RBC, Interest Rate Risk Rule Discussed at Fall Meetings With NCUA

In meetings with the NCUA this fall, the NWCUA learned that the regulatory agency reviewed comments on the original risk-based capital (RBC) proposal very carefully. The Association expects that the forthcoming revised RBC proposal will heed commenters’ requests to exclude interest rate risk from the investment risk weights.

“The NCUA has made it clear that they are taking the comments they received on risk-based capital seriously,” said Kevin Cole, CFO for Maps Credit Union in Salem and member of the NCUA’s RBC working group. “It makes sense for the NCUA to deal with risk-based capital and interest rate risk separately, but I am not convinced that interest rate risk needs to be addressed by rule.”

The NCUA indicated that they must account for potential interest rate risk within the existing regulatory framework. So while the risk-based capital proposal was intended to be the last major safety and soundness regulation coming out of the crisis and complying with statutory mandates, and originally was to encompass interest rate risk, the NCUA is now considering a separate rule.

Together with ongoing interest rate risk supervisory efforts, the new rule would account for identified outlier credit unions with the heaviest exposure to interest rate risk that might, under economic duress, become undercapitalized, leading to potential failure and losses to the Share Insurance Fund.

“I don’t think we will see a proposal on this until next year, and probably not until the risk-based capital proposal comment period ends,” said John Trull, director of regulatory advocacy for the Association. “This is definitely going to be a concern to our members when proposed, and it is on our radar as one of the top regulatory issues likely facing credit unions next year. We would prefer to see the agency issue guidance rather than a rule, but at this point that seems unlikely.”

NCUA has preliminarily consulted with ALM practitioners, registered investment advisors, credit union derivatives practitioners, and others to start gathering the information necessary to design an interest rate risk rule. NCUA staff is now in the process of producing a proposed rule for eventual board review and potential action.

The Association is also advocating for regulatory changes that will benefit the credit union system, including addressing issues related to field of membership, making the treatment of military and rural credit union members fair for the purposes of qualifying for a low-income credit union designation, reviewing what constitutes a small credit union, and allowing individuals the ability to invest in higher yielding secondary capital products, currently only available to organizations.

“We had productive meetings that will lead to improvements in the regulatory environment for credit unions,” said Trull. “I would not be surprised to see the NCUA create some flexibility on supplemental capital prior to the end of the year, specifically removing subjectivity from the supplemental capital plan review process, and streamlining the redemption process.”

Questions about this story? Contact James Pearson: 206.340.4790, jpearson@nwcua.org. 

Posted in Advocacy News, NCUA.