A final rule on capital planning and stress testing for large credit unions, giving those institutions more control over the testing action, was approved by the federal regulator of credit unions Thursday.
The National Credit Union Administration (NCUA) Board approved the capital planning and stress-testing changes to its rules, it said, to extend to the large credit unions (those with $10 billion or more in assets, as covered under the rule) a measure of regulatory relief.
The agency said that the new requirements under the final rule are made more efficient for credit unions by “authorizing credit unions to conduct their own stress tests in accordance with the NCUA’s requirements and allowing those credit unions to incorporate the stress test results into their capital plan submissions.”
The regulation takes effect June 1.
Under the final rule approved by the board, some of the capital planning and stress testing requirements now applicable to the larger credit unions would be removed. For example, the agency said, tier I and II covered credit unions will continue to develop annual capital plans, but the capital plans will no longer be formally submitted annually to NCUA by May 31 (as recommended last fall in the proposed rule).
In contrast to the lower tiers, the agency’s final rule states, tier III covered credit unions will continue to submit capital plans annually to NCUA by May 31 that must be formally accepted or rejected by the NCUA. (That’s no change from the proposed rule.)
(The agency changed the tier definitions under the final rule. “Tier I” institutions under the final rule those that hold less than $15 billion in assets, rather than $20 billion as in the proposal. “Tier II” institutions are those with $15 billion or more in assets, but less than $20 billion in assets. “Tier III” credit unions are those at or above $20 billion in assets. However, under the final rule, the agency can designate a specific credit union to a different tier when it determines such action is necessary.)
The final rule also imposes tiers on stress-testing requirements: tier I credit unions are not subject to any stress testing requirements; tier II and III covered credit unions, however, are required to conduct stress testing (based on year-end financials), although tier II covered credit unions are not subject to a 5% minimum stress test capital threshold, as are tier III credit unions.
However, the final rule incorporates an “incremental approach” which requires the larger credit unions to prepare themselves for future stress testing as they increase in asset size. For example, a tier I credit union is required to obtain policies and processes necessary to develop sound capital plans and analyses prior to incorporating supervisory stress testing. A tier II credit union must incorporate the NCUA’s annual stress test scenarios into its capital plan, even though the capital plan is not required to be submitted to the NCUA on May 31.
Further, under the final rule, NCUA will no longer be required to conduct the annual supervisory stress tests on applicable covered credit unions. Rather, the covered credit unions will conduct the stress tests themselves.
“Having now completed three annual stress testing cycles, the NCUA believes that changing its regulation to have covered credit unions conduct their own supervisory stress tests, without needing to obtain approval from the NCUA, is appropriate,” the final rule states. “Accordingly, in this final rule, the requirement that the NCUA conduct supervisory stress tests is eliminated.”
However, the agency retained the right to conduct stress tests on any of the large credit unions when it chooses to, “and to request qualitative and quantitative information from the covered credit unions that pertains to supervisory stress testing,” it stated.
The agency specifically noted that differentiating capital planning and stress testing based on asset size of institutions “is deemed to be the most significant determinant regarding each covered credit union’s systemic risk to the NCUSIF (National Credit Union Share Insurance Fund).”
“The Board’s ability to recategorize a covered credit union into a higher tier, however, recognizes that the complexity and financial condition of the credit union are other important considerations for determining whether a credit union should be subject to additional capital planning and stress testing requirements,” the final rule states. “The final rule seeks to balance the higher risk that covered credit unions may pose to the NCUSIF, with the time and resources these institutions need to prepare themselves to meet capital planning and supervisory stress testing expectations.”