NCUA Board Approves Proposed Complex CU Rulemaking for Comment

Two issues on the NCUA board agenda Thursday received approval from all three members. In a 3-0 vote, board members voted to ask for comments on the proposed rulemaking for the complex credit union leverage ratio, as well as agreed to ask the industry for information concerning the potential future of using cryptocurrency and digital assets in the marketplace.

The notice of request for comment for the proposed rulemaking to amend the NCUA’s capital adequacy regulation aims to provide a simplified measure of capital adequacy that federally-insured credit unions that are classified as complex can opt into. Complex credit unions are those with assets of more than $500 million.

According to the NCUA, the new Complex Credit Union Leverage Ratio (CCULR) would give complex credit unions that maintain a minimum net worth level and meet other qualifying criteria “a streamlined framework to manage capital in their institutions. As long as a credit union in the CCULR framework maintains the minimum net worth ratio, it would be considered well capitalized.”

Under this proposal, the minimum net worth level under the CCULR framework would initially be 9% on Jan. 1, 2022 and gradually increase to 10% by Jan. 1, 2024.

“When it comes to risk-based capital standards for credit unions, we have three legal responsibilities, which can be summed up in four words: Comparable, consistent, complex and cooperative,” Chairman Todd M. Harper said. “This proposed rule is a balanced approach that gives complex credit unions a risk-based capital framework comparable to those developed by the other federal banking agencies and consistent with the Federal Credit Union Act. It also strengthens the system’s capital levels and provides complex credit unions with a streamlined approach to managing their capital within the cooperative system of credit.”

The proposed rule would also make several amendments to update the NCUA’s final risk-based capital rule, such as addressing asset securitizations issued by credit unions, clarifying the treatment of off-balance sheet exposures and deducting certain mortgage servicing assets from a complex credit union’s risk-based capital numerator. The proposed rule also updates several derivative-related definitions and clarifies the definition of a consumer loan, according to the NCUA.

Vice Chairman Kyle Hauptman added, “For me, the point of this simpler leverage ratio is that it protects both credit unions and the Share Insurance Fund from the inevitable problems associated with risk weighting.”

Board Member Rodney Hood, who has delayed the rule in the past, said, “RBC should be a tool and not a rule.” While he stated he’d rather table the issue, he begrudgingly voted to move the measure forward.

Comments on the proposed rule will be due 60 days after publication in the Federal Register.

Digital Assets

The NCUA board has asked for information about cryptocurrency, peer-to-peer payments, blockchain, identity management systems and dozens of other digital assets currently available for use. Board members want to know how, why or if credit unions would use these types of technologies, and what impact these technologies could have on credit unions.

In asking the credit union industry for feedback, the NCUA wants to create “a framework that ensures federally-insured credit unions can innovate and compete in an ever-changing marketplace.”

Hauptman said, “I’m pleased to see agreement at NCUA that early regulatory clarity is better than waiting until credit unions are left behind in a changing marketplace. The last thing we want is for credit unions to go the way of Blockbuster Video because their regulator didn’t allow them to compete. We’ve already seen assets move out of the traditional financial sector, and young people are getting used to using new fintech firms for their financial needs. Meanwhile, credit unions are ready to gain market share in services like remittances if we allow them to try new, easier, cheaper technologies.”

Harper noted one concern around the use of these kinds of digital assets lies in the expansion of CUSOs and third-party vendors offering these services to credit unions without proper oversight from the NCUA.

“The continued transfer of operations to CUSOs and other third parties diminishes the ability of the NCUA to accurately assess all the risks present in the credit union system,” he said. “To address this issue, the Government Accountability Office, the Financial Stability Oversight Council, and the NCUA Inspector General have all called on Congress to consider legislation to provide the agency with examination and enforcement authority over third-party vendors. I very much agree that we need to close this regulatory blind spot. Without this authority, thousands of credit unions, millions of credit union members and billions of dollars in assets are potentially exposed to unnecessary risks.”

Harper added that this request for information “is the logical next step in laying the groundwork for federally-insured credit unions to leverage these innovations, but we must recognize that things continue to quickly evolve.”

Comments on the request for information must be received no later than 60 days after publication in the Federal Register.