Proposed Stress Test Brings CU Parity to Dodd-Frank: On-Site at NCUA
ALEXANDRIA, Va.—Although credit unions were not included in Dodd-Frank Act provisions that mandate stress testing of banks with more than $10 billion in assets, the NCUA Board on Thursday approved a proposed rule that would require the same of credit unions.
The rule would also require credit unions of the same size to develop and maintain capital plans.
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Board Chairman Debbie Matz said during the meeting it didn’t make sense not to require stress testing of the system’s four largest credit unions. Matz even said the NCUA was concerned about the lack of stress testing currently conducted at the institutions.
At issue, the board chairman said, is the credit unions’ size compared to the share insurance fund. As of June 30, 2013, the assets of the four credit unions stood at $108.5 billion, nearly 10 times the size of the NCUSIF, which had $11.2 billion in equity. Cushioning the NCUSIF against losses at the credit unions was an aggregate net worth of $10.8 billion.
If the rule is finalized as written, the NCUA would conduct stress tests on the large credit unions based on Sept. 30 financial data. The tests would be based on those developed by three banking regulators: the Federal Reserve, the FDIC and the Office of the Comptroller of the Currency.
The rule proposes that those large credit unions must maintain a stress test capital ratio of at least 5%, which is higher than the 4% minimum leverage ratio required of banks. The 1% difference accounts for the fact that credit unions can’t raise capital in the form of stockholder equity. Raising capital through retained earnings could be especially difficult in times of financial stress, the NCUA said in the memo.
Results of the tests may or may not be made public. Matz said the board “punted on the decision” and is seeking comment from the industry on the matter.
Jim Blaine, president/CEO of the $27 billion State Employees’ Credit Union of Raleigh, N.C., previously told Credit Union Times he supports the NCUA making the results of the stress tests public. SECU is one of the four credit unions affected by the proposed rule.
The other three credit unions with assets more than $10 billion include the $54 billion Navy Federal Credit Union in Vienna, Va., the $16 billion Pentagon Federal Credit Union in Alexandria, Va., and the $12 billion BECU in Tukwila, Wash.
According to Scott Hunt, director of the Office of National Examinations at the NCUA, the cost for the NCUA to conduct the tests would be $1 million or less per credit union to establish the program and approximately $500,000 per year for each additional annual test.
Hunt said when presenting the proposed rule to the board that the NCUA would outsource the actual stress testing, and would solicit competitive vendor bids would could lower those estimates.
In response to a question from Board Member Michael Fryzel, Hunt said the costs could increase if additional credit unions cross the $10 billion threshold.
SchoolsFirst Federal Credit Union in Santa Ana, Calif., reported $9.8 billion in assets in its latest data on the NCUA’s website.