Capital Reform

Background

Risk Based Capital

On October 15, 2015, the NCUA Board voted 2-1 to approve a final risk-based capital rule, which was set to take effect January 1, 2019. The effective date has since been delayed: first to January 1, 2020 by the 2018 supplemental final rule, which also increased the asset threshold for determining “complex credit union,” and most recently to January 1, 2022 by the December 2019 final rule (see Recent Activity). NAFCU has consistently opposed this rulemaking and urged its withdrawal. We have long warned about the impact this rulemaking will have on the credit union industry – in particular the regulatory burden and costs it will impose. As a result of our efforts, the final rule recalibrates many risk weights to better align with banks’ requirements, removes interest-rate risk from the calculation of the risk-based capital ratio, and extends the implementation date. However, more can be done.

The 2015 final rule includes the following key changes (see NAFCU’s Final Regulation for more details):

  • Removes Individual Minimum Capital Requirement;
  • Removes interest rate risk (IRR) from consideration in the RBC calculation;
  • Raises the threshold for determining “complex credit union,” for the purposes of capital requirements, from $50 million to $100 million in assets;
  • Drops the 1.25 percent Allowance for Loan and Lease Losses (ALLL) cap from the RBC ratio numerator;
  • Revises a number of risk-weights, including those for Member Business Loans, credit union service organizations (CUSOs), corporate credit unions, real estate loans and investments;
  • Provides for an extended implementation period until January 1, 2019;
  • Incorporates a “Non-Significant Equity Exposure” risk-weight of 100 percent for non-consolidated investments in CUSOs, perpetual paid in corporate capital, among other, when the total of equity exposures is less than 10 percent of the credit union’s capital elements of the risk-based capital numerator;
  • Adds a section for “Charitable Donation Accounts,” assigning it a risk weight of 100 percent; and
  • Clarifies that “excluded goodwill” and “excluded other intangible assets” applies to mergers or combinations completed on or before 60 days after publication of the final rule in the Federal Register, and extending the expiration of this definition to January 1, 2029.

The 2018 supplemental final rule includes the following key changes:

  • Delays the effective date from January 1, 2019 to January 1, 2020; and
  • Raises the threshold for determining “complex credit union,” for the purposes of capital requirements, from $100 million to $500 million in assets.

The 2019 final rule includes the following key changes:

  • Delays the effective date from January 1, 2020 to January 1, 2022.

To learn more about the issues NAFCU fought for and against in the RBC rule, please read the official comments submitted to the NCUA on the agency's 2014 proposal (the Original Proposal), 2015 proposal (the Second Proposal), 2018 proposal (first delay) and 2019 proposal (second delay).

On the legislative side, the NCUA sent a report on its recently adopted risk-based capital rule to the House Financial Services Committee in November 2015. In the 228-page report, the NCUA defends the agency’s legal authority to create a two-tier risk-based capital system. In addition, the report recommends that Congress allow well-managed credit unions to count supplemental capital as net worth and suggests other technical legislative changes affecting credit union capital requirements.

Alternative Capital

A credit union's net worth ratio is currently determined solely on the basis of retained earnings as a percentage of total assets. Because retained earnings often cannot keep pace with asset growth, otherwise healthy growth (such as growth resulting from taking deposits) can dilute a credit union's regulatory capital ratio and trigger non-discretionary supervisory actions under prompt corrective action (PCA) rules.

Allowing all credit unions access to supplemental capital, in addition to retained earning sources, will help ensure healthy credit unions can achieve manageable asset growth and continue to serve their member-owners efficiently as the country continues to recover from the financial crisis.

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