Compliance Blog

Written by PJ Hoffman, Regulatory Affairs Counsel

Risk-Based Capital. As I am sure you have seen by now, on January 23, 2014, the NCUA Board issued a proposed rule regarding risk-based capital for credit unions. Without a doubt, risk-based capital is at the forefront of the mind of every credit union’s board, CEO, senior management, and compliance officers. The potential impact of this proposed rule cannot be understated. NAFCU has and will continue to advocate on behalf of our members regarding this rule.

With that in mind, we are launching a recurring series of posts where NAFCU’s Compliance Blog will break down different portions of NCUA’s proposed rule regarding risk-based capital and give a more detailed analysis and explanation than we have in our Regulatory Alert.  Today’s topic is Individual Minimum Capital Requirements.

The proposed rule includes a provision in proposed § 703.105 where NCUA may require a higher minimum risk-based capital ratio for an individual credit union in any case where the circumstances, such as the level of risk of a particular investment portfolio, the risk management systems, or other information, indicate that a higher minimum risk-based capital requirement is appropriate. This means that NCUA may establish increased individual minimum capital requirements upon its determination that the credit union’s capital is or may become inadequate in light of the credit union’s circumstances regardless of the actual risk-based capital ratio of the credit union.

In other words, an examiner can increase a credit union’s individual risk-based capital requirement by subjective action during an examination or “supervisory assessment” based solely on the determination of the examiner that the credit union needs additional capital based on the credit union’s balance sheet risk. There are a number of problematic elements to this new proposed NCUA power.

First, NAFCU is seriously concerned about the legal authority of NCUA examiners to decide on their own the material risks not accounted for in the statutory floor prescribed by the Federal Credit Union Act (FCU Act). The Credit Union Membership Access Act (CUMAA) amended the FCU Act to require the NCUA to take into account material risks that are not accounted for in the statutory floor. This is part of their rules for complex credit unions and is something that can and should be taken in to account when NCUA rules are written, but not on a case by case basis and certainly not by examiners in the field. This is all the more reason why we need a legislative solution rather than the current proposed rule.

Finally, this regulation undermines the entire purpose of the rule. On one hand, the NCUA is saying that the risk weights are designed specifically to factor in a number of risks including concentration risk, interest rate risk, credit risk, market risk, operational risk, and liquidity risk. On the other hand, if the NCUA decides that their risk-based capital ratios don’t do what they are designed to do, then the NCUA can just change the rules for an individual credit union on the fly. Also, the arbitrary and subjective judgment of the examiner can differ from credit union to credit union and examiner to examiner. How are credit unions supposed to look at their portfolio and adhere to the standards laid out in the rule with a constantly moving set of rules?

Just a reminder to folks who haven’t yet seen it, NAFCU’s Capital Reform Issue Page is up and running with great resources such as NAFCU’s Regulatory Alert on NCUA’s proposed rule regarding risk-based capital. If your credit union hasn’t submitted a comment to NAFCU, I encourage you to do so here. The more we know about how the rule affects your credit union, the better advocates we can be for you.

Thank you and lookout for more in-depth looks at part of NCUA’s proposed rule regarding risk-based capital.