RBC Rule Could Have Saved NCUSIF $180M
Had the NCUA’s proposed risk-based rule been in effect in 2007, it could have saved the NCUSIF as much as $180 million.
NCUA Board Chairman Debbie Matz included that statistic in a letter Friday to House Financial Services Oversight and Investigations Subcommittee Chairman Patrick McHenry (R-N.C.), in response to his concerns about the agency’s proposed risk-based capital rule.
“We back-tested the proposed risk-based capital rule on consumer credit union failures that created the largest losses to the [NCUSIF] since 2007. In 14 of the 15 failures tested, the credit unions would have held substantially more capital if they had been operating with the level of risk-based capital required in the proposed rule,” Matz wrote. “The maintenance of higher minimum risk-based capital levels in these institutions may have prevented their failure and would have reduced the amount of losses incurred by the [NCUSIF] by as much as $180 million.”
The letter also included a chart that compared the NCUA’s proposed asset risk weights to the FDIC’s rule. While many of the NCUA’s asset class risk weights mirror those enforced by the FDIC, there were some exceptions.
Credit unions would have it easier than banks when it comes to current consumer loans; the NCUA’s proposal risk weights the assets 75%, compared to the FDIC’s 100%.
However, the FDIC’s rule does not address concentration risk, while the NCUA’s proposal does. For example, the FDIC risk weights all current mortgages at 50%, regardless of concentration. The NCUA’s proposal would also risk weight mortgages up to 25% of assets at 50%, but would up the ante to 75% for mortgages that represent 25% to 35% of assets, and increase risk weighting to 100% for mortgages more than 35% of total assets.
Concentration risk is also addressed by the NCUA’s proposal for junior lien and delinquent first mortgages and for member business loans, while the FDIC’s rule does not increase based upon concentration.
Matz identified lessons learned during the financial crisis, new Basel capital standards, recommendations from the Government Accountability Office and the NCUA Inspector General, and new capital standards issued by the FDIC, OCC and the Fed as reasons for the agency’s proposal.
“In issuing the proposed rule, our goal is to ensure that a federally insured credit union holds capital commensurate with the institution’s level of risk. In other words, NCUA is seeking to ensure that those federally insured credit unions that have a higher appetite for risk hold enough capital to match that risk,” Matz wrote.
Matz said the proposal attempts to scale the capital requirements based on an individual credit union’s balance sheet risks.
“Additionally, the proposed rule is similar to the risk-based capital rules for other U.S. financial institutions and provides the flexibility envisioned in the Basel capital accords,” Matz said.
“Ensuring that credit unions hold sufficient capital to withstand reasonable economic shocks is fundamental to ensuring the safety and soundness of the credit union system,” she added.
Matz told McHenry the NCUA estimated that credit unions covered under the proposal would need to collectively hold an additional $633 million in capital to reach the well-capitalized level, assuming all 201 decide to keep their balance sheets’ current risk exposures.
She said that figure is equivalent to 0.80% of their combined assets of $80 billion.
“As we proceed with consideration of the risk-based capital rule, we will keep in mind stakeholder concerns that the individual minimum capital requirement provision is properly scoped and sufficiently limited,” she said.
In response to the letter from Matz, Carrie Hunt, NAFCU’s senior vice president of government affairs and general counsel, said the trade group appreciates NCUA’s willingness to hear from stakeholders and consider changes to its proposed rule.
“Nevertheless, many questions still remain and we believe that the agency should reissue a proposal for notice and comment before any final rule is issued, and that it should give credit unions ample time – at least three years – to comply,” she said.