Substituting a Higher Net Worth Ratio for Risk-Based Capital Requirement

The National Credit Union Administration's risk-based capital rule is very controversial for credit unions and their trade associations.

However, recent legislation may allow the National Credit Union Administration (NCUA) to substitute a higher net worth ratio for the risk-based capital requirement for complex credit unions with less than $10 billion in assets.

A complex credit union has assets of $100 million or more.

This would require combining Section 1790d(c)2 of the Federal Credit Union Act with Section 201 of the newly enacted S. 2155 (Economic Growth, Regulatory Relief, and Consumer Protection Act).

First, Section 201 of S. 2155 requires that the Federal banking agencies establish a community bank leverage ratio of tangible equity to average consolidated assets of not less than eight percent and not more than ten percent. Banks with less than $10 billion in total consolidated assets who maintain tangible equity in an amount that exceeds the community bank leverage ratio will be deemed to be in compliance with capital and leverage requirements. In other words, banks that adopt the heightened leverage ratio would opt out of the risk-based capital requirements.

Second, Section 1790d(c)2 of the Federal Credit Union Act states that if Federal banking agencies increase or decrease the required minimum level for the leverage limit, the NCUA Board may correspondingly adjust one or more of its Prompt Corrective Action net worth ratios in consultation with the Federal banking agencies by an amount equal to, not more than, the difference between the new minimum requirement established by bank regulators and 4 percent of total assets.

If NCUA Board decides to pursue this approach, complex credit unions would be allowed to opt for a higher minimum leverage ratio, which could be 300 to 500 basis points higher depending on the final decision by federal banking regulators, in return they would not longer be subject to NCUA's risk-based capital requirements. Complex credit unions that do not meet the higher net worth requirement would be subject to the current and future net worth regulatory regime.

For example, as of the end of 2017, 917 complex credit unions with less than $10 billion in assets had a net worth ratio of at least 10 percent and 425 complex credit unions had a net worth ratio of at least 12 percent.

This substitution of a higher leverage ratio for a risk-based capital rule would provide regulatory relief to many complex credit unions by simplifying their capital calculations.