On July 12 during a general session at NAFCU's Annual Conferencein Boston, NCUA Chairman Debbie Matz revealed some new detailsregarding a rule under development that would increase net worthrequirements for credit unions with more than $50 million inassets.

Matz said the current 7% net worth requirement would remain thefloor requirement, as defined by the Federal Credit Union Act.However, credit unions with more than $50 million in assets wouldbe subjected to higher risk-based net worth requirements.

“The result would be a higher cap for credit unions with higherconcentrations of risky assets,” Matz said.

According to NCUA Public Affairs Specialist John Fairbanks, theproposed 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 higherlevel of risk-based net worth for credit unions with higher levelsof concentration or other risks in their member business loanportfolio. That recommendation was part of the IG's material-lossreview for the failed Telesis Community Credit Union.

Director of the Office of Insurance and Examination Larry Faziosaid in February the NCUA was developinga risk-based capital rule that he described as Basel lite, sayingit would have a general but simplified Basel framework.

In her speech, Matz also reaffirmed her pledge that the NCUAwill not impose Basel III standards on credit unions.

“Basel III is not for this industry,” she said.

During his NAFCU conference breakout session on mergersimmediately following Matz's speech, former NCUA Board MemberDennis 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 buildupon the current 7% net worth requirement for well-capitalizedcredit unions. However, he also said he hopes the NCUA willapproach the rule from both ends, allowing low-risk credit unionsmore authorities while requiring more net worth of credit unionswith more risk on their balance sheets.

For example, Dollar said, maybe a credit union that has a lowerrisk profile would be allowed more blanket waivers for member business loans.

Additionally, he pointed out that while smaller credit unionshave less risk and higher net worth, they also generate far less return on average assets than large creditunions.

He shared statistics from the NCUA that revealed as of Dec. 31,2012, credit unions with less than $10 million in assets average14.65% net worth but generated negative ROA of negative 0.02%.Comparatively, credit unions with more than $500 million in assetsaveraged 10.17% net worth, and presumably have riskier balancesheets. However, those large credit unions averaged a positive ROAgain of 1.02%.

“One of the fallacies in the risk-based capital scenario is thatsmall credit unions would almost all be low risk under therisk-weighted calculation, but yet they are all losing ROAA,” hesaid. “Meanwhile, high risk credit unions are making 1.02%.”

He cautioned against putting so many restrictions on creditunions that take risk but earn good profit margins that they reduceearnings, saying “you don't want to kill the goose that's layingthe golden eggs for credit unions.”

Further, Dollar said, earnings are the only way credit unionscan build net worth.