Final Rule Summary

Prepared by NASCUS Legislative & Regulatory Affairs Department
January, 2016

NCUA 12 CFR Part 702

Risk-Based Capital

NCUA has published a final rule implementing risk-based capital standards for credit unions. The final rule amends Part 702 to add the risk-based net worth requirement to PCA, and eliminates several provisions in the current rule including provisions relating to the regular reserve account, risk-mitigation credits, and alternative risk weights. The final rule also makes conforming amendments to §700, §701, §703, §713, §723, and §747. The rule will apply to federally insured credit unions (FICUs) over $100 million.

The new final rule will become effective on January 1, 2019.

NCUA will update the Call Report by early 2018 to automatically calculate each FICU’s risk-based capital ratio.

You may read the final rule in full here.

Summary

NCUA’s new risk-based capital rule will require complex credit unions to maintain a net worth ratio of 7% or above AND a risk-based capital ratio of 10% or above in order to be well capitalized. In order to be adequately capitalized, complex credit unions must maintain a net worth of 6% and risk based ratio of 8%. The final rule incudes a tiered risk weight framework for high concentrations of residential real estate loans and commercial loans, therefore, as a credit union's concentration in those asset classes increases, incrementally higher levels of capital are required.

Risk Weighting

The rule contains risk weighting for off-balance sheets items that are determined by multiplying the off-balance-sheet exposure amount by the appropriate credit conversion factor and the assigned risk weight as follows:

  • For the outstanding balance of loans transferred to a Federal Home Loan Bank under the MPF program, a 20% CCF and a 50%  risk weight
  • For other loans transferred with limited recourse, a 100% CCF applied to the off-balance-sheet exposure and the following risk weightings:
  • For commercial loans, risk-weighted 100%
  • For first-lien residential real estate loans, risk-weighted 50%
  • For junior-lien residential real estate loans, risk-weighted 100%
  • For all secured consumer loans, risk-weighted 75%
  • For all unsecured consumer loans, risk-weighted 100%
  • For unfunded commitments, the following applies:
  • For commercial loans, a 50% CCF with a 100% risk weight
  • For first-lien residential real estate loans, a 10% CCF with a 50% risk weight
  • For junior-lien residential real estate loans, a 10% CCF with a 100% risk weight
  • For all secured consumer loans, a 10% CCF with a 75% risk weight
  • For all unsecured consumer loans, a 10% CCF with a 100% risk weight

The final rule creates risk weighted buckets ranging from 0% risk weighting to 1,250% risk weighting.

0% Risk Weighting

The following balance sheet assets are weighted at 0%:

  • The balance of cash, currency and coin, including vault, automatic teller machine, and teller cash
  • The exposure amount of an obligation of the U.S. Government, its central bank, or a U.S. Government agency that is directly and unconditionally guaranteed, and Federal Reserve Bank stock and Central Liquidity Facility stock
  • Insured balances due from FDIC-insured depositories or federally insured credit unions
  • Shared secured loans

20% Risk Weighting

The following items are risk weighted 20%:

  • The uninsured balances due from FDIC-insured depositories, FICUs and PICUs
  • The exposure amount of non-subordinated obligation of the U.S. Government, its central bank, or a U.S. Government agency that is conditionally guaranteed, excluding interest-only mortgage-backed-security STRIPS, a non-subordinated obligation of a GSE other than an equity exposure or preferred stock, excluding interest only GSE mortgage-backed-security STRIPS, securities issued by PSEs that represent general obligation securities, and Federal Home Loan Bank stock
  • The balances due from Federal Home Loan Bank
  • The balance of share-secured loans, where the shares securing the loan are on deposit with another depository institution
  • The portions of outstanding loans with a government guarantee
  • The portions of commercial loans secured with contractual compensating balances

50% Risk Weighting

The following on-balance sheet assets are assigned a 50% risk weighting:

  • The outstanding balance (net of government guarantees), including loans held for sale, of current first-lien residential real estate loans less than or equal to 35% of assets.
  • The exposure amount of securities issued by PSEs in the U.S. that represent non-subordinated revenue obligation securities, other non-subordinated, non-U.S. Government agency or non-GSE guaranteed, residential mortgage-backed securities, excluding interest-only mortgage-backed-security STRIPS

75% Risk Weighting

The following balance sheet items are weighted at 75%:

  • Current first-lien residential real estate loans greater than 35% of assets
  • Current secured consumer loans

100% Risk Weighting

A 100% risk weighting is assigned to the following balance sheet items:

  • The outstanding balance of first-lien residential real estate loans that are not current, current junior-lien residential real estate loans less than or equal to 20% of assets, current unsecured consumer loans, current commercial loans, less contractual compensating balances that comprise less than 50% of assets, and loans to CUSOs
  • The exposure amount of industrial development bonds, interest-only mortgage-backed-security STRIPS, §703 compliant investment funds, corporate debentures and commercial paper, non-perpetual capital at corporate credit unions, general account permanent insurance, GSE equity exposure or preferred stock, and non-subordinated tranches of any investment
  • All other assets listed on the statement of financial condition not specifically assigned a different risk weight under this subpart

Credit unions also are given the option to use the gross-up approach as an alternative to the 100 percent risk-weight.

150% Risk Weighting

The following balance sheet assets are risk weighted at 150%:

  • The outstanding balance, net of government guarantees and including loans held for sale of current junior-lien residential real estate loans that comprise more than 20% of assets, junior-lien residential real estate loans that are not current, consumer loans that are not current, current commercial loans, which comprise more than 50% of assets, and commercial loans which are not current

250% Risk Weighting

A credit union must assign a 250% risk weight to the carrying value of mortgage servicing assets (MSAs) held on-balance sheet.

300% Risk Weight

A credit union must assign a 300% risk weight to the exposure amount of the following on-balance sheet assets:

  • Publicly traded equity investments, other than a CUSO investment
  • Investment funds that do not meet the requirements under 12 CFR 703.14(c)
  • Separate account insurance, with the option to use the look-through approaches in § 702.104(c)(3)(iii)(B)

400% Risk Weight

A credit union must assign a 400% risk weight to the exposure amount of non-publicly traded equity investments that are held on-balance sheet, other than equity investments in CUSOs.

1,250% Risk Weight

A credit union must assign a 1,250% risk weight to the exposure amount of any subordinated tranche of any investment held on balance sheet.