(Dec. 17, 2021) A final rule adopting an “off ramp” from risk-based capital (RBC) requirements for complex credit unions will take effect Jan. 1 after unanimous action by the NCUA Board Thursday.
The regulations include several changes from the proposal issued in July: It adopts a 9% complex credit union leverage ratio (CCULR), permanently grandfathering excluded supervisory goodwill from the deduction in the risk-based capital numerator, and excluding grandfathered supervisory goodwill from the goodwill qualifying criteria for the CCULR framework.
It applies to federally insured, natural-person credit unions classified as “complex” (those with total assets greater than $500 million).
Designed to provide a simplified measure of capital adequacy (like that provided by federal banking regulators under the community bank leverage ratio, CBLR), qualifying credit unions that maintain the 9% minimum net worth ratio (and meet other qualifying criteria) are allowed to “opt into” the CCULR framework. Once it does that, NCUA said, an eligible credit union need not calculate a risk-based capital ratio under the NCUA Board’s risk-based capital final rule.
Further, a qualifying complex credit union that opts into the CCULR framework and maintains the minimum net worth ratio is considered well capitalized, NCUA said.
The CCULR surfaced in July with a 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. It was inspired by the bank 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.
The 9% requirement is repeated in the new NCUA rule; a provision included in the proposal that the rate would rise gradually to 10% by Jan. 1, 2024 was dropped from the final rule.
In its October comment letter, NASCUS wrote that the state system supports the CCULR, as well as a quick implementation of a final regulation. However, the state system suggested that: subordinated debt should be permitted in calculating net worth for CCULR thresholds; 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.
NCUA took a pass on including subordinated debt in calculating net worth for CCULR thresholds. The agency argued that subordinated debt can be an expensive form of capital, both in the terms of the cost of issuing it and in terms of necessary rate of return to investors. Also, the agency said, the capital form it may not be readily available during times of stress.
It also declined to make any additional changes, for now, to the existing sub debt and RBC rules. “The Board will separately monitor implementation of the subordinated rule and consider any appropriate changes in the future, the agency wrote. The final rule also made no changes to the opt-in procedures.