NASCUS Responds to NCUA Proposals on Interest Rate Risk, Net Worth and Equity Ratios

Arlington, Va. —NASCUS submitted two comment letters to the National Credit Union Administration (NCUA) on recent proposals regarding a written interest rate risk policy and changes necessary to net worth and equity ratio regulations from Senate Bill 4036.

Regarding the proposed rule, Part 741, Interest Rate Risk (IRR), NASCUS wrote that while state regulators agree that IRR management is an essential component of a credit union’s safety and soundness, they would expect that all credit unions under their supervision, regardless of size, to appropriately identify and manage IRR. Instead of NCUA’s three tiered approach to IRR, NASCUS recommends a more simple policy requiring every credit union to identify and to effectively manage IRR depending on the circumstances of the individual credit union. The NASCUS alternative provides clear and conspicuous authority for regulators to require shock testing, but also provides credit unions with freedom to design a program that matches whatever IRR may exist. A similar approach is used by the Federal Deposit Insurance Corporation (FDIC), NASCUS pointed out in its letter.

NASCUS also suggested that NCUA publish guidance on the proposed rule independently of the rule rather than as an Appendix to the rule.  By publishing the guidance independently, NCUA can minimize confusion as to what is “rule” and what is “guidance.”  Further, by publishing the guidance independently, NCUA preserves the ability to quickly amend or augment the guidance in the future.

Although outside the scope of the current proposal, NCUA could also consider making changes to the Call Report to better capture information regarding the potential IRR on a credit union’s balance sheet.  NASCUS believes better reporting would mitigate some of the need for more detailed requirements for IRR management.

In the NCUA proposed rulemaking regarding net worth and equity ratio, the agency is amending the definitions of credit union “net worth” and the National Credit Union Share Insurance Fund (NCUSIF) “equity ratio” in order to conform to the definitions of these terms as required by Senate Bill 4036, signed by the President earlier this year.

In our comment letter, NASCUS discusses three areas regarding member business lending where net worth is not statutorily defined in the Federal Credit Union Act in the context for purposes of calculating the maximum aggregate amount of MBLs a federally insured credit union may hold. NASCUS recommends that NCUA consider amending §723 to incorporate the new definition of net worth for those regulatory net worth thresholds.

NCUA also proposes a change to the definition of net worth in §702.2(f)(3) to address situations where an acquiring credit union benefits twice from a combination.  In particular, NCUA should reconcile the proposed change with Congress’ specific statutory language that the definition of net worth includes “the retained earnings balance of the credit union, as determined under generally accepted accounting principles, together with any amounts that were previously retained earnings of any other credit union with which the credit union has combined,” as defined in the Financial Services Relief Act of 2006.

Lastly, NASCUS asks NCUA to clarify the parameters of when Section 208 assistance is considered for a credit union and how it is used for calculating a credit union’s net worth.