Wednesday, June 13, 2018

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.

No comments:

Post a Comment


The content is provided for educational purposes only, with the understanding that neither the authors, contributors, nor the publishers of this site are engaged in rendering legal, accounting or other expert or professional services. If legal or other expert assistance is required, the services of a competent professional should be sought.

Comments appearing in response to articles appearing on this site do not necessarily reflect the views of the ABA. ABA makes no representations regarding the truth or accuracy of commentary or opinions that may be posted in response to the articles that appear on this website.

The inclusion herein of any link to a website, either in the text of an article or in a comment, does not denote any approval, sponsorship, or endorsement by the ABA, and ABA is not responsible for the content or opinions expressed on those linked websites or related commentary. This content is not licensed to third parties sites and is not affiliated with any third party site. Any reference to the author or this content on any third party site on the Internet is not authorized by the ABA.

It is the policy of the American Bankers Association to comply fully with all antitrust laws. Certain discussions should be considered off-limits, including those that contain competitively sensitive data such as price and cost information, or statements that could be construed as reflecting an attempt or desire to control or influence a particular market or markets. Future pricing or other prospective competitive information should never be shared.