The developments in risk based capital that have credit unions boards worried

By now, you have probably heard about the National Credit Union Administration’s proposal to introduce a Risk Based Capital system to the credit union movement. With only two weeks left to submit comments on the proposal – and all formal requests for an extension declined – credit union boards across the country are squirming under the implications of the rule. 

“NCUA is trying to change how credit unions do business in a way that will cost our members, and needs to hear from the members they serve,” stated Lou Gill, Secretary and Director of Chartway Federal Credit Union. “As a volunteer elected credit union official representing over 180,000 members, I have a responsibility to comment on this RBC proposed regulation because, if approved as written, it will change the future credit unions–and not for the good.”

Here’s a quick overview of two key changes:

1. A Basel-style approach that calculates capital ratios based on risk and new requirements for credit unions with more than $50 million in assets to maintain a well-capitalized ratio of 10.5% or to maintain an adequately-capitalized ratio of 8%.
2. NCUA examiners will be authorized to impose additional capital on credit unions on a case-by case basis when they determine that a credit union is facing risks not captured by the risk-based capital requirements.

NCUA estimates that, if the proposed changes were applied today, only about 200 credit unions would be significantly affected: 189 experiencing demotion in classification from well- to adequately-capitalized, and 10 more dropping from well- to under-capitalized. They have made available to the public a risk-based capital calculator, with which credit unions may determine whether they will be among those influenced. But, even if NCUA’s RBC calculator tells you that your credit union’s capital is sufficient today, consider the future. CUNA has developed a risk-based capital simulator that allows a credit union to model changes in its balance sheet and provides for the use of what-if scenarios, like changes over time in mortgage and member business lending and other eventualities NCUA has failed to consider.

In order to determine whether NCUA’s impact estimate was realistic, CUNA’s economists dug deeper into the proposal’s implications and quickly found thousands of additional credit unions that will be significantly affected by the proposed rule. The proposal also suggests that any credit union, whether or not they are among the estimated 200, may be subject to additional NCUA capital requirements if an examiner deems it necessary. We do not find a national regulation as arbitrary as this one to be justifiable.

Additionally, as the debate has continued, game-changing new developments have surfaced that no board should ignore:

Extended Phase-in

In a recent press release, NCUA indicated that there will be an “extended” time period for credit unions to come into compliance with the final rule once it is adopted by the NCUA Board. The release states that “NCUA plans an extended phase-in period for the final risk-based capital rule to allow credit unions enough time to adjust their risk profiles or capital levels, or both, to ensure compliance with the new regulation.” NCUA’s supplementary information accompanying the proposal goes on to state that “proposed amendments would go into effect approximately 18 months after the publication of a final rule in the Federal Register.”

In other words, NCUA believes 18 months is an adequate “extended” time period in which compliance can be achieved and capital buffers established movement-wide. We beg to differ, and feel that this phase-in time alone warrants a change to the proposal.

Concern from Congress

Former Senator Alfonse D’Amato (R-N.Y.), who chaired the Senate Banking Committee during the HR 1151 battle, wrote to NCUA last week outlining how the agency would exceed its legal authority if it adopted the RBC proposal. He makes the strong case that Congress never wanted NCUA to set up a two-tier risk-based standard because of “some very important differences” between credit unions and banks, most notably that the basic net worth standards for a credit union to be adequately or well capitalized are higher than those set for banks.

“If we had intended there to be a separate risk-based requirement to be well capitalized (in addition to the 7% net worth ratio), we would have said so,” D’Amato concluded.

This is a very important statement, which we think will be extremely helpful in persuading NCUA, and reinforces CUNA’s concerns with the proposal from the start, such as:

• • The Burden on Up-and-Coming Credit Unions: While the proposed rule would only apply to credit unions with more than $50 million in assets, it threatens the budding growth of the nearly 300 credit unions between $40 and $50 million that would exceed the $50 million level within a few years.
• • Risk Weights during Economic Upturn: When loan growth rises, loan-to-share ratios will approach pre-recession levels and shift large portions of assets from lower risk-weighted investments to substantially higher risk-weighted loans.
• • The High Cost of Buffer-Building: Even though most credit unions would be considered well-capitalized under the proposal, U.S. credit unions would likely need to hold $7 billion in additional capital to maintain current capital buffers.

The bottom line is, while many credit union boards agree that the movement would benefit from a smart and thoughtful Risk Based Capital system, NCUA’s proposed regulation is simply not it. Member and consumer lending, mortgage lending and the use of collaborative CUSOs will all be impacted, as well as dividends on member shares and product development.

“After reviewing NCUA’s calculator I started looking at the 198 page proposed regulation and listening to my CEO, CUNA and others in the credit union movement,” Lou Gill went on to say. “What I discovered was extremely troubling.  This proposed regulation will impede my credit union’s ability to be competitive in the marketplace in providing sound and safe member financial services.”

CUNA’s economic and legal staffs have been working to develop CUNA’s comments that would include recommendations that would satisfy NCUA’s goals while protecting credit unions’ potential for responsible growth. But it is essential that credit unions weigh in to add their voices to the demand  for major changes to the proposal. Please work with your CEO and use CUNA’s online resources to develop your letter and present your concerns and suggestions to NCUA before May 28, 2014.

Tune in to CUNA’s Risk Based Capital Blog for ongoing developments or visit the risk based capital action center at cuna.org/rbc to get involved in the debate.