NCUA reissued its controversial risk-based capital proposal.
Input on pending regulatory issues is at the heart of the credit union movement’s powerful grassroots advocacy. And for the second time, CUNA seeks credit union input on the NCUA Board’s revised riskbased capital proposal, now referred to as “RBC2.”
Credit unions, leagues, and CUNA generated 2,056 comment letters about the agency’s first RBC proposal last spring. Legislative supporters in the House and Senate also shared our concerns. The agency pulled the proposal last fall, pledging to issue a revision, which it did in mid-January. Credit unions should submit comments to NCUA and CUNA by April 27, 2015.
RBC2 addresses many of the flaws the credit union system flagged. For example, RBC2 would now apply to “complex credit unions” defined as federally insured credit unions with assets of more than $100 million. The original proposal applied to credit unions with more than $50 million. Fewer credit unions—1,455, down from 2,237—would need to comply if this approach is approved.
The new proposal requires covered credit unions to maintain net worth and calculate RBC based on this formula:
Capital components minus capital deductions divided by risk-weighted assets (all as determined by NCUA).
RBC2 includes at least 25 improvements from NCUA’s first approach, and fewer covered credit unions would be negatively affected than under the initial proposal.
A key change is that a well-capitalized complex credit union would maintain a 10% RBC level (down from 10.5% in the first proposal) and a 7% net worth ratio (which isn’t changed from the current requirements).
RBC also would:
• Improve the risk weights in most areas. (Credit unions still must assess if the changes are enough, and NCUA is seeking particular comments on these changes). The proposal also reduces risk weights for higher concentrations of mortgages and business loans. It doesn’t reduce the risk weight for mortgage servicing.
• Eliminate the confusing provision regarding individual minimum capital but add a requirement for covered credit unions to have a capital adequacy plan under which NCUA could impose additional capital beyond what the rule requires.
• Include the entire ALLL (allowance for loan and lease losses) account in RBC.
• Treat one- to four-family nonowner-occupied first or junior liens as residential rather than member business loans, and thus subject to a lower risk weight.
• Lengthen the time period to 90 days before NCUA considers a loan past due.
• Permit a credit union that holds the first mortgage and junior lien on the same property to treat the borrowings as a single loan subject to first lien risk weights.
• Delay compliance until Jan. 1, 2019.
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.
• 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.
1. Regulatory advocacy resources: cuna.org, select "legislative and regulatory advocacy"
2. Risk-Based Capital Action Center resources, including CUNA analysis, an archived webinar, FAQs, an ongoing blog, and a risk-based capital calculator: cuna.org/rbc
This provision would invite examiners to demand additional capital from credit unions continually, and potentially subject credit unions to even more scrutiny regarding their capital levels and capital strategies to balance their risks.
Of course, credit unions do routinely develop and implement strategies to maintain adequate capital. But addressing this issue as a regulatory requirement increases the likelihood that examiners will secondguess credit unions’ efforts and capital plans. NCUA has indicated that it will develop examiner guidance on this issue that would be available to credit unions, but rest assured, we’ll be covering this issue in our comment letter.
• Supplemental capital for RBC purposes. CUNA supports authority for all federally insured credit unions to use supplemental (secondary) capital for RBC2 purposes. Quite frankly, we believe NCUA should have included this provision in the new proposal.
While NCUA isn’t expanding supplemental capital authority under RBC2, the agency seeks comments on this issue. Credit unions should weigh in after considering these six questions:
1. Should NCUA include additional supplemental forms of capital in the risk-based capital ratio numerator, and how would including such capital protect the National Credit Union Share Insurance Fund from losses?
2. If you believe NCUA should include supplemental capital in the risk-based capital ratio numerator, what specific criteria should such additional forms reasonably meet to be consistent with GAAP (generally accepted accounting principles) and the Federal Credit Union Act (FCUA)—and why?
3. If NCUA allowed certain forms of certificates of indebtedness in the risk-based capital ratio numerator, what specific criteria should such certificates reasonably meet to be consistent with GAAP and the FCUA—and why?
4. In addition to amending NCUA’s risk-based capital regulations, what additional changes to NCUA’s regulations would be required to count additional supplemental forms of capital in NCUA’s risk-based capital ratio numerator?
5. For state-chartered credit unions, what specific examples of supplemental capital allowed under state law do you believe NCUA should include in the riskbased capital ratio numerator—and why?
6. What investor suitability, consumer protection, and disclosure requirements should be in place related to additional forms of supplemental capital?
NCUA formed an internal working group to focus on supplemental capital, and CUNA has reached out to work with that group as well.
• Goodwill in supervisory mergers. Unlike the agency’s initial proposal, RBC2 would allow a credit union to factor goodwill in a supervisory merger into its RBC calculation until January 2025.
Credit unions should consider two issues regarding NCUA’s treatment of goodwill. The agency has defined “supervisory merger” in a positive way, to include mergers in which the agency or a state regulator identified the continuing credit unions, and no actual assistance for the merger is necessary to meet the definition.
CUNA supports the definition. But we question whether it’s necessary to end the provision in January 2025. We’ll continue to discuss this issue with affected credit unions.
Working together for changes
Because CUNA does not agree that any RBC rule is necessary, we’re preserving all options as we continue to assess the proposal’s impact and our members’ views regarding the changes.
Two of the three NCUA Board members have already indicated their strong support for a new RBC rule, even as all three agency leaders urge credit unions to comment.
In light of that, CUNA will continue to listen to our members and seek improvements in RBC2, just as we did with the first proposal.
RBC2 and the improvements it contains are the direct result of the credit union system pulling together and engaging with Congress to accomplish a single objective: a much better RBC rule.
The second round of changes does not need to be as sweeping as the first. But collaborating again as we did before, we can improve RBC2 even more.
MARY DUNN is CUNA’s deputy chief advocacy officer and senior counsel for regulatory and executive branch affairs. Contact her at 202-508-6736 or at email@example.com.