NCUA Director Metsger to Address Amplify Convention in Spokane
July 22, 2014
July 22, 2014
Rick Metsger joined the National Credit Union Administration (NCUA) board of directors on Aug. 23, 2013. Prior to his appointment to the regulatory board, Metsger served as an Oregon State Senator and a volunteer board member for the Portland Teachers Credit Union. He has also worked as a teacher and print and television journalist.
Since his appointment to the NCUA by President Obama, Metsger became quickly immersed in the NCUA’s risk-based capital proposal, which has drawn thousands of comments. He has also launched a review of his agency’s restrictions on fixed assets for credit unions and is exploring regulatory relief in other areas. Metsger is slated to speak to Northwest Credit Union Association members on Oct. 7 for the kickoff of the Annual Business Meeting.
Do you often get out and make speeches to credit union and other groups?
I’ve met with credit union leagues and their members from Washington, Oregon, California, Nevada, Wyoming, Arizona, Colorado, Louisiana, South Carolina, Tennessee, Florida, New York and New England in just the last three months. I’ve probably met with credit unions from at least 40 of the 50 states during this first year alone.
What are you hearing?
Credit unions are interested in the proposal on risk-based capital that we are working on. It’s the topic of the day right now. It’s actually a revision of a rule we already have that didn’t receive a lot of attention until now.
Lending by its nature is risky. The issue is how sufficiently a credit union — or bank — has mitigated that risk. Risk-based capital looks at how heavily an institution is involved in mortgages, auto loans, and other investments. For example, during the most recent recession, people who had loans on houses valued at $800,000 turned back the key on homes that had dropped to $200,000 in value. It doesn’t take too many of those to cause a problem for the lender.
Does your proposal require credit unions to build more capital?
Only about 3% of credit unions would have to raise more capital, or alternatively, reduce risk, and only 10 credit unions out of 6,400 would be categorized as “undercapitalized.” The goal of the proposed rule is to require capital to be commensurate with the risk on a credit union’s balance sheet. Some risks take more capital than others.
Interest rates are low now. Let’s say you’ve invested in a security with a fixed rate of 3% and then interest rates double requiring you to pay your depositors 5% when you are only getting 3%. What the risk-based system does is try to quantify what risk is on your balance sheet and calculate the capital required to support that risk. Capital requirements are designed to encourage credit unions to have balanced portfolios.
Why has the NCUA proposed to update this rule now and what’s the timing as far as when it takes effect?
I can’t say for sure when the final rule will be issued but it is unlikely that it will before late fall and credit unions will be given an extended period of time to adjust their balance sheets before the rule actually takes effect.
Why do this now? You repair the roof in the summer, not in the winter. The idea is to have a more accurate portrayal of risk when there is no crisis, when interest rates are at historic lows. There’s really only one way for them to go. We have some financial institutions who want to invest in long-term assets that are paying yield now, so they can pay the bills. That works fine until interest rates go up.
Why has this been so controversial?
It’s definitely the most controversial issue I’ve dealt with since I came onto the board, but I can’t say whether it’s one of the most controversial issues in NCUA history. As people understand this more and more, they come to a better appreciation of why it makes sense. If you’re a well-run credit union with a balanced portfolio it really is not going to have material impact on you.
In June, the Wall Street Journal carried a story with the headline: “Credit Unions Ramp Up Risk; Lenders Loosen Lending Standards, Increase Exposure to Longer-Term Assets.” Do you agree with the headline and the story’s premise?
A: No. Obviously that was a headline writer trying to get attention. Looking at the system as a whole, I would tell you that credit unions are not taking undue risk. They’re well capitalized and continue to operate in a safe, sound and conservative environment. Regulation is always aimed at outliers to make sure they conform to best practices.
There are some credit unions that are reluctant to make tough choices. Let’s say you’re a credit union and you have 13 branches. Let’s say your lending is down quarter after quarter, year after year. Your expense ratio continues to grow but your earnings aren’t. Most credit union CEOs will make the tough decisions they have to make, such as shuttering a branch, reducing the size of staff. A few don’t.
Do you think small credit unions are an endangered species?
There’s no question that in the financial services industry, in general, there’s a trend toward consolidation. And that trend is going to continue. We get a merger just about every day and a half — about 300 a year.
The consumer is one of the primary drivers of this trend. Thirty years ago, when I was a member of the Mt. Hood Federal Credit Union, you had two things you wanted out of your credit union: a savings account and a car loan. Today consumers want mortgage loans and business loans. They want mobile banking and if they’re not doing everything online, they want to use their smart phone to access their accounts. They want these very expensive services and if they don’t get them from their credit union, then they will go someplace else. Bigger credit unions have the ability to offer these services whereas some smaller credit unions are consolidating in order to be able to afford to do so.
It’s important to remember that while the number of credit unions is shrinking, the total number of credit union members continues to grow at a rapid rate.
What’s been a surprise since you joined the NCUA board?
I don’t know that there was anything shocking. I was pleasantly surprised to find out how hardworking the people are at the agency. Moving from Oregon to join a bureaucracy in D.C., I just didn’t know if there were going to be a bunch of stuffed shirts. I’m happy to say these are great folks. And it’s a truly nonpartisan operation.
What issues do you think people will be talking about next year?
I can’t speak for others, but I’ve been looking into areas where there is a legitimate need for regulatory relief. For example the restrictions on fixed assets for credit unions, including their buildings and technology. This rule dates back to 1987. With today’s cybersecurity concerns, we’re encouraging credit unions to update their systems and it’s difficult for them to do that if they’re held to a specific spending level. Revising the fixed assets rule would give them much more freedom to address those issues without having to ask for permission from the regulator at every turn.
I am also interested in our definition of “small” credit unions being those with $50 million or less. As you are well aware, small credit unions qualify for regulatory relief. A lot of people think of a “small” bank as one that has less than $250 million or $500 million in assets. I believe we should revisit the definition of a small credit union. More generally, I think it’s important to look at areas where the NCUA might do less micromanaging of credit unions and concentrate instead on oversight.
Mestger joins a lineup of speakers with expertise in consumer behavior, developing future opportunities, branding, leadership and emerging technology. More details about Amplify Convention and registration information can be found online.
Questions about this story? Contact Lynn Heider: 503.350.2225, email@example.com.