Risk Based Capital: A Timeless Analysis

This Jim Blaine classic post is an analysis of the distortion of the Federal Credit Union Act by  NCUA when imposing Risk Based Capital on credit unions. Board Member McWatters voted against the proposed and final rule stating NCUA lacked the authority for the regulation.

These critiques are even more relevant as NCUA continues to expand its interpretation by adding a CCULR capital option to RBC in December 2021.  The lack of legislative authority to do so was detailed in this analysis.

These critiques are important if future corrections are to be undertaken to credit union’s RBC/CCULR regulatory morass.  The following is Blaine’s original critique.


Risk-Based Capital: Commenting on Your Future -OVERRIDING CONGRESS!

(originally published 3/26/2014 and again July 15, 2016)
… in which NCUA moves from rule making to lawmaking!
Really can’t believe this !

Little different tack today in terms of reviewing NCUA’s member-punitive and professionally embarrassing proposed, risk-based capital (RBC) regulation.  

We have taken a look at how NCUA’s “we-know-better-than-everybody-else-despite-our-track-record” approach to RBC will 1) deter member mortgage lending, 2) damage MBL lending, and 3) severely limit safe CU investments, forcing unnecessarily lower savings returns on CU members.  All proposed with utter disregard for the new, lower RBC standards now already in place for all other federally insured depository institutions. 

Today let’s look at how NCUA has decided to independently override the U.S. Congress and federal law with the new RBC proposal.  Have always noted how proud NCUA was of being “an independent agency of the Federal government”, but it had never occurred to me that NCUA believes it is independent of Congress – and above the law.

Congress is such a bother to
an independent federal Agency!

Here’s how NCUA intends to override Congress. In Section 216 of the 1998 Credit Union Membership Act (“HB 1151”), Congress specifically and purposefully wrote into the Federal Credit Union Act (FCUA) a series of mandatory “net worth” categories and prompt corrective action (PCA) requirements.  Congress defined statutorily that a credit union was “well capitalized” if its net worth was >7%, “adequately capitalized” if its net worth was >6% but <7%, etc – five categories in all. Congress wrote into the FCUA statute a very, very clear definition of “net worth” – nothing accidental nor haphazard about what Congress meant by “net worth”, nor how it was to be used to determine CU capital levels. 

NCUA through a sleight-of-hand (which they hope you won’t notice!) has rewritten the Congressional definition of “well-capitalized” for CUs. 

Let’s take a look at the proposed RBC reg:

NCUA is becoming
 thoroughly Pinnochioan …

“The proposal would change the title of Sect. 702.102 from “Statutory net worth categories” to “Capital classifications”.  NCUA believes that replacing the term “net worth” with the general term “capital categories” better describes the combined “net worth ratio” and “risk-based net worth” measurements that make up the five categories listed in the statute.  Moreover, the term “capital” is generally more inclusive of all accounts available to pay losses than the term “net worth” and is more commonly used in the financial services industry. No substantive changes to the requirements of Sect. 216(c) are intended by these changes in terminology.” 

 “[Several sections of 216] of the

“It’s growing…!!

 Federal Credit Union Act (FCUA) use the term “risk-based net worth” requirement, NCUA believes that replacing the term “risk based net worth” with the functionally equivalent term “risk-based capital” in the proposed rule would better describe the equity and assets the requirement would measure.  No changes to the requirements of the statute are intended by the alternative term…”

NCUA’s RBC comes with
strings already attached…

Now I’m sure that didn’t make any sense at all to most of you, because you’re nice, reasonable straight-forward kind of folks – unlike the folks  who wrote this proposed regulation. So, let’s break it down

Under current law:  Credit unions with net worth > 7% are “well capitalized”.  Under the current risk-based net worth (RBNW) formula, if a credit union is determined to be “complex”, it may be required to hold additional capital (none of even the 25 largest CUs are required to hold capital above their statutory net worth and most are not complex under current RBNW standards).

Under the proposed reg:  NCUA unilaterally has 1) decreed that all CUs with assets > $50 million are complex! No test, no evaluation – as now required by the FCUA – to determine if a CU is simple or complex.  NCUA simply changes a Congressionally approved law to make you complex regardless of your balance sheet risk; and then since you are complex(!), NCUA imposes its new RBC regime requirements on your CU.

Weaseling Congress !
(… robustly !!)

Here’s the weasel, NCUA is attempting to change the Congressionally legislated definition of  “well capitalized” to:

“To be well-capitalized a credit union must maintain a net worth ratio of 7% or greater and, if a complex credit union, (which NCUA has defined as all CU with assets >$50 million) must have a risk based capital ratio of 10.5% or greater…”  

NCUA’s proposed RBC reg flies in the face of express Congressional intent under the FCUA. You can always spot a weasel when you read phrases like:

1. “… replacing the term “net worth” with the term “capital categories” better describes…” – That’s a Weasel!
2. “… no substantial changes … are intended…” – That’s a weasel!
3.  “… replacing the term “risk-based net worth” with the functionally equivalent term “risk-based capital”… – That’s a weasel!
4. “… the term “capital” is generally more inclusive… and is more commonly used in the financial services industry …” – That’s a weasel!
5. Changing “if you are complex” to “you are complex”… – That’s a weasel!
6. “… no changes to the requirements of the statute are intended…” – That’s a weasel!

Shouldn’t we – on behalf of our 100+ million member-owners – demand that Congress make changes, if necessary, to credit union statutes, …

… and not have to deal with these weasels?


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