In October 2018, the National Credit Union Association (NCUA) Board approved a supplemental final risk-based capital rule that makes changes to the original rule that was set to go into effect on January 1, 2019. Under the original rule, a risk-based capital requirement was established for all federally insured, natural-person credit unions defined as “complex.” A “complex” credit union was defined under the original rule as having assets exceeding $100 million. The supplemental final rule increases the threshold for “complex” credit unions to assets exceeding $500 million. The supplemental rule also delays the effective date to January 1, 2020.
The risk-based approach of the original rule remains essentially the same under the supplemental rule. Each type of asset of a credit union is assigned a risk level from zero percent to over 100 percent based primarily on its level of credit and concentration risk, and the total, with some adjustments, is divided by the capital of the credit union to arrive at a risk-based capital ratio. The resulting ratio must be at least 10% for the credit union to be considered “well-capitalized” under the risk-based capital requirement.
Industry advocates have argued since 2015 that the risk-based rule places undue burden on smaller credit unions that do not have the resources to monitor compliance with the risk-based rule, nor the same level of complex products as larger credit unions. The NCUA looked for a solution to provide more credit unions relief from regulatory requirements while still protecting the National Credit Union Share Insurance Fund (NCUSIF).
To find an appropriate assets threshold for a credit union to be considered “complex,” the NCUA reviewed the number of complex products and services provided by credit unions at various asset levels. The indicators included items such as commercial loans, indirect loans, real estate loans, participation loans sold, borrowings, and derivatives. The NCUA found that there was a notable increase in the prevalence of complex products and services for credit unions with over $500 million in assets as compared with credit unions with $250 million to $500 million in assets, which supported the idea of using $500 million as the new threshold.
Some highlights of the supplemental rule’s impact include:
- The new rule exempts an additional 1,026 credit unions from the requirements (531 down from 1,557)
- 10% of credit unions are subject to the requirements (old rule was 26%)
- 76% of assets are subject to the requirements (old rule was 93%)
- More than 98% of all credit unions over $500 million will be considered well-capitalized
The simple net worth ratio will still apply to all credit unions, and it will be impacted by possible changes in the allowance for loan losses level when the Current Expected Credit Losses accounting standard is adopted in 2022. However, the risk-based ratio adds back the allowance for loan losses to the numerator, reducing the impact of any increase in the allowance on the risk-based capital ratio.
Credit unions above the $500 million threshold have been measuring their risk-based ratio in anticipation of the standard going into effect next year. However, credit unions below the threshold should measure and monitor their ratio as they approach the threshold and evaluate new products and services. Credit unions exploring mergers could quickly find themselves subject to the new requirements. Even credit unions that are well below the threshold may find the periodic calculation and monitoring of the ratio beneficial to tracking their risk levels.
The main intent of the original 2015 rule was to reduce the likelihood that a relatively small number of high-risk outlier credit unions would cause large losses to the NCUSIF. The supplemental rule still subjects a majority of total credit union assets to the risk-based capital requirements, but significantly reduces the number of credit unions required to expend time and financial resources to comply with the regulation.
If you have any questions regarding the supplemental final rule and the new risk-based capital ratio, please contact your Wipfli relationship executive.