The NCUA released its final rule on risk-based capital requirements. Complex credit unions (those over $100 million in total assets as of its latest Call Report) will be required to calculate their risk-based capital ratio instead of its net worth to determine capital adequacy.
Recommended Actions:
In preparation for the rule’s effective date of January 1, 2019, credit unions with over $100 million in assets should consider doing the following in 2018:
- Monitor the credit union’s risk-based capital ratio. The NCUA indicated that the first Call Report of 2018 will be revised so that it will calculate the risk-based capital.
- Review any operational policies and strategic plans to see how those policies/plans will affect risk-based capital.
- Develop a capital plan. The examiner guidance that NCUA plans to distribute in 2018 will address the process of developing a capital plan. Under NCUA’s current rule on capital planning and stress testing, credit unions that have $10 billion or more in assets are already required to have a capital plan in place. The NCUA has indicated that those plans used by the credit unions with $10 billion or more in assets will suffice.
Detailed Analysis:
The calculation for the risk-based capital is the risk-based numerator (undivided earnings + appropriation for non-conforming investments + other reserves + equity acquired in mergers + net income + allowance for loan losses + secondary capital accounts that are included in net worth + Section 208 assistance that is included in net worth) minus (NCUSIF capitalization deposit + goodwill + other intangible assets + identified losses not reflected in the numerator) divided by risk-weighted assets (various on and off balance sheet assets multiplied by the risk ratio of each).
Capital Categories
| Capital classification | Net worth ratio | RBC ratio | And subject to the following condition(s) | |
| Well Capitalized | 7% or greater | And | 10.0% or greater | |
| Adequately Capitalized | 6% or greater | And | 8% or greater | And does not meet the criteria to be classified as well capitalized |
| Undercapitalized | 4% to 5.99% | or | Less than 8% | |
| Significantly Undercapitalized | 2% to 3.99% | N/A | Or if “undercapitalized at <5% net worth and (a) fails to timely submit, (b) fails to materially implement, or (c) receives notice of the rejection of a net worth restoration plan | |
| Critically undercapitalized | Less than 2% | N/A |
