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The final rule establishes a direct relationship between risk exposure and required capital for credit unions.


Final Risk-Based Capital Rule Requires Credit Unions to Maintain Adequate Reserves

  • Steve Schiltz
  • 11/2/2015

After two proposed rules and significant public debate and comment letters, the National Credit Union Administration (NCUA) Board approved a much anticipated final rule on risk-based capital (RBC).

The final rule was approved on October 15, 2015, and requires complex credit unions (those with over $100 million in assets) to hold capital commensurate with their exposure to operational risk. The aim of this requirement is to reduce the chances of high-risk credit unions exhausting their capital and causing systemic losses, which would have to be covered by other credit unions through the National Credit Union Share Insurance Fund.

The final RBC rule will go into effect on January 1, 2019, and is comparable to RBC measures used by other federal regulators. NCUA plans to update the Call Report by early 2018 to automatically calculate each credit union’s risk-based capital ratio.

Highlights of final rule

The most significant factors associated with the final rule include:

  • In order to be considered well-capitalized, complex credit unions will have to maintain a net worth ratio of 7 percent or above AND a risk-based capital ratio of 10 percent or above.
  • A credit union’s entire Allowance for Loan and Lease Losses (ALLL) balance is included in the RBC ratio. Therefore, this ratio should not be impacted by the Financial Accounting Standards Board’s proposed Current Expected Credit Loss model that is expected to result in higher ALLL balances for the financial institution industry.
  • Credit unions will be required to maintain higher amounts of capital if they hold larger concentrations of Residential Real Estate and Member Business loans.

NCUA reports that just 16 credit unions nationwide currently would experience a downgrade in their prompt corrective action category that would result in mandatory and discretionary supervisory actions as a result of the final RBC rule.

Minor changes

While the revised proposed rule contained significant changes from the original proposed rule, the final rule incorporated relatively minor changes, including:

  • Establishing a risk weight of 100 percent for all equity exposures, if the aggregate of the equity is considered non-significant (less than 10 percent of the RBC ratio’s numerator). Equity exposures generally consist of investments in credit union service organizations and capital in corporate credit unions. Most credit unions have minimal equity exposures.
  • Reducing the risk weight for share-secured loans to 0 percent, if the shares securing the loan are on deposit at the credit union. Share-secured loans generally represent a small percentage of a credit union’s loan portfolio.
  • Allowing a lower risk weight for certain charitable donation accounts. Most credit unions have insignificant (if any) charitable donation accounts.

How we can help

CliftonLarsonAllen can help credit unions assess their capital and examine how changes to business operations or acquisitions would impact their risk-based capital ratio.

NCUA has also updated their website with resources related to the final RBC rule, including frequently asked questions, RBC estimator tool, and upcoming webinars and videos.