Capital proposal would allow CUs to ‘opt in,’ avoid RBC requirements

(July 23, 2021) Federally insured credit unions with $500 million or more in assets could avoid risk-based capital (RBC) requirements and opt-in to a new measure of capital adequacy if they meet a minimum net worth standard and other qualifying criteria, under a proposal issued by the NCUA Board Thursday.

Called the Complex Credit Union Leverage Ratio (CCULR, and dubbed “cooler” by members of the board), the proposal would allow the $500 million and more credit unions to opt in to the new capital standard if they also hold a minimum net worth ratio of 9% as of Jan. 1 of next year (which will be gradually increased to 10% two years later).

Other qualifying criteria include: off-balance sheet exposures held by the credit union must be 25% or less of total assets; trading assets and trading liabilities must be 5% or less of total assets; and goodwill and other intangibles must be 2% or less of total assets.

“A complex credit union that opts into the CCULR framework would not be required to calculate a risk-based capital (RBC) ratio under the Oct. 29, 2015, risk-based capital final rule” as amended in October, 2018, the proposal’s summary states. “A qualifying complex credit union that opts into the CCULR framework and that maintains the minimum net worth ratio would be considered to be well capitalized.”

Issued on a unanimous vote by the board, the proposal would make other changes to the RBC rule, according to the summary, including addressing asset securitizations issued by credit unions, clarifying the treatment of off-balance sheet exposures, deducting certain mortgage servicing assets from a complex credit union’s risk-based capital numerator, updating several derivative-related definitions, and clarifying the definition of a consumer loan.

As both NCUA staff and board members noted during the meeting, the proposal is similar to the community bank leverage ratio (CBLR) adopted by the federal banking agencies for banks and which became effective in 2020. That rule removes requirements for calculating and reporting risk-based capital ratios for most banks with less than $10 billion in assets that hold 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.

The NCUA proposal was issued with a 60-day comment period, which means it would end sometime in either late September or early October. That doesn’t give NCUA much time to consider whatever comments it receives before finalizing a rule that will, in effect, directly affect the risk-based capital (RBC) rule set to take effect on Jan. 1.

During discussion, NCUA Board Chairman Todd Harper called the proposal a prudent course of action. “This proposal is an appropriate measure that provides complex credit unions with a streamlined approach to managing their capital levels while also strengthening the system’s resiliency to economic shocks,” he said.

He said year-end 2020 call report data indicate that nearly 75% of complex credit unions would meet the 9% net worth requirement under the proposal. He also asserted that the proposal would increase the capital buffer of insured complex credit unions, by $22 billion (to an estimated $104.6 billion) , if all of the credit unions “opted in” to the rule. (The increase in capital is compared to the total amount if the RBC rule were in effect, Harper noted.)

Board Vice Chairman Kyle Hauptman said the chief benefit of the proposal is that it allows some credit unions to bypass the risk-based capital approach. “For me, the point of this simpler leverage ratio is that it protects both credit unions and the (National Credit Union) Share Insurance Fund from the inevitable problems of risk weighting,” he said.

Although Board Member Rodney Hood said he would “begrudgingly” vote for the proposal (which he did), he took the opportunity before the vote to call for an end to the RBC rule. He said he wants the board to either table the RBC rule or rescind it, noting that it would be eight years old when it fully takes effect. “RBC should be a tool and not a rule,” he said.


Notice of Proposed Rulemaking, Parts 702 and 703, Complex Credit Union Leverage Ratio