Feb. 21, 2020 NASCUS Report

THIS WEEK: Proposal offers subordinated debt investment trade-off; CECL/ACL policy adopted; Agency sells taxi medallion loan portfolio; Summaries outline bank acquisition proposal, review; FDIC names state supervisors to panel; ON THE ROAD in ID offering testimony; BRIEFLY: Welcome new members; See you at GAC; CT marks 30th year as accredited regulator; Banks reap more overdraft fees

Corporates could invest in sub debt
but only after capital deduction

Corporate credit unions could invest in subordinated debt instruments issued by credit unions – action contained in a regulation proposed last month – but would be required to fully deduct the amount of the instrument from their top capital amounts, NCUA proposed this week.

The NCUA Board issued the proposal on corporate credit union investments in credit union subordinated debt as part of a larger proposal about corporate credit union regulations. The subordinated debt provision, however, is likely a next step for the agency as it rolls out an earlier proposal allowing some credit unions to issue subordinated debt that would count toward their risk-based capital requirements.

In its proposal this week, the NCUA Board said it clarified that corporate credit unions may purchase subordinated debt instruments of natural person credit unions under a corporate credit union’s lending authority. The authority, the agency said, is derived from corporate credit union lending authority because subordinated debt instruments are issued under a natural person credit union’s borrowing authority.

Treating the purchase of such subordinated debt instruments as lending would ensure consistent treatment between natural person credit unions and corporate credit unions,” the agency said. “The proposed rule would not explicitly state that a corporate credit union may purchase a natural person credit union subordinate debt instrument because the Board believes corporate credit unions’ current lending authority is currently sufficiently broad to include purchasing subordinated debt instruments.”

However, the proposal states, the full amount of any investment in a subordinated debt instrument would have to be deducted from the corporate’s tier 1 capital “to ensure consistent treatment between investments in the capital of other corporate credit unions and natural person credit unions.”

“Corporate credit unions are currently required to deduct from tier 1 capital any investments in perpetual contributed capital and nonperpetual capital accounts that are maintained at other corporate credit unions,” NCUA said in its proposal. “The Board believes that investments in natural person credit union subordinated debt instruments should be treated similarly as such instruments may qualify as regulatory capital for the natural person credit union.”

Further, the proposal states, NCUA is also concerned about systemic risk if corporate credit unions own a significant amount of natural person credit union issued subordinated debt.

The proposal also asserts that a natural person credit union subordinated debt instrument would be in a “first loss position,” even before the NCUSIF and any private insurance fund or entity. “Therefore, an involuntary liquidation of the issuing credit union would potentially mean large, and likely total, losses for the holders of those subordinated obligations,” the proposal states. “The Board believes that fully deducting such instruments from tier 1 capital will ensure any potential losses do not affect the capital position of the investing corporate credit union. This measured approach strikes the right balance between providing corporate credit unions the flexibility to purchase natural person credit union subordinated debt instruments and avoiding undue systemic risk to the credit union system.”

NASCUS has long held that subordinated debt should be a part of the risk-based capital framework because it encourages well-managed credit unions to attract additional loss-absorbing forms of capital that they would otherwise forego. NASCUS President and CEO Lucy Ito has noted that the risk-based capital rulemaking itself is intended to increase the capital buffer standing of a credit union before the share insurance fund, and that subordinated debt is consistent with that goal.

Other provisions of the proposed rule for corporate credit unions are:

  • Permitting a corporate credit union to make a minimal investment in a credit union service organization (CUSO) without the CUSO being classified as a corporate CUSO;
  • Expanding the categories of senior staff positions at member credit unions eligible to serve on a corporate credit union’s board;
  • Removing the minimum experience and independence requirement for a corporate credit union’s enterprise risk management expert;
  • Codifying the current list of permissible activities for a corporate CUSO;
  • Clarifying the definition of a collateralized debt obligation;
  • Simplifying the requirement for net interest income modeling.

The proposal was issued for a 60-day comment period.

Proposed Rule, Part 704, Corporate Credit Unions

Board adopts CECL/ACL policy; ‘day one’ phase-in supported

Also at Thursday’s meeting, the NCUA Board adopted an interagency policy on allowances for credit losses (ACLs) as affected by the upcoming current expected credit loss (CECL) accounting standard.

A proposed statement was issued in October by the federal financial institution regulators. In it, the agencies described the CECL methodology for determining ACLs at the institutions they supervised that are applicable to financial assets measured at amortized cost, including loans held-for-investment, net investments in leases, held-to-maturity (HTM) debt securities, and certain off-balance-sheet credit exposures. The adoption by NCUA of the statement ensures that all federal financial institution regulators are on board with the statement.

The CECL standard takes effect for most smaller financial institutions, including credit unions, in 2023.

However, NCUA Board Chairman Rodney Hood reiterated his view (as expressed last fall) that NCUA will allow for a “day one” phase in of the capital impact of the new standard. Hood has said doing so will provide relief to credit unions that could see large increases in their loan-loss reserves.

NCUA Board Member Todd Harper said he supported that approach – but said he wanted the agency to “move forward in the second quarter” of this year on a “day one” mitigation treatment.

Board Member J. Mark McWatters joined with his board colleagues in supporting adoption of the policy, making the decision unanimous.

During the meeting, NCUA staff told the board that the agency is developing a page on its website dedicated to the CECL standard and related issues (particularly with regard to NCUA regulation).

NASCUS President and CEO Lucy Ito said the state system “could not agree more regarding the need for more CECL education and training resources.” “As such, NASCUS and state regulators continue to provide joint examiner-credit union CECL training courses as we have for the past several years,” she noted.

Interagency Policy Statement on Allowances for Credit Losses

NCUA sells off portfolio of taxi medallion loans

Taxi medallion loans, held by NCUA since credit unions making the advances were liquidated in 2018, have been sold, the agency said this week.

In a release, the agency said the sale of the loan portfolios of the liquidated credit unions, Melrose Credit Union and LOMTO Federal Credit Union – both of New York – was “the most appropriate action to meet its statutory obligation under the Federal Credit Union Act to achieve the least long-term cost to the National Credit Union Share Insurance Fund.”

The agency also asserted that the sale – to Marblegate Asset Management LLC – “provides borrowers and their families greater certainty about the management of their loans. Private entities have specialized skills and greater resources and flexibility to work with borrowers in ways the NCUA cannot.”

NCUA did not reveal the sale price. However, the agency did note that, since the credit union liquidations in 2018, the savings insurance fund “has lost more than $760 million because of these and other credit union failures related to taxi medallion loans.” “For nearly 18 months, the NCUA evaluated a variety of approaches for resolving this portfolio, including holding and servicing the loans, pooled sales, structured sales, and securitization,” the agency stated.

In selecting the firm to buy the portfolio, the credit union regulator said it was the best, least long-term cost option to the savings insurance fund out of the two buyers the agency considered. NCUA also said Marblegate “also demonstrated the best track record of working with borrowers in a good-faith manner.”

The agency also noted that “there is nothing associated with this transaction that prevents a public-private partnership or any private investor from seeking to purchase these assets at a later date.”

NCUA Completes Taxi Medallion Loan Sale

Latest summaries look at bank acquisitions, reg review

Two new summaries – of the NCUA proposed rule meant to clarify bank asset acquisition by credit unions, and of the agency’s call to review one-third of its rules – were posted by NASCUS this week. Both are available to members only.

The proposal on bank asset acquisitions – known formally as “Combination Transactions with Non- Credit Unions; Credit Union Asset Acquisitions” – was issued for a 60-day comment period at the NCUA Board’s Jan. 23 meeting (comments are due March 30). According to the agency, the proposal is meant to

In proposing the rule last month, the agency noted that credit union acquisitions of banks – which, historically, have been rare occurrences – has seen an uptick recently. For example, the proposal includes a chart showing 15 credit union acquisitions in 2019 (for all or part of another institution’s assets and liabilities) – and 17 already pending for 2020. Between 2013 and 2017, according to the NCUA numbers, only 20 such transactions were made.

“Because of a desire to add even more transparency, and the questions the NCUA has received recently from FICUs, the Board believes it would be beneficial to clarify the processes and requirements related to FICU applications for these transactions,” the agency wrote in its proposal. “This increased transparency will assist FICUs seeking to engage in these transactions to meet the NCUA’s requirements.”

NASCUS has said that the agency should confine itself to safety and soundness issues with regard to states and credit union bank acquisitions – and not governance of credit unions. “The role of state regulators and NCUA is to ensure that the resulting entity from a credit union’s acquisition of a bank is safe and sound and adequately capitalized,” NASCUS’ Ito said in a statement last month. “For state-chartered credit unions, NCUA’s authority should be limited to safety and soundness concerns and should not extend to governance questions which are the purview of state regulators.”

The second summary addresses the 16 rules that NCUA will be reviewing this year as part of its “rolling review” of one-third of its regulations each year. Rules under review this round of the review include those addressing credit union service organizations (CUSOs), management official interlocks, and agency administrative actions. Comments will be taken through Aug. 3, the agency said.

NASCUS summary: proposal on Combination Transactions with Non- Credit Unions; Credit Union Asset Acquisitions (members only)

NASCUS Summary: NCUA 2020 regulatory review (members only)

FDIC fills roster for new state regulator advisory group

Top bank supervisors from 14 states were named members of a new advisory group to the federal insurer of bank deposits Wednesday, as part of the agency’s efforts to discuss issues with “potential implications” for state-chartered banks and thrifts.

The FDIC noted that the agency’s board had approved the formation of the new Advisory Committee of State Regulators last November. According to Board Chairman Jelena McWilliams, the committee will serve as a “formal venue to engage on issues pertinent to state-chartered banks.”

NASCUS has advocated that NCUA form a similar council of state credit union supervisors for the federal credit union regulator, to serve in a similar function of advising (and coordinating with) the agency on regulatory matters.

State regulators named to the FDIC panel include:

  • Bret Afdahl, Director, Division of Banking, State of South Dakota
  • Kevin R. Allard, Superintendent, Division of Financial Institutions, State of Ohio
  • Charles G. Cooper, Commissioner, Department of Banking, State of Texas
  • Thomas C. Fite, Director, Department of Financial Institutions, State of Indiana
  • Mary L. Gallagher, Commissioner of Banks, Commonwealth of Massachusetts
  • Greg Gonzales, Commissioner, Department of Financial Institutions, State of Tennessee
  • Ray Grace, Commissioner of Banks, State of North Carolina
  • Kevin B. Hagler, Commissioner, Department of Banking and Finance, State of Georgia
  • Melanie G. Hall, Commissioner, Division of Banking and Financial Institutions, State of Montana
  • Dawn E. Holstein, Commissioner of Banking, Division of Financial Institutions, State of West Virginia
  • Lise Kruse, Commissioner, Department of Financial Institutions, State of North Dakota
  • Edward Leary, Commissioner, Department of Financial Institutions, State of Utah
  • Antonio P. Salazar, Commissioner, Office of the Commissioner of Financial Regulation, State of Maryland
  • Mick Thompson, Commissioner, Banking Department, State of Oklahoma

Also named to the committee is John Ryan, president and CEO of the Conference of State Bank Supervisors, the professional association for the state bank supervisors.

FDIC Announces Members for the Advisory Committee of State Regulators

ON THE ROAD: Offering testimony about accreditation in ID

The value of state regulator accreditation was the topic during testimony this week by NASCUS before the Idaho House Business Committee in Boise. The testimony was offered as the state considers reaccreditation for the department, which has been accredited for 30 years.

In her testimony and in a letter to the committee NASCUS’ Ito outlined the five-step process of the NASCUS accreditation program, including: self-evaluation, on-site review, performance standards affirmation, the final report and follow-up between on-site reviews (of every five years).

She also noted that state accreditation serves several distinct, but related constituencies:

  • The public (by assuring the competency of the agency charged with supervising the safety and soundness of the financial institutions entrusted with the savings and personal finances of the state’s citizens);
  • Idaho credit unions (by ensuring that their regulator is effective and efficient with highly trained professionals);
  • Executive and legislative branches of state government (by providing independent validation of the quality and fidelity to mission of the agency);
  • The state Department of Finance itself (through a thorough assessment of the agency’s policies, procedures and performance; a review of what it does well and no so well; and acknowledgement to state and federal peers of the agency’s high quality.)

“The credit union supervision program of the Idaho Department of Finance was first accredited by NASCUS in 1990,” Ito said. “Throughout the evolution of the NASCUS Accreditation Program, the department has progressed and kept pace with the fast-moving advancements of the financial services marketplace.  As a result, NASCUS has granted the department re-accreditation every five years for the past 30 years,” she said

The NASCUS leader further noted that current best practices across state credit union regulatory agencies include: third party vendor examination authority, the authority to impose civil money penalties and to do so daily, and direct enforcement authority including the removal of a director, executive, or other officials and employees of a credit union.

BRIEFLY: Welcome new member; See you at CUNA GAC next week; CT marks 30th year as accredited regulator; Banks go big on overdraft fees

Catalyst Corporate Federal Credit Union of Plano, Texas, is the latest member of NASCUS. Bruce Fox is CEO of the $2.5 billion wholesale cooperative financial institution … Next week (actually beginning Saturday) is the CUNA Governmental Affairs Conference (GAC), the largest credit union gathering of the year. As part of the event, NASCUS is hosting its third annual member reception on Tuesday, Feb. 25; NCUA Board Chairman Rodney will offer some remarks. Need more information about attending? Contact NASCUS VP of Member Relations Alicia Valencia Erb … Congratulations to the Connecticut Department of Banking: credit union division on being reaccredited by NASCUS. The Nutmeg State regulator was one of the first to earn accreditation by NASCUS (in 1990), and has held the honor since. Established in 1989, the NASCUS Accreditation Program administers and assures quality standards of states’ credit union examination and supervision by applying national standards of performance to a state’s credit union regulatory program … Banks collected $11.7 billion in overdraft fees for 2019, according to S&P Global Intelligence, the highest amount recorded by the news and research organization since it began tracking the fees in 2015. However, overall fees (including for maintenance and ATM usage) collected by banks were down slightly in 2019, the group said.

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