The NCUA won’t require credit unions to adopt Basel III capital requirements, said director of Examination and Insurance Larry Fazio. However, as required by statute, he said the federal regulator will have to require credit unions maintain capital that is “comparable” what other regulators enforce.
That means updating Part 702 of NCUA Regulations, which outlines prompt corrective action and net worth requirements. Part 702 came up in rotation as part of the NCUA’s three-year revolving regulatory review, but Fazio said the rule gets two years to contemplate because it’s a big-ticket item.
The FDIC, the Federal Reserve and Office of the Comptroller of the Currency will also be reviewing and updating capital regulations this year.
Credit unions will likely end up with a version of Basel requirements Fazio called “Basel lite” that would have a general but simplified Basel framework without the bells and whistles that would be required of more complex, for-profit institutions.
Risk-based capital requirements could also be applied on a scalable basis, Fazio said, with smaller credit unions having a simpler version of rules to comply with compared to larger institutions with presumably more risk. Stock-based entities utilize scalable rules, he said, and different plug and play options are available for scalable net worth models.
However, he said the new rules won’t mean a big change for most credit unions.
“It will pick up those that take a lot of risk and have little capital on top of that,” he said.
NCUA examiners have always looked beyond the 7% net worth minimum requirement for well-capitalized institutions, he said, taking a more customized approach. Examiners expect each credit union to find its own balance between covering expected and unexpected losses and storing up too many reserves.
The strategic days of managing to 7% are history following the financial crisis, Fazio said.
“I think it was a nice philosophical oriented punch line, but if you ask any risk manager worth their salt, they would say unless you’re a clean and simple organization, 7% isn’t enough,” he said, adding that managing to 7% because Congress set it as a minimum is the wrong way to approach capital.
Orlando Hanselman, a director in Fiserv’s risk and compliance group, said it takes between six and 12 months to properly identify risks and build a customized capital profile.