NCUA Director of Examination and Insurance Larry Fazio said credit unions won’t be required to adopt Basel III capital requirements.
However, as required by statute, credit unions will have to maintain “comparable” capital to what other regulators enforce.
That means updating Part 702 of NCUA Regulations, which outlines Prompt Corrective Action and net worth requirements. Part 702 came up in rotation as part of the NCUA’s three-year revolving regulatory review, but Fazio said the rule gets two years to contemplate because it’s “a big ticket item.”
Basel III would require banks to hold 4.5% of total capital and 6% of Tier I capital of risk-weighted assets. It would also allow regulators to require up to another 2.5% of capital during periods of high credit growth and introduces a minimum leverage requirement.
Credit unions will likely end up with a version of Basel requirements Fazio called “Basel lite” that would have a general but simplified Basel framework without the “bells and whistles” that would be required of more complex, for-profit institutions.
Risk-based capital requirements could also be applied on a scalable basis, Fazio said, with smaller credit unions having a simpler version of rules to comply with compared to larger institutions with presumably more risk.
Stock-based entities utilize scalable rules, he said, and different “plug-and-play options” are available for scalable net worth models.
However, he said the new rules won’t mean a big change for most credit unions.
“It will pick up those that take a lot of risk and have little capital on top of that,” he said.
NCUA examiners have always looked beyond the 7% net worth minimum requirement for well-capitalized institutions, he said, taking a more customized approach. Examiners expect each individual credit union to find its own balance between covering expected and unexpected losses and storing up too many reserves and failing to deliver maximum value to members.
The strategic days of managing to 7% are history following the financial crisis, Fazio said.
“I think it was a nice philosophically oriented punch line, but if you ask any risk manager worth their salt, they would say unless you’re a clean and simple organization, 7% isn’t enough,” the NCUA director said.
The agency is limited regarding how much supplemental capital authority it can write into regulations. The board does have the authority to allow credit unions to count supplemental capital toward its risk-based net worth capital requirements.
However, with the exception of low-income credit unions, it would take statutory action for supplemental capital to count toward the leverage ratio.
While risk-based requirements are compared against risk-based assets, the leverage ratio requires a level of net worth compared to total assets.
CUNA said Monday it expects Rep. Peter King (R-N.Y.) to reintroduce supplemental capital legislation within the next week.
FDIC Board member Jeremiah Norton said in a speech Wednesday he thinks banks should be required to meet a stricter leverage ratio than what was defined in the recent Basel III international agreement.
The FDIC currently requires 10% risk-based capital, 6% Tier 1 capital and a 5% leverage ratio to be well-capitalized. In addition to the NCUA, the FDIC, Federal Reserve Office of the Comptroller of the Currency will be reviewing and updating capital regulations this year.