Wednesday, October 5, 2011

NCUA Proposal Would Artificially Inflate Corporate CU Leverage Ratio

In a comment letter filed with NCUA on October 5, the American Bankers Association opposed excluding Central Liquidity Facility (CLF) stock subscriptions from the definition of net assets, which is the denominator of the leverage ratio for corporate credit unions.

NCUA is proposing to deduct CLF stock subscription from net assets, because it believes CLF stock subscription poses negligible credit risk and will help address systemic liquidity needs of natural person credit unions.

However, deducting CLF stock subscription is an accounting gimmick that would artificially inflate the leverage ratio for corporate credit unions, making them appear less risky than they really are.

The four percent leverage ratio requirement is intended to ensure that credit unions maintain a minimum amount of capital as protection against risks that are not captured by risk-based capital standards, risks that by definition are unknown or unknowable. The leverage ratio is a recognition that risk models are subject to significant error, which the recent financial turmoil affecting banks and credit unions alike made all too clear. The leverage ratio should not be influenced by fallible estimates of the riskiness of the assets.

Additionally, if NCUA believes that the credit risk posed by CLF stock subscription, is negligible, then this is best addressed through the risk-based capital requirements for corporate credit unions and not the leverage ratio.

Moreover, arguments that the proposed definitional change in net assets is necessary to meet the systemic liquidity needs of natural person credit unions ignores the fact that credit unions have other alternative sources of liquidity already available to them.

First, credit unions can meet their liquidity needs by becoming members of the Federal Home Loan Bank (FHLB) system. As of June 2011, NCUA is reporting that 1,047 federally-insured credit unions were FHLB members.

Second, almost all credit unions, except for the smallest, can make arrangements with the Federal Reserve to access the discount window to meet emerging liquidity needs.

Read ABA's Comment Letter.
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