WASHINGTON — If NCUA rethinks the proposed new capital rule's risk weights and allows CUs to access supplemental capital, the final rule would be much improved, says CUNA's chief economist.
During a well-attended breakout session at CUNA's Governmental Affairs Conference here earlier this week, Bill Hampel argued that some of the proposed risk weights are too tough, since credit union capital has been solid throughout the recession and CU loan losses, historically, have been markedly lower than banks'.
"That makes us question whether 10.5% (the well capitalized floor under the risk-based proposal) is necessary," said Hampel
Hampel reiterated CUNA's position on the proposed rule: NCUA should re-examine the risk weights during the rule's 90-day comment period. The proposed rule's concentration escalators apply high risk weights — higher than bank risk weighting — on mortgage and member business lending.
"The risk weights for credit unions should be lower than the comparable risk weights for commercial banks because historically credit union loan-loss rates are demonstrably lower than bank loss rates on the same kinds of loans," said Hampel. "So if 100% risk weighting is appropriate for a bank, and credit union charge-off history is half that of banks', then our risk weight should be 50%."
Supplemental Capital Concerns
CU access to supplemental capital is also in CUNA's crosshairs, with the trade association, industry executives and analysts saying credit unions need access to secondary capital to make the new risk-based rule work.
They cite CUs' inability to raise capital quickly as a serious concern for the future of many credit unions under the new rule.
Kirk Kordeleski, CEO of the $5.5 billion Bethpage FCU in Bethpage, N.Y., reminded that a bill was introduced in February 2013, that if passed would provide credit unions with access to secondary capital. "H.R. 719, the Capital Access for Small Businesses and Jobs Act, has 47 co-sponsors," he said.
Bethpage is among more than 40 CUs involved in a credit union coalition on capital options.
"Supplemental capital would offset some of the challenges of the risk-based capital proposal," said Kordeleski, who contended that without secondary capital, many CU plans for growth will be stalled or even ended under the proposed rule.
"Even if the credit union does not need supplemental capital today, knowing it is available can be very important when making long-term plans," Kordeleski noted.
Hampel said that as NCUA re-examines the new rule during the comment period, it's possible the agency could open the door for supplemental capital.
"There is nothing stopping NCUA from saying that another factor in the numerator for the risk-based capital ratio could be some form supplemental capital," he noted. "This may be a way to get access to supplemental capital just for the risk-based portion of the capital requirement. However, it will not solve the problem of still having a 7% leverage requirement without access to supplemental capital."
Citing recently released CUNA data, Hampel reviewed how the new rule will affect CU capital, costing the community $7.3 billion more to maintain the same healthy capital cushions enjoyed today.
CUNA said that it examined 2,504 federally insured credit unions with more than $40 million in assets and compared their current margins above being well capitalized to what they would be if the NCUA proposal were in effect. The risk-based rule applies only to CUs with assets of $50 million and above, but CUNA reached down to $40 million as many CUs will grow and fall under the rule by time it takes effect.
Deeper Dive To Come
The trade group plans to dig a lot deeper into the proposal, according to Hampel and will also compare CU loan loss rates to that of community banks to determine if NCUA's risk weights are right.
"If NCUA wants to have this graduation of risk weights according to concentration, that's fine," said Hampel. "But don't start at 100% risk weighting, start at 30% risk weighting because that is about what credit unions' loan loss rate is compared to banks."
A strong case can be made that the Federal Credit Union Act does not allow NCUA to create an additional standard for a CU to be well capitalized, according to Hampel. "The law says they are to develop a risk-based capital requirement in order to maintain adequacy of capital. It doesn't say anything about being well capitalized."
The chief economist also cautioned that credit union financial performance has been slightly inflated, as well as capital cushions, due to excess loan loss reserves. "Allowances for loan loss levels are still artificially elevated. You have not burned through them yet."
CUNA will soon look at 2006 CU balance sheets, when loan-to-share ratios were higher and loan-loss reserves had not been built up to address the economy, to determine the impact of the rule under those conditions.
Hampel estimates three years will pass before the new capital rule takes effect. He cited the fact that the comment period begins only after the proposed rule has been published in the Federal Register. "I would be surprised to see a final rule from NCUA before late this year or sometime in 2015."
He added that NCUA has stated there will be an 18-month delay from when the rule is finalized until it takes effect.
"We think that period will be even longer with all the input we expect from credit unions, and from looking at how the bank capital rules were phased in. So you don't have to go home today and fix your balance sheets."
But Hampel noted that credit unions need to take some action now. "You need to provide comment letters to NCUA and go to this summer's 'Listening Sessions,' he advised, referring to three meetings Chairman Debbie Matz has scheduled for this summer to meet with and hear CUs concerns about the rule.
