A blog addressing issues and topics of interest for Montana credit union board members. Read a new post every week.
Every once in a while, something comes along that has good intentions and, yet, misses the mark. Such is the case with NCUA’s Risk-Based Capital Proposal. As regulators, the National Credit Union Administration (NCUA) responded to a need to modernize the credit union capital system with reform. They recently proposed a concept to restructure their prompt corrective action regulation and impose calculations for risk in certain asset categories.
While many credit union leaders have asked for such a move, this particular proposal is problematic. It is supposedly parallel to the Basel III for community banks; but, as proposed, it includes higher risk weights and a more aggressive implementation period. After credit unions did so well surviving the economic downturn, especially in comparison to their community lending competitors, this difference raises concern.
The rule proposes to cover credit unions with assets over $50 million. At its most basic level, it would require a well-capitalized credit union to maintain a net worth of 7% and a risk-based capital (RBC) ratio of 10.5%. An adequately capitalized credit union would need 6% net worth and an RBC of 8%. Higher capital requirements would be imposed on credit unions with concentrations of assets in member business lending, real estate loans, and other long-term investments.
Many are asking about the necessity of this change after the recession when these asset categories did not result in credit union failures, and those that did -- like fraud -- are not addressed. Questions also abound about whether NCUA has the legal authority to impose risk-based net worth, and how FASB proposals could impact all of this.
Taking expected industry growth and the few years it will take before this is effective, even credit unions over $40 million need to look closely at this proposal. We urge you to take this opportunity to be informed, assess the impact to your institution (by using the calculators provided by NCUA and CUNA), and comment to the NCUA before May 28. The action center link is below.
Your voice is important in this process and we hope to bring about a positive adjustment to the rule with broad participation.
Donya Parrish is the VP-Dues Based Services for the Montana Credit Union Network. She would welcome any questions or comments on this material. You can email Donya or call her at 800-745-5546, ext. 122.