WASHINGTON--CUNA sent a letter to members of the House and Senate Jan. 16. regarding its viewpoints on the new risk-based capital rule.
The letter (below), signed by CUNA President Jim Nussle, outlines how NCUA's new rule is a marked improvement over the original proposal, yet is still a "solution in search of a problem."
The letter also shows how NCUA responded to the trade association's requests for changes to the first version of the RBC proposal.
January 16, 2015
Yesterday, the National Credit Union Administration (NCUA) Board released for comment the second version of its Risk-Based Capital Proposal for credit unions. This re-issued proposal (RBC2) includes substantial changes, but we still believe it is a solution in search of a problem, particularly considering the costs that credit unions will have to bear in its implementation and the lingering question as to whether NCUA has the statutory authority to issue this proposal in the first place.
The good news is that most of the changes that NCUA has proposed are positive. This is no doubt due to the 2,056 comment letters that the agency received -- a number that includes comments from the nearly 375 House and Senate members who weighed in last year. We greatly appreciate the interest these Members expressed, and we appreciate the extent to which NCUA took all of the comments into consideration.
The changes respond to the major criticisms we levied against the original proposal. As a result, it is a step toward a more palatable final rule, and the entire NCUA board is to be commended. However, RBC2 is far from perfect. In the coming weeks, we will be conducting analysis to more precisely measure the proposal's potential impact on credit unions and their members, but we do have some initial observations.
According to CUNA's analysis, under the original proposal (RBC1), about 200 credit unions would have seen their capital classifications downgraded. NCUA reports that with RBC2, the number of credit unions that would be downgraded would be fewer than 30. CUNA will conduct its own analysis of the number of affected credit unions.
The increase in the amount of capital that credit unions as a whole would need to hold in order to be classified as well capitalized is another key impact point of the proposal. Under the current Prompt Corrective Action system, that amount is 7% of assets for virtually all credit unions. RBC1 would have raised that by almost $8 billion. Our initial analysis of RBC2 suggests that increase could be less than $1 billion, but again, we will analyze this in more detail.
Here's a rundown of how well RBC2 responds to our requests for changes to RBC1:
| CUNA Request for Changes to RBC1 | Changes Reflected in RBC2 |
| We urged that the 10.5% requirement to be well capitalized be reduced or eliminated. | The requirement was lowered to 10%, however we are reviewing this change in light of our belief that the Federal Credit Union Act does not authorize NCUA to impose a risk-based requirement for a credit union to be well capitalized. |
| We urged that the risk weights applied to mortgage loans, member business loans, long-term investments, CUSOs and mortgage servicing assets be reduced. | Most of these risk weights have been lowered to some degree, with the exception of mortgage servicing assets. |
| We urged that interest-rate risk not be dealt with in the RBC system. | Interest-rate risk is not included in RBC2. We are concerned it will be the subject of another rulemaking, to which we have already objected. |
| We urged that the number of credit unions affected by the RBC rule be reduced by raising the asset size at which credit unions are covered. | The asset size threshold for RBC coverage was raised to $100 million from $50 million, reducing the number of credit unions covered to 1,455 from 2,237. |
| We urged that the power to impose an "individual minimum capital requirement," under which a credit union would have to hold more capital than that indicated by the risk-weighting system, be restricted only to the NCUA board, and not individual examiners. | The individual minimum capital requirement has been removed, but the NCUA board will retain its existing authority to take action on capital levels beyond the confines of the proposed rule. |
| We urged that credit unions be given more than 18 months to comply with any new RBC requirements. | The rule will not be implemented until January 1, 2019, or almost four years from now. |
| We urged that goodwill and credit unions' 1% insurance fund deposits be included as capital under RBC. | Certain goodwill already on the books will continue to be counted until 2025. However, RBC2 does not permit the inclusion of the 1% deposit. |
As you can see, almost all of credit unions' major recommendations were addressed in the right direction. However, the devil is in the details. We will be taking a deep dive to evaluate just how much relief the changes imply for well-managed credit unions. We will also comb through the complete proposal to make sure no other changes are necessary.
The biggest questions that remain are whether NCUA actually has the authority to issue this proposal under the Federal Credit Union Act, and whether the cost to credit unions is worth the benefit of having this proposal in place. These are significant questions that will take time to answer. We appreciate the interest that has been shown by so many Members of Congress, and we look forward to working with you as these and other questions are explored.
On behalf of America's credit unions and their 102 million members, thank you very much for your interest in this matter.
Sincerely,
Jim NusslePresident and CEO