Friday, January 24, 2014

Risk-Based Net Worth Requirement for All CUs with More Than $50 Million in Assets

In a 198 page proposal, the National Credit Union Administration (NCUA) is seeking to apply a new risk-based net worth standard to all credit unions with more than $50 million in assets.

The Federal Credit Union Act requires complex credit unions to be subject to a risk-based net worth requirement.

NCUA justified the proposed revisions by stating that the proposal would more closely align its risk-based capital measures with those used by other banking regulators and the use of a consistent framework for assigning risk-weights would improve the comparison of assets and risk-adjusted capital levels across financial institutions.

Credit unions will need a minimum risk-based capital ratio of 10.5 percent along with a net worth leverage ratio of 7 percent or greater to be considered well capitalized.

To be adequately capitalized, a credit union would need to have a leverage ratio of 6 percent or greater and must also have a risk-based capital ratio of 8 percent or greater.

According to NCUA's analysis, an overwhelming majority of credit unions with more than $50 million in assets would already be in compliance with the proposal, if it was in effect today. Over 90 percent of these credit unions would meet or exceed the minimum risk-based capital requirement under the proposed rule.

Based upon June 2013 financial information, the proposed changes to the risk-based capital measure, if applied immediately, would cause 189 credit unions to experience a decline in their prompt corrective action classification from well capitalized to adequately capitalized and 10 well capitalized credit unions would become undercapitalized.

NCUA estimates that, collectively, the 10 credit unions that would become undercapitalized under the rule if applied immediately would need to retain an additional $63 million in risk-based capital to become adequately capitalized, assuming no other adjustments.

NCUA is providing an online calculator to help federally insured credit unions evaluate the impact of the proposed risk-based capital rule on their institutions.

I will post additional comments regarding the proposed rule in the coming weeks.

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