The Proposed Definition of “Complex”: It’s Not Complex Enough
Posted April 23, 2014 by CUNA Regulatory Advocacy
Most readers now know that NCUA’s RBC proposed rule applies to “complex” credit unions, which NCUA defines as any federally insured credit union with more than $50 million in assets. Why did NCUA choose to define “complex” based on asset size? From our perspective, this is overly simplistic. It is business decisions, operations, activities and portfolios that make a credit union’s operations complex, not simply its assets. The definition of “complex” should rely on factors that are actually related to risk.
According to NCUA stats, as of January 2013, 94 percent of total federally insured assets are held with credit unions of $50 million or more in assets. In other words, most credit unions will be considered “complex” and thus covered by the new proposal.
Such a simplistic approach should mean it will be easier for the agency and credit unions to determine if they are in or out of the rule. But that is not necessarily the case as credit unions with assets of say, $40 million, will need to start thinking about how the rule would impact their operations once they cross over the “complex” credit union threshold.
Moreover, a definition that is too easy distorts the purpose of having risk based capital. Under the Federal Credit Union Act, NCUA’s risk based capital system must be based on credit unions’ “portfolios of assets and liabilities” and should provide additional protection when the credit union’s net worth at the adequately capitalized level is not sufficient for the risks presented. As the Act provides, risk based capital is only needed when the complexity of a credit union’s operations present risks that justify more capital over and above the adequately capitalized level.
Bottom line, NCUA’s definition of complex as indicated by the Act is far too simple – and should be more complex!