A new proposed “simplified” rule for credit unions is being likened to one in use for banks. Is it really? The proposed Complex Credit Union Leverage Ratio (CCULR), as its name suggests, is aimed at “complex” credit unions. Whereas the Community Bank Leverage Ratio (CBLR), that it’s being compared to applies to “non-complex”, community banks.
The CBLR was created to spare traditional community banks from unnecessary burden, since they are far less likely to run into trouble with risky assets than their larger, more complex counterparts. It is available to community banks with:
- A Leverage Capital Ratio > 9% (temporarily lowered due to COVID, phasing back up to 9% in January 2022—currently 8.5%);
- Total assets < $10 billion;
- Off-balance sheet exposure not more than 25% of total assets;
- Trading assets and liabilities not more than 5% of total assets;
- Not an advanced approach bank.
While bullets three and four are the same in the NCUA proposal, the CCULR instead allows certain “complex” CUs—those with assets greater than $500 million—to opt-out of the new risk-based reporting. All credit unions under the $500 million threshold are exempt. Currently, 677 credit unions have assets > $500 million. Most of them—those with a leverage capital ratio exceeding 9%—will also be allowed to opt-out. (This ratio will phase up to 10% over the next two years.) That leaves only about 235 credit unions that will be required to complete the new risk-reporting. (The largest 50 CUs can be found on page 7 along with capital ratios.)
The “new” rule has been in the works since 2015 and has been the source of much consternation. If it becomes effective as slated in January 2022, it will apply to roughly 23% of credit union industry assets. Those held by the 235 credit unions noted above.
Is this the best way to ensure the safety of the credit union industry without overburdening CUs with unnecessary regulatory costs and requirements? We are not sure. And we’re not alone. Many credit unions submitted comments to make their views heard during this process. In addition, here’s what the board members had to say on the subject.
NCUA Chairman, Todd M. Harper:
"I have long held that all financial institutions backed by federal deposit insurance, including federally insured credit unions, should hold capital equal to the risks held on their balance sheets. In the case of federally insured credit unions, if a credit union with greater risk fails, risk-based capital would help minimize losses to the National Credit Union Share Insurance Fund."
NCUA Vice Chairman, Kyle S. Hauptman:
"The chief benefit of the proposed Complex Credit union Leverage Ratio (CCULR) rule is that it allows some credit unions to bypass a risk-based capital approach. For me, the point of this simpler leverage ratio is that it protects both credit unions and the National Credit Union Share Insurance Fund from the inevitable problems associated with risk-weightings.
NCUA board member Rodney Hood (former chairman):
"The world has changed since 2015. The reality is RBC should be a tool — not a rule. If it is effective in identifying risk, put it in the examiners’ toolbox, but the last thing the NCUA should do is impose it on credit unions as an operating model. The juice just isn’t worth the squeeze for risk-based capital because this is a regulatory burden with limited benefit. Again, we already have a risk-based net worth framework as required by law, so this is not needed."
They are clearly not all on the same page. But something else that Mr. Hauptman said really resonates, “capital is the holy grail”. We’ve been saying that (in other words) for years. And with good reason. With enough capital, a financial institution can withstand virtually any downturn.
When institutions get into risky investments, however, or when seemingly safe investments go sour, (like the housing collapse or taxi medallions), how do you know how much capital is really enough? This is precisely why Bauer’s Adjusted Capital Ratio and the Texas Ratio were created in the 1980s. They are both incredibly effective forecasting tools and neither increases reporting costs or burden. These ratios are provided on the list on page 7 and definitions are in the sidebar (page 2).
Interesting Fact:
Over half of credit union CEOs are women, yet, all three NCUA board members are men.