Risk-based capital requirements for “complex” credit unions would be again delayed – for another two years – under a 30-day proposal for comment issued Thursday by the National Credit Union Administration (NCUA) as the agency considers potential rule changes.
The NCUA’s risk-based capital rule is currently set to take effect Jan. 1, 2020. Presuming the delay – to Jan. 1, 2022 – is approved, NCUA’s prompt corrective action (PCA) requirements would remain in effect between now and the time a final rule is implemented.
Meanwhile, NCUA Board Chairman Rodney Hood said his aim is for the board to issue a proposal on subordinated debt before year-end.
The board approved issuing the proposed rule delay after about a two-hour discussion, and over the objections of Board Member Todd Harper. The agency says it will use the extra time prior to implementation to review potential changes such as subordinated debt authority (a way to allow credit unions to generate “alternative” or “supplemental” capital); capital requirements for asset securitization; and an option similar to the community bank leverage ratio (CBLR) proposed by federal banking agencies under last year’s regulatory relief statute (the Economic Growth, Regulatory Relief, and Consumer Protection Act, or EGRRCPA/S.2155).
The CBLR option for community banks was proposed last year by the Federal Deposit Insurance Corp. (FDIC), Federal Reserve Board, and Office of the Comptroller of the Currency (OCC). Expected to be adopted in final form this summer, the proposed rule would make most banks and bank holding companies that have less than $10 billion in total consolidated assets, meet risk-based qualifying criteria, and have a community bank leverage ratio exceeding 9% eligible to opt into a community bank leverage ratio framework. This would, in turn, allow them to avoid other risk-based and leverage capital requirements and to be considered well-capitalized.
Both Republicans on the NCUA Board – Hood as well as Board Member J. Mark McWatters – approved issuance of the proposed two-year delay in the risk-based capital rule, noting that credit unions now are well-capitalized (averaging an 11.3% capital ratio) and that economic conditions remain generally favorable. But Board Member Todd Harper warned about a delay that he said could leave credit unions without risk-based capital requirements by the time of the next financial downturn.
“Putting safeguards like the revised final risk-based capital rule in place before the next recession or financial crisis occurs is good public policy,” Harper said. “After all, it’s better to repair a roof before it rains than to patch it while it rains.”
The NCUA first issued its risk-based capital proposal for “complex” credit unions – those with more than $100 million in assets – in 2014, with implementation slated 18 months after the rule would have been finalized. A revised proposed rule was issued in 2015 and finalized that October with an effective date of Jan. 1, 2019. But last year, the NCUA Board revised its definition of “complex” credit unions to include those with more than $500 million in assets and delayed the rule’s implementation further, to Jan. 1, 2020.
Harper during Thursday’s open board meeting engaged in about an hour-long Q&A session with agency Examination and Insurance Director Larry Fazio on the rule’s background, how it does and does not compare with risk-based capital requirements for banks, the rule’s coverage and, among other things, how it might have mitigated last year’s losses to the National Credit Union Share Insurance Fund due to the failures of three credit unions heavily engaged in taxi medallion loans. Fazio pointed out that not even the current risk-based rules would have saved those institutions, which caused losses totaling some $765.5 million (by NCUA’s latest estimate).
According to NCUA, the current risk-based capital rule would apply to 545 federally insured credit unions – about 10% of the total – with all but five of those currently satisfying the rule’s requirements. The remaining five, according to Fazio’s remarks Thursday, do not meet the requirements and pose about a $50 million loss risk to the National Credit Union Share Insurance Fund (NCUSIF) – a risk that Fazio said was manageable.
Asked whether the rule would require any adjustments related to the current-expected-credit-loss (CECL) accounting standard, Fazio said it would not.
Reg lookup: Community Bank Leverage Ratio (proposed rule)