Just How Costly Will RBC2 Really Be?!?
Written by Alicia Nealon, Director of Regulatory Affairs
Happy Friday Compliance Community! When NAFCUÃ¢ÂÂs Compliance Team graciously lets me borrow the blog, I usually try to share happy news- especially on Fridays. Sadly, I am not going to deliver anything joyous today.Â Instead, I need to let the credit union industry know about the astronomical costs of NCUAÃ¢ÂÂs proposed two-tiered approach to risk-based capital (RBC).
As we blogged about last Friday, the NCUA Board issued a revised RBC proposal, or RBC2, during its January 15th opening Board meeting. The proposed rule would amend Part 702 of NCUAÃ¢ÂÂs capital adequacy regulations to, among other things, establish RBC requirements for Ã¢ÂÂcomplexÃ¢ÂÂ federally insured credit unions.Â For some further reading and analysis on the proposal, take a look at NAFCUÃ¢ÂÂs Regulatory AlertÂ 15-EA-02, NAFCU's RBC calculator, and our Capital Reform Issue Page.
Simply put- RBC2 will cost the credit union industry hundreds of millions of dollars.Â NCUAÃ¢ÂÂs claim that only a limited number of credit unions will be downgraded ignores the fact that most credit unions maintain a capital cushion above the minimum needed to avoid prompt corrective action (PCA) Ã¢ÂÂ a practice often strongly encouraged by NCUAÃ¢ÂÂs own examiners.Â Despite NCUAÃ¢ÂÂs projections, this proposal would force credit unions to hold hundreds of millions of dollars in additional reserves to achieve the same capital cushion levels that they currently maintain.Â
Based on our financial analysis, credit unionsÃ¢ÂÂ capital cushions will suffer a $490 million hit if NCUA promulgates a two-tier approach to RBC.Â Specifically, in order to satisfy the proposalÃ¢ÂÂs Ã¢ÂÂwell-capitalizedÃ¢ÂÂ thresholds, todayÃ¢ÂÂs credit unions would need to raise an additional $760 million.Â On the other hand, to satisfy the proposalÃ¢ÂÂs Ã¢ÂÂadequately capitalizedÃ¢ÂÂ thresholds, todayÃ¢ÂÂs credit unions would need to raise an additional $270 million.
So what does this all mean? Essentially, if NCUA were to promulgate a single-tier approach and only establish an RBC ratio for Ã¢ÂÂadequately capitalized,Ã¢ÂÂ todayÃ¢ÂÂs credit unions would need to raise an additional $270 million in order to maintain their current capital levels.Â However, because NCUA is proposing a two-tier approach, credit unions will need to raise an additional $760 million to achieve their current capital levels.Â That means the proposed two-tier system could cost nearly half a billion more than a one-tier system.
NAFCU believes these shocking costs clearly demonstrate that the proposal misclassifies safe, sound credit unions and imposes the unnecessary burden on them to raise additional capital in order to maintain their current capital buffers or to avoid PCA.
NAFCU continues to challenge the agencyÃ¢ÂÂs legal authority to implement this two-tiered system, whichÂ based on these figures would clearly hinder credit unionsÃ¢ÂÂ viability and prosperity.Â We strongly believe this proposal is costly and unnecessary for an industry that is already extremely well-capitalized.
Again, for more information on other aspects of the nearly 500-page proposal, be sure to check out NAFCUÃ¢ÂÂs Regulatory Alert.Â We are also accepting feedback from our members for our comment letter through our Regulatory Alert Survey.