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NCUA Revises Risk-Based Capital Calculation Proposal for Credit Unions
In response to an overwhelming number of comments received after its original proposed rule was published in 2014, the National Credit Union Administration (NCUA) board has approved a revised proposed rule on risk-based capital. Released on January 15, 2015, the revision is designed to establish a direct relationship between risk exposure and required capital.
Feedback produces significant changes
Significant changes to the original proposed rule were based on the feedback received by the NCUA and now better align the rule with the banking rules of other agencies. Some of the most significant changes include:
- Only credit unions that are considered “complex” would be subject to the proposed rule, and the threshold was increased from $50 million to $100 million in total assets. This reduced the percentage of credit unions affected from 33 to 22 percent.
- To be considered well-capitalized, complex credit unions would have to maintain a net worth ratio of 7 percent or above, and a risk-based capital ratio of 10 percent or above (this was a reduction from a risk-based capital ratio of 10.5 percent in the original proposal).
- A credit union’s entire allowance for loan and lease losses (ALLL) would be included in the risk-based capital ratio (it was previously limited to 1.25 percent of risk assets). This should help alleviate concerns regarding the Financial Accounting Standards Board’s proposed current expected credit loss model that is likely to result in higher ALLL balances for the industry.
- The revised proposed rule no longer requires higher risk-weightings based on longer-term investment securities, which is now consistent with the banking industry.
- The implementation date was extended from 18 months after the publication of a final rule in the Federal Register to January 1, 2019 (more than three years). In addition, a new 90-day public comment period was introduced.
- The individual minimum capital requirement provision that allowed the NCUA board to increase the risk-based capital requirement for certain credit unions was eliminated.
Concentration thresholds remain
While NCUA addressed the majority of issues raised by those who commented on the original proposal, residential real estate (RRE) and member business loan (MBL) concentration thresholds remain in the revised proposed rule. This was based on recommendations from the Government Accountability Office and the NCUA inspector general.
The risk-weightings assigned to higher concentrations of RRE loans and MBLs continue to be higher than those assigned to the banking industry. For example, junior-lien residential real estate loans greater than 20 percent of assets, and commercial loans greater than 50 percent of assets, are risk-weighted at 150 percent. However, NCUA indicated that nationally only 67 complex credit unions would be impacted by the junior-lien RRE loan limits, and only 12 would be affected by commercial loan limits.
In all, NCUA estimates that 98 percent of credit unions will remain well-capitalized under the revised proposal.
Access online resources
NCUA has resources related to the new proposed rule on risk-based capital, including frequently asked questions, proposal comparison, risk-weight comparison, and a new risk-based capital estimator tool.