Capital Rules Change Could Have Residual Effect on CUs
American credit unions aren't subject to international capital requirements, but changes to these requirements could prompt the U.S. government to allow supplemental capital.
The Basel Committee on Banking Supervision is considering increasing the capital requirements of banks that operate internationally and could release final rules later this year. The proposals discussed would require banks to double their capital levels. According to an analysis by Swiss bank UBS, financial institutions covered by the rules could be forced to raise as much as $375 billion in additional capital.
Some credit unions in foreign countries have to comply with Basel rules. WOCCU fears that the changes could increase their regulatory burden or cause some countries that exempt CUs to mandate compliance.
WOCCU Vice President Dave Grace wrote the committee that, based on past experience, he feared that "regulators will apply the standards in a uniform fashion across all financial institutions" to ensure that analysts and financial sector assessment programs view countries' financial systems as sound.
The Basel committee is focusing on making more stringent requirements on financial institutions' risk ratio, which is the total capital divided by risk-weighted assets. For example, the lowest risk assets are considered the government's sovereign debt and short-term private-issued debt. Mortgages are rated to have a 50% risk, credit card debt is rated a 75% risk and overdue loans are 100%.
By contrast, when American regulators focus on changes, they focus on the leverage ratio, which is an institution's total capital divided by its total assets.
CUNA Chief Economist Bill Hampel said focusing on leverage ratio makes more sense because a risk-based system is more speculative.
"Ten years ago, if you had suggested that mortgage-backed securities could almost bring down the entire financial system, nobody would have believed you," he said.
He said the silver lining in the emphasis on leverage ratio will be that the Obama administration and Congress could make changes in capital rules that could benefit credit unions. "The debate will give credit unions a good opportunity to show that they would benefit if they were allowed to seek supplemental capital," he said.
Congress would have to amend the Federal Credit Union Act to allow for supplemental capital, and the NCUA would then write the rules to implement the changes.
The industry hasn't formed a consensus on what supplemental capital should look like.
Last December, NCUA Chairman Debbie Matz wrote to Barney Frank, chairman of the House Financial Services Committee, and urged Congress to "consider authorizing qualified credit unions, as determined by the NCUA Board, to issue alternative forms of capital." She did not say what form the alternative capital should take. The Treasury Department hasn't taken a position on the subject.
In April, a report by an agency task force chaired by NCUA Board Member Gigi Hyland said any capital must adhere to three principles: preservation of the cooperative credit union model, robust investor safeguards and increased prudential safety and soundness safeguards.
The report noted that the agency's supervisory experience with the 41 low-income credit unions (out of 1,102) that receive secondary capital has been "mixed." It criticized some of those credit unions for poor due diligence and "premature and excessively ambitious concentrations of uninsured secondary capital to support unproven or poorly performing programs."
CUNA fears the NCUA would place too many regulatory constraints on credit unions that want to seek secondary capital and NAFCU strongly opposes allowing supplemental capital from outside the credit union system.
Frank's committee and the Senate Banking Committee are expected to hold hearings on the Basel rules this fall as a prelude to more comprehensive action on capital standards next year.