Compliance Blog

Written by PJ Hoffman, Regulatory Affairs Counsel

Welcome back to the second installment of our 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. Today’s topic is Risk Weights.

For some background, on January 23, 2014, the NCUA Board issued a proposed rule regarding risk-based capital for credit unions. We at NAFCU have created some helpful resources for our members to use including NAFCU Regulatory Alert 14-EA-03, NAFCU Compliance Blog Posts here and here, and the Capital Reform Issue Page. We know that this is an important issue and NAFCU has and will continue to advocate on behalf of our members regarding this rule, but your feedback is needed. Please send us your comments here regarding the rule so that we can incorporate them into our advocacy and comment letter.

Now back to those pesky risk weights. The proposed rule revises the risk-weights for many of NCUA’s current asset classifications and requires higher minimum levels of capital for credit unions with more risky portfolios. See the chart on page 15 of our Regulatory Alert 14-EA-03. As you will see, the NCUA designed their proposed risk weights to take into consideration concentration risk and interest rate risk.

As you look at the assets and their associate risk weights, you’ll see that some assets are weighted differently depending on the percentage of the type of asset that is in a credit union’s portfolio. This is done to compensate for concentration risk and can be seen with real estate loans, member business loans, and higher levels of delinquent loans. For example, non-delinquent 1^st mortgage real estate loans start at 50 percent risk weight for those less than 25% of a credit union’s assets then jump to 75 percent from 25-35% of assets and finally go all the way to 100 percent for those that comprise more than 35% of the assets of the credit union’s portfolio.

The proposed rule also uses the risk weights to compensate for interest rate risk with the investment risk weights. An example of this is the difference in proposed risk weights for investments based on the maturity levels of those investments. For investments with a maturity of 0-1 years the proposed risk weight is 20 percent. For those with 1-3 year maturities the proposed risk weight is 50 percent. It jumps again to 75 percent for those with 3-5 year maturities and up to 150 percent for investments with maturities from 5-10 years. If your credit union is has an investment with an investment with a maturity over 10 years, under the proposed rule, it will have a 200 percent risk weight!

These risk weights were not chosen at random. There was thought behind many of them. Unfortunately, NCUA did not include much of their analysis in the text of the proposed rule. As NAFCU has stated in a recent letter to Chairman Matz, we question whether the risk weighting proposed actually matches real risk in the system. The proposed rule assigns rigid risk-weights to many investments that when properly examined represent much less risk than the assigned risk-weights. Capital requirements should not be substitute for proper credit union management or appropriate examinations.

Tell us what you think. Which risk-weights did NCUA get right and which ones do they need to change?

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Webcast: What Credit Unions Need to Know Now About NCUA’s New CUSO Rule

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