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Regulatory Advocacy

Working Together to Reduce Regulatory Burdens
Regulation Summary
Agency National Credit Union Administration
Rule Name Risk-Based Capital
Comment Due Date 05/28/14

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The National Credit Union Administration Board (NCUA) is proposing to amend part 702 of its regulations regarding prompt corrective action (PCA) to restructure the part and make various revisions, including replacing the agency’s current risk-based net worth requirements with new risk-based capital requirements for federally insured “natural person” credit unions.

CUNA has produced a video designed to help explain the proposal, address what credit unions can do to apply it to their situations and steps credit unions can take to get involved in the effort to improve the proposal. On the video, members of CUNA’s Executive Committee—credit union CEOs themselves—describe the significance of the rule to the future of the credit union system.

The following Executive Summary is provided by the Credit Union National Association (CUNA). For CUNA's full, detailed summary, please see the attached CUNA Regulatory Comment Call. CUNA plans to refresh and update their Comment Call as CUNA, the Leagues, and credit unions continue to digest the proposal and identify any additional concerns. This information is dated January 30, 2014.

What NCUA Is Proposing – An Overview

The NCUA is seeking comments for 90 days on a proposal regarding risk based capital (RBC) requirements under its prompt corrective action rules. The proposal would:

  • Cover credit unions with assets over $50 million;
  • Restructure NCUA’s current PCA regulation to involve calculation of a capital to risk assets ratio, analogous to Basel III for community banks, although the risk weights would be substantially different;
  • Require a well-capitalized credit union to maintain a 7% net worth ratio (unchanged from the current PCA system) and a new, 10.5% risk based capital ratio;
  • Change many of the effective risk-weights for most of NCUA’s current asset classifications;
  • Set higher risk weights and hence higher capital requirements for credit unions with higher concentrations of assets in real estate loans, member business loans, longer-term investments and some other assets;
  • Authorize the agency to require even higher capital on a case-by-case basis.
  • Set further restrictions on the ability of a credit union to pay dividends.

NCUA has produced a calculator to help credit unions demine how the proposal would affect their net worth, as the bank regulators provided under their Basel III proposal.

Calculator: http://www.ncua.gov/News/Pages/NW20140123Calculator.aspx

CUNA’s Initial Concerns

We will be updating this document as we continue our review of the 198-page proposal. Initial concerns include the following:

  • NCUA has not justified the need for the rule adequately;
  • NCUA would assume additional authority to impose even higher capital requirements on individual credit unions that could exceed even well-capitalized level requirements;
  • NCUA would require covered credit unions to subtract good will from net worth when calculating their risk based capital requirements (note: this is consistent with Basel III);
  • NCUA would also require the National Credit Union Share Insurance Fund 1% deposit to be ignored in the risk-based capital calculation;
  • More credit unions than NCUA has indicated would be impacted as their net worth would fall to just barely over well-capitalized or adequately capitalized levels;
  • More time is needed for the rule to be phased in;
  • A number of the risk weightings, especially for member business loan and mortgage concentrations as well as for CUSO investments, do not appear to be properly calibrated for credit unions. Using higher risk weights on long-term assets to deal with interest-rate risk is misleading without considering liability maturities.

CUNA’s Plan to Address the Rule’s Deficiencies

CUNA is analyzing all aspects of the proposal, including the agency’s legal authority for the proposal and how it compares with Basel III for community banks.

CUNA staff will be working with our Examination and Supervision Subcommittee and others, such as the CUNA Accounting Subcommittee and the CUNA Councils, to develop our official response in our comment letter. We will be meeting with NCUA Board members and staff as well as reaching out to the credit union system to solicit the views of credit unions and leagues. We will also be talking with outside consultants that have particular expertise on Basel III and discussing aspects of the proposal with bank regulators.

For more information about this rulemaking, contact CUNA SVP, Chief Economist Bill Hampel at bhampel@cuna.coop, SVP, Deputy General Counsel Mary Dunn at mdunn@cuna.coop, or Assistant General Counsel Lance Noggle at lnoggle@cuna.coop.

Comments Are Urged

CUNA and the Leagues urge credit unions to review the proposal in light of its impact on their operations and to share their views regarding the proposal with CUNA and the Leagues as soon as possible; comment letters to NCUA are also urged, with a copy to CUNA and your credit union’s League. This is a critical proposal and as many credit unions as possible should weigh in with their assessments and concerns.