NCUA’s Risk-Based Capital Rule is approaching – what does it mean for your Credit Union?

This blog was authored by my colleague Pam Hemstreet, Director Financial Institutions.

In 2015, the National Credit Union Administration (NCUA) issued its final ruling on Risk-Based Capital.  After a series of extensions, the new standard is effective January 1, 2022. The 2015 Final Rule restructures the NCUA’s current prompt corrective action (PCA) regulations by replacing the existing risk-based net worth ratio with a new risk-based capital ratio for “complex” federally insured, natural-person credit unions.  The changes resulting from the new rule result in a risk-based capital calculation more consistent with that used for corporate credit unions and those of other banking agencies, such as the OCC. The new well-capitalized ratio threshold will increase from 7% to 10%.

Why the new rule?

The 2015 Final Rule intends to reduce the risk of credit unions exhausting their capital and putting an undue burden on the NCUSIF by causing large losses.

Definition of a Complex Credit Union

Under Section 702.103 of the NCUA’s 2015 Final Rule, a credit union is defined as complex and the risk-based capital ratio is applicable only if the credit union’s quarter-end total assets exceed $500 million, as reflected in its most recent call report.  In the case of the effective date on January 1, 2022, this complex credit union definition is applicable to the March 31, 2022 call report.

The NCUA has a complexity index which counts the number of complex products and services provided by credit unions based on the following indicators:

• Commercial Loans
• Participation Loans Sold
• Interest-Only Loans (excluding first-lien mortgages)
• Indirect Loans
• Sold Mortgages
• Non-Federally Guaranteed Student Loans
• Non-Agency Mortgage-Backed Securities
• Non-Mortgage Related Securities with Embedded Options
• Collateralized Mortgage Obligations/Real Estate Mortgage Investment Conduits
• Commercial Mortgage-Related Securities
• Borrowings (Draws against lines of credit, borrowing repurchase transactions, other notes, promissory notes and interest payable)
• Repurchase Transactions
• Derivatives

The NCUA believes this complexity index provides a more accurate methodology for identifying when credit unions engage in complex activities and defining credit unions as complex. The NCUA noted that among credit unions with $500 million or more in total assets, 100 percent of these credit unions engage in at least one of the above-noted complex activities; therefore, reinforcing the standard for complex.

Impact and implementation

With the filing of the March 31, 2022 call report, the new standard will be in effect.  At the time of development of the 2015 Final Rule, over 98% of credit unions considered complex were still well capitalized using the Risk-Based Capital approach.  Some credit unions will require a higher minimum capital requirement in terms of dollars under this new ratio to achieve the well-capitalized designation but will still meet the threshold.

With significant asset increases over the past 18 months due to the pandemic and credit unions showing share growth of over 20% in 2020 and 15% through 2021, this would be an ideal time for your credit union to evaluate the impact of this new standard.

The March 31, 2022 call report will be updated for the new rule; however, credit unions desiring to see how the changes will impact them directly, are able to download a Risk-Based Capital estimator to run any “what if” scenarios they believe are necessary to ensure no downgrades below well-capitalized will occur upon implementation of the new standard.

Please visit the following link for the Risk-Based Capital Estimator and well as other resources.

Risk-based Capital Rule Resources | National Credit Union Administration (ncua.gov)

Key Takeaways

Credit unions should assess their status of qualifying under the new structure quarterly, as the new standard has a quarterly application.  Documentation will be critical when managing a capital plan for credit unions considered complex under this framework. As credit unions grow and increase complexity, risk correspondingly increases and the monitoring of capital adequacy is paramount to the NCUA.  The NCUA will have the ability to collect more detailed data on each federally insured, natural person credit union, which will improve its supervision capabilities of the entire credit union population. Contact Us to learn how we can help you evaluate this impact.