updated 09/24/13 06:31 AM
Capital Requirements in Focus
National Credit Union Administration (NCUA) Chairman Debbie Matz announced in July that the agency is considering changes to risk-based net worth requirements that would apply to credit unions with assets of more than $50 million. The 7 percent well-capitalized standard was established in 1998 and is a one-size-fits-all requirement.
Sharon Lindeman, Vice President of Regulatory Advocacy for the California and Nevada Credit Union Leagues
During the financial crisis, we saw credit unions that held risky assets fail even though they held greater than 7 percent capital before the crisis. As a result, NCUA believes that those credit unions having a higher risk tolerance should also have a higher capital requirement.
NCUA cannot change the 7 percent minimum for "well capitalized," but they can—by regulation—subject credit unions to risk-based net worth requirements.
At the California and Nevada Credit Union Leagues’ Hike the Hill event in September, Chairman Matz indicated that a proposal is "coming soon,” but it would not be implemented quickly, and there would be a reasonable period of implementation. She also indicated the proposal would likely include a calculation method incorporated in call reports that will assess a credit union’s risk and determine capital requirements.
Last week at the National Association of State Credit Union Supervisors' (NASCUS) conference in Coeur d’Alene, ID, Matz again indicated a proposed rule is coming sooner rather than later.
Steve Farrar, loss-risk analyst for NCUA, provided further information on the status of the proposal. A draft of the preamble is written and NCUA staff is working with its board members in further discussions. When the proposed rule is issued, there will be a 90-day comment period—and at the time the proposed rule is issued, NCUA will release a tool that credit unions can use to calculate their capital requirements under the proposed requirements.
Farrar said 90 percent of credit unions would be fine (not fall into Prompt Corrective Action) under the proposed scheme, and 10 percent would not meet the new net worth requirements. Of the 10 percent, the majority are “close to the requirement.” He added that when a final rule is issued, there will be a 12 to 18-month implementation period, and he anticipates an effective date of Jan. 1, 2016.
The Leagues’ are concerned that adding a net worth requirement on top of what is already required will be burdensome. If a credit union does not have sufficient capital requirements under the new rule and becomes subject to PCA requirements, the credit union will need to submit a net worth restoration plan to the NCUA.
The NCUA has said it supports legislation that would allow secondary capital. However, under proposed legislation, H.R. 719, only well-capitalized credit unions would be eligible for secondary capital; therefore, secondary capital would not be an option for those who need to increase capital under the new risk-based-capital requirements. Those credit unions will need to increase capital in some other way or decrease risks in their portfolio.
The Leagues strongly encourage credit unions to comment on the proposed rule once it is issued. The Leagues’ PowerComment tool makes it easy for you to write an effective comment letter. For more information, visit PowerComment.org and let your voice be heard.
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