Asset Threshold for Determining the Appropriate Supervisory Office (RIN 3133-AF41)

May 2, 2022

Melane Conyers-Ausbrooks
Secretary of the Board
National Credit Union Administration
1775 Duke Street
Alexandria, VA 22314

Re: NASCUS Comments on Asset Threshold for Determining the Appropriate Supervisory Office (RIN 3133-AF41)

Dear Secretary Conyers-Ausbrooks:

The National Association of State Credit Union Supervisors (NASCUS)[1] submits this letter in response to the National Credit Union Administration’s (NCUA) request for comments on RIN 3133-AF41, Asset Threshold for Determining the Appropriate Supervisory Office.[2] The proposed rule would amend NCUA’s capital planning and stress testing rules to raise the asset threshold at which a natural person credit union would become subject to supervision by NCUA’s Office of National Examinations and Supervision (ONES). Specifically, under the proposed rule, federal credit unions and federally insured state credit unions (FISCUs) currently supervised by ONES, and natural person credit union with $15 million in assets or greater would be subject to ONES supervision. Natural person credit unions not currently supervised by ONES, but with assets between $10 billion and $15billion (Tier I credit unions) would remain under the supervision of their NCUA Regional Office.[3]

In support of the proposed change, NCUA notes that the agency could more effectively manage its resources by retaining Tier I credit unions under the appropriate NCUA Regional Office; that the level of risk to the National Credit Union Share Insurance Fund (SIF) posed by Tier I credit unions has changed; and that the agency has implemented new supervisory tools that further reduce risk to the SIF.[4] No other changes to existing § 702 rules for Tier I credit unions would be made under this proposal.

NASCUS agrees that NCUA’s share insurance supervision for Tier I FISCUs can be conducted by the appropriate NCUA Regional Office without increasing risk to the SIF. While NCUA has traditionally transitioned FISCUs with $10 billion in assets to ONES for SIF supervision, state regulators generally administer supervision of their large FISCUs up to, and above, the $10 billion asset threshold with their general supervisory program on par with the NCUA

Regional Offices without having ever experiencing a failure of a state chartered natural person or corporate credit union up to and above $10 billion in assets.

The Proposed Addition of a Definition of a ONES Credit Union is Confusingly Located

Under the proposal, a new definition of “ONES credit union” would be added to §702.302 to read:

ONES credit union means a credit union subject to supervision by the Office of National Examinations and Supervision and includes tier I covered credit unions that had $10 billion or more in total assets as of March 31, 2020, and tier II and tier III covered credit unions.

Subpart C – Capital Planning and Stress Testing will continue to apply in full to all credit unions with assets of $10 billion or greater. Given the proposal would only change the NCUA office responsible for supervision, and not the remainder of the Subpart C, it would be more appropriate to include the definition of “ONES credit union” in §700.2 definitions of Regional Director.

NCUA’s Reservation of Authority Should Include Consultation with State Regulators

Under the proposal, NCUA could use existing reservations of authority to transfer, at the agency’s discretion, a Tier I credit union to the supervision of ONES before that credit union reaches $15 billion in assets. NCUA asserts that when determining to transfer a Tier I credit union to ONES ahead of schedule, the Board will consider the credit union’s condition, activities, business model, risk management practices, assets, net worth, and any other relevant factors.[5] The reservation of authority as presented in the proposal would benefit from the inclusion of a specifically articulated requirement that NCUA consult and cooperate with state regulators before transferring a Tier I FISCU to ONES.

Transferring a Tier I FISCU to ONES might appear to be an internal resource allocation decision for NCUA. However, such a transfer has implications for the FISCU’s prudential state regulator, as well as for the FISCU itself. Including a consultation provision would be consistent with the statutory and regulatory framework of existing Part 702 and would reinforce the shared supervisory relationship between NCUA and the states.[6]

NCUA Should Consider Comparable Changes to the Agency’s FISCU Examination Cycle for FISCUs with Less-Than $ 3 Billion in Assets

While beyond the scope of this proposal, NASCUS urges NCUA to further consider how the underlying circumstances supporting increasing the asset threshold for transitioning Tier I

credit unions to ONES supervision likewise support extension of the NCUA examination cycle for FISCUs with assets of $1 billion or more.[7] Under NCUA’s 2016 policy, NCUA examines every FISCU with assets of $1 billion or greater every 8-12 months. In general, all other well managed FISCUs with assets less than $1 billion are only required to be examined by NCUA once every 5 years.

NCUA should raise the asset threshold for the 8–12-month examination cycle to credit unions with $3 billion or greater in assets.

Just as the increase in Tier I credit unions has the potential to strain the current staffing of the ONES, the increase in natural person credit unions surpassing $1 billion in assets could strain existing supervisory programs absent the flexibility to extend examination cycles for well managed credit unions. Between 2016 and Q3 of 2021, the number of credit unions with assets of $1 billion or greater has increased 45% from 272 to 395.[8] Extending the examination cycle to 18 months for qualifying credit unions with less than $3 billion in assets would provide regulatory and supervisory relief to those credit unions and allow for more granular allocation of supervisory resources to areas, and entities, in more pressing need of attention.

The advances in offsite monitoring cited by NCUA with respect to the Tier I credit unions apply to credit unions with less than $3 billion in assets. NCUA’s assessment that a $15 billion asset credit union has the risk profile of $10 billion asset credit union from 2013 suggests that the risk profile of a $1 billion credit union in 2016 is likely comparable to a much larger credit union today. In addition, the growth of the number of credit unions over $1 billion in assets, particularly the growth of Tier I credit unions, increases the likelihood that a supervisory merger partner might be identified to assist the resolution of a $1 billion credit union in troubled condition. Finally, given that FISCUs have a prudential state regulator conducting off-site monitoring and on-site contacts in addition to NCUA’s share insurance reviews, the fabric of supervision for FISCUs can easily bear an extended NCUA examination schedule for FISCUs with less-than $3 billion in assets without materially increasing risk to the SIF.

Raising the asset threshold for the 8-12-month examination cycle to $3 billion or greater has the added benefit of eliminating a regulatory competitive disadvantage for the credit union

charter. The regulatory and supervisory relief this change would provide to credit unions is consistent with relief previously provided to banks via the Economic Growth, Regulatory Relieve, and Consumer Protection Act of 2018.[9] This change would create consistency between NCUA and the federal banking regulatory agencies.

NASCUS supports NCUA’s initiatives that reduce regulatory burden and create supervisory efficiencies. As the financial services sector, and the credit union system, grow more complex, resources available for compliance and supervision are stretched thin. Enhancing calibration of regulation and supervision will be essential to sustaining a safe, sound, and viable credit union system. Properly implemented and coordinated with state regulators, this proposed rule when finalized should benefit both credit unions and regulators.

Sincerely,
Brian Knight
President & CEO

[1] NASCUS is the professional association of the nation’s 45 state credit union regulatory agencies that charter and supervise over 1,900 state credit unions. NASCUS membership includes state regulatory agencies, state chartered and federally chartered credit unions, and other important stakeholders in the state system. State chartered credit unions hold over half of the $2.06 trillion assets in the credit union system and are proud to represent nearly half of the 129.6 million credit union members.

[2] “Asset Threshold for Determining the Appropriate Supervisory Office” 87 Fed. Reg. 11996 (March 3, 2022).

[3] Ibid.

[4] Id. At 11998.

[5] 87 Fed. Reg. 11998.

[6][6] NCUA should also consider whether transferring a Tier I FISCU to ONES is a material supervisory determination which should be subject to a FISCU’s right of appeal pursuant to Part 746.

[7] Pursuant to NCUA’s Risk-Based Examination Scheduling Policy, FISCUs meeting any of the following criteria will receive an NCUA examination every 8-12 months from the end of the previous examination:

Assets greater than $1 billion;
Composite NCUA CAMEL code 4 or 5 with assets greater than $50 million; or
Composite NCUA CAMEL code 3 with assets greater than $250 million.

NCUA will examine all other FISCUs based on risk, but no less than once every 5 years. See “Risk Based Examination Policy,” Letter to Credit Unions 16-CU-12 (December 2016). Available at https://www.ncua.gov/regulation-supervision/letters-credit-unions-other-guidance/risk-based-examination-scheduling-policy.

[8] “Number of credit unions in the United States from 2016 to 2021, by assets,” Statista, F. Norrestad (December 15, 2021). Available at https://www.statista.com/statistics/470325/number-of-credit-unions-usa-by-assets/#:~:text=The%20number%20of%20credit%20unions,395%20by%20third%20quarter%202021.

[9] S. 2155, P.L. 115-174 (2018).