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RBC2 Expected to be
Finalized This Week
Approximately twenty months after it was first proposed,
NCUA’s new risk-based capital regime is expected to be finalized this Thursday. While the details of the final proposal will
not be known until the NCUA Board meets, what is known is that since it was
first proposed, the RBC and RBC2 have undergone significant scrutiny, been the
subject of intense industry and NCUA Board debate, attracted a record number of
credit union comments, and improved significantly. As we prepare to receive the final rule,
let’s take a look at the progress we’ve made so far.
How Did This All
Begin in the First Place?
NCUA is required by law to have a risk based capital
standard and has had a rule for several years.
It was encouraged by Congress and the Governmental Accountability
Office (GAO) following the financial crisis to update its standard. So, as much as we would have liked, it was
never realistic to expect NCUA to do nothing because they’re under a degree of
pressure to modernize the current outdated rule. What we have sought in asking NCUA to
withdraw the proposal was to have the issue of credit union capital standards
considered comprehensively in coordination with Congress. And, if NCUA does not pursue a comprehensive
approach that details with statutory defects, then we have said the agency should
tailor any solutions that might be developed as a result of the GAO report to
problem areas only and to avoid the temptation to issue new regulations that
cover all credit unions, regardless of their risk profiles.
What Were Our Concerns in the First Round?
In 2014, NCUA issued what is now commonly referred to as RBC1. This was a deeply flawed approach that we
considered a solution in search of problem.
In our comment letter
on the proposal, we criticized the agency for working on this issue in a
vacuum, suggesting, as noted above, changes to RBC standards should be done as
part of a comprehensive approach. We
expressed concern that what NCUA was really trying to do was to use a
heavy-handed rule to mask the deficiencies of the supervisory process,
suggesting that enhanced examiner training was necessary. We addressed head-on the flaws in the
proposal including well substantiated concerns that the proposal exceeded
NCUA’s legal authority; that it would needlessly interfere with credit unions’
operations without effectively identifying potential problem credit unions and
reducing losses the NCUSIF; that it would not effectively identify potential
credit union failures nor would it significantly reduce losses to the NCUSIF
without overcapitalization of other, healthier, credit unions; that it was
unjustifiable given the vigorous health of the credit union system; and the
negative impact of the proposal would be far greater than anticipated, leading
to a smaller credit union system over the long term. We concluded that it would be much more
appropriate to keep the current system than to implement the RBC1 proposal.
What Did We Do to
Address the Problems?
In response to RBC1, CUNA and the Leagues executed one of
the more coordinated and successful advocacy campaigns since the enactment of
H.R. 1151. Thousands of credit union
employees and board members submitted comment letters to NCUA in opposition to
the proposal. They were joined by 375
Members of Congress and dozens of other stakeholders who expressed concern for
the proposal. Credit unions attended
town hall meetings organized by the NCUA to voice their concerns face to
face. CUNA and League leaders travelled
to Alexandria several times to make our case before the Boardmembers and NCUA
staff. Leagues raised this issue
regularly during their Hike the Hill meetings.
And, CUNA commissioned a legal
opinion focusing on whether NCUA had the statutory authority to implement
the rule as it was proposed, a document which became the key focus of debate
when the NCUA Board took up the revised
proposal (RBC2) in January 2015.
What Was the Impact
of the CUNA-League Advocacy Efforts?
The changes that our efforts affected were quite significant,
as described in this summary
document we prepared after RBC2 was released.
First, the Board announced that there would be no new rule
on interest rate risk, a key concern we raised in our comment letter. Further, the level of risk based capital
needed to be well capitalized was reduced from 10.5% to 10%; this did not
represent a complete victory, but it did help reduce the number of credit
unions that would be adversely affected.
The reduction in many of the risk weights in RBC2 also contributed to a
reduction in the number of affected credit unions, and it was a move that we
welcomed. RBC2 included a revised
definition of “complex credit union” that lowered the number of credit unions
covered by the proposal from more than 2,200 to fewer than 1,500. Further, it temporarily grandfathered
goodwill. The revised proposal also made changes to the additional capital
requirements provisions, taking much of the authority out of the hands of
examiners but placing it in the hands of the NCUA Board. Finally, credit unions were given much more
time to comply with RBC2 than they would have RBC1, as the revised proposal extended
the implementation period from 18 months to four years.
While we have concerns with RBC2, when it is placed side-by-side
with RBC1, it is very difficult to ignore the breadth and depth of changes that
the CUNA-League Advocacy effort brought about.
What Have We Been Focused on Since RBC2 was Released?
Shortly after RBC2 was released, we put out a document
that provided our initial reactions and concerns. While there were many improvements, a number
of matters were not addressed satisfactorily in RBC2. We addressed all of our remaining concerns in
detail in our RBC2
comment letter, which we filed with the agency in April.
For example, we believe the agency could do more to adjust
the risk weights, particularly with respect to mortgage servicing rights. The capital adequacy provisions should be
deleted altogether. Goodwill ought to be
grandfathered in perpetuity because the amount is known and relatively
small. The definition of “complex”
credit union should be more complex than an asset threshold. And, credit unions
should be given more time to comply with the new requirements.
When issuing RBC2 for comment, NCUA asked for comments on
whether supplemental capital should be permitted for purposes of complying with
the rule, and whether there are alternative approaches to interest rate risk
that should be considered. We strongly
urged NCUA to include a supplemental capital option as part of this rule, and
we firmly stated our view that no new interest rate risk rule was needed at
What Will Happen Next?
On Thursday, the NCUA will take up the final rule. We expect modest improvements between RBC2
and the final rule, but we do not expect some of the major concerns we have to
be fully addressed. Also, NCUA does not
have a supplemental capital proposal on its agenda this week, which likely
means that such a proposal will have to wait for a future board meeting. We will have a summary of the rule and
additional analysis in this space following Thursday’s board meeting.
Many will find the final rule unsatisfactory; they will wish
the existing risk-based capital requirement had not been changed. We would agree with them, but the fact is
that there are at least two votes for the final rule, and we’ve known that all
along. Our job has been about getting
the best possible rule for credit unions, and without the CUNA-League advocacy
efforts, there is absolutely no question that the final rule would be much
worse for credit unions. Under RBC1,
nearly 200 credit unions would have had their capital classification
downgraded; under RBC2, 26 credit unions.
We are hopeful that number will be even smaller under the final
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