Credit union system stakeholders responded strongly to the risk-based capital rule NCUA's Board proposed in January 2014. The agency received more than 2,000 comment letters, and Chairman Matz and staff heard more comments at a series of listening sessions last spring and summer.
You spoke, NCUA listened. This month, NCUA's Board approved a revised proposed RBC rule with a 90-day comment period. This rule is one of the last pieces of a broad reform effort undertaken by the agency in the wake of the financial crisis, an event that resulted in the failure of 102 consumer credit unions and cost the National Credit Union Share Insurance Fund nearly three-quarters of a billion dollars.
The purpose of the proposed rule is simple: To require outlier credit unions that take greater risk to hold additional capital, shed some of their risk, or a combination of both.
What We Changed
Credit unions with less than $100 million in total assets would be exempt from the revised proposed rule. NCUA's original proposal would have applied to all "complex" credit unions, defined as credit unions with more than $50 million in total assets. The revised proposal narrows the scope of this definition to credit unions with more than $100 million in total assets. NCUA made this change in recognition of the fact that, generally, credit unions with less than $100 million in total assets do not have a complex portfolio of assets and liabilities. Conversely, based on an NCUA analysis of credit union services and activities, all credit unions with more than $100 million in assets are involved in one or more complex activities.
The $100 million asset threshold exempts 78% of credit unions from any regulatory burden associated with complying with the proposed rule, while covering nearly 90% of the assets in the credit union system.
A well-capitalized credit union would be one with a risk-based capital ratio of 10%, rather than 10.5%. NCUA's original proposal set the risk-based capital ratio for well-capitalized, complex credit unions at 10.5%. This threshold aligns with the standards used by other federal banking agencies, which by 2019 will require banks to maintain an eight percent total risk-based capital ratio to be adequately capitalized, plus a mandatory 2.5% capital conservation buffer.
Commenters suggested that a 10% risk-based capital ratio would simplify the comparison between NCUA's and the other agencies' rules by removing the effect of the capital conservation buffer. NCUA's Board agrees with this sentiment and has proposed the lower 10% threshold.
It's worth noting that most credit unions already maintain capital levels well above the regulatory minimum. Ninety-eight percent of credit unions would remain well-capitalized with the proposed 10% threshold.
Risk weights for some assets have been lowered. In another move to align the rules applicable to credit unions with those for banks, NCUA revised the risk weights assigned to certain classes of assets. The process of developing the original proposal included significant efforts to calibrate risk weights while remaining mindful of any increase in reporting burden and in the complexity of calculations. NCUA took the revised proposal as an opportunity to revisit these weights. Like the original proposal, the revised proposal takes into account the unique positioning of the credit union system, but the updated risk weights also match up more closely with those assigned by other regulators for banks, such as for marketplace investments.
Interest rate risk will be addressed separately. The Federal Credit Union Act requires NCUA's risk-based requirement to account for all material risks faced by the credit union system. Thus, the agency's original proposal accounted not only for credit risk, but for interest rate and concentration risk as well.
Commenters argued against this approach and NCUA's Board agreed a more comprehensive, full balance-sheet approach to assessing IRR would be more effective. The revised proposed RBC rule removes the interest rate risk components of the risk weights, and specifically requests comments on alternative approaches that could be taken to account for IRR at credit unions.
The implementation timeframe would be extended to Jan. 1, 2019. NCUA's original proposal provided at least 18 months for affected credit unions to adjust to the new requirements. The Board agreed with many commenters that a longer implementation period would be prudent. The revised proposal extends the implementation period to Jan. 1, 2019, more time than requested by stakeholders. This longer timeframe will give credit unions ample opportunity to make necessary adjustments to systems, processes, and procedures in order to meet the new requirements. It also gives NCUA sufficient time to develop and implement any related and potentially extensive changes to the call report program.
Our revised proposal reflects the fact that the agency listened carefully to what stakeholders said about our original approach to risk-based capital. Visit the Proposed Risk-Based Capital Resources page on NCUA's website for more information. NCUA's Board has provided a 90-day comment period on our revised proposal and we look forward to continuing the dialogue on this important issue.
Larry Fazio is Director of NCUA's Office of Examination and Insurance.