Risk-Based Capital NCUA`s Proposed Regulation

Important Dates
May 28th: Comments Due
June 26th: NCUA Listening Session in Los Angeles, CA
July 10th: NCUA Listening Session in Chicago, IL
July 17th: NCUA Listening Session in Alexandria, VA
Action Steps
Run CU #s through calculator
Submit letter; copy Cornerstone
Consider sending to Congressional Representatives
Attend town hall
Basis for the Proposal
The Federal Credit Union Act requires NCUA to:
 Develop a PCA system that is comparable to bank PCA, and
 Adopt a risk-based net worth plan
Applies to all federally insured CUs with more than $50 million in total assets.
Restructures NCUA’s current PCA regulation.
 Eliminates the “risk-based net worth” requirement and replaces that with a new
“risk-based capital” (RBC) requirement.
The new RBC requirement adds additional categories of risk and sets higher risk
To remain “well capitalized,” a credit union must maintain a net-worth ratio of 7% or
above AND a RBC ratio of 10.5% or above.
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NCUA has authority to impose even higher RBC requirements on a case-by-case basis.
Takes effect 18 months after adoption by NCUA.
Impacts all CUs because of the need to change information provided on call reports; the
amount of work this will entail will vary by CU.
Reduces overall capital held by CUs by $7.3 billion. CUs tend to maintain a buffer above
what is required to be well capitalized. Under the RBC proposal, that buffer is reduced
by $7.3 billion. Thus, if CUs wish to restore the buffer they enjoy under current rules,
they’ll need to raise an additional $7.3 billion in capital.
Talking Points for Comment Letter
Oppose Proposal
 Oppose NCUA’s proposal as written.
 Need not justified.
Support Current System and/or RBC in Concept, but Not As Proposed
 Current system is working.
 CUs came through the Great Recession, the worst financial crisis since the
Depression, just fine.
 NCUA has not demonstrated problems related to current PCA regulation, other
than a few isolated incidents.
 If you support RBC in concept, that is perfectly ok, just be sure to address the problems
with the current proposal.
Risk Weights Not Justified (Sec. 702.104; See Table 6, page 11194)
 Explain how the new risk weights are inappropriate and do not accurately reflect actual
risk. The revaluation of certain asset weighting could change a CU’s PCA without any
reasoned justification.
For some risk areas, the weighting is the same for all loans or investments in that
category. For example, all CUSO investments are treated the same regardless of the type
of CUSO or its record of performance.
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Imposing RBC Requirements on Well Capitalized Credit Unions
 NCUA has no legal authority to impose higher RBC requirements on well capitalized
credit unions than are imposed on adequately capitalized credit unions.
Impact on CU and Members
 Compared to the risk-based net worth requirement, the RBC proposal will increase the
risk weight for: investments with maturities exceeding five years; MBLs; non-fixed-rate
first mortgages; consumer loans; CUSO investments; and the NCUSIF deposit. The RBC
proposal will discourage CUs from making these kinds of loans and investments, which
is a disservice to their members.
Discuss the impact on your CU and your ability to serve your members and make
Consistency with Banks (See “Summary of the Proposed Rule”, page 11184)
 NCUA states that it intends to bring the CU method closer in line with the Basel III used
by banks. Basel III is focused on credit risk. However, the RBC proposal covers not only
credit risk, but also interest-rate risk, concentration risk, liquidity risk, operational risk,
and market risk. NCUA has not justified why its RBC proposal is significantly broader
than Basel III.
The RBC proposal attempts to bring consistency between the bank PCA and CU PCA,
but it does not provide CUs with any of the tools to enable parity (e.g., a lower leverage
or the ability to raise additional capital).
Subjective Determination of Higher Capital Amounts (Sec. 702.105; See page 11203)
 Under the proposal, NCUA has the authority on a case-by-case basis to increase the
amount of capital a CU is required to maintain. In other words, even if a CU is in
compliance with the rules, NCUA could require more capital. Such power is not
Definition of “Complex” Credit Union (Sec. 702.103; See page 11192)
 The proposal would define a “complex” credit union as ANY CU with over $50 million
in assets. To be considered a complex credit union under the current rule, a CU needs to
be over $50 mill AND have a risk based net worth over 6%.
NCUA has provided no justification for expanding the definition of complex credit
union. Size alone does not make a credit union complex.
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Regulatory Burden (See “Paperwork Reduction Act”, page 11209)
 The proposal increases the regulatory burdens of all credit unions, even those under $50
million in assets. Credit unions would experience costs associated with updating
policies, data collection, and updating reporting systems. This is in addition to the
countless other regulatory burdens currently hampering credit unions from serving
their members.
Estimated burden for each credit union to collect risk-based capital ratio data (applies to
ALL credit unions, not just those over $50 million):
o One-time recordkeeping, 122 hours
o On-going recordkeeping; 20 hours
o One-time policy review and revision, 20 hours
Estimated burden of the risk based capital ratio policy implications on complex credit
unions (those over $50 million):
o One time policy review and revision, 40 hours
o Total estimated annual burden:
 One time recordkeeping and disclosures: 162 hours per complex CU, 122
hours per noncomplex CU
 On-going record keeping, 20 hours all credit unions
Extend Compliance Date (See Page 11208)
 CUs need at least three years to comply; 18 months is not sufficient time. Basel III allows
banks until 2019 to comply.
Under the proposed timeline, CUs looking to alter their investment portfolio due to the
RBC method may be forced to sell investments at less advantageous terms.
Submission of the call report will be significantly slower, more costly, and more
complicated due to the amount of new information to be provided. Gathering such
information will require changes by data processors, additional staff time, staff training,
etc.—all of which will cost the CU money and decrease the time and resources the CU
provides back to its members. NCUA estimates the rule will create an additional 162
hours annually for CUs of less than $50 million. That’s three to four weeks of work for a
full-time employee, provided that NCUA has not underestimated the work involved.
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 Suzanne Yashewski, SVP Regulatory Compliance Counsel
Cornerstone Credit Union League
(512) 853-8516
Current Risk Portfolios Defined – current 702.104
Standard Calculation of RBNW Requirement – current 702.106
Major Types of Risks Identified in CU Business
Proposed Capital Categories
Proposed Risk-Based Capital Numerator
Risk Weight Categories and Associated Risk-Weights
Proposed Risk-Weights for Cash and Investments
Comparison of Current Reg and Proposed MBL Component
Current Risk Weights for Long Term Real Estate Loans
Proposed Risk-Weights for First Lien Real Estate Loans
Proposed Risk-Weights for Junior Lien Real Estate Loans
Proposed Risk-Weights for Consumer Loan Types Reported on Call
Proposed Risk-Weights for Delinquent Consumer Loans
Proposed Risk-Weights for Loans to CUSOs and Investments in
Proposed Risk-Weight for Mortgage Servicing Assets
Proposed Risk-Weights for Other On-Balance Sheet Assets
Proposed Credit Conversion Factors and Risk-Weights for OffBalance Sheet Assets
Proposed Credit Conversion Factor and Risk-Weight for Total
Unfunded Commitments for Non-Business Loans
Proposed Conversion Factor Matrix for Derivatives Contracts
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