By Ray Birch
WASHINGTON—Despite the fact a final risk-based capital rule will almost certainly be published within the next 12 months, CUNA and NAFCU say the final judgment on RBC can only be made once a new interest rate risk rule is delivered.
And consensus is that won’t even begin to appear from NCUA until risk-based capital is finalized.
Bill Hampel, CUNA’s chief economist and chief policy officer, explained that having IRR addressed within the risk weights, as was the case with the first risk-based capital proposal, did not work.
“A major concern with the original proposal, among credit unions and CUNA, is that it addressed interest rate risk within the risk weights,” said Hampel. “Now it is removed, which is one of the significant reasons this pure risk-based system is substantially improved. However, NCUA has indicated that they will find another way to deal with interest rate risk, and that is what we and credit unions are concerned about.”
How Will NCUA Handle IRR?
Bill Hampel, CUNA
CUNA Deputy General Counsel Mary Dunn pointed out that a key issue related to the second proposal is how the agency may handle IRR. She said CUNA is not supporting a new IRR rule or additional IRR requirements. She noted that in the agency’s description of the proposal, NCUA states that one way to treat IRR would be to add a separate IRR standard as a sub-component of risk based capital. The IRR standard would be based on a comprehensive balance sheet measure, like net economic value, that takes into account offsetting risks across all asset and liability categories.
“That could be outlined under a new proposal,” Dunn explained. She said NCUA currently is not clear on how this assessment will be implemented and addressed, but added the assessment could be “problematic.”
“It is costly for credit unions to do these kinds of analyses,” said Dunn. “And right now we don’t know what the timeframe for them will be. One of the biggest concerns credit unions continue to raise is that they don’t want new rules and don’t know how NCUA will address interest rate risk.”
Carrie Hunt, NAFCU SVP/general counsel, sees RBC incomplete with IRR looming.
“There is a missing piece as to how NCUA will address what they feel is risk within the credit union system,” said Hunt. “So it is hard to entirely judge the impact on credit unions from the second proposal just by looking at this latest rule.”