On Jan. 15, the NCUA board approved a revised risk-based capital proposal that contained many changes and departures from the agency’s 2014 proposal. The board approved the proposal in a 2-1 vote with board chair Debbie Matz and vice chair Rick Metsger voting for and board member Mark McWatters voting against.
he below chart outlines a selection of notable changes between the two proposals.
|Rule Component||2014 Proposal||2015 Proposal|
|Which credit unions must comply with the rule?||Credit unions greater than $50 million in assets. (2,237 credit unions; 94% of industry assets)||Credit unions greater than $100 million in assets. (1,455 credit unions; 89% of system assets)|
|What is the well-capitalized PCA threshold level for risk-based capital?||10.5%||10%|
|What is the proposed rule’s implementation date?||At least 18 months after adoption.||January 1, 2019.|
|How many credit unions today would fall below the well-capitalized standard for risk-based capital?||3% of all federally insured credit unions. It would require those institutions to pay roughly $700 million to be well-capitalized.||2% of all federally insured credit unions. It would require those institutions to pay roughly $50 million to be well-capitalized.|
|What would the average risk-based net worth ratio be for credit unions?||NCUA estimates this ratio to be 15.7%||NCUA estimates this ratio to be 19.3%|
|Interest Rate Risk Weights||Five Weighted Average Life (WAL) tiers applied to investment risk weights from less than one year to 10+ years maturity to account for interest rate risk.||Removed WAL from investment risk weights; alternative approaches will be evaluated for future agency action.|
|Concentration Risk Weights||Three tiers applied to first liens, junior liens, and commercial loans to account for asset concentration levels.||Single tier break approach for first liens (>35% of assets), junior liens (>20%), and commercial loans (>50%) based on standard deviation calculations to cover outliers.|
Additionally, the new proposal lowers the risk weights for residential real estate loans and member business loans and changes the definition of a delinquent loan from 60 days to 90 days past due.
These changes are not without cost, including what it will require to update policies and procedures, change data fields in the 5300 Call Report, and train staff. According to Larry Fazio, director of the office of examination and insurance at NCUA, one-time costs over the three-year implementation period will total $3.7 million for NCUA. He estimates one-time costs to credit unions will reach into the millions for policy adjustments and time to learn and complete the new call reports.Additionally, the new proposal lowers the risk weights for residential real estate loans and member business loans and changes the definition of a delinquent loan from 60 days to 90 days past due.
Tool, Not A Rule
Callahan chair Chip Filson was bearish on the proposal overall.
The rule is an explicit regulatory effort to impose NCUA’s regulatory point of view and its judgments on every asset class on the credit union balance sheet, he says.
According to Filson, the proposal would be more valuable as a tool for credit unions and not as rule.
The rule has the potential to show the different ways that capital allocations, as you make those capital decisions, might be broken down, he says.
But to RBC as a hard, fast, rigid set of standards that apply to a constantly changing industry makes little sense.
First, McWatters’s vote against the proposal as well as his 15-minute prepared statement during which he called NCUA’s legal authority into question was significant. It shows a potential for dissent among the industry as a whole.
It’s critical to react to new points of view, Filson says. If 500 more credit unions submitted comments that said simply I agree with McWatters,’ that would be a message in itself.
Second, although NCUA says more than 2,000 comment letters and three summer listening sessions influenced the new proposal, Filson says the rule fails to address issues of complexity. In fact, the page length of the new rule more than doubles that of its predecessor.
Those that were concerned about the rule will still have the same concerns because all the risk weightings, all the complexity, all the calculations are still there, Filson says. People who believed the rule might have had some beneficial purpose might think NCUA attempted to clean it up, but it’s still an extraordinarily complex rule. I think the best evidence of that is its length.
Questions remain as to whether, higher levels of capital reduce the likelihood of a financial crisis, as Fazio said during the proceedings.
According to NCUA data, 192 credit unions have failed in the past 10 years. A full 102 failed during the great recession despite an injection of $26 billion in liquidity by the NCUA. But NCUA’s analysis also shows that the net worth ratio of these 192 eventually failed credit unions was 12.1% two years before they failed. The average net worth of credit unions today is 10.9%.
The implication of NCUA’s own data is that the problem isn’t adequate capital, Filson says. The problem is poor supervision and a poor working relationship with institutions that get into trouble. Institutions get into trouble for myriad reasons that have nothing to do with capital adequacy.
What Does RBC Mean For You?
Explore the changes to NCUA’s proposed risk-based capital rule and the potential impact it will have on the credit union industry during this webinar with Callahan chairman Chip Filson and senior analyst Andrew Bolton.
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