Proposed Capital Rule Details Risk-Weights by Asset
Credit unions that can’t convince an NCUA examiner they understand how certain features might affect the performance of an asset-backed investment may have to exponentially increase its risk-weight within the next year.
That’s according to the regulator’s proposed risk-based capital rule, approved by the NCUA board Thursday. For federally-insured credit unions with more than $50 million in assets, such asset-backed investments would be assigned a 1,250% risk weight if the rule is finalized as proposed.
The NCUA included a 10-category table in the proposed capital standards that outlines the risk-weights assigned to each asset class.
Investments in CUSOs and mortgage servicing assets would be assigned a 250% risk-weight under the rule. Corporate credit union perpetual capital, investments with a weighted average life of more than 10 years and member business loans that exceed 25% of assets would all be assigned a 200% risk-weight.
The category of assets weighted 150% includes investments with a weighted-average life of greater than five years but less than 10 years, several classes of delinquent loans, real estate-secured loans greater than 20% of assets and member business loans greater than 15% of assets and less than 25%.
Also risk-weighted more than 100% would be real estate-secured loans greater than 10% of assets but less than 20%, which would be weighted 125%.
A long list of additional assets would be risk-weighted 100% or less. Corporate credit union nonperpetual capital, private student loans, foreclosed and repossessed assets, delinquent first mortgage loans, loans held for sale and other assets were included in the 100% risk-weight category.
Cash on hand and government-guaranteed assets would be the least risky assets, weighted 0%.
The proposed rule would include real estate loans that reprice, refinance or mature within five years or less; the current standard of risk-weighting does not. That means current standards do not address a large amount of real estate loans, the rule said, and credit unions build real estate loan concentrations without appropriate capital.
“We have already learned from the failures of Cal State 9, Chetco and Telesis, which cost the credit union industry more than $350 million, that our 15-year-old minimum standard can be improved to better protect the industry,” said NCUA Chairman Debbie Matz in a release Thursday. “This modernized regulation would allow NCUA to enforce examiners’ recommendations that credit unions holding higher risk on their books should hold more capital. We’re proposing a flexible, forward-looking standard that recognizes the current realities of the industry and quantifies the risks of tomorrow and beyond.”
The comment period for the proposed rule will be 90 days. Matz said in addition to the extended comment period, the NCUA is planning a phase-in period of at least one year for the final rule.