board or in interactions with the regulator, democracy is fragile.  It requires constant practice, renewal and involvement.

This rule is so obviously wrong from  many perspectives that it is hard to understand how it got this far.  But the internal appeal of governmental authority is strong, especially clothed with good intent.

The authority asserted in this rule is total, every asset and maturity decision now comes with a regulators’ risk rating.  NCUA staff and board seem blissfully unaware of how this will impact credit unions.  Somehow it is supposed to make the insurance fund stronger!

Changing this outcome will require an all hands and all voices effort.  But then democracy was never meant to be a spectator sport.

And I will continue to do so!