Proposed Rule Gives NCUA Discretion to Set Individual CU's Minimum Capital Requirements

While NCUA's proposed risk-based capital rule sets 10.5 percent as the minimum risk-based capital ratio for being classified as well capitalized, Section 702.105 of the proposed rule grants NCUA discretion to require individual credit unions to hold more capital than is required, if NCUA determines that a credit union's capital is or may become inadequate given the circumstances of the credit union.

NCUA noted that the appropriate level of capital cannot be solely determined by a mathematic formula or objective standards; but must include subjective judgement based upon the agency's expertise.

NCUA outlined 10 scenarios where higher capital levels may be warranted.

(1) A credit union is receiving special supervisory attention;
(2) A credit union has or is expected to have losses resulting in capital inadequacy;
(3) A credit union has a high degree of exposure to interest rate risk, prepayment risk, credit risk, concentration risk, certain risks arising from nontraditional activities or similar risks, or a high proportion of off-balance sheet risk;
(4) A credit union has poor liquidity or cash flow;
(5) A credit union is growing, either internally or through acquisitions, at such a rate that supervisory problems are presented that are not adequately addressed by other NCUA regulations or other guidance;
(6) A credit union may be adversely affected by the activities or condition of its CUSOs or other persons or entities with which it has significant business relationships, including concentrations of credit;
(7) A credit union with a portfolio reflecting weak credit quality or a significant likelihood of financial loss, or which has loans or securities in nonperforming status or on which borrowers fail to comply with repayment terms;
(8) A credit union has inadequate underwriting policies, standards, or procedures for its loans and investments;
(9) A credit union has failed to properly plan for, or execute, necessary retained earnings growth, or
(10) A credit union has a record of operational losses that exceeds the average of other similarly situated credit unions; has management deficiencies, including failure to adequately monitor and control financial and operating risks, particularly the risks presented by concentrations of credit and nontraditional activities; or has a poor record of supervisory compliance.