May 10, 2021
Secretary of the Board
National Credit Union Administration
1775 Duke Street
Alexandria, VA 22314
NASCUS Comments on Simplification of Risk-Based Capital Requirements (RIN 3133-AF35)
Dear Secretary Conyers-Ausbrooks:
The National Association of State Credit Union Supervisors (NASCUS) submits this letter in response to the National Credit Union Administration’s (NCUA) request for comments on RIN 3133-AF35, Advanced Notice of Proposed Rulemaking: Simplification of Risk Based Capital Requirements (RBC ANPR). NCUA seeks input on approaches to simplify its risk-based capital regime. The first approach would replace the 2015 Risk-Based Capital Rule (2015 RBC Rule) with a Risk-based Leverage Ratio (RBLR) requirement. The second approach would retain the 2015 RBC Rule but create an off-ramp enabling eligible complex federally insured credit unions (FICUs) to opt-in to a ‘‘complex credit union leverage ratio’’ (CCULR) framework to meet all regulatory capital requirements. The CCULR approach would be modeled on the ‘‘Community Bank Leverage Ratio’’ framework. NCUA also seeks additional recommendations that might provide regulatory relief within the regulatory capital regime without diminishing the efficacy of the standards.
NASCUS appreciates the opportunity to provide our perspective to NCUA on these important issues. Any changes precipitated by this RBC ANPR would have a significant impact on the safety and stability of the credit union system.
We support NCUA efforts to simplify the agency’s risk-based capital rules. Reducing regulatory reporting burdens and providing complex credit unions added flexibility to meet their capital requirements are shared goals that will benefit the credit union system overall. With these goals in mind, NASCUS recommends that NCUA forego further development of the RBLR in favor of further developing the proposed CCULR. Furthermore, given the inextricably linked nature of the 2015 RBC Rule and the 2020 final Subordinated Debt Rule, NASCUS recommends that NCUA revisit the complexity of the issuing requirements and prescriptive approach related to Subordinated Debt. We also urge NCUA to consider the “timing” of further rulemaking in light of the fact that many complex credit unions have already taken steps to adjust balance sheets in anticipation of the impending effective date of the 2015 RBC Rule.
NASCUS Does Not Support the Development or Implementation of the Risk-based Leverage Ratio at this Time
We commend NCUA for putting forth preliminary concepts to help reduce complex credit unions’ compliance burden with the soon-to-be effective 2015 RBC Rule. For the reasons discussed below, however, NASCUS does not think further development of the RBLR would be constructive.
First, the proposal to displace the current RBC rule with the proposed RBLR seems premature. There is no compelling rationale to abandon the 2015 RBC Rule at this time. The rule was developed over several years of thorough public comment from numerous stakeholders. Neither credit unions nor NCUA have had the chance to operate under and assess the value of the 2015 RBC Rule.
Second, while NASCUS agrees with the stated goal of regulatory simplification, there are limits on the merits of simplification in the context of regulating regulatory capital. A mandatory, “simpler,” one-size-fits-all regulatory capital framework has inherent limitations. Mainly, such a system could overprice risk while simultaneously failing to sufficiently link capital requirements to different risk portfolios and assets. Put simply, all stick and no carrot.
More risk differentiation and sensitivity may not be necessary for every credit union but maintaining a parallel system that allows for such differentiation is important. From NASCUS’s perspective it is crucial to maintain at least the option of a more proportionate, flexible risk-based capital regulation. The proposal that the RBLR displace, rather than complement the existing RBC rule is problematic and is not comparable to the risk-based capital rules for banks.
Third, the RBLR may create a perceived conflict with the Subordinated Debt Rule. The RBC ANPR states that “RBLR approach would require the NCUA to modify its recent final rulemaking regarding subordinated debt” because “non-LICU complex credit unions may or may not be able to apply subordinated debt towards a capital calculation, depending on the ultimate design of the approach and the relevant legal and policy considerations.” While NASCUS disagrees that the RBLR is necessarily incompatible with the Subordinated Debt Rule, NCUA’s stated concern is an additional justification not to move forward with the RBLR at this time.
Repealing the Subordinated Debt Rule would be disruptive for the reasons discussed above: the rule has been many years in the making and complex credit unions are actively preparing for the rule’s implementation. To abandon the commitment to providing complex credit unions access to additional regulatory capital as part of a risk-based capital regime would create uncertainty and confusion and would be a step in the wrong direction.
Fourth, replacing the existing 2015 RBC Rule, at this late stage, would be disruptive and would impose significant transition costs on credit unions. Complex credit unions have been preparing for the NCUA’s risk-based capital requirements for the last several years. The proposed implementation of an entirely new, mandatory capital regime would create uncertainty. Complex credit unions would need to quickly evaluate the rule, develop a new capital plan, and implement that plan in very short order. Doing so would impose significant legal, operational, and human capital costs. Fundamentally, a change of this nature, at this stage, would aggravate rather than minimize regulatory burdens for affected credit unions.
Fifth, there is insufficient time to develop a new and different mandatory risk-based capital approach. NCUA issued this RBC ANPR on January 14, 2021 (published in the Federal Register in early March) and public comments are due by May 10. NCUA, thus, has only seven months to consider comments on the RBC ANPR, develop and publish a proposed rule, allow for public notice and comment, consider additional comments and develop and publish a final rule. This timeframe is not suited to the development of a carefully considered rule. It also is not feasible for the public and interested stakeholders to adequately comment on a rulemaking from the ANPR stage to a final rule in less than 12 months. This is especially true for an issue as important and potentially complex as new capital requirements. Stakeholders will need at least as much, if not more, time to consider any proposed rule and prepare comments than they would an ANPR given that a proposed rule will be far more detailed. This type of breakneck pace may be appropriate if the NCUA were operating under an aggressive statutory deadline, but here there is no compelling reason to rush the development of a new rule to supplant the existing RBC Rule in its entirety.
NASCUS is also concerned that a risk-based leverage ratio unrelated to risk may have the unintended effect of encouraging more risky behaviors by some credit unions to improve their regulatory capital ratios. If a credit union is required to hold more capital than its risk profile indicates is prudent, that credit union will face pressure to grow its retained earnings. As a result, it will be incentivized to make riskier loans in pursuit of higher returns. Thus, such a framework could actually encourage more risk to the share insurance fund rather than less.
For all these reasons, NASCUS urges the NCUA to focus its efforts on the Complex Credit Union Leverage Ratio and improving the issuing regulations of the Subordinated Debt rule rather than development of the RBLR.
NASCUS Supports Further Development of Complex Credit Union Leverage Ratio
NASCUS is encouraged by NCUA’s consideration of the CCULR and we support further development of this aspect of the proposal. NASCUS has previously encouraged NCUA to consider adopting an off-ramp to the 2015 Risk-Based Capital Rule commensurate with the Community Bank Leverage Ratio (CBLR). The flexibility of parallel, complementary risk-based capital rules will allow credit unions to choose which approach is most compatible with their business model. 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.
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.
First, optionality is essential. The voluntary nature of the proposed CCULR is a critical and beneficial component because it provides eligible credit unions the flexibility to choose their preferred risk-based capital approach. Optionality would promote efficient capital allocation and balance sheet management, which would allow complex credit unions to better serve their members. Preserving the optionality of the CCULR would also ensure that capital standards are not effectively raised for complex credit unions across the board. The banking regulators were appropriately sensitive to this concern when developing the CBLR in both the rules formation and in terms of protecting against mandating the CBLR in terms of de facto practice once implemented. The CCULR should be developed with these same principles in mind.
Second, any simplified capital standard must guard against inadvertently encouraging inappropriately risky behavior. The proposal should be carefully developed to ensure credit unions are not incentivized to increase earnings to satisfy a simplified risk-based capital approach.
Third, the development of the CCULR should preserve the Subordinated Debt Rule and should leverage the use of subordinated debt for both low-income designated credit unions (LICUs) as well as non-LICU complex credit unions to satisfy capital requirements. The 2015 RBC and Subordinated Debt Rules work together to promote both safety and sustainability in the credit union system. Enabling these rules to work as intended is important to the long-term health of the credit union system.
We believe that maintaining the existing 2015 RBC Rule, and the Subordinated Debt Rule, and designing a CCULR as an optional alternative to the RBC Rule would help preserve stability and provide certainty to the credit union system while meeting NCUA’s goals of providing eligible credit unions flexibility and a reduced regulatory reporting burden. This approach is superior to the RBLR, which would supplant the 2015 RBC Rule, undermine the Subordinated Debt Rule, and could inadvertently encourage unnecessary risk-taking by credit unions seeking to comply with higher capital requirements not necessarily reflective of balance sheet risk.
Responses to Questions in the RBC ANPR Relevant to the CCULR
NASCUS provides the following comments in response to the specific questions in the RBC ANPR dedicated to the CCULR. As a general matter, we urge NCUA to work with state regulators in the development of the CCULR. Many state regulators have first-hand experience in the real-world workings of the CBLR in their capacity as also regulating state-chartered banks. The perspectives of these state regulators would be invaluable to NCUA as the agency develops the CCULR.
Question 5: The Board invites comments on the merits of incorporating the CCULR in its capital adequacy regulations. Should the NCUA capital framework be amended to adopt an ‘‘off-ramp’’ such as the CCULR to the risk-based capital requirements of the 2015 Final Rule?
Yes, as discussed above, NASCUS supports further development of an alternative, simplified risk-based capital “off-ramp” like the CCULR. NCUA should look to the Community Bank Leverage Ratio (CBLR) as a guide because the federal banking regulators addressed many of the same practical issues raised in the RBC ANPR in the development and implementation of the Community Bank Leverage Ratio. The CBLR also reflects the importance of flexibility in developing and implementing a parallel, simplified approach. The final CBLR rule reflects the many comments the federal banking regulators received regarding the benefits of a voluntary parallel capital regime and the importance of ensuring that the implementation of such a rule preserves the optional nature of the rule. By preserving the optional nature of the rule, the Community Bank Leverage Ratio addresses the federal banking regulators’ goal (and NCUA’s goal with this RBC ANPR) of minimizing banks’ regulatory burden via an alternative, simplified approach.
Question 6: The Board invites comments on the criteria for CCULR eligibility. Should the Board adopt the same qualifying criteria as established by the other banking agencies for the CBLR? In recommending qualifying criteria regarding a credit union’s risk profile, please provide information on how the qualifying criteria should be considered in conjunction with the calibration of the CCULR level under question 7, below.
NASCUS supports using the CBLR as a guide for developing criteria for CCULR eligibility. The goal should be a proposal that both maximizes comparability so the NCUA and the industry can benefit from lessons learned from an established approach, while reflecting key differences in the regulatory context, business model, asset distribution, and risk profile of complex credit unions. For example, scoping the rule to cover the majority of the risk among complex credit unions may counsel in favor of a lower threshold or a tiered approach as NCUA has proposed in other contexts. The existing 2015 RBC rule was designed, in part, to identify credit unions with unique risk portfolios, this goal should be preserved to the extent possible with a simplified approach.
Question 7: What assets and liabilities on a FICU’s Call Report should the Board consider in determining the net worth threshold? How should each of these items be weighted?
Again, NASCUS supports using the CBLR as a guide for developing the CCULR proposal. The CBLR could serve as a default proposal, including flexibility with respect to Tier 2 qualifying investments (e.g., subordinated debt instruments) to ensure maximum comparability, with adjustments as necessary to reflect key differences in the regulatory context, business model, asset distribution, and risk profile of complex credit unions. As above, the goal should be to reward actual management of risk on the balance sheet while promoting a simplified approach.
Question 8: What are the advantages and disadvantages of using the net worth ratio as the measure of capital adequacy under the CCULR? Should the Board consider alternative measures for the CCULR? For example, instead of the existing net worth definition, the CCULR could use the risk-based capital ratio numerator from the 2015 Final Rule, similar to the ‘‘Tier 1 Capital’’ measure used for banking institutions.
NASCUS does not believe there are many, if any, advantages to using the net worth ratio as a measure of capital adequacy under the CCULR. On the contrary, this approach would have several disadvantages, mainly needlessly limiting NCUA’s discretion to develop a more tailored risk-based capital regime. Moreover, anchoring the risk-based capital regime in the definition of net worth would create unconstructive tensions with the Subordinated Debt Rule. As NCUA notes in the RBC ANPR:
“[S]ection 216 [of the Federal Credit Union Act] charged the NCUA with developing discretionary actions which are comparable to the discretionary safeguards available under section 38 of the Federal Deposit Insurance Act…Section 216(d)(1) of the FCUA requires that the NCUA’s PCA system include, in addition to the statutorily defined net worth ratio requirement, ‘a risk-based net worth requirement’ [now the risk-based capital ratio] for credit unions that are complex, as defined by the Board.” 
The explicit definitions of “net worth” and “net worth ratio” apply only to the statutory leverage ratio requirement. The FCUA does not include specific definitions for risk-based net worth requirements. NCUA has previously recognized, in the final RBC Rule and in the Subordinated Debt Rule, that it has broad discretion in fashioning risk-based requirements to move beyond the statutory net worth ratio. It should do so again here.
Moreover, the FCUA directs the NCUA to adopt risk-based capital rules that are comparable to the risk-based capital rules for banks. The risk-based capital rules for banks allow banks to include Tier 1 and Tier 2 instruments, like subordinated debt, in the Community Bank Leverage Ratio. NCUA should do so as well. NCUA has the flexibility in developing a parallel CCULR to expansively define the components of a new risk-based capital leverage ratio. We do not believe it would be constructive for NCUA to revert to a much more limited form of risk-based capital, particularly for an optional, alternative framework intended to provide flexibility to credit unions and to minimize compliance burdens.
Question 9: Should all complex credit unions be eligible for the CCULR, or should the Board limit eligibility to a subset of these credit unions? For example, the Board could consider limiting eligibility to the CCULR approach to only complex credit unions with less than $10 billion in total assets.
As stated above, NASCUS supports using the CBLR as a guide for developing criteria for CCULR eligibility. In this case the $10 billion asset threshold could serve as an eligibility limitation. However, NASCUS believes NCUA could set a higher threshold of $15 billion or $20 billion to harmonize the proposed CCULR with more granular stress testing Tiers. This variance from the CBLR would reflect key differences in the regulatory context, business model, asset distribution, and risk profile of complex credit unions.
Question 10: The Board invites comment on the procedures a qualifying complex credit union would use to opt into or out of the CCULR approach. What are commenters’ views on the frequency with which a qualifying complex credit union may opt into or out of the CCULR approach? What are the operational or other challenges associated with switching between frameworks?
NASCUS recommends that NCUA look to the Community Bank Leverage Ratio as a guide because the federal banking regulators addressed many of the same practical issues that are raised in the ANPR. The Community Bank Leverage Ratio reflects the importance of flexibility in developing and implementing a parallel, simplified approach. Eligible credit unions should be able to opt-in and out of the CCULR with relative ease so they can maximize the efficiency of their capital compliance. We do not see the benefits of raising barriers to use of a voluntary parallel system like the CCULR and we are not aware of features of the Community Bank Leverage Ratio designed to reduce the frequency of opting in or out.
On the contrary, the federal banking regulators have made it relatively easy to opt-in or out. The implementing rule states that a “qualifying community banking organization may opt into or out of the community bank leverage ratio framework at any time and for any reason.” Moreover, the federal banking regulators elected not to impose a mandatory notice requirement based on concerns that such a requirement may discourage institutions from freely electing to opt into or out of the simplified approach.
Absent a compelling reason not to permit such flexibility, the NCUA should adopt the same approach if it moves forward with the development of the CCULR. Maximum flexibility is consistent with the stated goal of minimizing regulatory burdens. It would also make the CCULR comparable to the Community Bank Leverage Ratio, as Congress intended.
Question 11: The Board invites comment on the treatment for a complex credit union that no longer meets the definition of a qualifying complex credit union after opting into the CCULR approach. Should the Board consider requiring complex credit unions that no longer meet the qualifying criteria to begin to calculate their assets immediately according to the risk-based capital ratio? Should the Board provide a grace period for these credit unions to come back into compliance with the CCULR and, if so, how long of a grace period is appropriate? What other alternatives should the Board consider with respect to a complex credit union that no longer meets the definition of a qualifying complex credit union and why? Is notification that a credit union will not meet the qualifying criteria necessary?
The federal banking regulators adopted a flexible approach to allow banks to freely transition between the Prompt Correct Action framework and the Community Bank Leverage Ratio. That flexibility is based in part on the availability of sufficient grace periods for institutions to allow smooth adjustments and to demonstrate compliance. Specifically, the final rule provides a grace period of two consecutive calendar quarters, subject to certain capital leverage requirements. This is a prudent approach that appears to be working well in practice. NASCUS is not aware of any reason why credit unions should not similarly be afforded two consecutive calendar quarters to come into compliance. Absent a demonstrated need for a different approach, NCUA should consider modeling the CCULR on the existing Community Bank Leverage Ratio framework.
Rather than Supplanting the 2015 RBC Rule, NCUA Should Refine the Issuing Requirements of the 2020 Subordinated Debt Rule
While NASCUS has serious reservations regarding the instability likely to result from a sudden change to the risk-based capital framework that would result from the development of a risk-based leverage ratio, we do support a thoughtful reconsideration of issuing requirements for the 2020 Subordinated Debt Rule. As we wrote in our 2020 comment letter in response to NCUA’s request for comments on the Subordinated Debt proposal, rules related to the offerings needed to be scalable to permit meaningful capital relief, within safe and sound parameters, to both LICUs and non-LICU complex credit unions. We remain concerned that the Subordinated Debt as finalized is too prescriptive and will dampen the viability of secondary capital for LICUs. 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.
Rather than explore a replacement for the 2015 RBC Rule, NCUA should develop the off-ramp concept and re-evaluate the offering requirements of Subordinated Debt Rule.
NASCUS appreciates NCUA’s continued efforts to develop a risk-based capital framework that promotes an appropriate and efficient allocation of capital to protect the credit union system while affording credit unions the flexibility necessary to deploy their capital for productive purposes. The 2015 RBC Rule and the Subordinated Debt Rule will be critical elements of the credit union system. NASCUS believes that a widely available, flexible parallel capital rule like the contemplated CCULR could further improve the risk-based capital regime.
Given the fast-approaching effective dates of the 2015 RBC and Subordinated Debt Rules, the development of the RBLR is not a prudent course for NCUA. Complex credit unions have begun implementing changes in anticipation of the January 1, 2022 effective date on the longstanding final 2015 RBC Rule. The uncertainty of pending risk-based capital rules introduced by the RBC ANPR is unnecessarily disruptive.
We would be happy to discuss our comments in detail or to provide additional information at NCUA’s convenience. As always, NASCUS stands ready to work with NCUA to achieve our shared goals of a safe, sound, and productive credit union system.
Lucy Ito, President and CEO
National Association of State Credit Union Supervisors
 NASCUS is the professional association of the nation’s 45 state credit union regulatory agencies that charter and supervise over 2,000 state credit unions. NASCUS membership includes state regulatory agencies, state chartered and federally chartered credit unions, and other important stakeholders in the state system. State chartered credit unions hold over half of the $1.87 trillion assets in the credit union system and are proud to represent nearly half of the 125 million credit union members.
 “Simplification of Risk Based Capital Requirements” 86 Fed. Reg. 13498 (March 9, 2021).
 Id. at 13499.
 “Subordinated Debt” 86 Fed. Reg. 11060 (February 23, 2021).
 “Risk-Based Capital” 80 Fed. Reg. 66626 (October 29, 2015).
 86 Fed. Reg. 11060 (Feb. 23, 2021).
 86 Fed. Reg. 13498, 13501 (Mar. 9, 2021).
 NCUA has significant flexibility in determining the standards for risk-based capital. NASCUS believes that NCUA thus has the authority to establish a risk-based leverage ratio that encompasses subordinated debt if it chooses to implement such a system.
 86 Fed. Reg. 13498, 13501 (Mar. 9, 2021).
 84 Fed. Reg. 61776, 61785 (Nov. 13, 2019).
 NASCUS Comments on Proposed Rule: Subordinated Debt [RIN3133-AF08] (July 8, 2020). Available at https://www.nascus.org/comment-letters/comment-letter-proposed-rule-subordinated-debt/.
 86 Fed. Reg. 13498, 13501 (Mar. 9, 2021).