NCUA Risk-Based Capital Rule Could Affect RE Lending
Early reaction to National Credit Union Administration's proposed risk-based capital rule is that growth for a number of credit unions will stall under the new standards.
Some CUs will benefit from a capital cushion, but not enough was done by the agency to reward good managers of risk, market participants say.
NCUA released its highly anticipated new proposed risk-based capital rule at its January board meeting Thursday. Federally insured credit unions with assets of $50 million and above, with concentrations in real estate loans, member business loans or delinquent loans, would have to maintain additional capital requirements.
Those CUs with less than $50 million in assets will follow current capital rules, with the current 7% leverage capital standard remaining the floor.
Under the proposed rule, to be classified as "well capitalized," the impacted institutions must maintain a risk-based capital ratio of 10.5% or higher and pass a net-worth ratio as well as risk-based capital ratio requirements.
Adequately capitalized credit unions would be required to maintain risk-based capital ratios between 8% and 10.49% and pass ratio requirements. Undercapitalized institutions would fall under 8%.
"So it is a mixture of stick and carrot under the new risk-based rules," said Credit Union National Assoc. chief economist Bill Hampel, who noted that the rule is out for a 90-day comment period and that changes will be likely. "The rules under the new risk-based system are very complicated and it will take a while to work through them to determine who is really affected."
According to NCUA's Larry Fazio, director of the Office of Examination & Insurance, the agency believes that of the CUs affected by the new risk-based rule, approximately 2,237 would be in compliance with the rule, based upon June 30, 2013, call report data.
However, 189 institutions would see their PCA classification drop to adequately capitalized from well capitalized, and 10 well-capitalized CUs would dip to undercapitalized.
Hampel's early review of the rule indicates that a number of institutions' growth will be slowed by the risk-based system.
"For those CUs for which this newly calculated risk-based ratio puts them not much above 10.5%, their growth will be retarded."
Hampel pointed out that the proposed rule, when compared with new bank capital rules, has advantages, and shows NCUA is looking for ways to drive CU growth. "Compare [the new rule] to the bank Basel system and you will see lower capital requirements for consumer loans and small concentrations of other loans."
Steve Farrar, NCUA loss risk officer, made the same point, emphasizing the agency sought ways to deliver "carrots" in the new rule. "Our risk weighting for consumer loans is 75%, lower than the banks'," Farrar said. "Credit unions have not had trouble with this loan category so we assigned it lower risk weighting.
"Under the new risk-based rule, if you are granting consumer loans and not having problems with delinquencies and not loading up on any concentration of MBL or real estate loans, you will have a very high risk based capital ratio," he added.
Todd Fanning, SVP and CFO at the $2.1 billion University of Iowa Community CU, in Iowa City, said that under the new rules no credit is given for those institutions that have historically shown success in managing balance sheets containing higher-risk assets, yet have little or no charge-offs and delinquency.
Fanning said the "fallacy" of this standard for the industry is those credit unions with historically low profitability and higher charge-offs for low-risk assets will be held to a different standard than those that have historically high profitability with lower charge-offs for high-risk assets.
"These institutions that are required to maintain a higher capital ratio may be less likely to grow total assets which could mean more restrictive lending," said Fanning. "This fact will ultimately lead to less credit availability for the members served, and should be forefront in the minds of those generating the rules.
National Association of Federal Credit Unions president and CEO Dan Berger said another concern is simply the regulatory burden the rule brings, which he noted is already "far too great."
"Enough is enough," Berger said. "NCUA's risk-based capital proposal will require credit unions to allocate even more resources for regulatory compliance, a move NAFCU strongly opposes."
A NAFCU spokesperson added that the trade association is concerned that the proposed rule could stall industry growth, but thinks that to fully gauge the rule's impact time needs to be spent to review the detailed 198-page proposal. The trade association is also not in favor of a capital system with divisions, contending all CUs should fall under the same capital standards.
While not having yet thoroughly reviewed the new rule, Jim Blaine, president of the $27 billion State Employees' CU in Raleigh, N.C., said if NCUA in designing the rule followed much of the new risk weighting for banks, SECU's strength should show.
Blaine said SECU has benchmarked the CU's risk capital ratios to bank/FDIC standards for more than ten years.
"The FDIC requires a three-tiered risk-capital regime," said Blaine, noting that under bank/FDIC standards to be well capitalized requires a minimum at least 5% leverage capital, 6% tier 1 capital and total capital of at least 10%.
"SECU, as of Dec. 31, 2013 had 7.33% leverage capital, 17.92% tier 1 capital for a total of 19.97%," Blaine noted. "Hopefully it's very clear that SECU is extremely well-capitalized under bank standards. I would assume NCUA standards would reveal the same very low risk levels."