3 Ways the Risk-Based Proposal Tops Basel
Stakeholders have expressed opposition to the risk weights assigned to assets in the NCUA’s proposed risk-based capital rule. Credit unions and their trade associations have said the figures are tougher on credit unions than the risk weights defined by Basel III, which are required of banks.
However, the NCUA’s proposal included three asset classes that give credit unions a regulatory advantage over banks. Click through to learn more about them.
Read more: Credit unions’ bread and butter …
The risk weight for credit unions’ consumer loans in the NCUA's proposed rule is 75%, compared to 100% under Basel III for banks. NCUA officials have said they set the bar lower in this asset category because consumer loans are the bread and butter of credit union lending activity.
While trade associations have decried much of the proposed risk-based rule, they said they approve of the consumer loan risk weighting.
“We are appreciative that Chairman Matz and NCUA staff are listening to credit unions concerns and have indicated there will be changes in the proposed rule to make it better for credit unions,” Mike Coleman, NAFCU director of regulatory affairs, told CU Times. “However, consumer loans (unsecured credit cards loans, lines of credit, automobile loans and leases) are generally highly desired credit union assets and a key element of providing basic financial services. We agree with NCUA that this 75% risk weight for consumer loans is appropriate for credit unions.”
Read more: Once bitten, twice shy …
In Basel III, equity investments (equities not publicly traded) are weighted at 400% while the NCUA’s proposed rule assigns a 200% risk weight to corporate credit union perpetual contributed capital.
“We are concerned that the weight on corporate perpetual capital will have some credit unions leaving the system for other providers (though for most credit unions the balance sheet exposure to corporate perpetual capital is quite small relative to total assets so the set aside is large on a marginal basis but small relative to the entire portfolio),” Mike Schenk, CUNA’s vice president of economics and statistics, told CU Times.
Read more: An upside to the CUSO rule …
The risk weight for CUSO equity investments is 250% in the NCUA’s proposed risk-based capital rule. Under Basel III, equity investments are risk-weighted at 400%.
“Those are essentially at risk equity investments that aren’t publicly traded. Under the FDIC rule they’d be risk weighted at 400%. We risk-weighted those for our proposal purposes at 250% and 200% because we have more direct supervisory oversight in those areas and we have a strong regulatory regime for corporate credit unions,” said Larry Fazio, director of the NCUA Office of Examination and Insurance.
Schenk said a more appropriate risk weighting for CUSO equity investments would be no higher than 100% since most CUSOs carry out day-to-day credit union operations.
“Of the 985 federally insured state credit unions with more than $50 million in assets, only 38 have more than 1% of assets invested in CUSOs, and only three of these have more than 3%,” Schenk pointed out. “In total, federally insured state credit unions have only 0.19% of assets invested in CUSOs, about the same as for federal credit unions.”
Coleman expressed a similar view.
“NAFCU continues to believe that the proposed 250% risk weight for investments in CUSOs should be lowered to 100% to match the risk weight of lending to a CUSO,” Coleman said.