NCUA Board Proposes Capital
and RegFlex Improvements
Alexandria, Va., July 21, 2005 -- The National Credit Union Administration (NCUA) Board today issued proposed rule changes to protect the net worth of low-income credit unions that offer uninsured secondary capital accounts, and extend the Regulatory Flexibility Program (RegFlex) to include more institutions, particularly low-income designated credit unions.
“While NCUA is actively engaged with Congress on capital improvements requiring statutory changes, the NCUA Board today issued two important improvements the agency can achieve without legislative change,” Chairman JoAnn Johnson said.
“I believe both proposals strike the right balance between regulatory flexibility and safety and soundness,” said Board Member Debbie Matz.
“The RegFlex proposal is designed to ensure the agency’s Regulatory Flexibility Program is available to all credit unions that demonstrate sustained superior performance in both net worth and their CAMEL rating, the agency’s supervision tool measuring overall credit union performance,” Chairman Johnson said. “I’m especially pleased that if this proposal is adopted many more small credit unions will be able to avail themselves of RegFlex benefits.”
RegFlex Enhancements
“Under the proposed RegFlex rule change, 462 additional credit unions would automatically qualify for the NCUA Regulatory Flexibility Program, which would be based on a new minimum net worth requirement and sustained CAMEL code of 1 or 2 for two consecutive examinations,” Chairman Johnson said.
Credit unions with 7 percent minimum net worth are currently classified “well capitalized” under Prompt Corrective Action (PCA). The proposal recommends the 7 percent minimum net worth requirement also qualify credit unions for RegFlex. Currently, RegFlex requires a minimum 9 percent net worth. Credit unions subject to a risk-based net worth (RBNW) requirement would qualify for RegFlex if they remain “well capitalized” after that requirement is applied.
“NCUA should not micro-manage well-managed institutions,” the Chairman said, “and by lowering the qualifying net worth percentage this proposal would provide more options for a credit union and its members.”
Credit unions that are unable to meet both the minimum net worth and CAMEL standards to automatically qualify for RegFlex, but that meet one of those standards, may apply to the appropriate NCUA regional director for RegFlex designation.
“The RegFlex proposal presents opportunities especially for small and mid-size credit unions,” Board Member Matz said. “Nearly two-thirds of the credit unions that would gain eligibility for RegFlex exemptions are under $50 million. And I invite commenters to consider other regulations that could qualify for a RegFlex exemption, providing they would have no negative impact on safety and soundness.”
Secondary capital improvements proposed
The Board proposed changes to Section 701.34 to protect the net worth of low-income designated credit unions by permitting them to redeem secondary capital within five years of maturity. This would prevent secondary capital that is no longer counted as net worth from remaining on credit union’s books as an asset and diluting its PCA net worth ratio.
“When these funds no longer count as net worth, the funds remain on the credit union’s books as an asset and reduce the credit union’s overall net worth ratio, essentially causing a detrimental cost effect, because it is generally a more costly source of funds than share accounts,” Chairman Johnson said
“The Board proposal would permit well-managed, highly-rated low-income institutions to have the option to release the portion of a secondary capital account that no longer counts as net worth,” the Chairman said. “This significant capital improvement would allow low-income designated credit unions to have flexibility and potentially enhance their ability to serve by providing more capital options.”
“The proposal is intended to ensure that otherwise healthy low-income credit unions do not incur PCA sanctions as a result of secondary capital,” Board Member Matz pointed out. “While this is important for well capitalized credit unions, it is even more important for adequately capitalized credit unions, with net worth between 6 and 7 percent. For some of these credit unions, it is the discounted secondary capital that is pushing them below the 7 percent PCA threshold. So giving them an opportunity to redeem that capital will have the effect of immediately improving their net worth.”
The amendment also recommends NCUA approve a credit union’s plan for use of secondary capital before it offers such accounts. In the near future, internal guidance as well as an update to the Examiners Guide will provide additional guidance and assistance.
The National Credit Union Administration charters and supervises federal credit unions. NCUA, with the backing of the full faith and credit of the U.S. government, operates and manages the National Credit Union Share Insurance Fund, insuring the accounts of more than 83 million account holders in all federal credit unions and the majority of state-chartered credit unions.
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