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NCUA’s Final Rule on Stress Testing Enhances Security of Credit Union System

April 2014
NCUA’s Final Rule on Stress Testing Enhances Security of Credit Union System

Board Action Bulletin

Associational Common Bond Proposed Rule Cuts Red Tape, Increases Clarity

ALEXANDRIA, Va. (April 24, 2014) – The National Credit Union Administration Board convened its fourth scheduled open meeting of 2014 at the agency’s headquarters here today. The Board approved three items:

  • A final rule to provide greater security for the credit union system by requiring capital planning and stress testing for credit unions with assets greater than $10 billion.
  • A proposed rule to clarify requirements for associational common bond groups for federal credit union membership and streamline approval of recognized groups.
  • An expansion of CME Federal Credit Union’s community charter to serve eight counties in the vicinity of Columbus, Ohio.

The Chief Financial Officer also provided the Board with an update on the performance of the National Credit Union Share Insurance Fund, which remains stable.

Board Approves Final Stress Testing Rule for Largest Credit Unions
The safety and soundness of the credit union system will be enhanced with the Board’s approval of a final rule (Part 702) requiring federally insured credit unions with assets of $10 billion or more to develop and maintain a capital plan and providing for comprehensive, independent stress testing on all covered credit unions.

“NCUA has spent five years building a stronger regulatory framework, based on the hard lessons learned during the financial crisis,” NCUA Board Chairman Debbie Matz said. “This final rule on capital planning and stress testing is designed to protect the system against a future crisis. Federally insured credit unions with assets of at least $10 billion, by virtue of their sheer size, pose the largest potential risk to the Share Insurance Fund. This rule requires that in advance of a worst-case scenario, the largest credit unions will be prepared to increase their capital buffers in order to protect the Share Insurance Fund.”

Stress testing is a forward-looking tool designed to evaluate whether a financial institution is holding sufficient capital to survive adverse economic events and make adjustments before a crisis occurs. The Dodd-Frank Wall Street Reform and Consumer Protection Act requires certain financial institutions with more than $10 billion in assets to conduct annual stress tests. The NCUA Board determined it is equally important for federally insured credit unions of comparable size to undergo stress testing.

“I was pleased to see that all the comments we received on the proposed rule supported the concept of stress testing,” Matz said. “The concerns we have heard focus on how it should be implemented. This final rule and forthcoming guidance will address most of those concerns.”

Under the new rule, covered credit unions will submit an annual capital plan to NCUA for approval. NCUA will conduct the supervisory stress tests beginning this year, and the rule makes it possible for covered credit unions to conduct their own stress tests after three years if they meet certain benchmarks. Results will remain confidential during the first three years.

Currently, four credit unions exceed $10 billion in assets. A fifth credit union is projected to exceed this asset threshold before the cut-off date for the 2014 stress testing cycle begins.

Approved by a 2–1 vote, the new rule, available online here, will become effective 30 days after publication in the Federal Register.

Proposed Associational Common Bond Rule Would Increase Clarity, Flexibility
The Board unanimously approved a proposed rule (Part 701) to define more clearly which associational groups do and do not qualify for membership of a federal credit union. The proposed rule would provide automatic approval for associations that do qualify.

“This regulatory relief provision is consistent with my Regulatory Modernization Initiative and would resolve an enforcement issue that arose last summer,” Matz said. “Several federal credit unions with associational groups were advertising that membership was open to anyone. Without qualifying language, that description can be inaccurate or deceptive. So, we propose to expand the ‘totality of circumstances’ test to reflect traits of legitimate associations. At the same time, the regulatory relief provision would remove unnecessary steps to approve automatically associational groups we know are legitimate.”

The proposed rule would:

  • Establish a threshold requirement that an association not be formed primarily for expanding the federal credit union’s membership.
  • Expand the criteria of the test on totality of circumstances, which determines if an association satisfies the associational common bond requirements and qualifies for inclusion in the federal credit union’s field of membership.
  • Grant automatic qualification under the associational common bond rules to certain categories of groups NCUA has approved in the past, like scouting groups, labor unions, electrical cooperatives, churches, ethnic organizations, and homeowner and alumni associations.

Comments on the proposed rule, available online here, must be received within 60 days of publication in the Federal Register.

CME Federal Credit Union Now Able to Serve 736,000 More in Columbus Area
More than 736,000 additional people living in an eight-county area surrounding Columbus, Ohio, are now potential members of CME Federal Credit Union, headquartered in Columbus, after the NCUA Board unanimously approved an expansion of the credit union’s community charter.

CME will now serve 1.8 million people who live, worship, attend school in, work or regularly conduct business in, as well as businesses and other legal entities located in, Delaware, Fairfield, Franklin, Licking, Madison, Morrow, Pickaway and Union counties.

Chartered in 1935 to serve city firefighters in Columbus, CME received NCUA approval in 2002 to convert to a community charter to serve Franklin County. CME currently has 28,046 members and assets of $224.4 million, according to its most recent Call Report. Before the expansion, the credit union had a potential field of membership of 1.1 million.

Board approval is required for community charters to serve a population of more than 1 million.

Share Insurance Fund Remains Steady
The Share Insurance Fund ended the first quarter of 2014 with a net loss of $300,000 and an equity ratio of 1.30 percent. NCUA calculated the ratio on an insured share base of $866.3 billion. The assets of troubled credit unions, those rated CAMEL code 4 or 5, also remained steady at 1.3 percent of federally insured credit union assets for the first quarter.

For the first quarter, investment and other income was $51.7 million, operating expenses were $41.7 million, and the provision for insurance losses was $10.3 million.

“NCUA’s core mission is to protect the Share Insurance Fund and the safety and soundness of the credit union system,” Matz said. “The number of troubled credit unions continues to decline, and insurance losses for the first quarter came in lower than expected. The steady position of the fund reflects the stability of the system overall and NCUA’s prudent management.”

Six federally insured credit unions failed during the first quarter of 2014. The total amount of losses associated with failures in the first quarter was $18.6 million.

Also for the first quarter, the Chief Financial Officer reported:

  • The number of CAMEL code 4 and 5 credit unions declined 9.7 percent from the first quarter of 2013, to 306.
  • Assets of the CAMEL code 4 and 5 credit unions were $13.6 billion, a decline of 19 percent from the first quarter of 2013.
  • The number of CAMEL code 3 credit unions declined 5.6 percent from the first quarter of 2013, to 1,471.
  • Assets of CAMEL code 3 credit unions were $107 billion, a decline of 6.5 percent from the first quarter of 2013.

NCUA did not assess a Share Insurance Fund premium in 2013. In November 2013, staff recommended to the NCUA Board a premium range of zero to five basis points of insured shares for 2014. The Board will decide whether or not to charge a premium for 2014 at the open meeting on July 31.

The first-quarter figures are preliminary and unaudited.

NCUA tweets all open Board meetings live. Follow @TheNCUA on Twitter, and access Board Action Memorandums and NCUA rule changes at NCUA also live streams, archives and posts videos of open Board meetings online.

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