NCUA Proposal Would Revise Risk-Based Capital Requirements

Credit unions with assets of more than $50 million would be subject to revised risk-based capital requirements under a proposal announced Thursday by the National Credit Union Administration that would require a risk-based capital ratio of 10.5 percent for credit unions to be classified as “well capitalized.”

Under the 198-page proposal, credit unions would still need to maintain a net worth ratio of 7 percent to be classified as “well capitalized.” But the agency said it would replace its “outdated and insufficient” one-size-fits-all capital requirement with a weighted system that better correlates required capital levels to risks the agency deems relevant.

The proposal would require credit unions with complex balance sheets that include concentrations in member business loans, delinquent loans, equity investments and other off-balance-sheet exposures to recalculate their balance-sheet risk using new risk weights. Some exposures — such as consumer loans — would have lower risk weights under the new proposal.

“The NCUA is trying to fix a problem that does not exist,” says Troy Stang, president and CEO of the Northwest Credit Union Association. “Existing credit unions have made it through the worst financial crisis since the Great Depression and are strong and stable compared to their counterparts.”

John Trull, the NWCUA’s director of regulatory affairs, says the Association will comprehensively review the proposed rule and advocate for changes. CUNA also said Thursday that its Examination and Supervision Subcommittee will review the proposal to determine “whether any new rule on this is needed, and whether major elements of the proposal, such as the risk-weighting of certain assets, are reasonable and appropriate.”

“We are particularly troubled by the section of the proposal that would allow NCUA to raise the risk-based capital requirement of an individual credit union above the normal threshold levels based on subjective factors,” says Mary Dunn, CUNA’s deputy general counsel. “We do not think there is a credible case for increasing credit union capital requirements.”

The reality, Trull says, “is that if this rule is adopted as proposed, credit unions will be forced to make drastic changes to their balance sheets.”

Currently, 94 credit unions in Oregon and Washington have assets of more than $50 million.

“This rule looks like it was designed to encourage credit unions to become banks,” says Kevin Cole, chief financial officer for Maps Credit Union in Salem. “Credit unions cannot operate in a regulatory environment that requires them to take less risk than banks, hold more capital, and not have the same ability to go to the market for capital that banks have.”

According to its analysis of Call Report data through June 30, 2013, the NCUA says that more than 90 percent of credit unions subject to the proposed capital measures currently hold capital in excess of the minimum net worth ratio and the risk-based capital ratio required to be classified as well capitalized. If the proposed changes were applied immediately, the agency says, 189 credit unions would see their classification drop from well capitalized to adequately capitalized, and 10 well-capitalized credit unions would drop to undercapitalized.

Assuming no other adjustments, those 10 under-capitalized credit unions would need to retain an additional $63 million in risk-based capital to become adequately capitalized, the NCUA says. According to the proposal, “affected credit unions may be required to change internal policies and practices to meet the new risk-based capital requirements of the proposed rule.”

In any case, all credit unions will have to re-evaluate their strategic plans for growth, Trull says, taking into account the new risk weighting requirements.

For example, “the proposed capital rule would require credit unions to hold 26 percent in capital reserves for every dollar they have invested in a CUSO,” says Dan Hein, the Association’s vice president of finance. “This defies common sense. Investments in CUSOs have historically performed well and not shown losses that would justify holding 26 percent in capital reserves.”

The NCUA proposal includes five risk-based capital categories:

  • Well capitalized: Net worth ratio of 7 percent, risk-based capital ratio of 10.5 percent;
  • Adequately capitalized: Net worth ratio of 6-6.99 percent, risk-based capital ratio of 8-10.49 percent;
  • Undercapitalized: Net worth ratio of 4-5.99 percent, risk-based capital ratio of less than 8 percent;
  • Significantly undercapitalized: Net worth ratio of 2-3.99 percent, risk-based capital ratio would not apply; and
  • Critically undercapitalized: Net worth ratio of less than 2 percent, risk-based capital ratio would not apply.

Credit unions can assess the impact of the proposed rule by using the NCUA’s online calculator, and will have 90 days to comment on the proposal after it is published in the Federal Register. NCUA Chair Debbie Matz says the final rule will have a phase-in period of one year.


Questions? Contact Gary Stein: 503.350.2216,

Posted in CUNA, NCUA.