ALEXANDRIA, Va.–By a 2-1 vote, the NCUA board has approved the revised risk-based capital rules for credit unions, over the protests of at least one CU trade group and several members of Congress.
The new RBC rules will go into effect in 2019. Voting in favor of the new rules were Chairman Debbie Matz and Vice Chairman Rick Metsger; board member Mark McWatters cast the dissenting vote.
The majority of CUs will see an increase in their capital ratios as a result of the proposed rules, with NCUA saying the average “complex” CU will have 19.2% in capital under the new rules. Both Matz and Metsger repeatedly stated the rule is aimed at “outliers” and at “encouraging other credit unions from becoming outliers by holding capital commensurate with the risk on their balance sheets,” as Metsger noted.
Those outliers, approximately 5% of all CUs, will need to manage their balance sheets over the next three years to get in compliance with the new standards.
Small Number Of CUs Affected
Although the new rules affect a small number of CUs, the risk-based capital proposal has been the subject of one of the most extensive discussions and debate in NCUA history. While the proposal remains subject to a “Stop and Study” bill in Congress, as Metsger noted during the meeting the process of implementing the risk-based capital rules has been the subject of substantial stops and studies to date. The initial proposal was followed by 125 days of comment, which was followed by more study at NCUA, listening sessions led by Matz, a revised proposal, and another comment period.
The revised rule reflects a number of changes to the original proposal, including recalibrating many risk weights to better align with banks’ requirements, the removal of interest-rate risk from the calculation of the risk-based capital ratio, and an extension of the implementation date.
Despite those changes, opposition to the rule remains strong. As NCUA staff was citing statistics showing 76% of all credit unions are currently exempt from the risk-based capital rules and that 99% of all CUs currently qualify as “well-capitalized” under the plan, NAFCU was tweeting that those figures demonstrate exactly why the new rules aren’t needed. In addition, in what’s believed to be a first, a letter from a member of Congress who opposes NCUA’s decision to issue the rule was read into the record during the board meeting. In all, more than 4,000 letters were received by NCUA to both the original proposal and the revised proposal.
Prior to the vote, board member McWatters read a lengthy statement opposing NCUA’s legal authority to issue the two-tiered risk-based capital plan, saying congressional intent had been misinterpreted and that an opinion letter the agency had previously obtained was relatively weak. That statement can be found here.
Wishful Thinking
McWatters, who referred to his fellow board members’ votes and agency staff interpretation of the law as “wishful thinking,” called on NCUA to “revise the rule as soon as possible to incorporate a three-tier regulatory approach under which credit unions with assets of $100 million or less would be fully exempt from the rule, credit unions with assets of greater than $100 million but less than $550 million would be subject to a RBNW rule specifically tailored to their small entity status and the actual risk presented by such credit unions to the NCUSIF, and credit unions with assets totaling more than $550 million (to) be subject to a more fulsome rule, which would include supplemental capital.”
McWatters’ opposition however, was not sufficient to win over the other two board members.
After thanking credit unions for their record input to both proposals, and emphasizing it’s been a two-year process, Matz—as she has in the past—turned to reasons for the rule.
“This board has a responsibility to follow the current law. And current law, according to the Federal Credit Union Act, requires the NCUA board to design a risk-based capital system that is ‘comparable’ with the federal banking agencies. The FDIC, OCC, and the Federal Reserve Board issued new risk-based capital rules in 2013. So, by law, we are required to update our risk-based capital rule as well.”
Matz pointed to reports from both the Government Accountability Office and NCUA’s Inspector General that found the existing NCUA rule on risk-based net worth failed to prevent credit union losses during the financial crisis.
“However, even if we were not compelled to do so by law, or by the GAO, or by the Inspector General, there is another compelling reason why we need this rule—it will protect the entire credit union system,” she said.
Focus Is On 'Outliers'
Matz stressed the focus of the rule has always been requiring credit unions that are “high-risk outliers” to hold sufficient capital to offset their risks to minimize systemic losses. She reminded that CUs that “survived” the recession hold an average net worth of 10.9%.
Matz again cited the failures of CUs during the financial crisis, including corporate CUs, and said the “outdated” PCA rules NCUA has in place did nothing to prevent or even delay many of those losses.
“So if history repeats itself, those who believe today’s credit union system has too much capital will see more high-risk credit unions fail the next time there is a major downturn in the economy,” said Matz, who emphasized that she is not saying each credit union must hold net worth over 12%. “What I am saying is that each credit union needs to have sufficient capital to cover its own risks. A well-designed, risk-based capital rule should do exactly that.”
Matz stated that the NCUA’s “outdated” risk-based rule has not kept up with the growing sophistication of credit union assets over the past 13 years, and restated the agency’s position on the rule’s impact on the CU system—a position credit union trade groups have disagreed with.
“For the vast majority of credit unions, this final rule will have no impact,” Matz said. “That’s because 76% of all credit unions are exempt, as their assets are below $100 million. And even among the complex credit unions that are covered by the rule, based on their current balance sheets, nearly 99% would remain well capitalized.”
CUNA and NAFCU have consistently stated that the limited reach of the rule over the entire industry questions the need for the guidelines.
Matz added that the vast majority of covered credit unions will see their capital buffers increase.
“If the rule took effect today, only 16 credit unions would fall into a lower capital category,” she said. “Based on the current risks on their balance sheets, those outliers would have a combined capital shortfall of $67 million. The rule will not take effect until 2019. So capital outliers will have more than three years to plan their strategies.”
Matz reminded that even though the outliers represent a very small number of credit unions, in assets they hold $10 billion, or about as much as the entire NCUSIF.
“If any one of those outliers were to fail, all credit unions would have to pay for their losses,” Matz said. “Further, this rule will require credit unions with more than $100 million in assets to develop a capital adequacy plan. This will ensure the safety and soundness of the credit union system well into the future.”
Matz re-emphasized a point made earlier this year, that RBC will be the last significant safety and soundness rule change for the foreseeable future. And she noted that, “Contrary to some reports, we are not planning any new rule on interest rate risk. In the coming months, we do plan to propose several new rules that will provide regulatory relief to thousands of credit unions.”
Supplemental Capital Rule Coming
Matz restated the agency’s support for supplemental capital as part of RBC.
“However, under the Administrative Procedure Act, before we can include supplemental capital in a final rule, we are required to issue a separate Notice of Proposed Rulemaking,” Matz said. “So we plan to address supplemental capital as soon as possible in a new proposed rule. The new proposed rule will present stakeholders with a specific outline of our plans to count supplemental capital, and provide opportunities for further comments.”
Matz said the effective date of a final supplemental capital rule would coincide with the effective date of risk-based capital in 2019.
NCUA’s Director of Examination and Insurance, Larry Fazio, said guidance will be provided to examiners in 2018, as will new tools for credit unions to be able to determine their capital ratios under the new metrics.