In a report to Congress released Monday, the NCUA provided more details regarding how examiners will determine capital adequacy when enforcing the agency's final risk based capital rule. The final rule granted examiners the ability to determine capital adequacy beyond the risk-based capital ratio; when the rule was proposed, that provision drew criticism that it gave examiners too much subjective examination authority.
"(The) NCUA's supervisory assessment of capital adequacy may differ from conclusions that might be drawn solely from the calculation of a complex credit union's regulatory capital ratios," the report read.
The NCUA further explained that examiners will take into account the following when judging capital adequacy:
- Quality and trends in a credit union's capital composition;
- Whether the credit union is entering new activities or introducing new products;
- If a credit union is receiving special supervisory attention;
- If a credit union has or is expected to have losses resulting in capital inadequacy;
- If a credit union has significant exposure due to risks from non-traditional activities; or,
- If a credit union has significant exposure to interest rate or operation risk.
An effective capital planning process involves an assessment of the risks to which a credit union is exposed and its processes for managing and mitigating those risks, an evaluation of its capital adequacy relative to its risks and consideration of the potential impact on its earnings and capita base from current and prospective economic conditions," the report read.
"While elements of a supervisory review of capital adequacy would be similar across credit unions, evaluation of the level of sophistication of an individual credit union's capital adequacy process should be commensurate with the institution's size, sophistication and risk profile, similar to the current supervisory practice," the report continued.
The NCUA also said it will develop and publish supervisory guidance for examiners regarding how to apply the provision.
Additionally, credit unions anticipating a supplemental capital rule from the NCUA that would allow them to apply the capital toward existing net worth standards will have to wait.
In the report, the agency said that although it does have the authority to write a supplemental capital rule that credit unions could apply to new risk-based capital standards, the authority to apply that capital toward existing net worth ratios must come from Congress.
"As part of modernizing the NCUA's risk-based capital rule, the NCUA board was unanimous in its commitment to move forward with a separate rulemaking to allow supplemental capital to be counted toward the risk-based capital ratio. The effective date of this proposed change would coincide with implementation of the NCUA's modernized risk-based capital rule scheduled for Jan. 1, 2019," the report read.
"Nevertheless, commenters during the risk-based capital rulemaking noted the differential treatment for supplemental capital for low-income credit unions and non-low-income credit unions. They also generally acknowledged that counting supplemental capital as part of a credit union's net worth requirement (for all but low-income credit unions) would require an authorizing amendment to the Federal Credit Union Act. The NCUA agrees and recommends that Congress consider legislation to allow healthy and well-managed credit unions to issue supplemental capital that will count as net worth," the report continued.
The NCUA report said the agency supports H.R. 989, the Capital Access for Small Business and Jobs Act, sponsored by Rep. Peter King (R-N.Y.) and Brad Sherman (D-Calif.), which would grant supplemental capital authority.
"In my view, the NCUA should promulgate a supplemental capital rule as soon as possible because it's far better from a safety and soundness perspective that credit unions hold more capital rather than less, even though supplemental capital won't help for the risk-based capital ratio until 2019 or the leverage ratio absent a legislative fix (other than for LICUs)," NCUA Board Member Mark McWatters commented via email. "The NCUA should prepare a transparent, easy to understand, market oriented rule that fits into well-recognized accounting and regulatory norms."
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