Risk-Based Capital Rule: Manageable, But Flawed
Credit union executives told Credit Union Times the levels of capital proposed by the NCUA in its risk-based capital rule are manageable, but the rule could use a little fine tuning.
“While Wescom's capital rating would decline from ‘well capitalized’ to ‘adequately capitalized’ under the proposal, it would not be difficult for us to make some minor shifts in our balance sheet to attain the 10.5% risk-based equity ratio necessary to be considered ‘well capitalized,’” said Darren Williams, CEO of the $2.5 billion Wescom Credit Union in Pasadena, Calif.
“I suppose we'll have to ask ourselves if those shifts would be in our members' best interest. We certainly don't want to see a regulation that discourages credit unions from meeting the needs of their members,” he added.
According to the proposed rule, to be classified as well capitalized, affected credit unions would be required to maintain a risk-based capital ratio of 10.5% or above, and pass both net worth ratio and risk-based capital ratio requirements.
Adequately capitalized credit unions would be required to maintain risk-based capital ratios between 8% and 10.49% and pass ratio requirements. Undercapitalized credit unions would fall below 8% risk-based capital ratio.
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After reviewing the proposal, Williams called the rule a straightforward approach to risk-based capital, largely based on concentration risk.
“While concentration risk is certainly one risk an institution can be exposed to, I'm not sure using only concentration risk to determine a risk-based capital requirement is the best approach. For instance, the proposed rule assumes first mortgage loans held over a certain percentage of a credit union's assets should be backed by increased assets,” he said.
“This does not take into consideration the risk attributes of the loans at all, i.e. loan-to-value ratios, fixed or variable rates, loan maturities, etc. or other risk mitigation the credit union may have in place to manage the risk,” he added.
Under the proposal, Williams said home equity loans with conservative loan-to-value ratios of 80% or less would be risk-weighted higher than unsecured consumer loans.
“I'm not sure that necessarily makes sense in all cases.
Still, the proposed levels of risk-based capital don’t seem to be onerous, he said.
David Osborn, president/CEO of the $1.4 billion Anheuser-Busch Employees’ Credit Union in St. Louis, said the 10.5% “well-capitalized” requirement is a huge jump from the current level.
“Even though I was pleasantly surprised that our numbers came out well above that – we are in a growth mode – I think our concern here is that if we start growing, obviously capital will be affected and we might bump down to the 10.5% figure so in the long term you’ve got to be concerned about what growth would do to your numbers,” Osborn said.
He also said the risk-based calculator data on the NCUA site should not have been immediately available to everyone.
“It should be proprietary until the rule is finalized. It could go down,” he said, calling the 10.5% requirement arbitrary.
“Obviously we needed a calculator but maybe they should have given us a PIN number or some sort of security so we could see our calculation but we couldn’t go out there and see anybody else’s,” Osborn suggested. “I don’t think it’s really any of our business until its final.”
Denise Boutross McGlone, executive vice president and chief financial officer of the $2.2 billion Affinity Federal Credit Union in Basking Ridge, N.J., said the 10.5% requirement will not affect Affinity’s strategic plan.
“If I were sitting in their [NCUA] shoes and they had to balance the capabilities of most of the credit unions in the country relative to how calibrated they wanted the rule to be, I think they struck a good balance,” she said. “If they made it too complicated, nobody would be able to do it.”
McGlone does have some reservations about the rule.
“Interest rate risk in the loan portfolio is ignored. Credit risk is not totally ignored but it’s not carefully calibrated,” she said. “How could a 50% LTV mortgage be considered the same as a 100% LTV?”
McGlone also agreed with the NCUA’s decision to make the risk-based capital calculator public.
“I think transparency is always a wonderful thing and anybody who can read the call report can calculate it anyway,” she said.