Posts tagged ‘risk based net worth’

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

Is Flood Insurance Hurting The Housing Market?

What really caught my eye about the National Association of Realtors’ (NAR)quarterly report on the State of US Housing was not the familiar litany of excuses for why, even though optimists continue to see robust economic growth right around the corner, the housing market continues to underwhelm (the weather was bad, credit is tight and the first time homebuyer isn’t buying, yada, yada, yada). No, what really caught my eye was the Association’s assertion that spiking flood insurance premiums are beginning to take a bite out of housing.

According to NAR President Steve Brown, “Thirty percent of transactions in flood zones were cancelled or delayed in January as a result of sharply higher flood insurance rates,” he said. “Since going into effect on October 1, 2013, about 40,000 home sales were either delayed or canceled because of increases and confusion over significantly higher flood insurance rates. The volume could accelerate as the market picks up this spring.”

If part of what is going on here is political gamesmanship, it’s gamesmanship of the best kind. The Senate has already passed legislation that would delay reforms mandated by the Bigget-Waters Reform Act of 2012. One of the primary goals of the Act is to entice private insures into the flood insurance business by phasing out government subsidies that insurers argue make it impossible to accurately and cost effectively price insurance in areas where it is necessary.

While the argument appeals to the free market guy in me, members of both sides of the aisle are justifiably concerned by the evidence that without amendments to this legislation, individuals who live in areas prone to flooding will see huge spikes in their flood insurance premiums. No surprise then that Congressman Michael Grimm of Staten Island is one of the primary proponents of legislation (HR3511) to keep insurance premiums from rising. It appears that House action on the bill is imminent, but the bill has already faced unexpected delays. At the end of the day, this is one of those bills that shows that ideology won’t trump legislation to help constituents stay in their homes.
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A Failure to Communicate?

I was more than a little surprised when I read Chairman Matz’s speech before CUNA’s Government Affairs Conference yesterday. With some credit union officials describing the Risk Based Net Worth proposal as Armageddon for the industry, I figured Matz would use the opportunity to explain why NCUA feels its proposal is medicine worth taking for the industry as a whole. I was wrong.

Given the fact that the industry itself pushed for net-worth reform for several years before seeing NCUA’s proposal, the agency undoubtedly has some arguments to make in its favor. But its failure to mount any kind of a defense of its idea is becoming a real problem. The proposal itself lacks the kind of detail that credit unions deserve when their regulator puts forward a proposal of this magnitude. Matz’s silence in the face of mounting credit union concerns does nothing to address legitimate credit union jitters on this issue.

February 25, 2014 at 8:53 am 3 comments

Too Much Concentration On MBLs

No one is going to accuse CU Times of overstatement in its article today that “Risk Based Rule Hurts MBL Biz Model.”

In putting forward this proposal, NCUA frankly acknowledges that its goal is to attack four main areas where it feels that the existing risk-based net worth framework inadequately reflects credit union risk. These four areas are delinquent loans; concentrations of MBL and real estate secured loans; equity investments; and off-balance sheet exposures.

NCUA’s decision to attack MBL concentration limits is understandably getting the most attention because it has the greatest potential of making large previously well-capitalized credit unions into undercapitalized institutions scrambling for ways to find additional capital. According to NCUA, currently MBLs comprise an aggregate of 4.8% of assets and an average of 5.14% of assets for complex credit unions with MBL loans. In contrast, 70 credit unions holding Member Business Loans have portfolios in excess of 15% of total assets.

This proposal would put the squeeze on these credit unions by increasing the asset weightings of MBLs that surpass certain concentration thresholds. For example, under the current risk based net worth weightings framework, MBLs comprising up to 15% of a credit union’s assets are given a 75% weighting. The new rule would increase this weighting to 100%. In addition, those credit unions with MBL concentrations between 15% and 25% of assets would see their risk weightings increase from 100% to 150%. Since the lwa already caps credit union’s MBL loans NCUA is going after credit unions that currently have authority to exced the MBL cap You can find more information about the regulation’s proposed MBL impact beginning on page 54 of the draft regulation.

The MBL concentration limit underscores just how crucial it is that credit unions not only question the need for any risk-based net worth changes at this time, but also take the time to show how specific changes would impact credit union operations.

If NCUA is hell-bent on making changes to risk-based net worth it is going to make them, but coming up with constructive amendments to those proposed weightings is one way in which credit unions could work to minimize the negative impact this proposal could have.

On that note, have a nice weekend. Your faithful blogger is taking tomorrow off and catching the Knicks at the World’s Most Famous Arena.

February 6, 2014 at 9:04 am 1 comment

NCUA’s Net Worth Reform: Bad for Credit Unions; Bad for Members

NCUA has taken its obsession with how best to protect the Share Insurance Fund to an extreme with its recent risk-based net worth requirement. In putting forward its radical proposal to impose enhanced risk-based net worth requirements on those credit unions lucky enough to have $50 million or more in assets, the NCUA is proposing a solution in search of a problem. Absent evidence that the current RBNW poses a risk to the credit union industry as a whole, there is no demonstrated need for the type of reform that NCUA is seeking to impose.

According to the NCUA, 90% of credit unions already meet the proposed net worth requirements. But this statistic only tells half the story. First, credit unions suddenly deemed to have inadequate capital will have to scramble for ways to comply with this new mandate, notwithstanding the fact that they, unlike their banking counterparts, cannot go out and raise additional capital through stock offerings. This means that members of these credit unions will pay the price for NCUA’s dictate in the form of fewer and/or less competitively priced financial products. With the economy still sluggish, this is a strange time to be putting the brakes on sound financial institutions. In addition, even though the vast majority of credit unions will satisfy the new net worth requirements, these enhanced restrictions represent a barrier to future growth.

In putting forward this proposal, NCUA acknowledges that while credit unions generally have high capital, it complains that in recent years the Share Insurance Fund experienced several hundred million dollars in losses “due to failures of individual credit unions holding inadequate levels of capital relative to the levels of risk associated with their assets and operations.” NCUA complains that its examiners did warn these credit unions of the risk, but that these recommendations were unenforceable.

With all due respect, there is something wrong with this logic. The goal of the fund is not to prevent all losses. It should surprise no one that individual credit unions, either because of severe economic conditions, mismanagement or a combination of both become insolvent. But to suggest that all credit unions should have to pay the price for these events ultimately robs credit unions of their obligation to run their institutions in the way that reflects the needs of their community and the members for whom they operate.

To be fair to NCUA, there are certainly going to be situations where a credit union could be complying with relevant rules and regulations but still operating in a risky manner. Therefore, it is justified in clarifying that it has the authority to impose capital requirements on individual credit unions where a unique composition of assets poses risk to its safety and soundness. However, there is no such thing as a completely safe financial environment and by imposing enhanced capital requirements on all credit unions, NCUA is taking money from members and failing to strike a proper balance between managing risks and allowing credit unions to run their businesses.

January 30, 2014 at 9:02 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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