NEW YORK—Analysis of the new risk-based capital proposal shows the revision has come a long way in reducing RBC’s negative competitive impact on credit unions, reports one analyst.
Peter Duffy, managing director at Sandler O'Neill, said the new version of the RBC plan is much “kinder and gentler” than its predecessor and substantially similar to the banks’, with some advantages, a couple big disadvantages, and an “oddity” that improves upon the original rule but is “incongruous.”
That “oddity,” Duffy referred to is that CUs covered by the new proposal are those with $100 million in assets and greater. “This is a big improvement (over the original rule) for credit unions, but is at odds with NCUA’s recently finalized liquidity and hedging rules, where the covered credit unions start at $250 million in assets”.
Among important changes, there are those that bring the CU rule in line with the banks’ rule, continued Duffy:
“Mortgage lending is the same as it is for banks until you get to 35% of assets, and then there is a 25-basis-point tax on credit unions,” said Duffy. “The mortgage risk weight is a win versus the first risk-based proposal and an improvement versus banks’, but some CUs will still struggle with this.”
Funds held at the Federal Reserve or Treasury go to zero risk weight. “The same as banks,” said Duffy. “And investments are now essentially risk weighted the same as banks. This is a huge improvement, and removes a serious competitive flaw versus banks.”
Consumer loans are looked at from the standpoint of whether the loan is secured by collateral or unsecured—same as banks. ”If the loan is secured by collateral the risk weight is 75%, if unsecured it is 100%—the same as banks—that means student loans and credit cards are 100% risk weighted. Auto loans enjoy 75% risk weighting, which is kinder than the banks’ risk weights here, which are 100%.”
Delinquent loans, for the purposes of risk weighting, are at 90 days not 60, Duffy said, bringing credit union capital rules more in line with banks’.
Like banks, Goodwill will no longer be considered part of capital, but will be allowed for mergers prior to the final RBC rule taking effect. “And then CUs will have a ten-year runway to work the Goodwill off the balance sheet.”
Besides the auto loan advantage, credit unions “pick up important potential advantages over banks in the revised rule with the changes proposed for ALLL, and the ratio required for well capitalized, noted Duffy.
“Specifically, CUs will be able to count in capital all of the ALLL, while banks are capped at 1.25%. When combined with the 10% requirement for well capitalized—down from 10.5%--some may argue 10% is not enough, given the inability of credit unions to raise capital. The community bank well-capitalized ratio is 10%, but they are capped at 1.25% for ALLL and can raise equity capital. Equity capital is distinguished from debt capital for banks and Basel III. This is because equity and retained earnings are considered Tier1 while debt is Tier2.”
Duffy called removing the individual minimum capital requirement a “non-event,” saying NCUA has always had the authority, if they are not comfortable with a CU’s balance sheet, to address the CU’s minimum capital standard via supervision.”
And as CUs’ risk-based capital standards fall more in line with banks, industry trade groups are paying close attention. The Independent Community Bankers of America has stated that if the new rule turned out to be similar to banks, particularly if supplemental capital were allowed, the group will ask why the CU tax exemption is justified.
“The revised rule is difficult to distinguish from the bank rule, with the exception a limited number of advantages and disadvantages,” said Duffy.
But Duffy cautioned that, “optimism” about the capital regulation is tempered by the need to consider the revision in the context of the new interest rate risk regulation he feels is due sometime this year from NCUA. “What will that look like? Some, who may be happy with the new RBC rule now, might then consider things back to square one.”
Duffy said the biggest disadvantage to CUs with the new proposal is that supplemental capital was not addressed. “There remains no access to equity capital, which many large CUs desire to accommodate both their strategic planning and to facilitate mergers. But, equity capital is a Congressional decision, anyway.”
Related
McWatters Challenges NCUA’s Legal Authority To Issue Two-Tiered Rule
CUNA, NAFCU & NASCUS Weigh In On RBC