CU regulator proposes one-year delay in ‘risk-based capital’ rule, whittles down number it affects

A regulation on risk-based capital would become effective in 2020, rather than 2019, under a proposal issued Thursday for a 30-day comment period by the federal regulator of credit unions.

NCUA’s Larry Fazio (middle) explaining the proposed supplemental rule on risk-based capital.

Additionally under the proposal, the agency would modify its current asset threshold of a “complex credit union” (used for determining risk-based capital requirements) from $100 million to $500 million. That change would effectively exempt about two-thirds of credit unions now subject to the current rule.

In proposing the one-year extension and increase in the “complex” definition, the National Credit Union Administration (NCUA) said the proposed changes would provide “covered credit unions and the NCUA with additional time to prepare for the rule’s implementation,” particularly changes related to the increased asset threshold for defining “complex” (including for call reports, computer coding, etc.).

The agency also noted that, by redefining “complex,” the proposal would exempt an additional 1,026 credit unions from the rule (resulting in 90% of all credit unions being exempted, based on year-end 2017 call report data) “without subjecting the National Credit Union Share Insurance Fund (NCUSIF) to undue risk.” The proposal would leave 531 credit unions defined as “complex”; that adds up to less than 10% of all federally insured credit unions. The remaining 90% of credit unions would be defined as noncomplex and thus exempt.

According to the agency, during the extension period, its current prompt corrective action (PCA) requirements would remain in effect. Staff told the board it hopes to have a final rule for the board to consider before year’s end.

The agency adopted its current PCA requirements in 2015. That regulation, according to NCUA, restructured its regulations and made various revisions, including amending the agency’s current risk-based net worth requirement. That replaced the risk based net worth ratio with a new risk-based capital ratio for federally insured credit unions, which the agency called comparable to the regulatory risk-based capital measures used by the federal banking agencies (the Federal Deposit Insurance Corp. [FDIC], Federal Reserve, and Office of the Comptroller of Currency [OCC]).

According to NCUA Director of Examination and Insurance Larry Fazio, the one-year delay is a “good balance” between providing additional time for credit unions and the agency to adjust to the proposed changes without unduly extending the effective date of risk-based capital. “With this delay, credit unions subject to risk-based capital will have a total of more than four years to have prepared,” Fazio said.

Regarding the “complex” redefinition, the agency said the proposal eliminates two indicators from the previous definition: Internet banking, and investments with maturities greater than five years, where the investments are greater than 1% of total assets. It further revises four of the indicators in the definition, by: substituting “commercial loans” for “member business loans”; replacing “participation loans” with “participation loans sold”; excluding first-lien mortgages from interest-only loans; and narrowing “real estate loans” to “sold mortgages.”

The proposal also factors in the extent to which a credit union is involved in complex activity (the “complexity ratio”), NCUA said.

Staff told the board that the revised indicators show that all credit unions with more than $500 million in assets engage in at least one complex activity, and that 92% of those credit unions engage in four or more complex activities. Additionally, staff noted that the larger credit unions hold more complex assets and liabilities as a share of their total assets; and 85% of all complex assets and liabilities ($423 billion of the total $497 billion) of all credit unions.

The credit unions being dropped from the “complex” definition (those between $100 million and $500 million in assets) represent approximately 16% of the total assets of credit unions “bound” by risk-based capital under the original rule adopted in 2015, and 21% of incremental capital required, NCUA pointed out.

Board Chairman J. Mark McWatters said he and Board Member Rick Metsger plan to pen a joint letter to Congress outlining the proposal and the agency’s rationale in issuing it.

Risk-Based Capital Proposal – Supplemental Rule

Board Briefing Slides – RBC

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