Areas of concern remain
CUNA advocated for these and other changes NCUA included in RBC2.
It was encouraging to see that the NCUA Board listened and responded to credit union concerns, CUNA President/CEO Jim Nussle says. “This includes lowering the 10.5% well-capitalized requirement, lowering some of the risk weights, removing the treatment of interest rate risk [IRR], extending the implementation time frame, reducing the number of credit unions affected, and addressing the individual minimum capital requirement.
“We remain unconvinced that this risk-based capital approach is even necessary,” he continues. “We’re concerned about the risk-based, well-capitalized requirement and the substantial cost the proposal will impose on credit unions. We’ll continue to be fully engaged with the NCUA Board and the credit union system to enhance the revised rule.”
Specific areas of concern with RBC2 relate to the agency’s continued focus on IRR, capital planning, supplemental capital, and goodwill in a supervisory merger. Here’s a closer look at each:
• IRR. While the agency removed weighted average life (IRR components) to assign risk weightings for investments, NCUA is still concentrating on IRR. As concerns surfaced in 2014 regarding IRR in the risk weightings, the agency signaled it might issue a separate rule on IRR.
NCUA now asks for comments on how it should deal with IRR within its overall regulation of prompt corrective action. As a number of credit unions have noted, this quest is troublesome and most credit union stakeholders (at least those outside the agency) question the need for any new IRR rule.
The supplementary information accompanying the proposal indicates NCUA is considering adding a separate IRR standard that’s based on a “comprehensive balance sheet measure, like NEV [net economic value] that takes into account off setting risk effects between assets and liabilities. The intent…would be to measure IRR consistently and transparently across all asset and liability categories, to address both rising and falling rate scenarios, and to supplement the supervisory process with a measure calibrated to address severe outliers,” NCUA says.
We believe this sounds like more regulation, especially since the current IRR rule just took effect in 2012. That’s why CUNA staff, along with our Examination and Supervision Subcommittee, are already meeting with NCUA regarding our concerns and monitoring developments in this area closely.
Our objective is to develop recommendations to address any real safety and soundness issues the current IRR rule might not satisfactorily cover, but without tough new requirements for well-managed credit unions.
CUNA will be discussing RBC2 with credit unions and policy makers during this month’s Governmental Affairs Conference, March 8-12 in Washington, D.C.
CUNA encourages all credit unions to share their views and concerns on RBC2, even after the conference.
Visit cuna.org/rbc for more resources about the proposal and assistance with comment letters.
The comment deadline to NCUA is April 27, 2015.
• Additional capital. Responding to concerns from CUNA, leagues, credit unions, and others, the agency eliminated the provision in the earlier proposal regarding individual additional minimum capital. That’s the good news. (Under the previous provision, an examiner could have imposed additional capital on credit unions on a case-by-case basis. RBC2 would continue the authority of the NCUA Board to reclassify a credit union and, if below adequately capitalized, subject the credit union to supervisory actions because of safety and soundness.)
But the new proposal would add this requirement: A covered credit union must maintain capital commensurate with the level and nature of all its risks. These credit unions also must have a process to determine capital adequacy in light of their risk and a comprehensive written strategy to maintain “an appropriate level of capital.”
NCUA maintains that this addition merely codifies its existing examination policy.
Yet including this provision as a new regulatory requirement will be problematic. CUNA is concerned because such a provision would potentially subject credit unions to higher capital requirements than what the final rule provides.