Overview of steps an “undercapitalized” credit unions must take

Submitted by sevans on Tue, 01/06/2015 - 5:26pm

Prompt corrective action for “undercapitalized” credit unions.

(a) Mandatory supervisory actions by credit union. A federally-insured credit union which is “undercapitalized” must—

(1) Earnings retention. Increase net worth and transfer earnings to its regular reserve account in accordance with §702.201;

Composite ratings are based on a careful evaluation of an institution's managerial, operational, financial, and compliance performance. The six key components used to assess an institution's financial condition and operations are: capital adequacy, asset quality, management capability, earnings quantity and quality, the adequacy of liquidity, and sensitivity to market risk.

Under the UFIRS, each financial institution is assigned a composite rating based on an evaluation and rating of six essential components of an institution's financial condition and operations. These component factors address the adequacy of capital, the quality of assets, the capability of management, the quality and level of earnings, the adequacy of liquidity, and the sensitivity to market risk. Evaluations of the components take into consideration the institution's size and sophistication, the nature and complexity of its activities, and its risk profile.

The Uniform Financial Institutions Rating System (UFIRS) was adopted by the Federal Financial Institutions Examination Council (FFIEC) on November 13, 1979. Over the years, the UFIRS has proven to be an effective internal supervisory tool for evaluating the soundness of financial institutions on a uniform basis and for identifying those institutions requiring special attention or concern. A number of changes, however, have occurred in the banking industry and in the Federal supervisory agencies' policies and procedures which have prompted a review and revision of the 1979 rating system.

The NCUA Board has the discretion to reclassify a credit union to the next lower category if the credit union has an unsafe or unsound condition or engages in material unsafe and unsound practices. The NCUA Board may reclassify a well-capitalized credit union as adequately capitalized, and may require an adequately capitalized or undercapitalized credit union to comply with certain mandatory or discretionary supervisory actions as if it were in the next lower category.