Regulatory Comment Calls
On February 3, 2000, the NCUA Board published for comment Proposed Rule: Part 702 -- Risk-Based Net Worth Requirement.
The proposed rule sets out the criteria under which a credit union will be classified as "complex," and the amount of net worth a credit union will have to hold in order to remain adequately capitalized if complex. This document has excerpted from the Proposed Rule the information a credit union would need to determine:
- Would your credit union be considered complex under the proposed rule?
- If complex, how much net worth would your credit union need to hold to remain "adequately" capitalized?
Once the rule becomes final, these two calculations will be incorporated into the Call Report process and will be produced when Call Reports are filed.
It is important to remember that this is a proposed rule. A sixty-day comment period will follow the proposed rule’s publication in the Federal Register next week, and the NCUA Board has indicated they expect to make many changes based on comments they receive.
Therefore, if your credit union’s data suggests you would be considered complex based on the proposed rule, it may well be that with the final rule that would not be the case. Indeed, your comments to NCUA, your league, and CUNA based on your analysis of your situation can go a long way to improving the final rule.
DETERMINING IF YOUR CREDIT UNION WOULD BE "COMPLEX"
According to the proposed rule, a credit union would be classified as complex if it exceeds one or more of the four thresholds shown in Table A below. (The four tables in this document are almost exactly as they appear in NCUA’s published proposed rule. They have been renumbered to fit the order of presentation in this document.) Definitions of each of the four triggers that define complexity follow in Table B.
Table A—Thresholds to define complex credit unions
| Risk portfolios to define complex credit unions | Thresholds to define "complex" (as percent of month-end total assets) |
|---|---|
| 1. Long-term real estate loans | 25% |
| 2. Combined portfolios of:
a. MBLs outstanding and b. Unused MBL commitments |
12.25% |
| 3. Long-term investments | 15% |
| 4. Loans sold with recourse | 5% |
If none of these four items exceeds the threshold shown in the second column, the credit union is not considered complex, and would therefore be "adequately" capitalized if its net worth exceeds 6% and "well" capitalized if its net worth exceeds 7%.
If a credit union crosses one or more of the thresholds, it is considered "complex." In that case, the credit union would have to maintain a net worth ratio that is determined by applying factors to various components of the balance sheet, as explained below.
Table B—Definitions and Call Report Line Items for Identifying A "Complex" Credit Union
| Risk Portfolio | Assets, Liabilities, and Contingent Liabilities in Risk Portfolio | Call Report Reference |
|---|---|---|
| Long-term real estate loans | Total real estate loans Less:
a) The amount of real estate loans that meet the definition of a member business loan. b) Real estate loans that will contractually refinance, reprice or mature within 3 years. |
Schedule A, line 3 (Acct. Code 710) Less:
a) Schedule A, line 9 (Acct. Code 718) b) Schedule A, line 11 (Acct. Code 712) |
| Member business loans |
a) Outstanding member business loans. b) Unused Commitments for Commercial Real Estate, Construction, and Land Development. |
a) Schedule B, line 3 (Acct. Code 400) b) Schedule G, line 1.D. (Acct. Code 814) |
| Long-term Investments |
a) Investments with a weighted average life or repricing interval greater than 3 years. b) Mutual Funds & Common Trust Investments. |
Schedule C, line 12.(Acct. Code 799C)+(Acct. Code 799D) Schedule C, line 4 (Acct. Code 743C) |
| Loans sold with recourse | Outstanding balance of loans sold or swapped with recourse. | Schedule G, line 2.B. (Acct. Code 819) |
DETERMINING THE NET WORTH REQUIREMENT IF YOUR CREDIT UNION IS "COMPLEX"
If a credit union were classified as complex by virtue of crossing one for the four thresholds described above, it then would be required to calculate a Risk-Based Net Worth (RBNW) requirement. This RBNW requirement is calculated by multiplying the various components shown in Lines 1 to 7 of Table C by the RBNW factors in the last column of the table. From the total of these products, the credit union subtracts its loan and lease allowance accounts (up to 1.5% of loans.) The resulting amount would be divided by total assets to determine the risk based net worth requirement.
In other words, add together all the results of multiplying the various balance sheet and off- balance sheet components by each’s RBNW factors, subtract allowances (up to 1.5% of total loans), and divide by total assets.
Definitions and call report line items for the components of the Risk Based Net Worth requirement are found in Table D below.
There is an alternative set of factors that a credit union could use to determine its RBNW requirement if it so chose. These alternative factors are found on pages 28 to 30 of the full NCUA Proposed Rule. A credit union could chose whichever factors produced the lower risk based net worth requirement. A credit union could use the factors in Table C below for some components, and the alternative factors for others, picking the lower risk based net worth requirement in each case.
Table C—RBNW components to calculate RBNW requirement
| Risk portfolio | Amount of risk portfolio (as percent of month-end total assets) to be multiplied by RBNW factor | RBNW factor |
|---|---|---|
| 1. Long-term real estate loans | 0 to 25.00% over 25.00 to 40.00% over 40.00% |
.06 .14 .16 |
| 2. MBLs outstanding |
0 to 12.25% over 12.25% |
.06 .14 |
| 3. Long-term investments | 0 to 15.00% over 15.00% |
.06 .12 |
| 4. Low-risk assets | All % | .03 |
| 5. Average-risk assets | All % | .06 |
| 6. Loans sold with recourse | All % | .06 |
| 7. Unused MBL commitments | All % | .06 |
| 8. Allowance | Limited to equivalent of 1.50% of total loans (expressed as a percent of total assets) | (1.00) |
| A complex credit union’s RBNW requirement is the sum of eight RBNW components. An RBNW component is calculated for each of the eight risk portfolios, equal to the sum of each amount of a risk portfolio times its RBNW factor. A complex credit union is "undercapitalized" if its net worth ratio is less than its RBNW requirement. | ||
Table D—Definitions and Call Report Line Items for Determining RBNW Requirement
| Risk Portfolio | Assets, Liabilities, and Contingent Liabilities in Risk Portfolio | Call Report Reference |
|---|---|---|
| Long-term real estate loans | Total real estate loans less:
a) The amount of real estate loans that meet the definition of a member business loan. b) Real estate loans that will contractually refinance, reprice or mature within 3 years. |
Schedule A, line 3 (Acct. codes 710) less:
a) Schedule A, line 9 (Acct. code 718) b) Schedule A, line 11 (Acct. code 712) |
| Member business loans | Outstanding member business loans | Schedule B, line 3 (Acct. code 400) |
| Long-term Investments |
a)Investments with a weighted-average life or repricing interval greater than 3 years. b)Mutual Funds & Common Trust Investments |
a)Schedule C, line 12.(Acct. code 799C)+(Acct. Code 799D) b)Schedule C, line 4 (Acct. code 743C) |
| Low-risk Assets | Cash and Cash Equivalents | Assets, line 1 (Acct. code 730) |
| Average-risk Assets | Total Assets less: Risk Portfolios 1- 4. | Assets, line 27 (Acct. code 010) less: Risk Portfolio line items 1- 4 above. |
| Loans sold with recourse | Outstanding balance of loans sold or swapped with recourse | Schedule G, line 2.B. (Acct. code 819) |
| Unused MBL Commitments | Commercial Real Estate Construction and Land Development | Schedule G, line 1.D. (Acct. code 814) |
| Allowance for Loan and Lease Losses | Allowance for Loan and Lease Losses | Assets, line 21 (Acct. code 719) (Limited to equivalent of 1.5 percent of total loans.) |
Again, it must be pointed out that this is a proposed rule. Credit unions should evaluate whether they are now, or might in the future become classified as complex based on this proposal. Also, what might you maximum risk-based net worth requirement be now and in the future, and how does that compare to your current net worth level, and future plans for net worth?
The NCUA Board has expressed a strong interest in receiving comments on the proposed rule, and is likely to make many changes to the final rule based on those comments. Individual credit unions, leagues and CUNA will all be commenting on the proposal. CUNA’s Examination and Supervision Subcommittee will produce a detailed comment letter to NCUA that is likely to recommend a number of changes to the thresholds and the risk-based net worth factors. The Subcommittee would greatly appreciate the input of credit unions on the issue. Please e-mail any comments you wish the Subcommittee to see to REGCOMP@cuna.com.
