RBC Rule Would Double Credit Union Capital Requirements

NCUA’s proposed RBC rule would double credit union capital requirements versus banks for common asset classes where risk weights are different.


The below comparison of existing risk-based capital requirements for banks with the proposed RBC levels for credit unions by Douglas Alldredge, CPA and chief financial officer of First Credit Union ($402.5M, Chandler, AZ), shows credit unions would have to reserve twice the level of capital, 199%, for common asset classes where risk weights are different for credit unions compared to banks.

Alldredge’s comparison uses sample asset classes for investments, mortgage loans, home equity, consumer, and member business loans. In every asset class except one, the reserve requirement is lower, often significantly so, in banking. The current banking industry ratios are based on a 25-year history of using RBC to assess capital adequacy.


The cumulative effect of the differences on the mix of 14 common assets in Alldredge’s model is that credit unions would reserve $1.675 million in capital for each $1 million of assets per class. Banks, however, are required to have only $840,000 for the same asset total.

The model shows the competitive disadvantage NCUA's RBC rule would place on credit unions, which would have to charge higher loan terms to generate the greater amount of reserves versus the amount required for banks. More importantly, the example illustrates the fallacy of trying to construct a single formula for computing capital for all financial institutions. As documented in prior articles, the growing consensus is that a simple leverage ratio is the best approach for setting capital levels for financial institutions.  

Review Alldredge’s example and draw your own conclusions. Does NCUA’s proposal demonstrate competence in defining specific capital standards? Or is it just mimicking other regulators and imposing arbitrary ratios without any factual grounding?


April 3, 2014


  • Maybe the plan is to drive credit unions into converting to banks. Our plans are in motion just in case. Great article!!
  • Great article! My view: it's naive of the credit union industry to oppose the implementation of risk based capital, and expect to remain virtually the only financial services industry in the world that doesn't face risk based capital requirements (in addition to leverage). And it's naive of the NCUA to believe they could build a better mousetrap in this arena, compared to the banking regulators. They should utilize the requirements for community banks as a template, benefitting from the 25 years of refinement that have been embedded. The NCUA take an approach be similar to banking regulators, in that they should not attempt to address interest rate risk thru risk based capital... a horrible misuse of the mechanism. Nor should they utilize such an arbitrary approach to concentration risk (utilizing heavier weights once the relative size of a portfolio exceeds an arbitrary limit).
    Michael Calcote, CFO Elevations Credit Union
  • Proof that the NCUA is a greater strategic risk than the banks and legislators. Will we, and the trade associations wake up in time? The clock is ticking...
  • So not only would we have to have double the capital required by FDIC but NCUA will also ramp up their expectations of our AFLL balances to compensate for subjective risk!? Seems like they are driving us towards FDIC but then they restrict the process of conversion?
  • Hey Chip, always good to be asked to think about such things. Leaving aside the fairness or competency question, I am wondering if anyone has produced a similar analysis but weighted for the actual asset distributions for credit unions? This assumes (in the 199% ratio) that a bank and credit union each hold exactly $1MM in each of these asset categories, which is maybe just one part of a larger potential picture? Any idea what it is industry wide based on actual balance sheet structures? Maybe it can be done pretty closely based on aggregated YE 5300 reports?
    Tim Kolk