With a new record number of comment letters still to delve through on risk-based capital, NCUA is addressing associational common bonds at its monthly board meeting Thursday, a prelude to the agency's effort to tackle another big-ticket piece or regulation for credit unions: field of membership.
Associational common bonds was put on the agenda for the meeting that is coming just days after the deadline for submitting comments on what has come to be known as RBC2.
If NCUA officials ever expected the revisions they made to their proposed risk-based capital rule would serve to tamp down the objections that accompanied its original rollout back in back in January 2014, those illusions probably vanished more than 2,000 comment letters ago.
NCUA reported Tuesday it had received 2,167 letters commenting on its second risk-based capital draft, breaking the previous record set just last year when the agency received a then-unprecedented 2,056 letters on its first risk-based capital proposal.
And as was the case the first time around, few — if any — of the correspondents wrote in to say "good job."
The second wave of critical commentary makes it likely NCUA will make at least some revisions before unveiling a final rule.
Following receipt of the first tranche of letters, NCUA made a number of significant changes to the original draft. It pushed the effective date for the rule back more than two years, to Jan. 1, 2019, lowered threshold an institution would have to meet to be well-capitalized from 10.5% to 10%, and it altered its definition of "complex" from credit unions with more than $50 million of assets to those with more than $100 million.
That last change is key because only complex credit unions will be subject to the rule, but it's also noteworthy as NCUA is also exploring changing how it defines "small," with a current, unrelated proposal suggesting moving that threshold from $50 million to $100 million.
Letter-writers have suggested a number of additional changes they would like to see made to the risk-based proposal, from dropping it altogether, to adjusting the risk weights attached to various asset classes, to coming up with a formula that uses business activity instead of rather than asset size to define complex credit union.
Regulators are weighing the pros and cons of all those ideas, but one recommendation they are likely to give extra-special attention to is the call for supplemental capital.
Net worth, the fundamental measure of credit union capital, is limited by law to retained earnings. Advocates for supplemental capital argue that since risk-based capital is distinct from net worth, NCUA has the authority to include supplemental capital in any risk-based scheme and should do so to cushion its regulatory impact.
Each of the three major credit union trade groups, CUNA, NAFCU and the National Association of State Credit Union Supervisors included a call for supplemental capital in their comment letters, as did Cutler Dawson, CEO of the nation's largest credit union, $66.9 billion-asset Navy Federal Credit Union.
The growing drumbeat threatens to put NCUA in a difficult spot. The institutions it oversees want access to secondary capital badly, but the prevailing regulatory currents are blowing against it. The BASEL III framework, which is being implemented by bank regulators around the world, places a strong emphasis on common equity as the purest source of capital, according to Samantha M. Kirby, an attorney at Goodwin Procter LLP in Boston.
For depositor-owned institutions such as credit unions and mutual banks, "the feeling is either you're a mutual and you support yourself with retained earnings, or you're not," Kirby said.
Kirby added that despite the benefits new sources of capital would bring to depositor-owned institutions, there is little appetite for supplemental capital among regulators or lawmakers.
"I could go on and on and on about the regulatory environment," she said. "It's not conducive to being creative about anything."
There is legislation in congress that would expand the sources of capital for credit unions. In February, Representatives Peter King (R-N.Y.) and Brad Sherman (D-Calif.) introduced a bill that would allow credit unions to access supplemental capital in the form of payments into uninsured share accounts. However, a similar bill introduced in the preceding 113th Congress never made it out of House Financial Services Committee.
Even so, advocates for credit union supplemental capital are hoping NCUA will buck the trend.
"Including supplemental forms of capital in the risk-based capital numerator could help protect the NCUSIF from losses by encouraging credit unions to attract additional loss-absorbing forms of capital that they would otherwise forego," wrote NASCUS president and chief executive Lucy Ito.
According to Dan Berger, president and CEO of NAFCU, "supplemental capital authority is needed now more than ever considering the restrictions brought on by this proposed rule." Berger wrote that NCUA should "promulgate regulations that allow access to supplemental capital for all credit unions."
"NCUA has the authority to permit supplemental capital for [risk-based capital] purposes, and we believe NCUA should include such a provision if a final rule is approved," Jim Nussle, CUNA's president and CEO wrote.
A number of credit union executives joined Navy Federal's Bossing in backing supplemental capital and at least one, James Pendulik, executive vice president and chief financial officer at Fairfax County Federal Credit Union in Fairfax, Va., called on NCUA to "pursue legislation that would authorize the use of supplemental capital as net worth."
Ken Bossung, president of Catholic and Community Credit Union in Shiloh, Ill., did not call for any legislative changes in his comment letter, but he wrote that "it makes sense that a capital regulation would include supplemental capital."
Another issue that has been raised is what NCUA intends to do about interest-rate risk. The original RBC proposal included a section on IRR, which was removed from RBC2, but that doesn't mean the issue is just going away. When the regulator nixed IRR from the revised risk-based capital rule, it was with the understanding that NCUA was going to handle it in a separate rulemaking, not nixing it entirely. CUNA, among others, has suggested the agency scrap any plans to promulgate an IRR rule.
Meanwhile, as if NCUA didn't have enough on its plate with its contentious RBC regulation, the agency is expected to issue its reinterpretation of the field of membership rules at its monthly board meeting Thursday. The difference, of course, is that credit unions are prepared to welcome these changes, as the agency has indicated its main purpose in revisiting FOM is to modernize it to provide expanded growth opportunities for CUs.