Had the NCUA's proposed risk-based rule been in effect in 2007,it could have saved the NCUSIF as much as $180 million.

NCUA Board Chairman Debbie Matz included that statistic in aletter Friday to House Financial Services Oversight andInvestigations Subcommittee Chairman Patrick McHenry (R-N.C.), inresponse to his concerns about the agency's proposed risk-based capitalrule.

“We back-tested the proposed risk-based capital rule on consumercredit union failures that created the largest losses to the[NCUSIF] since 2007. In 14 of the 15 failures tested, the creditunions would have held substantially more capital if they had beenoperating with the level of risk-based capital required in theproposed rule,” Matz wrote. “The maintenance of higher minimumrisk-based capital levels in these institutions may have preventedtheir failure and would have reduced the amount of losses incurredby the [NCUSIF] by as much as $180 million.”

The letter also included a chart that compared the NCUA'sproposed asset risk weights to the FDIC's rule. While many of theNCUA's asset class risk weights mirror those enforced by the FDIC,there were some exceptions.

Credit unions would have it easier than banks when it comes tocurrent consumer loans; the NCUA's proposal risk weights the assets75%, compared to the FDIC's 100%.

However, the FDIC's rule does not address concentration risk,while the NCUA's proposal does. For example, the FDIC risk weightsall current mortgages at 50%, regardless of concentration. TheNCUA's proposal would also risk weight mortgages up to 25% ofassets at 50%, but would up the ante to 75% for mortgages thatrepresent 25% to 35% of assets, and increase risk weighting to 100%for mortgages more than 35% of total assets.

Concentration risk is also addressed by the NCUA's proposal forjunior lien and delinquent first mortgages and for member businessloans, while the FDIC's rule does not increase based uponconcentration.

Matz identified lessons learned during the financial crisis, newBasel capital standards, recommendations from the GovernmentAccountability Office and the NCUA Inspector General, and newcapital standards issued by the FDIC, OCC and the Fed as reasonsfor the agency's proposal.

“In issuing the proposed rule, our goal is to ensure that afederally insured credit union holds capital commensurate with theinstitution's level of risk. In other words, NCUA is seeking toensure that those federally insured credit unions that have ahigher appetite for risk hold enough capital to match that risk,”Matz wrote.

Matz said the proposal attempts to scale the capital requirements based on anindividual credit union's balance sheet risks.

“Additionally, the proposed rule is similar to the risk-basedcapital rules for other U.S. financial institutions and providesthe flexibility envisioned in the Basel capital accords,” Matzsaid.

“Ensuring that credit unions hold sufficient capital towithstand reasonable economic shocks is fundamental to ensuring thesafety and soundness of the credit union system,” she added.

Matz told McHenry the NCUA estimated that credit unions coveredunder the proposal would need to collectively hold an additional$633 million in capital to reach the well-capitalized level,assuming all 201 decide to keep their balance sheets' current riskexposures.

She said that figure is equivalent to 0.80% of their combinedassets of $80 billion.

“As we proceed with consideration of the risk-based capitalrule, we will keep in mind stakeholder concerns that the individualminimum capital requirement provision is properly scoped andsufficiently limited,” she said.

In response to the letter from Matz, Carrie Hunt, NAFCU's seniorvice president of government affairs and general counsel, said thetrade group appreciates NCUA's willingness to hear fromstakeholders and consider changes to its proposed rule.

“Nevertheless, many questions still remain and we believe thatthe agency should reissue a proposal for notice and comment beforeany final rule is issued, and that it should give credit unionsample time – at least three years – to comply,” she said.