NCUA Risk-Based Capital Final Rule. August 2016

Transcription

1 NCUA Final Rule August 2016

2 Legal Disclaimer This presentation has been prepared by NCUA staff to provide an overview of the final rule as it generally applies to complex credit unions. This presentation does not address all aspects of the final rule that could apply. Therefore, each credit union should carefully review the rule as it may relate to each institution. 2

3 Goals of a Framework Be faithful to the 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 3

4 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. 4

5 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 5

6 Complex vs Non-Complex Credit Unions [VALUE] ([PERCENTA GE]) [VALUE] ([PERCENTA GE]) Complex Non-Complex Based on Dec. 31, 2014 Call Report Data 6

7 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 7

8 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 8

9 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

10 RBC Ratio Distribution Distribution of the Risk-based Capital Ratios Among Complex Credit Unions 400 Less than Well- Capitalized Well-Capitalized Number of Credit Unions % 8-10% 10-11% 11-12% 12-13% 13-14% 14-15% 15-16% 16-17% 17-18% 18-19% 19-20% 20-30% 30%+ Ratio Based on Dec. 31, 2014 Call Report Data 10

11 Capital Levels for Complex CUs Less than Well Capitalized Well Capitalized to Well +2% Well Capitalized +2% to +3.5% Well Capitalized +3.5% to +5% Greater than Well Capitalized +5% Net Worth Ratio RBC Ratio <7% <10% 7%-9% 10%-12% 9%-10.5% 12%-13.5% 10.5%-12% 13.5%-15% >12% >15% Net Worth Ratio RBC Ratio ,025 Based on Dec. 31, 2014 Call Report Data 11

12 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 12

13 Impact on PCA Status for Complex Credit Unions (if final rule effective immediately) All Federally Insured CUs with assets > $100 Million Asset Range $100 million to $200 million $200 million to $250 million $250 million to $1 billion Total Number Units Over $1 billion 227 Total 1,489 Downgraded from Well-Capitalized to Adequately Capitalized (% of Units) 9 (1.60%) 2 (1.44%) 1 (0.18%) 3 (1.32%) 15 (1.01%) Downgraded from Well-Capitalized to Undercapitalized (% of Units) 0 (0.00%) 0 (0.00%) 0 (0.00%) 1 (0.44%) 1 (0.07%) Based on Dec. 31, 2014 Call Report Data 13

14 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 14

15 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 15

16 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 16

17 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

18 Supplemental Capital The Federal Credit Union Act includes qualifying secondary capital in regulatory capital for low income designated credit unions Authorization of additional forms of supplemental capital for all credit unions is beyond the scope of the final RBC rule A separate proposed rule is under development There is ample time for the NCUA Board to finalize a new supplemental capital rule before the effective date of risk-based capital 18

19 What Changed? What Changed in the Final Rule from the Second Proposal? 19

20 Non-Significant Equity Exposure Non-Significant Equity Exposure: Notwithstanding the risk weights assigned in paragraph (c)(2) of this section, a credit union must assign a 100 percent risk weight to nonsignificant equity exposures. 20

21 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

22 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. 22

23 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. 23

24 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. 24

25 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 25

26 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. 26

27 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. 27

28 What s Next? What s Next For Credit Unions and NCUA? 28

29 What s Next Credit Unions Nothing is required immediately Examiners will NOT be using the RBC ratio in exams until the rule becomes effective in Complex credit unions should: Become familiar with the requirements of the rule and the calculation of the risk-based capital ratio. Consider how projected changes to business operations would impact the risk-based capital ratio. Evaluate your credit union s process for assessing overall capital adequacy. Review related supervisory guidance when issued. 29

30 What s Next NCUA Revise the Call Report to include the data items necessary to compute the risk-based capital ratio. Update AIRES to incorporate the new risk-based ratio. Modify risk-report systems to use the new data to enhance off-site monitoring. Issue examiner guidance on the rule. Provide examiner training. Communicate with the industry on the implementation of the rule. 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

33 Feel free to contact our office with questions or comments. Robert Parrish, Director of Supervision Region III