Risk-Based Capital

Written by Anthony Demangone

Sure, leadership is about communicating clearly, creating a vision and motivating your colleagues to reach their full potential.

But sometimes, it is about recognizing when your credit union or the industry is driving into a buzz-saw.

At NAFCU, we think that's about to happen with NCUA's Risk-Based Capital proposal. 

• Here's a link to NCUA's proposal.
• Here's a link to NAFCU's Risk-Based Capital resource page. 
• NAFCU's RBC Talking Points - great if you are preparing your own comment letter, or if you want an overview of our concerns. 
• Here are the comment letters already received by NCUA.

What's the big deal? 
The proposal would revise the risk-weights for many of NCUA's current asset classifications and require higher minimum levels of capital for many credit unions with concentrations of assets in real estate loans, MBLs or higher levels of delinquent loans. It even would allow NCUA to require a credit union to hold higher levels of risk-based capital based on "supervisory concerns."

If the risk-weights are wrong, which NAFCU believes they are, credit unions will needlessly waste valuable capital. For example, under the proposal, non-delinquent first mortgage real estate loans start at a 50 percent risk-weight for those loans that represent less than 25% of a credit union’s assets, then jumps to 75 percent for those from 25-35% of assets, and finally goes all the way to 100 percent for those that comprise more than 35% of the assets of the credit union’s portfolio. (Compare this to the FDIC, which weights non-delinquent first mortgage real estate loans at 50 percent, regardless of concentration.)

In just this one category, we have a huge amount of concern. For example, the proposal doesn't seem to care whether a mortgage has a low loan-to-value ratio. Or the borrower's credit score. According to the proposal, a mortgage, is a mortgage, is a mortgage. 

The ramifications. The proposal, if finalized as is, will certainly put pressure on your credit union to build its balance sheet in a certain way. The proposal shows a bias against a number of types of assets.

What should you do?

1. Read the NAFCU Talking Points. That will give you a high-level view of the rule, including why we don't like it.
2. Make sure someone at your credit union is reading the proposal to see how it will affect you today, and into the future. 
3. Comment. The deadline is May 28th. Borrow from our talking points. Read other comment letters. Let NCUA know how this will affect your credit union. 
4. Make sure your senior staff and board are educated.  We'll address this rule over and over again at this year's NAFCU Annual Conference.  NCUA is sending a number of high-level officials - NCUA Chair Debbie Matz, Larry Fazio, and William Myers will all be there. 

Is this a big deal? Here at NAFCU, we clearly think so. NCUA has indicated that they are open to tweaking the proposal - but now is the time to put the pedal down and make sure your comments and concerns are heard. As always, let us know if you need help with your comment letter, or if you have any questions.

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Comments

[David Meade]

Great article, Anthony! As a young professional at a credit union I'm always amazed by the retroactive approach to problem solving. This risk based capital is something that is needed and no one is arguing that, but setting weights that are almost arbitrary in nature after crisis years in the making makes me believe those writing the rules aren't aware of the impact on our membership. Keep up the awesome work, sir!

[Anthony Demangone]

David,

Thanks for the feedback. I couldn't agree more. And here's another thought - putting these weights into a regulation makes it so much more difficult to amend them later. Regulations are difficult to tweak when changes are needed. Have a great weekend, David!

- Anthony

[David Meade]

Anthony you are right on, once the cement is poured it's hard to change the frame. Have a great weekend!

-David