Risk-Based Rule Hurts MBL Biz Model: CU CEO
The CEO of a $1 billion credit union told Credit Union Times the NCUA’s proposed risk-based capital rule would hurt his business model.
“The capital requirements for credit unions with concentration in member business loans is way too high at 14% – higher than what’s required for commercial banks,” said Mark Holbrook, CEO of the $1 billion Evangelical Christian Credit Union in Brea, Calif., noting that unlike banks, credit unions have no means of raising alternative capital.
“So the effect that has on our credit union is we go from well capitalized, which we’ve been at for years, to now undercapitalized overnight. So of course we feel that it’s an outrageous level of capital to be requiring of credit unions that have these concentrations. It’s really a direct attack on our business model, so I’m deeply concerned about that,” he said.
Holbrook also said there should be a phase-in period to give credit unions adequate time to respond to the new regulation if it gets finalized.
“Why does NCUA make a rule that goes into effect 12 to 18 months after adoption and then give no time to adjust to the new regulation? That seems pretty arbitrary,” he said.
Holbrook, whose credit union has more than 12,000 members, also expressed concern about the effect of the NCUA’s decision to make the risk-based capital calculator available to the public.
“A reasonable person could conclude that we’re undercapitalized today,” he said.
“From an agency that makes a really big deal about reputation risk, I don’t understand why they are choosing to publish information on a proposal that gives the impression that our credit union is undercapitalized. It doesn’t make a lot of sense to me,” he added.
According to the NCUA’s risk-based calculator, Evangelical Christian is not the only credit union with more than $1 billion in assets that lose its well-capitalized status under the proposed rule. Other large credit unions that would be undercapitalized include the NCUA-controlled $1.4 billion Texans Federal Credit Union in Richardson, Texas, and the $1.9 billion Chartway Federal Credit Union in Virginia Beach, Va.
Other credit unions that would be undercapitalized under the proposed rule include:
- $120 million Keys Credit Union in Key West, Fla.;
- $51 million Union Yes Federal Credit Union in Orange, Calif.;
- $137 million Tri–Co Federal Credit Union in Randolph, N.J.;
- $234 million A.E.A. Federal Credit Union in Yuma, Ariz.;
- $267 million Sperry Associates Federal Credit Union in Garden City Park, N.Y.;
- $105 million Meadows Credit Union in Arlington Heights, Ill.;
- $62 million Archer Cooperative Credit Union in Central City, Neb.;
- $278 million America's Christian Credit Union in Glendora, Calif.;
- $112 million Transwest Credit Union in Salt Lake City;
- $72 million School Systems Federal Credit Union in Troy, N.Y.;
- $50 million MED5 Federal Credit Union in Rapid City, S.D.;
- $180 million Bayridge Federal Credit Union in Brooklyn, N.Y.; and, the
- $83 million Motion Federal Credit Union in Linden, N.J.
Motion is currently adequately capitalized while Chartway, Bay Ridge, MED5, School Systems, America's Christian, Archer Cooperative and Evangelical Christian are well capitalized under the existing capital requirements.
Read more: Risk-based capital rule would cause more mergers, stifle growth ...
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.
School Systems CEO Mark Hatfield told Credit Union Times that the existing risk-based capital requirements could be improved greatly.
“If you’ve got a two-year car loan on your books and you’ve got a low delinquency rate, why should that be rated the same as a 10-year or 15-year mortgage or home equity?” Hatfield said. “The current rule just doesn’t make sense.”
Hatfield was hesitant to comment on the specifics of the proposed rule since he has not read through the entire regulation yet.
“Our delinquency percentage is .47, so we’re half of what the industry average is. And we have no business lending,” Hatfield said. “If that’s the case, then why are we going into a different category – from well capitalized to below – when we don’t have what they’re [NCUA] considering risky assets on the books?”
Cheryl Hubbeling, CEO of the $43 million Rapid City Telco Federal Credit Union in Rapid City, S.D., said if the proposed rule is ultimately approved, it could discourage her credit union and others similar in size from growing.
“I do think this will definitely increase the mergers. I don’t know but that may very well be the intent of NCUA – to speed up the mergers; to not have to supervise these undercapitalized credit unions,” Hubbeling said.
“This is going to adversely impact the credit unions that are trying to serve people of low and modest income means while rebuilding their capital,” she added.
Hubbeling, who is currently operating her credit union under a cease and desist order issued in 2010, added that she has a wonderful working relationship with the NCUA staff.
“Every day we come in and hope for the best,” she told Credit Union Times. “There were some unfortunate things that came along that required them [NCUA] to intercede and they did and we worked on a plan and we’ve been doing it now for 3 years.”