BOSTON NCUA said this morning it is building a new risk-based capital framework tailored to protect the industry from losses.
"The one-size-fits-all credit union capital regime is outdated and insufficient,” NCUA Chairman Debbie Matz told attendees to NAFCU’s annual convention this morning. “For many, if not most, credit unions, seven percent of assets may still be appropriate. For higher-risk credit unions, it can be a prescription for disaster when the next crisis hits. We need a flexible, forward-looking standard that makes sense for today and tomorrow.”
NMatz said the current 7% leverage capital standard, set by Congress in 1998, “was really just a best guess” at future requirements to protect safety and soundness. The recent financial crisis and industry changes, she asserted, require a modern approach.
Under the NCUA draft, “Seven percent would remain the floor, as required by the Federal CU Act," said Matz. "However, credit unions with assets over $50 million would be subject to improved risk-based capital requirements to better correlate required capital levels to risk. The result would be higher capital levels for credit unions with high concentrations of risky assets.”
“Job one is preventing another crisis,” Matz said. “One of the most important things we need to do to ensure a sound future is to revisit capital requirements. Our challenge is to make sure that, in the future, credit unions that choose to take on higher risks will be required to meet higher capital standards.”
Matz used contrasting cases from the housing bust to illustrate her point. Two high-risk credit unions in California held up to nine percent capital during the housing boom, but that proved insufficient when the real estate market collapsed, and NCUA had to liquidate both credit unions. Another federally insured credit union in Nevada, heavily invested in real estate at the same time, survived because it held 13 percent capital.
While reaffirming that Basel III is not right for the credit union industry, Matz noted NCUA has a responsibility to ensure the agency’s safety and soundness standards evolve along with credit unions.
