During its first open meeting of 2014, the National Credit Union Administration Board issued a proposed rule that strengthens risk-based capital requirements for federally insured credit unions and approved a final rule that allows those institutions to mitigate interest rate risk through the purchase of what were termed as “plain vanilla” derivatives.

NCUA—the independent federal agency that regulates, charters and supervises federal credit unions—also renewed the current 18 percent interest rate cap for most loans at federal credit unions through Sept. 10, 2015.

Federally insured credit unions that take higher risks would be required to either reduce those risks or hold more capital under the proposed rule, which updates standards for the first time in 15 years. Credit unions with less than $50 million in assets are excluded from the rule. Under the proposed formula, 94 percent of credit unions would still be considered well-capitalized, NCUA Chairman Debbie Matz said in a statement.

The proposed rule would:

Revise risk weights for many of NCUA's current asset classifications.

Require higher minimum levels of capital for federally insured credit unions with relatively high concentrations of assets in real estate loans, member business loans, delinquent loans, long-term investments, and other risky assets.

Create a process for NCUA to require a federally insured credit union to hold higher levels of risk-based capital to address supervisory concerns.

An NCUA statement says events of recent years prompted the changes, among them the recession, which exposed weaknesses in capital retention and risk measurement, the Basel III capital accord, and Government Accountability Office reviews of the NCUA's capital standards.

NCUA has created an online calculator that allows credit unions to see how the proposed rule would affect them. An extended comment period on the proposed rule is planned, with a phase-in period of at least one year. Comments on the proposed rule, available online here, must be received within 90 days of publication in the Federal Register.

The new standards were criticized by the National Association of Federal Credit Unions. “The regulatory burden on credit unions is already far too great. Enough is enough,” NAFCU President Dan Berger said in a statement.

Final Rule on Derivatives

The board's other action allows certain federal credit unions to mitigate interest rate risk with derivatives investments. It applies to federal credit unions with assets of at least $250 million and an adequate CAMEL rating (the supervisory rating system banks undergo to assess capital adequacy, assets, management capability, earnings, and liquidity).

Specifically, the final derivatives rule includes:

Limited authority to invest in simple interest rate derivatives for balance sheet management and risk reduction, including interest rate swaps, interest rate caps, interest rate floors, basis swaps, and Treasury futures.

A requirement that federal credit unions apply and receive approval for the use of the derivatives investment authority.

A requirement that credit unions engaging in derivatives activities have appropriate resources, controls and systems to maintain an effective derivatives program.

Limits on total derivatives exposure by two methods: a measure of notional amount of derivatives and a fair value loss limit.

The final rule will become effective 30 days after publication in the Federal Register.

Interest Rate Cap

NCUA will extend the current interest rate cap of 18 percent for most federal credit union loans through Sept. 10, 2015. Without this action, the cap would have reverted to 15 percent on March 11, 2014.

The current 18 percent ceiling has been in place since May 1987. The Federal Credit Union Act caps the interest rate on most credit union loans at 15 percent, but the NCUA Board has the discretion to raise that ceiling for an 18-month period.

Topics