Revised RBC Proposal Reflects Lessons Learned.
The financial crisis may seem like a thing of the past nowadays, but in the words of a philosopher, "those who do not remember the past are condemned to repeat it."
The NCUA is obligated to position the credit union system to weather future challenges, and its determination to do so has been one of the drivers of the agency's regulatory agenda. The revised proposed risk-based capital rule, approved by the NCUA board at its January 2015 meeting, is one of the last pieces of a broad regulatory reform effort the agency launched in response to the financial crisis.
We should never forget that consumer credit union failures resulting from the crisis cost the NCUSIF $750 million. Those failures occurred, in part, because many of those credit unions did not have sufficient capital to protect against the risk in their balance sheets.
The RBC proposal gets right to the heart of this problem. The agency has developed a targeted, forward-looking rule that can identify outlier credit unions with high levels of credit risk in their portfolios and require them to mitigate it, while giving them options for doing so. Had this proposed rule been in place in 2007, losses to the share insurance fund would have been substantially lower, and many credit union failures might have been prevented.
Refining Our Approach
The revised proposal represents the agency's consideration of feedback received from hundreds of stakeholders on the original RBC rule proposed in January 2014. More than 2,000 comment letters were received from trade associations, state credit union leagues, state supervisory authorities and public officials, including current and former members of the U.S. Congress, Federal Home Loan Banks, credit union members and other interested parties.
The preamble of our revised proposed rule discusses in detail the thoughtful feedback we received, all of which was considered as part of our process for revising the proposal.
On the whole, the credit union system is very strongly capitalized today. Call report data shows the average risk-based capital ratio would be 19.3% under the proposed new calculation, well above regulatory minimums. However, the few outliers in the system pose significant risks to the share insurance fund.
The NCUA has proposed that credit unions with $100 million or more in assets will be subject to the risk-based capital requirements. That's 1,455 credit unions, which hold 90% of system assets. Based on estimates from current call report data, only 27 credit unions would see their PCA classification fall below the 10% risk-based capital threshold for well-capitalized.
To help credit unions determine their risk-based capital ratios under the proposed revised approach, the NCUA has developed the downloadable RBC Estimator. This tool allows credit unions to input data that currently is not collected on call reports to generate results confidentially.
Assigning Risk Weights
Developing a forward-looking approach to risk-based capital is a priority for the NCUA. To that end, the agency carefully calibrated risk weights and concentration tiers to reflect the composition of the system's portfolio while also taking into account the risk weights developed for banks. The agency's revised proposed rule imposes risk weights that are largely comparable to those for banks, but includes some that are notably lower to reflect the credit union system's overall performance.
The NCUA recognized that achieving well-calibrated risk weights was paramount to developing an effective rule. From its perspective as an insurer, the future performance of a credit union's assets is NCUA's primary concern. Risk weights help project that performance, and the risk-based capital ratio provides information that is more forward-looking, beyond what can be derived from the net worth ratio, which tends to be a lagging indicator.
Commenters favored more calibrated risk weights as well and, as a result, the NCUA would need to make extensive changes to the call report over the next several years to allow the agency to gather more granular data.
Throughout the rulemaking process, the NCUA considered its obligation to protect the system's safety and soundness and the need to provide a sound framework for future growth. That's why the revised proposed rule offers credit unions options for addressing their portfolio risk: Strategically reducing risk, holding more capital, and doing some combination of both. This approach doesn't constrain growth; it helps credit unions manage growth.
As always, stakeholder feedback is important. The NCUA has provided extensive materials to help stakeholders understand the revised proposed RBC rule. Visit the Proposed Risk-Based Capital Resources page on the NCUA's website for more information. The board has approved a 90-day comment period, and the agency looks forward to hearing additional feedback.
Larry Fazio is director of the Office of Examination and Insurance for the NCUA. He can be reached at 703-518-6360 or firstname.lastname@example.org.