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Survey on NCUA’s Risk-Based Capital Proposal

BACKGROUND

A credit union’s net worth is determined by dividing its assets into its retained earnings. As a result, a credit union’s assets have an inverse relationship to its net worth. All credit unions are required to have a net worth ratio of at least 6% to be adequately capitalized. In calculating a credit union’s net worth, assets are not weighted to account for the risk of holding different types of assets.

In contrast, “complex” credit unions (those with $50 million or more in assets with a net worth of 6% or greater) must meet RBNW requirements. A credit union is classified as undercapitalized if its net worth ratio is less than its risk-based net worth ratio. Risk weightings attempt to gauge the ability of a credit union to absorb future losses by weighting assets according to their riskiness. NCUA’s current formula is very basic, as illustrated by these charts in current Part 702:


GENERAL QUESTIONS

To be well capitalized under this proposal, a credit union would be required to have an RBNW of at least 10.5%. According to NCUA, this number is “designed to bolster the resiliency of complex credit unions throughout financial cycles. It is also comparable to the other federal banking regulatory agencies’ rules, to be fully implemented in 2019.


Which of the following statements reflects your view of this proposal? Please choose one.







Currently, a credit union is “complex” if it has assets of $50 million or more and has an RBNW of at least 6%. Under this proposal, any credit with assets of $50 million or more would be “complex,” regardless of its RBNW. Do you agree with this new definition?






Currently, an RBNW credit union is classified as either capitalized or undercapitalized. This proposal places credit unions in one of five categories and mandates that all credit unions be at least adequately capitalized.

Should all credit unions subject to this rule be placed in one of five categories depending on their asset strength, or should credit unions continue to be classified as either adequately capitalized or undercapitalized? Please choose the statement the best reflects your view.



Do you agree that a 10.5% RBNW is the appropriate threshold for a credit union to be considered well capitalized?







These regulations would take effect 18 months after they are finalized. According to NCUA, 90% of impacted credit unions already meet these new capital requirements. Do you feel that 18 months is a sufficient phase-in period?





NCUA is concerned that individual credit unions could be in compliance with capital requirements but still have an asset composition that raises safety and soundness concerns. Should NCUA have the authority to impose unique capital requirements for individual credit unions when it decides that a credit union’s asset composition risks its safety and soundness, notwithstanding the fact that the credit union meets RBNW requirements?







CALCULATION OF RISK-BASED CAPITAL RATIO

The regulation renames risk-based net worth as risk-based capital ratio. A credit union’s capital would still be determined by dividing its net worth (numerator) by its assets (denominator). The following components would be added and subtracted when calculating a credit union’s capital:

Additions: undivided earnings (includes any regular reserve), appropriations for non-conforming investments, other reserves, equity acquired in a merger, net income, ALLL (limited to 1.25% of risk assets), secondary capital accounts included in net worth and Section 208 assistance included in net worth (as defined in §702.2).

Deductions: NCUSIF deposit, goodwill, other intangible assets and identified losses not reflected as adjustments to components of the risk-based numerator.

Do you agree that the above components should be included in a credit union’s capital calculation?





By limiting the amount of ALLL that can be included in the capital numerator, NCUA is seeking to provide an incentive for making quality loans. Should the amount of ALLL that can be included in capital be capped?







A credit union determines its total risk-weighted assets by calculating the sum of: its risk-weighted assets, minus goodwill and other intangibles, and minus the National Credit Union Share Insurance Fund deposit. Because “goodwill” is an intangible, should it be excluded from calculation of a credit union’s capital?






RISK WEIGHTING OF ASSETS

Since the capital ratio is determined by dividing a credit union’s risk-weighted assets into its capital, the larger a credit union’s asset size, the smaller its capital ratio. Following is the proposed categorization of the items to be included in a credit union’s assets with the corresponding risk weighting for each category. Given the impact that these weightings may have, please be as specific as possible when detailing the risk weightings that most impact your credit union and why (if applicable) you think an alternative classification is appropriate.




Do you support this proposed classification for Category 1?







 
Do you support this proposed classification for Category 2?







Do you support this proposed classification for Category 3?







Do you support this proposed classification for Category 4?







Do you support this proposed classification for Category 5?







Do you support this proposed classification for Category 6?





Do you support this proposed classification for Category 7?







Do you support this proposed classification for Category 8?







Do you support this proposed classification for Category 9?







Do you support this proposed classification for Category 10?





NCUA is proposing to increase the risk-weighting assigned to concentrations of member business loans (MBLs) as listed above. Should credit unions have to hold more capital than currently required to account for MBL concentration risk?







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