Risk-based capital for CUs delayed to 2020. Next to come: Alternative capital

A final, “supplemental” rule delaying implementation of risk-based capital for federally insured credit unions, and applying the rule to fewer credit unions, was adopted during Thursday’s open meeting of the National Credit Union Administration (NCUA) Board, which approved the rule by a unanimous vote of 2-0.

With the rule completed and finalized, NCUA (and credit unions) will be using the time between now and 2020 to modify their systems to accommodate the risk-based capital requirements. Additionally – and as urged by some commenting on the proposal – the agency is expected to resume work on an “alternative capital” rule to help certain small credit unions meet their risk-based capital requirements.

Board Member Rick Metsger raised the alternative capital issue as the board, chaired by J. Mark McWatters, prepared to approve the final risk-based capital rule. Metsger said Thursday’s action gives the board, “in the not-to-distant future, the opportunity to adopt” a final alternative capital rule with an implementation date to coincide with the new effective date for risk-based capital. McWatters concurred with his comments.

The agency already has a leg up on this issue, as it issued an advance notice of proposed rulemaking (ANPR) on alternative capital in February 2017.

NCUA Chairman J. Mark McWatters (left) and Board Member Rick Metsger discuss the delay in implementation of risk-based capital and prospects for final action on “alternative capital.”

Risk-based capital

Thursday’s supplemental final rule revises the risk-based capital rule adopted by the board in October 2015. Originally set to take effect Jan. 1, 2019, the risk-based capital rule now will instead be implemented Jan. 1, 2020, and it will apply to fewer credit unions than originally planned.

The supplemental rule revises the asset-size threshold for “complex” credit unions – those targeted by the risk-based capital rule – from $100 million to $500 million, which exempts an additional 1,026 insured credit unions from risk-based capital requirements. This exempts 90% of federally insured credit unions (based on year-end 2017 data, staff noted), but NCUA says the rule still covers 76% of credit union assets, as well as 85% all complex assets and liabilities in the credit union system. (By comparison, the agency says, 100% of banks are subject to federal risk-based capital rules.)

Staff presenting said the change will not add undue risk to the National Credit Union Share Insurance Fund (NCUSIF, which insures credit union member shares to the same extent bank deposits are insured by the Federal Deposit Insurance Corp. Bank Insurance Fund).

The agency notes a small change in the final supplemental rule from the August proposal. NCUA based its asset-size threshold for “complex” credit unions on an analysis of portfolios of assets and liabilities of credit unions, and it used a “revised complexity index” (RCI) in this analysis. The analysis showed that among credit unions with $500 million or more in total assets, 100% of them engage in at least one complex activity, and 96% engage in three or more complex activities. In response to one commenter’s suggestion, the agency says it will, “going forward, include first–lien, interest-only real estate loans within the interest only loan indicator” in the RCI.

The agency’s standing prompt corrective action requirements will remain in effect between now and Jan. 1, 2020, staff said.

Risk-Based Capital Supplemental Rule – Draft Notice for Federal Register