Key Risk Based Capital Requirements to Be Proposed Next Thursday

July 16, 2021 at 9:25 am Leave a comment

I have some potentially good news for credit unions with $500 million or more in assets.

As readers of this blog already know, starting on January 1st credit unions over this threshold must start complying with risk based capital requirements intended to ensure that NCUA appropriately accounts for the capital risks of complex credit unions under its PCA framework. Up until May, the NCUA was receiving feedback from credit unions on how this requirement might be modified. Remember, not one of the three board members currently serving at NCUA was even around when this new framework was put in place way back in 2016.

Under a risk based capital framework, financial products are given risk weights. So for example, a credit union holding a disproportionate number of 30 year mortgages would have a different risk rating than a credit union with the same level of assets that specializes in car loans. We will know by next Thursday what approach NCUA has decided to take when it comes to simplifying these new capital requirements. One approach would implement a risk based leverage ratio framework. Very generally, this framework would establish certain risk factors that would trigger additional capital buffer requirements. A second approach would implement a so-called complex credit union leverage ratio. Again, very generally speaking this approach would allow credit unions to satisfy risk based capital requirements by putting aside a greater amount of capital than would otherwise be necessary under NCUA’s existing risk based capital framework.  Credit unions would be able to opt in and out of this framework.

Irrespective of what approach NCUA decides to take it is time to give impacted credit unions a clear compliance framework. There is much work to be finalized in the coming months. NCUA is cutting this closer than a college kid who put off his big term paper to a day before the quarter ended. On that note, enjoy your weekend.

Entry filed under: Regulatory. Tags: , , , .

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Authored By:

Henry Meier, Esq., Senior Vice President, General Counsel, New York Credit Union Association.

The views Henry expresses are Henry’s alone and do not necessarily reflect the views of the Association. In addition, although Henry strives to give his readers useful and accurate information on a broad range of subjects, many of which involve legal disputes, his views are not a substitute for legal advise from retained counsel.

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