NCUA: RBC And Supplemental Capital Are Like Peanut Butter And Jelly

November 24, 2015 at 9:16 am 3 comments

Responding to Congressional pressure, NCUA released a comprehensive report yesterday  defending its decision to impose an updated Risk-Based Capital system on complex credit unions and renewed  its call   for congress to authorize expanded use of supplemental capital by the industry.

“The high-quality capital that underpins the credit union system is a bulwark of its strength and key to its resiliency during the recent financial crisis. However, most federal credit unions only have one way to raise capital—through retained earnings, which can grow only as quickly as earnings. Thus, fast-growing, financially strong, well-capitalized credit unions may be discouraged from allowing healthy growth out of concern it will dilute their net worth ratios and trigger mandatory prompt corrective action-related supervisory actions.”

NCUA called on Congress to pass HR 989, introduced at the urging of New York credit unions by Long Island Republican Peter King and California Democrat Brad Sherman.  It would allow NCUA to authorize well capitalized credit unions to take subordinate supplemental capital provided doing so does not alter the cooperative nature of the industry.

Keeping in mind that low-income credit unions can already use supplemental capital, and that a more sophisticated capital system goes hand-in-hand with a more sophisticated capital system this proposal is common sensical to me but I know not all credit union people would agree.

In her CU Times article this morning Heather Anderson highlighted NCUA’s explanation of its supervisory powers. (It’s in Section VI of the report).  For those of you concerned that NCUA is giving itself a little too much flexibility with examiner Guidance the report will provide few assurances.

“While elements of a supervisory review of capital adequacy would be similar across credit unions, evaluation of the level of sophistication of an individual credit union’s capital adequacy process should be commensurate with the institution’s size, sophistication, and risk profile, similar to the current supervisory practice. NCUA will develop and publish supervisory guidance for examiners on how to apply this provision.” It explained

This means that the next stage of the RBC process will hopefully involve a healthy dialogue between the industry and regulators explaining just how much examiners are told to mandate capital requirements for individual credit unions that are in compliance with regulatory requirements.  With interest rates likely to rise over the next three years expect to hear plenty more about interest rate risk.

The report is also another example of NCUA demonstrating that it is in fact responsive to, as opposed to indifferent to,  congressional concerns. This wasn’t entirely clear to me after testimony by Chairman Mats before the House Financial Services Committee earlier this year.  Her performance was a great example of how to lose friends and not influence people.     It is modeled after   HR 2769 which was voted out of the House Financial Services Committee.  It calls on NCUA to review and explain four aspects of its RBC rule.

Here is the report.

I’ll be blogging again on Monday.  In the meantime  Happy Thanksgiving everyone and thanks for reading.

Entry filed under: Compliance, Regulatory. Tags: , .

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3 Comments Add your own

  • 1. Keith Leggett  |  November 24, 2015 at 12:33 pm


    Supplemental capital that matures is not high quality capital. It clearly should not be included in tier 1 capital. Unfortunately, that is what the bill introduced by Rep. King does.

    • 2. Henry Meier  |  November 24, 2015 at 3:38 pm

      Hello Keith- It seems to me that if common stock is a component of Tier 1 capital for commercial banks, which it is and should be, then equity with a minimum maturity of at least five years should also qualify as capital.

      • 3. Keith Leggett  |  November 26, 2015 at 8:55 am


        Common stock is permanent. Any capital that matures is not treated as high quality capital by bank regulators. It is treated as tier-2 capital.

        If you look at NCUA’s corporate credit union regulations, you will note that capital that matures is not treated as core capital; but is tier-2 capital.

        Happy Thanksgiving,


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Authored By:

Henry Meier, Esq., General Counsel, New York Credit Union Association.

The views Henry expresses are Henry’s alone and do not necessarily reflect the views of the Association.

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