CCULR OK, but some considerations needed, NASCUS writes

(Oct. 22, 2021) The state system supports the NCUA proposed rule establishing a “complex credit union leverage ratio” (CCULR), as well as a quick implementation of a final regulation, but also has key considerations for the agency before it finalizes the rule, NASCUS wrote in its comment letter this week.

More specifically, NASCUS wrote that subordinated debt should be permitted in calculating net worth for CCULR thresholds; that complex credit unions of all sizes can appropriately manage the optionality of both entering and exiting the CCULR; and changes are needed to the current (and proposed) risk-based capital (RBC) and subordinated debt rules in order to avoid a “chilling effect” on the low-income credit union (LICU) secondary capital system.

The NASCUS letter was in response to a call for comments issued by NCUA in July for its proposal to make a simplified measure of capital adequacy available to federally insured credit unions defined as “complex” – meaning those with more than $500 million in assets. According to NCUA, the CCULR framework is comparable to the community bank leverage ratio (CBLR) that went into effect in January 2020 for banks under the 2018 financial regulatory relief law. That rule allows banks to hold a certain, uniform level of capital (now at 9% of assets) as long as they meet certain conditions, including in lending and investments.

Under the NCUA proposed rule, a complex credit union that opts into the CCULR framework and maintains the minimum net worth ratio would be considered well capitalized. For the CCULR, that would begin with 9% as of Jan. 1, 2022, and rise gradually to 10% by Jan. 1, 2024. The credit union would not be required to calculate a risk-based capital ratio under the Oct. 29, 2015, risk-based capital final rule, which also takes effect Jan. 1, 2022. Other qualifying criteria for the proposed framework include: off-balance-sheet exposures equal to 25% or less of total assets; trading assets and trading liabilities that are 5% or less of total assets; and goodwill and other intangible assets that are 2% or less of total assets.

NASCUS wrote developing the CCULR would reduce regulatory burden for those complex credit unions opting-in and would allow them to redirect scarce resources toward other operational priorities, without compromising capital standards or endangering the credit union share insurance fund (SIF).

“By ensuring that the CCULR is available as an option to all complex credit unions, the NCUA can maximize synergy with the RBC rule, maintain flexibility, and achieve greater consistency with sound public policy and the Federal Credit Union Act,” NASCUS wrote. “Thus, the CCULR can achieve its purposes of providing optionality and regulatory relief to complex credit unions by allowing for more effective and efficient deployment capital in service of the members.”

NASCUS also urged the agency to make some additional considerations before finalizing the rule, which – as proposed – would take effect at the beginning of next year, the same date that the RBC rule is scheduled to take effect.

NASCUS recommended that that agency incorporate subordinated debt into the calculation of the CCULR net worth ratio. “Excluding subordinated debt from the CCULR would be an unfortunate step back from nearly a decade’s worth of work to modernize the credit union capital framework,” NASCUS wrote. “Allowing complex credit unions to access capital in addition to retained earnings to meet regulatory benchmarks is sound public policy.”

Further, NASCUS urged the agency provide credit unions with authority to opt in and out of the CCULR with the same flexibility that community banks have udder the CBLR (the proposal allows credit unions to open in at the end of a reporting quarter, and they can only opt out if they provide NCUA with at least 30 days prior notice; banks can do both at any time under their rule). NCUA, in its proposal, said the advance notice was required because credit unions do not have experience, yet, with calculating risk-based capital under the RBC, which takes effect at the beginning of next year.

“While it is true that complex credit unions have not been required to calculate the risk-based capital ratio pursuant to the 2015 final RBC rule, the fact is that the rule has been in place for several years and we believe many complex credit unions have familiarized themselves with the calculations in anticipation of previous, and now pending, effective date(s),” NASCUS asserted.

Finally, the state system urged NCUA to address ongoing concerns about whether the final Subordinated Debt rule is properly calibrated with respect to low-income designated credit unions (LICUs).

“LICUs are a critically important component of the credit union system providing services to predominantly low-income members,” NASCUS wrote. “While an overwhelming majority of LICUs are not subject to the RBC rule, they are subject to the 2020 Subordinated Debt rule. Given the genesis of the Subordinated Debt rule as a corollary to the RBC rule, it is appropriate that refinements to the subordinated debt framework be considered contemporaneously with changes to the RBC rule.”