ALEXANDRIA, Va.–The NCUA board has voted 3-0 in favor of an interim final rule related to asset thresholds pertaining to large credit unions.
As part of the vote, one NCUA board member proposed well-managed credit unions be given extended exam cycles so that NCUA might direct resources to credit unions that require more work.
The rule approved by the board—technically parts 700, 702, 708a, 708b and 790, is in response to the surge in deposits related to the pandemic and stimulus payments that has pushed some CUs over the $10 billion in assets threshold, which creates new regulatory and compliance demands.
The rule seeks to mitigate transition costs on certain credit unions related to the COVID-19 pandemic by allowing federally insured credit unions to use asset data as of March 31, 2020, to determine the applicability of certain regulatory asset thresholds during calendar years 2021 and 2022.
Specifically, the interim final rule allows a federally insured credit union to use March 31, 2020, financial data when determining whether the institution is subject to capital planning and stress testing requirements under the NCUA’s regulations and supervision from the Office of National Examinations and Supervision (ONES).
The change is expected to affect approximately 10 credit unions.
Response to ‘Temporary’ Issues
NCUA Chairman Todd Harper said the interim final rule is being issued to address economic disruptions caused by the COVID-19 pandemic, and is also comparable to an interim final rule for certain banks put in place by banking regulators.
“As financial first responders on the frontlines of the COVID-19 crisis, many credit unions have experienced rapid and unexpected balance sheet growth resulting from government policy responses to and consumer choices resulting from the economic upheaval caused by the pandemic,” said Harper. “In most cases, this growth is expected to be temporary and unlikely to change the long-term risk profile of the affected credit unions. In fact, many credit unions are holding these new deposits in cash, instead of long-term investments and member loans.”
Harper noted the assets have grown at many CUs due to factors related to the pandemic, including more than $1 trillion in stimulus payments to consumers and businesses, and the growth is expected to be temporarily.
“For federally insured credit unions just below $10 billion in assets at the start of the pandemic, these factors have resulted in their balance sheets burgeoning by an average of about 14%, and in one case by more than 34%,” said Harper. “In contrast, in 2019, federally insured credit unions with assets just below the $10 billion threshold had an average asset growth of only 9%."
The result, said Harper, is some federally insured credit unions have been, or may soon be, pushed over the asset thresholds that could subject them to additional regulatory requirements and supervision by the Office of National Examinations and Supervision (ONES).
“Because the asset growth was rapid and unexpected, many of these institutions have not adequately planned and budgeted for these transitions,” said Harper. “What is more, some of them may eventually fall below the thresholds as government interventions subside and consumers return to more traditional spending patterns. Accordingly, this interim final rule gives affected federally insured credit unions more time either to reduce their balance sheets or to prepare for higher regulatory standards.”
‘Treated Differently’
Harper acknowledged that there may be limited instances in which a threshold exemption would be inappropriate, which is why the interim final rule allows the board to continue to use its existing reservations of authority to designate a federally insured credit union as subject to ONES supervision or other stress testing and capital planning requirements.
“In instances when the federally insured credit union crossed the threshold due to a merger or purchase and assumption transaction, the asset growth is planned and should be treated differently than unanticipated increases,” said Harper. “In the case of the former, the credit union had the opportunity to plan and prepare for the change in regulatory requirements. In the case of the latter, it did not.”
Harper added that the board may in some instances still require a federally insured credit union to conduct capital planning and stress testing in the absence of a merger or purchase and assumption transaction, if significant asset growth at a federally insured credit union reflects a material change in the business model, risk profile, or complexity of the credit union.
Hauptman: Being ‘Thoughtful & Appropriate’
NCUA Vice Chairman Kyle Hauptman said the proposed rule will allow those credit unions nearing the $10 billion threshold to “thoughtfully and deliberately make the operational changes needed to comply with significantly heightened reporting requirements.”
“Normally, crossing the $10 billion threshold should be something one plans for carefully, given the substantial regulatory burden that comes with being over $10 billion — hence there’s not much reason to be sitting on, say, $10.1 billion in assets,” continued Hauptman. “Larger institutions do obviously place a larger risk on the Share Insurance Fund—no one is forgetting that—but today’s action is in line with NCUA’s efforts to provide temporary pandemic relief.
Citing the growth in assets and membership during 2020 by credit unions, including a record $273 billion (20%) surge in share deposits, Hauptman said it’s a “remarkable increase, but these changes in behavior are the result of the current environment and do not represent a threat to safety and soundness. We can also expect members to soon ramp up spending, as the American economy is the undisputed world champion at finding ways for consumers to spend money.”
Examination Incentive Proposed
Hauptman also added, “While we’re talking about thresholds, we may want to continue our conversations around aligning incentives so the NCUA can do what credit unions do, which is put resources where they’re most effective. What I mean is that perhaps well-managed credit unions can earn a longer exam cycle. If we can offer more credit unions the carrot of getting an 18-month exam cycle only if they get high CAMEL ratings, then NCUA can focus on the more problematic institutions. Plus those that earned the 18-month cycle would really want to excel on their future exams so they can keep the 18-month cycle, and those who didn’t earn it would have an incentive to do better so that they, too, can move to 18-months.”
Hood: ‘The Right Thing to Do’
NCUA Board Member Rodney Hood agreed with his fellow board members.
“Given the influx of stimulus deposits, and other government stimulus programs, this only makes sense to provide relief for share growth that could be temporary,” said Hood. “Temporary share growth should not bring credit unions additional regulatory burden.”
Hood noted five CUs have passed the $10-billion
threshold since April 1, 2020, and four more are approaching the milestone.
“The biggest adjustment for credit unions entering the ONES supervision is preparing for the quarterly data submissions and the capital planning and stress testing rule,” said Hood. “Providing a temporary reprieve is the right thing to do.”