Credit union regulator delays capital rule to 2022; board member indicates new ‘suite’ of capital proposals coming soon

Also approves $315.8 million operating budget for 2020

A rule to subject some credit unions to “risk-based capital” (RBC) requirements was delayed until 2022 on a split vote of the board for the federal regulator of credit unions Thursday. The delay is the second for the rule’s effective date.

The National Credit Union Administration (NCUA) Board voted 2-1 (with Chairman Rodney Hood and Board Member Mark McWatters – both Republican appointees – voting in favor, and Board Todd Harper – a Democrat appointee – voting against) to delay the effective date of the RBC rule.

The board first issued its risk-based capital proposal for “complex” credit unions – then defined as 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. That final rule was intended to replace the then- (and still now) effective risk-based net worth ratio with a new risk-based capital ratio for federally insured credit unions, which the NCUA 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).

However, last year, the NCUA Board revised its definition of “complex” credit unions to include only those credit unions with more than $500 million in assets and delayed the rule’s implementation further, to Jan. 1, 2020. Thursday’s vote to delay the effective date of the 2015 rule is thus the second delay for the rule.

Hood said delaying the effective date to 2022 will give the agency time to consider new methods for strengthening credit union capital requirements, indicating that now is a good time to do so as credit unions enjoy strong capital positions.

McWatters said he believes the 2015 rule, as adopted, violates the Federal Credit Union Act (and that he voted against final adoption of the rule that year), “so I’m not going vote to have a rule going into effect that, in my opinion as a lawyer over three decades, violates the law.” He noted that the agency is now looking “at a suite of capital rules” which will include subordinated debt for non-low-income credit unions that will count as capital for risk-based net worth purposes. “Currently, that does not exist,” McWatters said. He said he had received distinct assurances that the proposal would come before the NCUA Board in January. “It’s a good rule, it’s a complex rule – we’ll need a lot of feedback on it,” he said.

He indicated the suite of capital rules will also include a proposal similar to the community bank leverage ratio (CBLR), adopted by the federal banking agencies this year, for credit unions. That rule, he indicated, would exempt credit unions with less than $10 billion in assets from complying with the risk-based capital requirements, if those credit unions meet certain requirements.

“I’ve received assurances that this rule will be brought before the board in February,” he said.

Harper, in voting against extending the RBC effective date, said the time has long-since come for the board to implement the rule. In voting to further delay the RBC rule, Harper said, the board is “forgetting the past, just like the characters in ‘Groundhog Day,’” referring to a movie in which the lead character relives the same day over and over. He said he voted against the proposal to extend the effective date – as he would against the final rule – because “I believe credit unions should hold capital equal to the risks held on their balance sheets.”

In other action, the board:

  • Approved, also on a 2-1 vote (with Harper again dissenting), a 2020 operating budget of $315.8 million, an increase of 3.8% from the 2019 spending plan. Harper said he voted against the budget because it did not include additional spending for additional staff in the agency’s consumer compliance program, which he had requested. He said he was “deeply disappointed” that a negotiated agreement among NCUA board members to add two positions to consumer compliance section of the agency was not included in the final budget. McWatters said he also supported budget increases for the consumer compliance program “in a sensible, proactive manner.” However, he said, he was voting in favor of the budget because not doing would leave the agency without an adjusted spending plan for 2020; he said he intended to pursue a “collegial, collaborative” path forward for additional consumer protection resources at the agency.
  • Heard a report on the federal insurance fund for credit union savings (the National Credit Union Share Insurance Fund [NCUSIF]), particularly the reserve level for the fund. Staff reported that, based on current estimates, the NCUSIF would have adequate reserves for 2020 (estimated at about 1.38% of total credit union insured savings). However, the staff told the board that it did not anticipate that level rising significantly enough that credit unions would receive in 2020 an “equity distribution” of excess reserves.