WASHINGTON (5/29/14)--The 12 Federal Home Loan Bank presidents warn that the National Credit Union Administration's plan to revise its prompt corrective action rule for risk-based capital could have negative consequences both for credit unions and for homebuyers in their communities.
In a May 28 comment letter to the NCUA, the home loan bank presidents note that the proposed risk weights for mortgages in the RBC plan increase as the percentage of mortgages to total assets held by a credit union increases.
"Consequently, credit unions that serve the needs of their members by issuing mortgages would be negatively impacted if they retain these mortgages on their balance sheets," the FHLB letter cautions.
It further warns, "This would put credit unions at a competitive disadvantage to other financial institutions that hold such mortgages under less restrictive regulatory standards and would also prevent credit unions from holding mortgage collateral that can be used to access liquidity through the FHLBanks and support mortgage lending within their communities.
"Therefore, we request that the limits imposed with respect to mortgages be revised to be more in line with other bank regulatory standards."
The FHLB presidents also asked the NCUA to bring its proposal more in line with banks' and thrifts' capital rules in the risk weights assigned FHLBank capital stock.
In contrast to the risk-based capital rules for banks and thrifts, the NCUA's proposed framework would assign risk weights to all investments, regardless of credit quality, based on the weighted average life (WAL) of the investment.
Under current and proposed Basel rules for risk-based capital, claims on government-sponsored entities, including the home loan banks, are assigned a 20% risk value.
Under the NCUA's WAL approach, the FHLBank letter says, the same stock could be subject to risk weightings of 20% or 75%, depending on the class of capital stock. Furthermore, investments in FHLBank consolidated obligations could be subject to risk weightings that range from 20% to 200%, depending on their WALs.
"This treatment by the NCUA will require credit unions to hold more risk-based capital against their holdings of FHLBank Capital Stock and FHLBank Consolidated Obligations than other depository institutions are required to hold," the letter notes.
It warns that, in addition to placing credit unions at a disadvantage compared to other depository institutions, this requirement could restrict credit unions' extension of needed credit to the communities that they serve.