NCUA Should Propose the Equivalent of the Community Bank Leverage Ratio

On June 20, 2019, the National Credit Union Administration (NCUA) Board delayed the effective date of the agency’s risk-based capital rule to January 1, 2022.

The delay was meant to provide the NCUA Board time to consider additional improvements to credit union capital standards, including the equivalent of a community bank leverage ratio for credit unions.

On September 17, the Federal Deposit Insurance Corporation finalized the community bank leverage ratio rule.

The final rule implements a section of the S. 2155 regulatory reform law that directed the agencies to set a community bank leverage ratio between 8 percent and 10 percent.

Under the final rule, banks with less than $10 billion in assets may elect the community bank leverage ratio framework if they meet the 9 percent ratio and if they hold 25 percent or less of assets in off-balance sheet exposures, and 5 percent or less of assets in trading assets and liabilities.

Community banks with a leverage capital ratio of at least 9 percent will be considered to have met the well-capitalized ratio requirements under the Prompt Corrective Action regulations and will not be required to report or calculate risk-based capital.

The final rule has a two-quarter grace period for a qualifying community bank that fails to meet any of the qualifying criteria. For example, if the leverage ratio slips under 9 percent, but remains above 8 percent, the community bank will be deemed to be well-capitalized during the grace period. However, there is no grace period for a community bank if its leverage ratio falls below 8 percent.

The final rule goes into effect on January 1, 2020.

Section 1790d(c)2 of the Federal Credit Union Act states that if Federal banking agencies increase or decrease the required minimum level for the leverage limit, the NCUA Board may correspondingly adjust one or more of its Prompt Corrective Action net worth ratios in consultation with the Federal banking agencies.

The NCUA Board should use its authority to issue a proposed rule this year that is equivalent to the community bank leverage ratio.

By doing so, strongly capitalized, complex credit unions could elect to receive regulatory relief from the agency's risk-based capital rule.

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