National Credit Union Administration Chairman Debbie Matz said on Wednesday that the agency is in the process of drafting a rule that would require credit unions with more than $10 billion in assets to undergo annual stress testing.
“At NCUA, we need to utilize all the tools at our disposal to look ahead in order to protect the industry in the future,” Matz said. “Stress tests are forward-looking measures. They’re designed to determine whether an institution is holding an adequate capital cushion to survive adverse scenarios and to allow credit unions to make adjustments before a crisis hits.”
Under the Dodd-Frank Act, certain financial institutions with more than $10 billion in assets are required to conduct annual stress tests, which Matz said were equally important for credit unions of comparable size.
“With more than $1 trillion in industry assets, deposits at federally insured credit unions are protected by a fund of just over $11 billion,” Matz said. “However, four credit unions each have assets of $10 billion or more. So, each of those four has assets nearly the size of, or greater than, those of the Share Insurance Fund.”
Stress testing is done to identify weak points in an institution, so that it may avoid collapse during periods of economic downturn or depression. Matz said the stress testing would be done as part of NCUA’s approach to supervising a rapidly changing industry.
Economic scenarios would be based on those issued every year by the Federal Reserve, with adjustment for differences between banks and credit unions.
“The results of NCUA’s stress tests will help each credit union and NCUA identify future risks by quantifying the impact of potential financial and economic shocks on loan losses, net income and capital,” Matz said. “The results will serve to alert credit unions to just how far their capital would fall under extreme stress scenarios, enabling them to make the necessary adjustments to protect against losses.”
Credit unions that fail a stress test are required to revise their capital plans to demonstrate how it would meet the stress test capital requirements.