NCUA Chairman Todd M. Harper Statement on the Final Rule on the Complex Credit Union Leverage Ratio and Amendments to the 2015 Risk-Based Capital Rule

As Prepared for Delivery on December 16, 2021

Thank you, Tom and Rachel, for your informative presentation and your diligent efforts in bringing before the NCUA Board today the Complex Credit Union Leverage Ratio final rule, also known as CCULR, and amendments to the agency’s 2015 risk-based capital rule. I also appreciate that Myra, Viki, Rick, Kathryn, and Ian are available for questions, although I have none at this time.

I have long held that all financial institutions backed by federal deposit insurance, including federally insured credit unions, should hold capital equal to the risks held on their balance sheets. In the case of federally insured credit unions, if a credit union with greater risk fails, risk-based capital would help minimize losses to the National Credit Union Share Insurance Fund.

Capital, after all, is the first line of defense against losses. In the event of a complex credit union failure, the additional capital buffer provided through a robust risk-based framework protects surviving credit unions, their members, and the taxpayers who ultimately guarantee the Share Insurance Fund. 

When it comes to risk-based capital standards for credit unions, we have several legal responsibilities, which can be summed up in four words: comparable, consistent, complex, and cooperative.

• First, these standards need to be comparable to the rules developed by the other federal banking agencies.
• Second, our rules must be consistent with the requirements of the Federal Credit Union Act.
• Third, whereas risk-based capital rules apply to all banks regardless of size, our rules need only apply to complex credit unions, which the Board has currently set at $500 million or more in assets.
• And fourth, our risk-based capital rules must address the cooperative nature of the institutions the NCUA oversees.

In my view, the risk-based capital rule approved in 2015 met all those standards. And, when finally implemented at the start of 2022, it will provide the system with greater stability. 

We must, however, also recognize several legislative, regulatory, and marketplace developments since the NCUA Board approved the final risk-based capital rule in 2015. For example, in 2018, Section 201 of the Economic Growth, Regulatory Relief, and Consumer Protection Act directed the other federal banking agencies to propose a simplified, alternative measure of capital adequacy for certain federally insured banks. The result of that effort became known as the Community Bank Leverage Ratio framework, which became effective in January 2020.

Since 2015, the NCUA has also approved several regulatory measures, like our new final rules on subordinated debt and derivatives, which affect a credit union’s capital levels. Additionally, credit unions have begun issuing their own loan securitizations to investors. In acting today, we should take these developments into consideration.

Accordingly, the final rule incorporates all these items and addresses stakeholder comments gained as part of the earlier advance notice of proposed rulemaking approved in January as well as the proposed rule issued in July. Primarily, this final rule would amend the NCUA’s capital adequacy regulation to provide a simplified measure of capital adequacy for federally insured credit unions classified as complex. 

The proposed Complex Credit Union Leverage Ratio for federally insured credit unions is comparable to the Community Bank Leverage Ratio. In essence, both standards seek to strike a balance among several objectives, including maintaining strong capital levels, protecting safety and soundness, and simplifying compliance. So long as an eligible credit union in the CCULR framework maintains the minimum net worth ratio, it would be considered well capitalized.

Our biggest decision in finalizing this rule was at what level to set the CCULR. In reaching a consensus, we looked to the lessons of a famous children’s story. Some wanted the leverage ratio to be 8 percent. I viewed that as too soft. I wanted the final CCULR level to rise over time and reach 10 percent, a level that others considered too hard. So, we compromised and have permanently set the CCULR at 9 percent. That ratio turned out to be just right.

While lowering a credit union’s risk-based capital compliance requirements, CCULR actually increases the system’s capital buffer. If all 473 complex credit unions currently with a 9 percent net worth ratio or higher opted into the CCULR and continued to hold the minimum 9 percent net worth ratio required to be well capitalized, the total minimum net worth required is estimated at $111.8 billion, an increased capital requirement of $24.3 billion over the minimum required under the 2015 Final Rule. This additional capital would strengthen the system’s ability to absorb any future financial losses and economic shocks.

The proposed rule makes several other changes to the NCUA’s risk-based capital rule, including clarifying the treatment of off-balance sheet exposures and deducting certain mortgage servicing assets included in a complex credit union’s risk-based capital numerator. The proposed rule also clarifies the risk weights for asset securitization, which were not included in the 2015 rule because credit unions had not yet engaged in this activity.

While we have seen some positive signs in the economy and in credit union performance data, we are not out of the woods just yet when it comes to the COVID-19 pandemic. With pandemic-relief programs now expiring, many households could soon face financial stress. If so, then we could see higher delinquency and charge-off rates and potential losses for credit unions — and even failures — in the coming months.

An uncertain interest rate environment and the potential for continued elevated insured shares also place additional stress on credit union capital levels. As such, this proposal is an appropriate measure that provides complex credit unions with a streamlined approach to managing their capital levels while also strengthening the system’s resiliency to economic shocks.

In sum, this final 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. The final rule strengthens the system’s capital levels and provides 70 percent of complex credit unions with a streamlined approach to managing their capital. As we continue to address the fallout of the COVID-19 pandemic, this final rule is a prudent course of action.

That concludes my remarks. I now recognize Vice Chairman Hauptman.