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In response to the NCUA’s advanced notice of proposed rulemaking (ANPR) related to simplification of risk-based capital (RBC) requirements, NAFCU’s Andrew Morris detailed the association’s recommendations and offered support for the agency’s efforts to reconsider the 2015 RBC rule – currently scheduled to take effect in 2022.

The ANPR – approved during the NCUA Board’s January meeting – proposed two different approaches for simplifying the RBC rule, which include:

• replacing the RBC rule with a risk-based leverage ratio (RBLR), which uses risk attribute thresholds to define “complex” credit unions; and
• adopting a complex credit union leverage ratio (CCULR) which would leave the 2015 RBC rule unchanged but allow eligible complex federally-insured credit unions to opt-in to the CCULR to meet the RBC requirements.

“NAFCU would support further consideration of the RBLR or the CCULR in a future proposal,” wrote Morris, NAFCU’s senior counsel for research and policy. “While certain design characteristics present natural tradeoffs between the two options, the merits of both are difficult to judge in the absence of specific information about either the RBLR’s risk factors or the CCULR’s eligibility criteria and ultimate leverage ratio.”

In the letter, Morris noted that the 2015 RBC rule lacks important flexibility found in comparable bank regulations and broke down the association’s recommendations for each approach that would provide credit unions with necessary capital relief as challenges presented by the pandemic continue to linger.

CCULR Approach

Morris urged the NCUA to “tailor this analogue of the CBLR to the unique characteristics of credit unions rather than copy the exact criteria adopted by the other banking regulators,” and consider leverage ratio lower than 9 percent.

In addition, Morris called for the NCUA to avoid an asset-based limitation on the CCULR eligibility, include goodwill in the CCULR numerator, and consider a longer grace period for those credit unions that temporarily dip below the required leverage ratio. He also noted that there is merit in the simplicity of the approach.

RBLR Approach

On the RBLR approach, Morris noted that a proposal where the risk factors encompass a reduced set of asset categories that would, under the final RBC rule, receive a risk weight in excess of 100 percent offers a desirable starting point. In addition, Morris recommended tailoring the RBLR to mitigate the risk of a capital cliff, where a small increase in a certain type of asset results in a large increase in the risk based capital requirement.

The NCUA in 2019 approved delaying the implementation of its RBC rule by two years to Jan. 1, 2022, and NAFCU has led efforts to ensure credit unions and their members benefit from a modern capital regime, working closely with policymakers on Capitol Hill and at the agency. NAFCU supports amendments to the RBC rule and has asked the agency to adopt a community bank leverage ratio, similar to the CCULR included in the ANPR.

NAFCU has also requested that the NCUA permanently grandfather "excluded goodwill" and "excluded other tangible assets" in the RBC calculation and will continue to encourage the agency to design a true risk-based capital system for credit unions.

For more on this topic, the association sent members a Regulatory Alert outlining a section-by-section analysis of the ANPR; NAFCU will continue to update members on the status of the RBC rule.