Michigan CUs, Members Would Feel Impact of RBC Proposal (Misc News: March 21, 2014)
Seven Michigan credit unions would be reclassified from well-capitalized to adequately capitalized under the NCUA’s proposed risk-based capital proposal, according to an MCUL & Affiliates analysis of the proposal.
There are potential long-term implications from the proposal. Under the new system, credit unions, in order to raise or maintain their capital at well-capitalized or adequately capitalized levels, would have to re-evaluate every product and service they offer, thus directly affecting their membership.
Credit unions may have to lower dividends, which are already at the lowest levels in history and increase their loan rates, driving membership elsewhere. Additionally credit unions are seeing rapid growth and, based on this proposal, may have to ration their services, which would slow growth.
Finally, credit unions may be forced to reposition their balance sheets. CUNA has created a Risk-Based Capital Calculator that shows how changing the mix of the credit union’s assets would affect the credit union’s Risk-Based Capital ratio under the proposal. Credit unions are encouraged to review the calculator to analyze what the potential impact could be to individual credit unions if the proposed rule were be finalized as currently presented.
The NCUA’s risk-based capital proposal has garnered a great deal of attention since the proposal’s publication in the Federal Register. The NCUA has indicated the proposed risk-based capital requirements would be more consistent with the risk-based capital measure for corporate credit unions and the regulatory risk-based capital measures used by the Federal Deposit Insurance Corp., Board of Governors of the Federal Reserve, and Office of the Comptroller of Currency. In addition to the proposed changes to risk-based capital requirements, the proposed revisions would revise the risk-weights for many of NCUA’s current asset classifications, require higher minimum levels of capital for federally insured natural person credit unions with concentrations of assets in real estate loans, member business loans or higher levels of delinquent loans. Additionally, the NCUA has indicated that individual credit unions may be required to maintain higher levels of risk-based capital if the agency raises supervisory concerns.
The proposal would also eliminate provisions in part 702 relating to transfers to the regular reserve account, the standard calculation of risk-based net worth requirement, alternative components for standard calculation and risk-mitigation credit.
The proposal would apply to all federally insured “natural person” credit unions with assets above $50 million, otherwise defined as “complex” credit unions. This equates to 2,237 credit unions nationwide. According to the NCUA, based on June 2013 call report data, in excess of 90 percent of credit unions that would be affected by the rule would be considered either well or adequately capitalized under the proposal. However, 199 credit unions that are currently considered well-capitalized would see their status drop under the proposed rule with 189 moving to adequately capitalized and 10 being deemed undercapitalized.
Nationally, credit unions would need to increase their capitalization by a total of $7 billion for all to maintain their well-capitalized classification.
The proposal also would revise existing Prompt Corrective Action Capital Requirements by adding the risk-based net worth ratio components. This restructuring of current PCA regulation to involve calculation of capital-to-risk assets ratio, is to align the NCUA’s regulation to that of BASEL III for community banks, although the risk weights would be substantially different. Under 702.102(a)(1), to be classified as well-capitalized, a credit union must maintain a net worth ratio of seven percent or greater AND, if deemed a “complex” credit union, must also have a risk-based capital ratio of 10.5 percent or greater. This equates to a risk-based net worth ratio of seven percent or above and a risk-based capital ratio of 10.5 percent or above. To be considered adequately capitalized, the credit union’s net worth ratio would need to be six percent to 6.99 percent with a risk-based capital ratio of 8% to 10.49%.