Removing Barriers Blog

RBC2 Expected to be Finalized This Week
Posted October 12, 2015 by Chandler Schuette

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it was never realistic to expect NCUA to do nothing because they’re under a degree of pressure to modernize the current outdated rule.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 this time. 

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 rule.