​​Regulatory Capital Transition Date Approaching for Corporates

In 2010, the NCUA Board adopted wholesale changes to the regulations (Part 704) governing the activities of corporate credit unions. These changes bolstered requirements for corporate credit unions to ensure they remain safe and sound, and can serve their credit union members, even in times of economic turmoil.

One of the key provisions of the revised regulations requires corporate credit unions to meet new capital standards. The NCUA Board recognized that rebuilding capital to sufficient levels, especially through retained earnings, would take time. It, therefore, granted a phase-in period of ten years, consisting of several transition periods. October 2016 represents the next transition period, and it could result in changes to a corporate's reported regulatory capital.

In this article, we outline the capital requirements under this transition period. It is important to remember that this is just one more step in NCUA's ongoing efforts to ensure a strong corporate credit union system.

Under Section 704.3, a corporate credit union must maintain capital, defined as a leverage ratio, of at least 4 percent to be adequately capitalized. The leverage ratio is determined by dividing a corporate's Tier 1 capital (generally, the sum of retained earnings and perpetual-contributed capital or PCC) by a corporate's net assets. Perpetual-contributed capital is a capital investment placed with a corporate that is available to cover losses that exceed retained earnings. During the economic crisis, many corporates incurred losses, which led them to solicit PCC from their credit union members to bolster the reserves of the corporate credit union.

In constructing this rule, the Board intentionally prioritized the importance of corporates building a healthy level of retained earnings. Retained earnings absorb losses without an immediate downstream effect on a corporate's members. However, should perpetual-contributed capital have to absorb these losses, credit unions that made these investments may have to record impairment charges on their balance sheet, which can adversely affect their own financial stability. Such impairments occurred during the financial crisis of 2008–2009.

In an effort to encourage the corporates to build robust levels of retained earnings, the Board adopted provisions in Part 704 that set caps on the amount of PCC that can be counted as regulatory capital.

Effective October 2016, the regulatory definition of Tier 1 capital will change and will require a corporate to deduct any amount of perpetual-contributed capital that causes PCC— minus retained earnings, all divided by the moving daily average net assets—to exceed 2 percent.

This calculation for Tier 1 capital will remain in effect until October 2020, at which time a corporate credit union will be required to deduct any amount of PCC that causes it to exceed retained earnings for purposes of reporting Tier 1 capital.

On the October 2016 and 2020 transition dates, the regulatory capital-level ratios for a corporate credit union could decline due solely to the required exclusion of PCC above the respective caps. However, the actual dollar amount of the total capital (retained earnings and all PCC) available to absorb losses will remain unchanged. As a result, the Share Insurance Fund and external parties doing business with corporates will be protected by the full amount of retained earnings and PCC.

If your credit union has any questions about the capital levels at your corporate, we encourage you to contact your corporate credit union directly.