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Supervisory Utility of Risk Based Capital

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By Kevin Kirksey

Screen Shot 2014-04-15 at 3.42.53 PMThe NCUA has issued a notice of proposed ruling on risk-based capital (RBC) as a continued effort to orchestrate heightened safety and soundness parameters for the credit union industry. In response to Government Accountability Office mandates, the NCUA galvanized an improved scrutiny of systemic capital threats. Now, it welcomes feedback from the credit union population. The proposed RBC framework introduced by the NCUA Board on January 23, revises the insufficient, one-size-fits-all capital regulations for federally insured credit unions with more than $50 million in assets. It also attempts to partially correlate with the Basel III capital adequacy standards adopted by the Federal Reserve (Fed), Federal Deposit Insurance Corporation (FDIC), and Comptroller of the Currency (OCC). But the critically important RBC proposal lacks some congruency with the Basel Accords and could lead to a misrepresentation of risk across the credit union spectrum. While the stability of depository systems relies profoundly on capital cushions, it is imperative to measure capital prudently. Doing so will both prevent institutional failures and allow credit unions the flexibility to enhance earnings while strategically managing risk so that they may continue to offer superior products to their members.

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