NCUA approves risk-based capital changes, setting stage for new banker battle

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Credit unions will get at least one more year to prepare for the National Credit Union Administration’s long-anticipated risked-based capital rule after the agency’s governing board approved a pair of modifications to the controversial regulation.

The NCUA board on Thursday pushed the risk-based capital rule's start date to Jan. 1, 2020. The board also increased the asset threshold that defines the so-called complex credit unions that will be subject to the rule, to $500 million.

When the rule was approved in October 2015, the board set a $100 million threshold. The increase has the effect of exempting another 1,026 credit unions. In all, Thursday’s vote leaves about a tenth the nation’s roughly 5,480 federally insured credit unions subject to the risk-based capital rule.

Still, the rule still covers more than three-quarters of credit union assets, down from 93% under the original version.

While the higher threshold will result in some increased risk, NCUA Chairman J. Mark McWatters said the change also creates substantial 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,” McWatters said.

The NCUA unveiled the risk-based capital changes in August, receiving 38 letters over a 60-day comment period.

Under the rule, credit unions with assets of $500 million or more 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.

The NCUA plans to address capital issues that arise at smaller credit unions through its regular examination process, said Julie Cayse, director of the Division of Risk Management in the Office of Examination and Insurance.

Despite a delay in implementation, a large number of credit unions — along with many industry trade groups — continue to oppose the rule, bemoaning added costs. They’re backing a bill that would delay implementation until Jan. 1, 2021. While the House of Representatives approved the measure on June 26 by a 400-to-2 vote, the Senate has yet to take action.

Opponents of the new rule aren’t giving up hope that they can further delay the start date or scuttle it, but they applauded the 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 in a Thursday press release.

Dan Berger, president and CEO of the National Association of Federally-Insured Credit Unions, lauded the vote by McWatters and Rick Metsger but said 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 the 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 NCUA 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" take on the issue of alternative capital, Metsger said. “I anticipate we’ll be able to [unveil] a rule in the not-too-distant future.”

At least one trade group believes the risk-based capital rule won’t be complete unless the NCUA 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.

The NCUA, which issued an advance notice of proposed rulemaking addressing alternative capital in January 2017, has taken no action since.

Bankers are on record strongly opposing any additional means of raising capital for credit unions.

Simpler bylaws

The NCUA also approved a proposed rule to clarify and simplify federal credit union bylaws. Among other things, the rule outlines steps credit unions are allowed 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 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,” the rule 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.”

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