Past-Due Mortgages Make Risk-Based Rule Tough: Glatt
According to data compiled by Glatt Consulting, 11 credit unions currently considered well-capitalized would fall to undercapitalized under the NCUA’s proposed risk-based capital rule.
That’s one more than the NCUA said would drop as far when it presented the rule Jan. 23. One reason for the difference could be that Glatt’s numbers were as of Sept. 30, while the NCUA’s were from June 30.
In total, 21 credit unions with more than $50 million in assets would be considered undercapitalized if the NCUA’s proposed risk-based capital rule is ultimately approved, said Tom Glatt Jr., strategy consultant/founder of the Wilmington, N.C.-based consulting firm.
“You could have a portfolio of fairly benign mortgages, next to somebody with a smaller portfolio and more risky mortgages – just by the mere fact that they might have a smaller portfolio could be considered less risky even though the actual assets on the books may be more risky. this rule doesn’t look at any of that as far as I can tell,” he said.
Glatt also said compliance to the rule could be difficult for some credit unions.
“If you’ve got a problem with delinquent real estate loans, there’s really no place to turn to get rid of those, so you’re kind of stuck. I think if you’re in that position, where we stand now in this current rate environment, it’s going to be very difficult to fulfill these ratio expectations,” he said.
Glatt added although the NCUA had to start somewhere when it crafted the rule, he thinks the regulator put too much weight on concentration.
“You would have to start somewhere if they [NCUA] really wanted to understand risk but I think they’re looking at this just from a concentration prospective which could be fine too depending on the type of product on the books at these credit unions,” he added.
The risk-based capital rule proposed by the NCUA at January’s monthly board meeting rates a credit union with more than $50 million in assets adequately capitalized if it maintains a risk-based capital ratio between 8% and 10.49%, and a net worth ratio of 6% to 6.99%. A risk-based capital ratio above 10.49% and a net worth ratio above 7% would designate a credit union as well capitalized.