ALEXANDRIA, Va.–The NCUA board has voted 2-1 to put out for 30-day comment a proposal to raise the definition of a “complex” credit union to $500 million in assets from $50 million for purposes of being required to determine risk-based net worth.
But the change to Part 702 of NCUA’s regulations, which if approved by the board would not go into effect until later this year, would expire on Dec. 31 as the result of another NCUA rule. As a result, NCUA Board Member Todd Harper called the proposal a “hocus-pocus sleight of hand worthy of Harry Houdini.”
According to the agency, the change would provide relief to 1,700 credit unions between $50 million and $500 million in assets, and 284 credit unions would no longer be subject to having to determine their risk-based net worth ratio.
NCUA staff, which told the board the proposal will not increase risk to the share insurance fund, said those 284 CUs represent 3% of all assets.
NCUA staff said that over the past year more than 100 credit unions grew beyond $50 million in assets, and now, in addition to dealing with the fallout from the pandemic, would have the new challenge of figuring out their new risk-based net worth ratio. The proposal will save those CUs the complex task, agency staff told the board. It is also worth noting the COVID 19 pandemic has resulted in more than 100 additional CUs increasing assets over the $50 million asset threshold. Prior to the pandemic they did not have to assess the net worth requirements. In 2018 NCUA determined a $500 million threshold was appropriate for defining a complex credit union.
“Even though we are providing potential relief for a number of credit unions, we are able to do so without imposing undue risk,” said NCUA staff. “It is important to note all complex credit unions under the current and proposed rule meet the risk-based net worth requirements. The majority exceed the net worth ratio minimum.”
‘Hocus Pocus’
After NCUA Chairman Rodney Hood, who likely oversaw his last meeting as chair as the incoming Biden Administration is expected to elevate Democrat Todd Harper to the chairmanship, Harper also called it “short-sighted” and “half-baked.”
“This proposal effectively lowers capital standards in the middle of a pandemic-induced economic crisis,” said Harper. “Even before the economic crisis brought about by the COVID-19 pandemic, I said that the agency’s safety-and-soundness supervisory efforts should focus on the institutions and activities posing the greatest risk to the Share Insurance Fund. In my view, all financial institutions backed by federal share or deposit insurance should hold capital commensurate with the risks held on their balance sheets. In the case of federally insured credit unions, such capital will protect taxpayers and credit union members by helping to either prevent credit union failures or mitigate losses to the Share Insurance Fund when a credit union fails.”
Noting he had long advocated for fixing the roof before it rains, Harper said the “next recession and financial crisis are here, and the proposal before us would weaken capital standards in the middle of this economic storm.”
A ‘Paper Exercise’
“Moreover, this rulemaking is a paper exercise without any substance,” Harper continued. “The proposal claims that it would provide regulatory relief for those credit unions currently subject to the risk-based net worth requirement between the current $50 million threshold and $500 million—supposedly 67 credit unions. All these credit unions, however, hold net worth in excess of the risk-based net worth requirement. So, the actual provided relief would be to zero credit unions.
“And, in a hocus-pocus sleight of hand befitting of Harry Houdini, another reason put forth to justify this proposed rule is that it would align the risk-based net worth standards with the risk- based capital rule set to take effect on January 1, 2022, which ta-da, would be undone by another item on today’s agenda—the advance notice of proposed rulemaking on simplifying the risk-based capital requirement.”
Harper suggested the board had again been presented with a proposal that is “bad public policy, has nothing to do with helping credit unions and their members weather the economic crisis caused by the COVID-19 pandemic, and is half-baked.”
Not a Game-Changer, But…
NCUA Vice Chairman Kyle Hauptman said he recognized the rule may only be in effect for less than a full year should it be finalized by the board, but it should still make “life easier” for some credit unions.
“I’m not saying it’s a game-changer, but it does fit in the category of small things NCUA can do for certain credit unions to make life somewhat easier this year,” said Hauptman.