Friday, July 15, 2016

Risk-Based Capital: Commenting on Your Future - Part 3: PENALIZING SAFE INVESTMENTS.

The Robust Wizards of OB
(originally published 3/18/14)

... where NCUA quadruples risk-weighting on some gov't bonds!

Well, welcome to "Day 3" in our review of NCUA's proposed regulation on risk-based capital (RBC) - part of a week long exploration of regulatory OB-tuseness.  

Might help to go back and take a quick look at the posts of 3/17/2014 and 3/18/2014 where we talked about how NCUA's proposed RBC rule will significantly increase the capital costs for credit unions and, therefore, the financial costs to members seeking mortgages and business loans from their credit unions.

What's "capital"?
Let's also do another quick review of that obscure, "sometimes-difficult-to-grasp" concept called "capital"!  Again, remember that when NCUA requires more capital for a CU service, NCUA is essentially mandating an increased "tax " or "fee" on the credit union member for that product or service.  NCUA simply, unilaterally, and seemingly without justification "makes up" and then imposes these "capital taxes" on you, me, and your members!  No dialogue, no research, no quantitative proof, and no accountability to Congress nor those taxed.

 What ever happened to : 


Today, let's take a look at the capital tax penalties which NCUA is imposing on credit unions on the other side of the balance sheet, with CU investments

Lend it, or invest it !
At the simplest level, credit unions do just two things with members' share deposits - make member loans and invest the rest!  Credit unions have always invested their members' funds conservatively, mostly in T-bills, government agency securities, FDIC-insured institutions,  or other state/local government obligations .  Definitely "nothing too fancy"!

Here's NCUA's Proposal:

                                                   Capital Required
                                                        Bank      CU
1) Gov't Agencies & State/Local 
    General Obligation bonds:
              *  < 1 yr. term:                  20%      20%
              *  > 1 yr. < 3yr. term:       20%      50%
              *  > 3 yr. < 5 yr. term:      20%      75%
              *  > 5 yr. < 10 yr. term:    20%     150%
              *  > 10 yr. term:                20%   ! 200%

2) State/Local Revenue bonds:
             *  < 1 yr. term:                   50%       20%
             *  > 1 yr. < 3 yr. term:       50%       50%
             *  > 3 yr. < 5 yr. term:       50%       75%
             *  > 5 yr. < 10 yr. term:     50%      150%
             *  > 10 yr. term:                 50%      200%

Say What?
…. so after punitively taxing members attempting to make mortgages and MBLs at credit unions; the NCUA doubles, triples, even requires 10 times more capital for CUs investing in longer term low-risk securities penalizing CU member returns.  

Are the investments somehow "riskier" when they are held on a CU balance sheet as opposed to being held by a bank? Absolutely not! 

"How did NCUA "come up with" the much higher risk weightings required on conservative CU investments? Why are the NCUA capital requirements "more robust" than those for institutions regulated by the OCC, FDIC, or the FED?"

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