Proposed Rule Summary

Capital Planning & Stress Testing

Prepared by NASCUS Legislative & Regulatory Affairs Department
October 2017

After three years of capital planning and stress testing, NCUA is proposing changes to its rule applicable to credit unions with $10 billion or more in assets. The proposal would create three tiers for credit unions with assets of $10 billion or more with credit union in the first tier being exempted from the stress testing requirement, and allowing credit union in tiers II and III to conduct their own stress tests. All credit unions with at least $10b in assets would be required to develop annual capital plans and submit those plans to NCUA.  In addition, Tiers II and III would be required to include stress testing scenarios in their capital plans and Tier III credit unions would need formal NCUA approval of the annual capital plan.

Since promulgation of the original stress testing rule proposal in 2013, NASCUS has advocated allowing credit unions to conduct their own stress tests.

The proposed rule is here; comments are due December 29, 2017.

Summary

Under the proposal, NCUA would create 3 Tiers for credit unions with $10 billion or more in assets. Each tier would have differing obligations under the Capital Planning and Supervisory Stress Testing Rule, Part 702 Subpart E. NCUA reserves the right to classify an otherwise Tier I or Tier II credit union into a higher Tier based upon that credit union’s risk profile.

While all credit unions with assets greater than $10 billion would continue to be required to have capital policies and submit capital plans to NCUA, Tier I & II credit unions would not have to obtain formal NCUA approval of submitted capital plans. In addition, only Tier II and II credit unions would have to perform annual stress testing.

Tier I credit unions

Tier I credit unions would be those credit unions with between $10 billion and $20 billion in assets that have completed less than three capital planning cycles. These credit unions would not be required to complete, or be subject to, a supervisory stress test. Tier I credit unions would be required to conduct Capital Planning, and those capital plans would continue to be submitted to NCUA annually on May 31. However, NCUA would no longer be specifically approving the submitted capital plans, but rather review the capital planning as part of its normal supervisory process.

 

Tier II credit unions

Tier II credit unions would be those credit unions with less than $20 billion in assets that haves completed three or more capital planning cycles. Like a Tier I credit union, a Tier II credit union’s capital policy and capital plan would be reviewed during the course of normal ongoing supervision.  Tier II credit unions must incorporate NCUA’s annual stress testing scenario into its capital plan. Tier II credit unions would also be required to conduct annual stress tests, but would not be subject to the existing 5% minimum stress test capital threshold.

Tier III credit unions

Tier III credit unions have $20 billion or more in total assets. Tier III credit unions will continue to submit their annual capital plans to NCUA for approval, must include the stress test scenario into the capital plan, must conduct annual stress tests, and will continue to be subject to the current 5% minimum stress test capital threshold. NCUA’s formal rejection of a Tier III credit union’s capital plan would be subject to the Supervisory Review Committee process (Part 746 Subpart A).

A Tier III credit union’s assets are measure on a March 31 threshold. Any credit union with $20 billion or more in assets would be subject to the Tier III requirements for thee Capital Planning cycle that begins on June 1 of that year.

Tier

Tier I

Tier II

Tier III

Definition

Credit unions with at least $10b in assets but less than $20b that have note completed 3 capital planning cycles.

Credit unions with assets between $10b and $20b that have completed 3 cycles of capital planning.

Credit unions with more than $20 billion in assets.

Requirements

  • Must engage in capital planning and submit annual plan to NCUA
  • Formal NCUA approval of capital plan not required
  • Must submit capital plan to NCUA annually
  • Must conduct annual stress testing
  • Formal NCUA approval of capital plan not required
  • Annual stress testing scenario must be incorporated into capital plan
  • Annual submission of capital plan for NCUA approval
  • Inclusion of stress test scenario in capital plan
  • Annual stress test required
  • Must maintain 5% stress test capital ratio

 

Stress Testing

Under the current rule, NCUA has conducted annual stress tests on all credit union with $10 billion or more in assets. The current rule also contains a provision that allowed covered credit unions to apply to NCUA, after NCUA had conducted 3 stress tests on the credit union, to conduct its own annual stress test (Part 702.506(c)). Under the proposal, credit unions required to undergo annual stress testing (Tier II and II) would conduct their own stress tests. In addition, Tier II and Tier III credit unions would be required to incorporate NCUA’s annual stress test scenarios into its annual capital plan submitted to NCUA.

Furthermore, Tier III credit unions would continue to be required to submit a capital restoration plan or risk mitigation plan if the stress test results in a capital level below 5%.

  • Web Site Instructions

 

NCUA will publish instructions on its website governing the stress tests conducted by Tier II and III credit unions. NCUA would publish different instructions for the two Tiers subject to stress testing requirements.

Consultation with State Regulators

The proposed rule retains the provision that NCUA consult with state regulators before taking supervisory actions under this provision. NASCUS had successfully advocated for this provision in 2013.

Technical and Conforming Proposed Changes

NCUA proposes making several changes the agency considers technical. Under Part 702.502, which contains definitions related to the capital planning and stress testing rule, NCUA would make the following changes:

  • NCUA is deleting the terminology related to “adverse scenarios” and replacing them with references to “scenarios” and “stressed scenarios”
  • Would define the capital planning cycle to be from June 1 to the following May 31

NCUA seeks additional comments on whether the asset thresholds for the 3 Tier are appropriately rightsized.

While NCUA notes that it will publish stress testing instructions on the web, the proposal is silent as to whether those instructions will be vetted by notice and comment before being finalized.