Compliance Blog

Written by Michael Coleman, Director of Regulatory Affairs

Thank you. There is no doubt that NCUA’s proposed rule on risk-based capital is the most significant rule that NCUA has issued in recent history. The entire credit union industry has come out in force to express their concerns about this proposal. 

So we would like to say thank you to all of our members, and other industry stakeholders, who have submitted more than 1100 comment letters in response to NCUA’s proposed rule on risk-based capital. Thank you because your comments are already making a difference. Chairman Matz has said that NCUA will take into consideration all of the comments NCUA receives as they evaluate making changes to the proposal (such as to the risk-weighting of MBLs). Check out her article in the May edition of the NCUA Report. Also, Chairman Matz has stated in the press that they are listening to the comments and feedback that they hear from credit unions on the proposal (including the implementation timeframe), check out this article, this article and this article. If the NCUA makes significant changes to the proposed rule it will be due to your efforts, so again, thank you!

NAFCU filed our letter yesterday. You can check it out here, you can also find it on NAFCU’s capital reform issue page. It’s more than 30 pages long, but there are a couple of things we would like to highlight. First, a number of the NCUA proposed risk-weights (such as those for real estate, investments and MBLs) would require credit unions to hold much more capital as compared with  the FDIC and Basel III requirements for community banks ─ often without solid justification for the deviations. If finalized as proposed, these risk weights would ultimately result in a competitive disadvantage for credit unions. NAFCU argued in our comment letter that NCUA should change those risk-weights to be consistent with the risk-weighting given to those assets by the FDIC.

NAFCU has a number of concerns with the proposed rule as detailed in our letter. However, our major concerns include:

• Several issues related to NCUA’s legal authority to issue the rule as proposed, such as:The need for a legislative solution in order to achieve a fair and balanced risk-based capital system;
  • Comparability with banking regulatory requirements;
  • Substitution of statutorily defined legal terms;
  • Individual minimum capital requirements;
  • Definition of a “complex” credit union;
• NCUA’s treatment of the regulatory process including the refusal to extend the comment period and form an industry working group prior to releasing a proposed rule, and the need for an additional notice of proposed rulemaking with public comment period;
• NCUA’s drastic understatement of credit unions that will be affected by this rule and whose balance sheets and business plans will need adjustment;
• NCUA’s proposed risk-based capital ratio for well capitalized credit unions set at 10.5 percent;
• NCUA’s treatment of risk-weighted assets and the lack of explanation for deviation from similar banking risk-weights;
• NCUA’s incorporation of interest rate and concentration risk into risk-weighting for real estate, investments, and member business loans (MBL’s);
• Individual minimum capital requirements for credit unions including issues with the subjectivity of their imposition;
• Components not included in the numerator portion of the risk-based capital ratio, such as goodwill;
• The 1.25 percent cap on Allowance for Loan and Lease Losses (ALLL) especially considering the Financial Accounting Standards Board’s (FASB) most recent proposal on ALLL;
• Supplemental capital authority is needed now more than ever considering the restrictions brought on by this rule; and
• The proposed 18-month implementation timetable is not long enough for a rule as complex and impactful as this proposed rule.

So what happens next? NCUA is hosting three listening sessions where Chairman Matz and Board Member Metsger will be seeking feedback on the rule from members of the credit union industry and they are open to the public. The catch is you need to register. You can do so here. The first is on June 26th in Los Angeles, CA. The second is on July 10th in Chicago, IL. The third and final one is in Alexandria, VA on July 17th. This is a great opportunity to get your voice heard and speak directly to NCUA Chairman Matz about how this rule impacts you and your credit union. Hearing from credit unions directly is the most powerful message.

Remember that this rule as proposed will create a competitive disadvantage for credit unions and your voice can help to change that. Thank you for all of your comments to NCUA and your efforts to change this important proposed rule. As a reminder, this is the last day to submit comment letters to NCUA, so be sure to get your letters in if they aren’t in already. Comment letters should be addressed to Mr. Gerard Poliquin, Secretary to the NCUA Board, 1775 Duke Street, Alexandria, VA  22314. They can be emailed to regcomments@ncua.gov. Be sure to include "[Your credit unions name] - Comments on Proposed Rule: PCA - Risk-Based Capital" in the e-mail subject line. Again, thank you!