Tuesday, September 14, 2010

Could Credit Unions Face Higher Net Worth Requirements?

Credit unions should pay careful attention to proposed changes in capital requirements coming out of Basel; because credit unions may face higher minimum net worth requirements in the future.

The Basel Committee on Banking Supervision has agreed that banks should hold more capital in the future to avoid the type of turmoil seen in recent years. At present, banks must have a risk-based capital ratio of at least 8 percent and a leverage ratio of at least 4 percent. Under the Basel Committee agreement, the risk-based capital floor will rise to 10.5 percent and the capital-to-asset ratio will either be replaced or augmented with a new capital-to-risk-weighted-asset minimum of 7 percent. These are the new standards for being adequately capitalized. Banking regulators will apply higher cut-offs to be well capitalized.

These new requirements will be phased in over time. However, U.S. banking regulators may move quicker than the proposed Basel Committee timeline to meet Dodd-Frank Act deadlines.

U.S. regulators have until Jan. 1, 2013, to implement the agreement. In the past, U.S. bank regulators have applied these requirements to all banks and I suspect this will be the case with these proposed capital standards.

But why am I saying that this may mean higher future net worth requirements for credit unions.

Section 1790d(c)(2)(A) of the Federal Credit Union Act, which deals with Prompt Corrective Action, states that “[i]f … the Federal banking agencies increase or decrease the required minimum level for the leverage limit, the [NCUA] Board may correspondingly increase or decrease 1 or more of the net worth ratios … in an amount that is equal to not more than the difference between the required minimum level most recently established by the Federal banking agencies and 4 percent of total assets.”

In order for this adjustment to occur, two conditions must be met. First, the NCUA must determine, in consultation with the Federal banking agencies, that the reason why the agencies changed the required minimum level for the leverage limit also justifies the proposed adjustment in net worth ratio for credit unions. Second, NCUA must determine that the resulting net worth ratios for credit unions is sufficient to carry out the purpose of this section of the Federal Credit Union Act.

While NCUA has some discretion associated with adjusting the net worth ratio for credit unions, deciding not to adjust the minimum net worth requirement when the Federal bank regulators have raised the minimum capital requirements for banks may come at enormous political cost to the agency.

Therefore, I believe credit unions should begin to prepare for higher future minimum net worth requirements.


  1. Note to bankers -- Welcome to our world. We've been at 7% for quite some time. Here's some parity for the banks that you've always wanted... the same capital requirements. Happy?

  2. Professor Leggett,
    Would you be so kind as to explain the difference between "risk based capital ratio" and "capital to risk weighted asset ratio".

  3. The difference between the the risk based capital requirement and the capital to risk weighted asset ratio is that the total capital can be met with Tier 2 and higher forms of capital, while capital to risk weighted asset ratio can only be met with Tier 1 capital.

    Here is the link to the press release from the Basel Committee. http://www.bis.org/press/p100912.pdf

  4. Just another case of the banks messing up and credit unions paying the price. And, boy, that PCA scheme really worked well to reduce the number of financial institution failures. Maybe this is the straw that will allow supplemental capital for credit unions if the capital requirements are increased.

  5. All credit union capital is Tier 1 and we do not benefit from any risk weighting of the assets. So, banks will still have a capital advantage, just less of one.



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