Some Thoughts on Risk-Based Capital Proposal

The National Credit Union Administration (NCUA) Board proposed to amend its definition of a “complex” credit union adopted in the 2015 for risk-based capital purposes by increasing the asset-size threshold from $100 million to $500 million.

According to the Board, the new definition of a complex credit union would exempt an additional 1,026 credit unions from the risk-based capital rule, providing these credit unions with regulatory relief. The NCUA believes that a single asset-size threshold is clearer, more logical, and easier to administer. The Board believes raising the threshold level for a complex credit union from $100 million to $500 million would not pose an undue risk to the National Credit Union Share Insurance Fund (NCUSIF).

Unfortunately, this proposal of raising the asset-size threshold for a complex credit union to $500 million would exclude numerous credit unions engaged in complex and risky activities.

• According to the proposal, increasing the asset-size threshold to $500 million would exclude approximately 800 credit unions with at least 3 complex activities, as identified by NCUA, from the agency’s risk-based capital rule.
• NCUA estimated that 284 credit unions with between $100 million and $500 million in assets would under the current rule need to raise $165 million in capital over what is required by the net worth ratio due to the credit unions’ risk profile.
• Increasing the asset-size threshold to $500 million would exclude 122 credit unions with composite CAMEL codes of 3, 4, or 5 with approximately $21.4 billion in insured shares from the risk-based capital rule, as of March 2018.
• Seven of the 10 costliest failures to the NCUSIF involved credit unions with between $100 million and $500 million in assets would be exempted from the risk-based capital rule.

While I agree with the Board that credit unions between $100 million and $500 million don't pose a systemic risk to the NCUSIF, I do believe that credit unions face the risk of future premium assessments. These credit unions with assets between $100 million and $500 million would not hold enough capital relative to their risk profiles. The losses to the NCUSIF from the failure of these credit unions would be paid for by other credit unions.

A better alternative for identifying a complex credit union would involve looking at the business model of a credit union based upon its assets and liabilities.