12 CFR part 702, subpart E

National Credit Union Administration

§ 702.502

Subpart E—Capital Planning and
Stress Testing
SOURCE: 79 FR 24315, Apr. 30, 2014, unless
otherwise noted.
EFFECTIVE DATE NOTE: At 80 FR 66722, Oct.
29, 2015, subpart E to part 702 was redesignated as subpart C, effective Jan. 1, 2019.

§ 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
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.

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§ 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.

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§ 702.503

12 CFR Ch. VII (1–1–17 Edition)

Capital planning process means development of a capital policy and formulation of a capital plan that conforms
to this part.
Covered credit union means a federally
insured credit union whose assets are
$10 billion or more. A credit union that
crosses the asset threshold as of March
31 of a given calendar year is subject to
the capital planning and stress testing
requirements of this subpart in the following 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 non-interest 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.
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.
[79 FR 24315, Apr. 30, 2014, as amended at 80
FR 48012, Aug. 11, 2015]

§ 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).
(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);

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National Credit Union Administration

§ 702.504

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(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. It must submit this plan and its capital policy to
NCUA by May 31 each year, or such
later date as directed by NCUA. The
plan must be based on the credit
union’s financial data as of December
31 of the preceding 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 the 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.
(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.
[79 FR 24315, Apr. 30, 2014, as amended at 80
FR 48012, Aug. 11, 2015; 81 FR 7198, Feb. 11,
2016]
EFFECTIVE DATE NOTE: At 80 FR 66722, Oct.
29, 2015, § 702.504 was amended in paragraph
(b)(4) by removing the citation ‘‘§ 702.506(c)’’
and adding in its place ‘‘§ 702.306(c)’’, effective Jan. 1, 2019.

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§ 702.505

12 CFR Ch. VII (1–1–17 Edition)

§ 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 by August
31 of the year in which the credit union
submitted its plan.
(b) Grounds for rejection of capital
plan. NCUA may reject a capital plan if
it determines that:
(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) Unacceptable weakness in the capital plan or policy, the capital planning
analysis, or any critical system or
process supporting capital analysis;
(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) Resubmission 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 by November 30 of the year in
which the credit union submitted its
plan. The resubmitted capital plan
must, at a minimum, address:
(1) NCUA-noted deficiencies in the
credit union’s original capital plan or
policy; 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.
[79 FR 24315, Apr. 30, 2014, as amended at 80
FR 48012, Aug. 11, 2015]
EFFECTIVE DATE NOTE: At 80 FR 66722, Oct.
29, 2015, § 702.505 was amended in paragraph
(b)(4) by removing the citation ‘‘§ 702.504’’
and adding in its place ‘‘§ 702.304’’, effective
Jan. 1, 2019.

§ 702.506 Annual supervisory stress
testing.
(a) General requirements. The supervisory stress tests consist of baseline,
adverse, and severely adverse scenarios, which NCUA will provide by
February 28 of each year. The tests will
be based on the credit union’s financial
data as of December 31 of the preceding
calendar 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 of a covered credit union, the covered credit union may, with NCUA approval, conduct the tests described in
this subpart. A covered credit union
must submit its request to NCUA to
conduct its own stress test by November 30 for the following annual cycle.
NCUA will approve or decline the credit union’s request by December 31 of
the year in which the credit union submitted its request. NCUA reserves the
right to conduct the tests described in
this section on any covered credit

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National Credit Union Administration

Pt. 702, App. A

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 subpart.
(d) Potential impact on capital. In conducting stress tests under this subpart,
NCUA or the covered credit union will
estimate the following for each scenario during each quarter of the stress
test horizon:
(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 tests 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 sales or derivatives positions, on
the date of the stress test.
(e) 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 tests under this subpart.
(f) Stress test results. NCUA will provide each covered credit union with the
results of the stress tests by August 31
of the year in which it conducted the
tests. A credit union conducting its
own stress tests must incorporate the
test results in its capital plan.
(g) 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, by November 30 of
the calendar year in which NCUA conducted the tests, a stress test capital
enhancement plan showing how it will
meet that target. If credit union-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 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.
(h) Consultation on proposed action.
Before taking any action under this
section against a federally insured,
state-chartered credit union, NCUA
will consult and work cooperatively
with the appropriate State official.
[79 FR 24315, Apr. 30, 2014, as amended at 80
FR 48012, Aug. 11, 2015]

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