By Norm Patrick
Thanks to multiple stimulus payments and a sustained period of low interest rates that can be attributed to COVID-19-related policies, credit unions across the country have experienced unprecedented levels of deposits and growing balance sheets.
The impact on the number of $10-billion credit unions is undeniable: It has nearly doubled since pre-pandemic, and more credit unions are on track to surpass the $10-billion mark within the next few years, with 18 credit unions currently in the $7-billion to $9.9-billion range.
Why is the $10 billion threshold significant? The Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank) was signed into law in July 2010 and was aimed at implementing go-forward corrections following the financial crisis and recession over the preceding three years. Under Dodd-Frank, an asset threshold of $10 billion was established as a trigger to invoke heightened risk management, regulatory oversight and scrutiny, including direct supervision from the newly created Consumer Financial Protection Bureau (CFPB).
Furthermore, surpassing the $10 billion mark would unlock aspects of certain regulations that impact credit union revenue generation, such as debit card interchange fees under Regulation II.
Definitions and Requirements
As a result of the unintended balance sheet expansion resulting from policies related to COVID-19, two interim rules have been adopted by regulators to temporarily ease the burden of increased compliance costs and revenue impacts for credit unions reaching the threshold to become covered financial institutions ahead of plan:
- In December 2020, a temporary interim final rule was issued by the Federal Reserve that changed the asset measurement date for Regulation II (Debit Card Interchange Fees and Routing). If a debit card issuer reached $10 billion in assets after Dec. 31, 2019, that issuer would not be considered a covered issuer subject to interchange fee limitations until assets are measured by the Federal Reserve in 2022.
- In March 2021, another temporary interim final rule was issued by the NCUA that changed the asset measurement date for capital planning and stress testing requirements, with direct oversight from the NCUA’s Office of National Examinations and Supervision (ONES). If a credit union surpassed $10 billion in assets after March 31, 2020, then the credit union would not be considered as covered until January 2023.
Key Implications
The primary impact on credit unions once they surpass the $10 billion threshold is a new realm of risk management and capital planning requirements, as well as more rigorous regulatory oversight – all of which have a significant impact on the cost structure of a covered credit union.
Covered credit unions are required to initially develop, and then maintain, an annual capital plan and related policy by Dec. 31 each year. Credit unions can expect a heightened level of regulatory scrutiny and examination of impacts from NCUA ONES, as well as the CFPB as an additional bureau of oversight and examination, primarily through the consumer protection lens.
Directly related to these requirements, there will be a need to invest significantly in technology, infrastructure and talent needed to support the new regulatory demands of a $10 billion institution. To that end, credit unions should plan for higher levels of operating expenses.
An End to Exemption
Becoming a $10 billion credit union also brings an end to the small issuer exemption afforded through Regulation II, which governs debit card interchange fees and routing. More specifically, credit unions can expect to have debit card interchange fees capped, regardless of the point-of-sale transaction type (i.e., signature vs. PIN-based). This regulated level of interchange fee represents roughly a 50% reduction from the current level of non-regulated interchange.
Furthermore, debit card issuers over $10 billion are subject to rules around net compensation from a payment card network, which have been established to avoid issuers and networks evading the interchange fee caps. As a result, a covered issuer may not receive financial compensation from a payment card network that exceeds the total amount of fees paid by the issuer to the network in a calendar year.
Looking Ahead
Surpassing the $10 billion threshold brings about very significant implications for credit unions in terms of complexity, increased costs and pressures on revenue, all of which impact the entire organization, from the board to front-line staff. Preparing to surpass this threshold is a complex undertaking requiring multiple years of commitment.
PSCU’s Advisors Plus recently published the Credit Union Guide to Crossing the $10 Billion Asset Threshold to help credit unions prepare for this process. The key to success? Start the process early, at least two to three years prior to the anticipated crossing of that threshold.
Norm Patrick is vice president of Advisors Plus Consulting at PSCU. Advisors Plus was established in 2004 as the consulting arm of PSCU. Together, PSCU and Advisors Plus’ products, financial services solutions and service model collectively support millions of credit, debit, prepaid, online bill payment and mobile accounts at PSCU’s Owner credit unions; protect over 2 billion transactions annually from fraud; and optimize credit union performance and growth. For more info, visit AdvisorsPlus.com.