NCUA approves risk-based capital changes, sets stage for new banker battle
Credit unions will get at least one more year to prepare for implementation of the National Credit Union Administration’s long-anticipated risked-based capital rule after the agency’s governing board voted Thursday to approve a pair of modifications to the controversial regulation.
In addition to pushing back RBC’s start date to Jan. 1, 2020, the board increased to $500 million the asset threshold that defines the so-called complex credit unions that will be subject to the rule.
Back in October 2015, when the rule was first approved, the board set the threshold at $100 million. The increase has the effect of exempting another 1,026 credit unions. In all, Thursday’s vote leaves about 10 percent of the nation’s approximately 5,480 federally insured credit unions subject to the risk-based capital rule.
Even with fewer credit unions subject to it, the rule still covers more than three quarters of credit union assets, down from 93 percent under the original version.
Board Chairman J. Mark McWatters acknowledged the increased threshold will result in some increased risk, but said it also brings with it a substantial amount of regulatory relief.
“Does the new protocol present a threat to safety and soundness? Our view around here after a lot of discussion and hard thinking is that it does not,” said McWatters.
NCUA unveiled the risk-based capital changes in August and received 38 letters during a 60-day comment period.
Under risk-based capital, credit unions with $500 million or more in assets will be required to meet a risk-based capital ratio of 10%, in addition to the universal 7% net worth ratio to be considered well-capitalized.
NCUA plans to address capital issues that arise at smaller credit unions through its regular examination process, according to Julie Cayse, director of the Division of Risk Management in the Office of Examination and Insurance.
Despite NCUA a delay in implementation, a large number of credit unions – along with many industry trade groups – continue to oppose the rule, bemoaning the added costs it entails. They’re backing a bill in Congress that would delay implementation until January 1, 2021. The House of Representatives approved the measure on June 26 by a vote of 400 to 2, but it is awaiting action by the Senate.
Opponents of the new rule aren’t giving up hope they can further delay the start date or even scuttle it altogether, but they applauded NCUA for its modifications.
“While CUNA supports a longer delay and other substantive modifications to the rule, the proposal’s changes are important and will provide relief, and NCUA deserves credit for this targeted regulatory relief,” Ryan Donavan, chief advocacy officer at the Credit Union National Association, said Thursday in a press release.
In a similar manner, Dan Berger, president and CEO at the National Association of Federally-Insured Credit Unions, lauded Thursday’s vote by McWatters and Board Member Rick Metsger, but added his group would continue to press Congress for a longer delay.
“A one-year delay is a step in the right direction," Berger said in a press release. "However, we remain concerned about the regulatory burdens and costs the rule will place on credit unions. NAFCU will continue to advocate for Congress to delay the rule's implementation by two years in order to give the NCUA time to revise it."
Alternative capital moving forward?
Banks have largely remained on the sidelines of the risk-based capital debate, but they’re likely to get more involved as NCUA prepares to take up the issue of alternative capital.
As things stand, retained earnings are the only form of capital available for credit unions. The agency has long promised to introduce a rule making it easier for credit unions to raise alternative forms of capital to cushion the burden created by tougher risk-based capital standards. After Thursday’s vote, Metsger said it was time to make good on that pledge.
The extra year before the risk-based capital rule takes effect “gives us time to do just that,” Metsger said, referring to alternative capital. “I anticipate we’ll be able to [unveil] a rule in the not-too-distant future.”
At least one trade group believes the RBC rule won’t be complete unless the regulator approves an accompanying alternative capital scheme.
“We have long held that alternative capital should be a part of the risk-based capital framework because it could help protect the National Credit Union Share Insurance Fund from losses by encouraging credit unions to attract additional loss-absorbing forms of capital that they would otherwise forgo,” Lucy Ito, president and CEO of the National Association of State Credit Union Supervisors, said Thursday in a press release.
NCUA issued an advance notice of proposed rulemaking addressing alternative capital in January 2017 but has taken no action since.
Bankers, not surprisingly, are on record strongly opposing any additional means of raising capital for credit unions.
In other actions Thursday, NCUA approved a proposed rule that would clarify and simplify federal credit union bylaws. Among other things, the rule outlines steps credit unions are permitted to take to limit service to members deemed disruptive or abusive.
Many credit unions have reportedly been reluctant to move against troublesome members, even in the wake of violent incidents, because the Federal Credit Union Act sets a high bar for expelling members.
The proposed rule, however, makes it clear institutions have the right to limit the services available to problem members.
“An individual that has become violent, belligerent, disruptive or abusive may be prohibited from entering the premises, making telephone contact with the credit union, and the individual may be severely restricted in terms of eligibility for products and services,” it states.
“What it’s really talking about are criminal issues,” McWatters said during Thursday’s meeting. “The Federal Credit Union Act establishes membership rights, but it doesn’t trump criminal law.”