NCUA’s risk-based capital proposal is generating widespread and deep-seated concern among credit unions—and rightly so.
The proposal would require credit unions with more than $50 million in assets to meet a minimum risk-based capital requirement. NCUA says more than 90% of affected credit unions would meet the minimum risk-based capital requirement if the proposed rule were in effect today. The aggregate risk-based capital ratio for credit unions subject to the proposed standard would average 14.6%, the agency reports, while the overall average credit union risk-based capital ratio would be 15.7%—well above the proposed 10.5% requirement for classifcation as “well-capitalized.”
NCUA further estimates that if the requirements were applied today, only 189 credit unions would experience a decline in their prompt corrective action (PCA) classifcation from well capitalized to adequately capitalized, and only 10 well-capitalized credit unions would be downgraded to undercapitalized.
Credit unions, however, have not allowed the agency’s initial estimates to lull them into a false sense of security. There are three big reasons for grave concern:
1. Any credit union currently with less than $50 million in assets must anticipate future asset growth that will put them over the threshold and expose them to the rule.
2. Loan growth is picking up among credit unions, and balance sheets are changing. For many, those changes are shifting big chunks of assets from the proposal’s lower risk-weighted investments to substantially higher risk-weighted loans.
3. Many more credit unions will lose their current capital cushions and see their risk-based capital ratios fall closer to the proposed 10.5% definition of well-capitalized. Credit unions strive to maintain sufficient capital levels to remain safe from risks and avoid running afoul of PCA requirements. Most credit unions want a sufficient capital buffer to remain adequately capitalized, if not well-capitalized, for PCA purposes in the event of significant growth or a loss that might reduce the capital ratio.
Under the proposal, the margin of error will decline substantially for many due to the introduction of a new requirement to be “well capitalized.” In fact, CUNA’s analysis shows many credit unions would fall from being well-capitalized with a healthy margin to just barely above the well-capitalized level.
The proposal would require credit unions to hold more than $7 billion in additional capital. We arrive at this estimate by studying 2,504 federally insured credit unions with more than $40 million in assets and comparing their current margins above being well capitalized to what they would be if the NCUA proposal were in effect.
Many, if not most, of the nearly 300 credit unions with $40 million to $50 million in assets will exceed the $50 million asset level in just a few years. And while 863 of the 2,504 credit unions examined would enjoy greater capital buffers under the proposal, the total capital increase among these credit unions would be only $63 million.
The remaining 1,641 credit unions with assets of more than $40 million would see their capital cushions shrink by a combined $7.4 billion if the proposal went into effect.
NCUA’s proposal imposes a multibillion dollar price tag of additional capital for a system that withstood, under the current system, the worst financial crisis in 80 years.
The more we examine the proposal, the more we find it has little or no basis. We’re not even convinced NCUA has the authority to establish this rule in the first place.
All credit unions must engage to obtain meaningful change to this proposal. Express your concerns to NCUA. But know that the clock is ticking: the comment period expires May 28. Learn more at cuna.org/rbc.
MIKE SCHENKis CUNA’s vice president of economics and statistics. Contact him at 608-231-4228.
CUNA’s inaugural Fair Lending Workshop took place last week in Denver, leading to valuable discussions on compliance with the Equal Credit Opportunity Act, the Fair Housing Act, the Home Mortgage Disclosure Act and more.