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The two members of the National Credit Union Administration’s board on Thursday reached a compromise with a proposed rule delaying implementation of the agency’s much-maligned risk-based capital rule until 2020, while also greatly reducing the number of institutions the rule will impact.

Enacted in October 2015 over the vocal objection of current Chairman J. Mark McWatters, who joined the board as a member in August 2014, the risk-based capital rule requires larger credit unions with more complex business models to hold additional reserves. As things stand, it is scheduled to take effect Jan. 1, 2019.

Industry groups voiced strong objections to the original RBC rule, arguing the vast majority of credit unions already hold retained earnings far exceeding the level needed to qualify as well-capitalized. Despite those reservations, then-Chairwoman Debbie Matz and Vice Chair Rick Metsger spearheaded risk-based capital’s passage, claiming it was necessary to add additional ballast to NCUA’s share insurance fund.

As a result of Thursday’s vote, credit unions now have 30 days to comment on the measure delaying implementation. The goal then is for the agency to review comments and make any necessary adjustments so the board can vote on a final version before the end of 2018.

Beyond delaying implementation another 12 months, the key provision in the proposed rule would increase the asset threshold for recognition as a complex institution from the current $100 million to $500 million. That would have the effect of reducing the number of institutions subject to the risk-based capital rule by more than half, from 505 to 221.

Measured by assets, the effect is less dramatic, with coverage dropping 15% to $369 billion.
The proposed rule would also reduce the number of institutions required to raise additional capital from 20 to just six, with a combined deficiency of $71 million. The 14 credit unions no longer impacted are smaller, to their aggregate capital shortfall totals only $13 million.

In response to a question from McWatters, Larry Fazio, director of the agency’s office of insurance and examinations, admitted the amendment to the 2015 version of risk-based capital actually increases risk to the system, but said the agency is well-positioned to handle it, with the share insurance fund totaling $16 billion – approximately $3.5 billion more than it held in 2015.

2020 or 2021
It remains to be seen how Congress will react to NCUA’s plan to delay risk-based capital implementation until 2020. Measures to delay implementation until 2021 have been included in several pieces of House legislation.

McWatters said he and Metsger would draft a non-partisan letter to lawmakers explaining NCUA’s action.

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Risk-based capital rule Risk-based capital Capital requirements Financial regulations Compliance Mark McWatters J. Mark McWatters Rick Metsger Dan Berger Lucy Ito Jim Nussle NCUA NAFCU NASCUS CUNA