If Your Credit Union’s Asset Size Is Between $50M & $500M, I Have Some Good and Bad News For You

March 23, 2021 at 10:09 am Leave a comment

 Good morning folks.  Thursday is the deadline for commenting on the first of several proposals dealing with various aspects of NCUA’s risk based net-worth requirements with which NCUA will be grappling in the coming months.  Trust me, I know there are better things to think about on a beautiful spring day than the arcane nuances of capital requirements, but the sense I get is that the industry has not focused as much attention on this key operational issue, even though for many CU’s it will have as big an impact if not bigger than the dreaded CECL.

12 USCA § 1790d has long required “complex” credit unions to satisfy Risk-Based Net Worth (RBNW) requirements in addition to the traditional Prompt Corrective Action to which all credit unions are subject.  This RBNW requirement applies to credit unions with $50M or more in assets.  Easy enough. 

As many of you know, for more than half a decade now, NCUA has debated augmenting this requirement with a Risk Based Capital (RBC) requirement. However, the board’s unease with this new framework has resulted in several tweaks and postponements.  Specifically in 2018 the NCUA decide to raise the RBC compliance threshold to $500M.  It also has postponed the effective date of the RBC framework until January 1, 2022. 

With the pending proposal that is out for comment until Thursday, NCUA is now raising the threshold for compliance with the erstwhile RBNW threshold from $50M to $500M.  Specifically, the proposed rule would provide that any risk-based net worth requirement will only be applicable to credit unions with quarter end assets in excess of $500M and a risk-based net worth requirement that exceeds 6%. 

NCUA is proposing this change in the context of its efforts to give credit unions more flexibility to deal with the impact that COVID-19 has had on capital.  For instance, in last Thursday’s board meeting, it proposed changing the date for determining if a credit union has exceeded $10B in assets and therefore must comply with NCUA’s stressed test requirements. 

But with or without the pandemic, raising the compliance threshold to $500M also reflects the reality of just how quickly the credit union industry is consolidating, a trend which has been exacerbated by the pandemic. According to the NCUA as of September 30, 2020 credit unions with assets between $50M and $500M account for 15.9% of industry assets and 33.8% of credit unions. The average asset size of a credit union in this cohort is $164M. Conversely, credit unions with assets greater than $500M account for 81.6% of industry assets and only 12.4% of total credit unions. 

In the meantime the NCUA has put out for comment suggested changes to its risk based capital requirements and expanded the use of subordinated debt for credit unions that will have to satisfy RBC requirements.  Yours truly remains convinced that the Board has never made a truly convincing argument for why this extensive new framework has to be put in place in the first place.  Maybe a new board will consider scraping the RBC framework all together. 

Entry filed under: Compliance, COVID-19, Regulatory. Tags: , , .

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Authored By:

Henry Meier, Esq., Senior Vice President, 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. In addition, although Henry strives to give his readers useful and accurate information on a broad range of subjects, many of which involve legal disputes, his views are not a substitute for legal advise from retained counsel.

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