Compliance Blog

Written by Angela Meyster, Regulatory Affairs Counsel

At its October Board meeting, the NCUA released a proposed rule requiring annual stress testing for credit unions with more than $10 billion in assets (covered credit unions).  Additionally, the proposal would require such credit unions to submit, on an annual basis, capital plans with certain mandatory elements and analyses.  The increased need to implement a stress testing regime seems to stem from the NCUA wanting parity with other federal regulators, as its proposal largely mirrors the Federal Reserve System’s requirements that large bank holding companies submit to capital plans.

Under the proposal, the NCUA will conduct the stress testing on covered credit unions, financed by the share insurance fund and administered by a third party selected by the NCUA.  Each year of stress testing will use a baseline, adverse, and severely adverse scenario (described by the NCUA each December 1) on credit unions’ financial data as of September 30, using a nine-quarter horizon.  Although credit unions and the NCUA contest the potential burden of the stress testing component of the proposal, the capital plan component will almost certainly increase annual compliance costs.

A covered credit union must submit a capital plan, based on its financial data of the previous September 30, by March 31 of each year.  The capital plan must include:

• A quarterly assessment of the expected sources and levels of capital that reflects the credit union’s size, operations, and existing level of capital under both favorable and unfavorable conditions, including:
•  estimates of projected revenues, losses, and pro forma capital levels under a range of conditions appropriate for the credit union’s characteristics; and
• a detailed description of the credit union’s process for determining its capital adequacy;
• A discussion of how the credit union can maintain an appropriate level of capital given its risk profile, under both expected and unfavorable conditions;
• A discussion of how the credit union can, under both expected and unfavorable conditions, maintain its access to funding, meet its obligations to creditors and other counterparties, and serve its members;
• The credit union’s capital policy; and
• A discussion of any expected changes to the credit union’s business plan that are likely to have a material impact on its capital adequacy and liquidity.

Further, covered credit unions must conduct a variety of analyses as a part of their capital planning process.  Mandatory analyses a credit union must conduct include:

• A sensitivity analysis to evaluate the effects on capital of changes in variables, parameters, and inputs used in its capital plan;
• An analysis of the net economic value of the credit union using interest rate risk shocks of at least plus or minus 300 basis points, assuming all non-maturity shares have final maturities not exceeding two years; and
• An analysis of the credit risk to capital under unfavorable economic conditions, both on its own and in conjunction with the impact of unfavorable interest rate scenarios.

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Programming Note. NAFCU’s offices will close today at noon and remain closed until Monday, December 2, for the long holiday weekend. We’ll be back to blogging on Monday!

Have a great Thanksgiving!