CCULR: NCUA’s proposed alternative to risk-based capital

The NCUA’s proposed new Complex Credit Union Leverage Ratio (CCULR) would modify capital adequacy regulation to provide a simplified measure of capital adequacy for federally insured credit unions that are classified as complex.

NCUA proposed rule as part of a continued effort to refine the risk-based capital rule, which is delayed until January 1, 2022.

This is what credit unions need to know about the rule:

What is CCULR?

The proposed new Complex Credit Union Leverage Ratio (CCULR) would allow complex credit unions that maintain a minimum net worth level and meet other qualifying criteria a streamlined framework to manage capital in their institutions.

Credit unions that opt in to the CCULR framework would not be required to calculate risk-based capital under the 2015 risk-based capital final rule, as amended on October 18, 2018.   

The CCULR is defined as the credit union’s net worth as a percentage of its total assets, rounded to two decimals, and would also require the following criteria to be met:

• A minimum net worth of 10%, subject to an initial transition period
• Off-balance-sheet exposures of 25% or less of its total assets as of the most recent calendar quarter-end
• Sum of total trading assets and liabilities of 5% or less of its total assets as of the most recent calendar quarter-end
• Sum of total goodwill and other intangible assets of 2% or less of its total assets

In exchange for calculating their risk-based capital ratio, credit unions would be required to maintain a higher net worth ratio under this proposed alternative than is otherwise required for the “well capitalized” classification.

Credit unions would be able to opt in to the CCULR at the end of each quarter by completing a CCULR reporting schedule on the call report. To opt out, the credit union would be required to provide written notice.

Who CCULR impacts

Eligible complex credit unions (over $500 million in total assets).

Why CCULR is important

It allows credit unions flexibility in capital changes while meeting the requirements established by the 2015 Final Rule.

Other proposed amendments

In addition to the alternative risk-based capital calculation, the NCUA included some clarifications and updates in the proposal, including the following:

• Aligns the treatment of asset securitizations issued by credit unions and whether they can be excluded from risk-based capital with other banking agencies’ 2013 capital rules.
• Clarifies the treatment of off-balance-sheet exposures by amending the definition to reduce ambiguity and also includes an explicit credit conversion factor and risk weight for the risk-based capital rule.
• Deducts certain mortgage servicing assets from a complex credit union’s risk-based capital numerator if the asset exposure impacts the risk-based capital ratio by 25% or more.
• Updates certain derivative-related definitions.
• Clarifies the definition of a consumer loan to include leases.
• Proposes updating the Final Rule to reflect that SBA PPP loans receive a zero-percent risk weight, as was stated in the 2020 Interim Final Rule.

Important dates: Effective date of January 1, 2022. Qualifying credit unions can begin to opt in to the CCULR framework, given they meet the criteria noted above, with a minimum transitionary net worth of 9% between January 1, 2022, and December 31, 2022, and a 9.5% minimum opt-in requirement between January 1, 2023, and December 31, 2023. Effective January 1, 2024, the minimum net worth ratio increases to 10%. Public comments on the proposed rule are open on or before October 15, 2021.

Note: Effective August 2, 2021, NCUA published Final Rule Part 702 Subpart G, which allows for a phase-in of the adverse effects from CECL adoption over a 12-quarter period starting in the year of adoption for federally insured credit unions for purposes of net worth calculation.