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Draft Response to RBC 2.0

As promised in last week’s blog post, our draft response to RBC 2.0 can be found here.

Our main objective in writing this response is to convince NCUA that it would be dangerous for the industry, regardless of the chosen methodology, to add an interest rate risk (IRR) component to the proposed rule. IRR is a highly-complex risk with many interdependent components.

We welcome any questions you may have regarding our response.

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Voice your concerns NOW about NCUA’s consideration of adding a separate IRR component to RBC

If RBC 2.0 passes as written, each credit union defined as complex will be required to quantify their unique risks and maintain adequate capital to back those risks, all of which is to be supported by a written strategy.

Excerpt from proposed RBC 2.0, §702.101
(b) Capital Adequacy: “(1) Notwithstanding the minimum requirements in this part, a credit union defined as complex must maintain capital commensurate with the level and nature of all risks to which the institution is exposed. (2) A credit union defined as complex must have a process for assessing its overall capital adequacy in relation to its risk profile and a comprehensive written strategy for maintaining an appropriate level of capital.”

RBC 2.0 also advises that because the rule no longer proposes including interest rate risk, NCUA will consider alternative approaches to account for IRR at credit unions. These alternatives could include “adding a separate IRR standard as a subcomponent of the risk-based net worth requirement to complement the proposed risk-based capital ratio measure.”

Our question is: Why further muddy the waters by incorporating the complex issue of attempting to standardize the quantification of IRR into rule making?

Taking a one-size-fits-all approach by standardizing assumptions, or approaches to assumptions, guarantees that the unique risk of an individual credit union will not be appropriately captured.

It is important for credit unions to invest time to think critically about this issue and voice their concerns about the impact of adding a separate IRR component to the proposed credit-based RBC – before it is too late!