(Jan. 28, 2022) Changes to the first quarter call report for federally insured credit unions will be highlighted during a 90-minute webinar set for Feb. 10 by NCUA, the agency announced this week.

More specifically, the webinar on the agency’s call report Form 5300 will include a look at new schedules for risk-based capital (RBC) and the Complex Credit Union Leverage Ratio (CCULR), both of which took effect at year’s start, the agency said.

Registration is open for the event. It is scheduled to begin at 2 p.m. and run for an hour and a half. Participants may submit questions during the presentation, or in advance (by emailing the questions to [email protected], with a email’s subject line of “Call Report Changes.” Technical questions about accessing the webinar should be sent to [email protected].

LINK:

NCUA Call Report Changes Webinar

(Dec. 23, 2021) When credit unions open their doors for business on Jan. 3, a revised regulatory landscape will stretch before them with three regulatory changes that took effect Jan. 1: a new “risk-based capital” (RBC) rule, a new “complex credit union leverage ratio” (CCULR), and a new reference rate to replace the then-defunct London Interbank Offered Rate (LIBOR).

The RBC rule was approved by NCUA more than six years ago (and amended more than three years ago). Its aim was to require credit unions taking certain risks to hold capital commensurate with those risks. It restructured the agency’s existing “prompt correction action” (PCA) rules, including by adding a risk-based capital ratio (rather than a risk-based net worth ratio) for federally insured credit unions.

The effective date of the rule was delayed repeatedly by NCUA, as the agency considered (and later made) changes to the asset size for defining a “complex” credit union, which is affected by the RBC rule, and restructured the rule in consideration of recent events.

The agency first issued its risk-based capital proposal for “complex” credit unions – then defined as those with more than $100 million in assets – in 2014, with implementation slated 18 months after the rule would have been finalized. A revised proposed rule was issued in 2015 and finalized that October with an effective date of Jan. 1, 2019. That final rule replaced the risk-based net worth ratio contained in the 2015 rule with a new risk-based capital ratio for federally insured credit unions, which the NCUA called comparable to the regulatory risk-based capital measures used by the federal banking agencies: the Federal Deposit Insurance Corp. (FDIC), Federal Reserve, and Office of the Comptroller of Currency (OCC).

However, in 2018 the NCUA Board revised its definition of “complex” credit unions to include only those credit unions with more than $500 million in assets and delayed the rule’s implementation again, to Jan. 1, 2020. A year later (in 2019) the agency pushed the rule’s implementation date to Jan. 1, 2022. The delay was necessary, the agency said, to review potential changes to credit union capital such as subordinated debt authority; capital requirements for asset securitization; and an option like the community bank leverage ratio (CBLR) that had since been adopted for banks by federal banking agencies.

The board, in fact, addressed all those issues – including, just last week, finalizing the CCULR which it described as an “off-ramp” for eligible complex credit unions from the RBC rule. The rule also took effect Jan. 1; it was approved just last week.

That final rule creates a framework that allows “complex” credit unions opting in to maintain the CCULR instead of risk-based capital. Under CCULR, a complex credit union – one having more than $500 million in assets – may qualify to opt in to the CCULR framework if it has a minimum net worth ratio of 9%. this minimum requirement for a classification of “well capitalized” under the CCULR framework – modeled on federal banking agencies’ community bank leverage ratio (CBLR) – is higher than the 7% minimum ratio required under prompt corrective action (PCA) but lower than the 10% required under risk-based capital. The CCULR final rule also amends provisions of the 2015 risk-based capital final rule. The agency notes that based on June 30, 2021, call report data, about 70% of complex credit unions (down from 90% pre-pandemic) qualify to use the CCULR framework and would be well capitalized under a 9% calibration.

(Also taking effect Jan. 1: changes to NCUA’s rule on subordinated debt, aimed at easing low-income credit unions’ participation in Treasury’s Emergency Capital Investment Program (ECIP), which was created to help communities hard hit economically by the COVID-19 pandemic. The revisions amend the definition of “grandfathered secondary capital” to include any secondary capital issued to the U.S. government or one of its subdivisions under a secondary capital application approved before Jan. 1, 2022, regardless of the date issued. The final rule also extends the expiration of regulatory capital treatment for such secondary capital issuances to the later of 20 years from the date of issuance or Jan. 1, 2042. According to the NCUA, Treasury on Dec. 14 said 85 credit unions will receive about $2 billion in funding that can be used as secondary capital.)

Finally, also effective Jan. 1: LIBOR can no longer be used as a reference rate for a wide variety of financial instruments: from derivative contracts to consumer loans written after Jan. 1 (existing contracts may use LIBOR until June 30. 2023, when LIBOR will be completely phased out). Financial institutions and others will have to use an alternative, which (for derivatives and many other financial contracts) is the Federal Reserve-developed Secured Overnight Financing Rate (SOFR), a broad Treasuries repurchase financing rate.

NCUA has not told credit unions they must use SOFR for their consumer, student, commercial, real estate or other loans with potential LIBOR exposure. Instead, the agency has left that up to each institution to determine for itself (as long as the credit union determines the rate is appropriate for its risk management and member needs).

The agency has also advised that all LIBOR-based contracts that mature after Dec. 31 (one-week and two-month) and June 30, 2023 (one-, three-, six- and twelve-month) should include contractual language that provides for use of a robust fallback rate.

(July 23, 2021) NASCUS President and CEO Lucy Ito said the state system welcomes the proposal and that it will carefully analyze it and offer comments. “NASCUS has encouraged NCUA to consider adopting an off-ramp to the RBC rule that has an effect that is similar to the banking agencies’ CBLR,” she said.

The state system had strongly urged the agency to move forward on the CCULR, rather than adopt a proposed risk-based leverage ratio (RBLR) requirement. Ito said NASCUS was pleased the agency dropped the latter approach. “The RBLR approach may have created a perceived conflict with the new subordinated debt rule, by requiring the agency to modify the rule,” she said. “That could have put a damper on credit unions’ attempts to apply subordinated debt toward their capital calculations.”

But the proposed CCULR, she noted, would not require that change – and allow credit unions moving forward on subordinated debt to continue their plans. “The CCULR proposal allows both the 2015 RBC rule and subordinated debt rules to go into effect,” she said. “The optional nature of the CCULR would also permit parallel development of subordinated debt 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.”

(July 23, 2021) Federally insured credit unions with $500 million or more in assets could avoid risk-based capital (RBC) requirements and opt-in to a new measure of capital adequacy if they meet a minimum net worth standard and other qualifying criteria, under a proposal issued by the NCUA Board Thursday.

Called the Complex Credit Union Leverage Ratio (CCULR, and dubbed “cooler” by members of the board), the proposal would allow the $500 million and more credit unions to opt in to the new capital standard if they also hold a minimum net worth ratio of 9% as of Jan. 1 of next year (which will be gradually increased to 10% two years later).

Other qualifying criteria include: off-balance sheet exposures held by the credit union must be 25% or less of total assets; trading assets and trading liabilities must be 5% or less of total assets; and goodwill and other intangibles must be 2% or less of total assets.

“A complex credit union that opts into the CCULR framework would not be required to calculate a risk-based capital (RBC) ratio under the Oct. 29, 2015, risk-based capital final rule” as amended in October, 2018, the proposal’s summary states. “A qualifying complex credit union that opts into the CCULR framework and that maintains the minimum net worth ratio would be considered to be well capitalized.”

Issued on a unanimous vote by the board, the proposal would make other changes to the RBC rule, according to the summary, including addressing asset securitizations issued by credit unions, clarifying the treatment of off-balance sheet exposures, deducting certain mortgage servicing assets from a complex credit union’s risk-based capital numerator, updating several derivative-related definitions, and clarifying the definition of a consumer loan.

As both NCUA staff and board members noted during the meeting, the proposal is similar to the community bank leverage ratio (CBLR) adopted by the federal banking agencies for banks and which became effective in 2020. That rule removes requirements for calculating and reporting risk-based capital ratios for most banks with less than $10 billion in assets that hold more than 9% in risk-based capital, and that meet certain risk-based qualifying criteria. Banks meeting the criteria can “opt-in” to use the CBLR.

The NCUA proposal was issued with a 60-day comment period, which means it would end sometime in either late September or early October. That doesn’t give NCUA much time to consider whatever comments it receives before finalizing a rule that will, in effect, directly affect the risk-based capital (RBC) rule set to take effect on Jan. 1.

During discussion, NCUA Board Chairman Todd Harper called the proposal a prudent course of action. “This proposal is an appropriate measure that provides complex credit unions with a streamlined approach to managing their capital levels while also strengthening the system’s resiliency to economic shocks,” he said.

He said year-end 2020 call report data indicate that nearly 75% of complex credit unions would meet the 9% net worth requirement under the proposal. He also asserted that the proposal would increase the capital buffer of insured complex credit unions, by $22 billion (to an estimated $104.6 billion) , if all of the credit unions “opted in” to the rule. (The increase in capital is compared to the total amount if the RBC rule were in effect, Harper noted.)

Board Vice Chairman Kyle Hauptman said the chief benefit of the proposal is that it allows some credit unions to bypass the risk-based capital approach. “For me, the point of this simpler leverage ratio is that it protects both credit unions and the (National Credit Union) Share Insurance Fund from the inevitable problems of risk weighting,” he said.

Although Board Member Rodney Hood said he would “begrudgingly” vote for the proposal (which he did), he took the opportunity before the vote to call for an end to the RBC rule. He said he wants the board to either table the RBC rule or rescind it, noting that it would be eight years old when it fully takes effect. “RBC should be a tool and not a rule,” he said.

LINK:

Notice of Proposed Rulemaking, Parts 702 and 703, Complex Credit Union Leverage Ratio