Capital

A credit union is expected to maintain capital commensurate with the nature and extent of risk to the institution and the ability of its management to identify, measure, monitor, and control these risks. Examiners consider the effect of credit, market, and other risks on the credit union’s financial condition when evaluating capital adequacy.

The types and quantity of risk inherent in a credit union’s activities will determine the extent to which it may be necessary to maintain capital to properly reflect the potentially adverse consequences these risks may have on the institution’s capital levels.

Regulatory capital requirements are set to a minimum level, and are separate and distinct from a credit union’s need to maintain capital commensurate with the level of risk inherent in operations. A credit union’s capital adequacy is based on, but not limited to, an assessment of the following evaluation factors. The order of these factors does not signify a level of importance.

• Capital level and quality of capital, including a credit union’s use of and reliance on subordinated debt

• Overall financial condition

• The ability of management to address emerging needs for additional capital

• Compliance with risk-based net worth requirements, if applicable1 NCUA’s revised Capital Adequacy Standards in part 702 of NCUA regulations became effective January 1, 2022.

• Composition of capital

• Interest and dividend policies and practices

• Quality, type, liquidity, and diversification of assets, with particular reference to classified assets

• Loan and investment concentrations

• Balance sheet composition, including the nature and amount of market risk, concentration risk, and risk associated with nontraditional activities

• Growth plans and experience managing growth

• Volume and risk characteristics of new business initiatives

• Ability of management to control and monitor risk

• Earnings quality and composition

• Liquidity and interest rate risk management

• Extent of contingent liabilities and existence of pending litigation

• Field of membership

• Economic environment

Capital Ratings

Rating	Description
1	Indicates sound capital relative to the credit union’s current and prospective risk profile.
2	Indicates satisfactory capital relative to the credit union’s current and prospective risk profile.
3	Reflects less than satisfactory capital that does not fully support the credit union’s current and prospective risk profile. The rating indicates a need for improvement.
4	Indicates deficient capital. In light of the credit union’s current and prospective risk profile, viability of the credit union may be threatened. Financial support from outsiders may be required.
5	Indicates critically deficient capital in light of the credit union’s current and prospective risk profile such that the credit union’s viability is threatened. Immediate assistance from external sources or financial support is required.

Last updated April 29, 2022