WASHINGTON (5/27/14)--Former Speaker of the House Newt Gingrich, who worked on amending the Federal Credit Union Act in 1998, submitted a letter Friday to the National Credit Union Administration regarding its risk-based capital (RBC) proposal, calling the proposal "extraordinarily troubling."
Gingrich, a Republican who represented the 6th District of Georgia, is one of the latest U.S. legislators to bring their concerns to the attention of the regulator. (See related story: RBC proposal may impede CU goals: Sen. Nelson.)
The NCUA's proposal would replace existing risk-based net worth requirements with new risk-weighted asset and capital requirements. The rule would apply to federally insured "natural person" credit unions with more than $50 million in assets.
"This is not what Congress contemplated NCUA should do to establish a Prompt Corrective Action regime," Gingrich wrote, adding, "We never intended, nor even comprehended the possibility of higher risk-based capital requirements for well-capitalized credit unions than those that apply to adequately capitalized credit unions."
Under the proposed rule, an adequately capitalized credit union would need to maintain a net worth ratio of 6% and an RBC ratio of 8% of equity to risk assets, while a well-capitalized credit union would need 7% and a higher RBC ratio of 10.5%, meaning the RBC ratio for well-capitalized credit unions exceeds that for adequately capitalized credit unions. This violates the Federal Credit Union Act, the Credit Union National Association says.
The act directs the NCUA to set any risk-based component for the well-capitalized threshold no higher than the component for the adequately capitalized level.
He continued, "If Congress wanted a different result, we would have indicated that. In fact, in other banking statutes, we did exactly that. At the time of the 1998 statutory change, banks were already subject to risk-based capital ratio standards for both the adequate and well-capitalized classifications.
"However, both then and now, banks have a lower statutory leverage ratio and access to supplemental forms of capital," Gingrich wrote. Quoting from the Federal Credit Union Act, he added, "The proposal thus creates a system that does not seem 'to take into account that credit unions are not-for-profit cooperatives' that 'do not issue capital stock,' 'must rely on retained earnings to build net worth' and 'have boards of directors that consist primarily of volunteers."
Lastly, "banks and credit unions are not the same, and we did not want NCUA to treat them exactly the same," he wrote, urging the regulator to design a system that takes into consideration the unique nature of credit unions and applies the risk-based standards as Congress intended--at the adequately capitalized level.