ARLINGTON–NAFCU has filed its comment on NCUA’s proposed simplification of risk-based capital requirements, but noted it’s difficult to offer detailed response in the absence of specific information about either of two proposals the agency has put forward.
NAFCU’s comment letter was sent in response to NCUA’s advanced notice of proposed rulemaking (ANPR) on its RBC rules as it reconsiders the rule first put in place in 2015 and now scheduled to take effect in 2022.
The ANPR, which the NCUA board approved in January, proposes two different approaches for simplifying the RBC rule, including:
- Replacing the RBC rule with a risk-based leverage ratio (RBLR), which uses risk attribute thresholds to define “complex” credit unions
- Adopting a complex credit union leverage ratio (CCULR), which would leave the 2015 RBC rule unchanged but allow eligible complex federally-insured credit unions to opt-in to the CCULR to meet the RBC requirements
Support for Further Consideration
“NAFCU would support further consideration of the RBLR or the CCULR in a future proposal,” wrote Andrew Morris, NAFCU’s senior counsel for research and policy. “While certain design characteristics present natural tradeoffs between the two options, the merits of both are difficult to judge in the absence of specific information about either the RBLR’s risk factors or the CCULR’s eligibility criteria and ultimate leverage ratio.”
In the letter, Morris said the 2015 RBC rule lacks important flexibility found in comparable bank regulations and broke down the association’s recommendations for each approach that would provide credit unions with necessary capital relief as challenges presented by the pandemic continue to linger.
CCULR Approach
Morris called on NCUA to “tailor this analogue of the CBLR to the unique characteristics of credit unions rather than copy the exact criteria adopted by the other banking regulators,” and consider leverage ratio lower than 9%.
He also urged NCUA to avoid an asset-based limitation on the CCULR eligibility, include goodwill in the CCULR numerator, and consider a longer grace period for those credit unions that temporarily dip below the required leverage ratio, saying there is merit in the simplicity of the approach.
RBLR Approach
On the RBLR approach, Morris wrote that proposal where the risk factors encompass a reduced set of asset categories that would, under the final RBC rule, receive a risk weight in excess of 100% offers a “desirable starting point.” In addition, Morris recommended tailoring the RBLR to mitigate the risk of a capital cliff, where a small increase in a certain type of asset results in a large increase in the risk based capital requirement.
Prior Support Expressed
NAFCU has stated in the past it supports amendments to the RBC role and has requested NCUA consider adopting a community bank leverage ratio, similar to the CCULR included in the ANPR.
The grade group also asked the agency to permanently grandfather “excluded goodwill" and "excluded other tangible assets" in the RBC calculation.
CUNA also filed its comment letter on the proposal with NCUA. Coverage can be found here.