Complex Credit Union Leverage Ratio and the MBL Cap
At the beginning of the month, the National Credit Union Administration’s (NCUA) risk-based capital requirements and complex credit union leverage ratio (CCULR) went into effect. Today’s blog will discuss the effects of those events on the member business lending (MBL) cap in the Federal Credit Union Act (FCU Act) and section 723.8 of NCUA’s regulations.
The FCU Act provides that complex credit unions must be subject to a risk-based net worth requirement. As noted in the CCULR final rule, NCUA set the complex credit union threshold at $500 million. For a credit union with total assets greater than $500 million, section 702.103 of NCUA’s regulations requires that credit union to “calculate its risk-based capital measure either by using the risk-based capital ratio under § 702.104(a) through (c), or, for a qualifying complex credit union opting into the CCULR framework, by using the CCULR framework under § 702.104(d).”
Calculating the risk-based capital ratio under section 702.104(a) through (c) involves several steps. On the other hand, the CCULR is calculated just like the net worth ratio. It is “the ratio of the net worth of the credit union to the total assets of the credit union, expressed as a percentage rounded to two decimal places.” Credit unions must be qualifying complex credit unions under section 702.104(d)(2) to be able to opt in to using the CCULR framework rather than the risk-based capital requirements. This includes having a CCULR of at least 9% and satisfying three other requirements.
How does this affect how credit unions calculate the aggregate MBL cap in the FCU Act and section 723.8? There is an effect because the cap is “is the lesser of 1.75 times the actual net worth of the credit union, or 1.75 times the minimum net worth required under section 1790d(c)(1)(A) of the [FCU] Act.” Net worth is defined in section 702.2 as, among other things, encompassing retained earnings. The reference to section 1790(c)(1)(A) is a reference to the net worth ratio required of a credit union to be well-capitalized, 7%.
The preamble to the CCULR final rule explains that a credit union that is not complex and has a net worth greater than what is necessary to be well capitalized (i.e., the 7% net worth ratio) calculates its MBL limit by multiplying “1.75 by seven percent of its total assets.”
Because complex credit unions are subject to NCUA’s risk-based capital requirements, the preamble to the CCULR final rule indicates that the calculation is a little more complicated for complex credit unions that elect to use the CCULR:
Accordingly, under the final rule, a qualifying complex credit union that opts into the CCULR determines its MBL limitation by reference to the amount of net worth required to be well capitalized under the CCULR. Complex credit unions that do not qualify or do not opt into the CCULR framework determine their MBL limitation by reference to the 10 percent risk-based capital ratio, as described in the 2016 MBL final rule. In either scenario, if a complex credit union has actual net worth below those measures, its actual net worth would determine its MBL limitation.
The preamble also discusses how the calculation may differ for complex credit unions that choose to rely on the risk-based capital ratio.
Complex credit unions may want to review how they calculate their MBL caps to make sure the calculations align with NCUA’s expectations.