What effect would NCUA’s risk-based capital proposal have on U.S. credit unions?
It all depends on your perspective, Mike Schenk, vice president of CUNA’s economics and statistics department, told 2014 CUNA CFO Council Conference attendees last week.
From NCUA’s perspective, the proposal “is no big deal,” Schenk said. The agency estimates that only 189 credit unions would fall from “well capitalized” to “adequately capitalized,” and that only 10 well-capitalized credit unions would be downgraded to undercapitalized.
Plus, Schenk explained, NCUA argues that the aggregate risk-based capital requirement for affected credit unions (those with more than $50 million in assets), would average 14.6%, while the overall average credit union risk-based capital ratio would be 15.7%—well above “adequately capitalized.”
Schenk’s response: “Really?”
“This is big deal that could have an incredibly negative effect on your credit union, your members, and your community,” Schenk said.
Schenk cited three reasons for his “grave concern” with NCUA’s proposal:
1. Credit unions that currently have 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,” Schenk said.
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.
According to CUNA’s analysis, many credit unions would fall from being well-capitalized with a healthy capital margin to just barely above the well-capitalized level.
“The proposal would require credit unions to hold more than $7 billion in additional capital,” Schenk said. “It also provides strong disincentives to engage in things we’re really good at and that members want. Policymakers should encourage more of what you do, not less.”
Schenk encouraged attendees to comment on NCUA’s proposal by the May 28 deadline.
“If you’ve already commented, there no rule that says you can’t comment more than once,” he said. “Every letter counts.
“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. That’s indefensible.”
Bill Merrick is deputy editor of Credit Union Magazine. Follow him on Twitter via @CUMagazine.