NCUA Risk-Based Capital Final Rule

Transcription

1 NCUA Final Rule October 2015

2 Goals of a Framework Be faithful to Act mandate for risk-based net worth requirement Protect the credit union system and the NCUSIF from future losses Address today s outliers Make sure larger, more complex credit unions remain wellcapitalized as they grow and expand Incorporate a modern approach to calculating the risk-based capital ratio Ensure credit unions can continue to lend during time of economic distress without government intervention 2

3 Why did NCUA update RBC now? Basel Committee on Banking Supervision - Basel III in December 2010 and revised in June The other banking agencies updated their capital standards in July Note - NCUA has a statutory requirement for credit unions capital standards to be comparable to those for banks. 3

4 Why did NCUA update RBC now? Address recommendations and concerns raised by the U.S. Government Accountability Office and NCUA s Inspector General Address lessons learned from credit union failures during the Great Recession Apply a risk-based capital measure that is more consistent with measures used by other financial institutions 4

5 Complex vs Non-Complex Credit Unions [VALUE] ([PERCENTA GE]) [VALUE] ([PERCENTA GE]) Complex Non-Complex Based on Dec. 31, 2014 Call Report Data 5

6 Implementation Period October 2015 Final Rule Call Report Changes and Supervisory Guidance 2019 Effective Date 2029 End of extended phase-out of Supervisory Goodwill and Intangibles 6

7 PCA Categories A credit union s capital classification is Net worth ratio Risk-based capital ratio also applicable for complex credit union Well Capitalized 7% or greater And 10.0% or greater And subject to following condition(s) 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 7

8 Thresholds Compared to Other Banking Agencies Well-Capitalized Risk-based capital measure NCUA Final Rule Other Banking Agency Rule 10.0%+ 10%+ Adequately Capitalized Risk-based capital measure Undercapitalized Risk-based capital measure 8% % 8% %* < 8% < 8% *Federally insured banks also have to hold a 2.5% capital conservation buffer by January

9 Ratio Numerator Capital Elements Undivided Earnings Net Income Other Reserves Secondary Capital and 208 Asst. Included in NW Appropriation for Non-Conforming Investments Equity Acquired in Merger ALLL Numerator Deductions NCUSIF Capitalization Deposit Identified Losses not Reflected in RBC Ratio Numerator Goodwill* Other Intangible Assets* Ratio = Capital Elements Numerator Deductions Total Risk-Weighted Assets *Supervisory goodwill and other intangible assets would not be deducted until

10 Complex Credit Union Assets by Risk Weight Percentage of 1,489 Complex Credit Union Assets by Risk Weight (Data as of 12/31/14) [CELLRANGE] [CATEGORY NAME] < 1% 150% or greater [CELLRANGE] [CATEGORY NAME] [CELLRANGE] [CATEGORY NAME] [CELLRANGE] [CATEGORY NAME] [CELLRANGE] [CATEGORY NAME] Based on Dec. 31, 2014 Call Report Data 10

11 Risk Weight Comparison to FDIC (As a % of Complex Credit Union Assets) Secured Consumer (21.09%) First-Lien RE > 35% (1.19%) Junior-Lien RE > 20% (0.11%) Commercial > 50% (0.13%) Non-Current Junior-Lien RE (0.02%) Unfunded Non-Commercial (1.46%) All Other Assets 75.66% CUSO Investment (0.25%) Corporate Capital (0.09%) Comparable Risk Weight Lower Risk Weight More Conservative Risk Weight Not Directly Comparable Based on Dec. 31, 2014 Call Report Data 11

12 Credit Unions Affected by Concentration Risk Weights Concentration Threshold First-Lien Residential Real Estate (> 35% of Total Assets)* Junior-Lien Residential Real Estate (> 20% of Total Assets)* Commercial Loans (using MBLs as a proxy) a (> 50% of Total Assets) Number of Credit Unions with Total Assets Greater than $100 Million as of 12/31/2014 Percentage of 1,489 Credit Unions with Total Assets Greater than $100 million % % % * One credit union has First-Lien Residential Real Estate (>35% of Total Assets) and Junior-Lien Residential Real Estate (>20% of Total Assets) a Using MBL data as the current Call Report does not capture commercial loan data as defined in this final rule. 12

13 Comparison of MBL and Commercial Loan Definitions 1 Outstanding aggregate net member business loan balance greater than $50,000 2 Risk-weight based on government guarantee and does not count toward concentration limit 13

14 Risk Weight Comparison to FDIC NCUA Risk-Weight FDIC Risk-Weight Cash/Currency/Coin 0% 0% Investments: Unconditional Claims - U.S. Government 0% 0% Balances Due from Federal Reserve Banks 0% 0% Federally Insured Deposits in Financial Institutions 0% 0% Debt Instruments issued by NCUA and FDIC 0% 0% Central Liquidity Facility Stock 0% n/a Uninsured deposits at U.S. Federally Insured 20% 20% Institutions Agency Obligations 20% 20% FNMA and FHLMC pass through Mortgage Backed Securities (MBS) 20% 20% General Obligation Bonds Issued by State or Political 20% 20% Subdivisions Federal Home Loan Bank Stock and Balances 20% 20% Senior Agency Residential MBS or Asset-Backed Securities (ABS) Structured 20% 20% Revenue Bonds Issued by State or Political Subdivisions 50% 50% Senior Non-Agency Residential MBS Structured 50% Gross-up or Simplified Supervisory Formula Corporate Membership Capital 100% n/a 14

15 Risk Weight Comparison to FDIC Investments: (continued) NCUA Risk-Weight FDIC Risk-Weight Industrial Development Bonds 100% 100% Agency Stripped MBS (Interest Only) 100% 100% Part 703 Compliant Investment Funds 100% a n/a Value of General Account Insurance (bank owned life 100% 100% insurance, and credit union owned life insurance) a Corporate Perpetual Capital 100%/150% c n/a Mortgage Servicing Assets 250% 250% Separate Account Life Insurance 300% a Look-through Publicly Traded Equity Investment (non-cuso) 100%/300% c 300% Mutual Funds Part 703 Non-Compliant 300% a n/a Non-Publicly Traded Equity Investments (non-cuso) 100%/400% c 400% Subordinated Tranche of Any Investment 1,250% b Gross-up or Simplified Supervisory Formula Consumer Loans: Share-Secured (shares held at the credit union) 0% 0% Share-Secured (shares held at another depository 20% 20% institution) Current Secured 75% 100% Current Unsecured 100% 100% Non-Current Consumer 150% 150% a With the option to use the look-through options. b With the option to use the gross-up approach. c If a credit union s total equity exposures are non-significant under (c)(3)(i), then the risk weight is 100 percent. This lowers the risk weight to 100 percent for CUSO equity exposures, corporate perpetual capital, and all other equity investments when they are part of a credit union s non-significant equity exposures. 15

16 Risk Weight Comparison to FDIC Real Estate Loans: NCUA Risk-Weight FDIC Risk-Weight Share-Secured (shares held at the credit union) 0% 0% Share-Secured (shares held at another depository 20% 20% institution) Current First Lien < 35% of Assets 50% 50% Current First Lien > 35% of Assets 75% 50% Not Current First Lien 100% 100% Current Junior Lien < 20% of Assets 100% 100% Current Junior Lien > 20% of Assets 150% 100% Noncurrent Junior Lien 150% 100% Commercial Loans: Share-Secured (shares held at the credit union) 0% 0% Share-Secured (shares held at another depository 20% 20% institution) Portion of Commercial Loans with Compensating 20% n/a Balance Commercial Loans < 50% of Assets 100% 100%/150% d Commercial Loans > 50% of Assets 150% 100/150% d Non-current Commercial 150% 150% Miscellaneous: Loans to CUSOs 100% 100% Equity Investment in CUSO 100%/150% c 100% - 600% Other Balance Sheet Items not Assigned 100% 100% c If a credit union s total equity exposures are non-significant under (c)(3)(i), then the risk weight is 100 percent. This lowers the risk weight to 100 percent for CUSO equity exposures, corporate perpetual capital, and all other equity investments when they are part of a credit union s non-significant equity exposures. d FDIC identifies certain commercial loans as High Volatility Commercial Real Estate (HVCRE) and assigns a 150% risk weight. 16

17 Other Differences Between Credit Union and Bank Standards No cap on the amount of the allowance for loan losses counted as regulatory capital for credit unions Only credit unions greater than $100 million in assets are subject to risk-based capital measure while all banks are subject to risk-based capital measures (over 1,700 banks with assets < $100M) No capital conservation buffer for credit unions No higher risk-weight for high volatility commercial real estate (HVCRE) loans Lower risk-weight on secured consumer loans for credit unions Lower risk-weight on contractual compensating balances for credit unions Risk weighting system for non-significant levels of equity exposures simplified for credit unions and no deductions from regulatory capital 17

18 0% - 8% 8% - 10% 10% % 10.5% - 11% 11% % 11.5% - 12% 12% % 12.5% - 13% 13% % 13.5% - 14% 14% % 14.5% - 15% 15% % 15.5% - 16% 16% % 16.5% - 17% 17%-20% 20%-30% 30% - 50% 50% - 75% 75% + # of FICUs Distribution of Ratio- Complex CUs 10% RBC requirement CUs less than 10% Total Assets = $12 Billion 16 = RBC < 10% and NW > 7% Total Assets = $9.8 Billion Capital Needed = $67 Million Average RBC Ratio = 19.2% Ratio Source: December 31, 2014 NCUA Call Report Data 18

19 Distribution of NWR and RBC Excluding 30 With RBC < 10% and NW < 7% Well Capitalized to Well +2% [Net Worth = 7-9%] [RBC = 10-12%] Well Capitalized +2% to +3.5% [Net Worth = %] [RBC = %] Well Capitalized +3.5% to Well +5% [Net Worth = %] [RBC = %] Greater than Well Capitalized +5% [Net Worth = >12%] [RBC = >15%] NWR RBC Based on Dec. 31, 2014 Call Report Data 19

20 RBC Denominator / Total Assets Comparison of Complex CUs Bound by NWR vs. RBC Ratio 300 Weighted Avg. = 54.7% 72.0% 250 1,176 FICUs (79%) $787B in total assets (78%) FICUs (21%) $223B in total assets (22%) 200 Avg. Net Worth Ratio 11.2% Avg. RBC Ratio 20.7% Avg. Net Worth Ratio 10.2% Avg. RBC Ratio 13.6% <25% 30% 35% 40% 45% 50% 55% 60% 65% 70% 75% 80% 85% 90% 95% 100% >100% # Bound by NWR # Bound by RBC Based on Dec. 31, 2014 Call Report Data 20

21 # FICUs <7% NWR <10% RBC Net PCA Category Change Due to RBC RBC Bound NWR Bound 1, Total 1, FICUs Bound by RBC, have less than needed capital millions $736.4 $75.5 $84 $0 $100 $200 $300 $400 $500 $600 $700 $800 $900 $NW = 7% Assets $NW Above 7% $NW Need for 10% RBC 292 FICUs Bound by RBC, have more than needed capital billions $14.9 $1.1 $5.9 $0 $5 $10 $15 $20 $25 $NW = 7% Assets $NW = 10% RBC $NW Free All 313 FICUs Bound by RBC $15.6 $1.3 $5.8 Based on Dec. 31, 2014 Call Report Data billions $0 $5 $10 $15 $20 $25 $NW = 7% Assets $NW = 10% RBC $NW Free 21

22 What Changed? What Changed in the Final Rule from the Second Proposal? 22

23 Non-Significant Equity Exposure A credit union has non-significant equity exposures if the aggregate amount of its equity exposures does not exceed 10 percent of the sum of the total amounts (as recorded on the statement of financial condition in accordance with GAAP) of the following assets: (1) equity investments in CUSOs (2) perpetual contributed capital at corporate credit unions (3) nonperpetual capital at corporate credit unions (4) equity investments subject to a risk weight in excess of

24 # of FICUs Distribution of Equity Exposure to RBC Ratio Numerator 0% - 1% 1% - 2% 2% - 3% 3% - 4% 4% - 5% 5% - 6% 6% - 7% 7% - 8% 8% - 9% 9% - 10% 10% - 11% 11% - 12% 12% - 13% 13% - 14% 14% - 15% 15% - 16% 16% - 17% 17% - 18% 18% - 19% 19% - 20% 20% - 25% 25% - 30% 30% - 40% 40% - 50% 50% - 60% > 60% Overall Average = 3.7% of RBC Numerator 102 FICUs, with a total equity exposure of $720 million, have an estimated equity exposure greater than 10% of the RBC ratio numerator. This analysis does not attempt to estimate which FICUs will consolidate CUSO investments Source: December 31, 2014 NCUA Call Report Data 24

25 Charitable Donation Accounts Charitable Donation Accounts: An account that satisfies all of the conditions in 721.3(b)(2)(i), (b)(2)(ii), and (b)(2)(v) of this chapter. Notwithstanding the risk weights assigned in paragraph (c)(2) of this section, a credit union may assign a 100 percent risk weight to a charitable donation account. 25

26 0 % Risk Weight Other Risk Weight Changes Revised to include share secured loans where the shares securing the loan are on deposit at the credit union in the zero percent risk weight. 20 % Risk Weight Revised to clarify Part 703 compliant investment funds that are restricted to holding only investments that qualify for a zero or 20 percent risk-weight under this section. Revised to clarify when the shares or deposit is held at another depository institution the risk-weight is 20 percent. 100% Risk Weight Revised to include Non-subordinated tranches of any investment, with the option to use the gross-up approach in paragraph (c)(3)(iii)(a) of this section. Other Assigned principal-only mortgage-backed-security STRIPS a risk-weight based on the underlying collateral. 26

27 Alternative Approaches Rule Text Fully Incorporated (no longer by reference) Gross-up Approach: A credit union may use the gross-up approach under appendix A of this part to determine the risk weight of the carrying value of non-subordinated or subordinated tranches of any investment. Look-through Approaches: A credit union may use one of the look-through approaches under appendix A of this part to determine the risk weight of the exposure amount of any investment funds, the holdings of separate account insurance, or both. 27

28 Definition Changes Appropriate State Official - clarified the appropriate state official is the authority that chartered the credit union. Carrying Value - clarified that carrying value can apply to assets and liabilities. Charitable Donation Account definition added: means an account that satisfies all of the conditions in 721.3(b)(2)(i), (b)(2)(ii), and (b)(2)(v) Commitment - added enter into borrowing agreement to the description of legally binding arrangements under the definition. Commercial Loan - removed to individual, sole proprietorships, partnerships, corporations, or other business enterprises from the definition 28

29 Definition Changes Consumer Loan - removed to one or more individuals, added that vehicle loans must be wholly or substantially secured and added one or more vehicles to be part of a fleet of vehicles to the definition. Exchange - revised definition to clarify an exchange is a central clearing financial market where users can trade derivatives. Excluded Goodwill and Excluded Other Intangible Assets - clarified that excluded goodwill and excluded other intangible assets applies to mergers or combinations completed on or before 60 days after publication of the final rule in the Federal Register. Mortgage Partnership Finance Program - removed and serving them from the definition so servicing of the loans is not construed as a requirement to meet the definition. 29

30 Definition Changes Subordinated - revised to clarify that an investment that is not a junior claim on the underlying collateral or assets is non-subordinated. Part 703 Compliant Investment Fund - definition added: Part 703 compliant investment fund means an investment that meets the requirements under (c) of this chapter. U.S. Government Agency - clarified that NCUA is a U.S. Government Agency to ensure NGNs receive a zero riskweight. 30

31 Information Available on the Final Rule Ratio Estimator - spreadsheet tool that allows a credit union to individually input its data to determine its risk-based capital ratio under the revised proposed rule. Risk Weights at a Glance Compares the risk weights of the final rule to the FDIC Summary of Rule Changes - Final Rule Compared to 2015 Revised Proposal Questions and Answers About RBC 31

32 Information Available on the Final Rule See the Resource Center at 32