NCUA Issues Proposed PCA and Risk-Based Capital Rule
NCUA published a proposed Prompt Corrective Action (PCA) and Risk-Based Capital rule at its Jan. 23, 2014, Board Meeting. Over the past several months, NASCUS state regulator members participated in a joint task force with NCUA to help discuss and shape this rulemaking. Now that it is public, NASCUS staff will begin to analyze the nearly 200-page rulemaking, and a comprehensive summary will be available to members soon. In the meantime, here are the main highlights of the proposal:
- Restructures part 702 of NCUA’s regulations regarding PCA, and replaces the agency’s current risk-based net worth requirements with new risk-based capital (RBC) requirements.
- Eliminates provisions relating to transfers to the regular reserve account (§702.401(b)), the standard calculation of risk-based net worth requirement (§702.106), alternative components for standard calculation (§702.107), and risk-mitigation credit (§702.108).
- Would apply to federally-insured “natural person” credit unions with assets of more than $50 million (according to NCUA, this equates to 2,237 credit unions total, 199 of which will experience a decline in their PCA classification, with 10 of those becoming Undercapitalized).
- Risk Based Capital Ratio is calculated as a percentage, rounded to two decimal places, of the Risk-based Capital Numerator/ Total Risk-Weighted Assets
- Risk-Based Capital Numerator is the sum of specifically listed capital elements (including net income, undivided earnings, and ALLL, limited to 1.25% of risk assets) minus regulatory adjustments for NCUSIF deposit, goodwill, other intangible assets, and identified losses not reflected in the numerator.
- Total Risk-Weighted Assets includes risk-weighted on balance sheet assets (divided into 10 categories ranging from zero to 1,250% risk-weights), plus risk-weighted off balance sheet assets, plus risk-weighted derivatives, minus regulatory adjustments for NCUSIF deposit, goodwill, other intangible assets, and identified losses not reflected in the numerator.
- Revises existing PCA capital categories by adding the risk based net worth ratio components as follows:
- Well Capitalized: Net worth ratio 7% or above and RBC ratio 10.5% or above
- Adequately Capitalized: Net worth ratio 6% - 6.99% and RBC ratio 8% - 10.49%
- Undercapitalized: Net worth ratio 7% or above and RBC ratio less than 8%
- Significantly Undercapitalized: Net worth ratio 2% - 3.99% (RBC not applicable)
- Critically Undercapitalized: Net worth ratio less than 2% (RBC not applicable)
- Requires higher levels of RBC for credit unions with concentrations of assets in real estate loans, MBLs, or high levels of delinquent loans.
- Primarily uses existing information contained in the Call Report, but some additional Call Report data will need to be collected.
- Includes procedures for NCUA to require an individual credit union to hold a higher level of risk-based capital where specific supervisory concerns arise regarding the credit union’s condition.
- Ninety-day public comment period following publication in the Federal Register.