Compliance Blog

Written by Alicia Nealon, Director of Regulatory Affairs

After much anticipation, the NCUA Board issued a revised risk-based capital (RBC) proposal during yesterday’s opening Board meeting.  Given its nearly 500 page length, it’s no surprise that the proposal would make several changes to the agency’s current capital requirements.

Out for a 90-day comment period, the proposal retains some elements of last year’s RBC proposal.  Most notably, the revised proposal would still establish different risk-based capital thresholds for “well-capitalized” and “adequately capitalized” credit unions.  NCUA’s legal authority to promulgate these differing thresholds was a point of heated debate amongst the NCUA Board Members yesterday. 

Here are some of the key changes that the proposal would make to the agency’s current capital requirements:

• Establish a new RBC ratio for federally insured natural person credit unions with over $100 million in assets;
• Changes the definition of “complex credit union,” for the purposes of capital requirements, to include credit unions greater than $100 million in assets;
• Establish a risk-based capital ratio of 10 percent for well-capitalized credit unions;
• Establish a risk-based capital ratio of 8 percent for adequately-capitalized credit unions;
• Revise existing risk weights to reflect recent changes made by other banking regulators under the Basel System;
• Require higher minimum levels of capital for credit unions with concentrations of assets in real estate loans, commercial loans or non-current loans; and
• Set forth how NCUA, through its supervisory authority, can address a credit union that does not hold capital that is commensurate with its risk.

If finalized, these changes would be effective on January 1, 2019.

This revised proposal makes a number of changes from the original 2014 RBC proposal.  Most notably, it:

• Removes individual minimum capital requirements (IMCR);
• Removes interest rate risk (IRR);
• Raises the threshold for determining  “complex credit union,” for the purposes of capital requirements, from $50 million to $100 million in assets;
• Drops the 1.25% Allowance for Loan and Lease Losses (ALLL) cap from the risk-based capital ratio numerator;
• Revises a number of risk-weights, including those for Member Business Loans, CUSOs, corporate credit unions, real estate loans and investments; and
• Provides a longer implementation period.

A noteworthy aspect of the revised RBC proposal is the reduced impact on credit union capital buffers.  Simply looking at the number of credit unions downgraded by the RBC proposal ignores the fact that many more credit unions, while not downgraded, will be required to hold more capital in order to maintain their current capital buffers.  According to NCUA, the removal of Interest Rate Risk and the 1.25% ALLL cap from the risk-based capital ratio numerator will reduce the impact on credit union’s capital cushions.   As a result, the average credit union will not need to hold as much additional capital as the original 2014 proposal would have required in order to maintain its current capital buffer.  NAFCU’s Research Division is in the process of updating our Risk-Based Calculator so our members can thoroughly assess the impact of this proposal on their institutions’ capital requirements.

NCUA has also posted various revised proposal summary documents on its website. These include a two-page risk weight comparison sheet that details the current effective risk weights, the original proposal, the revised proposal and the Federal Deposit Insurance Corporation’s (FDIC’s) equivalent for banks. The documents will also show where the revised proposals match those for banks.  All these documents are also listed in the "Additional Information & Resources" section of NAFCU’s Capital Reform page.

A report on yesterday’s NCUA Board meeting is posted on NAFCU’s website.  NAFCU is also sharing our initial analysis in a special video update from NAFCU’s Senior Vice President of Government Affairs and General Counsel Carrie Hunt- available on our website today.  Additionally, NAFCU staff is diligently reviewing the proposal to prepare more detailed analysis, including a Regulatory Alert and a webcast……Stay tuned!!! 

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Programming Note. NAFCU's office will close at noon today and will also be closed on Monday in honor of Martin Luther King Day. We will be back to blogging on Wednesday.