Matz Unmasks Risk Capital Details
On July 12 during a general session at NAFCU’s Annual Conference in Boston, NCUA Chairman Debbie Matz revealed some new details regarding a rule under development that would increase net worth requirements for credit unions with more than $50 million in assets.
Matz said the current 7% net worth requirement would remain the floor requirement, as defined by the Federal Credit Union Act. However, credit unions with more than $50 million in assets would be subjected to higher risk-based net worth requirements.
“The result would be a higher cap for credit unions with higher concentrations of risky assets,” Matz said.
According to NCUA Public Affairs Specialist John Fairbanks, the proposed rule is expected before the end of this year.
In March, NCUA Deputy Inspector General James W. Hagen recommended the NCUA amend capital rules to require a higher level of risk-based net worth for credit unions with higher levels of concentration or other risks in their member business loan portfolio. That recommendation was part of the IG’s material-loss review for the failed Telesis Community Credit Union.
Director of the Office of Insurance and Examination Larry Fazio said in February the NCUA was developing a risk-based capital rule that he described as Basel lite, saying it would have a general but simplified Basel framework.
In her speech, Matz also reaffirmed her pledge that the NCUA will not impose Basel III standards on credit unions.
“Basel III is not for this industry,” she said.
During his NAFCU conference breakout session on mergers immediately following Matz’s speech, former NCUA Board Member Dennis Dollar broke off topic and expressed both his support for, and opposition to, the coming rule.
Dollar said he supports the need for a rule that would build upon the current 7% net worth requirement for well-capitalized credit unions. However, he also said he hopes the NCUA will approach the rule from both ends, allowing low-risk credit unions more authorities while requiring more net worth of credit unions with more risk on their balance sheets.
For example, Dollar said, maybe a credit union that has a lower risk profile would be allowed more blanket waivers for member business loans.
Additionally, he pointed out that while smaller credit unions have less risk and higher net worth, they also generate far less return on average assets than large credit unions.
He shared statistics from the NCUA that revealed as of Dec. 31, 2012, credit unions with less than $10 million in assets average 14.65% net worth but generated negative ROA of negative 0.02%. Comparatively, credit unions with more than $500 million in assets averaged 10.17% net worth, and presumably have riskier balance sheets. However, those large credit unions averaged a positive ROA gain of 1.02%.
“One of the fallacies in the risk-based capital scenario is that small credit unions would almost all be low risk under the risk-weighted calculation, but yet they are all losing ROAA,” he said. “Meanwhile, high risk credit unions are making 1.02%.”
He cautioned against putting so many restrictions on credit unions that take risk but earn good profit margins that they reduce earnings, saying “you don’t want to kill the goose that’s laying the golden eggs for credit unions.”
Further, Dollar said, earnings are the only way credit unions can build net worth.