NCUA-proposed complex credit union leverage ratio framework would require 10% minimum net worth by 2024

A proposal to make a simplified measure of capital adequacy available to federally insured credit unions defined as “complex” – meaning those with more than $500 million in assets – was released for comment Thursday by unanimous vote of the three-member National Credit Union Administration (NCUA) Board.

The NCUA said its proposed new complex credit union leverage ratio (CCULR) framework is comparable to the community bank leverage ratio (CBLR) that went into effect in January 2020 for banks under the 2018 financial regulatory relief law.

Under the NCUA proposed rule, a complex credit union that opts into the CCULR framework and maintains the minimum net worth ratio – for the CCULR, that would begin with 9% as of of Jan. 1, 2022, and rise gradually to 10% by Jan. 1, 2024 – would be considered well capitalized. It would not be required to calculate a risk-based capital ratio under the Oct. 29, 2015, risk-based capital final rule, which also takes effect Jan. 1, 2022.

Other qualifying criteria for the proposed framework include: off-balance-sheet exposures equal 25% or less of total assets; trading assets and trading liabilities are 5% or less of total assets; and goodwill and other intangible assets are 2% or less of total assets.

The NCUA estimated that based on Dec. 31, 2020, financial performance data, most complex credit unions would be able to meet the CCULR’s initial net worth requirement of 9%.

In addition to the CCULR framework, the proposed rule includes several amendments to update the 2015 risk-based capital rule. These changes would address asset securitizations issued by credit unions, clarify the treatment of off-balance sheet exposures, deduct certain mortgage servicing assets from a complex credit union’s risk-based capital numerator, update several derivative-related definitions, and clarify the definition of a consumer loan.

The agency welcomes all comments but highlighted some specific issues on which it seeks input:

  • the advantages or disadvantages of a CCULR minimum net worth of 8%, 9%, or 10%;
  • the qualifying criteria, including how they might change if the minimum net worth requirement is set differently;
  • whether the agency board should limit CCULR eligibility to credit unions with less than $2 billion in assets;
  • commenters’ views on excluding mortgage servicing assets (MSAs) from qualifying criteria;
  • advantages and disadvantages of using the net worth ratio as the measure of capital adequacy under the CCULR;
  • whether the trend of credit unions investing in fewer corporate credit union capital instruments is likely to continue or whether that is considered temporary and in response to the 2007–2009 recession.
  • advantages and disadvantages of deducting MSAs from the risk-based capital numerator.

While all three board members voted to release the proposal, Board Member Rodney Hood, who questioned the need for even the risk-based capital rule, said he would “grudgingly” support the proposed CCULR, which he termed a “small step in the right direction.”

Comments will be due 60 days after the proposal’s publication in the Federal Register.

Capital Adequacy: The Complex Credit Union Leverage Ratio, Amendments to Risk-Based Capital, and other Technical Amendments (Notice for Federal Register)