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NCUA Board Member Todd M. Harper Statement on Interim Final Rule on Capital Adequacy and Prompt Corrective Action

May 2020
NCUA Board Member Todd M. Harper Statement on Interim Final Rule on Capital Adequacy and Prompt Corrective Action
Board Member Todd M. Harper

NCUA Board Member Todd M. Harper delivers remarks remotely from his home during the May 2020 Board Meeting.

As Prepared for Delivery on May 21, 2020

Myra, Marvin, and Ian, thank you for your briefing and for your diligence on refining this rulemaking in the days leading up to this presentation.

In today’s significantly stressed economic environment, the NCUA and the federal banking agencies should work to preserve the capital of the depository institutions that they regulate and insure, consistent with their statutory mandates, especially those prompt corrective action capital levels currently contained within the Federal Credit Union Act.

In the credit union system, preserving capital will better enable federally insured credit unions to weather the credit stresses to come, support the economy, and serve their members. Preserving capital and maintaining capital levels will not only prevent future losses to the Share Insurance Fund, which the members of all surviving federally insured credit unions would need to pay, but also protect taxpayers.

That said, I also recognize that our economy is facing unprecedented challenges. We are living through the most severe economic contraction in the agency’s history. Therefore, to the extent practical, we need to allow federally insured credit unions to focus their time and resources on serving their members and addressing employee needs.

Consistent with maintaining safety and soundness and adhering to the requirements of the Federal Credit Union Act, I believe that the NCUA can and should take measured steps to relieve regulatory paperwork burdens for federally insured credit unions in certain circumstances when possible. Because the interim final rule on prompt corrective action is tailored, targeted and temporary, I will support its adoption.

The rule before us would make two tailored and targeted changes to the agency’s prompt corrective action rules. The first change would allow the NCUA Board to issue a single order, instead of multiple orders, to waive the earnings retention requirement for any federally insured credit union classified as adequately capitalized.

In discussing standard practice for considering earnings transfer waivers, staff informed me that, if requested within the required timeframes, credit unions nearly always receive waivers. In fact, during the last five years, field offices have approved earnings transfer waivers 94 percent of the time.

Given that field staff would likely grant such a waiver to an adequately capitalized credit union, if requested, and given that credit unions can use these funds to make responsible and affordable loans to members who need help during this severe economic downturn, it makes sense to temporarily streamline this requirement. Instead of completing a perfunctory paperwork exercise, the change will provide covered federally insured credit unions with more time to focus on serving their members, which will in turn serve the interest of the credit union and its community in the long term.

The second change creates a streamlined process for submitting a net worth restoration plan for a federally insured credit union that becomes undercapitalized primarily because of an increase in share deposits.

During the first quarter, we saw a sizable increase in the shares of federally insured credit unions because of government stimulus checks, a flight to safety from the securities markets, and the payment of annual bonuses. A credit union experiencing such inflows could see its net worth ratio drop, even though its total net worth stayed the same or even increased, because share deposits are counted in the denominator of the net worth ratio and not the numerator.

As the economic fallout related to COVID-19 continues in the months ahead, this temporary increase in share deposits will likely run off the credit unions’ books as members use the money to pay for necessary living expenses. Because such share deposit increases are temporary, the targeted and tailored rule before us would allow certain credit unions that have fallen to an undercapitalized status to submit streamlined net worth restoration plans, better allowing the credit unions to use their limited resources to serve their members.

In both amendments to the requirements for earning transfer waivers for adequately capitalized credit unions and for streamlined net worth restoration plans for undercapitalized credit unions meeting certain standards related to share deposit increases, we have fail-safes. In the first case, a field office may still require a federally insured credit union to submit an earnings transfer waiver if the credit union poses an undue risk to the Share Insurance Fund or exhibits material safety and soundness concerns.

In the second case, in reviewing streamlined net worth restoration plans submitted by credit unions that became undercapitalized because of a large deposit inflow, the field office will check to ensure that the decrease in net worth primarily resulted from share growth. Any credit union found otherwise would be ineligible to submit a streamlined net worth restoration plan.

Finally, both the earning transfer waivers and the streamlined net worth plan provisions that we are adopting today will expire at the end of 2020. Because these temporary regulatory changes will sunset and because they are targeted and tailored, I will vote in favor of this matter.

Mr. Chairman, I have no additional observations to make at this time, and I look forward to hearing Board Member McWatters’ thoughts on these matters.

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