(May 14, 2021) Two significant comment letters were submitted this week by the state system, on simplification of risk-based capital requirements and on adding an “S” for sensitivity to market risk to the examination grading system.
NASCUS opposed much of the former and supported most of the latter.
On NCUA’s advanced notice of proposed rulemaking about simplification of risk-based capital (RBC) requirements, NASCUS wrote that the state system supports efforts to simplify the agency’s rules – but not necessarily by using the proposed risk-based leverage ratio (RBLR) contained in the proposal.
Under the two approaches NCUA offered for simplifying RBC requirements, the first would replace the RBC rule with the proposed RBLR (which uses relevant risk attribute thresholds to determine which complex credit unions would be required to hold additional capital buffers).
The second would keep the rule adopted in 2015 (and now scheduled to take effect at the beginning of next year) but allow eligible “complex” credit unions to opt-in to a “complex credit union leverage ratio” (CCULR) framework to meet all regulatory capital requirements. The CCULR is modeled on the “community bank leverage ratio” (CBLR) adopted by federal banking agencies in 2019, which removes requirements for calculating and reporting risk-based capital ratios for most banks with less than $10 billion in assets, 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.
On the first approach using the RBLR, NASCUS noted several issues:
- Displacing the current RBC rule with the proposed RBLR seems premature, as there is no compelling rationale to abandon the 2015 RBC Rule at this time.
- There are limits on the merits of simplification in the context of regulating regulatory capital.
- The proposed RBLR may create a perceived conflict with the subordinated debt rule adopted by the agency in December.
- Replacing the existing RBC rule now would be disruptive and would impose significant transition costs on credit unions.
- Time is running short to develop a new and different mandatory RBC approach, especially since the RBC rule takes effect at the beginning of next year.
However, the state system does support further development of the CCULR as outlined in the second approach, NASCUS wrote. “The flexibility of parallel, complementary risk-based capital rules will allow credit unions to choose which approach is most compatible with their business model,” NASCUS wrote. “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.”
NASCUS also said 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.”
Finally, the association expressed support for a “thoughtful reconsideration” of issuing requirements for subordinated debt outlined in last year’s rule on that issue. Echoing its 2020 comment letter, NASCUS said rules related to subordinated debt offerings needed to be scalable to permit meaningful capital relief.
“We remain concerned that the subordinated debt rule as finalized is too prescriptive and will dampen the viability of secondary capital for low-income credit unions (LICUs),” NASCUS wrote. “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.”
LINK:
NASCUS comment: Simplification of Risk-Based Capital Requirements
(March 12, 2021) After a delay of nearly two months since approval, two proposals from NCUA – on simplifying rules for risk-based capital and on adding an “S” to the exam rating system – have been finally opened for 60-day comment periods, following publication this week in the Federal Register. Comments on both proposals are due for both May 10.
On Jan. 14, the agency board approved the two proposals to be issued for comment. The proposal on simplifying risk-based capital – an advance notice of proposed rulemaking (ANPR) adopted on a 2-1 vote with (then) Board Member Todd Harper dissenting – outlines two approaches to simplifying risk-based capital requirements.
Under the first, the agency contemplates replacing the risk-based capital rule with a risk-based leverage ratio requirement, which would use relevant risk attribute thresholds to determine which complex credit unions would be required to hold additional capital. The second approach would retain the risk-based capital rule (approved in 2015 and revised numerous times, with two delays in effective dates, and now set to take effect Jan. 1, 2022) but would enable eligible complex 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” (CBLR) framework implemented under the 2018 economic growth and regulatory relief law.
The proposal on adding an “S” – for “market sensitivity” – to the agency’s CAMEL examination rating system is aimed at ensuring the agency’s exams of credit unions include a specific look at market-risk sensitivity. In conjunction with this would be a modification in the review of credit union liquidity and asset/liability management for the “L” in CAMEL.
In January, NCUA said the proposal would bring the agency’s rating system up to date with a change that banking regulators incorporated decades ago. It would also satisfy a recommendation the agency’s inspector general has been advancing for about the past five years. It was approved for comment unanimously by the agency board.
To date, 24 state credit union regulatory agencies have adopted the “S” for state-chartered credit unions.
LINKS:
NASCUS summary: ANPR, Simplification of the RBC Requirements (Parts 702 & 703) (members only)
NASCUS summary: Proposed rule: CAMELS Rating System (members only)
(Feb. 26, 2021) Summaries on NCUA proposals for simplifying risk-based capital (RBC) requirements and on the complex credit union threshold under risk-based net worth (RBNW) for relief during theCOVID-19 pandemic have been published by NASCUS.
Both summaries are available to members only.
Last month, the board issued an advance notice of proposed rulemaking (on a vote of 2-1, with now-Chairman Todd Harper dissenting) to invite comment on two approaches to simplify risk-based capital (RBC) requirements. Under the proposal, the agency envisions:
(1) replacing the risk-based capital rule with a risk-based leverage ratio requirement, which would use relevant risk attribute thresholds to determine which complex credit unions would be required to hold additional capital; and
(2) retaining the risk-based capital rule (approved in 2015 and revised numerous times, with two delays in effective dates) but enabling eligible complex 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 implemented under the 2018 economic growth and regulatory relief law. A 60-day comment period was assigned to the proposal (As of Thursday, it had not yet been published in the Federal Register; that publication date launches the comment period).
Also in January, NCUA proposed (on a vote of 2-1, with Harper again dissenting) to raise the asset threshold for defining a credit union as “complex” for purposes of being subject to any RBNW requirement in its regulations. According to the agency, the proposal would amend the regulations to provide that any RBNW requirement will be applicable only to a federally insured credit union (FICU) with assets that exceed $500 million and an RBNW requirement that exceeds 6%.
“The COVID-19 pandemic has created a vital need for financial institutions, including credit unions, to provide access to responsible credit and other member services to support consumers,” NCUA said in its proposal. “Implementing this regulatory change in advance of Jan. 1, 2022, the effective date of the 2015 final risk-based capital (RBC) rule issued by the NCUA, would provide necessary capital relief to a significant number of credit unions without substantially decreasing the safety and soundness of credit unions or the National Credit Union Share Insurance Fund (NCUSIF).”
Comments are due by March 25.
LINKS:
NASCUS Summary: ANPR, Simplification of the RBC Requirements (Parts 702 & 703) (members only)
Proposed rule: Risk-Based Net Worth – COVID-19 Regulatory Relief
(Jan. 15, 2021) NASCUS President and CEO Lucy Ito urged careful review of the proposal by the entire credit union system – and noted that federal law requires the agency to consult with the state system. “The FCU Act requires NCUA to consult and cooperate with state supervisors on prompt corrective action and capital adequacy issues, and we expect the agency to meet its lawful obligation,” she said. “Both approaches outlined by NCUA represent significant changes to how federally insured credit unions will meet capitalization requirements. The approaches include trade-offs that credit unions must weigh thoroughly, but also offer the potential for significant flexibility. NASCUS urges all of its members, both regulators and credit unions, to study this proposal carefully and offer input to us as we prepare our own feedback to the agency on the proposal.”
(Jan. 15, 2021) Two approaches for simplifying risk-based capital (RBC) requirements for federally insured credit unions (FICUs) were proposed by the NCUA Board Thursday, one replacing the current rule with a risk-based leverage ratio (RBLR) rule requirement, and the second retaining the RBC rule but allowing credit unions to “opt-in” to the RBLR.
The proposal (an advance notice of proposed rulemaking (ANPR)) was issued for a 60-day comment period on a 2-1 vote, with Board Member Todd Harper objecting.
The final vote on the proposal came after a more than one-hour delay in which the sound (and written transcript) from the Internet-streamed, virtual meeting was unavailable. That meant, for the most part, discussion among the board members about the proposal was not public. The sound (and transcript) was audible (and visible) again just in time for the recorded vote of 2-1.
In issuing the ANPR, NCUA noted that the existing RBC rule, which was adopted more than five years ago, has been delayed to the first of next year. That delay time, the agency said, has provided it with more time to evaluate FICUs that are classified as “complex” (those with total assets greater than $500 million, a new threshold also set at the meeting Thursday).
NCUA said the RBLR contained in the proposal is intended to simplify the regulatory risk-based capital requirements, while ensuring the overall capital framework. “The RBLR approach would utilize certain risk characteristics to determine the required capital level,” the agency said. This approach differs from the 2015 final rule, the agency said, where all assets and certain off- balance sheet activities were categorized into risk groups and then risk-weighted to produce a risk- based ratio.
The first approach the board is considering, according to the agency, would replace the current risk-based capital rule with the RBLR requirement. The agency said that approach uses relevant risk attribute thresholds to determine which complex credit unions would be required to hold additional capital (or buffers).
The second approach would keep the 2015 RBC rule, but would allow eligible complex FICUs to opt-in to a “complex credit union leverage ratio” (CCULR) framework to meet all regulatory capital requirements. That approach would be modeled on the “Community Bank Leverage Ratio” (CBLR) framework, which is available to certain banks under certain conditions, and went into effect early last year (after adoption in 2019). NCUA Board Chairman Rodney Hood has, in the past, signaled his interest in the agency adopting a similar approach for credit unions. Under the CBLR, a community banking organization may qualify if it has a tier 1 leverage ratio of greater than 9%, less than $10 billion in total consolidated assets, and limited amounts of off-balance-sheet exposures and trading assets and liabilities.
The board also indicated that only one or the other of the approaches would be adopted, calling them mutually exclusive and that the CCULR would not be available under the RBLR.
NCUA also said it is considering the net worth ratio as the RBLR measurement. It would be supplemented, the agency said, with mandatory capital buffers when certain risk factors are triggered. That approach, NCUA said, would require an extra cushion of capital buffers over and above the 7% net worth ratio standard for classification as well capitalized “when certain characteristics inherent in a FICU’s balance sheet exceed specified thresholds.”
The risk factors under consideration, according to NCUA, would be based on the 2015 final rule, which it said used higher risk weightings.
LINK:
Advance Notice of Proposed Rulemaking, Part 702, Simplification of Risk Based Capital Requirements
(Jan. 8, 2021) Nine items – including a proposal on risk-based net worth (complex threshold), an advance notice of proposed rulemaking on simplification of risk based capital requirements and four other final or proposed rules – are all on the NCUA Board’s agenda for Thursday’s open meeting, which gets underway at 10 a.m. ET.
The other action items on the board’s open meeting agenda include: a proposed rule (part 712), on credit union service organizations (CUSOs); a final rule (and a board briefing) on statutory adjustment of civil money penalties (CMPs, part 747); a final rule (part 704), corporate credit unions; and a notice of proposed rulemaking (parts 700, 701, 703, 704 and 713), CAMELS rating system.
The meeting could also possibly be the last chaired by Rodney Hood, a Republican appointee. President-elect Joe Biden, once he is inaugurated Jan. 20, is expected to name Todd Harper, a Democrat appointee, chairman shortly after taking office.
Rulemaking for risk-based net worth and capital requirements has been on the board’s action item list since at least 2014. That year, the board first issued its risk-based capital proposal for “complex” credit unions – then defined as those with more than $100 million in assets – 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 was intended to replace the then- (and still now) effective risk-based net worth ratio with a new risk-based capital ratio for federally insured credit unions, which 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).
But in 2018, the board revised its definition of “complex” credit unions to include only those with more than $500 million in assets. It also delayed the rule’s implementation further, to Jan. 1, 2020.
In December 2019, the board delayed the implementation date again, to 2022 (and on a split vote, with Board Member Todd Harper voting no). At that 2019 meeting, NCUA Board Chairman Rodney Hood said delaying the effective date to 2022 woiuld give the agency time to consider new methods for strengthening credit union capital requirements, indicating that then was a good time to do so as credit unions enjoy strong capital positions.
Also at that meeting, then-NCUA Board Member J. Mark McWatters said the agency was considering “a suite of capital rules,” which would include a proposal for credit unions similar to the community bank leverage ratio (CBLR), adopted by the federal banking agencies in 2019. That rule, he indicated, would exempt credit unions with less than $10 billion in assets from complying with the risk-based capital requirements, if those credit unions meet certain requirements.
Other items on the NCUA Board’s Jan. 14 open meeting agenda include:
- Consideration of the agency’s 2021 annual performance plan;
- Board briefing on the agency’s “Advancing Communities through Credit, Education, Stability and Support” (ACCESS) initiative;
- Board briefing on December’s Consolidated Appropriations Act, 2021 (the COVID-19 relief bill).
Following the board’s public meeting will be its closed (non-public) meeting, featuring six items – which include two supervisory actions, two personnel actions, a delegation of authority and a board briefing.