Jan 01 1994

Applying Risk-Based Capital Ratios to Credit Unions

In this study, Professor Harold Sollenberger and Kurt Schneckenburger examine risk-based capital – a capital measure that links risk and capital adequacy – and its application to credit unions.

They propose a new way to approach the “C” in CAMEL and show that risk-based capital can make a valuable contribution toward improving regulators and credit union boards’ ability to assess risk levels and the appropriate amount of capital.

Sollenberger and Schneckenburger suggest that risk-based capital measures already developed and implemented by commercial bank regulators offer insight into capital adequacy positions. The researchers are careful to note that a different set of risk-based capital rules would most likely be applied to credit unions. However, they contend that the basic system should be relatively consistent with broad-based systems being used by other financial institutions.

Using credit union data provided by NCUA’s 5300 report and making certain assumptions, this research transforms the traditional data into the needed formats for calculating credit union risk-based capital ratios. The researchers discuss how capital adequacy fits with risk and return, past capital adequacy measures, and issues involved in implementing a system of risk-based capital. They then construct a risk-based capital measure, apply it to a group of credit unions, and assess the results.

Report Number 1009