ALEXANDRIA, Va.–The NCUA board has voted to put out for 60-day comment a proposal that offers two suggested approaches to simplify the risk-based capital requirement, one of which borrows from a model in place for community banks.
The vote on the proposal, which also calls for the creation of a Complex Credit Union Leverage Ratio, was 2-1, with Board Member Todd Harper casting the dissenting vote and calling portions of the proposal a bad idea “built on rubble.”
The trade group representing state regulatory agencies also issued a statement noting the FCU requires NCUA to consult and cooperate with state supervisors on prompt correction action and capital adequacy issues, and it expects "the agency to meet its lawful obligation."
The Advance Notice of Proposed Rulemaking, Part 702, Simplification of Risk Based Capital Requirements, would amend a current rule on risk-based capital scheduled to go into effect Jan. 1, 2022. That final RBC rule as it currently stands requires complex credit unions to meet an RBC requirement, which is a compliment to the PCA requirement (leverage ratio).
NCUA staff told the board the two approaches are aimed at reducing regulatory burden and include:
The Two Approaches
According to staff, the two approaches include:
- Risk Based Leverage Rule (RBLR). Agency staff said the RBLR would use a relevant risk attributes threshold to determine which complex CUs would be required to be hold additional capital, also known as capital buffers.
- Community Bank Leverage Ratio (CBLR). Recently put in place as an option for community banks by regulators, the CBLR would not replace the risk-based capital ratio in credit unions, staff said. Instead it provides an alternative. It would require a higher level of capital than otherwise required to be well-capitalized under PCA. Under the bank system, the bank must meet qualifying criteria, such as having total off balance sheet exposures of 25% or less; must have a minimum amount of tier 1 capital to quality for the CBLR; must opt in, and is involuntarily subject to RBC if qualifying criteria are not met.
Hood Seeks Feedback
NCUA Chairman Rodney Hood noted he has sought to reduce regulatory relief during his term and the ANPR seeks input on means of reducing requirements around risk-based capital. He repeatedly appealed to CUs to provide input.
Groundhog Day
NCUA Board Member Todd Harper said the proposal feels like “Groundhog Day” to him, as “again, some are seeking to delay and diminish the NCUA’s sensible risk-based capital rules with this proposal.”
“I have long held that all financial institutions backed by federal deposit insurance, including credit unions, should hold capital equal to the risks held on their balance sheets. In the case of federally insured credit unions, if a credit union with greater risk fails, risk-based capital would help to minimize losses to the Share Insurance Fund,” said Harper. “That additional money would protect surviving credit unions, their members, and taxpayers.”
Harper, who will likely be named chairman of NCUA next week under the new Biden Administration, said he is more concerned with concentration risk, and cited the estimated loss of $765.5 million to the insurance fund from the failure of credit unions that specialized in making loans for taxi medallions.
“After the Great Recession, the FDIC and other banking regulators moved promptly to update and implement their risk-based capital standards,” said Harper. “Yet, nearly a decade later, the NCUA continues to drag its feet. Why should it take complex, federally insured credit unions with $500 million or more in assets significantly longer to implement their comparable risk-based capital rule than it took for banks and thrifts to implement theirs? An uneven regulatory playing field.
“Because the NCUA’s existing risk-based, net-worth requirement is ineffective, now is the time for the NCUA to move ahead with implementing its already approved risk-based capital standard,” Harper continued. “This advance notice of proposed rulemaking, however, is a big step backwards. The notice mashes two separate ideas together. One of those ideas is bad. The other has some merit.”
Bad Vs. Merit
The “bad idea,” said Harper, is the Risk-Based Leverage Ratio, or RBLR.
“RBLR sounds a lot like rubble, and therein lies the rub. Regulators want an effective capital system to stand on a strong foundation, not on rubble,” he said. “Knowing that it is a bad idea to build on landfill created from rubble, why would we want to build a new capital system for federally insured credit unions based on the same concept?
According to Harper, there are “four problems with the rubbish capital concept”:
- The contemplated risk-based capital level would be too imprecise and would likely lead to some credit unions holding less capital than is safe and sound.
- The agency will face litigation risk, the Federal Credit Union Act requires that the proposed standards to be at least comparable.
- The rest of the international financial system follows the Basel capital standards, including financial institutions in developing countries, and so should NCUA.
- NCUA staff have put in a decade worth of work into the risk-based capital rule finalized in 2015, the subordinated debt final rule adopted by the Board in December, and the Complex Credit Union Leverage Ratio proposal conceptualized in the notice. “Absent a compelling reason to dismiss that hard work, the agency should not divert course to a capital simplification project,” said Harper. “The RBLR concept serves as little more than yet another attempt to delay the implementation of the 2015 risk-based capital rule. As a safety and soundness regulator, I cannot abide that.”
Some Merit
The idea that has some merit, said Harper, is the creation of a Complex Credit Union Leverage Ratio, also known as CCULR.
“While not ideal, this concept has some merit. Section 201 of the Economic Growth, Regulatory Relief, and Consumer Protection Act directed the other federal banking agencies to propose a simplified, alternative measure of capital adequacy for certain federally insured banks,” he said. “While I would prefer that all credit unions hold capital in proportion to their risk, I also know that the Federal Credit Union Act requires us to develop comparable standards. Therefore, I am willing to consider implementing a similar option in the credit union system for those complex credit unions meeting certain tests.”
NASCUS Response
Iin response, Lucy Ito, president of the National Association of State Credit Union Supervisors, said, "The Federal Credit Union Act (FCUA) requires NCUA to consult and cooperate with state supervisors on prompt correction action and capital adequacy issues, and we expect the agency to meet its lawful obligation. As for the proposal itself, both approaches outlined by the agency represent significant changes to how federally insured credit unions will meet capitalization requirements. The approaches include trade-offs that credit unions must weigh thoroughly, but also offer the potential for significant flexibility. NASCUS urges all of its members, both regulators and credit unions, to study this proposal carefully and offer input to us as we prepare our own feedback to the agency on the proposal."