How NCUA’s Revised Capital Proposal Will Affect Your Credit Union
Now that NCUA has taken its mulligan and released the brand new Risk-Based Capital proposal, it’s time to start digesting how its suggested framework will impact the industry. While the ultimate impact will be unique to each credit union, there are certain things that are crystal clear.
In a nutshell, if your credit union has $100 million or more in assets and specializes in certain types of MBL or real estate loans, for example, then there is very little NCUA has suggested in its do over that will make this proposal more palatable. In contrast, if your credit union has under $100 million in assets or over $100 million in assets but has a fair share of longer term investments and avoids loan concentrations, NCUA’s new proposal is a noticeable improvement over its original framework. Still, there are many questions that the industry should be asking and many areas that need to be refined.
The most dramatic improvement of the proposal is that is raises the threshold after which credit unions must comply from those with $50 million to those with $100 million in assets. In New York State, this means that under the old proposal 111 credit unions were subject to an enhanced RBC framework, but now only 75 will be. This is a huge step in the right direction since an RBC framework should be designed to guard against systemic risk as opposed to trying to prevent every individual credit union from failing. My question is: why $100 million? As I talked about in yesterday’s blog, all but the biggest credit unions are struggling and increasingly there are big differences between a $500 million credit union and a $100 million one.
NCUA also took a huge step back when it decided not to use its proposed RBC framework to control interest rate risk. This is obviously good news for those of you with longer term investments, but don’t fool yourselves, interest rate risk remains NCUA’s primary concern and it will be coming out with additional proposals to deal with it. Still the proposal does away with “weighted average life” tiers that weighted longer term investments against credit unions simply due their term.
Common sense prevailed and if your credit union is subject to the RBC framework, you will have until January 1, 2019 as opposed to 18 months from issuance to comply with this mandate. I have no idea what NCUA was thinking when it came up with this initial timeline.
NCUA is sticking to its legal guns and insisting that it has the right to delineate credit unions as either well capitalized or adequately capitalized. I don’t have the time or space to delve into the legal nuances, but suffice it to say that this distinction would be at the core of any legal challenge to NCUA’s ultimate regulation. The good news is that NCUA has lowered the threshold for well-capitalized credit unions from 10.5% to 10%.
Now for the bad news. The biggest change in tone and substance in the new proposal deals with the adequacy of credit union buffers. In criticizing the initial proposal, many credit unions pointed out that they preferred to have capital buffers. As a result, even though the vast majority of credit unions were already well capitalized, the industry pointed out that many would feel the need to increase their capital cushions. As I pointed out in an earlier blog, NCUA seemed to be indifferent to this concern in marked contrast to the position taken by other financial regulators. Not any more. In yesterday’s proposal, NCUA puts credit unions on notice that it has the authority to impose additional capital requirements on credit unions where unique risks justify safety and soundness concerns. The Board will be coming out with additional guidance and all credit unions are going to want to take a close look at what the NCUA says is an appropriate buffer.
One other concern I have with this proposal is that it still creates the impression that investing within the credit union industry is a bad idea. Specifically, it only reduces its proposed risk rating for investing in corporate perpetual capital from 200 to 150 and investments in CUSOs are still among the most negatively weighted. With regard to the corporate weightings, it’s unfair to encourage credit unions to invest in corporates only to penalize them for making such investments. Furthermore, we need a viable corporate system. With regard to investments in CUSOs, I still say that absent a showing that all CUSOs pose a systemic risk, credit unions should not be penalized for investing in services for credit unions. NCUA has given itself more than enough power to deal with CUSOs on a case-by-case basis.
I could say much, much more, but I am running out of space and time. Have a good weekend and enjoy the football games.