Too much concentration on MBLs

by. Henry Meier

No one is going to accuse CU Times of overstatement in its article today that “Risk Based Rule Hurts MBL Biz Model.”

In putting forward this proposal, NCUA frankly acknowledges that its goal is to attack four main areas where it feels that the existing risk-based net worth framework inadequately reflects credit union risk. These four areas are delinquent loans; concentrations of MBL and real estate secured loans; equity investments; and off-balance sheet exposures.

NCUA’s decision to attack MBL concentration limits is understandably getting the most attention because it has the greatest potential of making large previously well-capitalized credit unions into undercapitalized institutions scrambling for ways to find additional capital. According to NCUA, currently MBLs comprise an aggregate of 4.8% of assets and an average of 5.14% of assets for complex credit unions with MBL loans. In contrast, 70 credit unions holding Member Business Loans have portfolios in excess of 15% of total assets.

This proposal would put the squeeze on these credit unions by increasing the asset weightings of MBLs that surpass certain concentration thresholds. For example, under the current risk based net worth weightings framework, MBLs comprising up to 15% of a credit union’s assets are given a 75% weighting. The new rule would increase this weighting to 100%. In addition, those credit unions with MBL concentrations between 15% and 25% of assets would see their risk weightings increase from 100% to 150%. Since the lwa already caps credit union’s MBL loans NCUA is going after credit unions that currently have authority to exced the MBL cap You can find more information about the regulation’s proposed MBL impact beginning on page 54 of the draft regulation.

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