CUNA Responds to NCUA Proposal on Risk Based Net Worth

LEAGUE GOVERNMENT RELATIONS NEWS

As you know, the NCUA has come out with a proposal on risk based net worth. We thought you would appreciate a summary of the issue based on the research that CUNA has done so far. They are continuing to research the impact on credit unions this proposal would make but below are their preliminary findings. They will be working with their Examination and Supervision Subcommittee to sort through whether any new rule on this is needed and whether major elements of the proposal, such as the risk-weighting of certain assets, are reasonable and appropriate.

Particularly troubling to us all is the section of the proposal that would allow NCUA to raise the risk-based capital requirement of an individual credit union above the normal threshold levels based on subjective factors. This proposal will be a significant topic at the CUNA Governmental Affairs Conference in February as we will keep you posted on it. However, here is CUNA’s initial statement:

“Given how well credit unions in general survived the recent great recession, we do not think there is a credible case for increasing credit union capital requirements. While it is apparent that the agency has put a lot of effort into developing the proposal, which would have a lengthy transition period, we are reviewing the proposal in detail with our Examination and Supervision Subcommittee; the Subcommittee has already expressed the view that the current system seems to provide sufficient levels of capital.  We support capital modernization, including risk based net worth, but as part of a broader plan that considers appropriate leverage ratios and also access to supplemental capital. We are assessing the impact not only on the 199 that would be affected if the proposal is adopted, but also on the credit union system as a whole.  The bottom line for us is: If our members agree that this proposal is needed, our primary objective in developing our position will be to ensure a final rule is narrowly tailored to minimize any negative effects on credit unions. We are particularly troubled by the section of the proposal that would allow NCUA to raise the risk-based capital requirement of an individual credit union above the normal threshold levels based on subjective factors, and will be closely looking into this.”

Upon CUNA’s initial analysis, the proposed revisions would:

  • Revise the risk-weights for many of NCUA’s current asset classifications;
  • Require higher minimum levels of capital for those federally insured natural person credit unions that have concentrations of assets in real estate loans, member business loans, or higher levels of delinquent loans; and
  • Permit NCUA to require an individual federally insured natural person credit union to hold higher levels of risk-based capital to address unique supervisory concerns raised by NCUA.
  • Not apply to credit unions with assets of $50 million or less.

In addition, the proposed rule includes procedures for NCUA to require an individual credit union to hold a higher level of risk-based capital that what the rule calls for where specific supervisory concerns have arisen.

According to NCUA, 2,237 credit unions reported over $50 million in total assets, all of

which would be subject to the proposed risk-based capital measures. As of June 2013, the proposed changes to the risk-based capital measure, if applied immediately, would cause 189 credit unions to experience a decline in their PCA classification from well-capitalized to adequately-capitalized and 10 well-capitalized credit unions to experience a decline to undercapitalized.

Based on June 2013 Call Report data, NCUA estimates that if the proposed risk-based capital requirements were applied today, the aggregate risk-based capital ratio for credit unions subject to the proposed risk-based capital measure would be 14.6% and the average risk-based capital ratio would be 15.7%. These numbers are well above the proposed 10.5% requirement for classification as well capitalized.

Several provisions of NCUA’s current part 702, including provisions relating to regular reserve accounts, risk-mitigation credits, and alternative risk-weights would be removed.

The proposal is open for a 90-day comment period. We are reviewing the proposed rule and will be working closely with our Examination and Supervision Subcommittee, other credit union members and leagues to determine the rule’s potential impact to credit unions.

To access the proposal and all of the links provided by the NCUA to review and make comments on the rule, Ctrl+Click on the following link: proposed rule.