Proposed Rule Summary

NCUA Part 702: Risk-Based Capital Supplemental Rulemaking


Prepared by NASCUS Legislative & Regulatory Affairs Department
August, 2018

NCUA is proposing several changes to its final Risk-Based Capital rule, including delaying its effective date from January 1, 2019 to January 1, 2020. The proposal would also amend the definition of a ‘‘complex’’ credit union for risk-based capital purposes by increasing the threshold from $100 million to $500 million in assets. This change would exempt an additional 1,026 credit unions from the risk-based capital requirements.

Rule-at-a-Glance

  • Delays effective date of NCUA’s risk-based capital rule to January 1, 2020
  • Current requirements remain in place until new RBC rule takes effect in 2020
  • Raises threshold for complex credit unions to $500 million in assets
  • Changes the criteria that was used to determine asset threshold for covered credit unions

NCUA’s proposed rule may be read here. The proposed rule is open for comment until September 7, 2018.

Summary


In October 2015, NCUA published the final Risk-Based Capital (RBC) rule amending part 702 of the agency’s rules and regulations for Prompt Corrective Action (PCA). The 2015 final RBC rule applied to natural person federally insured credit unions (FICUs) with quarter-end assets exceeding $100 million.

A NASCUS summary of the 2015 final RBC rule is available here. NCUA also has a resource page on its website dedicated to the RBC 2015 rule, and an FAQ on the 2015 RBC rule.

1. $500 million threshold

NCUA proposes raising the threshold for being a complex credit union, and subject to the rule, to $500 million. This would exempt another 1000+ credit unions from the risk based requirements. NCUA continues to assert that an asse- based threshold, as opposed to a portfolio risk based standard is the better approach for ease of administration in identifying covered credit unions.

2. Further delayed effective date: January 1, 2020

NCUA is proposing further delaying the effective date of the rule another year to January 1, 2020. NCUA states the delayed effective date would provide covered credit unions additional time to adjust systems, processes, and procedures. In addition, NCUA has yet to issue guidance for examiners, or covered credit unions, as to how RBC will be implemented from a supervisory perspective.

Finally, NCUA has yet to issue a supplemental capital rule as a companion rule to RBC. NCUA has repeatedly assured the credit union system it would develop supplemental capital for covered credit unions to help meet RBC requirements.

3. Changes to the Original Complexity Index (OCI)

In order to establish the asset threshold at which a credit union is categorized as complex, NCUA developed a “complexity index” in the 2015 RBC rule (known as the Original Complexity Index). The OCI counted the number of complex products and services provided by credit unions based on 14 indicators:

Complexity Index


2015 Rule OCI

Proposed Changes

Member Business Loans

Changed to “Commercial Loans”

Participation Loans

Changed to Participation Loans Sold

Interest Only Loans

Definition Changed to Exclude 1st Lien Mortgages

Indirect Loans

No Change

 

Real Estate Loans

Changed the indicator for ‘‘real estate loans (where the loans are greater than five percent of assets and/or sold mortgages)’’ with an indicator for ‘‘sold mortgages.”

Non-Federally Guaranteed Student Loans

No Change

Investments with Maturities of Greater than Five Years (where the investments are greater than one percent of total assets)

Will be Removed

Non-Agency Mortgage-Backed Securities

No Change

Non-Mortgage Related Securities with Embedded Options

No Change

Collateralized Mortgage Obligations/ Real Estate Mortgage Investment Conduits

No Change

Commercial Mortgage-Related Securities

No Change

Borrowings (Draws Against Lines of Credit, Borrowing Repurchase Transactions, Other Notes, Promissory Notes, and Interest Payable)

No Change

Repurchase Transactions

No Change

Derivatives

No Change

Internet Banking

Completely Removed

NCUA’s OCI did not account for the volume of the complex activity indicator in each credit union. After reviewing the rule, NCUA believes changes are necessary to better right-size the OCI. NCUA is proposing to revise the original complexity index (Revised Complexity Index “RCI”), and to apply a new Complexity Ratio (CR) for analyzing the portfolios of assets and liabilities of credit unions to determine the proper asset threshold over which credit union are ‘‘complex.’’

As noted in the above chart, NCUA is amending 6 of the indicators:

  1. Member Business Loans – NCUA will replace the indicator for ‘‘member business loans’’ with an indicator for ‘‘commercial loans’’ to reflect changes to the NCUA’s member business lending rule.
  2. Participation Loans – NCUA will replace the indicator for ‘‘participation loans’’ (which included participation loans sold and participation loans held) with an indicator for ‘‘participation loans sold’’ to restrict the indicator to what NCUA considers the most complex component of participation loans.
  3. Interest Only Loans – NCUA will replace the indicator for ‘‘interest only loans’’ to exclude first-lien mortgages.
  4. Internet Banking – NCUA will remove the indicator for ‘‘internet banking’’ in its entirety because it has become common place.
  5. Investments with Maturities Greater than 5 Years – NCUA will remove the indicator for ‘‘investments with maturities greater than five years (where the investments are greater than one percent of total assets)’’ because the indicator is adequately captured in the other index components.
  6. Real Estate Loans - Replace the indicator for ‘‘real estate loans (where the loans are greater than five percent of assets and/or sold mortgages)’’ with an indicator for ‘‘sold mortgages.”

NCUA provides data that shows credit unions with $500 million or more in total assets ALL engage in at least one complex activity, and 96% engage in 3+complex activities.

Specific Request for Comments

NCUA specifically requests comments on 2 issues:

  1. The increase of the asset threshold for “covered credit unions” from $100 million in assets to $500 million in assets; and
  2. The delay of the effective date of the rule from January 1, 2019, to January 1, 2020.

NASCUS is evaluating other issues
As noted above, there are several additional issues that NCUA does not specifically seek comment on, but NASCUS is evaluating for possible inclusion in formal comments:

  1. Supplemental Capital – NCUA should use the extended delay to promulgate a regulatory framework for supplemental capital.
  2. Consultation with State Regulators – Section 1790(l) of the Federal Credit Union Act directs NCUA to consult and cooperate with state regulators to implement PCA provisions. NCUA should use the delayed effective date to form a working group of state regulators to review comments and develop any further needed refinements for the rule.
  3. The 2015 Risk Weightings – The proposed supplemental rule does not address the original 2015 risk weightings for RBC. NCUA should review those risk weightings to ensure they accurately reflect material risk in light of the changing nature of the credit union system NCUA cites in proposing the changes in this proposal.
  4. Appropriateness of using an Asset Threshold – NCUA asserts that the use of an asset threshold, rather than specific portfolio thresholds makes for ease of administration. NASCUS will evaluate if this is truly the bets approach.
  5. Future Changes to Asset Threshold – As evidenced by this supplemental rulemaking, NCUA has noted in the preamble to the 2015 final rule, the agency may revisit the complexity indicators to determine the proper asset threshold for covered credit unions. NASCUS will consider whether the regulation itself should contain an explicit reference to formally re-evaluating the asset threshold.