WASHINGTON — More credit unions will be negatively affected by the new risk-based capital rule than the National Credit Union Administration has indicated, say the two main CU trade groups.
In addition, according to CUNA and NAFCU, NCUA has the authority to impose even higher capital requirements on CUs — above well-capitalized levels — on a case-by-case basis.
Those are two of several concerns the trade groups have with the proposed new capital rule, and both are urging credit unions to carefully review NCUA's rule and weigh in during the 90-day comment period.
"This is a critical proposal and as many credit unions as possible should share their assessments and concerns," said CUNA Deputy General Counsel Mary Dunn.
CUNA, in a
The agency has stated that over 90% of credit unions with assets over $50 million (2,237 CUs) — based upon June 30, 2013, call report data — would meet the minimum risk-based capital requirements.
However, 189 institutions would see their PCA classification drop to adequately capitalized from well capitalized, and 10 well-capitalized CUs would dip to undercapitalized.
Another Category Of CUs
But CUNA says there is another category of credit unions affected that should be added to the list. CUNA is concerned about credit unions that would fall from being well-capitalized with a healthy capital margin to those that are just barely above the well-capitalized level.
CUNA stated that NCUA estimates that if the proposed risk-based capital requirements were applied today, the aggregate risk-based capital ratio (dollar weighted average) for credit unions subject to the proposed risk-based capital measure would be 14.6% and the credit union average risk-based capital ratio would be 15.7%.
"These average numbers are well above the proposed 10.5% requirement for classification as well-capitalized," the CUNA summary stated, adding that many credit unions will have risk-based capital ratios near 10.5%, a much smaller cushion than they enjoyed under the current capital system.
CUNA Chief Economist Bill Hampel said CUNA expects to soon know how many CUs have had their capital cushion markedly drop. "We're concerned not only about the roughly 200 currently well-capitalized credit unions that would become less than well capitalized under the proposal, but also about the many credit unions whose cushion above being well capitalized would be so reduced that they would feel compelled to restrain their growth," Hampel said.
Analysts, including former NCUA Chairman Dennis Dollar, warn that smaller capital cushions will negatively affect credit union growth, discouraging CUs from doing the things they need to expand, such as investing in branches and new technology.
NAFCU President Dan Berger told Credit Union Journal that his trade association not only is worried about the growth rates of credit unions with smaller capital cushions, but these CUs could also fall under corrective action. "Credit unions just can get into a little bit of trouble more quickly under the proposed rule," he said.
What NAFCU is paying closest attention to, according to Berger, is that under the proposed new rule, NCUA has the authority to impose even higher capital requirements on individual credit unions that could exceed even well-capitalized levels. "We are concerned about this open-ended provision," Berger added.
CUNA'S Primary Concerns
According to CUNA's summary, some of its primary concerns include:
- NCUA has not justified the need for the rule adequately.
- NCUA would require covered credit unions to subtract goodwill from net worth when calculating their risk based capital requirements.
- NCUA would also require the National Credit Union Share Insurance Fund 1% deposit to be ignored in the risk-based capital calculation.
- More time is needed for the rule to be phased in.
- A number of the risk weightings, especially for member business loan and mortgage concentrations as well as for CUSO investments, do not appear to be properly calibrated for credit unions. Using higher risk weights on long-term assets to deal with interest-rate risk is misleading without considering liability maturities.
"[NAFCU] questions whether the risk weighting proposed actually matches real risk in the system," said Berger in a letter to NCUA. "The proposed rule assigns rigid risk-weights to many investments that when properly examined represent much less risk than the assigned risk-weights."
CUNA and NAFCU continue to analyze the rule, with CUNA saying it is looking at NCUA's legal authority for the proposal and how it compares with Basel III for community banks. Both trade associations are developing comment letters and will be reaching out to credit unions to solicit viewpoints.
Carrie Hunt, NAFCU's SVP of government affairs and general counsel, said shortly after the rule was released the trade association began receiving member feedback. "We have very detailed comments. So we already have a good idea of the issues credit unions have with the new rule — and there are many."
