NCUA should ensure FHLBank ‘negative tangible equity’ issues are resolved

CUNA, the American Association of Credit Union Leagues (AACUL), and Leagues wrote to NCUA board members Wednesday urging the board to ensure that creditworthy credit unions with negative tangible equity are able to “quickly and efficiently” obtain necessary written requests for advances from NCUA to the Federal Home Loan Banks (FHLBanks).

The Federal Housing Finance Agency currently prohibits FHLBanks from making new advances to members with negative tangible capital unless the institution’s federal agency or insurer makes a written request to the FHLBank. 

“The unique effects of the pandemic on the housing market and financial institutions’ balance sheets in combination with a rising rate environment, has increased the likelihood that many financial institutions may have negative tangible capital under this definition,” the letter reads. “However, this is not truly an indicator that these financial institutions are not creditworthy. The FHLBanks already engage in a rigorous credit review process, but, unfortunately, this bright line regulatory requirement puts the onus on NCUA to verify the credit union is safe and sound before the advance can be issued.”

CUNA requests NCUA ensure the request process is transparent, efficient, and as fast as possible, and asks that NCUA communicate about this process quickly so the requests aren’t delayed.

“If possible, NCUA should make a preemptive written request that the FHLBanks make advances to credit unions that can demonstrate their safety and soundness through reported metrics, such as their capitalization category,” the letter reads. “This would ensure that NCUA could spend time considering issuing written requests only for those credit unions that might be actual borderline cases.

“We also would encourage the NCUA to work with the FHFA to waive the regulatory requirement for the FHLBanks to treat negative tangible equity as a disqualifying metric of credit worthiness when considering new advances to members,” it adds.

In the longer term, the organizations believe FHFA should modify its requirements align with NCUA and other regulators’ capital requirements when determining a credit union’s creditworthiness in connection with a new advance.