The National Credit Union Administration says 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.
The rule was approved by a 2–1 vote, and is available online here. It will become effective 30 days after publication in the Federal Register.