NCUA Stiffens Risk-Based Rules
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 on Jan 23.
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 have 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 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.
The NCUA estimated 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.
The NCUA board also finalized a new rule that would grant investment authority for simple derivatives transactions to qualifying federal credit unions with more than $250 million in assets.
The regulator scrapped the two-tier authority proposed back in May and left out an unpopular so-called pay-to-play provision that could have charged individual credit unions for the cost of supervising the authority.
The final rule also dialed back the NCUA’s authority over federally insured, state chartered credit unions, applying the final rule only to federally chartered credit unions.Under the final rule approved at the regulator’s monthly board meeting, qualifying credit unions are able to engage in limited derivative activities for the purpose of mitigating interest rate risk.
The NCUA has estimated that derivatives authority would cost the agency $750,000 in 2014 and $750,000 in 2015. The total contingency costs could change depending upon the amount of credit unions that apply.Those cost estimates are lower than originally proposed, the NCUA said, because the agency reallocated six full-time employees who were qualified to assess derivatives and other complex asset/liability management risks.
However, the agency “may need to contract the services of additional specialists should the level of applications exceed our internal capacity,” said the board action memorandum.
The final rule requires a credit union seeking derivatives authority to submit a detailed application to the NCUA.“NCUA estimates that this one-time recordkeeping burden will take an average of 50 hours per respondent to prepare,” said a draft of the final rule.
The NCUA said it estimates between 30 and 60 credit unions will apply for the authority.The final rule also includes a provision that provides an NCUA field director with the authority to permit a credit union with assets under $250 million to apply for derivatives authority.
“The field director will only permit a credit union that does not meet the asset threshold to apply if he or she concludes that the credit union needs derivatives to manage its IRR and can effectively manage a derivatives program,” the board memo said.
“Further, a field director may set additional stipulations or conditions related to the application of a credit union that is below the $250 million asset threshold,” the board memo said. The final rule will take effect 30 days from the date of publication in the Federal “Further, a field director may set additional stipulations or conditions related to the application of a credit union that is below the $250 million asset threshold,” the board memo said. The final rule will take effect 30 days from the date of publication in the Federal Register.The NCUA board also approved an extension of the current 18% loan rate ceiling.