Industry stakeholders are hunkering down to go through NCUA's revised proposed rule on risk-based capital, but at first blush, response has been largely positive, even though the two primary CU trade groups still believe the rule simply isn't necessary, revised or not.
The most positive reaction belonged to Lucy Ito, president and chief executive of the National Association of State Credit Union Supervisors. Although she admitted to "lingering concerns," Ito said she was "confident that with continued open dialogue, the remaining issues with the rule can be worked out."
CUNA and NAFCU were fiercely critical of NCUA's first risk-based capital draft, and neither went so far as to endorse the second, but in a joint statement NAFCU CEO Dan Berger and his counterpart at CUNA, Jim Nussle, said the effort represented "some much needed improvements."
In an interview Friday, Nussle said the changes NCUA made reflect the massive response generated by its initial plan, which the agency introduced last January. According to NCUA, it received 2,056 comment letters - a figure Nussle called unprecedented. "That's the largest outpouring of comments we've seen at CUNA," he said. Indeed, a CUNA spokesman added that "nothing has ever come close" to the response risk-based capital generated.
Nussle said he has heard from dozens of his members since the NCUA acted Thursday, but he added that it was too early to draw any conclusions about the industry's reaction. That said, there can be no question NCUA addressed many of the hot-button topics that emerged from its first stab at a risk-based capital rule.
It raised the asset threshold at which the rule would apply from $50 million to $100 million, a level that exempts four-fifths of all federally insured credit unions. The agency also eliminated one of the most controversial aspects of the original proposal, an Individual Minimum Capital Requirement that would have given officials authority to require individual credit unions to hold even higher levels of capital if their business models were deemed particularly risky.
NCUA also agreed to count all of a credit union's loan loss reserves as capital. In its initial draft capped the amount of the allowance that counted at 1.25% of risk-weighted assets. The revised rule would also alter the way NCUA defines delinquent loans, from 60 days to 90 days.
In another major change, NCUA also dropped consideration of interest rate risk from the proposed rule, eliminating five tiers of risk weights that would have applied to investments. The new draft focuses entirely on credit and concentration risk.
In operation, the rule is relatively simple. A credit union's assets are multiplied by an associated risk-weight. The total is divided into capital with the result counting as an institution's risk-based capital. A minimum of 10% - down from the original 10.5% is required for an institution to be classified as "well capitalized."
In general, activities deemed riskier have higher weights. Thus the weight for an unsecured consumer loan or a commercial loan (both 100%) is lower than the weight for a secured consumer loan (75%). Current loans are also weighted more favorably than non-current loans.
Nussle said NCUA "clearly listened" to the comments it received, and he called the agency's responsiveness a positive takeaway from the process.
Still, he and other risk-based capital critics are a long way from mollified. Nussle called the proposal "a solution in search of a problem," and NAFCU's Berger labeled it "unnecessary."
Berger also said the regulation's cost - which NCUA said would top $3.7 million between now and 2019, when the proposed rule is currently slated to take effect - "shocking The huge costs of this proposal, which attempts to address just a few dozen credit unions, reinforces our position that this rule is not necessary and, quite frankly, was never necessary," he said in a press release Thursday.
But NCUA board member Rick Metsger noted that the agency's current risk-based capital rule applies to just two credit unions. "The existing system is broke and does need to be fixed," Metsger said Thursday.
NCUA's vote Thursday authorized publication of the revised risk-based capital proposal for a 90-day comment period. The agency said it hopes to approve a final rule later this year.