WASHINGTON (2/10/14)--The National Credit Union Administration's proposed risk-based capital rule could prove costly for many credit unions, forcing them to increase their capital levels by a net $7.3 billion to maintain their current margins above the proposed "well capitalized" thresholds.
Credit Union National Association Chief Economist Bill Hampel explains, "We looked at the 2,504 federally insured credit unions with more than $40 million in assets, and compared their current margins above being well capitalized to what they would be if the NCUA proposal were in effect. Although the rule would only apply to credit unions with more than $50 million in assets, many--if not most--of the almost 300 credit unions with between $40 million and $50 million in assets will exceed the $50 level in just a few years."
About one-third, or 863, of these 2,504 credit unions would enjoy greater buffers above well-capitalized thresholds under the proposal, but the total increase among these credit unions would be only $63 million, Hampel says. The remaining 1,641 credit unions with above $40 million in assets would see their cushions above well-capitalized thresholds shrink by a combined total of $7.4 billion if the proposal were in effect.
"Meanwhile, earnings at credit unions continue to be squeezed by low interest rates, downward pressure on other revenue streams, and moderate, but rising, loan growth," CUNA President/CEO Bill Cheney wrote in the most recent edition of The Cheney Report .
Specifically, the NCUA proposal would restructure the NCUA's current prompt corrective action regulation to include calculation of a capital-to-risk-assets ratio, analogous to Basel III for community banks, but with substantially higher risk weights. The proposal would impose higher capital requirements for credit unions with higher concentrations of assets in real estate loans, member business loans, longer term investments and some other assets. The proposal would apply to credit unions with assets of more than $50 million. A final version of the proposal is not likely to go into effect until 2016 or later.
CUNA analysis of the proposal indicates that a number of credit unions would fall from being comfortably well capitalized under the current system to being merely well capitalized under the proposed system. Currently, 68% of credit unions with more than $50 million in assets maintain more than a two-percentage point buffer above being "well capitalized."
This total would fall to about 62% under the proposal, Cheney wrote. Almost 10% of credit unions would drop below "well capitalized" under the proposed rule, he added.
"Most credit unions desire to continue their long practice of being 'comfortably well capitalized,'" the CUNA leader wrote.
CUNA is also concerned by parts of the proposal that would grant the NCUA additional authority to impose even higher capital requirements on individual credit unions.
The agency has not adequately justified the need for this rule, and CUNA will push for a number of major changes in the proposal before it is made final, Cheney said.
"We will continue analyzing all aspects of the proposal, including the agency's legal authority for the proposal and how it compares with Basel III for community banks," he added.
CUNA's Governmental Affairs Conference the last week in February in Washington, D.C. will focus on the proposal. For more information about GAC opportunities for credit unions to learn more about the proposal and air concerns, use the resource link below.