In a speech to the Mountain West Credit Union Association’s Annual Meeting on Thursday, April 23, National Credit Union Administration Board Member Todd Harper stated that federally insured credit unions entered the pandemic-induced recession in a strong position.
At the end of 2019, the system had a net worth ratio of 11.37 percent and a delinquency rate of just 71 basis points.
However, he cautioned that credit unions will face a challenging environment.
He noted that the COVID-19 pandemic will likely lead to sizable losses in the commercial real estate portfolio at credit unions. While the industry has an overall exposure to commercial real estate of 4.8 percent of the industry's assets, those credit unions that have concentrated in commercial real estate lending will be carefully monitored by the agency.
He further stated that residential real estate comprises 31 percent of the industry's balance sheet. Credit unions should expect elevated losses from higher rates of unemployment.
Credit unions hold $380 billion in auto loans. Harper told the audience that the agency expects auto loan delinquency rates to be high to very high, but he pointed out that credit union borrowers have better than average creditworthiness.
Harper noted that credit unions with large exposure in used auto loans could be challenged as used car prices plummet. He said: "These credit unions could face unexpectedly higher losses if the borrower defaults and the actual market price of the vehicle is lower than the value of the loan."
He also commented that these credit unions could face earnings pressure as both new and used car sales fall.
Harper stated that unsecured loans accounted for 7.5 percent of the industry's assets. Unsecured loans include credit cards, private student loans, and other unsecured products. Harper warned that if people don't return to work within the next 3 months, delinquencies on unsecured loans will start to hit credit unions.
Harper also encouraged credit unions to join the Central Liquidity Facility (CLF). He stated that even if your credit union does not borrow from the CLF, your joining the CLF will ensure that the CLF has the resources to meet the liquidity needs to other credit unions that are facing liquidity issues.
Read the speech
Showing posts with label Net Worth Ratio. Show all posts
Showing posts with label Net Worth Ratio. Show all posts
Tuesday, April 28, 2020
Wednesday, April 22, 2020
NCUA Amends Capital and Business Lending Regulations
The National Credit Union Administration (NCUA) Board unanimously approved on April 22, 2020, by notation vote, an interim final rule that amends the agency’s capital adequacy and member business loans and commercial lending regulations following the creation of the Small Business Administration’s Paycheck Protection Program (PPP).
The Coronavirus Aid, Relief, and Economic Security (CARES) Act created the PPP to help certain businesses affected by the COVID-19 pandemic. The CARES Act requires that PPP loans receive a zero-percent risk weighting under the NCUA’s risk-based capital requirements. To reflect this statutory requirement, the interim final rule amends the NCUA’s capital adequacy regulation so that covered PPP loans receive a zero-percent risk weight in the agency’s risk-based net worth requirements.
Additionally, if a loan is pledged as collateral for a non-recourse loan provided through the Federal Reserve System’s PPP Lending Facility, the covered loan can be excluded from a credit union’s calculation of total assets for the purposes of calculating its net worth ratio. This ensures that credit unions can neutralize the regulatory capital effects of PPP loans pledged to the facility.
The interim final rule also makes a conforming change to the definition of a commercial loan in the NCUA’s member business loans and commercial lending rule. Under the rule, PPP loans are excluded from the definition of a commercial loan because the unique nature of these loans mitigates the need for enhanced commercial underwriting.
Read the interim final rule.
The Coronavirus Aid, Relief, and Economic Security (CARES) Act created the PPP to help certain businesses affected by the COVID-19 pandemic. The CARES Act requires that PPP loans receive a zero-percent risk weighting under the NCUA’s risk-based capital requirements. To reflect this statutory requirement, the interim final rule amends the NCUA’s capital adequacy regulation so that covered PPP loans receive a zero-percent risk weight in the agency’s risk-based net worth requirements.
Additionally, if a loan is pledged as collateral for a non-recourse loan provided through the Federal Reserve System’s PPP Lending Facility, the covered loan can be excluded from a credit union’s calculation of total assets for the purposes of calculating its net worth ratio. This ensures that credit unions can neutralize the regulatory capital effects of PPP loans pledged to the facility.
The interim final rule also makes a conforming change to the definition of a commercial loan in the NCUA’s member business loans and commercial lending rule. Under the rule, PPP loans are excluded from the definition of a commercial loan because the unique nature of these loans mitigates the need for enhanced commercial underwriting.
Read the interim final rule.
Monday, September 23, 2019
NCUA Should Propose the Equivalent of the Community Bank Leverage Ratio
On June 20, 2019, the National Credit Union Administration (NCUA) Board delayed the effective date of the agency’s risk-based capital rule to January 1, 2022.
The delay was meant to provide the NCUA Board time to consider additional improvements to credit union capital standards, including the equivalent of a community bank leverage ratio for credit unions.
On September 17, the Federal Deposit Insurance Corporation finalized the community bank leverage ratio rule.
The final rule implements a section of the S. 2155 regulatory reform law that directed the agencies to set a community bank leverage ratio between 8 percent and 10 percent.
Under the final rule, banks with less than $10 billion in assets may elect the community bank leverage ratio framework if they meet the 9 percent ratio and if they hold 25 percent or less of assets in off-balance sheet exposures, and 5 percent or less of assets in trading assets and liabilities.
Community banks with a leverage capital ratio of at least 9 percent will be considered to have met the well-capitalized ratio requirements under the Prompt Corrective Action regulations and will not be required to report or calculate risk-based capital.
The final rule has a two-quarter grace period for a qualifying community bank that fails to meet any of the qualifying criteria. For example, if the leverage ratio slips under 9 percent, but remains above 8 percent, the community bank will be deemed to be well-capitalized during the grace period. However, there is no grace period for a community bank if its leverage ratio falls below 8 percent.
The final rule goes into effect on January 1, 2020.
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.
The NCUA Board should use its authority to issue a proposed rule this year that is equivalent to the community bank leverage ratio.
By doing so, strongly capitalized, complex credit unions could elect to receive regulatory relief from the agency's risk-based capital rule.
Read more.
The delay was meant to provide the NCUA Board time to consider additional improvements to credit union capital standards, including the equivalent of a community bank leverage ratio for credit unions.
On September 17, the Federal Deposit Insurance Corporation finalized the community bank leverage ratio rule.
The final rule implements a section of the S. 2155 regulatory reform law that directed the agencies to set a community bank leverage ratio between 8 percent and 10 percent.
Under the final rule, banks with less than $10 billion in assets may elect the community bank leverage ratio framework if they meet the 9 percent ratio and if they hold 25 percent or less of assets in off-balance sheet exposures, and 5 percent or less of assets in trading assets and liabilities.
Community banks with a leverage capital ratio of at least 9 percent will be considered to have met the well-capitalized ratio requirements under the Prompt Corrective Action regulations and will not be required to report or calculate risk-based capital.
The final rule has a two-quarter grace period for a qualifying community bank that fails to meet any of the qualifying criteria. For example, if the leverage ratio slips under 9 percent, but remains above 8 percent, the community bank will be deemed to be well-capitalized during the grace period. However, there is no grace period for a community bank if its leverage ratio falls below 8 percent.
The final rule goes into effect on January 1, 2020.
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.
The NCUA Board should use its authority to issue a proposed rule this year that is equivalent to the community bank leverage ratio.
By doing so, strongly capitalized, complex credit unions could elect to receive regulatory relief from the agency's risk-based capital rule.
Read more.
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.
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.
Monday, March 12, 2018
Notre Dame FCU's Highly Redacted Application for Secondary Capital
Notre Dame Federal Credit Union (Notre Dame, IN) issued $12 million in secondary capital with a maturity of 10-years during the fourth quarter 2017, according to its secondary capital application.
A Freedom of Information Act (FOIA) obtained copies of highly redacted initial and revised applications of the credit union and a copy of the National Credit Union Administration's approval letter.
The credit union stated that the secondary capital will be used to expand deposit and credit services of its members and its communities without curtailing expected future growth of the credit union. It will also assist the credit union in providing mission-related loans, such as zero percent holiday loans up to $1,000, favorable rates for first-time car buyer, and loans for home/appliance repairs up to $5,000.
The application redacts information on the ratio of qualified secondary capital to regular reserves plus retained earnings in 2017, but also the ratio in 2027 at maturity. However at the end of 2017, the ratio of qualified secondary capital to regular reserves plus retained earnings was 27.76 percent.
The credit union further stated that the issuance of secondary capital will strengthen its capital base. With the injection of secondary capital, the credit union's net worth ratio went from 8.06 percent at the end of the third quarter of 2017 to 9.74 percent at the end of 2017.
The National Credit Union Administration (NCUA) wanted to know how the credit union will repay its secondary capital at maturity. The credit union stated it would use liquid accounts at correspondent institutions and its available lines of credit. However, several lines of the application were redacted. This might suggest that the credit union will issue new secondary capital to repay maturing secondary capital.
The NCUA redacted information on how Notre Dame FCU will offset the cost of secondary capital. Also, there was no information on the cost of the secondary capital.
A Freedom of Information Act (FOIA) obtained copies of highly redacted initial and revised applications of the credit union and a copy of the National Credit Union Administration's approval letter.
The credit union stated that the secondary capital will be used to expand deposit and credit services of its members and its communities without curtailing expected future growth of the credit union. It will also assist the credit union in providing mission-related loans, such as zero percent holiday loans up to $1,000, favorable rates for first-time car buyer, and loans for home/appliance repairs up to $5,000.
The application redacts information on the ratio of qualified secondary capital to regular reserves plus retained earnings in 2017, but also the ratio in 2027 at maturity. However at the end of 2017, the ratio of qualified secondary capital to regular reserves plus retained earnings was 27.76 percent.
The credit union further stated that the issuance of secondary capital will strengthen its capital base. With the injection of secondary capital, the credit union's net worth ratio went from 8.06 percent at the end of the third quarter of 2017 to 9.74 percent at the end of 2017.
The National Credit Union Administration (NCUA) wanted to know how the credit union will repay its secondary capital at maturity. The credit union stated it would use liquid accounts at correspondent institutions and its available lines of credit. However, several lines of the application were redacted. This might suggest that the credit union will issue new secondary capital to repay maturing secondary capital.
The NCUA redacted information on how Notre Dame FCU will offset the cost of secondary capital. Also, there was no information on the cost of the secondary capital.
Tuesday, August 29, 2017
Less Than 20 Percent of CUs That Became Significantly Undercapitalized Are Still Active
Less than 20 percent of credit unions that become significantly undercapitalized are still active or independent, according to the National Credit Union Administration.
Over a 20 year period ranging from the second quarter of 1996 through the second quarter of 2016, 2,502 federally insured credit unions fell below the well-capitalized threshold (net worth ratio below 7 percent) after having a net worth ratio above that threshold for at least one quarter.
This indicates that over the 20 year period approximately one in five credit unions fell below the well-capitalized threshold.
The net worth ratio of 825 of these 2,502 credit unions fell below 4 percent -- the threshold for being significantly undercapitalized. Only 151 of these credit unions (18 percent) remained active.
The net worth ratio of 490 of these 2,502 credit unions eventually fell below two percent -- critically undercapitalized. Importantly, only 15 percent of those credit unions whose net worth dropped below two percent sometime in this period remain active.
Over a 20 year period ranging from the second quarter of 1996 through the second quarter of 2016, 2,502 federally insured credit unions fell below the well-capitalized threshold (net worth ratio below 7 percent) after having a net worth ratio above that threshold for at least one quarter.
This indicates that over the 20 year period approximately one in five credit unions fell below the well-capitalized threshold.
The net worth ratio of 825 of these 2,502 credit unions fell below 4 percent -- the threshold for being significantly undercapitalized. Only 151 of these credit unions (18 percent) remained active.
The net worth ratio of 490 of these 2,502 credit unions eventually fell below two percent -- critically undercapitalized. Importantly, only 15 percent of those credit unions whose net worth dropped below two percent sometime in this period remain active.
Thursday, April 16, 2015
Mergers and Net Worth Adjustments
Recently, Pepsico Employees Federal Credit Union (White Plains, NY) was merged into larger USAlliance Federal Credit Union (Rye, NY).
The rationale for the merger was expanded services.
However, what was not disclosed was whether the 3,567 members of Pepsico Employees FCU received any net worth adjustment.
According to the December 2014 call reports, Pepsico Employees FCU had a higher net worth ratio than USAlliance FCU -- 13.95 percent versus 8.57. This is a difference of 538 basis points.
If the combined institution's net worth ratio was maintained at 8.57 percent, then the members of Pepsico Employees FCU should have received approximately $1.92 million net worth payment or slightly more than $65 per $1000 deposited at the credit union.
An e-mail to USAlliance FCU about whether a net worth adjustment was part of the merger agreement was not answered.
I don't know how prevalent such net worth adjustments are when credit unions merge; but if a credit union that merges into another has a higher net worth ratio, then its members should benefit by getting back a portion of the credit union's net worth.
The rationale for the merger was expanded services.
However, what was not disclosed was whether the 3,567 members of Pepsico Employees FCU received any net worth adjustment.
According to the December 2014 call reports, Pepsico Employees FCU had a higher net worth ratio than USAlliance FCU -- 13.95 percent versus 8.57. This is a difference of 538 basis points.
If the combined institution's net worth ratio was maintained at 8.57 percent, then the members of Pepsico Employees FCU should have received approximately $1.92 million net worth payment or slightly more than $65 per $1000 deposited at the credit union.
An e-mail to USAlliance FCU about whether a net worth adjustment was part of the merger agreement was not answered.
I don't know how prevalent such net worth adjustments are when credit unions merge; but if a credit union that merges into another has a higher net worth ratio, then its members should benefit by getting back a portion of the credit union's net worth.
Tuesday, September 16, 2014
Undercapitalized Credit Unions, June 30, 2014
As of June 30, 2014, there were 60 undercapitalized credit unions in the United States.
These undercapitalized credit unions held slightly more than $3.4 billion in assets.
Six credit unions were classified as critically undercapitalized, while 14 credit unions were significantly undercapitalized.
Four credit unions that were classified as undercapitalized had net worth ratios in excess of 6 percent. However, their net worth ratios did not meet the minimum risk-based net worth requirement.
These undercapitalized credit unions held slightly more than $3.4 billion in assets.
Six credit unions were classified as critically undercapitalized, while 14 credit unions were significantly undercapitalized.
Four credit unions that were classified as undercapitalized had net worth ratios in excess of 6 percent. However, their net worth ratios did not meet the minimum risk-based net worth requirement.
Tuesday, July 1, 2014
Undercapitalized CUs, Q1 2014
Sixty-three credit unions were undercapitalized at the end of the first quarter of 2014. This was an increase of two credit unions from the end of 2013; but down 31 credit unions from a year ago.
The 63 undercapitalized credit unions reported slightly more than $3.5 billion in assets at the end of the first quarter of 2014.
Four credit unions were critically undercapitalized. Another 13 credit unions were significantly undercapitalized.
Although four credit unions had net worth leverage ratios in excess of 6 percent, their risk-based net worth ratios indicated that they were undercapitalized.
The 63 undercapitalized credit unions reported slightly more than $3.5 billion in assets at the end of the first quarter of 2014.
Four credit unions were critically undercapitalized. Another 13 credit unions were significantly undercapitalized.
Although four credit unions had net worth leverage ratios in excess of 6 percent, their risk-based net worth ratios indicated that they were undercapitalized.
Monday, June 2, 2014
Matz's Letter to Reps. King and Meeks on Risk-Based Capital Proposal
On May 30th, NCUA Chairman Debbie Matz wrote Representatives King and Meeks regarding their May 15 letter about NCUA's risk-based capital proposal. (Read the King-Meeks letter)
The King-Meeks letter encouraged the NCUA Board to take into account the cost and burden of implementing the new risk-based capital requirements beyond the current leverage ratio; to provide a justification for the proposed risk-weights and why the proposed risk-weights differ from those for community banks; and to give credit unions more than 18 months to comply with the risk-based capital requirements, when finalized.
In her letter, Chairman Matz pointed out the need for the proposed rule and sets forth why the risk-weights for some asset classes diverge from those for community banks.
She noted that "[b]y law, NCUA must adopt a risk-based capital rule that is comparable to the rules for banks but that also takes into account any material risks to credit unions, such as interest rate risk and concentration risk in addition to credit risk."
She does appear to be sympathetic to giving credit unions an adequate amount of time to comply with the regulation, when it is finalized.
However, the letter makes it pretty clear that she has taken an exception to the dissemination of misinformation about the costs of the proposed rule from some trade associations.
Below is Chairman Matz's letter.
The King-Meeks letter encouraged the NCUA Board to take into account the cost and burden of implementing the new risk-based capital requirements beyond the current leverage ratio; to provide a justification for the proposed risk-weights and why the proposed risk-weights differ from those for community banks; and to give credit unions more than 18 months to comply with the risk-based capital requirements, when finalized.
In her letter, Chairman Matz pointed out the need for the proposed rule and sets forth why the risk-weights for some asset classes diverge from those for community banks.
She noted that "[b]y law, NCUA must adopt a risk-based capital rule that is comparable to the rules for banks but that also takes into account any material risks to credit unions, such as interest rate risk and concentration risk in addition to credit risk."
She does appear to be sympathetic to giving credit unions an adequate amount of time to comply with the regulation, when it is finalized.
However, the letter makes it pretty clear that she has taken an exception to the dissemination of misinformation about the costs of the proposed rule from some trade associations.
Below is Chairman Matz's letter.
Thursday, January 30, 2014
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.
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.
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.
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.
Wednesday, January 22, 2014
Net Worth Ratio May Not Identify Capital Deficiencies
The net worth ratio may mask capital deficiencies at credit unions, delaying mandatory corrective actions under the prompt corrective action (PCA) framework.
Credit unions hold both capital (net worth) and loan loss reserves for the purpose to absorb losses.
However, looking strictly at the net worth ratio as an indicator for triggering corrective action without examining the adequacy of loan loss reserves may not accurately measure the financial resiliency of credit unions.
In other words, capital deficiencies may be hidden by inadequately funding loan loss allowance accounts relative to the level of nonperforming assets.
The loan loss allowance account is funded by provisions for loan losses. Reducing provisions for loan losses will cause net income to increase, which will increase the amount of net worth for a credit union.
The following example examines the impact on credit unions that are currently well-capitalized, if the loan loss reserves was funded at 100 percent, 75 percent and 50 percent of nonperforming assets plus other real estate owned (OREO).
If loan loss reserves were funded to equal 100 percent of nonperforming assets plus OREO, 96 credit unions that are currently well-capitalized would slip to undercapitalized and another 152 credit unions would go from well-capitalized to adequately-capitalized. (All information is pulled from the September 30, 2013 call report).
If loan loss reserves were funded at 75 percent of nonperforming assets and OREO, 48 well-capitalized credit unions would become undercapitalized and 103 well-capitalized credit unions would become adequately-capitalized.
If loan loss reserves were funded at 50 percent of nonperforming assets plus OREO, we would see 13 credit unions transition from being well-capitalized to undercapitalized and 51 credit unions would switch from being well-capitalized to adequately-capitalized.
Credit unions hold both capital (net worth) and loan loss reserves for the purpose to absorb losses.
However, looking strictly at the net worth ratio as an indicator for triggering corrective action without examining the adequacy of loan loss reserves may not accurately measure the financial resiliency of credit unions.
In other words, capital deficiencies may be hidden by inadequately funding loan loss allowance accounts relative to the level of nonperforming assets.
The loan loss allowance account is funded by provisions for loan losses. Reducing provisions for loan losses will cause net income to increase, which will increase the amount of net worth for a credit union.
The following example examines the impact on credit unions that are currently well-capitalized, if the loan loss reserves was funded at 100 percent, 75 percent and 50 percent of nonperforming assets plus other real estate owned (OREO).
If loan loss reserves were funded to equal 100 percent of nonperforming assets plus OREO, 96 credit unions that are currently well-capitalized would slip to undercapitalized and another 152 credit unions would go from well-capitalized to adequately-capitalized. (All information is pulled from the September 30, 2013 call report).
If loan loss reserves were funded at 75 percent of nonperforming assets and OREO, 48 well-capitalized credit unions would become undercapitalized and 103 well-capitalized credit unions would become adequately-capitalized.
If loan loss reserves were funded at 50 percent of nonperforming assets plus OREO, we would see 13 credit unions transition from being well-capitalized to undercapitalized and 51 credit unions would switch from being well-capitalized to adequately-capitalized.
Monday, January 6, 2014
Publishing Stress Test Results, CU Trades Say Nyet
Credit union trade associations gave a thumbs down to the idea of publicly disclosing the stress test results for credit unions with $10 billion or more in assets.
The Credit Union National Association (CUNA) in its comment letter stated that the public disclosure of stress test results is neither appropriate nor useful for credit unions. CUNA wrote:
In addition, the National Association of State Credit Union Supervisors (NASCUS) believed that results of NCUA’s stress testing should not be disclosed; but rather treated as confidential examination product. NASCUS noted that "the inexperience of the credit union system administering a formal stress testing regulation" and "the uniqueness of credit union structure" were compelling reasons to not publicize the results.
NASCUS echoes NAFCU's position that credit unions do not have investors, so there is no public policy rationale for the dissemination of the stress test results. NASCUS further points out that credit unions can only build capital through retained earnings, which takes time. NASCUS worries that a covered credit union would be stigmatized by a "failed" stress test for some time, which might lead to a run by its members and endanger the National Credit Union Share Insurance Fund.
Interestingly, NASCUS letter makes the case for credit unions to be subject to a higher capital (net worth) requirement than banks. NASCUS states that unlike its bank counterpart, "a cover credit union has limited options available to it to build capital and restructure its balance sheet."
The Credit Union National Association (CUNA) in its comment letter stated that the public disclosure of stress test results is neither appropriate nor useful for credit unions. CUNA wrote:
"We realize that the bank regulators make such information public. However, we do not think such disclosure is appropriate for credit unions. Credit unions already have a number of incentives to avoid risks. This includes limits on how credit unions build capital, limits on activities and investments, and certain membership conditions. A number of mortgage lending credit unions are also concerned that the new mortgage rules, particularly with the emphasis on “qualified mortgages,” may mean they will limit loan offerings for those who do not meet QM requirements.The National Association of Federal Credit Unions (NAFCU) also advised against making public the stress test results. NAFCU wrote:
No one knows for certain what the impact of the disclosure of stress test results would be on covered credit unions. (One good reason in itself not to disclose the results.) It is easy to see, however, that such disclosure could result in self-limiting of services if credit unions fear risk taking will result in a poor showing under the stress testing.
Public disclosure of stress tests may be appropriate for banks, many of which are publicly traded. However, we cannot agree that it is appropriate or useful for credit unions, and we urge NCUA not to pursue this approach."
"[i]f the NCUA insists on pursuing stress testing and capital planning, it should allow credit unions at least two full reporting cycles to evaluate the necessary resources and identify any potential implementation issues. Only after assessing the results from these cycles should the NCUA promulgate final stress testing and capital reporting requirements. The NCUA should also refrain from making a decision regarding public disclosure until after making such assessments. Banking prudential regulators make these results public because this information could be pertinent to the banks’ investors, and therefore, increased transparency is necessary for the public investment markets to function properly. Credit unions on the other hand have members-owners, not investors. Given that there may be potentially sensitive confidential exam information in the stress testing results, the NCUA should not disclose these results without finding of a compelling reason to do so or examining the issue further."
In addition, the National Association of State Credit Union Supervisors (NASCUS) believed that results of NCUA’s stress testing should not be disclosed; but rather treated as confidential examination product. NASCUS noted that "the inexperience of the credit union system administering a formal stress testing regulation" and "the uniqueness of credit union structure" were compelling reasons to not publicize the results.
NASCUS echoes NAFCU's position that credit unions do not have investors, so there is no public policy rationale for the dissemination of the stress test results. NASCUS further points out that credit unions can only build capital through retained earnings, which takes time. NASCUS worries that a covered credit union would be stigmatized by a "failed" stress test for some time, which might lead to a run by its members and endanger the National Credit Union Share Insurance Fund.
Interestingly, NASCUS letter makes the case for credit unions to be subject to a higher capital (net worth) requirement than banks. NASCUS states that unlike its bank counterpart, "a cover credit union has limited options available to it to build capital and restructure its balance sheet."
Friday, December 27, 2013
Undercapitalized Credit Unions, Q3 2013
At the end of the third quarter of 2013, there were 68 credit unions that were undercapitalized. This is down from 82 credit unions as of June 2013 and 104 credit unions from a year ago.
Three credit unions were critically undercapitalized and 13 credit unions were significantly undercapitalized, as of September 30th.
In addition, several complex credit unions were classified as undercapitalized because their risk-based net worth ratios exceeded their net worth ratios.
Three credit unions were critically undercapitalized and 13 credit unions were significantly undercapitalized, as of September 30th.
In addition, several complex credit unions were classified as undercapitalized because their risk-based net worth ratios exceeded their net worth ratios.
Friday, December 20, 2013
ABA Comment on NCUA's Stress Test Proposal
In a comment letter to the the National Credit Union Administration (NCUA), the American Bankers Association (ABA) expressed its support for a proposal to subject a federally insured credit union (FICU) with over $10 billion in assets to annual stress testing, just as banks of similar size are required to do under the Dodd-Frank Act.
ABA noted that stress testing is an important and beneficial tool for both institutions and regulators in developing appropriate risk-management decisions and providing valuable information to both parties.
The proposal would require FICUs with assets of $10 billion or more to submit capital plans annually to NCUA. If the supervisory stress test shows that a covered FICU does not have the ability to maintain a stress test capital ratio of at least 5 percent under expected and stressed conditions throughout a nine-quarter stress test period, NCUA will require the credit union to take steps to enhance capital and/or may take other supervisory actions against the FICU.
However, ABA called for NCUA to revise the net ratio to 6 percent, which is “the mandated statutory level to be adequately capitalized”; at 5 percent, a FICU would be “undercapitalized.” This would ensure comparability with the bank stress test, which requires a bank to be adequately capitalized to pass the test.
ABA also said that FICUs should be held to the same public disclosure requirements about the results of their stress tests that banks are. ABA wrote: "Credit union members/owners deserve to have the same information available to them ... so they may determine — with complete and consistently reported information — the best place for their money and business."
If the proposed rule is adopted by the NCUA Board it would immediately affect four credit unions.
Read the letter.
ABA noted that stress testing is an important and beneficial tool for both institutions and regulators in developing appropriate risk-management decisions and providing valuable information to both parties.
The proposal would require FICUs with assets of $10 billion or more to submit capital plans annually to NCUA. If the supervisory stress test shows that a covered FICU does not have the ability to maintain a stress test capital ratio of at least 5 percent under expected and stressed conditions throughout a nine-quarter stress test period, NCUA will require the credit union to take steps to enhance capital and/or may take other supervisory actions against the FICU.
However, ABA called for NCUA to revise the net ratio to 6 percent, which is “the mandated statutory level to be adequately capitalized”; at 5 percent, a FICU would be “undercapitalized.” This would ensure comparability with the bank stress test, which requires a bank to be adequately capitalized to pass the test.
ABA also said that FICUs should be held to the same public disclosure requirements about the results of their stress tests that banks are. ABA wrote: "Credit union members/owners deserve to have the same information available to them ... so they may determine — with complete and consistently reported information — the best place for their money and business."
If the proposed rule is adopted by the NCUA Board it would immediately affect four credit unions.
Read the letter.
Friday, November 15, 2013
Fryzel: Goldilocks Risk-Based Capital Requirement
In a speech to the American Association of Credit Union Leagues, NCUA Board Member Michael Fryzel outlined his thoughts regarding risk-based capital requirements for credit unions.
While Fryzel noted that credit unions are not covered by Basel, the capital regime of credit unions is required to be “comparable” to that of the banking industry.
Fryzel's goldilocks moment came when he stated: "I advocate neither an overly stringent nor an overly permissive approach. I advocate “right sizing” NCUA’s risk-based capital rules."
He goes on to state that an undeniable lesson from the financial crisis is that capital needs to be ample, durable, and readily deployable to shore up a balance sheet under duress.
Moreover, the amount of capital (net worth) required by a credit union will ultimately depend on the activities pursued by a credit union.
Read the speech.
While Fryzel noted that credit unions are not covered by Basel, the capital regime of credit unions is required to be “comparable” to that of the banking industry.
Fryzel's goldilocks moment came when he stated: "I advocate neither an overly stringent nor an overly permissive approach. I advocate “right sizing” NCUA’s risk-based capital rules."
He goes on to state that an undeniable lesson from the financial crisis is that capital needs to be ample, durable, and readily deployable to shore up a balance sheet under duress.
Moreover, the amount of capital (net worth) required by a credit union will ultimately depend on the activities pursued by a credit union.
Read the speech.
Monday, September 16, 2013
Undercapitalized Credit Unions, June 2013
There were 82 credit unions that were undercapitalized as of June 2013. Seven credit unions were critically undercapitalized and 15 credit unions were significantly undercapitalized.
Click on the images to enlarge.
Click on the images to enlarge.
Monday, July 15, 2013
Matz: NCUA to Update Risk-Based Capital Standards
Speaking at the Annual Conference of the National Association of Federal Credit Unions, NCUA Chairman Debbie Matz said the agency is in the process of updating its risk-based net worth (capital) requirements for credit unions with more than $50 million in assets.
Chairman Matz pointed out that the current one-size-fits-all net worth requirement of 7 percent is outdated and insufficient. She said that such a capital regime "does not belong in the ever growing, increasingly complex credit union industry."
Chairman Matz stated:
However, Chairman Matz said that NCUA has no plans to implement Basel III for credit unions and that Basel III is not right for credit unions.
Read the speech.
Chairman Matz pointed out that the current one-size-fits-all net worth requirement of 7 percent is outdated and insufficient. She said that such a capital regime "does not belong in the ever growing, increasingly complex credit union industry."
Chairman Matz stated:
"A net worth ratio of 7 percent would remain the floor, as required by the Federal Credit Union Act. However, credit unions with assets over $50 million would be subject to improved risk-based capital requirements, to better correlate required capital levels to risk. The result would be higher capital levels for credit unions with high concentrations of risky assets."
However, Chairman Matz said that NCUA has no plans to implement Basel III for credit unions and that Basel III is not right for credit unions.
Read the speech.
Monday, April 1, 2013
NCUA Explains How to Cook the Net Worth Ratio
The transcript from NCUA's February 20, 2013 webinar has a NCUA staffer telling credit unions how to cook their books to inflate their net worth ratio for Prompt Corrective Action purposes.
The transcript quotes Dominic Carullo, who is an Economic Development Specialist with the Office of Small Credit Union Initiatives, saying:
This is crazy.
It is one thing for NCUA to inform credit unions that they have four options available to them for calculating the denominator of the net worth ratio. It is another thing for NCUA to tell credit unions to use whatever method that puts their net worth ratio in the best light.
In addition, if a credit union can change the method it uses for calculating its net worth ratio every quarter, then it is more difficult to evaluate the capital adequacy of a credit union over time. Consistency in reporting is needed for comparability.
The transcript quotes Dominic Carullo, who is an Economic Development Specialist with the Office of Small Credit Union Initiatives, saying:
"Okay, there are four basic methods available to federally insured credit unions for computing your assets on your quarterly call reports. The first one is using quarter end assets, which is the actual assets at the end of that quarter. There are also three other options. There is the average daily assets over the quarter. There is the average of the three month end balances over the quarter. There is the average of the past four quarter ends."Dominic Carullo goes on to say:
"The credit union has the option of using any one of the four methods and can use whichever denominator gives it the best net worth ratio. You do not need to be consistent from one quarter to the next. The credit union can change the method is [sic] uses for computing the new worth ratio every quarter. If you get a result that does not please you, you can try the other three methods to see if it can give you a better ratio."
This is crazy.
It is one thing for NCUA to inform credit unions that they have four options available to them for calculating the denominator of the net worth ratio. It is another thing for NCUA to tell credit unions to use whatever method that puts their net worth ratio in the best light.
In addition, if a credit union can change the method it uses for calculating its net worth ratio every quarter, then it is more difficult to evaluate the capital adequacy of a credit union over time. Consistency in reporting is needed for comparability.
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