What’s the big idea?

by. Henry Meier

Yesterday, the NCUA proposed the most far reaching revisions of credit union risk based net worth requirements since they were originally promulgated at the beginning of the last decade. Given the complexity of the issue and the fact that every credit union will be affected differently, it is far too early to give this proposal a thumbs up or thumbs down. But given NCUA’s aggressive use of its authority to create risk-based net worth requirements to deter what it perceives as safety and soundness risks, this proposal will undoubtedly keep more than a few credit union CEOs and CFOs up at night. The changes would take effect 18 months after final approval.

Risk based net worth generally attempts to gauge the stability of a financial institution’s assets by weighting the risk posed to financial institutions in the event of financial trouble. So, for example, cash on hand is not counted against an institution’s strength at all, but member business loans would be. The system is already used by banks and NCUA is putting forward this proposal, in part, to harmonize credit unions with other financial institutions.

First, the good news. This proposal would only affect credit unions with $50 million or more in assets. Second, it is possible that for those of you with a conservative asset composition, the new asset weighting system proposed by NCUA will actually result in your credit unions having to put aside less, not more, capital.

Now for the potentially bad news. As explained by NCUA in the proposal’s preamble, credit unions usually have quality capital; however, the Share Insurance Fund has lost hundreds of millions of dollars due to the failure of individual credit unions holding inadequate levels of capital. According to NCUA, “examiners did warn officials at these credit unions that they needed to hold higher levels of capital to offset the risks in their portfolios, but the credit union officials ignored the examiner’s recommendations, which were unenforceable. This proposal seeks to incorporate the lessons learned from these failures and better account for risks not addressed by the current rule.”

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