NCUA Chairman Todd M. Harper at the NCUA's Headquarters in Alexandria, Virginia.
As Prepared for Delivery on March 18, 2021
Good morning, Scott, and thank you for your presentation on the temporary rule on asset thresholds pertaining to large credit unions. The NCUA Board is issuing this interim final rule to address economic disruptions caused by the COVID-19 pandemic. Late last year, our fellow banking agencies published a comparable interim final rule for certain banks.
Before I begin, I want to commend Vice Chairman Hauptman and Board Member Hood for bringing this matter to my attention and requesting that the Board consider it. As a Board, Congress expects us to consider the views of one another and work together to develop good public policy for the credit union system. Thank you, Vice Chairman Hauptman and Board Member Hood, for your leadership on this matter.
The rule before us today would mitigate transition costs on certain credit unions related to the COVID-19 pandemic by allowing federally insured credit unions to use asset data as of March 31, 2020, to determine the applicability of certain regulatory asset thresholds during calendar years 2021 and 2022. Specifically, the interim final rule allows a federally insured credit union to use March 31, 2020, financial data when determining whether the institution is subject to capital planning and stress testing requirements under the NCUA’s regulations and supervision from the Office of National Examinations and Supervision.
As financial first responders on the frontlines of the COVID-19 crisis, many credit unions have experienced rapid and unexpected balance sheet growth resulting from government policy responses to and consumer choices resulting from the economic upheaval caused by the pandemic. In most cases, this growth is expected to be temporary and unlikely to change the long-term risk profile of the affected credit unions. In fact, many credit unions are holding these new deposits in cash, instead of long-term investments and member loans.
The rise in federally insured credit union assets has resulted from several factors. For example, at the start of the pandemic, consumer spending decreased significantly as states or localities ordered millions of Americans to stay home to stop the spread of COVID-19. Additionally, market volatility led to a flight to safety during which securities investments became insured credit union shares. And, as part of congressional action like the CARES Act, the U.S. government provided more than $1 trillion in direct support to consumers and businesses.
For federally insured credit unions just below $10 billion in assets at the start of the pandemic, these factors have resulted in their balance sheets burgeoning by an average of about 14 percent, and in one case by more than 34 percent. In contrast, in 2019, federally insured credit unions with assets just below the $10 billion threshold had an average asset growth of only 9 percent.
The latest round of stimulus checks and unemployment benefits to Americans across the country will only continue this growth. As a result, some federally insured credit unions have been, or may soon be, pushed over the asset thresholds that could subject them to additional regulatory requirements and supervision by the Office of National Examinations and Supervision.
Because the asset growth was rapid and unexpected, many of these institutions have not adequately planned and budgeted for these transitions. What is more, some of them may eventually fall below the thresholds as government interventions subside and consumers return to more traditional spending patterns. Accordingly, this interim final rule gives affected federally insured credit unions more time either to reduce their balance sheets or to prepare for higher regulatory standards.
There may, however, be limited instances in which a threshold exemption would be inappropriate. To address such situations, under this interim final rule, the Board may continue to use its existing reservations of authority to designate a federally insured credit union as subject to ONES supervision or other stress testing and capital planning requirements.
When making any such determination, the Board would consider all relevant factors affecting the federal credit union’s safety and soundness, including, but not limited to:
- the extent of asset growth of the federally insured credit union since March 31, 2020;
- the causes of such growth, including whether the growth occurred as a result of mergers or purchase and assumption transactions;
- whether such growth is likely to be temporary or permanent;
- whether the federally insured credit union has become involved in any additional activities since March 31, 2020, and, if so, the risk of such activities; and
- the type of assets held by the federally insured credit union.
In instances when the federally insured credit union crossed the threshold due to a merger or purchase and assumption transaction, the asset growth is planned and should be treated differently than unanticipated increases. In the case of the former, the credit union had the opportunity to plan and prepare for the change in regulatory requirements. In the case of the latter, it did not.
Furthermore, the Board may in some instances still require a federally insured credit union to conduct capital planning and stress testing in the absence of a merger or purchase and assumption transaction, if significant asset growth at a federally insured credit union reflects a material change in the business model, risk profile, or complexity of the credit union. Nonetheless, we expect to apply the reservation of authority only in limited situations.
While the rule before us today affects large credit unions, we recognize that the latest stimulus payments resulting from the American Rescue Plan will soon lead to further increases in the assets and shares of smaller credit unions. The NCUA Board, therefore, will soon consider a tailored, targeted and temporary rule, similar to last year’s regulatory action, to exempt credit unions from certain prompt corrective action requirements.
Specifically, this rulemaking will 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. The rule would also create 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. I look forward to working with my fellow Board Members on that proposal in the coming weeks.
That concludes my questions and remarks. Vice Chairman Hauptman, you are recognized.