NCUA tries to meet credit unions halfway on capital rules

The National Credit Union Administration board has approved a proposed rule to allow “complex” credit unions to opt out of its controversial risk-based capital requirements if they maintain a minimum net-worth ratio.

The board by a 3-0 vote issued a notice of proposed rulemaking that would establish the “complex credit union leverage ratio.” Under the measure, credit unions with at least $500 million of assets meeting a leverage ratio of at least 9% can avoid burdensome risk-based standards that go into effect next year.

Officials compared the plan to a similar measure implemented by bank regulators last year. That provides community banks with an off-ramp from complicated risk-based capital requirements if they meet a minimum leverage ratio.

Both the community bank and credit union “standards seek to strike a balance among several objectives including maintaining strong capital levels, protecting safety and soundness and simplifying compliance,” said NCUA Chairman Todd Harper at the board meeting.

At the meeting Thursday, the board also heard a presentation about the potential intersections between blockchains, cryptocurrencies, fintech and credit unions, and issued a request for more information to gain public feedback.

NCUA board member Rodney Hood said his preference would be to table the risk-based capital rule indefinitely or for the board to even consider repealing it. He said it would be eight years old by the time it goes into effect. “The world has changed considerably since 2015.”

Bloomberg News

The NCUA’s leverage ratio plan attempts to find a middle ground between maintaining capital requirements for larger credit unions while responding to industry complaints that the risk-based capital regime — set to go into effect next year — would pose an undue burden.

The regulator in January redefined “complex” credit unions for purposes of capital requirements by raising the asset threshold from $50 million to $500 million. Credit unions below the new threshold are already exempted from the new risk-based capital regime.

Under the new proposal, complex credit unions could choose between complying with the risk-based standards and the CCULR if their leverage ratio — a measure of net worth — is at least 9% on Jan. 1, 2022. That minimum ratio would gradually increase to 10% by Jan. 1, 2024. The NCUA estimates that about 75% of complex credit unions would initially meet the requirement.

The proposal is subject to a 60-day comment period.

The risk-based capital rule, which was originally approved in 2015, has had its implementation date changed multiple times and is currently slated to take effect Jan. 1, 2022.

But even though the leverage ratio proposal passed unanimously, not all three board members were thrilled with the concept.

Board member Rodney Hood said his preference would be to table the risk-based capital rule indefinitely or for the board to even consider repealing it. He said the risk-based rule would be eight years old by the time it goes into effect.

“The world has changed considerably since 2015,” he said. “The reality is that RBC should be a tool and not a rule.”

Hood ultimately said he would “begrudgingly” vote for the leverage ratio proposal that he called a step in the right direction because it provides an off-ramp for the RBC rule that goes into effect in just six months.

NCUA Vice Chairman Kyle Hauptman said the chief benefit of the proposed rule is that it allows some credit unions to bypass a risk-based capital approach.

“For me, the point of this simpler leverage ratio is that it protects both credit unions and the Share Insurance Fund from the inevitable problems associated with risk-weightings,” he said. “Capital is the holy grail. When a recession hits, the first thing I’d want to know about any deposit-taking institution is how much total capital they have.”

Hauptman also said a simpler capital standard isn’t just useful because it saves time and effort. It’s also a way of protecting the system from the problems inherent in any risk-weighting process, he said.

The NCUA board in January approved an advance notice of proposed rulemaking that solicited comments on two approaches to simplify risk-based capital requirements. One of those was the CCULR. Comment letters on the leverage ratio that the agency received in response to the ANPR were factored into the proposed rule, board members said Thursday.

Credit Union National Association President and CEO Jim Nussle on Thursday said the trade group looks forward to reviewing the proposal and is hopeful the CCULR will allow credit unions flexibility when complying with the risk-based capital rule, “though we continue to believe the rule itself is functionally unnecessary.”

“We support minimizing the compliance burden for credit unions that would otherwise be required to comply with the 2015 rule, and we look forward to submitting more detailed feedback to the NCUA in our comments,” he said.

The National Association of State Credit Union Supervisors said in a May 10 comment letter that parallels between the CCULR and the existing “community bank leverage ratio” are a big advantage.

“The regulatory and commercial experience with the CBLR can help inform the development and implementation of NCUA’s CCULR proposal,” NASCUS wrote.

Meanwhile, the NCUA board also approved a request for information and public comment on digital assets and related technologies for a 60-day comment period.

Along those lines, Hood said the regulator is currently working to hire its first director of innovation and access.

“We recognize these technologies are going to play a growing role in financial services in the years to come,” he said.

The NCUA board will next meet on Sept. 23.

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