Final Rule 12 CFR 702, Subpart E April 30, 2014

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Rules and Regulations

Federal Register
Vol. 79, No. 83
Wednesday, April 30, 2014

This section of the FEDERAL REGISTER
contains regulatory documents having general
applicability and legal effect, most of which
are keyed to and codified in the Code of
Federal Regulations, which is published under
50 titles pursuant to 44 U.S.C. 1510.
The Code of Federal Regulations is sold by
the Superintendent of Documents. Prices of
new books are listed in the first FEDERAL
REGISTER issue of each week.

NATIONAL CREDIT UNION
ADMINISTRATION
12 CFR Part 702
RIN 3133–AE27

Capital Planning and Stress Testing
National Credit Union
Administration (NCUA).
ACTION: Final rule.
AGENCY:

NCUA is issuing a rule
requiring federally insured credit
unions (FICUs) with assets of $10
billion or more to develop and maintain
capital plans. The rule also provides for
annual stress tests of those credit
unions.
DATES: This rule is effective May 30,
2014.
FOR FURTHER INFORMATION CONTACT:
Jeremy Taylor, Senior Capital Markets
Specialist, Office of National
Examinations and Supervision, (703)
518–6640; Dale Klein, Senior Capital
Markets Specialist, Office of
Examination and Insurance, (703) 518–
6360; or Lisa Henderson, Staff Attorney,
Office of General Counsel, (703) 518–
6540.
SUPPLEMENTARY INFORMATION:
SUMMARY:

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Table of Contents
I. Background
A. Why is NCUA adopting this final rule?
B. What did the proposed rule say?
C. How did the commenters respond to the
proposed rule?
II. Final Rule
A. Capital Planning
B. Stress Testing
C. State Coordination
D. Public Disclosure
E. Process Overview
F. Effective Date
III. Regulatory Procedures
A. Regulatory Flexibility Act
B. Paperwork Reduction Act
C. Executive Order 13132
D. Assessment of Federal Regulations and
Policies on Families

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E. Small Business Regulatory Enforcement
Fairness Act

I. Background
A. Why is NCUA adopting this final
rule?
The NCUA Board (Board) believes
that in order to ensure the safety and
soundness of the credit union system
and to protect the National Credit Union
Share Insurance Fund (Share Insurance
Fund), the largest FICUs should have in
place systems and processes to monitor
and maintain their capital adequacy.
This rule achieves that by requiring
FICUs with assets of at least $10 billion
(covered credit unions) to submit capital
plans annually to NCUA. The rule
establishes a supervisory tool for
assessing covered credit union capital
adequacy by also providing for annual
stress tests of their balance sheets using
baseline, adverse, and severely adverse
scenarios.
B. What did the proposed rule say?
The proposed rule required covered
credit unions to develop and maintain
a capital plan and submit the plan to
NCUA annually.1 It applied to all FICUs
that reported $10 billion or more in
assets on their March 31 Call Report.
The proposed rule also provided for
NCUA to conduct independent stress
tests on all covered credit unions based
on September 30 financial data.
C. How did the commenters respond to
the proposed rule?
NCUA received 22 comments on the
proposed rule. All of the commenters
supported the concept of stress testing
and capital planning for covered credit
unions. However, eight were opposed to
the issuance of a new regulation, urging
that NCUA issue non-binding
supervisory guidance instead. The
remaining 14 commenters, including the
four credit unions that are currently
over $10 billion in assets, did not object
to a new regulation but suggested
significant changes to the proposal.
The Board has determined that
issuing guidance would not achieve the
goals intended by this rule. The Board
views stress tests and capital planning
as common safety and soundness
requirements for financial institutions,
including credit unions, with $10
billion or more in assets. This element
of safety and soundness is broadly
1 78

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outlined in federal banking agency
guidance, and NCUA intends to do the
same. Also, in a manner similar to bank
regulatory agencies, NCUA will issue
guidance with greater details describing
how covered credit unions can comply
with the requirements for stress testing
and capital planning.
Two commenters said that the
proposal does not comply with the
Administrative Procedure Act (APA).
With respect to this type of rulemaking,
the APA requires federal agencies to
give the public advance notice of the
contents of a proposed rule and to offer
the public an opportunity to express
their views of the proposed rule before
the agency.2 The requirement to provide
the public with adequate notice of a
proposed rule is generally achieved
through the publication of a notice of
proposed rulemaking in the Federal
Register.3 NCUA issued a proposed rule
regarding capital planning and stress
testing on October 24, 2013, which was
published in the Federal Register on
November 1, 2013.4 The public was
given 60 days from that date to submit
comments. The Board believes that the
rulemaking procedures comply with
APA requirements.
These commenters also stated that the
legal authority cited for the proposed
regulation, Sections 120(a) and 216 of
the Federal Credit Union Act (the Act) 5
do not specifically address capital
planning and stress testing. This is
correct, but the Act does not limit
NCUA to issuing regulations only
explicitly authorized by statute. Instead,
it grants NCUA a broad mandate to
‘‘prescribe rules and regulations for the
administration of this chapter.’’ ‘‘This
chapter’’ means Chapter 14 of Title 12
of the United States Code, which is the
Act itself.
Seven commenters argued that credit
unions should be treated like banks, that
is, NCUA should apply the supervisory
stress testing and capital planning
requirements only to credit unions with
at least $50 billion in assets. The Board
disagrees. As of December 2013, the
assets in the Share Insurance Fund
totaled $11.6 billion, and the assets of
the four largest covered credit unions
totaled $111.4 billion—nearly 10 times
the size of the Share Insurance Fund.
25

U.S.C. 553(b) and (c).
U.S.C. 553(b).
4 78 FR 65583 (Nov. 1, 2013).
5 12 U.S.C. 1766a and 1790d.
35

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The net worth of these credit unions
was $11.24 billion as a cushion against
the risks of these assets. NCUA can
expect the exposure of the Share
Insurance Fund will increase further as
additional credit unions cross this $10
billion threshold. The Board believes it
is important to require capital planning
and stress testing at the credit unions
that, by virtue of their sheer size, could
pose the greatest risk to the Share
Insurance Fund, while limiting the
regulatory burden.
After careful consideration of all of
the comments, the Board has
determined to issue this final capital
planning and stress testing rule. In
response to comments, the Board has
reorganized the rule and made other
changes from the proposal, as discussed
below.

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II. Final Rule
A. Capital Planning
The proposed rule contained
mandatory elements of a capital plan.
Some commenters objected that the
requirements were too broad. Others
said that the grounds for rejecting a
capital plan should be specifically
defined. The Board disagrees with these
views. The risk exposure of a credit
union depends on its marketplace, its
individual business model, changes to
its business plan, and the management
of enterprise-wide risks specific to the
credit union’s strategies. The adequacy
of capital planning must be
commensurate with the risks and
complexity of each credit union in the
context of its own circumstances; these
cannot be pre-defined.
The proposed rule required a covered
credit union to perform specific capital
analyses, including a requirement to test
the impact of interest rate shocks of at
least +/¥ 300 basis points on the net
economic value of the credit union,
using final maturities of non-maturity
shares not exceeding two years. A
number of commenters opposed this test
as arbitrary and unrealistic. The purpose
of the requirement in the proposed rule
was to address the extent to which an
assumption of long maturities on nonmaturity shares can mask a credit
union’s interest rate risk. However, the
specificity of the rule as proposed may
detract from other interest rate risk
factors. Accordingly, the Board has
removed that test from the final rule and
substituted a requirement that covered
credit unions perform reverse stress
testing as part of their capital planning.
Reverse stress testing is a tool that
allows a credit union to assume a
known adverse outcome, such as
suffering a credit loss that breaches

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regulatory capital ratios or suffering
severe liquidity constraints that render
it unable to meet its obligations, and
then infer the types of events that could
lead to such an outcome. This type of
stress testing may help a credit union to
consider scenarios beyond normal
business expectations and see the
impact of severe systemic effects on the
credit union. It also allows a credit
union to challenge common
assumptions about its performance and
expected mitigation strategies. NCUA
expects that credit unions will address
ranges of member behavior in regard to
non-maturity share pricing in their
sensitivity tests and reverse stress tests.
The Board has added definitions of
‘‘sensitivity testing’’ and ‘‘reverse stress
test’’ to the final rule.
Commenters objected to the
requirement that capital plans must
contain ‘‘at least’’ the elements
enumerated in the proposal. They
expressed concern that the phrase might
lead examiners to require additional
elements not listed in the rule.
However, the point of the capital
planning exercise is for a covered credit
union to consider its specific risk
exposures and to establish capital goals
and requirements to support these risks.
Where a particular covered credit
union’s unique products, lines of
business, and field of membership
create a risk not captured by the
enumerated elements, the credit union
will be expected to conduct additional
analyses.
The proposed rule required covered
credit unions to conduct certain capital
plan assessments over each quarter of a
3-year planning horizon. Some
commenters suggested that the capital
planning horizon should be only 9
quarters, like the stress test horizon. The
Board disagrees. A covered credit
union’s capital planning should be part
of long-term strategic planning. A 3-year
capital planning horizon is longer than
the stress test period and therefore
allows a credit union to incorporate any
stress testing as it formulates its capital
plans. NCUA also encourages covered
credit unions to incorporate factors
longer than 3 years into their capital
planning process.
B. Stress Testing
The proposed rule provided that
NCUA would conduct independent
stress tests on all covered credit unions.
Many commenters suggested stress
testing should be performed by the
covered credit unions themselves and
that it would be simpler and less costly
for NCUA to validate the models and
assumptions of the credit unions than to
conduct the stress testing

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independently. The Board considered
the reasons for relying on independently
performed stress testing, taking into
account the costs. The primary objective
of stress testing is for the Board to assess
the ability of the largest credit unions to
absorb the impact of significant
economic stresses and to determine
with a high degree of confidence when
a covered credit union does not have
sufficient capital to protect the Share
Insurance Fund from losses that may
threaten the credit union system. The
Board believes consistent processes and
uniform application of stress test
procedures and analysis are critical to
achieving reliable results. As a result,
the Board believes NCUA-run stress
testing is necessary for the first three
years of credit union stress testing.
After NCUA conducts stress tests on
a credit union for three years, the credit
union may apply to NCUA to conduct
its own stress test in such a manner as
approved and as supervised by NCUA.
This final rule is not the end of the
process on stress testing, but just the
beginning. The agency’s objective is for
stress testing to be a process of
continuous improvement. For the first
three years, NCUA will use external
providers to assist in evaluating data
and producing comparable results for
the required stress test scenarios. In the
following years, whether NCUA or the
credit union conducts the stress test,
NCUA will ensure the stress testing
protocol maintains an independent and
comparable assessment of capital plus
the flexibility to address the demands of
a changing environment.
In determining whether or not to
approve a covered credit union’s request
to perform its own stress tests, NCUA
may consider factors such as the credit
union’s previous stress test results,
recent supervisory history, current
financial condition, CAMEL codes,
management continuity, and any
operational changes, among other
parameters.
The proposed rule established a
minimum stress test capital ratio of 5
percent. Some commenters argued that
the minimum ratio should be 4 percent,
like the minimum bank leverage ratio.
The Board disagrees. The stress test
capital ratio must take into account the
difference between credit union and
bank capital. Because credit unions do
not have access to the capital markets to
raise common stock, they must rely on
retained earnings, which take time to
accumulate. A minimum ratio of 5
percent provides a threshold below
which a credit union may take timely
action to enhance its stress test capital
before reaching a 4 percent level, at
which time the credit union would be

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considered significantly
undercapitalized.
The proposed rule also excluded
several items from the calculation of
stress test capital, including the 1
percent Share Insurance Fund deposit.
Some commenters argued that the 1
percent deposit should be included
because the credit union has a claim on
the deposit. However, the deposit is not
available to the credit union to cover
losses it may incur. The Board therefore
continues to believe it is appropriate to
exclude the deposit from stress test
capital for NCUA’s stress testing.
C. State Coordination
The proposed rule provided that
before taking any action against a
federally insured, state-chartered credit
union for capital planning or stress
testing violations, NCUA would consult
with the applicable state supervisory
authority. Several commenters objected
that consultation was insufficient and,
therefore, that the proposal undermined
state authority. The Board has added to
the final rule a commitment that NCUA
will also work cooperatively with the
state authority.

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D. Public Disclosure
The Board noted that bank stress tests
are publicly disclosed and sought
comment on whether credit union tests
should be similarly disclosed. The
Board noted that public disclosure helps
to provide valuable information to
market participants, enhances
transparency, and facilitates market
discipline but also cautioned that stress
test results can be misinterpreted and
lead to inaccurate conclusions about the
health of an institution. The majority of
the commenters stated that stress test
results should not be publicly disclosed.
However, three of the four covered
credit unions suggested that there
should be public disclosure after an
initial implementation period. The
Board recognizes that the public policy
goals of providing information to market
participants and facilitating market
discipline are of reduced importance in
the case of credit unions, as credit
unions are cooperatives and not
publicly held institutions. The Board
does, however, acknowledge that
members are owners of credit unions

and as such should be afforded as much
information as possible about the credit
union in which they invest and entrust
to provide their financial services. To
that end, NCUA provides full
transparency of all federally insured
credit unions’ current and past financial
information by posting quarterly Call
Report data for all the public.
At the same time, the Board must
consider whether publicizing stress test
results could harm the credit union
members that NCUA intends to protect.
As some stakeholders cautioned, stress
test results could be taken out of context
or misreported in public media. This
could lead members to faulty
conclusions about their credit union’s
current health, and cause a run on
deposits—one of the worst-case
scenarios that stress testing is intended
to avoid.
The same fundamental reasons why
NCUA does not publicize CAMEL Codes
would apply to publicizing stress test
results: Both CAMEL Codes and stress
tests are supervisory tools. Both are
designed to require credit unions to take
certain actions in order to strengthen
safety and soundness. Similarly, NCUA
does not require credit unions to
publicly release results from assetliability management modeling,
liquidity planning, or interest rate risk
shock tests. These tests are designed as
internal exercises to ensure that credit
unions are prepared for a wide variety
of ‘‘what if’’ scenarios.
For credit unions that may be
approved by NCUA to conduct their
own stress tests after three years,
publicizing the results could put even
more pressure on the credit unions to
make sure they always show positive
results. In some cases, credit unions
might choose to alter their assumptions
rather than increase capital. Such an
action would subvert the purpose of this
rule: To ensure that the largest credit
unions take proactive steps to increase
capital in advance of the worst-case
scenario.
Accordingly, the Board has
determined that public disclosure is not
appropriate during the first several years
of stress test implementation. However,
when NCUA next reviews Part 702 as
part of its ongoing three-year rotation,
the Board reserves the right to take a

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separate action on whether or not to
publicly disclose the stress test results.
E. Process Overview
The proposed rule contained a table
setting out the timeframes of various
requirements. Under the proposed rule,
and as shown in that table, covered
credit unions were required to submit
their capital plans to NCUA by March
31 of each year. It provided that NCUA
would notify the credit union of its
acceptance or rejection of the plan by
June 30 and, in the case of a rejection,
allowed the credit union 30 days to
resubmit its plan. Several commenters
stated that 30 days was insufficient. The
Board agrees, and the final rule provides
90 days for resubmission of a rejected
plan. In order to accommodate this
change, however, the final rule requires
initial submission of the plan by
February 28 and an NCUA response
within 90 days. NCUA believes the
slightly shorter time frame for initial
submission will not be burdensome as
capital planning is an ongoing process
that occurs on an annual cycle.
The proposed rule provided that
covered credit unions would be given
the results of the NCUA stress tests by
May 31. One commenter said that credit
unions should be given the stress test
results before the capital plan is due.
The Board recognizes that credit unions
would like to have the stress test results
available for the development of their
capital plans. However, supervisory
stress testing and credit union capital
planning have different purposes and
are unique exercises. NCUA’s
supervisory stress test provides an
independent assessment of the credit
union’s capital adequacy. A covered
credit union’s capital planning process
is a sound practice that integrates
strategic planning, risk management,
and capital assessment.
Capital planning and supervisory
stress testing are separate processes.
Moreover, the final rule allows for stress
testing to be performed by NCUA, or
subsequently by the covered credit
unions. These processes have
independent timelines, so the tables
below now show each process
separately.

TABLE 1—PROCESS OVERVIEW OF CAPITAL PLANNING REQUIREMENTS WHEN NCUA PERFORMS STRESS TESTS UNDER
THIS FINAL RULE
Timeframe

Steps

September 30 * ...................................................
by February 28 (of the following year) * .............
within 90 days of submission of plan .................

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‘‘As of’’ date for covered credit union’s capital plan.
Covered credit union submits capital plan to NCUA.
NCUA accepts or rejects capital plan.

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TABLE 1—PROCESS OVERVIEW OF CAPITAL PLANNING REQUIREMENTS WHEN NCUA PERFORMS STRESS TESTS UNDER
THIS FINAL RULE—Continued
Timeframe

Steps

within 90 days of NCUA decision to reject plan

Affected covered credit union submits revised capital plan.

* The final rule allows NCUA to direct a covered credit union to formulate its capital plan based on financial data for a date other than the September 30 date in Table 1. NCUA anticipates there may be cases where September 30 data does not appropriately capture the risk of the covered credit union. In this instance, NCUA would specify the alternative capital plan date, and adjust the February 28 deadline for capital plan
submissions on a schedule to reflect the change in the ‘‘as of’’ date.

TABLE 2—PROCESS OVERVIEW OF NCUA-RUN SUPERVISORY STRESS TEST REQUIREMENTS UNDER THIS FINAL RULE
Timeframe

Steps

September 30 ** ..................................................
by December 1 ...................................................
by May 31 *** ......................................................
within 90 days of receipt of stress test results (if
below required minimum).

‘‘As of’’ date for NCUA’s stress test data
NCUA releases scenarios on which it will conduct independent stress tests.
NCUA provides stress test results to covered credit union.
Affected covered credit union submits stress test capital enhancement plan.

** As with capital planning, NCUA may direct stress tests of a covered credit union to occur on an alternative ‘‘as of’’ date to the September 30
date in Tables 2 and 3, if the September 30 data does not accurately reflect the credit union’s risks or financial position. Any such change would
prompt corresponding amendments in submission deadlines for NCUA and credit union-run stress tests.
*** NCUA recognizes the first year of stress test implementation poses unique challenges, such as selecting the NCUA-designated vendor,
compiling data across multiple covered credit unions, and developing modeling processes that capture the risks within the covered credit unions.
The NCUA Board shares commenters’ thoughts that the quality of the results is of utmost importance. Therefore, NCUA reserves the right to adjust this date in the first year of implementation if necessary to ensure the accuracy of the results.

TABLE 3—PROCESS OVERVIEW OF CAPITAL PLANNING AND SUPERVISORY STRESS TEST REQUIREMENTS WHEN THE
CREDIT UNION PERFORMS STRESS TESTS UNDER THIS FINAL RULE
Timeframe

Steps

by July 31 ...........................................................
by August 31 .......................................................
September 30 ** ..................................................
by December 1 ...................................................
by February 28 (of the following year) ...............

Covered credit union requests authority to perform stress tests for coming annual cycle.
NCUA approves or declines request by credit union to perform stress tests.
‘‘As of’’ date for NCUA’s stress test data.
NCUA releases scenarios on which CU will conduct stress tests.
Covered credit union submits capital plan, stress test results and, if applicable, stress test capital enhancement plan to NCUA.
NCUA accepts or rejects capital plan and, if applicable, stress test capital enhancement plan.
Affected covered credit union submits revised capital plan and, if applicable, stress test capital
enhancement plan.

Within 90 days of submission .............................
within 90 days of NCUA decision to reject plan

A covered credit union with a stress
test enhancement plan accepted by
NCUA, following an NCUA-run
supervisory stress test, must incorporate
this enhancement plan into the credit
union’s capital plan for the following
year.

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F. Effective Date
Some commenters urged NCUA to
delay implementation of the regulation
for a year to enable covered credit
unions adequate time to develop and
test assumptions, models, and processes
and to collect the data. The Board
believes that delayed implementation is
unnecessary, as credit unions already
employ many of the practices involved
in stress testing and capital planning.
The Board recognizes that
implementation may include an element
of continuous improvement and that
practices will develop and be refined
over time.

III. Regulatory Procedures
A. Regulatory Flexibility Act
The Regulatory Flexibility Act
requires NCUA to prepare an analysis of
any significant economic impact any
regulation may have on a substantial
number of small entities (primarily
those under $50 million in assets).6
Because the rule only applies to credit
unions with $10 billion or more in
assets, it will not have any economic
impact on small credit unions.
B. Paperwork Reduction Act
The Paperwork Reduction Act of 1995
(PRA) applies to rulemakings in which
an agency by rule creates a new
paperwork burden on regulated entities
or increases an existing burden.7 For
purposes of the PRA, a paperwork
burden may take the form of a reporting
or recordkeeping requirement, both
referred to as information collections.
65

U.S.C. 603(a).
U.S.C. 3507(d); 5 CFR part 1320.

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The information collection requirements
are found in sections 702.503, 702.504,
702.505, and 702.506 of this final rule.
Section 702.503(b) provides a list of
mandatory elements to be included in a
covered credit union’s capital policy.
Section 702.504(a) requires a covered
credit union to develop and maintain a
capital plan and to submit the plan to
NCUA by February 28 of a given year.
Section 702.504(a) further requires a
covered credit union’s board of directors
or a designated committee to review and
approve the covered credit union’s
capital plan prior to its submission to
NCUA. Section 702.504(b) establishes a
list of mandatory elements to be
included in the capital plan.
Section 702.505(d) provides that
within 90 calendar days of receipt of a
notice of rejection by NCUA of a
covered credit union’s capital plan,
under section 702.505(c), the covered
credit union must update and re-submit
its capital plan to NCUA.
Section 702.506(f) requires a covered
credit union to provide any relevant

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qualitative or quantitative information
requested by NCUA to conduct or
analyze the stress test.
Section 702.506(h) provides that
within 90 days of receipt of a notice that
a covered credit union does not have the
ability to maintain the required stress
test capital ratio, the covered credit
union must submit a stress test capital

enhancement plan showing how it will
meet that requirement.
In the proposed rule’s PRA
discussion, NCUA estimated that the
initial paperwork burden for each
covered credit union was 500 hours.
One commenter stated that this estimate
was low. The paperwork burdens of this
final rule are substantially similar to
Number of
respondents

Initial Paperwork Burden:
Initial Report .............................................................................................
Ongoing Paperwork Burden:
Annual Report ...........................................................................................

C. Executive Order 13132
Executive Order 13132 encourages
independent regulatory agencies to
consider the impact of their actions on
state and local interests. NCUA, an
independent regulatory agency as
defined in 44 U.S.C. 3502(5), voluntarily
complies with the executive order to
adhere to fundamental federalism
principles. The final rule applies to
federal credit unions and to two
federally insured, state-chartered credit
unions, each with assets over $10
billion. By law, these state-chartered
institutions are already subject to
numerous provisions of NCUA’s rules,
based on the agency’s role as the insurer
of member share accounts and the
significant interest NCUA has in the
safety and soundness of their
operations. Given the limited reach of
the final rule on state-chartered credit
unions, NCUA does not believe the rule
will have a substantial direct effect on
the States, on the relationship between
the national government and the States,
or on the distribution of power and
responsibilities among the various
levels of government. NCUA has,
therefore, determined that this rule does
not constitute a policy that has
federalism implications for purposes of
the executive order.

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D. Assessment of Federal Regulations
and Policies on Families
NCUA has determined that this final
rule will not affect family well-being
within the meaning of § 654 of the
Treasury and General Government
Appropriations Act, 1999, Public Law
105–277, 112 Stat. 2681 (1998).
E. Small Business Regulatory
Enforcement Fairness Act
The Small Business Regulatory
Enforcement Fairness Act of 1996
(SBREFA) 8 provides generally for
8 Public

Law 104–121, 110 Stat. 857 (1996).

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4

1

250

1,000

1. The authority citation for part 702
continues to read as follows:

■

Authority: 12 U.S.C. 1766(a), 1790d.

2. Revise the heading of part 702 to
read as set forth above.
■ 3. Add subpart E to read as follows:
■

Subpart E—Capital Planning and Stress
Testing
702.501 Authority, purpose, and
reservation of authority.
702.502 Definitions.
702.503 Capital policy.
702.504 Capital planning.
702.505 NCUA action on capital plans.
702.506 Annual supervisory stress testing.

Subpart E—Capital Planning and
Stress Testing
§ 702.501 Authority, purpose, and
reservation of authority.

(a) Authority. This subpart is issued
by the National Credit Union
Administration (NCUA).
(b) Purpose. This subpart requires
covered credit unions to develop and

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Total hours

3,000

PART 702—CAPITAL ADEQUACY

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Hourly
estimate
750

For the reasons discussed above, the
National Credit Union Administration
amends part 702 as follows:

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As of December 31, 2013, there were
four FICUs with assets of $10 billion or
more.

1

By the National Credit Union
Administration Board on April 24, 2014.
Gerard Poliquin,
Secretary of the Board.

PO 00000

Summary of Burden

4

List of Subjects in 12 CFR Part 702
Credit unions, Reporting and
recordkeeping requirements.

U.S.C. 551.

those in the proposed rule. NCUA has
reevaluated the initial paperwork
burden, however, and determined it to
be 750 hours.

Annual
frequency

congressional review of agency rules. A
reporting requirement is triggered in
instances where NCUA issues a final
rule as defined by section 551 of the
APA.9 The Office of Management and
Budget has determined that this rule is
not a ‘‘major rule’’ for purposes of
SBREFA.

95

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maintain capital plans and describes
stress testing requirements and actions
on covered credit union capital plans.
(c) Reservation of authority.
Notwithstanding any other provisions of
this subpart, NCUA may modify some or
all of the requirements of this subpart.
Any exercise of authority under this
section by NCUA will be in writing and
will consider the financial condition,
size, complexity, risk profile, scope of
operations, and level of capital of the
covered credit union, in addition to any
other relevant factors. Nothing in this
subpart limits the authority of NCUA
under any other provision of law or
regulation to take supervisory or
enforcement action, including action to
address unsafe and unsound practices
or conditions, or violations of law or
regulation.
§ 702.502

Definitions.

For purposes of this subpart—
Adverse scenario means a scenario
that is more adverse than that associated
with the baseline scenario.
Baseline scenario means a scenario
that reflects the consensus views of the
economic and financial outlook.
Capital plan means a written
presentation of a covered credit union’s
capital planning strategies and capital
adequacy process that includes the
mandatory elements set forth in this
subpart.
Covered credit union means a
federally insured credit union whose
assets were $10 billion or more on
March 31 of the current calendar year.
Planning horizon means the period of
3 years over which capital planning
projections extend.
Pre-provision net revenue means the
sum of net interest income and noninterest income, less expenses, before
adjusting for loss provisions.
Provision for loan and lease losses
means the provision for loan and lease
losses as reported by the covered credit
union on its Call Report.

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Reverse stress test means a test that
defines severely unfavorable outcomes
and then identifies events or scenarios
that lead to these outcomes. Examples of
severely unfavorable outcomes are
breaching regulatory capital, failing to
meet obligations, or being unable to
continue independent operations.
Scenarios are those sets of conditions
that affect the U.S. economy or the
financial condition of a covered credit
union that serve as the basis for stress
testing, including, but not limited to,
NCUA-established baseline, adverse,
and severely adverse scenarios.
Sensitivity testing means testing the
relationship between specific variables,
parameters, and inputs and their
impacts on analytical results.
Severely adverse scenario means a
scenario that overall is more severe than
that associated with the adverse
scenario.
Stress test means the process to assess
the potential impact of expected and
stressed economic conditions on the
consolidated earnings, losses, and
capital of a covered credit union over
the planning horizon, taking into
account the current state of the covered
credit union and the covered credit
union’s risks, exposures, strategies, and
activities.
Stress test capital means net worth
(less assistance provided under Section
208 of the Federal Credit Union Act,
subordinated debt included in net
worth, and NCUSIF deposit) under
stress test scenarios.
Stress test capital ratio means a
covered credit union’s stress test capital
divided by its total consolidated assets
less NCUSIF deposit.

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§ 702.503

Capital policy.

(a) General requirements. The extent
and sophistication of a covered credit
union’s governance over its capital
planning and analysis process must
align with the extent and sophistication
of that process. The process must be
consistent with the financial condition,
size, complexity, risk profile, scope of
operations, and level of capital of the
covered credit union. The ultimate
responsibility for governance over a
covered credit union’s capital planning
and analysis process rests with the
credit union’s board of directors. Senior
management must establish a
comprehensive, integrated, and effective
process that fits into the broader risk
management of the credit union. Senior
management responsible for capital
planning and analysis must provide
regular reports on capital planning and
analysis to the credit union’s board of
directors (or a designated committee of
the board).

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(b) Mandatory elements. A covered
credit union’s board of directors (or a
designated committee of the board)
must review and approve a capital
policy, along with procedures to
implement it. The capital policy must:
(1) State goals and limits for capital
levels and risk exposure.
(2) Establish requirements for
reviewing and reporting capital levels
and breaches of capital limits, with
contingency plans for remedying any
breaches.
(3) State the governance over the
capital analysis process, including all
the activities that contribute to the
analysis;
(4) Specify capital analysis roles and
responsibilities, including controls over
external resources used for any part of
capital analysis (such as vendors and
data providers);
(5) Specify the internal controls that
govern capital planning, including
review by internal audit, control of
changes in capital planning procedures,
and required documentation;
(6) Describe the frequency with which
capital analyses will be conducted;
(7) State how capital analysis results
are used and by whom; and
(8) Be reviewed at least annually and
updated as necessary to ensure that it
remains current with changes in market
conditions, credit union products and
strategies, credit union risk exposures
and activities, the credit union’s
established risk appetite, and industry
practices.
§ 702.504

Capital planning.

(a) Annual capital planning. (1) A
covered credit union must develop and
maintain a capital plan and submit this
plan to NCUA each year by February 28,
or such later date as directed by NCUA.
The plan must be based on the credit
union’s financial data as of September
30 of the immediately preceding
previous calendar year, or such other
date as directed by NCUA. NCUA will
assess whether the capital planning and
analysis process is sufficiently robust in
determining whether to accept a credit
union’s capital plan.
(2) A covered credit union’s board of
directors (or a designated committee of
the board) must at least annually, and
prior to submission of the capital plan
under paragraph (a)(1) of this section:
(i) Review the credit union’s process
for assessing capital adequacy;
(ii) Ensure that any deficiencies in the
credit union’s process for assessing
capital adequacy are appropriately
remedied; and
(iii) Approve the credit union’s
capital plan.

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(b) Mandatory elements. A capital
plan must contain at least the following
elements:
(1) A quarterly assessment of the
expected sources and levels of stress test
capital over the planning horizon that
reflects the covered credit union’s
financial state, size, complexity, risk
profile, scope of operations, and existing
level of capital, assuming both expected
and unfavorable conditions, including:
(i) Estimates of projected revenues,
losses, reserves, and pro forma capital
levels, over each quarter of the planning
horizon under expected and unfavorable
conditions; and
(ii) A detailed description of the
credit union’s process for assessing
capital adequacy;
(2) A discussion of how the credit
union will, under expected and
unfavorable conditions, maintain stress
test capital commensurate with all of its
risks, including reputational, strategic,
legal, and compliance risks;
(3) A discussion of how the credit
union will, under expected and
unfavorable conditions, maintain ready
access to funding, meet its obligations to
all creditors and other counterparties,
and continue to serve as an
intermediary for its members;
(4) If the credit union conducts its
own stress test under § 702.506(c), a
discussion of how the credit union will
maintain a stress test capital ratio of 5
percent or more under baseline, adverse,
and severely adverse conditions in each
quarter of the 9-quarter horizon;
(5) A discussion of any expected
changes to the credit union’s business
plan that are likely to have a material
impact on the credit union’s capital
adequacy and liquidity; and
(6) A program to:
(i) Conduct sensitivity testing to
analyze the effect on the credit union’s
stress test capital of changes in
variables, parameters, and inputs used
by the credit union in preparing its
capital plan;
(ii) Conduct reverse stress testing to
identify events and circumstances that
cause severely unfavorable outcomes for
the credit union; and
(iii) Analyze the impact of credit risk
and interest rate risk to capital under
unfavorable economic conditions, both
separately and in combination with
each other.
§ 702.505

NCUA action on capital plans.

(a) Timing. NCUA will notify the
covered credit union of the acceptance
or rejection of its capital plan within 90
calendar days of the date of the plan’s
submission.
(b) Grounds for rejection of capital
plan. NCUA may reject a capital plan if
it determines that:

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Federal Register / Vol. 79, No. 83 / Wednesday, April 30, 2014 / Rules and Regulations
(1) The covered credit union has
material unresolved supervisory issues
associated with its capital planning
process;
(2) The capital analysis underlying
the covered credit union’s capital plan,
or the covered credit union’s
methodologies for reviewing the
robustness of its capital adequacy, are
not reasonable or appropriate;
(3) Data utilized for the capital
analysis is insufficiently detailed to
capture the risks of the covered credit
union, or the data lacks integrity;
(4) The plan does not meet all of the
requirements of § 702.504;
(5) NCUA finds unacceptable
weakness in the capital plan, the capital
planning analysis, or any critical system
or process supporting capital analysis;
or
(6) The covered credit union’s capital
planning process constitutes an unsafe
or unsound practice, or would violate
any law, regulation, NCUA order,
directive, or any condition imposed by,
or written agreement with, NCUA. In
determining whether a capital plan
would constitute an unsafe or unsound
practice, NCUA considers whether the
covered credit union is and would
remain in sound financial condition
after giving effect to the capital plan.
(c) Notification in writing. NCUA will
notify the credit union in writing of the
reasons for a decision to reject a capital
plan.
(d) Re-submission of a capital plan. If
NCUA rejects a credit union’s capital
plan, the credit union must update and
resubmit an acceptable capital plan to
NCUA within 90 calendar days of the
rejection. The resubmitted capital plan
must at a minimum address:
(1) NCUA-noted deficiencies in the
credit union’s original capital plan; and
(2) Remediation plans for unresolved
supervisory issues contributing to the
rejection of the credit union’s original
capital plan.
(e) Supervisory actions. Any covered
credit union operating without a capital
plan accepted by NCUA may be subject
to supervisory actions on the part of
NCUA.
(f) Consultation on proposed action.
Before taking any action under this
section on the capital plan of a federally
insured, state-chartered credit union,
NCUA will consult and work
cooperatively with the appropriate State
official.
§ 702.506
testing.

Annual supervisory stress

(a) General requirements. The
supervisory stress tests consist of
baseline, adverse, and severely adverse
scenarios, which NCUA will provide by

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December 1 of a calendar year. The tests
will be based on the covered credit
union’s financial data as of September
30 of that year, or such other date as
directed by NCUA. The tests will take
into account all relevant exposures and
activities of a credit union to evaluate
its ability to absorb losses in specified
scenarios over a 9-quarter horizon. The
minimum stress test capital ratio is 5
percent.
(b) NCUA-run tests. Except as
provided in paragraph (c) of this
section, NCUA will conduct the tests
described in this section.
(c) Credit union-run tests under
NCUA supervision. After NCUA has
completed three consecutive
supervisory stress tests, a covered credit
union may, with NCUA approval,
conduct the tests described in this
section. A covered credit union must
submit its request to NCUA to conduct
its own stress test by July 31 for the
following annual cycle. NCUA will
approve or decline the credit union’s
request by August 31. The credit union
must include the results of the tests in
the capital plan it submits under
§ 702.504. NCUA reserves the ability to
conduct the tests described in this
section on any covered credit union at
any time. Where both NCUA and a
covered credit union have conducted
the tests, the results of NCUA’s tests
will determine whether the covered
credit union has met the requirements
of this section.
(d) Newly covered credit union. A
credit union that becomes a covered
credit union after the effective date of
this regulation must have three NCUArun stress tests before it can seek NCUA
approval to conduct credit union-run
stress tests.
(e) Potential impact on capital. In
conducting a stress test under this
subpart, during each quarter of the
stress test horizon, NCUA or the covered
credit union will estimate the following
for each scenario:
(1) Losses, pre-provision net revenues,
loan and lease loss provisions, and net
income; and
(2) The potential impact on the stress
test capital ratio, incorporating the
effects of any capital action over the 9quarter stress test horizon and
maintenance of an allowance for loan
losses appropriate for credit exposures
throughout the horizon. NCUA or the
covered credit union will conduct the
stress test without assuming any risk
mitigation actions on the part of the
covered credit union, except those
existing and identified as part of the
covered credit union’s balance sheet, or
off-balance sheet positions, such as asset

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sales or derivatives positions, on the
date of the stress test.
(f) Information collection. Upon
request, the covered credit union must
provide NCUA with any relevant
qualitative or quantitative information
requested by NCUA pertinent to the
stress test under this section.
(g) Stress test results. NCUA will
provide each covered credit union with
the results of the stress test by May 31
of the year following the effective
testing date. A credit union conducting
its own stress test must provide NCUA
the results of its stress test with its
capital plan by February 28 of the year
following the effective testing date.
(h) Supervisory actions. If NCUA-run
stress tests show that a covered credit
union does not have the ability to
maintain a stress test capital ratio of 5
percent or more under expected and
stressed conditions in each quarter of
the 9-quarter horizon, the credit union
must provide NCUA, within 90 days of
receipt of the stress test results, a stress
test capital enhancement plan showing
how it will meet that target. If the credit
union-run stress tests show that it does
not have the ability to maintain a stress
test capital ratio of 5 percent or more
under expected and stressed conditions
in each quarter of the 9-quarter horizon,
the credit union must incorporate a
stress test capital enhancement plan
into its capital plan. Any affected credit
union operating without a stress test
capital enhancement plan accepted by
NCUA may be subject to supervisory
actions on the part of NCUA.
(i) Consultation on proposed action.
Before taking any action under this
section against a federally insured, statechartered credit union, NCUA will
consult and work cooperatively with the
appropriate State official.
[FR Doc. 2014–09814 Filed 4–29–14; 8:45 am]
BILLING CODE 7535–01–P

DEPARTMENT OF TRANSPORTATION
Federal Aviation Administration
14 CFR Part 95
[Docket No. 30958; Amdt. No. 513]

IFR Altitudes; Miscellaneous
Amendments
Federal Aviation
Administration (FAA), DOT.
ACTION: Final rule.
AGENCY:

This amendment adopts
miscellaneous amendments to the
required IFR (instrument flight rules)
altitudes and changeover points for

SUMMARY:

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