On April 24, 2014, the National Credit Union Administration approved a final rule requiring federally insured credit unions with assets of $10 billion or more to develop and maintain capital plans and run annual stress tests. Stress testing is a forward-looking tool designed to evaluate whether a financial institution is holding sufficient capital to survive adverse economic events and make adjustments before a crisis occurs.

The Dodd-Frank Wall Street Reform and Consumer Protection Act requires certain financial institutions with more than $10 billion in assets to conduct annual stress tests. While Dodd-Frank does not mandate stress-testing for credit unions, the NCUA Board determined it is equally important for federally insured credit unions of comparable size to undergo stress testing.

Under the new rule, covered credit unions will submit an annual capital plan to the NCUA for approval. The NCUA will conduct the supervisory stress tests beginning this year, and the rule makes it possible for covered credit unions to conduct their own stress tests after three years if they meet certain benchmarks. Results will remain confidential during the first three years.

The rule did not pass unanimously, with board member Michael Fryzel casting the lone dissenting vote. His primary concerns were the cost to the National Credit Union Share Insurance Fund (the “NCUSIF”) and his concern that the NCUA does not have the internal expertise to conduct the capital planning and stress testing required by the rule. These two concerns go hand in hand, with the absence of internal expertise requiring the hiring of outside consultants at an estimated cost per institution in excess of $1,000,000 initially and $500,000 per annum thereafter (to be paid by the NCUSIF). Thus, while only five credit unions meet the asset threshold so as to be directly affected by the rule, all credit unions will be to some extent impacted by the costs of the program. It also remains possible, since the rule is regulatory in nature rather than being based on legislation, that it could be expanded in the future to reach credit unions with lower asset levels.