In January 2014, NCUA proposed to amend its current risk-based net worth requirements with new risk-based capital requirements. The reason for the amendment, according to the agency, is to ensure the safety and soundness of federally insured credit unions with more than $50 million in assets. The proposed rule increases the standard at which NCUA will consider credit unions well-capitalized a risk-based capital ratio of 10.5% and higher while also revising the risk-weights for many of the agency’s current asset classifications.
The announcement has been divisive. Credit union leaders, trade organizations, and industry advocates have spoken out against the proposed rule, and professionals from across the credit union landscape have submitted comments during the legally mandated comment period that ends on May 28.
This is an issue that will have far-reaching effects for the entire industry, and anyone especially credit union leaders, volunteers, and members can submit their feedback or opinion to the NCUA in any of the following ways:
- Email to email@example.com with the subject line [Your Name] Comments on Proposed Rule: PCA Risk-Based Capital
- NCUA website: http://www.ncua.gov/Legal/Regs/Pages/PropRegs.aspx
- Federal eRulemaking Portal: http://www.regulations.gov/#!documentDetail;D=NCUA-2014-0007-0001
- Fax to 703-518-6319 with the subject line [Your Name] Comments on Proposed Rule: PCA Risk-Based Capital
- Mail to Gerard Poliquin, Secretary of the Board, National Credit Union Administration, 1775 Duke Street, Alexandria, Virginia 22314-3428
- Deliver/courier to 1775 Duke Street, Alexandria, Virginia 22314-3428
Comments are open for the public to read. Below is a selection of comments the NCUA has received to date. They are unedited and categorized by three overarching themes in an effort to provide a snapshot of the industry’s reaction to the proposed rule.
Credit Unions Will Be At A Disadvantage Compared To Banks
It is not fair to impose additional hardships as credit unions did not cause the economic meltdown and aided consumers and businesses in the wake of the recession. This cannot be said for the banks who have benefited from the extremely low rate environment and have not passed those benefits back to their customers. Jim Norris, president/CEO, Montgomery County Employees Federal Credit Union ($95M, Germantown, MD)
Why will a credit union borrower be required to pay a higher capital tax than a bank borrower? John Gray, senior financial services representative, State Employees’ Credit Union ($27B, Raleigh, NC)
We believe that this elevated risk rating system will reduce the number of credit unions willing to consider merging troubled credit unions, and may result in conversions to banks, whose Basel III calculation appears to be less onerous. Steve Swofford, president, Alabama Credit Union ($620M, Tuscaloosa, AL)
Credit unions did not cause the financial crisis the nation has yet to recover from, yet we are regulated as though guilty. The remedies thus far foisted on lenders fail to benefit consumers; regulators, though, have inversely thrived. Steve Banks, chief administration officer, Greenville Federal Credit Union ($170M, Greenville, SC)
The Proposal Will Weaken Credit Unions’ Ability To Meet Member Needs
If this proposal is approved as it is now, then all credit unions would need to have their balance sheet in one hand and the Risk-Based Capital requirement in the other hand to determine what they can offer to their members with no flexibility to manage the credit union when the financial environment changes. Michael Ligon, CFO, Belvoir Federal Credit Union ($310M, Woodbridge, VA)
We would be forced to do the following reducedividend rates, curtail accepting deposits, discontinue offering real estate loans, restructure the balance sheet to sell of[f] long-term loans and investments, increasing fees to members to build up capital. Bruce Rosen, EVP/CFO, Hawaii Central Federal Credit Union ($180M, Honolulu, HI)
Del-One is not unique in the fact that we present ourselves to our members and the public as a more affordable alternative to banks. As it stands, we may be a more affordable alternative, but certainly a far less competitive alternative as the rule will result in the restriction of mortgage services in our compliance efforts with the new rule. Dion Williams, president/CEO, Del-One Federal Credit Union ($322M, Dover, DE)
Based on my analysis, the risk weightings for these assets appear to be structured to discourage for credit unions to engage in these forms of lending. Tom Boos, president/CEO,Billings Federal Credit Union ($107M, Billings, MT)
The Risk Weights Are Arbitrary And Ignore Key Considerations
By simply categorizing them based on years to maturity, only interest-rate risk is being captured, and not very accurately. No consideration is being given for whether a security is fixed-rate versus variable-rate. It also does not take into consideration the credit-risk differences. Marsha Schmidt, president/CEO, Red Crown Credit Union ($146M, Tulsa, OK)
Are you penalizing credit unions who engage in MBLs? Are you trying to regulate credit risk in a capital requirement alone? MBLs are better for ALM because of the repricing structure. So, why is NCUA attempting to deal with interest rate risk through this setup? Ignoring the liability side of the balance sheet is just fundamentally wrong. Brandon Michaels, president/CEO, Mazuma Credit Union ($470M, Kansas City, MO)
Lumping mortgages and basing the weighting on years to maturity once again totally discounts QUALITY. We sell all fixed rate product into the secondary market. How do you account for a variable rate mortgage with a 51% loan to value. Show me the risk! Thomas J. Powers Jr., CEO, Hudson River Teachers Federal Credit Union ($43M, Mohegan Lake, NY)
The risk weightings are overly general and do not take into account the nuances of particular portfolios. For example, some CUSOs do not pose as much risk as other CUSOs. Some real estate loan portfolios are not as risky as others based on policies, loan-to-value, and other terms. There are many factors that are not being taken into account when accessing the risk of a credit union using a one size fits all calculation. Lisa Lambrecht, president/CEO, Entrust Financial Credit Union ($72M, Richmond, VA)
Erik Payne contributed to this article.