NCUA Finalizes Delay of Risk-Based Capital Rule

NCUA Chairman Rodney Hood (right) and Michael Edwards (left) at today’s NCUA Board Meeting

By Michael S. Edwards, Esq.

The National Credit Union Administration (NCUA) today finalized its delay of the agency’s Risk-Based Capital regulation until January 1, 2022.  The Risk-Based Capital rule is modeled on the Basel III capital framework and was originally scheduled to take effect in a few weeks on January 1, 2020.

NCUA Chairman Rodney Hood stated that the agency was delaying the Risk-Based Capital rule so that the agency could look at credit union capital requirements holistically.  Director of the Office of Examination and Insurance Larry Fazio said that currently federally insured credit unions had an aggregate net worth ratio of more than 11 percent and that only four credit unions would have had their prompt corrective action status affected by the rule, and then only by lowering them to “Adequately Capitalized” from “Well Capitalized.”  Board Member Mark McWatters supported the delay because he believed that credit unions need more capital options and because he believes that the Risk-Based Capital rule is not consistent with the Federal Credit Union ActBoard Member Todd Harper opposed the delay on the basis that the other federal banking regulators already had Basel III-style risk-based capital regulations in place and because federally insured credit unions should be prepared for the next recession.

Regarding additional capital options, NCUA staff indicated that a proposed regulation on increased subordinated debt flexibility for federally insured credit unions will likely be issued in January 2020.

I supported the proposed Risk-Based Capital rule delay in a comment letter that I filed in July because the Federal Credit Union Act’s minimum 7 percent net worth ratio to be “well-capitalized” makes risk-based capital largely redundant and also because I supported NCUA developing additional capital options for credit unions.  The Federal Deposit Insurance Corporation, the Office of the Comptroller of the Currency and Federal Reserve Board have recently adopted a community bank leverage ratio that allows banks below $10 billion dollars in assets to be exempt from risk-based capital requirements if they have a leverage ratio of at least 9 percent, and the leverage ratio for banks subject to risk-based capital rules to be “well capitalized” is only 5 percent.  In addition, joint-stock banks can issue shares to raise capital, whereas natural-person federally insured credit unions in the United States cannot currently do so even though corporate credit unions in the United States and credit unions in Canada and Australia already have that authority.

My comments also argued that NCUA should propose a rule to allow natural-person credit unions to issue capital shares similar to corporate credit union Perpetual Contributed Capital (PCC), which I believe the Federal Credit Union Act would allow the agency to authorize by regulation.  The preamble to today’s final rule said that the agency will consider allowing natural-person credit unions to issue PCC-style capital shares “as it undergoes a substantive reevaluation of the NCUA’s capital standards.”

The NCUA Board also approved the agency’s 2020-2021 budget which Chairman Hood and Board Member McWatters supported but Board Member Harper opposed because it did not include increased funding to add personnel to the agency’s consumer protection staff.  In addition, NCUA staff briefed the Board on the National Credit Union Share Insurance Fund’s normal operating level, which will continue to be 1.38% relative to insured shares in 2020.