Risk-Based Capital Frequently Asked Questions

The following revisions have been made to the Capital Adequacy Standards effective for January 1, 2022:

• Removes the risk-based net worth (RBNW) ratio measurement.
• Leaves the Capital Adequacy Standards for NEW credit unions substantially unchanged, with some additional provisions related to subordinated debt.²
• Amends the definition of “complex” from total assets greater than $50 million to greater than $500 million.
• Makes non-complex credit unions only subject to the Net Worth Ratio requirements.
• Requires complex credit unions to have a comprehensive written strategy for maintaining an appropriate level of capital and makes them subject to both a Net Worth Ratio requirement and a Risk-Based Capital (RBC) ratio requirement unless they are eligible for and opt into the Complex Credit Union Leverage Ratio (CCULR) framework.

The mandatory and discretionary actions based on the PCA capital classification remain substantially unchanged. However, the revised Capital Adequacy Standards have changed to remove the RBNW ratio and incorporate RBC and CCULR. The updated Capital Adequacy Standards also remove the regular reserve account. These actions are detailed in NCUA Regulations starting in § 702.106.

The NCUA has created a Risk-Based Capital Rule Resources page, which contains the following information to help stakeholders understand the rule:

• Final rules approved by the NCUA Board, including the 2021 revisions to the 2015 RBC rule
• Board action memorandums related to RBC
• Risk weights at a glance, with and without comparison to the other banking agencies
• Complex Credit Union RBC ratio calculators 
• Industry webinar material

A complex credit union subject to the aggregate MBL cap may not make a member business loan that would result in the total amount of outstanding MBLs at the credit union being more than the lesser of 1.75 times the actual net worth of the credit union or 1.75 times the minimum net worth required for a credit union to be well capitalized. You will calculate your MBL limit in one of the following two ways:

• If you qualify for and have opted into the CCULR framework, your MBL limit is based on total assets times the minimum to be well capitalized, 9 percent of assets, then multiplied by 1.75.
• Otherwise, your MBL limit is based on the greater of 7 percent of total assets or 10 percent of risk-weighted assets for RBC, then multiplied by 1.75. It is important to note the RBC threshold is risk-weighted assets and differs from the net worth ratio, which is based on total assets.

The more significant changes include the following:

• Clarifying the treatment of off-balance sheet items to align with the other banking agencies more closely. Each item included in the definition of off-balance sheet exposure in the final rule is now provided an explicit credit conversion factor and risk weight.
• Addressing asset securitizations issued by credit unions. Specifically, a credit union must follow the requirements of the applicable provisions of 12 CFR 324.41 when it transfers exposures in connection with a securitization.
• Deducting the portion of mortgage servicing assets that exceed 25 percent of the sum of the capital elements in § 702.104(b)(1), less deductions required under § 702.104(b)(2)(i) through § 702.104(b)(2)(iv), from a complex credit union’s RBC numerator.
• Assigning a zero percent risk weight to an obligation of the Bank for International Settlements, the European Central Bank, the European Commission, the International Monetary Fund, the European Stability Mechanism, the European Financial Stability Facility, and multilateral development banks.
• Assigning a zero percent risk weight to loans fully guaranteed under the Small Business Administration Paycheck Protection Program.
• Revising the treatment of goodwill to remove the 2029 sunset date for excluded goodwill and excluded other intangible assets.
• Updating the definitions of derivatives, derivative clearing organization, and swap dealer by including a reference to the Commodity Futures Trading Commission regulation.
• Amending the definition of consumer loans to make clear that consumer leases are included.

The RBC ratio is calculated by dividing the RBC numerator by risk-weighted assets. The RBC numerator includes capital elements, plus certain additions, such as the entire Allowance for Loan and Lease Losses, less certain deductions. Risk-weighted assets include risk-weighted on-balance sheet assets plus risk-weighted off-balance sheet exposures, including derivative exposures. If capital elements in the numerator increase, then the RBC ratio increases.

Conversely, if more assets fall into higher risk weight categories, the risk-weighted assets in the denominator will increase, causing the RBC ratio to decrease. The final rule, as well as the Call Report instructions and RBC ratio calculator, provide details of what is included in the numerator and the risk weights for all assets and off-balance sheet exposures. See the NCUA’s Risk-Based Capital Resources page for more information.

The final rule became effective on January 1, 2022. The RBC rule is only applicable to complex credit unions, that is, those credit unions with assets greater than $500 million. The first measurement period is effective with the March 31, 2022, Call Report. Complex credit unions should do the following:

• Become familiar with the requirements of the rule, calculation of the RBC ratio, and eligibility for the optional CCULR framework.
• Consider how any projected changes to business operations and acquisition activities would impact the RBC ratio.
• Review any future related communications issued by the NCUA, such as letters to credit unions.
• Evaluate your credit union’s process for assessing overall capital adequacy and prepare a written strategy for examiner review during the examination or supervisory process.
  • Qualifying complex credit unions opting into the CCULR framework are required to have a straightforward written strategy for maintaining an appropriate level of capital that minimally states how the credit union intends to comply with the CCULR framework.
  • Complex credit unions that do not opt into the CCULR framework are required to have a more detailed written strategy.

Credit unions that are not classified as complex but are or will be approaching $500 million in assets soon should educate and inform their board of directors on capital adequacy requirements, review applicable policies, and determine whether changes are needed to their financial structure or growth plans for compliance and strategic purposes.

The NCUA updated its Call Report for March 31, 2022, to auto-populate as many data fields as possible to ease the burden of calculating the RBC ratio once the credit union has populated the related schedules. Your credit union, however, may want to use the NCUA-provided calculator to estimate its RBC ratio for informational purposes. The calculator is available on the Risk-Based Capital Resources page found on NCUA’s website.

• Revising the Call Report to include new schedules and instructions to compute the RBC ratio.
• Issuing examiner guidance on the updated standards.
• Delivering examiner training on the updated standards and the related examination and supervision tools.
• Providing outreach to credit unions on the revised capital adequacy standards.

The CCULR framework is an option for complex credit unions (those with assets greater than $500 million) to meet their risk-based net worth requirement without calculating an RBC ratio. To opt into the CCULR framework, complex credit unions must meet the following qualifying criteria as of the measurement date:

• CCULR (net worth ratio) of 9 percent or greater (Initial Opt-in)
• Total off-balance sheet exposures of 25 percent or less of total assets
• Sum of total trading assets and total trading liabilities of 5 percent or less of total assets
• Sum of total goodwill and total other intangible assets of 2 percent or less of total assets

Complex credit unions can opt into or out of the CCULR framework for any Call Report period by following the instructions for Call Report Schedule I, if all qualifying criteria have been met or the credit union elects to use the CCULR framework under the grace period. Complex credit unions that opt out of the CCULR framework are subject to the RBC requirements.

Complex credit unions that remain eligible (total assets greater than $500 million) that previously opted into the CCULR framework may use the CCULR framework under the grace period under the following scenarios.

• The credit union may opt into the CCULR framework under the first quarter of the grace period provision if the credit union:
  • Met all qualifying criteria and opted into the CCULR framework the previous quarter, and
  • Fails to meet one or more of the qualifying criteria for the current quarter.
• The credit union may opt into the CCULR framework under the second and final quarter of the grace period provision if the credit union:
  • Met all qualifying criteria and opted into the CCULR framework the quarter before last,
  • Elected to use the CCULR framework under the grace period in the previous quarter, and
  • Fails to meet one or more of the qualifying criteria for the current quarter.

There is an exception, however, to the grace period if the merger or acquisition is not a supervisory merger, as discussed in the Other Topics Related to the Revised Capital Adequacy Standards section. This is defined in NCUA regulations § 702.104(d)(7)(v). If a qualifying complex credit union ceases to meet qualifying criteria because of a merger or acquisition that is not a supervisory merger, there is no grace period, and the credit union must meet the RBC requirements in the quarter it ceases to be a qualifying complex credit union.

Complex credit unions will be subject to the RBC requirements under the following scenarios:

• The credit union does not opt into the CCULR framework for a given quarter, regardless of its eligibility and qualifying criteria,
• The credit union did not opt into the CCULR framework the previous quarter and does not meet all qualifying criteria for the current quarter, or
• The credit union opted into the CCULR framework under the grace period for the two previous quarters and does not meet all qualifying criteria for the current quarter.

If a credit union that previously opted into the CCULR framework has a net worth ratio that subsequently falls below 7 percent, the credit union may remain within the CCULR framework under the grace period. The credit union, however, will have a capital classification of less than “well capitalized” while its net worth ratio is less than 7 percent. Also, the credit union would need to have a net worth ratio of 9 percent or greater at the end of the grace period to continue to use the CCULR framework or would then be subject to the RBC requirement.

Significant changes were made to the March 31, 2022, call report and instructions. The NCUA provided credit unions with prior notification of changes as well as an opportunity to comment on these changes. The Call Report was restructured to streamline the schedules, retire obsolete account codes, and accommodate the new RBC and CCULR schedules. This data will allow for a more precise and better calibrated RBC ratio. More granular data will also enhance the NCUA’s off-site supervision capabilities.

We encourage complex credit unions to look at the Call Report changes and instructions early to understand reporting requirements prior to having to complete the Call Report. The Call Report instructions are sufficiently detailed to facilitate completion of the RBC schedules. Your credit union must retain workpapers to fully support the RBC calculations or CCULR eligibility.

The revised Subordinated Debt rule became effective January 1, 2022, and is codified in the NCUA Regulations 12 CFR part 702 Subpart D. Subordinated Debt issued by an Issuing Credit Union will count as Regulatory Capital, as that term is defined in § 702.402. With respect to an Issuing Credit Union that is a low-income designated credit union (LICU) and not a complex credit union, the aggregate outstanding principal amount of Subordinated Debt and, until January 1, 2042, Grandfathered Secondary Capital is included in the credit union's net worth ratio. With respect to an Issuing Credit Union that is a complex credit union and not a LICU, the aggregate outstanding principal amount of Subordinated Debt is included in the credit union's RBC Ratio. If a credit union is both a LICU and complex, the aggregate outstanding principal amount of Subordinated Debt, including Grandfathered Secondary Capital, will count towards that credit union’s net worth ratio and RBC Ratio. Note, the aggregate outstanding principal amount of Subordinated Debt is calculated in accordance with §702.407. Conversely, the aggregate outstanding principal amount of Grandfathered Secondary Capital is calculated in accordance with §702.414(b). The following chart illustrates how the use of Subordinated Debt can be used for capital treatment.

In accordance with NCUA Regulations § 702.2, a supervisory merger or combination means a transaction that involved at least one of the following:

• An assisted merger or purchase and assumption where funds from NCUA’s Share Insurance Fund were provided to the continuing credit union. 
• A merger or purchase and assumption classified by NCUA as an “emergency merger” where the acquired credit union is either insolvent or “in danger of insolvency” as defined under appendix B to Part 701 of this chapter.
• A merger or purchase and assumption that included NCUA's or the appropriate state official's identification and selection of the continuing credit union.

Both the RBC requirements and CCULR framework include adjustments for excluded goodwill. For RBC, goodwill and other intangible assets are deductions for the numerator; however, the deduction can be reduced by the amount of excluded goodwill, subject to requirements of Part 702.2.

The CCULR framework’s qualifying criteria require that the sum of goodwill and other intangible assets be 2 percent or less of total assets to opt into the framework for a given quarter. Similar to the RBC requirements, a credit union may reduce its goodwill by the amount of its excluded goodwill to meet this requirement.