Compliance Blog

Written by Ricardo Piñeres, Regulatory Compliance Counsel

At their January monthly board meeting, the NCUA Board of Directors approved Proposed Rule: Prompt Corrective Action; Risk-Based Capital (Part 702) with a 90-day comment period.  I am going to keep my analysis of the rule at a 30,000 foot level.  That said, the proposed rule goes into extreme detail as to how the risk-based capital ratio would be calculated and the different risk weights that would be used if the proposed rule were to go into effect.  So, some of you that are fascinated by numbers may really enjoy sifting through those sections of the proposed rule.

Let’s start with the most basic change that is being proposed – how a credit union is classified for capitalization purposes.  Under the proposed rule, credit unions would be classified as one of the following:

• Well Capitalized (Net worth ratio of 7% or above and risk-based capital ratio of 10.5% or above);
• Adequately Capitalized (Net worth ratio of 6% - 6.99% and risk-based capital ratio of 8% - 10.49%);
• Undercapitalized (Net worth ratio of 4% - 5.99% or risk-based capital ratio of less than 8% with a net worth ratio of 6% or above);
• Significantly Undercapitalized (Net worth ratio of 2% - 3.99% or net worth ratio of 4% - 4.99% and fails to submit/materially implement an approved net worth restoration plan); or
• Critically Undercapitalized (Net worth ratio of less than 2%).

Credit unions with $50 million or less in assets at the end of the previous quarter would be exempt from the risk-based capital ratio requirements.

So, how will the risk-based ratio be calculated under the new rule?  Under the proposed rule, the risk-based ratio would be determined by the percentage of a credit union’s net worth available to cover losses, divided by the credit union’s defined risk-weighted asset base.  The risk-weighted asset base is determined by subtracting a credit union’s NCUSIF deposit and goodwill/other intangibles from the credit union’s risk-weighted assets.  For a general overview of how to calculate all of those components, view this slideshow prepared by the NCUA’s Office of Examination and Insurance.  For a more detailed explanation of the calculations, see the proposed rule.

Along with these new risk-based capital standards, the NCUA has indicated that individual credit unions may be required to maintain higher levels of risk-based capital if the agency raises additional supervisory concerns.

The NCUA has estimated (based on June 2013 call report data) that in excess of 90% of credit unions that would be affected by the changes would be considered either well or adequately capitalized under the proposed rule.  Unfortunately, an estimated 199 credit unions that are currently considered well capitalized would see their status drop under the proposed rule, with 10 of those credit unions being deemed undercapitalized.  Credit unions that are interested in seeing how the proposed rule’s changes would affect them, can view that information using the NCUA’s On-Line Calculator for Proposed Risk-Based Capital Rule.

The NCUA believes that it needs to make these proposed changes in order for the risk-based capital requirements for natural person credit unions to be more in line with the requirements for FDIC, Federal Reserve, and OCC-regulated institutions, as well as more closely resembling the requirements for corporate credit unions.  That being said, this proposal is just the latest example of how the NCUA (and its other regulatory brethren) is unable to properly address many of the issues facing credit unions under the current, flawed regulatory framework.  NAFCU has called on the NCUA to join in advocating for legislative fixes that will give the agency the proper framework to effectively protect credit union members. 

Furthermore, as NAFCU CEO Dan Berger pointed out in his January 28 letter to the NCUA, “[NAFCU] question[s] whether the risk weighting proposed actually matches real risk in the system.  The proposed rule assigns rigid risk-weights to many investments that when properly examined represent much less risk than the assigned risk-weights.”  Therefore, it will be important for credit unions to take part in the comment process to, hopefully, show the NCUA that some of their preconceived notions regarding risk are not applicable and should be weighted differently or, even better, allow for varying risk-weights based on different programs that individual credit unions have implemented to mitigate risks.

Finally, let me take a moment to express some concern regarding the NCUA’s On-Line Calculator for Proposed Risk-Based Capital Rule.  I understand that the agency is attempting to make it easier for individual credit unions to understand how the proposed rule would affect them, but the NCUA is actually oversimplifying a very complex measure.  Having the calculator publicly available could lead to unfair reputational harm and general misunderstandings of a credit union’s health, especially for those credit unions that would see a drop in their capitalization classification.

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Free Kick. After a 16-year absence, Colombia will be returning to the World Cup this summer.  Los Cafeteros put together an impressive qualifying run, finishing second to Argentina in the South American region.  So impressive was their play that many pundits have tipped them as a team to watch in Brasil.  But could their dream be over before it even begins?

During a Coupe de France match on January 22 against Monts d'Or Azergues of France’s third division, Colombia and AS Monaco’s Radamel Falcao Garcia was stretchered off the field in the 40^th minute with what turned out to be a torn ACL in his left knee.  Following a successful surgery in Portugal on Saturday, doctors have given the Colombian striker a 50-50 chance of being available to play for Colombia at the World Cup.  Falcao, for his part, has said that he will take the recovery day-by-day, and will work his hardest to keep his World Cup dream alive.

Many have written that the loss of Falcao would be a crushing blow to Colombia’s hopes.  I disagree.  Call me a homer (I was born in Cartagena, Colombia), but I believe that Colombia has many quality attacking options should Falcao be unavailable to play in Brasil.  This current generation of Colombian football has been blessed by many quality (though young or unproven) attacking players.  From F.C. Porto’s Jackson Martinez and Juan Quintero to Udinese’s Luis Muriel and River Plate’s Teofilo Gutierrez, Jose Pekerman (Colombia’s manager) should have several options to fill Falcao’s role up front, should the AS Monaco forward not recover in time for the tournament.  A bigger problem for Colombia would be a loss in the midfield or center-back positions, as they do not have as much depth in those roles.

That said, it would be a shame if Falcao did end up missing the tournament because he is one of the most exciting strikers in today’s game and is a large part of the reason for Colombia’s return to the World Cup.  Such a talent deserves the chance to show off his skills on the world’s biggest stage.  FUERZA TIGRE!!!