Links in “Risk-Based Capital”

April newsletter covers various topics including fines for late submission of call reports, promoting fraud awareness, handling liquidity issues, the improving stabilizing fund position, and request for comments on new risk-based capital rules. [4/22]

NCUA was ill-prepared to deal with questions from the audience about why the NCUA’s risk-based capital rule is more strict than the bank rule. NCUA Board member Rick Metsger did not receive the warm welcome he has received at previous appearances, but added assurance that the NCUA Board is making major changes to the proposed rule. [4/21]

The newly released, two-part video on the NCUA's YouTube Channel provides insights for federally insured credit unions in understanding the proposed changes to NCUA’s Prompt Corrective Action rule that may affect CU's risk-based capital ratios. Link provides access to NCUA's Risk-Based Capital Calculator to compute impact and standing. [4/18]

Chip Filson of Callahan & Associates skewers the NCUA’s accounting practices for loan losses for the NCUSIF, the largest single expense for the share insurance fund. Filson demonstrates that the loss provisions established by the NCUA for the past six years bear no relationship to actual losses, which raises the question of whether the agency should have authority over an individual credit union’s reserving decisions as stated in the proposed risk-based capital rule. [4/18]

CUNA and NAFCU have jointly requested the NCUA extend the comment period for the proposed risk-based capital rule for an additional 90 days. The trade associations assert that the current end date for the comment period, May 28^th, has not provided credit unions sufficient time to analyze the impact of the proposed rule on their operations and to prepare responses. [4/18]

In an effort to clarify a statement he made during a recent Congressional hearing, NCUA General Counsel, Mike McKenna, has issued a letter to the committee chair that explains that while the proposed RBC rule addresses the use of supplemental capital for low-income credit unions, it does not and cannot address the issue of supplemental capital for other credit unions. McKenna explained that the Federal Credit Union limits the use of supplemental capital or secondary capital to only low-income designated credit unions and that Congress would need to amend the Act to authorize NCUA to expand the use of supplemental capital to all credit unions. McKenna added that NCUA supports a legislative change. [4/10]

It turned out to be a long day for NCUA General Counsel, Mike McKenna, who was grilled by the members of the House Financial Services Committee over why the agency’s proposed risk-based capital rule’s risk weights are higher than those set by the FDIC when credit unions have lower delinquency rates than banks.  McKenna responded that NCUA believes their proposed risk weightings are equivalent to those used by the FDIC given the unique nature of credit unions and other factors. [4/9]

In two related articles, Chip Filson, cofounder of Callahan and Associates, says that after 25 years of attempting to define a risk-based capital methodology for banks and credit unions, the experts agree that RBC and similar Basel approaches don’t work as well as a simple leverage ratio. Filson points out that the risk-based capital format used by banks for many years did not prevent the latest banking crisis or continuing bank failures. Doug Alldredge, CPA and CFO of First Credit Union has done a comparative study of a hypothetical $100 million bank to a $100 million credit union using the current bank risk-based capital formula and the proposed RBC formula for credit unions and found that credit unions would have to maintain a capital level that was 128% higher than a similar bank even though credit unions have outperformed banks in all economic cycles. See also. [4/8]

CUNA has asked Congress to conduct a thorough review of NCUA’s proposed Risk Based Capital Rule and to direct the agency to fix what CUNA sees as significant deficiencies in the rule as currently drafted.  Specifically, CUNA notes that:

• The rule is fundamentally flawed due to poorly calibrated risk weightings;
• The rule would significantly adversely affect credit unions’ ability to offer mortgage loans and small business loans; and
• The 18-month implementation period is unreasonably short. [4/7]

NCUA announced yesterday that it will remove the online risk based calculator on May 28^th, which is the closing date for comments to the proposed Risk Based Capital Rule.  CUNA had urged NCUA to take this action due to concerns that the calculator was also available to the general public who might not understand how to use the calculator properly or understand the results. [4/4]