Some Risk-Based Risk Weights Better Than Basel
While trade groups have criticized many of the risk weights in the NCUA's proposed risk-based capital rule, there are a few the NCUA said are lower than Basel III for banks.
However, NAFCU and CUNA said they have concerns about some of those risk weights as well.
The risk weight for consumer loans in the NCUA's proposed rule is 75%, as opposed to 100% under Basel III for banks. In Basel III, equity investments (equities not publicly traded) are weighed at 400% while the NCUA's proposed rule weighs corporate credit union perpetual contributed capital at 200% and CUSO equity investments at 250%.
“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.
However, Mike Schenk, CUNA's vice president of economics and statistics, said, “We are concerned that the weight on corporate perpetual capital will have some credit unions leaving the system for other providers.
He added that 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.
“We are likewise concerned that the proposed weight on investment in CUSOs is excessive, has not been justified, and will restrict and reduce the collaborative efforts through CUSOs that credit unions need in an increasingly competitive financial marketplace,” he added.
Schenk said a more appropriate risk weighting 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%,” the CUNA economist 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, he said.
Mike Coleman, NAFCU's director of regulatory affairs, said the risk weights in the NCUA's proposal for perpetual capital and CUSO equity investments are too high.
“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,” he said. “The proposed risk weight for corporate paid-in capital should also be lowered to 125% to account for the actual risk of the investment.”
NAFCU and CUNA said they support the proposed 75% risk weight for consumer loans.“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. 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,” he added.
Schenk said he would be shocked if the agency decided to raise some of the proposed risk weights to offset any weights made lower in the final rule.
“Our extensive historical analysis clearly shows that while several weights seem about right, the more appropriate reaction would be a lowering of most of the proposed weights,” the CUNA economist said. “Any increase compared to the proposal would be obvious and we will continue to strenuously oppose any weight that is not clearly justified by sound, rigorous and data-based analysis.”
As of June 3, the NCUA said, it had received 2,027 comment letters on the risk-based capital proposal, which were submitted prior to the May 28 deadline. An NCUA spokesman said the latest figure represents the total number of individual letters, not number of stakeholders. Two credit unions and two CUSOs had filed the most comment letters filed as of June 3.
The $394 million Resource One Credit Union in Dallas submitted 45 comment letters to the NCUA on the proposed risk-based capital rule.
“Although the regulation has good intentions, the one-size-fits-all approach applies to categories of assets, is a major weakness. Credit unions are diverse and there should be a standardization with the proposal,” Resource One CEO Jim Brisendine wrote in his comment letter. “The weightings for balance sheet items are significantly different than those required for banks by Basel III. The RBC proposal regulation seems to use restrictive percentages from Basel III while ignoring some standards that may be more liberal in other areas.”
The $306 million Frankenmuth Credit Union in Frankenmuth, Mich., had filed 52. Many of the letters from Frankenmuth followed the same template.
“It seems that most industry professionals view this proposal as going well beyond what is necessary to protect the insurance fund, and with the resulting consequence of limiting services to members,” wrote loan writer Angela Engelhardt.
Xtend Inc., a CUSO based in Grand Rapids, Mich., had submitted 47 letters and CU*Answers, its sister CUSO, had filed 129.
“The proposed changes to the risk-based capital requirements for credit unions is going far beyond what is necessary to protect the insurance fund and in the end will negatively impact services to the credit union members,” said CU*Answers Chief Information Officer Jody Karnes. “It will also discourage credit unions from investing in CUSOs such as the one I work for.”
NCUA spokesman John Fairbanks said the agency is still in the process of counting the comment letters that have been filed.
“Every letter received will be read by an agency staff member,” Fairbanks said.