CUNA Regulatory Advocacy Report

CUNA Files Comments on RBC2, Encourages Credit Unions to Weigh-in as Well

Friday, we filed a 14-page RBC2 comment letter with NCUA. We encourage credit unions to share their comments directly with NCUA. The comment period ends one week from today (April 27). To supplement the resources available at CUNA’s RBC2 Resource Center, we have provided below a summary of our comment letter.

NCUA Has Ignored its Obligation to Consider the Cooperative Nature of Credit Unions When Creating a Risk-Based Capital Regime Comparable to FDIC: One of the most troubling elements of the RBC2 proposal is the pervasive implication that credit union capital requirements, and also regulation and supervision, should be modified to be more like those applied to FDIC insured institutions. The FCU Act does indeed require NCUA to establish a risk-based capital system that is comparable to that in place for FDIC insured banks; however, the Act also instructs NCUA to take into account the cooperative character of credit unions. In drafting the proposal, the agency appears to have devoted itself to the comparability requirement, while ignoring the cooperative nature of credit unions.

NCUA Does Not Have the Statutory Authority to Establish a Risk-Based Capital Standard for the Purposes of Determining Whether a Credit Union Is Well-Capitalized: Even though CUNA continues to disagree that NCUA has legal authority to implement a two-tiered approach in RBC2, NCUA made improvements by lowering the threshold for a well-capitalized complex credit union from RBC1’s proposed 10.5% to 10%. This remains well above the proposed 8% requirement for an adequately capitalized credit union. While this treatment is preferable to RBC1, we still have concerns that the new approach is inconsistent with the FCU Act.

NCUA Has Failed to Demonstrate a Compelling Need for the Rule: In addition to the lack of a statutory footing for the proposal, there is virtually no evidence of the need for a revision of credit union capital standards, particularly one modeled on commercial bank Basel-style, risk-based capital requirements.

The Proposed Capital Adequacy Plan Imposes Systemically Significant Financial Institution Stress Testing Requirements on Well-Capitalized and Significantly Smaller Credit Unions: CUNA strongly opposes the capital adequacy plan requirements in RBC2. Strategic capital planning is very important for credit unions, and each credit union’s long-term desired capital ratio will depend on the credit union’s own assessment of the risks it faces, and its tolerance for risk. Such a plan, which for many credit unions includes a buffer of additional capital to stay above regulatory requirements, should not be the subject of examination and supervision, and the goals a credit union establishes for its own capital sufficiency should not become targets or standards for review in an examination. CUNA urges NCUA to delete the capital adequacy provisions from the RBC2 proposal.

The Definition of Complex Should Be More Complex than an Asset Threshold Which is Much too Low: Like its predecessor, RBC2 would use asset size as a proxy for complexity, leaving us with the same concerns about the definition of “complex” as we detailed in our RBC1 comment letter. Size should not be the only determinant for whether RBC requirements apply. Raising the asset size from $50 million to $100 million does, however, improve a flawed definition simply by impacting fewer credit unions. While we agree that the $50 million level was far too low for the rule’s threshold, $100 million is not the appropriate cut-off for application of the rule either. In addition, NCUA should provide a better-tailored definition of “complex” to ensure that the only credit unions covered are those with activities that pose extraordinary risk, beyond routine loans and investments, for which their adequately-capitalized-level net worth does not provide adequate protection.

NCUA Should Better Calibrate RBC2’s Risk Weights: RBC2 makes a number of positive changes to RBC1’s proposed risk weightings. Unfortunately, RBC2’s risk weights remain too high in key areas, given credit unions’ level of risk, and they should be lower than what the federal bank regulators require for assets such as mortgage loans, member business loans, servicing and certain investments. Lower risk weightings for credit unions are appropriate given their different incentives to manage risk as compared to banks, and lower loss history as detailed in our comment letter on RBC1.

The Treatment of Goodwill and Other Intangible Assets Needs Additional Improvement: The retention of goodwill and OIA in the RBC numerator until 2025 is an improvement over the original proposal, but does not go nearly far enough. CUNA believes a strong case can be made for the inclusion of all goodwill and OIA in the numerator so long as these intangible assets meet GAAP requirements, i.e., are subjected to annual goodwill impairment testing.

NCUA Should Give Credit Unions an Option to Provide the Additional Call Report Information Required by RBC2: While CUNA does not oppose the proposed additional data collection through the Call Report, we urge NCUA to consider an alternative to making changes that will affect all reporting credit unions. Specifically, we ask NCUA to consider an approach where credit unions will have the option of providing the additional, detailed information provided in the proposal. Such an approach could be accomplished by simply including additional optional data fields within the Call Report.

NCUA Should Permit the Use of Supplemental Capital for the Purposes of this Proposal and Should Strongly Advocate for Statutory Capital Reform that Includes Supplemental Capital for the Purposes of Prompt Corrective Action: In our comment letter on RBC1, CUNA urged NCUA to allow the use of supplemental capital for any complex federally insured credit union to meet its RBC requirements. NCUA has the authority to permit supplemental capital for RBC purposes, and we believe NCUA should include such a provision if a final RBC2 rule is approved.

A Separate Interest Rate Risk Rule Is Unnecessary Because Examiners Have Sufficient Tools to Supervise Interest Rate Risk: CUNA strongly disagrees with the notion that a separate IRR standard is needed to reasonably account for IRR at credit unions. Over the last several years, NCUA has issued numerous rules and letters addressing the issue of IRR, which we believe provide sufficient guidance.

Implementation Should Be Delayed to 2021 to Coincide with the Termination of the Corporate Stabilization Fund: We appreciate that NCUA has proposed a significant delay in the implementation of RBC2, but we encourage the agency to delay implementation even further—until 2021—to coincide with the termination of the corporate stabilization fund, at which time credit unions will receive refunds.

Current CUNA Regulatory Calls to Action

  • NCUA Issues New Risk-Based Capital Proposal (RBC2) (comments due by April 27)
  • NCUA Issues New Fixed Assets Proposal (comments due by April 29)
  • NCUA Proposes to Revise Definition of “Small Entity” (comments due by May 4)
  • FAF Seeks Comments on Effectiveness of Private Company Council (comments due by May 11)
  • Financial Regulators (excluding NCUA) Issue EGRPRA Review (comments due by May 14)
  • CFPB Seeks Input on Credit Card Market (comments due by May 18)

For other items of interest, visit CUNA’s Regulatory Advocacy page.

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