Two approaches proposed for simplifying risk-based capital requirements

(Jan. 15, 2021) Two approaches for simplifying risk-based capital (RBC) requirements for federally insured credit unions (FICUs) were proposed by the NCUA Board Thursday, one replacing the current rule with a risk-based leverage ratio (RBLR) rule requirement, and the second retaining the RBC rule but allowing credit unions to “opt-in” to the RBLR.

The proposal (an advance notice of proposed rulemaking (ANPR)) was issued for a 60-day comment period on a 2-1 vote, with Board Member Todd Harper objecting.

The final vote on the proposal came after a more than one-hour delay in which the sound (and written transcript) from the Internet-streamed, virtual meeting was unavailable. That meant, for the most part, discussion among the board members about the proposal was not public. The sound (and transcript) was audible (and visible) again just in time for the recorded vote of 2-1.

In issuing the ANPR, NCUA noted that the existing RBC rule, which was adopted more than five years ago, has been delayed to the first of next year. That delay time, the agency said, has provided it with more time to evaluate FICUs that are classified as “complex” (those with total assets greater than $500 million, a new threshold also set at the meeting Thursday).

NCUA said the RBLR contained in the proposal is intended to simplify the regulatory risk-based capital requirements, while ensuring the overall capital framework. “The RBLR approach would utilize certain risk characteristics to determine the required capital level,” the agency said. This approach differs from the 2015 final rule, the agency said, where all assets and certain off- balance sheet activities were categorized into risk groups and then risk-weighted to produce a risk- based ratio.

The first approach the board is considering, according to the agency, would replace the current risk-based capital rule with the RBLR requirement. The agency said that approach uses relevant risk attribute thresholds to determine which complex credit unions would be required to hold additional capital (or buffers).

The second approach would keep the 2015 RBC rule, but would allow eligible complex FICUs to opt-in to a “complex credit union leverage ratio” (CCULR) framework to meet all regulatory capital requirements. That approach would be modeled on the “Community Bank Leverage Ratio” (CBLR) framework, which is available to certain banks under certain conditions, and went into effect early last year (after adoption in 2019). NCUA Board Chairman Rodney Hood has, in the past, signaled his interest in the agency adopting a similar approach for credit unions. Under the CBLR, a community banking organization may qualify if it has a tier 1 leverage ratio of greater than 9%, less than $10 billion in total consolidated assets, and limited amounts of off-balance-sheet exposures and trading assets and liabilities.

The board also indicated that only one or the other of the approaches would be adopted, calling them mutually exclusive and that the CCULR would not be available under the RBLR.

NCUA also said it is considering the net worth ratio as the RBLR measurement. It would be supplemented, the agency said, with mandatory capital buffers when certain risk factors are triggered. That approach, NCUA said, would require an extra cushion of capital buffers over and above the 7% net worth ratio standard for classification as well capitalized “when certain characteristics inherent in a FICU’s balance sheet exceed specified thresholds.”

The risk factors under consideration, according to NCUA, would be based on the 2015 final rule, which it said used higher risk weightings.

Advance Notice of Proposed Rulemaking, Part 702, Simplification of Risk Based Capital Requirements