Risk-Based Rule Would Raise Well-Capitalized Standard to 10.5%
ALEXANDRIA, Va. – Federally insured credit unions with more than $50 million in assets that have concentrations in real estate loans, member business loans or delinquent loans would gain additional capital requirements per a proposed risk-based capital rule the NCUA Board introduced Thursday.
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According to the proposed rule, to be classified as well capitalized, affected credit unions would be required to maintain a risk-based capital ratio of 10.5% or above, and pass both net worth ratio and risk-based capital ratio requirements.
Adequately capitalized credit unions would be required to maintain risk-based capital ratios between 8% and 10.49% and pass ratio requirements. Undercapitalized credit unions would fall below 8% risk-based capital ratio.
Additionally, individual federally insured credit unions could be required to maintain higher levels of risk-based capital to address unique supervisory concerns raised by the NCUA, according to the rule’s Board Action Memo.
The risk-based capital proposal for natural person credit unions would replace the current risk-based net worth risk-weighting method, putting them more in line with the NCUA’s risk-based capital requirements for corporate credit unions, the NCUA said, as well as capital requirements at the FDIC, Federal Reserve and Comptroller of the Currency.
The proposed risk-based ratio would be determined by the percentage of a credit union’s net worth available to cover losses, divided by the credit union’s defined risk-weighted asset base, the NCUA said.
NCUA estimates that more than 90% of affected credit unions – approximately 2,237 institutions – would be in compliance with the proposed rule, based upon June 30, 2013 call report data.
However, 189 credit unions would experience a decline in their PCA classification from well capitalized to adequately capitalized, and 10 well-capitalized credit unions would experience a decline to undercapitalized status.
The NCUA estimated that, collectively, those 10 undercapitalized credit unions would need to retain an additional $63 million in risk-based capital to become adequately capitalized, assuming no other adjustments.
The capital requirements and PCA supervisory actions for “new” credit unions and credit unions with fewer than $50 million in assets would remain largely unchanged.
The rule was given a longer-than-usual comment period of 90 days.
In July 2013, NCUA Chairman Debbie Matz said the current 7% net worth requirement would remain the base requirement in a proposed risk-based capital rule, as defined by the Federal Credit Union Act. Credit unions with more than $50 million in assets would be subjected to higher risk-based net worth requirements.
Board Member Michael Fryzel was seeking a balanced approach to the rule in November 2013, advocating for a new standard that was not overly stringent or overly permissive.
“I advocate ‘right sizing’ NCUA’s risk-based capital rules. One of the undeniable lessons learned from the crisis is the value of a financial institution’s capital—capital that is ample, durable and can be readily deployed to shore up a balance sheet under duress,” he said.