In an Oct. 16 article, "Capital Concerns Weigh on RBC2," CU Times quoted David Giesen, a managing director at Navigant Capital Advisors, as talking about risk weights prior to the final approval of the NCUA's new risk-based capital rule and includes this statement: "Auto loans, which currently are in about 6.5% under the current standard, are moving up to 100% assets at 10%." Mr. Giesen then says this "may make it more difficult to originate as many auto loans as a credit union may like."
Before any credit unions begin to worry about making auto loans after the new rule goes into effect in 2019, a review of the impact of the rule is in order.
First, 76% of all credit unions will be exempt from this rule, as it applies to credit unions with assets of $100 million or greater. This is unlike the banking industry, where all banks are required to comply, regardless of asset size. Even among the complex credit unions covered by the new rule, nearly 99% would remain well-capitalized. So there is no reason for credit unions to cut back on auto lending.
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Of those credit unions covered under the rule, most will see their capital buffers actually increase because the new risk weights reflect credit unions' track record of prudent lending. Nearly 97% of covered credit union assets will receive risk weights that are the same or lower than similar bank assets. For example, secured consumer loans (such as auto loans) made by complex credit unions will be risk-weighted at 75%, while secured consumer loans made by banks are risk weighted at 100%
The new rule is aimed at protecting the credit union system by focusing on outliers that have large concentrations of high-risk assets. Only 313 complex credit unions have such large concentrations of high-risk assets that they will be required to hold more capital or shed some risky assets after the rule takes effect in 2019. All but 16 of these credit unions already hold far more capital than they will be required to hold when the rule takes effect.
If anything, the rule will encourage more auto lending, because auto loans are among credit unions' lowest-risk loans. For easily accessible information about the new risk weights, readers can click on the Risk Weights at a Glance chart posted in the new Risk-Based Capital Resources section on the NCUA's website.
Mark Treichel
Executive Director
NCUA
Alexandria, Va.
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