Posts tagged ‘Risk-based capital’

Key Risk Based Capital Requirements to Be Proposed Next Thursday

I have some potentially good news for credit unions with $500 million or more in assets.

As readers of this blog already know, starting on January 1st credit unions over this threshold must start complying with risk based capital requirements intended to ensure that NCUA appropriately accounts for the capital risks of complex credit unions under its PCA framework. Up until May, the NCUA was receiving feedback from credit unions on how this requirement might be modified. Remember, not one of the three board members currently serving at NCUA was even around when this new framework was put in place way back in 2016.

Under a risk based capital framework, financial products are given risk weights. So for example, a credit union holding a disproportionate number of 30 year mortgages would have a different risk rating than a credit union with the same level of assets that specializes in car loans. We will know by next Thursday what approach NCUA has decided to take when it comes to simplifying these new capital requirements. One approach would implement a risk based leverage ratio framework. Very generally, this framework would establish certain risk factors that would trigger additional capital buffer requirements. A second approach would implement a so-called complex credit union leverage ratio. Again, very generally speaking this approach would allow credit unions to satisfy risk based capital requirements by putting aside a greater amount of capital than would otherwise be necessary under NCUA’s existing risk based capital framework.  Credit unions would be able to opt in and out of this framework.

Irrespective of what approach NCUA decides to take it is time to give impacted credit unions a clear compliance framework. There is much work to be finalized in the coming months. NCUA is cutting this closer than a college kid who put off his big term paper to a day before the quarter ended. On that note, enjoy your weekend.

July 16, 2021 at 9:25 am Leave a comment

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

 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. 

March 23, 2021 at 10:09 am 1 comment

NCUA Proposes Major Rule for Expanded Use of Subordinated Debt

After almost five years of research, NCUA has released proposed regulations which would allow some credit unions to offer “subordinated debt” as a means of meeting regulatory requirements. Whether or not the proposal was worth the wait will become clear in the coming days as the industry takes the time to digest all 277 pages of it.

At first glance, the biggest winners seem to be complex credit unions that do not have low income designations. Currently, these institutions don’t qualify for secondary capital. Under the proposal, these larger institutions will be able to use this subordinated debt for purposes of meeting their risk based capital requirements.

Under existing regulations, low-income credit unions currently qualify for secondary capital. These institutions will be eligible to receive subordinated debt with their existing secondary capital grandfathered in, provided the credit union complies with parameters set forth in the proposal.

This means that if your credit union is not a complex or low income credit union, you will be ineligible to receive subordinated debt. Remember, credit unions in this category are currently not eligible to receive secondary capital.

Under the plan, NCUA stipulates that in order to qualify to issue subordinated debt, the debt must:

  • Be in the form of a written, unconditional promise to pay on a specified date a sum certain in money in return for adequate consideration in money;
  • Have, at the time of issuance, a fixed stated maturity of at least five years and not more than 20 years from issuance. The stated maturity of the Subordinated Debt Note may not reset and may not contain an option to extend the maturity; and
  • Be properly characterized as debt in accordance with U.S. GAAP.

Not surprisingly, this complicated framework would create more work for lawyers as the subordinated debt would be classified as a security, triggering additional disclosure requirements.

The new subordinated debt classification will replace the existing secondary capital regulations, allowing those of you who already had secondary capital to continue using it so long as you meet the newly proposed requirements found in the regulation. Take a look at page 262 to get a sense of the additional requirements.

Expect much more to come on this in the near future. Remember, these are proposed rules, so submitting comments on this proposal is absolutely critical.

DFS Extends Libor Plan Grace Period

Good news, people. New York’s Department of Financial Services has extended the deadline for which it will accept an institution’s post-Libor preparedness plan from February 7, 2020 until March 23, 2020. Keep in mind that this only applies to state chartered institutions, but NCUA expects federal credit unions to be able to be preparing for the post-Libor world.

January 24, 2020 at 9:51 am Leave a comment

Robert E. Lee, RBC, the Supreme Court and the FCC

Image result for robert e leeGood morning folks. I apologize for the late blog but I had a tough time waking up this morning after a great weekend.

First off, what everyone’s been asking about is the legislative session. As I’m sure many of you know by now, we came close but were unable to push legislation permitting municipalities to place money in credit unions over the proverbial finish line. Is this disappointing? Of course it is but let’s not underestimate the progress we made by getting the Assembly Banks Committee to vote in favor of the legislation and getting the Chairman of the Senate Banks Committee to agree to this legislation.

In addition, let’s not underestimate how big of a deal legislative approval of credit union participation in banking development districts is. First, credit union involvement in the program will help more consumers have access to banking services. Second, inclusion in credit unions in the program marks the first time that credit unions will be able to accept public funds in New York State. And finally, passage of the BDD bill shows that persistence pays off. The program has been in existence since 1997.

Forget all that stuff about how making laws is like making sausage. Running into an old colleague last week reminded me of one of my favorite analogues the New York legislative process. To really understand what it’s about you have to put yourself in the shoes of Robert E. Lee, who after surveying the battlefield following the battle of Fredericksburg turned to his colleagues and said, “It’s a good thing war is so awful less we grow too fond of it.” The legislative process may not be pretty and can be incredibly frustrating but it’s also the only one we have and we are certainly better off for engaging in the battle even if we don’t always get all the results we would want.

Okay, I’m getting off my high horse now.

NCUA Delays Risk Based Capital Rule

By a two-to- one vote on Thursday, the NCUA Board proposed delaying until January 1, 2022, the effective date of the Risk Based Capital rules. According to the NCUA, they will “allow the Board additional time to holistically and comprehensively evaluate the NCUA’s capital standards for federally insured credit unions.” This is of course good news for those credit unions with $500 million or more in assets which the RBC rule characterizes as complex. The preamble to the proposed delay regulation singles out the potential use of subordinated debt; evaluation of how federal banking legislation impacted the extent to which community banks have to comply with risk based capital requirements under the economic growth, regulatory relief and Consumer Protection Act of 2018 and the need to provide credit unions more time to prepare for complying with this regulation as among the key reasons justifying a delay.

Since I’m in a generous mood, I am going to offer two additional reasons. (1) I continue to believe that NCUA’s fundamental premise- that it was required to put forward RBC regulations in the first place- is flawed. (2) On a policy level show me the proof that RBC is actually the best approach for regulators to take from a safety and soundness point of view. Yours truly continues to believe that a risk based capital framework simply encourages both banks and credit unions to engage in regulatory arbitrage by overinvesting in products and activities based on regulatory speculation as to how dangerous the activities and investments are.

 Supreme Court Underscores Administrative Confusion Surrounding the TCPA

Since I can’t seem to avoid doing any blog lately without mentioning the TCPA, I want to bring to your attention a decision by the Supreme Court last week which underscores just how messed up – that’s a legal term – the TCPA framework is. In PDR Network, LLC. v. Carlton Harris Chiropractic Inc.,  the  question was whether a fax advertising the availability of a free diagnostic manual constituted an advertisement under the TCPA for which recipients could sue the senders? In 2006, the FCC issued an order stating that unsolicited advertisements  promoting free goods violated the TCPA but a district court disagreed with the FCC’s interpretation.

The question before the court was whether another statute, the Hobbs Act, only allowed federal appellate courts and not district courts to reverse FCC rulings. The Supreme Court’s answer to this question? It’s not sure. It sent the court case back to the lower courts to determine whether the FCC’s 2006 ruling was a “legislative rule” in which case the District Court went beyond its authority or if the FCC’s ruling was more analogous to a court’s interpretation for the statute in which case, a district court has more freedom to come to its own conclusions.

I know this is in the weeds stuff but given the importance of administrative rulemaking procedure in establishing the rules to which all credit unions are subject, it’s actually important to pay attention to.

June 24, 2019 at 9:57 am 1 comment

Is Supplemental Capital worth the risk?


In yesterday’s blog, I provided an overview of NCUA’s Supplemental Capital ANPR addressing a potential Supplemental Capital framework. I know requests for feedback are white noise to many of you, who actually have more immediate concerns to worry about, like running a credit union. But there are some big issues tied in with this proposal that affect the industry as a whole and you should take the time to weigh in.

Just how big are the issues? Well, this is the first ANPR I have ever seen that raises the prospect of credit unions putting their tax exempt status at risk. The ANPR notes that “With respect to federal credit unions, the Board is aware that part of the basis for the credit union tax exemption was that Congress recognized most credit unions could not access the capital markets to raise Capital.” It further points out in a footnote that Mutual Savings Banks and Savings and Loan Associations were stripped of their tax exempt status in part because they “had evolved from mutual organizations to ones that operated in a similar matter to banks.”

To me, the core issue is how much credit unions with $100 million or more in assets need Supplemental Capital both to comply with their enhanced risk based capital obligations and continue to grow to meet member needs. The simple truth is that the Basel iii  framework, for which NCUA’s Risk Based Capital was the inspiration, was designed with large banks in mind. These institutions can satisfy capital requirements by issuing stock. Credit Unions have no such option. Supplemental Capital would give them greater flexibility to meet these new demands.

And let’s not forget that the credit unions that are most likely to directly benefit from Supplemental Capital are the same ones large enough to bring down the entire industry. Supplemental Capital could provide an added buffer against future financial meltdowns.

Ultimately, I believe that the industry needs to have Broad Based Supplemental Capital as an option available for all credit unions that choose to use it. But seeing legislation like this pass any time soon is about as likely as seeing President Trump’s spokesman, Sean Spicer leading the Washington Press Corp. in a yoga class. (That man really has to take a chill pill.) Supplemental Capital regulations could show Congress how additional capital flexibility helps credit unions grow to meet member needs and enhances the safety and soundness of the industry.

On that note, Namaste

January 25, 2017 at 9:08 am Leave a comment

4 Things to Ponder on Monday AM

If you are like me, you haven’t been paying much attention to the news over the past few days, so here are 4 things to ponder as you begin your credit union work week.

  • The CFPB recently issued a guide instructing lenders how to comply with the combined TILA-RESPA integrated disclosures that take effect August, 2015.  The CFPB does a phenomenal job with these guides in which it cuts through the more technical aspects of its regulations and provides lenders with practical tips on complying with some of its lending regulations.  I know some of you have understandably taken a break from obsessing about mortgages now that you have gotten your qualified mortgages policies and procedures up and running (you have, right?) but you should remember that the CFPB’s regulation introducing brand new lending application and closing disclosures will have a huge operational impact on those of you who provide mortgages.  For example, closing disclosures will generally have to be provided three business days before closing.  To me this remains one of the most foolish requirements promulgated by the CFPB, but I hope I am wrong with this prediction.  On the bright side I have always been disgusted by the needlessly complicated disclosure process we use when buying and selling houses and in my opinion these new integrated disclosures can’t be any worse that the current disclosures provided to home buyers.  Bottom line, take a look at the manual.  It is not too early to see how you are going to comply with these new requirements.
  • While we are on the topic of mortgages, there is a great article in the Wall Street Journal pointing out a silver lining in an otherwise atrocious mortgage origination market.  According to the Journal, credit unions and community banks are leading the way in loosening lending standards.  Specifically, the paper notes that many lending organizations, desperate to find income now that the low hanging fruit of mortgage origination is no longer available, have reduced requirements for, among other things, the size of mortgage down payments. It will be interesting to see if this trend continues and if it is robust enough to jolt some life into the mortgage market.  It has always been the hope of the CFPB that smaller credit unions and community banks will make mortgage loans using the same standards that they had in place before Dodd-Frrank and the qualified mortgage rules. 
  • The CFPB filed a brief on Wednesday defending itself against a long-shot lawsuit claiming that Congress violated the Constitution when it created it under the Dodd-Frank Act.  The lawsuit, centers on claims that Congress violated the separation of powers doctrine when it gave the Bureau the power to create regulations free of the oversight of Congress or the need for annual Congressional appropriations.  The lawsuit also argues it is illegal that the director cannot be removed at will by the President.  In October the federal District Court for the District of Columbia dismissed the lawsuit.  Morgan Drexen, Inc. et al v. Consumer Finance Protection Bureau, 13-5342.  
  • If Heather Anderson’s report in the CU Times is any indication, then NCUA can expect about as warm a reception as the one Congressmen received as they tried to defend Obama Care at town hall meetings.  OK, maybe I am exaggerating a little but after seeing reports that credit union executives asked pointed questions of the NCUA staff at a recent session dedicated to the Risk-Based Capital proposal at a NACUSO conference in Orlando, it appears that NCUA staff better get working on answering some basic questions.  Among the questions for which the audience did not receive satisfactory answers were how NCUA weighed the need to allow credit unions to take risks in search of higher returns against the perceived need for stricter capital requirements.   There are two basic issues being debated with NCUA’s risk-based capital proposal.  One is whether or not the proposal make sense for the credit union industry at this time.  Secondly, did the NCUA perform adequate due diligence in devising this specific plan?  I sincerely hope the answer to the second question is yes, but one of the most striking aspects of the published proposal is a lack of substantive explanations for the specific requirements it is seeking to impose on credit unions. 

April 21, 2014 at 8:26 am Leave a comment

Why Credit Unions Are Wrong On Risk-Based Capital

As faithful readers of this blog will know, I occasionally feel the need to remind people that the opinions expressed are mine, and mine alone, although you, of course, are welcome to agree with me. 

Both NCUA and credit unions are making serious mistakes in the march toward a more sophisticated risk-based capital scheme for credit unions with at least $50 million in assets.  Another time I will talk about NCUA’s mistakes, but today I think it is time to take the industry to task.  Most importantly, the industry can’t have it both ways when it comes to risk-based capital.  For at least a decade, it has been pushing NCUA to adopt a risk-based capital formula arguing that a capital framework more in line with that of banks will free up capital at well run credit unions and ultimately help more members.  This sounds great, but it is flawed for two reasons. 

First, NCUA has always said that with any risk-based capital proposal there are not only going to be winners, but losers.  If the industry wants capital reform but continues to insist that NCUA’s proposal is fatally flawed, then it has an obligation to come up with a workable alternative.  However, my guess is that anything resembling industry consensus on what an alternative proposal would look like is impossible to obtain.  For instance, if you think the proposal places too much emphasis on concentration risk, does that mean you’re in favor of increasing risk ratings across the board?  And if you don’t think concentration risk should be dealt with by imposing higher risk ratings on mortgages and MBLs, then how else should NCUA account for concerns that too much concentration of any given asset poses a greater systemic risk to the industry?  There is no win-win here; there are winners and there are losers.

Which leads us to the second, more fundamental problem with the industry’s position on risk-based capital.  The simple truth is that despite the glorification of the BASEL framework, there is absolutely no indication that risk-based capital regimes actually work.  remember that some of the largest banks that failed over the past five years were subject to BASEL requirements.  In fact, as summarized in a recently released analysis from George Mason University “since 1991 the Federal Reserve has employed a risk-based measure of bank capital as its primary tool for regulating risk.  However, RBC regulations are easily exploited and susceptible to regulatory arbitrage.  Evidence indicates that such regulations have increased individual bank risk as well as systemic risk in the banking system.”  Also, read the excellent quotes in the CU Times provided by Chip Filson, who is doing a great job leading the charge against a risk-based capital regime. 

The myth of risk-based capital is underscored by NCUA’s proposal.  Risk rating is complicated but at its core it is nothing more than a policy judgement on the part of regulators about which assets pose the greatest relative risk to safety and soundness.  The problem is that such policy judgements are inevitably based on preventing the last financial crisis from occurring again.  In reality, whether the next financial crisis occurs in five or fifty years, no one knows which assets truly pose the greatest risk to the safety and soundness of this industry. 

Against this backdrop of uncertainty, it makes more sense to maintain general capital requirements than it does to provide regulators, financial institutions and the general public with false assurances that institutions are well capitalized.  In short, if it was up to me, we would scrap NCUA’s proposal all together not because the proposal is so flawed, but because risk-based capital doesn’t work as advertised.

April 8, 2014 at 8:28 am Leave a comment

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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