Summary: ANPR, Simplification of the RBC Requirements (Parts 702 & 703)
Prepared by NASCUS Legislative & Regulatory Affairs Department
NCUA has published an Advance Notice of Proposed Rulemaking (ANPR) to solicit comments on simplifying the October 29, 2015 final risk-based capital (RBC) rule scheduled to take effect on January 1, 2022. NCUA proposes 2 different approaches for simplifying the rule:
- Replace the RBC rule with a Risk-based Leverage Ratio (RBLR) requirement, which uses relevant risk attribute thresholds to determine which complex credit unions would be required to hold additional capital (buffers).
- Retain the 2015 final RBC rule but enable eligible complex FICUs to opt-in to a “complex credit union leverage ratio” (CCULR) framework to meet all regulatory capital requirements (modeled on the “Community Bank Leverage Ratio” framework).
The proposed rule may be read here. Comments are due to NCUA 60 days after publication in the Federal Register.
The 1998 Credit Union Membership Access Act (CUMAA) added § 216 to the Federal Credit Union Act (FCUA) creating a system of Prompt Corrective Action (PCA) for federally insured credit unions (FICUs).
Section 216(d)(1) of the FCUA required that the PCA rules include both the statutory net worth ratio requirements as well as a risk-based net worth requirement for credit unions that are complex (as defined by NCUA). NCUA implemented § 216 by rule in 2000. In 2015, NCUA finalized revisions to the rule that included replacing a credit union’s RBNW ratio with a RBC ratio. The 2015 rule defined complex credit unions as having
total assets over $100 million. In 2018, NCUA raised that threshold again to $500 million. The rule however will not take effect until January 1, 2022.
NCUA now seeks input on 2 potential alternatives to the 2015 (as amended) RBC rule. As noted above, the Risk-Based Leverage Ratio (RBLR) approach would include repealing the 2015 final rule in its entirety and recreating an entirely new risk-based capital rule. The Complex Credit Union Leverage Ratio (CCULR) would amend the 2015 rule to provide an alternative framework for some qualifying credit unions.
Option 1: Replacing the Entire 2015 RBC Rule with The Risk-Based Leverage Ratio (RBLR)
NCUA seeks input on whether it should repeal the 2015 RBC rule and replace it with a “simpler” framework that would be easier for credit unions to understand and for NCUA to administer. The simplified framework would still, in NCUA’s view:
- comply with all applicable statutory and legal requirements, including the statutory PCA requirements
- be easier to understand and use
- effectively identifies risk characteristics that trigger commensurate capital requirements.
The new approach would be called a risk-based leverage ratio (RBLR) and would utilize certain risk characteristics to determine the required capital level rather than risk weight all assets and off-balance sheet activities (as is done in the current 2015 rule approach). NCUA is also considering using the net worth ratio as the RBLR measurement, which is already a well-established, simplified, and observable measurement.
Under this approach, the net worth ratio would be supplemented with mandatory capital buffers when certain risk factors are triggered. The capital buffers would be a discreet percentage of net worth-to-total assets over 7%. NCUA is considering using the asset categories from the 2015 Final Rule as risk factors. For example, the 2015 rule weights the following categories as higher risk:
- non-current loans
- commercial loans exceeding 50% of assets
- junior lien real estate loans exceeding 20% of assets
- mortgage servicing rights
- other investment activities
If a FICU met a certain threshold of activity, then that could trigger a requirement to hold a buffer amount of net worth. The buffer amount might also vary based on the level of the applicable threshold. The minimum leverage ratio necessary to be well capitalized under RBLR would remain at 7%, with two higher tiers applied to those complex credit unions exhibiting quantified amounts of higher relative risk. The defining risk attributes would be a function of the types and concentration of underlying assets.
NCUA envisions converting the current computational framework for complex credit unions into a three-tiered system of minimum leverage ratios for all complex FICUs would be much simpler and would significantly reduce the Call Report requirements and utilize a measurement that FICUs are already familiar with.
However, NCUA cautions that while an RBLR approach would be simpler, it may also result in a higher capital requirement for certain FICUs that have riskier assets when compared to the risk-based capital framework.
NCUA seeks general feedback on this approach, and comments on the following specific questions:
- Question #1: Does the RBLR have merit as an alternative to the RBC framework under the 2015 Final Rule. What risk characteristics should be incorporated into the RBLR? Are the higher risk-weighted asset categories from the 2015 RBC rule framework the correct starting point, or should the Board consider a different approach?
- Question #2: What risk thresholds should be used for the risk factors. What measurements should be used and how would the measurement be reported and monitored? Should there be more than one capital buffer for a risk factor based on the measurement? How would multiple measurements be combined or weighted to determine the threshold?
- Question #3: What capital buffers over the well-capitalized seven percent threshold should be used?
Impact of RBLR on Subordinated Debt Final Rule
Any changes to NCUA’s capital rules would potentially affect NCUA’s recently finalized Subordinated Debt rule. The Subordinated Debt Rule is a direct amendment to the 2015 Final RBC rule. Therefore, rescinding the 2015 rule to replace it with the RBLR framework would fundamentally alter the structure of the Subordinated Debt rule. For example, using a net-worth based rule may not provide a means for non-LICUs to use subordinated debt because the FCUA includes a definition of net worth the limits use of such instruments to LICUs.
- Question #4: How may a non-LICU complex credit union be able to apply subordinated debt towards an RBLR capital calculation?
Option 2: Amending the 2015 RBC Rule to Include a Complex Credit Union Leverage Ratio (CCULR)
In 2019, federal banking agencies (FBAs) promulgated the Community Bank Leverage Ratio (CBLR ), an optional framework to the RBC requirements for depository institutions and depository institution holding companies that meet the following 5 criteria:
- A leverage ratio greater than 9%
- Total consolidated assets of less than $10 billion
- Total off-balance sheet exposures of 25% or less of its total consolidated assets;
- Trading assets plus trading liabilities of 5% or less of its total consolidated assets
- Not an advanced approaches banking organization
“Qualifying community banking organizations” meeting these 5 criteria that opt into the CBLR framework are considered to be in compliance with the FBAs applicable RBC and leverage capital requirements. In exchange, the qualifying banking organization must maintain a greater amount of capital than normally required to be deemed well capitalized. Qualifying community banking organizations may opt into or out of the CBLR framework at any time.
The banking framework includes a 2-mquarter grace period during which a qualifying community banking organization that temporarily fails to meet any of the qualifying criteria, including the greater than 9% leverage ratio requirement, will still be deemed well capitalized. However, the qualifying community banking organization must maintain a leverage ratio greater than 8%.
At the end of the grace period, the banking organization must meet all qualifying criteria to remain in the CBLR framework or otherwise must comply with and report under the generally applicable risk-based and leverage capital requirements. A banking organization that fails to maintain a leverage ratio greater than 8% will not be permitted to use the grace period and must comply with the generally applicable capital requirements and file the appropriate regulatory reports.
NCUA is considering developing the CCULR as a similar approach for credit unions. Complex credit unions meeting certain criteria and choosing to opt-into the approach would be relieved from the requirement of calculating a risk-based capital ratio as implemented by the 2015 rule. Rather, qualifying complex credit union would be required to maintain a higher net worth ratio than is otherwise required for the well-capitalized classification.
This is a similar trade-off to the one made by qualifying community banking organizations under the CBLR.
- Question #5: 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?
- Question #6: The Board invites comment 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 19 provide information on how the qualifying criteria should be considered in conjunction with the calibration of the CCULR level under question 7, below.
- 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?
- Question #8: What are the advantages and disadvantages of using the net worth ratio as the measure of capital adequacy under the CCULR? Should NCUA 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.
- 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.
- 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?
- Question #11: What should be the treatment for a complex credit union that no longer meets the definition of a qualifying criteria after opting into the CCULR approach. Should NCUA 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 a grace period be provided? What other alternatives should NCUA 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?