Looks like 2% RUDE ratio requirement won't make it in final Part 704

<p>WASHINGTON – According to many in the corporate network, the dreaded 2% RUDE (reserves, undivided earnings) ratio as it was originally proposed in NCUA’s Part 704 revision proposal will not see the light of day in the final reg. “It looks at this point that the 2% RUDE is going to be out,” said Gigi Hyland, executive director for the Association of Corporate Credit Unions. At the ACCU’s recent spring meeting NCUA Chairman Dennis Dollar and an official from the Office of Corporate Credit Unions addressed the meeting. Hyland said based on their presentations, the original RUDE provision is going to be changed. Originally, the proposal called for corporates to submit a capital restoration plan if their RUDE slipped below 2%, and it didn’t consider Paid-in-Capital. Many corporates were questioning why NCUA gave no value to PIC. Hyland said she’s hearing that NCUA’s new proposal would call for a corporate that falls under 2% RUDE to have to reserve part of its earnings. The provision will be termed as an earnings retention requirement. How much a corporate reserves will be dependent on the corporate’s core capital ratio, which will be defined as PIC plus RUDE. If core capital is 3% or higher, a corporate would have to reserve 10BP on earnings, under 3% 15BP. The RUDE trigger is still there, but the capital restoration aspect is out, and if the 2% is not hit, it moves to that second trigger of core capital. Hyland said she hasn’t had time to fully poll her members on this concept as the first time they heard it was at the spring meeting. “There wasn’t a completely adverse reaction from my members. I’m still checking on that,” she said. From the time the 2% RUDE ratio was proposed, corporates’ rallying cry was that it could inhibit growth. “The thing with the 2% RUDE is during times of increased credit union liquidity it may inhibit our ability to hold deposits on our balance sheet. Without some other means of raising capital, we may have to needlessly send those deposits outside the network,” said David Miles, president/CEO of Virginia League Corporate FCU. “The way it was written originally, if we went below 2%, regardless of all other capital, we were going to have to come up with a capital restoration plan. If that was picked up by the press, that would not send our members a good signal,” said Bruce Fahenstock, president/CEO of VolCorp, Brentwood, Tenn. Dollar emphasized that NCUA will not and should not take away the value of RUDE. “We’re looking for a better way to accommodate PIC into a core capital component someway that continues to emphasize RUDE, which is important and should be the first priority of net worth. RUDE is the true capital of institutions.” Dollar said that all the discussion surrounding RUDE, risk-based capital systems, and PIC may force NCUA to put 704 back out to comment. But Dollar said he is confident the board can get a final rule approved by the end of the year. [email protected]</p>