No Simple Answer to ‘Complex’ Question

Many CUs tagged as ‘complex’ are anything but—according to NCUA’s own definitions.

August 07, 2014
KEYWORDS capital , ncua , risk-based
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CU Complex

It is often useful to categorize credit unions despite their structural and philosophical similarities. Hence, we have “community credit unions,” “low-income credit unions,” and the like.

As credit unions have grown and developed, categorizing institutions based on operational sophistication has increasingly come into focus.

Is your credit union “complex”? It’s a simple question that’s not so easy to answer. Most recently, NCUA’s risk-based capital proposal recommended defining complex credit unions as those with more than $50 million in assets.

As CUNA noted in its comment letter, Congress directed NCUA to establish a risk-based net worth system for “complex” credit unions, but instructed the agency not to confine the definition of “complex” to asset size. Instead, NCUA was to base its definition of “complex” on the “portfolios of assets and liabilities of credit unions.”

Plus, the Federal Credit Union Act provides that risk-based capital requirements should be applied only to those complex credit unions for which the 6% adequately capitalized net worth level does not provide adequate protection. The use of a simple asset size definition of complexity not only runs counter to the intent of Congress, it also is unnecessary.

After all, NCUA provides a complexity index that it has used for various purposes, including the process of recalibrating the definition of “small” credit union. To capture complexity, NCUA constructed the index, which combines different measures of the sophistication and diversity of credit union activities and products.

Credit unions receive a value of “1” if they engage in a particular activity or offer a particular product, and are assigned a value of “0” if they don’t. The different indicators are summed with possible complexity index values ranging between 0 and 27 for each institution.

Naturally, smaller credit unions have low complexity index values because many of these institutions have simple operations with fewer deposit account types, loan types, and/or member services.

It’s also true, however, that many larger credit unions have limited service offerings and/or narrow portfolio composition; they simply are not complex institutions.

Using the NCUA complexity index, we identified about 1,170 credit unions at year-end 2013 with assets of more than $50 million (i.e., those the proposal deems “complex”) that have NCUA complexity index values below 17. That is the same level of complexity that applies to 97% of credit unions with less than $50 million in assets (i.e., credit unions the proposal deems non-complex).

These larger institutions with low complexity index scores either are “plain vanilla” or reflect comparatively limited operations. They tend to be on the small end of the $50-plus million asset category, and hold a combined $255 billion in total assets.

Based on extensive analysis, CUNA urged NCUA to redraft a more refined and accurate definition of “complex” credit unions.

The aim is to ensure that the only credit unions covered will be those engaging in activities that pose extraordinary risk beyond routine loans and investments they are not otherwise positioned to mitigate—and for which their adequately capitalized level of net worth does not provide adequate protection.

Based on these distinctions and the inadequacies of the proposal’s one-dimensional definition of “complex” credit unions, we urged that all federally insured credit unions with assets of $250 million or less be excluded from the definition of “complex,” and that only those credit unions with assets greater than $250 million and an NCUA complexity index value of 17 or higher be required to meet the risk-based capital requirements.

We believe this approach is the only one consistent with the Federal Credit Union Act and will result in a more reasonable application of risk-based capital requirements.

MIKE SCHENK is CUNA’s interim chief economist. Contact him at 608-231-4228 or at

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