The NCUA board approved its risk-based capital rule, which included only a few changes to the risk weights proposed in January.
First, the final rule reduced the risk weight for equity investments in CUSOs, corporate perpetual contributed capital and other higher risk equity investments to 100% if the total of equity exposure is less than 10% of the sum of the credit union's capital elements of the risk-based capital ratio numerator. The NCUA said it estimated 95% of credit unions with such investments will be assigned the lower risk weight.
The charitable donation accounts risk weight was reduced to 100%.
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The final rule also added descriptions of the gross-up approach and look-through approaches to effectively lower the risk weights for certain investment funds and life insurance.
It also assigned principal-only, mortgage-backed security STRIPS a risk weight based on the underlying collateral.
The final rule will go into effect on Jan. 1, 2019. During the meeting, Director of the Office of Examination and Insurance Larry Fazio said examiners will not enforce risk weights in exams until the rule goes into effect. He also said guidance will be issued in 2018 and examiners will be trained on examining for the new rule during the NCUA's 2018 training conference.
NCUA Chairman Debbie Matz reminded credit unions during the meeting that corporate credit unions did not hold enough capital to cover their losses. When corporate credit unions were asked by examiners to increase their capital coffers, they challenged examiners to show them where in existing regulations additional capital was required.
"After the last financial crisis began in 2007, credit unions paid a staggering cost," Matz said. "Due to a relatively small number of corporate credit unions taking excessive risks, the credit union system lost $5.6 billion in capital and paid $4.8 billion in assessments. In case anyone needs reminding, five corporate credit unions nearly brought down the entire credit union system."
She added, "Adding to that, consumer credit union failures resulting from the crisis cost the system another three-quarters of a billion dollars. Those losses had to be paid by all surviving credit unions through the share insurance fund. The fact is, the 7% statutory net worth requirement for consumer credit unions was not designed to recognize the difference between low-risk and high-risk assets. That's because the net worth ratio is a lagging indicator. It is based on historical performance."
Matz continued that she wasn't saying each credit union needs to have net worth over 12%.
"What I am saying is each credit union needs enough net worth to cover its risk," she said.
Matz also said the NCUA will write a supplemental capital rule that would go into effect by January 2019 to correspond with risk-based capital requirements.
A letter sent to Matz from House Financial Services Committee Chairman Jeb Hensarling (R-Texas) was read during the meeting, as Hensarling requested. The chairman asked Matz to delay finalizing the rule. During the meeting, Matz said entering a letter from Congress into NCUA official meeting minutes was unprecidented, but out of respect for Hensarling and the committee, she would allow it.
Matz and Vice Chairman Rick Metsger voted in favor of the rule. Board Member Mark McWatters voted against it.
In his comments, McWatters said while he respected NCUA staff attorneys' work on the rule, he disagreed with certain key underpinnings regarding the agency's legal authority to enforce the rule.
Supporters of the rule argued that the existing net worth rule is not up to date and not comparable with the FDIC's, McWatters said. He called that reasoning a red herring and a distraction from the broader issues caused by the NCUA's critical misinterpretation of the Federal Credit Union Act.
"Yes, the NCUA is charged with protecting the NCUSIF; yes, capital requirements represent a critical component in the agency's discharge of this mandate; yes, Congress directed the agency to implement a risk-based net worth requirement," McWatters said. "But no, in implementing a risk-based net worth regulation the agency may not disregard the rules of the road and clear directives prescribed by Congress in the Federal Credit Union Act."
He added, "Simply put, the NCUA is not required to adopt a new risk-based net worth rule at this time, and may not adopt a rule that contravenes the unambiguous language of the Federal Credit Union Act at any time."
McWatters also urged the NCUA to modify the rule to exempt credit unions from the rule using a three-tiered regulatory approach as outlined in an Oct. 6 opinion piece published by CU Times.
Vice Chairman Rick Metsger took several swipes at H.R. 2769, The Risk-Based Capital Study Act, during his comments. He stressed that the NCUA extensively studied the rule and its effect on credit unions. In fact, the NCUA stopped and studied the rule when it issued a second proposed rule, he said.
Metsger also said the cost and regulatory burden risk-based capital placed on credit unions had been grossly exaggerated.
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