WASHINGTON (2/24/14)--"CUNA supports a modern risk-based capital system for credit unions. Period," Credit Union National Association President/CEO Bill Cheney told an estimated 400 credit union leaders from across the country attending a Sunday 2014 Governmental Affairs Conference session on the new risk-based capital proposal. But, he declared, "What we don't support is layering additional capital requirements on top of our one-size-fits-all outdated system of prompt corrective action."
A capacity crowd—estimated at 400 credit union representatives—packed the room Sunday during a special breakout session at CUNA's GAC on the National Credit Union Administration's proposed rule on risk-based capital. CUNA experts detailed the NCUA's plan and discussed its costs to credit unions, in terms of maintaining current net worth buffers. The audience was polled on such things as whether they could manage their risk-based ratio by adjusting asset composition, how long should credit union have to comply with a new rule, and much more. (CUNA photo)
The risk-based capital plan recently proposed by the National Credit Union Administration is flawed, and the best fix "would be to withdraw the proposal as written today and start over," Cheney said at the session.
As proposed, the 198-page, risk-based capital framework for credit unions would impose new requirements on credit unions with assets of $50 million and above. CUNA estimates that the rule, if made final and implemented, would push credit unions to hold as much as $7.3 billion in additional capital. (For more on the rule, use the resource link.)
The CUNA leader encouraged credit unions to take part in three NCUA "listening sessions" scheduled for this summer (News Now Feb. 21), where the risk-based capital proposal will be on the agenda. "They're there to listen to you," Cheney reminded. (See resource link for more information on the NCUA sessions.)
CUNA Chief Economist Bill Hampel told the packed crowd of credit union attendees that the proposed system would create a new requirement to be well capitalized that would call for more capital than the current risk-based requirement for capital adequacy. "This is where it would eat into your buffer," he said.
In an on-the-spot survey, session attendees detailed what the rule would mean to their credit unions. The quick electronic survey showed:
44% of session attendees believe their current capital cushion above PCA thresholds is "about right," and 33% said they have more than they need;
26% said the NCUA proposal would reduce their capital cushion below what is needed;
More than 80% preferred the current risk-based PCA system; and
Most of the credit unions in attendance said they'd need 3-5 years to adjust to a new system.
"There will be strong incentives for credit unions not to make mortgages and member business loans, or to hold long-term investments as a result of the proposal," Hampel warned. "What the proposal would do by discouraging lending is put pressure on your bottom line, and induce credit unions to charge more fees to their members. The net result would likely not be what NCUA wants to see," he added.
CUNA Deputy General Counsel Mary Dunn, addressing the breakout session, said CUNA is working with others in the system to respond to the proposal. "The more united our voice on this the better off we will be," she said. CUNA is looking at potential changes, including the use of different risk weights. CUNA will also compare credit union loss weights by type of loan, and will compare credit union and bank loss rates as it continues analyzing the proposal.
And, the session leaders said, credit unions can start working on their own comment letters now. The majority of session attendees said they planned to draft a comment letter on the issue, and Hampel said credit unions have plenty of time to develop analytical, personalized comment letters.
Hampel also suggested that credit unions use CUNA's calculator tool and examine how factors such as increased numbers of second mortgages or other new products that are added to their books as the economy recovers could impact their risk-based capital numbers.
"There is a huge chance if we make cogent comments to NCUA that there will be changes in the final rule," he said.
These comment letters are part of an overall grassroots strategy that also incorporates a new resource, the risk-based capital action center.
For the CUNA tool and more on the proposed rule, use the resource link.