Key comments: Opposition to provisions of RBC simplification proposal

(May 14, 2021) Two significant comment letters were submitted this week by the state system, on simplification of risk-based capital requirements and on adding an “S” for sensitivity to market risk to the examination grading system.

NASCUS opposed much of the former and supported most of the latter.

On NCUA’s advanced notice of proposed rulemaking about simplification of risk-based capital (RBC) requirements, NASCUS wrote that the state system supports efforts to simplify the agency’s rules – but not necessarily by using the proposed risk-based leverage ratio (RBLR) contained in the proposal.

Under the two approaches NCUA offered for simplifying RBC requirements, the first would replace the RBC rule with the proposed RBLR (which uses relevant risk attribute thresholds to determine which complex credit unions would be required to hold additional capital buffers).

The second would keep the rule adopted in 2015 (and now scheduled to take effect at the beginning of next year) but allow eligible “complex” credit unions to opt-in to a “complex credit union leverage ratio” (CCULR) framework to meet all regulatory capital requirements. The CCULR is modeled on the “community bank leverage ratio” (CBLR) adopted by federal banking agencies in 2019, which removes requirements for calculating and reporting risk-based capital ratios for most banks with less than $10 billion in assets, more than 9% in risk-based capital, and that meet certain risk-based qualifying criteria. Banks meeting the criteria can “opt-in” to use the CBLR.

On the first approach using the RBLR, NASCUS noted several issues:

  • Displacing the current RBC rule with the proposed RBLR seems premature, as there is no compelling rationale to abandon the 2015 RBC Rule at this time.
  • There are limits on the merits of simplification in the context of regulating regulatory capital.
  • The proposed RBLR may create a perceived conflict with the subordinated debt rule adopted by the agency in December.
  • Replacing the existing RBC rule now would be disruptive and would impose significant transition costs on credit unions.
  • Time is running short to develop a new and different mandatory RBC approach, especially since the RBC rule takes effect at the beginning of next year.

However, the state system does support further development of the CCULR as outlined in the second approach, NASCUS wrote. “The flexibility of parallel, complementary risk-based capital rules will allow credit unions to choose which approach is most compatible with their business model,” NASCUS wrote. “Additionally, the CCULR proposal would allow both the 2015 RBC Rule and Subordinated Debt Rules to go into effect. The optional nature of the CCULR would also permit parallel development of the new rule with the simultaneous implementation of the existing 2015 RBC rules, providing credit unions with the choice to opt-in and out of the CCULR in the future.”

NASCUS also said the “parallels between the CCULR proposal and the existing CBLR is another advantage. The regulatory and commercial experience with the CBLR can help inform the development and implementation of NCUA’s CCULR proposal.”

Finally, the association expressed support for a “thoughtful reconsideration” of issuing requirements for subordinated debt outlined in last year’s rule on that issue. Echoing its 2020 comment letter, NASCUS said rules related to subordinated debt offerings needed to be scalable to permit meaningful capital relief.

“We remain concerned that the subordinated debt rule as finalized is too prescriptive and will dampen the viability of secondary capital for low-income credit unions (LICUs),” NASCUS wrote. “Amending the 2020 subordinated debt rule to allow greater flexibility and simplified issuing requirements for certain credit unions and offerings rather than the current one-size-fits-all approach would be consistent with NCUA’s stated goal for the RBC ANPR to develop a rule that is tailored to risks, simple in structure, and avoids unnecessary regulatory burden.”

NASCUS comment: Simplification of Risk-Based Capital Requirements