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RESPONSE TO NCUA PROPOSED PCA RISK-BASED CAPITAL RULE

Since last week’s blog post, we have received many requests for our response to NCUA’s Risk-Based Capital Proposed Rule. As a result, we have made our final response readily available on our website.

One of our objectives in writing this response is to point out that prudent risk management is too complex to be reduced to arbitrary risk-weightings applied to the masses. We welcome any questions you may have on why we took such a strong stand in regard to this proposed rule.

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Risk-Based Capital Proposed Rule

The deadline for responses to the NCUA’s Risk-Based Capital Proposed Rule is quickly approaching and we are working hard on our response.  We have our draft response available – if you are interested in reading it, please contact us.

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Thank Goodness the Proposed Risk-Based Capital Rule Doesn’t Affect Me!

If you’ve looked at NCUA’s calculator and determined that the rule won’t hurt you, go ahead and breathe a sigh of relief.  Then set aside some time to at least look at the table of risk weightings and some of the many analyses that have been done by various groups.  This is a cooperative industry and bad rules chip away at the credit union ideal.  Understanding whether you think it’s a bad rule or not is the first step, even if it doesn’t affect your credit union today.  You will want to ask if it could affect your business model in the future, but the questions are really bigger than that:

  • How long has it been since the industry has faced regulatory changes of this magnitude?
  • Look at each of the risk weightings – do they adequately address interest rate risk, concentration risk, credit risk, market risk and liquidity risk?  (NCUA states the proposed rule is focused on these risks)
  • Would you rely on the calculated capital requirement from this rule to make decisions in running your own credit union instead of the rigorous analysis you are doing today?
  • How do you feel about the proposed authority that enables NCUA to require an individual credit union to hold a higher level of risk-based capital (even if they meet the new risk-based capital requirement and their net worth shows them as Well Capitalized)?
  • Do you think the industry will be safer with the rule in place?
  • The rule doesn’t address relevancy risk, but will it increase or decrease the ability for credit unions to remain relevant to their memberships in the face of changing competition, member behavior, etc.?
  • What are the unintended consequences of the rule?
  • Will credit unions with certain business models be forced to convert to banks?  Does it matter?
  • Are there other ways to better address the issues the rule is trying to solve?
  • Will the industry be better off with this rule or without it?
Responses are due by May 28, 2014.  We will post our response soon!
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MBS and other Asset-Backed Investments in the Prompt Corrective Action—Risk-Based Capital Proposed Rule

The proposed rule promotes two options for determining the risk-weights of asset-backed investments, such as mortgage-backed securities (MBS) and collateralized mortgage obligations (CMOs).

One uses the current weighted average life for mortgage-backed investments. The other assigns an arbitrary risk weighting of 1,250%.

“Proposed §702.104(c)(2)(x) would require that credit unions assign a 1,250 percent risk-weight (8% * 1,250% = 100%) to an asset-backed investment for which the credit union is unable to demonstrate, as required under §702.104(d), a comprehensive understanding of the features of the asset-backed investment that would materially affect its performance. A 1,250 percent risk-weight is equivalent to holding capital equal to 100 percent of the investment’s balance sheet value [emphasis added].”  (Source: Prompt Corrective Action—Risk-Based Capital Proposed Rule)

If this rule passes, and the credit union can’t demonstrate a comprehensive understanding as noted above, the penalty can be severe.

If your credit union is holding a material portfolio that includes these types of investments, it can’t be too soon to reassess appropriate understanding of the investments held. The proposed rule is not clear on who in the credit union needs to demonstrate a comprehensive understanding. It is probably a safe bet that, minimally, the ALCO would need to demonstrate this type of understanding.

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Survey: NCUA’s Risk-Based Capital Proposed Rule

NCUA recently proposed a Risk-Based Capital rule that will change the way credit unions compute their risk-based capital ratio. The comment period for this proposed rule ends May 28 and many comments have already been received.

We want to hear from you—is your credit union planning to submit comments on this proposed rule?

Let us know your thoughts here.