12 Cfr 702 Nprm 1/27/2015 @ 80 Fr 4340

Vol. 80

Tuesday,

No. 17

January 27, 2015

Part II

National Credit Union Administration

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12 CFR Parts 700, 701, 702 et al.
Risk-Based Capital; Proposed Rule

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Federal Register / Vol. 80, No. 17 / Tuesday, January 27, 2015 / Proposed Rules

NATIONAL CREDIT UNION
ADMINISTRATION
12 CFR Parts 700, 701, 702, 703, 713,
723, and 747
RIN 3133–AD77

Risk-Based Capital
National Credit Union
Administration (NCUA).
ACTION: Proposed rule.
AGENCY:

The NCUA Board (Board) is
seeking comment on a second proposed
rule that would amend NCUA’s current
regulations regarding prompt corrective
action (PCA) to require that credit
unions taking certain risks hold capital
commensurate with those risks. The
proposal would restructure NCUA’s
PCA regulations and make various
revisions, including amending the
agency’s current risk-based net worth
requirement by replacing the current
risk-based net worth ratio with a new
risk-based capital ratio for federally
insured natural person credit unions
(credit unions). The proposal would
also, in response to public comments
received, make a number of changes to
the original proposed rule that the
Board published in the Federal Register
on February 27, 2014. These changes
include, among other things, exempting
credit unions with up to $100 million in
total assets from the new rule, lowering
the risk-based capital ratio level
required for an affected credit union to
be classified as well capitalized from
10.5 percent to 10 percent, lowering the
risk weights for various classes of assets,
removing interest rate risk components
from the risk weights, and extending the
implementation timeframe to January 1,
2019. These changes would
substantially reduce the number of
credit unions subject to the rule, reduce
the impact on affected credit unions,
and afford affected credit unions
sufficient time to prepare for the rule’s
implementation.
The proposed risk-based capital
requirement set forth in this proposal
would be more consistent with NCUA’s
risk-based capital measure for corporate
credit unions and more comparable to
the regulatory risk-based capital
measures used by the Federal Deposit
Insurance Corporation, Board of
Governors of the Federal Reserve, and
Office of the Comptroller of Currency
(Other Banking Agencies).
In addition, the proposed revisions
would amend the risk weights for many
of NCUA’s current asset classifications;
require higher minimum levels of
capital for credit unions with
concentrations of assets in real estate

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SUMMARY:

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loans or commercial loans or higher
levels of non-current loans; and set forth
how NCUA can address a credit union
that does not hold capital that is
commensurate with its risk.
The proposed revisions would also
eliminate several provisions in NCUA’s
current PCA regulations, including
provisions relating to the regular reserve
account, risk-mitigation credits, and
alternative risk weights. (For clarity, the
‘‘current’’ PCA regulations would
remain in force until the effective date
of a final risk-based capital rule.)
DATES: Comments must be received by
April 27, 2015.
ADDRESSES: You may submit written
comments, identified by RIN 3133–
AD77, by any of the following methods
(Please send comments by one method
only):
• Federal eRulemaking Portal: http://
www.regulations.gov. Follow the
instructions for submitting comments.
• NCUA Web site: http://
www.ncua.gov/Legal/Regs/Pages/
PropRegs.aspx. Follow the instructions
for submitting comments.
• Email: Address to regcomments@
ncua.gov. Include ‘‘[Your name]—
Comments on Proposed Rule: RiskBased Capital’’ in the email subject line.
• Fax: (703) 518–6319. Use the
subject line described above for email.
• Mail: Address to Gerard Poliquin,
Secretary of the Board, National Credit
Union Administration, 1775 Duke
Street, Alexandria, Virginia 22314–
3428.
• Hand Delivery/Courier: Same as
mail address.
You can view all public comments on
NCUA’s Web site at http://
www.ncua.gov/Legal/Regs/Pages/
PropRegs.aspx as submitted, except for
those we cannot post for technical
reasons. NCUA will not edit or remove
any identifying or contact information
from the public comments submitted.
You may inspect paper copies of
comments in NCUA’s law library at
1775 Duke Street, Alexandria, Virginia
22314, by appointment weekdays
between 9:00 a.m. and 3:00 p.m. To
make an appointment, call (703) 518–
6546 or send an email to OGCMail@
ncua.gov.
FOR FURTHER INFORMATION CONTACT:
Larry Fazio, Director, Office of
Examination and Insurance, at (703)
518–6360; JeanMarie Komyathy,
Director, Division of Risk Management,
Office of Examination and Insurance, at
(703) 518–6360; Steven Farrar, Loss/
Risk Analyst, Division of Risk
Management, Office of Examination and
Insurance, at (703) 518–6393; John
Shook, Loss/Risk Analyst, Division of

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Risk Management, Office of
Examination and Insurance, at (703)
518–3799; Tom Fay, Senior Capital
Markets Specialist, Division of Capital
and Credit Markets, Office of
Examination and Insurance, at (703)
518–1179; Rick Mayfield, Senior Capital
Markets Specialist, Division of Capital
and Credit Markets, Office of
Examination and Insurance, at (703)
518–6501; or by mail at National Credit
Union Administration, 1775 Duke
Street, Alexandria, VA 22314.
SUPPLEMENTARY INFORMATION:
I. Introduction
II. Legal Authority
III. Summary of the Original Proposal and
This Proposal
IV. Section-by-Section Analysis
V. Effective Date
VI. Impact of this Proposed Rule
VII. Regulatory Procedures

I. Introduction
NCUA’s primary mission is to ensure
the safety and soundness of federally
insured credit unions. NCUA performs
this function by examining and
supervising all federal credit unions,
participating in the examination and
supervision of federally insured, statechartered credit unions in coordination
with state regulators, and insuring
members’ accounts at federally insured
credit unions.1 In its role as
administrator of the National Credit
Union Share Insurance fund (NCUSIF),
NCUA insures and regulates
approximately 6,400 federally insured
credit unions, holding total assets
exceeding $1.1 trillion and representing
approximately 99 million members.
At its January 2014 meeting, the
Board issued a proposed rule (the
Original Proposal) 2 to amend NCUA’s
PCA regulations, part 702. The Original
Proposal sought to enhance risk
sensitivity and address weaknesses in
the existing regulatory capital
framework for credit unions. The
revisions in the Original Proposal
included a new method for computing
NCUA’s risk-based requirement that
would be more consistent with the riskbased capital ratio measure used for
corporate credit unions 3 and more
comparable to the risk-based capital
ratio measures used by the Other
Banking Agencies.4 In general, this new
method for computing NCUA’s riskbased requirement would have adjusted
the risk weights for many asset
1 Within the nine states that allow privately
insured credit unions, approximately 133 statechartered credit unions are privately insured and
are not subject to NCUA regulation or oversight.
2 79 FR 11183 (Feb. 27, 2014).
3 See 12 CFR part 704.
4 See 78 FR 55339 (Sept. 10, 2013).

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Federal Register / Vol. 80, No. 17 / Tuesday, January 27, 2015 / Proposed Rules
classifications to lower the minimum
risk-based capital ratio requirement for
credit unions with lower-risk
operations. Conversely, this new
method would have required higher
minimum levels of risk-based capital for
credit unions with concentrations of
assets in residential real estate loans or
commercial loans, or high levels of noncurrent loans.
In addition, due to the inherent
limitations of any widely applied riskbased capital measurement system, the
Original Proposal also included
procedures for the Board to require an
individual credit union to hold a higher
level of risk-based capital where NCUA
staff raised specific supervisory
concerns regarding the credit union’s
condition. Finally, the Original Proposal
eliminated the provisions of current
§ 702.401(b) relating to transfers to the
regular reserve account, current
§ 702.106 regarding the standard
calculation of the RBNW ratio
requirement, current § 702.107
regarding alternative components for the
standard calculation, and current
§ 702.108 regarding the risk-mitigation
credit.
In response to the Original Proposal,
the Board received over 2,000 comments
with many suggestions on how to
improve the Original Proposal. The
Board has reviewed the comments and
determined that it was appropriate to
issue a second proposed rule. The Board
notes that, because this is a new
proposed rule, it is not required to
respond to any comments received on
the Original Proposal. However, the
Board believes it is important to address
those comments, and has, therefore,
included comment summaries and
responses throughout the preamble to
this proposal.
The Board is now requesting
comment on this second proposed rule
regarding risk-based capital. Based
largely on comments it received on the
Original Proposal, the Board is
proposing many improvements to the
Original Proposal, including: (1)
Amending the definition of ‘‘complex’’
credit union by increasing the asset
threshold from $50 million to $100
million; (2) reducing the number of
asset concentration thresholds for
residential real estate loans and
commercial loans (formerly classified as
MBLS); (3) assigning one-to-four family
non-owner-occupied residential real
estate loans the same risk weights as
other residential real estate loans; (4)
eliminating IRR from this proposed rule;
(5) extending the implementation
timeframe to January 1, 2019; and (6)
eliminating the Individual Minimum
Capital Requirement (IMCR) provision.

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Among other things, these changes
would substantially reduce the number
of credit unions subject to the rule, and
would afford affected credit unions
sufficient time to prepare for the rule’s
full implementation. A full discussion
of the impact of these and other changes
in this proposed rule is contained in
Impact of the Proposed Regulation part
of the preamble below.
As discussed in more detail below,
the revisions in the Original Proposal
and this proposal are intended to
implement the statutory requirements of
the Federal Credit Union Act (FCUA)
and follow recommendations made by
the Government Accountability Office
(GAO).
II. Legal Authority
In 1998, Congress enacted the Credit
Union Membership Access Act
(CUMAA).5 Section 301 of CUMAA
added new section 216 to the FCUA,6
which requires the Board to adopt by
regulation a system of PCA to restore the
net worth of credit unions that become
inadequately capitalized.7 Section
216(b)(1)(A) requires the Board to adopt
by regulation a system of PCA for
federally insured credit unions that is
‘‘consistent with’’ section 216 of the
FCUA and ‘‘comparable to’’ section 38
of the Federal Deposit Insurance Act
(FDI Act).8 Section 216(b)(1)(B) requires
that the Board, in designing the PCA
system, also take into account the
‘‘cooperative character of credit unions’’
(i.e., that credit unions are not-for-profit
cooperatives that do not issue capital
stock, must rely on retained earnings to
build net worth, and have boards of
directors that consist primarily of
volunteers).9 In 2000, the Board
implemented the required system of
5 Public

Law 105–219, 112 Stat. 913 (1998).
U.S.C. 1790d.
7 The risk-based net worth requirement for credit
unions meeting the definition of ‘‘complex’’ was
first applied on the basis of data in the Call Report
reflecting activity in the first quarter of 2001. 65 FR
44950 (July 20, 2000). NCUA’s risk-based net worth
requirement has been largely unchanged since its
implementation, with the following limited
exceptions: Revisions were made to the rule in 2003
to amend the risk-based net worth requirement for
MBLs, 68 FR 56537 (Oct. 1, 2003); revisions were
made to the rule in 2008 to incorporate a change
in the statutory definition of ‘‘net worth,’’ 73 FR
72688 (Dec. 1, 2008); revisions were made to the
rule in 2011 to expand the definition of ‘‘low-risk
assets’’ to include debt instruments on which the
payment of principal and interest is
unconditionally guaranteed by NCUA, 76 FR 16234
(Mar. 23, 2011); and revisions were made in 2013
to exclude credit unions with total assets of $50
million or less from the definition of ‘‘complex’’
credit union, 78 FR 4033 (Jan. 18, 2013).
8 12 U.S.C. 1790d(b)(1)(A); see also 12 U.S.C.
1831o (Section 38 of the FDI Act setting forth the
PCA requirements for banks).
9 12 U.S.C. 1790d(b)(1)(B).
6 12

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PCA, primarily in part 702 of NCUA’s
regulations.10
The purpose of section 216 of the
FCUA is to ‘‘resolve the problems of
[federally] insured credit unions at the
least possible long-term loss to the
[NCUSIF].’’ 11 To carry out that purpose,
Congress set forth a basic structure for
PCA in section 216 that consists of three
principal components: (1) A framework
combining mandatory actions
prescribed by statute with discretionary
actions developed by NCUA; (2) an
alternative system of PCA to be
developed by NCUA for credit unions
defined as ‘‘new’’; and (3) a risk-based
net worth requirement to apply to credit
unions that NCUA defines as
‘‘complex.’’ This proposed rule focuses
primarily on principal components (1)
and (3), although amendments to part
702 of NCUA’s regulations relating to
principal component (2) are also
included as part of this proposal.
Among other things, section 216(c) of
the FCUA requires NCUA to use a credit
union’s net worth ratio to determine its
classification among five ‘‘net worth
categories’’ set forth in the FCUA.12
Section 216(o) generally defines a credit
union’s ‘‘net worth’’ as its retained
earnings balance,13 and a credit union’s
‘‘net worth ratio’’ 14 as the ratio of its net
worth to its total assets.15 As a credit
union’s net worth ratio declines, so does
its classification among the five net
worth categories, thus subjecting it to an
expanding range of mandatory and
discretionary supervisory actions.16
Section 216(d)(1) of the FCUA
requires that NCUA’s system of PCA
include, in addition to the statutorily
defined net worth ratio requirement
applicable to federally insured naturalperson credit unions, ‘‘a risk-based net
worth 17 requirement for insured credit
10 12 CFR part 702; see also 65 FR 8584 (Feb. 18,
2000) and 65 FR 44950 (July 20, 2000).
11 12 U.S.C. 1790d(a)(1).
12 Section 1790d(c).
13 Section 1790d(o)(2).
14 Throughout this document the terms ‘‘net
worth ratio’’ and ‘‘leverage ratio’’ are used
interchangeably.
15 Section 1790d(o)(3).
16 Section 1790d(c) through (g); 12 CFR
702.204(a) and (b).
17 For purposes of this rulemaking, the term ‘‘riskbased net worth requirement’’ is used in reference
to the statutory requirement for the Board to design
a capital standard that accounts for variations in the
risk profile of complex credit union. The terms
‘‘risk-based capital ratio’’ and ‘‘risk-based capital
ratio’’ are used to refer to the specific standards this
rulemaking proposes to function as criteria for the
statutory risk-based net worth requirement. For
example, this rulemaking’s proposed risk-based
capital ratio would replace the risk-based net worth
ratio in the current rule. The term ‘‘risk-based
capital ratio’’ is also used by the Other Banking
Agencies and the international banking community

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unions that are complex, as defined by
the Board . . . .’’ 18 Unlike the terms
‘‘net worth’’ and ‘‘net worth ratio,’’ the
term ‘‘risk-based net worth’’ is not
defined in the FCUA.19 Accordingly,
when read together, sections 216(b)(1)
and 216(d)(1) grant the Board broad
authority to design PCA regulations,
including a risk-based net worth
requirement, so long as the regulations
are comparable to the Other Banking
Agencies’ PCA requirements and
consistent with the requirements of
section 216 of the FCUA and the
cooperative character of credit unions.
The FCUA directs NCUA to base its
definition of ‘‘complex’’ credit unions
‘‘on the portfolios of assets and
liabilities of credit unions.’’ 20 It also
requires NCUA to design a risk-based
net worth requirement to apply to such
‘‘complex’’ credit unions.21 The riskbased net worth requirement must ‘‘take
account of any material risks against
which the net worth ratio required for
[a federally] insured credit union to be
adequately capitalized [(six percent net
worth ratio)] may not provide adequate
protection.’’ 22 In the Senate Report on
CUMAA, Congress expressed its intent
with regard to the design of the riskbased requirement and the meaning of
section 216(d)(2) by providing:
The NCUA must design the risk-based net
worth requirement to take into account any
material risks against which the 6 percent net
worth ratio required for a credit union to be
adequately capitalized may not provide
adequate protection. Thus the NCUA should,
for example, consider whether the 6 percent
requirement provides adequate protection
against interest-rate risk and other market
risks, credit risk, and the risks posed by
contingent liabilities, as well as other
relevant risks. The design of the risk-based
net worth requirement should reflect a
reasoned judgment about the actual risks
involved.23

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Section 216(c) of the FCUA requires
that, if a credit union meets the
definition of ‘‘complex’’ and its net
worth ratio initially indicates that it
meets or exceeds the net worth ratio
requirement to be either ‘‘adequately
capitalized’’ or ‘‘well capitalized,’’ the
when referring to the types of risk-based
requirements that are addressed in this proposal.
This change in terminology throughout the proposal
would have no substantive effect on the
requirements of the FCUA, and is intended only to
reduce confusion for the reader.
18 12 U.S.C. 1790d(d)(1).
19 See 12 U.S.C. 1790d(o) (Congress specifically
defined the terms ‘‘net worth’’ and ‘‘net worth
ratio’’ in the FCUA, but did not define the statutory
term ‘‘risk-based net worth.’’).
20 12 U.S.C. 1790d(d).
21 Id.
22 12 U.S.C. 1790d(d)(2).
23 S. Rep. No. 193, 105th Cong., 2d Sess. 13
(1998).

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credit union must still satisfy the
separate risk-based net worth
requirement.24 Under the separate riskbased net worth requirement, the
complex credit union must, in addition
to meeting the statutory net worth ratio
requirement, also meet or exceed the
minimum risk-based net worth
requirement that corresponds to either
the adequately capitalized or well
capitalized capital category in order to
receive a capital classification of
adequately capitalized or well
capitalized, as the case may be.25 For
example, if a complex credit union
meets or exceeds the net worth ratio
requirement to be classified as well
capitalized, then it must also meet or
exceed the corresponding risk-based net
worth requirement to be well
capitalized.
If any complex credit union meets or
exceeds the net worth ratio requirement
to be classified as well capitalized or
adequately capitalized, but fails to meet
the corresponding risk-based net worth
requirement to be well capitalized or
adequately capitalized, then the credit
union’s capital classification is
determined based on the risk-based net
worth requirement. For example, if a
complex credit union is classified as
well capitalized based on its net worth
ratio, but only meets the risk-based net
worth requirement that corresponds
with the adequately capitalized capital
category, then that credit union’s capital
classification would be adequately
capitalized. Similarly, if a complex
credit union meets the risk-based net
worth requirement to be well
capitalized, but only meets the net
worth ratio requirement to be
undercapitalized, then that credit
union’s overall capital classification is
undercapitalized. In either case, the
credit union would be subject to any
mandatory and discretionary
supervisory actions applicable to its
lowest capital classification category.26
24 12

U.S.C. 1790d(c).
risk-based net worth requirement also
indirectly impacts credit unions in the
‘‘undercapitalized’’ and lower net worth categories,
which are required to operate under an approved
net worth restoration plan. The plan must provide
the means and a timetable to reach the ‘‘adequately
capitalized’’ category. See 12 U.S.C. 1790d(f)(5) and
12 CFR 702.206(c). However, for ‘‘complex’’ credit
unions in the ‘‘undercapitalized’’ or lower net
worth categories, the minimum net worth ratio
‘‘gate’’ to that category will be six percent or the
credit union’s risk-based net worth requirement, if
higher than 6 percent. In that event, a complex
credit union’s net worth restoration plan will have
to prescribe the steps a credit union will take to
reach a higher net worth ratio ‘‘gate’’ to that
category. See 12 CFR 702.206(c)(1)(i)(A) and 12
U.S.C. 1790d(c)(1)(A)(ii) and (c)(1)(B)(ii).
26 12 U.S.C. 1790d(c)(1)(c)(ii).
25 The

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In response to the Original Proposal,
some commenters questioned NCUA’s
legal authority to impose a risk-based
net worth requirement on both well
capitalized and adequately capitalized
credit unions. NCUA’s position is that
the Board is authorized to do so under
the FCUA. Section 216(c)(1)(A)
specifically provides that, to be
classified as well capitalized, a complex
credit union must meet the statutory net
worth ratio requirement and any
applicable risk-based net worth
requirement. Section 216(c)(1) provides,
in relation to ‘‘net worth categories,’’
that: (1) An insured credit union is
‘‘well capitalized’’ if it has a net worth
ratio of not less than 7 percent; and it
meets any applicable risk-based net
worth requirement under subsection (d)
of this section; (2) an insured credit
union is ‘‘adequately capitalized’’ if it
has a net worth ratio of not less than 6
percent; and it meets any applicable
risk-based net worth requirement under
subsection (d) of this section; and (3) an
insured credit union is
‘‘undercapitalized’’ if it has a net worth
ratio of less than 6 percent; or it fails to
meet any applicable risk-based net
worth requirement under subsection (d)
of this section.27 The language in
components (1) and (2), when read in
conjunction with the language in
section 216(d), authorizes NCUA to
impose risk-based net worth
requirements on both well capitalized
and adequately capitalized credit
unions.
In addition, section 216(d)(2) of the
FCUA sets forth specific requirements
for the design of the risk-based net
worth requirement mandated under
section 216(d)(1).28 Specifically, section
216(d)(2) requires that the Board
‘‘design the risk-based net worth
requirement to take account of any
material risks against which the net
worth ratio required for an insured
credit union to be adequately
capitalized may not provide adequate
protection.’’ 29 Under section
216(c)(1)(B) of the FCUA, the net worth
ratio required for an insured credit
union to be adequately capitalized is six
percent.30 The plain language of section
216(d)(2) supports NCUA’s
interpretation that Congress intended
for the Board to design a risk-based net
worth requirement to take into account
any material risks beyond those already
addressed through the statutory 6
percent net worth ratio required for a
27 12

U.S.C. 1790d(c)(1)(A)–(C) (emphasis added).
at section 1790d(d).
29 Id. at section 1790d(d)(2).
30 Id. at section 1790d(c)(1)(B).
28 Id.

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credit union to be adequately
capitalized.31
In other words, the language in
section 216(d)(2) of the FCUA simply
identifies the types of risks that NCUA’s
risk-based net worth requirement must
address (i.e., those risks not already
addressed by the statutory six percent
net worth ratio requirement). It is a
misinterpretation of section 216(d)(2) to
argue, as some commenters have in
response to the Original Proposal, that
Congress’ use of the term ‘‘adequately
capitalized’’ in section 216(d)(2)
somehow limits the Board’s authority to
impose a higher risk-based capital ratio
level for well capitalized credit unions.
Rather than prohibiting the Board from
imposing a higher risk-based capital
ratio level for well capitalized credit
unions, section 216(d)(2) simply
requires that the Board design the riskbased net worth requirement to take into
account those risks not adequately
addressed by the statute’s six percent
net worth ratio requirement. Thus, the
plain language of section 216(d) does
not support these commenters’
interpretation.
NCUA’s interpretation of its legal
authority to impose a risk-based net
worth requirement on both well
capitalized and adequately capitalized
credit unions is further supported by the
Other Banking Agencies’ PCA statute
and regulations.32 Section 38(c)(1)(A) of
the FDI Act, upon which section 216 of
the FCUA was modeled,33 requires that
the Other Banking Agencies’ ‘‘relevant
capital measures’’ ‘‘include (i) a leverage
limit; and (ii) a risk-based capital
requirement.’’ 34 Despite Congress’ use
of the singular noun ‘‘requirement’’ in
section 38 of the FDI Act, the Other
Banking Agencies’ PCA regulations,
which went into effect before Congress
passed CUMAA, have long required that
their regulated institutions meet
different risk-based capital ratio levels
to be classified as well capitalized,
adequately capitalized,
undercapitalized, or significantly
undercapitalized. Therefore, by setting
different risk-based capital ratio levels
31 See S. Rep. No. 193, 105th Cong., 2d Sess.
(1998) (providing in relevant part: ‘‘The NCUA
must design the risk-based net worth requirement
to take into account any material risks against
which the 6 percent net worth ratio required for an
insured credit union to be adequately capitalized
may not provide adequate protection.’’).
32 See 12 U.S.C. 1831o, and, e.g., 12 CFR
324.403(b).
33 See S. Rep. No. 193, 105th Cong., 2d Sess., 12
(1998) (Providing in relevant part: ‘‘New section
216 [of the FCUA] is modeled on section 38 of the
Federal Deposit Insurance Act, which has applied
to FDIC-insured depository institutions since
1992.’’).
34 12 U.S.C. 1831o(c)(1)(A) (emphasis added).

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for credit unions to be adequately and
well capitalized, NCUA’s risk-based
capital requirement would be consistent
with the requirements of section 216 of
the FCUA and would be ‘‘comparable’’
to the Other Banking Agencies’ PCA
regulations.
III. Summary of the Original Proposal
and this Second Proposal
A. The Important Role and Benefit of
Capital
Capital is the buffer that depository
institutions, including credit unions,
use to prevent institutional failure or
dramatic deleveraging during times of
strees. As evidenced by the recent
recession, during a financial crisis a
buffer can mean the difference between
the survival or failure of a financial
insitution. Financial crises are very
costly, both to the economy in general
and to individual depository
institutions.35 While the onset of a
financial crisis is inherently
unpredictable, a review of the historical
record over a range of countries and
recent time periods has suggested that a
significant crisis involving depository
institutions occurs about once every 20
to 25 years, and has a typical
cumulative discounted cost in terms of
lost aggregate output relative to the
precrisis trend of about 60 percent of
precrisis annual output.36 In other
words, the typical crisis results in losses
over time, relative to the precrisis trend
economic growth, that amount to more
than half of the economy’s output before
the onset of the crisis.
35 Credit unions play a sizable role in the U.S.
depository system. Assets in the credit union
system amount to more than $1.1 trillion, roughly
8 percent of U.S. chartered depository institution
assets (source: NCUA Calculation using the
financial accounts of the United States, Federal
Reserve Statistical Release Z.1, Table L.110,
September 18, 2014). Data from the Federal Reserve
indicate that credit unions account for about 12
percent of private consumer installment lending.
(Source: NCUA calculations using data from the
Federal Reserve Statistical Release G.19, Consumer
Credit, September 2014. Total consumer credit
outstanding (not mortgages) was $3,246.8 billion of
which $826.2 billion was held by the federal
government and $293.1 billion was held by credit
unions. The 12 percent figure is the $293.1 billion
divided by the total outstanding less the federal
government total). Just over a third of households
have some financial affiliation with a credit union.
(Source: NCUA calculations using data from the
Federal Reserve 2013 survey of Consumer Finance.)
All Federal Reserve Statistical Releases are
available at http:\\www.federalreserve.gov\
econresdata\statisticsdata.htm.
36 Basel Committee on Banking Supervision, An
assessment of the long-term economic impact of
stronger capital and liquidity requirements 3–4
(August 2010), available at http://www.bis.org/publ/
bcbs173.pdf. These losses do not explicitly account
for government interventions that ameliorated the
observed economic impact. This is the median loss
estimate.

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4343

The 2007–2009 financial crisis and
the associated economic dislocations
during the Great Recession were
particularly costly to the United States
in terms of lost output and jobs. Real
GDP declined more than four percent,
almost nine million jobs were lost, and
the unemployment rate rose to 10
percent.37 The cited figures are just the
direct losses. Compared to where the
economy would have been had it
followed the precrisis trend, the losses
in terms of GDP and jobs would be
higher. For example, using the results
described in the previous paragraph as
a guide, the cumulative loss of output
from the recent financial crisis is
roughly $10 trillion (2014 dollars).38
Other estimates of the total loss, derived
using approaches different than
described in the previous paragraph, are
similar. For example, researchers at the
Federal Reserve Bank of Dallas, using a
different approach that achieved results
within the same range, estimated a
range of loss of $6 trillion to $14 trillion
due to the crisis.39
Research using bank data across
several countries and time periods
indicates that higher levels of capital
insulate financial institutions from the
37 The National Bureau of Economic Research
Business Cycle Dating Committee defines the
beginning date of the recession as December 2007
(2007Q4) and the ending date of the recession as
June 2009 (2009Q2). See the National Bureau of
Economic Research Web site: http://www.nber.org/
cycles/cyclesmain.html. The real GDP decline was
calculated by NCUA using data for 2007Q4 and
2009Q2 from the National Income and Product
Accounts, Bureau of Economic Analysis, U.S.
Department of Commerce; see Table 1.1.3. Data are
available at http://www.bea.gov/iTable/iTable.cfm?
ReqID=9&step=1#reqid=9&step=1&isuri=1. Data
accessed November 11, 2014. The jobs lost figure
was calculated by NCUA using data from the
Bureau of Labor Statistics (BLS), U.S. Department
of Labor, Current Employment Statistics, CES PeakTrough Tables. The statistic cited is the decline in
total nonfarm employees from December 2007
through February 2010, which BLS defines as the
trough of the employment series. Data available at:
http://www.bls.gov/ces/cespeaktrough.htm and
accessed on November 11, 2014. The
unemployment rate was taken from the Bureau of
Labor Statistics, U.S. Department of Labor, Current
Population Survey, series LNS14000000. Accessed
November 11, 2014 at http://data.bls.gov/pdq/
SurveyOutputServlet. The unemployment rate
peaked at 10 percent in October 2009.
38 NCUA calculations based on from the National
Income and Product Accounts, Bureau of Economic
Analysis, U.S. Department of Commerce. Data from
Table 1.1.6 show real GDP at $14.992 trillion in
2007Q4 in chained 2009 dollars. Adjusting to 2014
dollars using the GDP price index and using the 60
percent loss figure cited yields an estimated loss of
approximately $10 trillion in 2014 dollars. Data are
available at http://www.bea.gov/iTable/iTable.cfm?
ReqID=9&step=1#reqid=9&step=1&isuri=1.
39 Tyler Atkinson, David Luttrell & Harvey
Rosenblum, Fed. Reserve Bank of Dall, How Bad
Was It? The Costs and Consequences of the 2007–
2009 Financial Crisis (July 2013), available at
https://dallasfed.org/assets/documents/research/
staff/staff1301.pdf.

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effects of unexpected adverse
developments in their asset portfolio or
their deposit liabilities.40 For the
financial system as a whole, research on
the banking sector has shown that
higher levels of capital can reduce the
probability of a systemic crisis.41 By
reducing the probability of a systemic
financial crisis and insulating
individual institutions from failure,
higher capital requirements confer very
large benefits to the overall economy.42
With the median long-term output loss
associated with a crisis in the range of
60 percent of precrisis GDP, a one
percentage point reduction in the
probability of a crisis would add
roughly 0.6 percent to GDP each year
(permanently).43
While higher levels of capital can
insulate depository institutions from
adverse shocks, holding higher levels of
capital does have costs, both to
individual institutions and to the
economy as a whole. For the most part,
the largest cost associated with holding
higher levels of capital, in the long term,
is foregone opportunities; that is, from
the loss of potential earnings from
making loans, from the cost to bank
customers and credit union members of
higher loan rates and lower deposit
rates, and the downstream costs from
the customers’ and members’ reduced
spending.44 Estimating the size of these
effects is difficult. However, despite
limitations on the ability to quantify
these effects, the annual costs appear to
be significantly smaller than the losses
avoided by reducing the probability of
a systemic crisis. For example, research
using data on banking systems across
developed countries indicates that a one
percentage point increase in the capital
ratio increases lending spreads (the
spread between lending rates and
deposit rates) by 13 basis points.45 The
research also shows that the long-run

wreier-aviles on DSK4TPTVN1PROD with PROPOSALS2

40 See

An Assessment of the Long-Term Economic
Impact of Stronger Capital and Liquidity
Requirements, Basel Committee on Banking
Supervision, August 2010. Pages 14–17. The study
indicates that the seven percent TCE/RWA ratio is
equivalent to a five percent ratio of equity to total
assets. The average ratio of equity to total assets for
the 14 largest OECD countries from 1980 to 2007
was 5.3 percent.
41 Id.
42 Id.
43 Id.
44 See An Assessment of the Long-Term Economic
Impact of Stronger Capital and Liquidity
Requirements, Basel Committee on Banking
Supervision, August 2010. Pages 21–27.
45 There are a number of simplifying assumptions
involved in the calculation, including the
assumption that banks fully pass through the
increase in the cost of capital to their borrowers.
See Basel Committee on Banking Supervision, An
Assessment of the Long-Term Economic Impact of
Stronger Capital and Liquidity Requirements 21–27
(Aug. 2010).

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reduction in output (real GDP)
consistent with a one percentage point
increase in the Tier 1 common equity 46
to risks assets ratio would be on the
order of 0.1 percent.47 Thus, it is clear
that the relatively large potential longterm benefits of holding higher levels of
capital outweigh the relatively small
long-term costs.
The recent financial crisis revealed a
number of inadequacies in the current
approach to capital requirements.
Banks, in particular, experienced an
elevated number of failures and the
need for federal intervention in the form
of capital infusions.48 As discussed in
more detail below, credit unions also
experienced elevated losses and the
need for government intervention. The
clear implication is that capital levels in
these cases were inadequate, especially
relative to the riskiness of the assets that
some institutions were holding on their
books.
In a risk-based capital system,
institutions that are holding assets that
have historically shown higher levels of
risk are generally required to hold more
capital against those assets. At the same
time, an institution’s leverage ratio,
which does not account for the riskiness
of assets, can provide a baseline level of
capital adequacy in the event that the
approach to assigning risk weights does
not capture all risks. A system including
well-designed and well-calibrated riskbased capital standards is generally
more efficient from the point of view of
the overall economy, as well as for
individual institutions. In general, riskbased capital standards increase capital
requirements at those institutions whose
asset portfolios have, on average, higher
risk. Conversely, risk-based capital
standards generally decrease the cost of
holding capital for institutions whose
strategies focus on lower risk activities.
46 Tier 1 common equity is made up of common
stock, retained earnings, accumulated other
comprehensive income, and some miscellaneous
minority interests and common stock as part of an
employee stock ownership plan.
47 To be clear, the 0.1 percent figure represents
the one-time, long-term loss, which should be
compared with the 60 percent loss potentially
avoided by reducing the probability of a financial
crisis by a little more than one percentage point.
See An Assessment of the Long-Term Economic
Impact of Stronger Capital and Liquidity
Requirements, Basel Committee on Banking
Supervision, August 2010. Pages 21–27.
48 For a readable overview of the 2007–2008
financial crisis and the government response see,
The Final Report of the Congressional Oversight
Panel, Congressional Oversight Panel, March 16,
2011. See also Ben S. Bernanke, ‘‘Some Reflections
on the Crisis and the Policy Response,’’ Speech at
the Russell Sage Foundation and The Century
Foundation Conference on ‘‘Rethinking Finance,’’
New York, New York, April 13, 2012. Available at:
http://www.federalreserve.gov/newsevents/speech/
2012speech.htm.

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In that way, risk-based capital standards
generate the benefits of helping to
insulate the economy from financial
crises, while also preventing some of the
potential costs that would occur from
holding unnecessarily high levels of
capital at low-risk institutions.
B. Why did the Board issue the Original
Proposal?
The Original Proposal would have
amended NCUA’s risk-based net worth
requirements to be more comparable to
the Other Banking Agencies’
regulations, as required by the FCUA.49
In 2013, the Other Banking Agencies
issued final rules materially updating
the risk-based capital requirements for
insured banks.50 These changes to the
Other Banking Agencies’ risk-based
capital requirements, the weaknesses in
NCUA’s current risk-based net worth
ratio requirement exposed by the
recession of 2007–2009, and the fact
that NCUA’s risk-based net worth
requirement had not been meaningfully
updated since 2002, prompted the
Board to reconsider NCUA’s current
risk-based net worth ratio requirement
and other aspects of NCUA’s current
PCA regulations. In so doing, the Board
was also guided by specific
recommendations to update NCUA’s
PCA regulations made by GAO in its
January 2012 review of NCUA’s system
of PCA.51
The Board issued the Original
Proposal to enhance risk sensitivity and
address weaknesses in the existing
regulatory capital framework for credit
unions. Under the current rule, only two
credit unions are required to hold more
capital as a result of the required riskbased net worth ratio measure. The
Board emphasized that capital and risk
operate synchronously, and that credit
union senior management, boards, and
regulators are all accountable for
ensuring that appropriate capital levels
are in place based on the credit union’s
risk exposure. The Original Proposal
reflected the Board’s initial effort to
establish a system for assigning risk
49 See 12 U.S.C. 1790d(b)(1)(A)(ii) (Requiring that
the NCUA’s system of PCA be ‘‘comparable’’ to the
PCA requirements in section 1831o of the Federal
Deposit Insurance Act).
50 78 FR 55339 (Sept. 10, 2013) (The FDIC
published an interim final rule regarding regulatory
capital for their regulated institutions separately
from the Other Banking Agencies.) and 78 FR 62017
(Oct. 11, 2013) (The Office of the Comptroller of the
Currency and the Board of Governors of the Federal
Reserve System later published a regulatory capital
final rule for their regulated institutions, which is
consistent with the requirements in the FDIC’s
IFR.).
51 See U.S. Govt. Accountability Office, GAO–12–
247, Earlier Actions Are Needed to Better Address
Troubled Credit Unions, (Jan. 2012) available at
http://www.gao.gov/products/GAO-12-247.

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weights that was more indicative of the
potential risks existing within credit
unions. Accordingly, the Original
Proposal was intended to help credit
unions better absorb losses and establish
a safer, more resilient, and more stable
credit union system that could weather
periods of financial stress, thereby
reducing risks to the NCUSIF.
The recent economic crisis
highlighted the need for a sound system
of capital requirements to address risk.
From 2008 through 2012, 27 credit
unions with assets greater than $50
million (the current threshold for
applicability of the risk-based net worth
requirement) failed at a cost of $728
million to the NCUSIF,52 due in large
part to holding inadequate levels of

capital relative to the levels of risk
associated with their assets and
operations. In many cases, the capital
deficiencies relative to elevated risk
levels were identified by examiners and
communicated through the examination
process to officials at these credit
unions.53 Although the credit union
officials were provided with notice of
the capital deficiencies, they ignored the
supervisory concerns or did not act in
a timely manner to address the concerns
raised. Furthermore, NCUA’s ability to
take enforcement actions to address
supervisory concerns in a timely
manner was cited by GAO as limited
under NCUA’s current regulations. As a
result, over a dozen very large consumer
credit unions, and numerous smaller

ones, were in danger of failing and
required extensive NCUA intervention,
financial assistance, or both, along with
increased reserve levels for the
NCUSIF.54 The Original Proposal sought
to incorporate the lessons learned from
those failures, and near failures, and
better account for risks not addressed by
NCUA’s current PCA rule.
The Board notes that, in general, most
credit unions with over $100 million in
assets (the proposed new threshold for
applicability of the risk-based capital
ratio measure) hold capital well above
the statutory net worth ratio for credit
unions to be classified as well
capitalized, as shown in the following
table.55

NUMBER OF CREDIT UNIONS WITH ASSETS OF AT LEAST $100 MILLION, BY NET WORTH RATIO
2006

2007

2008

2009

2010

2011

2012

2013

Net Worth Ratio:
Less than 6 percent ..................................
6 percent to 7 percent ..............................
7 percent to 8 percent ..............................
8 percent to 9 percent ..............................
9 percent to 10 percent ............................
10 percent to 11 percent ..........................
Greater than 11 percent ...........................

3
8
39
123
193
205
628

5
7
42
109
197
217
642

10
32
109
185
213
212
522

42
63
188
248
244
192
388

35
44
162
243
289
192
404

16
35
152
256
299
213
430

11
17
138
269
293
231
478

7
9
103
234
305
257
540

Total ...................................................

1,199

1,219

1,283

1,365

1,369

1,401

1,437

1,455

Many credit unions hold additional
capital as a cushion against an
unexpected adverse shock that might
drive their net worth ratios below the
well capitalized level. Because credit
unions primarily generate capital only
through retained earnings, there is an
added incentive to hold higher levels of
capital. Most banks, however, also hold
capital in excess of their required well
capitalized thresholds and on par with
total capital levels held by credit

unions, despite having the ability to
raise capital outside of retained
earnings.56 This suggests that strong
capital levels serve an important
purpose for financial institutions
despite any associated cost of the
capital.
As shown in the table below, at year
end 2013, 119 credit unions, or 7.3
percent of all credit unions with assets
greater than $100 million in assets,
exhibited a net worth ratio below eight

percent. Of that 7.3 percent of credit
unions, all were either already below
the seven percent well capitalized
threshold or were only slightly above, so
they were vulnerable to falling below
the well capitalized level with only a
modest shock to their net income. Call
report data as of December 31, 2013,
indicates that these 119 credit unions
hold assets of $68.7 billion, which is
more than seven percent of all credit
union assets (see table below).

PERCENTAGE DISTRIBUTION OF TOTAL ASSETS OF CREDIT UNIONS WITH ASSETS OF AT LEAST $100 MILLION, BY NET
WORTH RATIO 57
2006

2007

2008

2009

2010

2011

2012

2013

wreier-aviles on DSK4TPTVN1PROD with PROPOSALS2

Percent
Net Worth Ratio:
Less than 6 percent ..................................
6 percent to 7 percent ..............................
7 percent to 8 percent ..............................
8 percent to 9 percent ..............................
9 percent to 10 percent ............................
52 These figures are based on data collected by
NCUA throughout the crisis, and do not include the
costs associated with failures of corporate credit
unions.
53 See, e.g., OIG–13–10, Material Loss Review of
Chetco Federal Credit Union (October 1, 2013),
OIG–13–05, Material Loss Review of Telesis
Community Credit Union (March 15, 2013), OIG–
10–15, Material Loss Review of Ensign Federal

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0.1
0.8
4.9
12.5
18.2

0.2
1.0
5.8
12.4
21.6

1.4
5.9
10.9
15.7
23.2

2.6
7.5
13.6
19.2
24.8

Credit Union, (Sept. 23, 2010), OIG–10–03, Material
Loss Reviews of Cal State 9 Credit union (April 14,
2010).
54 As most of these credit unions are still active
institutions, or have merged into other active
institutions, NCUA cannot provide additional
details publicly.
55 This statement and the majority of the related
analysis in this section is specific to credit unions

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2.6
1.6
15.3
18.5
28.1

0.5
2.5
12.6
16.7
24.5

0.4
0.5
9.1
19.1
21.1

0.3
0.2
6.8
12.5
22.9

with $100 million in assets or greater, unless
otherwise noted, as this proposed rule would only
apply to credit unions at or above this level.
56 The aggregate core capital (leverage) ratio for all
FDIC-insured institutions as of December 2013 was
9.41 percent. FDIC Quarterly, 2014, Volume 8, No.
1.

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PERCENTAGE DISTRIBUTION OF TOTAL ASSETS OF CREDIT UNIONS WITH ASSETS OF AT LEAST $100 MILLION, BY NET
WORTH RATIO 57—Continued
2006

2007

2008

2009

2010

2011

2012

2013

Percent
10 percent to 11 percent ..........................
Greater than 11 percent ...........................

16.3
47.1

18.2
40.8

15.3
27.6

12.3
20.0

12.3
21.6

20.4
22.8

23.9
25.8

19.0
38.3

Total Assets, billions $ ......................

582.4

628.1

686.3

760.1

790.2

839.4

901.7

945.4

The table below shows that credit
unions falling below the seven percent
well capitalized net worth ratio
requirement tend to contract their asset
base. By contrast, over the same period,
credit unions that did not fall below the
seven percent well capitalized net worth
ratio requirement experienced
annualized asset growth of almost seven
percent.

GROWTH IN ASSETS AT CREDIT
UNIONS WITH MORE THAN $100
MILLION IN ASSETS 58
Growth over the four
quarters after a
decline in the net
worth ratio below 7%

Growth over the four
quarters where the
net worth ratio did not
fall below 7%

¥4.3%

+6.8%

Unlike banks that can issue other
forms of capital like common stock,
credit unions that need to raise
additional capital when faced with a
capital shortfall generally have no
choice except to reduce member
dividends or other interest payments,
raise lending rates, or cut non-interest
expenses in an attempt to direct more
income to retained earnings.59 Thus, the
first round impact of falling or low
capital levels at credit unions is likely
a direct reduction in credit union
members’ access to credit or interest
bearing accounts. Hence, an important
policy objective of capital standards is
to ensure that financial institutions
build sufficient capital to continue
functioning as financial intermediaries
during times of stress without
government intervention or assistance.
NCUA’s analysis of credit union Call
Report data from 2006 forward, as

detailed below, also makes it clear that
higher capital levels keep credit unions
from becoming undercapitalized during
periods of economic stress. The table
below summarizes the changes in the
net worth ratio that occurred during the
recent economic crisis. Of credit unions
with a net worth ratio of less than eight
percent in the fourth quarter of 2006, 80
percent fell below seven percent at some
time during the financial crisis and its
immediate aftermath. Of credit unions
with 8 percent to 10 percent net worth
ratios in the fourth quarter of 2006, just
under 33 percent fell below seven
percent during the crisis period.
However, of credit unions that entered
the crisis with at least 10 percent net
worth ratios, less than five percent fell
below the seven percent well
capitalized standard during the crisis or
its immediate aftermath.

DISTRIBUTION OF NET WORTH RATIOS OF CREDIT UNIONS WITH AT LEAST $100 MILLION IN ASSETS BY LOWEST NET
WORTH RATIO DURING THE FINANCIAL CRISIS
Lowest Net Worth Ratio between 2007Q1 and 2010Q4
<6%
Net Worth Ratio in 2006Q4
<8 percent .........................................
8–10 percent .....................................
≥10 percent .......................................

44.0
13.0
1.9

wreier-aviles on DSK4TPTVN1PROD with PROPOSALS2

Similarly, the table below shows how
credit unions with at least $100 million
in assets in the fourth quarter of 2006
fared during the five years after the
fourth quarter of 2007, which was the
period that encompassed the Great

57 Data

based on year end Call Report data.
on Call Report data, using annualized
growth 2007 Q4–2013 Q4.
58 Based

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6–7%

36.0
19.6
2.8

7–8%

≥10%

8–10%

20.0
38.0
9.4

0.0
29.4
38.8

0.0
0.0
47.1

Total

100.0
100.0
100.0

Number of
credit
unions
50
316
830

Recession. The table shows that the
credit unions that survived the crisis
and recession had higher net worth
ratios going into the Great Recession. In
particular, credit unions with more than
$100 million in assets before the crisis

began, but failed during the crisis, had
a median precrisis net worth ratio of
less than nine percent, while similarly
sized institutions that survived the
crisis had, on average, precrisis net
worth ratios in excess of 11 percent.

59 Low-income designated credit unions can issue
secondary capital accounts that count as net worth
for PCA purposes. As of June 30, 2014, there are
2,107 low-income designated credit unions. Given

the nature (e.g., size) of these credit unions and the
types of instruments they can offer, however, there
is often a very limited market for these accounts.

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4347

CHARACTERISTICS OF FICUS WITH ASSETS > $100 MILLION AT THE END OF 2006 BY FIVE YEAR SURVIVAL BEGINNING
2007 Q4
Median
Number of
institutions

Failures ....................................................
Survivors ..................................................

27
1138

Net Worth
Ratio
(percent)

Assets
($M)
162.7
237.9

Loan to Asset
Ratio
(percent)

8.97
11.20

84.0
71.0

Real Estate
Loan Share
(percent)
58.0
49.0

Member
Business
Loan Share
(percent)
8.3
0.7

Survivorship is determined based on whether a FICU stopped filing a Call Report over the five years starting in the fourth quarter of 2007. Failures exclude credit unions that merged or voluntarily liquidated. Note: All failures had precrisis net worth ratios in excess of seven percent.

wreier-aviles on DSK4TPTVN1PROD with PROPOSALS2

Aside from demonstrating the
differences in the capital positions of
credit unions that failed from those that
did not fail, the table above highlights
two additional considerations. First, the
table shows that other performance
indicators were different between the
two groups of credit unions. In
particular, the survivors had a lower
median loan-to-asset ratio, a lower
median share of total loans in real estate
loans, and a lower share of member
business loans in their overall loan
portfolio.
A key limitation of the leverage ratio
is that it is a lagging indicator because
it is based largely on accounting
standards. Accounting figures are pointin-time values largely based on
historical performance to date. Further,
the leverage ratio does not discriminate
between low-risk and high-risk assets or

changes in the composition of the
balance sheet. A risk-based capital ratio
measure is more prospective in that, as
a credit union makes asset allocation
choices, it drives capital requirements
before losses occur and capital levels
decline. The differences in indicators
between the failure group and the
survivors in the table above demonstrate
that factors in addition to capital levels
play an important role in preventing
failure. For example, all of the failures
listed in the table above had net worth
ratios in excess of the well capitalized
level at the end of 2006. The severe
weakness of NCUA’s current risk-based
net worth requirement is further
demonstrated by the fact that, of the 27
credit unions that failed during the
Great Recession, only two of those
credit unions were considered less than

well capitalized due to the existing
RBNW requirement.60 A well designed
risk-based capital ratio standard would
have been more successful in helping
credit unions avoid failure precisely
because such standards are targeted at
activities that result in elevated risk.
The need for a risk-based capital
standard beyond a leverage ratio is
further supported when considering a
more comprehensive review of credit
union failures. The figures below
present data from NCUA’s review of the
192 credit union failures that occurred
over the past 10 years and indicates that
160 failed credit unions had net worth
ratios greater than seven percent two
years prior to their failure. Further, the
failed credit unions exhibited a 12
percent average net worth ratio two
years prior to their failure.

60 See table above (referencing the 27 failures of
credit unions over $100 million in assets).

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Net Worth Ratio 24 Months Prior to Failure (All CU Failures in the Last 10 Years)
35

160 CUs (85%) were Well Capitalized
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and have failed, demonstrating that a
leverage ratio alone has not always

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a more robust risk-based capital
standard would reflect the presence of
elevated balance sheet risk sooner, and
in relevant cases would improve a credit
union’s odds of survival.
A recession or other source of
financial stress poses more difficulties
for credit unions with limited capital
options and with capital levels lower
than what their risks warrant. A capital
shortfall reduces a credit union’s ability
to effectively serve its members. At the
same time, the shortfall can cascade to
the rest of the credit union system
through the NCUSIF, potentially
affecting an even broader number of
credit union members. Credit unions are
an important source of consumer credit
and a capital shortfall that affects the
credit union system could reduce
general consumer access to credit for
millions of credit union members. 61
Accordingly, a risk-based capital rule
that is effective in requiring credit
unions with low capital ratios and a
large share of high-risk assets to hold
more capital relative to their risk profile,
while limiting the burden on already
well capitalized credit unions, should
provide positive net benefits to the
credit union system and the United
States economy. Improved resilience
enhances credit unions’ ability to
function during periods of financial
stress and reduce risks to the NCUSIF.
The Original Proposal reflected the
Board’s objective of modifying the
existing system for assigning risk
weights to make it more indicative of
the risks in credit unions. The Board
intended it to help credit unions better
absorb losses and establish a safer, more
resilient, and more stable credit union
system. However, as noted below, the
Board believes the Original Proposal can
be improved and is, therefore, issuing
this second proposal.
61 Credit unions play a sizable role in the U.S.
depository system. Assets in the credit union
system amount to more than $1.1 trillion, roughly
eight percent of U.S. chartered depository
institution assets (source: NCUA calculation using
the financial accounts of the United States, Federal
Reserve Statistical Release Z.1, Table L.110,
September 18, 2014). Data from the Federal Reserve
indicate that credit unions account for about 12
percent of private consumer installment lending.
(Source: NCUA calculations using data from the
Federal Reserve Statistical Release G.19, Consumer
Credit, September 2014. Total consumer credit
outstanding (not mortgages) was $3,246.8 billion of
which $826.2 billion was held by the federal
government and $293.1 billion was held by credit
unions. The 12 percent figure is the $293.1 billion
divided by the total outstanding less the federal
government total). Just over a third of households
have some financial affiliation with a credit union.
(Source: NCUA calculations using data from the
Federal Reserve 2013 survey of Consumer Finance.)
All Federal Reserve Statistical Releases are
available at http:\\www.federalreserve.gov\
econresdata\statisticsdata.htm.

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C. What significant changes would the
Original Proposal have made?
The Original Proposal would have
changed the current risk-based net
worth requirement applicable to
complex credit unions (which was then
defined as credit unions with more than
$50 million in assets). In particular, the
Original Proposal would have replaced
the current risk-based net worth ratio
measure with a new risk-based capital
ratio measure that would have been
more comparable to the risk-based
capital requirement in the Other
Banking Agencies’ regulations. NCUA’s
capital requirements and PCA
supervisory actions for ‘‘new’’ credit
unions and credit unions with $50
million or less in assets would have
remained largely unchanged, with a few
exceptions.
The Board intended the change in the
risk-based capital methodology in the
Original Proposal to improve the
comparability of risk-based capital
ratios across financial institutions.
Compared to the current risk-based net
worth ratio measure, the methodology
under the Original Proposal would have
provided a more common measure both
of credit union capital available to
absorb losses and of asset risk.
Moreover, the use of a consistent
framework for assigning risk weights
would have resulted in better
comparability and improved
understanding between all types of
federally insured financial institutions,
and would have increased the
correlation between required capital
levels and risk.
The Original Proposal would have
replaced the current method used by
credit unions to apply risk weights to
their assets with a new risk-based
capital ratio measure that is more
commonly applied to depository
institutions worldwide. The proposed
risk-based capital ratio measure was the
percentage of a credit union’s capital
available to cover losses, divided by the
credit union’s defined risk weighted
asset base.
Under the current rule, the numerator
of the RBNW ratio is ‘‘net worth’’ as
defined in section 216(o)(2).62 However,
as discussed in the Legal Authority
section of this preamble, the FCUA
gives the Board broad discretion in
designing the risk-based capital
requirement.63 Thus, the Original
62 See the definition of ‘‘net worth’’ at 12 U.S.C.
1790d(o)(2)(A) through (C).
63 See section 1790d(d)(2) (Recognizing the
limitations of the net worth ratio, Congress directed
the Board to develop a risk-based net worth
requirement that ‘‘take[s] account of any material
risks against which the net worth ratio . . . may not
provide adequate protection.’’).

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Proposal would have broadened the
definition of the risk-based capital ratio
numerator.
The Board chose to take this approach
to provide a more comparable measure
of capital across all financial
institutions and to better account for
those related elements of the financial
statement that are available to cover
losses and protect the NCUSIF. Under
the Original Proposal, the risk-based
capital ratio numerator essentially
started with the generally accepted
accounting principles (GAAP) definition
of equity (which is broader than the
statutory definition of ‘‘net worth’’),
adding the allowance for loan and lease
losses (ALLL) account subject to some
limitations, and deducting goodwill,
intangible assets, and the NCUSIF
deposit. In addition, to more accurately
reflect capital available to absorb losses,
this broader definition of the risk-based
capital ratio numerator would have
contributed over 50 basis points, on
average, to credit unions’ risk-based
capital ratio.
With regard to the denominator for
the risk-based capital ratio, Congress
recognized that operating a credit union
involves taking and managing a variety
of risks. As stated previously, the FCUA
mandates that NCUA’s risk-based net
worth requirement ‘‘take account of any
material risks against which the net
worth ratio required for [a federally]
insured credit union to be adequately
capitalized may not provide adequate
protection.’’ 64 In the Senate Report on
CUMAA, Congress expressed its intent
with regard to the design of the riskbased net worth requirement by
directing NCUA to ‘‘consider whether
the 6 percent [net worth ratio]
requirement provides adequate
protection against interest-rate risk and
other market risks, credit risk, and the
risks posed by contingent liabilities, as
well as other relevant risks.’’ 65
The risk-based net worth ratio
measure in NCUA’s current PCA
regulation, which has not been
substantially updated since 2002, was
designed to primarily address credit
risk, concentration risk, interest rate risk
(IRR), and liquidity risk. The current
rule does this through the assignment of
risk weights to different types of assets
based on the predominant form of risk
that is associated with the asset type.
Loans and investments make up the vast
majority (88 percent based on December
2013 Call Report data) of credit union
assets and, therefore, are the primary
variables for the denominator of a credit
64 Id.
65 S. Rep. No. 193, 105th Cong., 2d Sess. 13
(1998).

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union’s current risk-based net worth
ratio.
Under the current rule, most types of
loans have risk weights based on credit
risk. Concentration risk and IRR are
incorporated for real estate loans and
member business loans (MBLs) using a
tiered risk weight framework. As a
credit union’s concentration in these
loans increases, incrementally higher
levels of capital are required. This
requirement was intended to provide
capital to protect against the
concentration risk and IRR inherent in
a long duration and/or complex whole
loan portfolio with limited liquidity.66
The Original Proposal would have
maintained a very similar risk weight
structure for loans, with a few
exceptions. The Original Proposal
would have effectively reduced the
capital required for a credit union to
hold first-lien residential real estate
loans, and raised the capital required to
hold junior-lien residential real estate
loans, consumer loans, and MBLs.
The current rule, as opposed to this
second proposal, assigns risk weights to
most types of investments based on
their IRR and liquidity risk. The
rationale for doing so was that most
credit unions maintain liquidity in their
investment portfolio. For credit unions
with high loan volume involving longterm fixed rate products, the investment
portfolio can exacerbate the interest rate
and liquidity risks involved in meeting
member lending and deposit
preferences. NCUA’s current rule,
unlike this second proposal, assigns risk
weights to most investments based on
their weighted average life, with the
weights generally calibrated to the
projected loss in value of a U.S.
Treasury security if interest rates
increased by 300 basis points. The
Original Proposal would have retained
this approach to assigning investment
risk weights. However, the Original
Proposal would have effectively
reduced the capital required for
investments with weighted average lives
of less than five years, and increased the
capital required for investments with
weighted average lives of greater than
five years.
The Original Proposal was
intentionally designed to parallel the
current approach to applying risk
66 Concentration

risk is mainly accounted for in
commercial and real estate loans because,
historically, this is where credit unions have
experienced concentration and IRR problems. These
types of assets are longer and/or provide fewer
options and greater challenges in managing,
restructuring, or selling such portfolios. Cash flows
for shorter-term loans, like auto loans, are typically
much less susceptible to changing rates; and
portfolios customarily cash flow fast enough to
mitigate concentration and IRR concerns.

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weights to assets using existing
information contained in the Call
Report, thereby minimizing transition
costs and associated reporting burdens.
In comparison to the current risk-based
net worth ratio method however, the
originally proposed risk-based capital
ratio method would have included a
greater number of exposure categories
for purposes of calculating a credit
union’s risk-weighted assets. Thus, the
Original Proposal would have required
that some additional data be collected
on the Call Report. However, this
additional data would not have
represented a material increase to the
burden of completing the Call Report.
Further, under the Original Proposal,
the rule would have provided an 18month implementation period for credit
unions to adjust their systems to
account for the additional data items
that would have been collected in the
Call Report.
The way in which the risk-based net
worth ratio functions in relation to the
net worth categories under the current
rule could result in a credit union’s
capital classification declining directly
from well capitalized to
undercapitalized if it fails to meet the
required risk-based net worth ratio
level.67 The Original Proposal would
have modified this approach by
requiring credit unions to meet different
risk-based capital ratio levels for the
well capitalized (10.5 percent) and
adequately capitalized (eight percent)
categories. This formulation would have
been comparable with the Other
Banking Agencies’ capital rules,68 and
would have encouraged (but did not
require) credit unions to build capital
sufficient to absorb losses and prevent
precipitous declines in their overall
capital classification. In addition to
providing greater comparability with the
Other Banking Agencies’ rules, the
different threshold levels also would
have resulted in a risk-based net worth
requirement that could have effectively
addressed any ‘‘outlier’’ credit unions
and encouraged them to accumulate
additional capital.
The Original Proposal would have
generally retained the definition of
‘‘complex’’ in the current rule so the
proposed changes to the risk-based net
worth requirement would have applied
to all credit unions with over $50
million in total assets.69
67 Per the FCUA, ‘‘undercapitalized’’ is the lowest
PCA category in which a failure to meet the riskbased net worth requirement can result.
68 See, e.g., 12 CFR 324.10, 324.11 and 324.403.
69 78 FR 4032 (Jan. 18, 2013).

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D. Public Comments on the Original
Proposal
The Board received 2,056 public
comments on the Original Proposal from
credit unions, trade associations, state
credit union leagues, state supervisory
authorities, public officials (including
current and former members of the U.S.
Congress), Federal Home Loan Banks,
credit union members, and other
interested parties. Because this is a new
proposed rule, the Board notes it is not
required to respond to any comments
received on the Original Proposal.
However, the Board believes it is
important to address all relevant
comments. Therefore, the Board has
included comment summaries and
responses throughout the preamble to
this proposal.
Overall, while some commenters
supported the concept of adopting riskbased capital standards for complex
credit unions that were more
comparable to those applicable to banks,
most commenters opposed the Original
Proposal, particularly those
requirements that the commenters
believed exceeded the requirements
imposed on banks.
Most commenters also expressed
concerns about the potential costs and
burdens of various aspects of the
Original Proposal. A significant number
of commenters argued that new riskbased capital standards were not
necessary at this time, particularly given
the success of consumer credit unions
during the recent financial crisis. A
number of commenters also requested
that the Board withdraw the Original
Proposal and reissue a proposal for
another round of public comments with
significant revisions to the risk weights.
Many commenters also asked for
additional time to implement the new
requirements and adjust their balance
sheets.
The Board responds to the significant
comments received on the Original
Proposal throughout this preamble.
More detailed discussions on the
comments received on particular
aspects of the Original Proposal, and
NCUA’s responses to those comments,
are primarily provided in the sectionby-section analysis part of the preamble.
General Comments on Application of
Risk-Based Capital Standards to Credit
Unions
The Board received over 2,000
comments regarding the application of
risk-based capital standards to credit
unions under the Original Proposal. A
majority of the commenters stated that
NCUA’s current risk-based net worth
ratio standard is working well,

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particularly given that the credit union
industry survived the recent financial
crisis, and that maintaining the current
system is far preferable to adopting the
Original Proposal. Some commenters
stated they were opposed to imposing a
more sophisticated risk-based capital
framework on credit unions. Other
commenters stated they appreciated
NCUA’s efforts to keep the new
requirements relatively simple and to
minimize the implementation burden
on affected institutions. A substantial
number of other commenters agreed that
updates to NCUA’s risk-based net worth
regulations were necessary to keep up
with what other financial institutions
are doing, but did not agree with certain
aspects of the Original Proposal. Other
commenters stated that some form of
risk-based capital calculation was
prudent to reward those institutions that
do not stretch too hard for earnings or
put their members’ deposits at
extraordinary risk. A significant number
of commenters specifically suggested
that the rule be amended to match the
risk-based capital requirement for
banks, the Basel III risk-based capital
standards, or both. Other commenters
suggested that the structure and
performance of credit unions suggests
that the risk weights should be less
stringent than the risk weights applied
to banks. Still other commenters
suggested that instead of focusing on the
past failures of credit unions, the Board
should be focused on the successes of
credit unions and issue regulations that
help credit unions achieve success.
The Board received a significant
number of comments questioning
whether the proposal would actually
serve to protect the NCUSIF and make
the industry safer and sounder. A
number of commenters stated that the
proposal essentially represented a de
facto assumption of important balance
sheet management decisions by NCUA
for purposes of protecting the NCUSIF
at the expense of the current
prerogatives and interests of individual
credit unions and their members.
Commenters contended that since the
implicit incentives in the proposal are
the same for every credit union, over the
long run, the Original Proposal would
cause credit unions to become less
financially diverse, which would
increase the vulnerability of the
industry and NCUSIF to some future
widespread economic adversity.
Commenters stated that credit unions
are in the risk business by nature and
that the proposal was too focused on a
number-generated, one-size-fits-all
solution. Other commenters requested
that the Board be mindful that the risk

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weights that are adopted in the rule
could ultimately drive which types of
products and services are offered by
credit unions.
Some commenters suggested NCUA
include a risk-capital model calculation
as part of the examination process,
similar to NCUA requirements for other
types of modeling such as the model
required for IRR testing. Those
commenters suggested that the results of
the risk-based capital model could be
used to identify ‘‘potential risk’’ by
examiners and credit union boards,
calling for additional scrutiny in the
exam, instead of prescribing a rule that
is assumed to quantify ‘‘actual’’ risk.
A small number of commenters
suggested that the Other Banking
Agencies are all leaning toward simply
using a simplified leverage ratio to
account for risks.
Justification and Supporting Analysis
A number of commenters commented
on the Board’s justification and analysis
supporting the need for a proposed rule.
Commenters suggested the proposal was
arbitrary and developed without
feedback from the credit union industry.
Other commenters suggested that the
Board should have provided
stakeholders with a more thorough
discussion of how the proposal would
fit into NCUA’s regulatory framework,
including recently issued final rules
regarding liquidity risk, IRR, and stress
testing and capital planning.
Commenters stated there was no
credible analysis available in the
Original Proposal to suggest credit
unions overall are unlikely to perform
well under the current PCA system,
which already includes a risk-based net
worth requirement. Others commented
that the proposal provided no evidence
that this rule would help members.
Commenters suggested the Board did
not sufficiently take into account the
unique nature of credit unions and the
financial performance and distinctive
structure of credit unions in developing
the proposal. They argued this was
problematic because the Board is
required to take into account the unique
nature of credit unions in designing a
system of PCA, and that by failing to
sufficiently account for credit union
differences and the lower level of risk
that credit unions demonstrate as a
result led to a proposal that would
require well-managed credit unions to
hold too much capital. Others suggested
that the proposal failed to consider how
the use of bank style capital levels could
adversely impact credit unions. There
were those who felt that the Board
should propose a rule only if NCUA has
prepared a reasoned determination that

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the rule’s benefits justify its costs. They
suggested that any benefits in terms of
reduced NCUSIF losses would be minor
at best and the very real costs of
unnecessarily high capital requirements
would be substantial. Commenters also
suggested that the proposal was not
tailored to impose the least burden.
The Board received a number of
comments on the basis provided for the
proposed rule. Commenters suggested
the proposal should have been based on
historical perspectives, and stated that
based on their own analysis the
proposal would have avoided few if any
past credit union failures. One
commenter stated that only 1.1 percent
of credit unions with more than $50
million in assets have failed in the sixand-a-half years since the beginning of
the worst financial crisis and recession
in 80 years. The commenter did,
however, acknowledge that the
proposed system would have been more
effective than the current system in
identifying credit unions that
subsequently failed.
One commenter suggested that the
Board’s justification that the proposal
seeks to incorporate lessons learned
from past failures of credit unions to
hold sufficient levels of capital despite
warnings from NCUA examiners was
unsupportable because NCUA and state
officials have various supervisory
enforcement measures at their disposal
(e.g., preliminary warning letters, letters
of understanding and agreement, and
cease and desist orders) to force a credit
union to improve the alignment
between its risk exposures and its
available capital.
A significant number of commenters
questioned the Board’s supporting
analysis for various aspects of the
proposal. Commenters suggested that
the empirical foundation provided for
the proposed risk weights was not
sufficient. Other commenters stated that
the Board should provide additional
justification and more clarity as to why
the proposed risk weights differ from
those for other community financial
institutions. Many commenters stated
they would like an opportunity to
review and comment on empirical data,
but that they were not provided
sufficient information to understand
how the metrics behind the proposal
were determined and how historic
losses contributed to each calculation.
One commenter suggested that NCUA
should expand its research horizons to
include data-sourcing outside the
natural-person credit union space,
claiming the Original Proposal
contained several examples where
‘‘uncertain’’ conclusions were drawn
from insufficient data or those where

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research was halted due to the
burdensome process of data collection.
The commenter suggested that often
these data sources are limited to naturalperson credit unions, many of which
have little exposure to the asset classes
in question.
Another commenter suggested that
the stated purpose of the proposal was
to mitigate losses to the NCUSIF that
could result from inadequate capital,
but that GAO and NCUA’s Office of
Inspector General (OIG) reports
demonstrate that deficiencies in the
examination process contributed
substantially to losses during the
financial crisis, and that such
deficiencies continue to be a significant
factor in more recent credit unions
failures. That commenter suggested that
instead of focusing on a risk-based
capital requirement for credit unions to
contain NCUSIF losses, the Board
should be improving examiner training
so that agency field staff can more
readily identify material risks without
increasing the agency’s budget, which is
funded by credit unions.
A significant number of commenters
expressed concerns regarding the
justification and explanation of how
credit risks as well as interest rate,
concentration, liquidity, operational,
market risks, and other types of risk
were addressed in the proposed rule.
Commenters questioned the Board’s
justification for including IRR and
concentration risk in the proposed risk
weights for investments, real estate
loans, and member business loans. A
small number of commenters suggested
that there was no explanation of which
portion of the proposed risk weight is
intended to address each of these risk
elements, and that, as a result, the risk
weights did not reflect a reasoned
judgment about the actual risks
involved.
Competitive Concerns and Concerns
Related to the Unique Nature of Credit
Unions
The Board received a significant
number of comments expressing
concerns that the proposed rule would
have put credit unions at a competitive
disadvantage to banks. A majority of the
commenters suggested that the
differences between NCUA’s proposed
risk weights and the Other Banking
Agencies’ capital rules would have
constrained the healthy growth of the
credit union industry. Commenters
suggested that the statutory seven
percent net worth requirement to be
classified as well capitalized was set
artificially high by Congress to slow the
growth of credit unions and that the
proposed rule would build on that

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artificially high net worth requirement
and further slow the growth of credit
unions, putting credit unions at a
further disadvantage to banks. A
significant number of commenters
stated that the competitive
disadvantages in the proposed rule
could incentivize many credit unions to
switch to bank charters. Other
commenters suggested that NCUA’s
proposed risk-based capital ratios were
much more volatile than the risk
weights under the Other Banking
Agencies’ rule, and that the proposed
risk weights for some investments were
excessively punitive and should be
changed to match the risk weights used
in Basel 70 and the Other Banking
Agencies’ calculations. Still others
suggested that it would be appropriate
for NCUA to establish new risk-based
capital ratio levels only when the
leverage ratio requirements for credit
unions to be adequately and well
capitalized were lowered.
A small number of commenters stated
that they appreciated that the Board
kept the proposed risk-based capital
calculation less complicated than the
banking risk-based capital calculation.
A substantial number of commenters
suggested that it was not appropriate for
the Board to adopt the framework of the
Basel system in the proposal and also
take parts from NCUA’s current PCA
regulation that bear no relationship to
Basel. A substantial number of
commenters stated that neither Basel III
nor the Other Banking Agencies rules
attempt to capture IRR, liquidity risk,
market risk, or operational risk in their
risk weights, and that Basel III and the
Other Banking Agencies’ capital rules
are only designed to take into account
credit risk. Many commenters stated
that adopting either the Basel III format
or the Other Banking Agencies’ risk
weights accurately would give both
NCUA and the credit union industry
credibility to all outside parties. Other
commenters suggested that, because of
these and other differences, the proposal
was not ‘‘comparable’’ with the Other
Banking Agencies’ rules, which is a
requirement of the FCUA.
A substantial number of commenters
stated that the structure and
performance of credit unions suggests
that the risk weights should be less
stringent than the risk weights applied
to banks. Other commenters suggested
that the proposed risk-based capital
standards for credit unions are
70 Basel 1 (First Capital Accord) established
minimum capital standards (1998). Basel II
established the three pillar framework (first issued
in 2004). Basel III is the most recent and builds
upon Basel II pillars and enhances the core
principles (first issued in 2010).

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comparable to FDIC standards, but that
they fail to take into account the unique
characteristics of the credit union
system as required by the FCUA.
Commenters noted that unlike banks,
credit unions do not have capital stock
and cannot go to outside investors to
seek equity capital to fuel growth or
shore up capital ratios in times of stress.
They stated that the rule and associated
risk weights should recognize that
sources of capital within the credit
union industry are not as easily
acquired as capital sources for banks. A
number of commenters stated that if
Congress had intended credit unions to
be subject to the same requirements as
banks it would have said so, and
suggested that the Board should stop
treating credit unions like banks and
judging them by return on investment,
and instead judge them on how
effectively they deliver on their mission
and make a distinctive impact relative
to their resources.
One commenter suggested that the
rule should be based on three
principles: (1) Risk weights should
generally be similar to those applied to
community banks in the United States;
(2) for those assets where credit union
loss experience is historically lower
than bank loss rates, credit union risk
weights should be at or below bank risk
weights; and (3) concentration risk and
IRR should not be incorporated into the
risk-based capital system, but instead,
should be addressed in the regulatory,
examination and supervision process.
Another commenter claimed that the
risk weights established by FDIC do not
exceed 100 percent so NCUA’s rule
should not establish levels over 100
percent as it would impede growth and
preclude credit unions from generating
net income.
Commenters suggested that the
differences between proposed risk
weights and banks’ rules would
encourage credit unions to make
consumer loans by discouraging credit
unions from making other types of
loans, such as mortgage loans, MBLs, or
agricultural loans. Others suggested that
the proposed rule would have forced all
credit unions into a bank model that
would have required them to pay less,
charge more, and increase fees. Other
commenters suggested that the proposed
risk weights could drive many credit
unions to a ‘‘cookie cutter’’ balance
sheet where each credit union has the
same percentage of total assets allocated
to specific loan types, which could force
a high percentage of credit unions into
less profitable asset growth and make it
challenging to differentiate themselves
from competitors.

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Commenters suggested that credit
unions generally operate as portfolio
lenders, making and holding highquality consumer and residential real
estate loans that serve their members
and improve their communities, and
that credit unions often carry
significantly less exposure to volatile
product lines such as acquisition
development and construction loans,
commercial real estate, and complex
derivatives products.
Commenters added that credit unions
also face stringent regulatory restrictions
on their investment powers, and as a
result, natural-person credit unions
fared substantially better during the
recent financial crisis than many other
entities, including banks. Those
commenters concluded that an
appropriate risk-based capital
requirement would reflect these
important differences with a
streamlined program that recognizes
credit unions as strong counter-cyclical
lenders while bolstering safety and
soundness through meaningful
benchmarks and access to supplemental
capital.
Impacts
The Board received a substantial
number of comments concerning the
impact that the Original Proposal would
have had on credit unions. In general,
most of these commenters expressed
concern that the Original Proposal
would have had a material adverse
impact on individual credit unions and
the entire credit union industry. This
section outlines these concerns.
A majority of commenters stated that
the proposed risk-based capital
requirement would weaken credit
unions’ ability to build the capital
cushions they need to protect
themselves against risk and would
hamper credit unions’ ability to grow
and provide services to their members.
Other commenters stated that the
Original Proposal would constrain
future investments by credit unions and,
thus, would limit credit unions’ ability
to provide certain services, better loan
rates, and dividends to their members.
Others expressed concern that the
proposal would impede growth and
deter lending among credit unions, even
those with demonstrated long-term
ability to manage risk and net worth.
Many commenters stated that the
Original Proposal seemed to be a
reaction to the Great Recession and that
the Board should further consider the
Original Proposal’s impact on the future
of the credit union industry.
Commenters suggested that the
proposed requirement to hold a higher
capital-to-asset ratio would cause credit

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union asset growth to stagnate and
decline over the long term, for any given
rate of return on assets, and that the
Board should try to quantify these costs
and weigh them against the uncertain
benefits of minor reductions in the
relative cost of credit union failures.
Using the rule that the sustainable asset
growth rate is equal to the return on
equity, or Asset Growth Rate = ROA/
Capital Ratio, some commenters
estimated that asset growth for credit
unions would slow to eight percent
under the Original Proposal, or 1.1
percent lower than the asset growth rate
would be without the Original Proposal.
Commenters stated that because credit
unions can only build capital through
retained earnings, the Original Proposal
could severely limit credit unions’
ability to grow, to increase the products
and services they provide to their
members, and to help their local
communities prosper. They also
suggested that the Original Proposal
may actually reduce credit unions’
ability to absorb losses, given their
limited access to capital markets.
A number of commenters stated that
the low risk weights applied to
consumer loans and the high risk
weights applied to first-lien mortgage
loans, mortgage servicing rights, and
subordinate-lien mortgage loans would
push credit unions to make more
consumer loans and fewer mortgage
loans, despite a significant demand for
real estate lending services at some
credit unions. Other commenters stated
that the Original Proposal would induce
credit unions to focus on risk-based
capital instead of growth in real capital.
Still other commenters suggested the
proposed risk weights would penalize
non-consumer lending, which could
force small credit unions to only make
consumer loans on very low margins, a
strategy that would not survive in the
future.
One commenter suggested that the
Original Proposal did not properly
account for the effect of economic
downturns on credit unions, and that it
would be difficult or impossible for
downgraded credit unions to rebuild
following an economic downturn.
A substantial number of commenters
suggested that NCUA underestimated
the adverse effect of the Original
Proposal. They maintained that the
Board understated the number of credit
unions whose net worth would have
decreased to just barely over well
capitalized or adequately capitalized
levels. One commenter suggested that,
under the Original Proposal,
approximately 1,000 credit unions
would be required to raise $4 billion in
additional capital. Other commenters

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proffered that the Original Proposal
would require the credit union industry
to hold an additional $6.5 billion to $7
billion dollars in additional capital to
retain the same buffers that exist today
and still be considered well capitalized.
Commenters suggested that the Board
considered only the narrowest
interpretation of the Original Proposal’s
impact, ignoring the immediate and
long-term effects that it would have on
individual credit unions and the entire
credit union system. They stated that
credit unions cannot easily manage their
capital to the exact dollar level that
equates to NCUA’s proposed standards,
and that credit unions typically strive to
maintain sufficient space or buffers
between their actual net worth ratios
and the minimum required levels to be
well capitalized because of the
significant consequences of not meeting
the net worth standards. According to
the commenters, credit unions choosing
to regain their buffer would only have
three choices: (1) Rebalance their assets,
recognizing an opportunity cost when
they forego higher earnings, which
would diminish their ability to grow; (2)
ration services, stifling asset and
membership growth; or (3) require
members to pay more, resulting in fewer
member benefits and increased
competition from banks.
Commenters added that the Original
Proposal would require many credit
unions to adjust their capital levels to
maintain current margins above the well
capitalized threshold, at the same time
as earnings at credit unions continue to
be squeezed by low interest rates,
downward pressure on other revenue
streams, and moderate loan growth.
They argued that these adjustments
would pressure credit unions, already
suffering from low to moderate loan-toshare ratios, to decrease their assets by
curbing lending in an attempt to comply
with the new requirements.
A significant number of commenters
stated that the Original Proposal would
cause the reallocation of credit union
capital toward less productive uses. One
commenter suggested that, for some
credit unions, the Original Proposal
would increase the amount of capital
required to be well capitalized above the
current level of seven percent of total
assets, positing that 10.5 percent of risk
assets amounts to more than seven
percent of total assets for most credit
unions, depending on the ratio of risk
assets to total assets. The commenter
assumed that, across all potentially
affected credit unions, the total amount
of capital necessary to be well
capitalized would increase by $7.6
billion, or, in other words, that the
Original Proposal would increase the

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well capitalized net worth ratio
requirement an average of 0.76 percent,
from seven percent to 7.76 percent.
A number of commenters also noted
their concern that the Original Proposal
would force many credit unions out of
business.
A significant number of commenters
expressed concern that the Original
Proposal would curtail MBL activities.
They stated that the Original Proposal
unfairly penalized credit unions that are
exempt from the MBL limits in § 107A
of the FCUA.71 Other commenters
suggested that the Original Proposal
would stifle the strategic business plans
of credit unions that specialize in MBLs
to grow their assets with additional
commercial and real estate loans. They
also stated that the Original Proposal
would drive down MBL activity in rural
areas because credit unions specializing
in MBLs, particularly in agricultural
loans and/or loans secured by farm
land, cannot diversify their portfolio by
providing other types of loans not
needed by their members. Others stated
that the proposed risk weights for MBLs
would discriminate against credit
unions that serve underserved and
credit-challenged Americans—taxi
drivers, farmers, and those in faithbased credit unions. Commenters
suggested that, in order to increase their
risk-based capital ratios required under
the Original Proposal, credit unions may
feel forced to reduce mortgage and
business lending or increase loan rates
and fees. They stated that the Original
Proposal would have a negative effect
on agricultural lending, farming
communities, and credit union
members, particularly those in rural and
low-income areas. A number of
commenters urged the Board to further
consider the economic impact and
consequences of reduced liquidity and
financing for families and small
businesses. Others argued that the
Original Proposal would eliminate
credit unions’ business models
centering on mortgage lending.
Commenters suggested that the
proposed risk weights would discourage
well capitalized credit unions from
engaging in mergers of undercapitalized
credit unions because the Original
Proposal would force credit unions into
less profitable asset growth. Other
commenters maintained that the
reduction of credit unions’ capital
margin or cushion would negatively
impact credit unions’ ability to merge,
and would permit only the largest credit
unions to merge with smaller credit
unions. Still others suggested that the
Original Proposal would encourage
71 12

U.S.C. 1757a.

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mergers of credit unions not meeting the
risk-based requirements.
A substantial number of commenters
stated that the Original Proposal would
have a direct negative impact on credit
union service organizations (CUSOs) by
discouraging investment in CUSOs,
thereby forcing many credit unions to
limit services to their members.
Commenters feared that the Original
Proposal would result in stricter
scrutiny by examiners, which would
increase NCUA’s examination and
supervision costs and, therefore, the
costs borne by credit union members.
Other commenters suggested that NCUA
already has a large examination and
oversight budget to eliminate risk to the
NCUSIF; they contended the Original
Proposal did not sufficiently address the
aggregate costs of these initiatives to
credit union members. According to
these commenters, the impact of the
Original Proposal on credit union
members, in the form of excessive
supervision and lost earnings due to
overcapitalization, could itself pose a
risk to the NCUSIF.
Some commenters shared their belief
that the Original Proposal would reduce
lending in dramatic ways and stifle the
economy. Other commenters asserted
that the Original Proposal would
decrease member benefits, such as
patronage dividends and reduced
expenses. A number of commenters
stated that the Original Proposal failed
to consider impacts on businesses and
the economy, particularly on small
businesses that rely on credit unions for
credit. Several commenters suggested
that the Original Proposal would force
some credit unions away from their
missions to serve member in
predominantly rural and low-income
fields of membership.
A small number of commenters
encouraged the Board to follow the costbenefit analysis blueprint established by
Executive Orders 13563 and 13579.
Doing so, they argued, would allow
meaningful, cumulative analysis that
would result in a more coherent rule
with fewer harmful, unintended
consequences for the American
economy.
A number of commenters expressed
significant concerns about the Original
Proposal’s negative impact on the
growth and viability of small credit
unions. They suggested that the Original
Proposal would inhibit the growth of
credit unions that are developing from
small credit unions (less than $50
million) to medium-size credit unions
($50 million–$99 million). Other
commenters suggested it would reduce
the monetary and other support that
larger credit unions historically have

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provided to their smaller counterparts.
They noted that some small credit
unions depend on grants, scholarships,
and training opportunities funded by
larger credit unions. If these larger
credit unions were compelled to change
their loan and investment portfolios, or
are required to adjust their capital, those
commenters concluded their income
levels would decline, thereby rendering
it more difficult for them to fund as
many opportunities for small credit
unions. One credit union with less than
$10 million in assets asserted that it
would be adversely affected by the
proposed change in the capital reserves
requirement.
Other commenters suggested that the
Original Proposal imposed unnecessary
regulatory burdens that would impede
small credit unions’ ability to serve their
members. A substantial number of
commenters stated that small credit
unions not classified as ‘‘complex’’ and
not subject to the risk-based capital
requirement would still be negatively
affected because the Original Proposal
estimated the paperwork burdens
include over 160 hours of work for
credit unions, which is significant for
small credit unions with limited
resources. Other commenters suggested
that small credit unions would suffer
significantly due to the complexity of
this regulation and its implementation
costs. Many commenters stated that
small credit unions cannot survive
under the current regulatory burdens.
Others foresaw potentially disastrous
consequences if this regulation were
pushed down to small credit unions. An
official at one small credit union
asserted that the Original Proposal
would affect its strategic planning as it
approached $50 million in assets.
Another commenter stated that, as a
credit union with under $50 million in
assets, it was concerned about the
uncertainty of how the Original
Proposal would affect privately insured
credit unions.
Other Concerns
Several commenters expressed
concerns that the proposal did not
provide for input from state regulators
who may have a different view or
approach from that of NCUA. Other
commenters suggested that the proposal
was developed with no involvement or
dialogue with state regulators.
Commenters suggested that the Board
should ensure that NCUA properly
implements directives in the FCU Act
and coordinates with state officials in
implementing risk-based requirements
and PCA.

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Federal Register / Vol. 80, No. 17 / Tuesday, January 27, 2015 / Proposed Rules
E. What are the primary changes the
Board has included in this proposal?
Similar to the Original Proposal, this
proposal would replace the method
currently used by credit unions to apply
risk weights to their assets with a new
risk-based capital ratio measure that is
more comparable to that applied to
depository institutions worldwide. The
proposed risk-based capital ratio
measure would be the percentage of a
credit union’s capital available to cover
losses, divided by the credit union’s
defined risk-weighted asset base.
As noted in the introduction, this
proposed rule would make substantial
modifications to the Original Proposal
to address specific concerns that were
raised by commenters regarding the
proposal’s cost, complexity, and burden.
These changes would include: (1)
Amending the definition of ‘‘complex’’
credit union by increasing the asset
threshold from $50 million to $100
million; (2) reducing the number of
asset concentration thresholds for
residential real estate loans and
commercial loans (formerly classified as
MBLS); (3) assigning one-to-four family
non-owner-occupied residential real
estate loans the same risk weights as
other residential real estate loans; (4)
eliminating IRR from this proposed rule;
(5) extending the implementation
timeframe to January 1, 2019; and (6)
eliminating the Individual Minimum
Capital Requirement (IMCR) provision.
Among other things, these changes
would substantially reduce the number
of credit unions subject to the rule, and
would afford affected credit unions
sufficient time to prepare for the rule’s
full implementation. A full discussion
of the impact of these and other changes
in this proposed rule is contained in
Impact of the Proposed Regulation part
of the preamble below.
As discussed previously, the FCUA
gives NCUA broad discretion in
designing the risk-based net worth
requirement. Thus, this proposal would
incorporate a broadened definition of
capital to be used as the numerator in
calculating the proposed new risk-based
capital ratio measure. The Board is
proposing this change to provide a more
comparable measure of capital across all
financial institutions and to better
account for related elements of the
financial statement that are available to
cover losses and protect the NCUSIF.
This broader definition of capital would
more accurately reflect the amount of
capital that is available at a credit union
to absorb losses. On average, it would
increase a credit union’s risk-based
capital ratio by over 50 basis points as
discussed in more detail below.

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The Board agrees with the various
comments received on the Original
Proposal that suggested the allowance
for loan and lease losses (ALLL) account
should be included in its entirety in the
risk-based capital ratio numerator (that
is, not subject to a 1.25 percent cap),
and that goodwill and other intangible
assets specifically related to a
supervisory merger that occurs before
the Board finalizes its risk-based capital
ratio rule should be included in the riskbased capital ratio numerator for some
period of time before being excluded
(approximately 10 years after any final
rule is published in the Federal
Register). For a more detailed
discussion on these and the other
proposed changes, and responses to the
comments received on the Original
Proposal, refer to the section-by-section
analysis part of this preamble below.
In terms of the denominator for the
risk-based capital ratio measure, section
216(d)(2) of the FCUA requires that the
Board, in designing a risk-based net
worth requirement, ‘‘take account of any
material risks against which the net
worth ratio required for [a federally]
insured credit union to be adequately
capitalized may not provide adequate
protection.’’ 72 Congress specifically
listed IRR with respect to this provision
in the Senate Report accompanying
CUMAA, which added the
aforementioned requirement to the
FCUA.73 Section 216(d)(2) of the FCUA
differs from the corresponding provision
in section 38 of the FDI Act,74 which
requires the Other Banking Agencies to
implement risk-based capital
requirements, because section 216(d)(2)
specifically requires that NCUA’s riskbased requirement address ‘‘any
material risks.’’ Accordingly, despite the
absence of an IRR component in the
Other Banking Agencies’ risk-based
capital requirements,75 the Board is still
required to account for any material
risks in the risk-based requirement
unless the risk is deemed immaterial
because of the existence of some other
mechanism that the Board believes
adequately accounts for the risk.
NCUA’s risk-based net worth
requirement has included some aspect
of IRR since its inception in 2000.
Further, the Board continues to believe
72 12
73 S.

U.S.C. 1790d(d)(2) (emphasis added).
Rep. No. 193, 105th Cong., 2d Sess. 13

(1998).
74 12 U.S.C. 1831o.
75 78 FR 55349, 55362 (Sept. 10, 2013) (‘‘The riskbased capital ratios under these rules do not
explicitly take account of the quality of individual
asset portfolios or the range of other types of risk
to which FDIC-supervised institutions may be
exposed, such as interest rate, liquidity, market, or
operational risks.’’).

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that IRR, if not adequately addressed
through some regulatory, statutory or
supervisory mechanism, can represent a
material risk for purposes of NCUA’s
risk-based requirement.76 The Board
noted its concerns about IRR in the
preamble of the final IRR rule issued in
January 2012 when it highlighted the
need for federally insured credit unions
to have an effective IRR management
program.77 NCUA’s requirement to have
an effective IRR management program
was necessitated in part by the Board’s
concern over the steady lengthening in
maturity of average credit union assets,
an increase that in turn was fueled by
a steady and extended expansion into
mortgage loans and investments. At the
same time credit unions were
experiencing an increase in the
weighted average maturity of their
assets, much of their current portfolio
was established in a period of recordlow interest rates and at contractually
fixed coupon amounts. These asset
factors, coupled with a large influx of
non-maturity shares also priced at
historically low rates, has created a
unique mismatch between assets and
liabilities and a potentially volatile
sensitivity in earnings and capital.
Accordingly, the Board continues to
view IRR as a major risk facing credit
unions.
Based on long-term balance sheet
trends at credit unions and NCUA’s
experiences dealing with problem
institutions, the Board has concluded
that NCUA’s current regulations and
supervisory process alone cannot
adequately address IRR. However, the
Board agrees with commenters on the
Original Proposal who suggested that
measures of IRR based comprehensively
on assets and liabilities (including
hedges) should be favored over
measures that are based upon an assetonly approach, which is the approach
taken in the current rule and was also
the approach taken in the Original
Proposal. Accordingly, the Board is now
proposing to exclude consideration of
IRR from the risk-based capital ratio
measure, but in the future intends to
consider alternative approaches for
taking into account the IRR at credit
unions.
The proposed methodology for
assigning risk weights in this proposed
rule, therefore, would account only for
credit risk and concentration risk. The
Board believes that a capital-at-risk
methodology is more appropriate for
76 IRR has been NCUA’s top supervisory priority
for the last few years, and has appeared as an issue
of significant concern in the Financial Stability
Oversight Council’s 2012 and 2013 Annual Reports.
77 77 FR 5155 (February 2, 2012).

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measuring the risks arising from the
changes in interest rates. The use of
capital-at-risk methodologies to identify,
measure and control IRR is a long
standing practice in larger credit unions
and a standard expectation among
depository institution supervisors,
including NCUA. Net economic value
(NEV) is the most prevalent tool credit
unions use to measure capital-at-risk.
NEV measures the effect of changes in
interest rates on a credit union’s
economic value. NCUA has had a
supervisory expectation for the use of
asset liability management modeling by
large credit unions for decades. In 2013,
NCUA codified the requirement for IRR
policies and management programs
under section 741.3(b)(5).78 Paragraph
(b)(5) currently requires federally
insured credit unions with over $50
million in assets to develop and adopt
a written policy on IRR management,
and a program to effectively implement
that policy, as part of their asset liability
management responsibilities.
Because IRR will no longer be
included in this proposal, NCUA will
consider what alternative approaches
can be taken to account for IRR at credit
unions. Alternative approaches that
could be taken include adding a
separate IRR standard as a
subcomponent of the risk-based net
worth requirement to complement the
proposed risk-based capital ratio
measure. Conceptually, a separate IRR
standard should be based on a
comprehensive balance sheet measure,
like NEV, that takes into account
offsetting risk effects between assets and
liabilities (including benefits from
derivative transactions). The intent of
such a measure would be to measure
IRR consistently and transparently
across all asset and liability categories,
to address both rising and falling rate
scenarios, and to supplement the
supervisory process with a measure
calibrated to address severe outliers.
This approach would also incorporate a
forward-looking, proactive measure into
NCUA’s capital standards, as
recommended by GAO.79
In light of the proposed elimination of
IRR measures from the current rule, and
GAO’s recommendation for NCUA to
incorporate a forward-looking measure
into credit union’s capital standards, the
Board specifically requests comments
on alternative approaches that could be
taken in the future to reasonably
account for IRR.

Because the Board has decided to
exclude IRR from the computation of
the risk weights for assets in this
proposal, it was necessary to propose
significant changes to how investments
are currently risk-weighted. This
proposal adopts a risk weight
framework for investments based largely
on the credit risk of the issuer or
underlying collateral. This proposed
approach would be substantially similar
to the Other Banking Agencies’
framework for investments.80 Because
the same types of investments generally
perform identically on a credit risk basis
for credit unions and banks, the
variations in this proposal from the
Other Banking Agencies’ investment
risk weights primarily involve credit
union-specific type investments. For
example, the proposed risk weights
assigned to investments in capital
instruments issued by corporate credit
unions and credit union service
organizations would differ from the
corresponding risk-weights assigned to
bank investments. While this approach
to assigning risk weight to investments
would require credit unions to report
additional data on the Call Report, the
Board believes such an approach would
result in net benefits to credit unions in
terms of the improved precision of the
capital requirements. Further, the more
granular data will improve NCUA’s
offsite supervision capabilities. The
section-by-section analysis part of the
preamble contains more detailed
discussions on the specific changes
being proposed to the investment risk
weights.
Concentration risk can also be a
material risk. As the Basel Committee
on Banking Supervision explained in
Basel II:
Risk concentrations are arguably the single
most important cause of major problems in
banks. Risk concentrations can arise in a
bank’s assets, liabilities, or off-balance sheet
items, through the execution or processing of
transactions (either product or service), or
through a combination of exposures across
these broad categories. Because lending is the
primary activity of most banks, credit risk
concentrations are often the most material
risk concentrations within a bank. Credit risk
concentrations, by their nature, are based on
common or correlated risk factors, which, in
times of stress, have an adverse effect on the
creditworthiness of each of the individual
counterparties making up the
concentration.81

The concept of higher risk weights for
concentrations of real estate loans and
80 See,

78 See

also 78 FR 4032, 4037 (Jan. 18, 2013).
79 See U.S. Govt. Accountability Office, GAO–12–
247, Earlier Actions Are Needed to Better Address
Troubled Credit Unions, (Jan. 2012) available at
http://www.gao.gov/products/GAO-12-247.

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e.g., 12 CFR 324.32.
Committee on Banking Supervision,
‘‘International Convergence of Capital Measurement
and Capital Standards: A Revised Framework,
Comprehensive Version’’ 214 (June 2006) available
at http://www.bis.org/publ/bcbs128.pdf (Basel II).
81 Basel

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MBLs exists in the current risk-based
requirement. Eliminating the
concentration dimension for risk
weights would be a step backward and
is inconsistent with the concerns raised
regarding concentration risk by GAO
and in Material Loss Reviews (MLRs)
conducted by NCUA’s OIG. The 2012
GAO report notes credit concentration
risk contributed to 27 of 85 credit union
failures that occurred between January
1, 2008, and June 30, 2011. Credit
unions with high MBL concentrations
are particularly susceptible to changes
in business conditions that can affect
borrower cash flow, collateral value, or
other factors increasing the probability
of default. GAO found in its 2012 report
that credit unions who failed had more
MBLs as a percentage of total assets than
peers and the industry average. GAO
advised NCUA to revise PCA taking into
account credit unions with a high
percentage of MBLs to total assets. The
report documented NCUA’s agreement
to revise PCA regulations so that capital
standards adequately address
concentration risk.82
GAO also recommended NCUA
address the real estate concentration
risk concerns raised by NCUA’s OIG,
who completed several MLRs where
failed credit unions had large real estate
loan concentrations. The NCUSIF
incurred losses of at least $25 million in
each of these cases. The credit unions
reviewed held substantial residential
real estate loan concentrations in either
first-lien mortgage loans, home equity
lines of credit (HELOCS), or both.83
Accordingly, the Board is now
proposing to include a tiered risk weight
framework for high concentrations of
residential real estate loans and
commercial loans 84 in NCUA’s riskbased capital ratio measure.85 As a
82 See U.S. Govt. Accountability Office, GAO–12–
247, Earlier Actions are Needed to Better Address
Troubled Credit Unions (2012), available at
http://www.gao.gov/products/GAO-12-247.
83 See Office of Inspector General, National Credit
Union Administration, OIG–10–03, Material Loss
Review of Cal State 9 Credit Union (April 14, 2010),
available at http://www.ncua.gov/about/Leadership/
CO/OIG/Documents/OIG201003MLRCalState9.pdf;
Office of Inspector General, National Credit Union
Administration, OIG–11–07, Material Loss Review
of Beehive Credit Union (July 7, 2011), available at
http://www.ncua.gov/about/Leadership/CO/OIG/
Documents/OIG201107MLRBeehiveCU.pdf; Office
of Inspector General, National Credit Union
Administration, OIG–10–15, Material Loss Review
of Ensign Federal Credit Union, (September 23,
2010), available at http://www.ncua.gov/about/
Leadership/CO/OIG/Documents/
OIG201015MLREnsign.pdf.
84 The definition of commercial loans and the
differences between commercial loans and MBLs
are discussed in more detail in the section-bysection analysis.
85 The tiered framework would provide for an
incrementally higher capital requirement resulting

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credit union’s concentration in these
asset classes increases, incrementally
higher levels of capital would be
required. This approach would address
concentration risk as it relates to
minimum required capital levels
through a transparent, standardized,
regulatory requirement. Considering
concentration risk solely in the
examination process would be less
consistent and transparent, and would
lack a strong enforcement framework.
The Board agrees with various
commenters on the Original Proposal
that the tiered risk weight system
should be adjusted so as to focus on
material outliers, thereby creating more
consistency of capital treatment with
banks. Accordingly, the Board proposes
to use a single, higher concentration
threshold to simplify the risk weight
framework and calibrate it to be
applicable only to credit unions that
deviate significantly from the mean.86
This single, higher concentration
threshold would provide sufficient

flexibility for the vast majority of credit
unions to operate at a level where the
risk weights are substantially similar to
the risk weights applied to similar bank
assets under the Other Banking
Agencies’ capital regulations.87
The concentration thresholds would
not limit a credit union’s lending
activity; rather, the thresholds would
merely require the credit union to hold
capital for the elevated risk. The Board
does not believe credit unions would be
at a competitive disadvantage because
most loans (except for loans at
extremely high concentrations) would
be assigned risk weights similar to those
applicable to banks.
Consistent with section
216(b)(1)(A)(ii) of the FCUA, which
requires NCUA’s PCA requirement be
comparable to the Other Banking
Agencies’ PCA requirements, the Board
largely relied on the risk weights
assigned to various asset classes under
the Basel Accords and the Other
Banking Agencies’ risk-based capital

rules, as well as the underlying
principles, for this proposal.88 NCUA
has, however, tailored the risk weights
in this proposal for certain assets that
are unique to credit unions; where a
demonstrable and compelling case
exists, based on contemporary and
sustained performance differences, to
differentiate for certain asset classes
between banks and credit unions; or
where a provision of the FCUA required
doing so. Thus, this proposal provides
for even greater comparability to Other
Banking Agencies’ risk weights than the
Original Proposal by adjusting asset
classes and recalibrating risk weight,
including for all loans changing the
definition of ‘‘current’’ from less than 60
to less than 90 days past due.
The following is a table showing a
summary of the risk weights included in
this proposal. See the section-by-section
analysis part of the preamble below for
more detail on the proposed changes to
the asset classes and risk weights.

SUMMARY OF PROPOSED RISK WEIGHTS
0%

20%

50%

75%

100%

150%

250%

300%

400%

1250%

X

............

............

............

............

............

............

............

............

............

X

............

............

............

............

............

............

............

............

............

X

............

............

............

............

............

............

............

............

............

X

............

............

............

............

............

............

............

............

............

X
X

............
............

............
............

............
............

............
............

............
............

............
............

............
............

............
............

............
............

X
X
X

............
............
............

............
............
............

............
............
............

............
............
............

............
............
............

............
............
............

............
............
............

............
............
............

X
X

............
............

............
............

............
............

............
............

............
............

............
............

............
............

............
............

X

............

............

............

............

............

............

............

............

X

............

............

............

............

............

............

............

X

............

............
X

............
............

............
............

............
............

............
............

............
............

X
X

............
............

............
............

............
............

............
............

............
............

X

............

............

............

............

............

wreier-aviles on DSK4TPTVN1PROD with PROPOSALS2

Cash/Currency/Coin .........................................
Investments:.
Unconditional
Claims—U.S.
Govt.
(Treas./GNMA) ......................................
Balances Due from Federal Reserve
Banks .....................................................
Federally Insured Deposits in Financial
Institutions .............................................
Debt Instruments issued by NCUA and
FDIC ......................................................
CLF Stock .................................................
Uninsured deposits at U.S. Federally Insured Inst. ..............................................
Agency Obligations ...................................
FNMA and FHLMC pass through MBS ....
Gen. Oblig. Bonds Issued by State or Political Sub. ..............................................
FHLB Stock and Balances ........................
Senior Agency Residential MBS or Asset
Backed Securities (ABS) Structured .....
Revenue Bonds Issued by State or Political Sub. .................................................
Senior Non-Agency Residential MBS
Structured ..............................................
Corporate Membership Capital .................
Senior Non-Agency ABS Structured Securities ...................................................
Industrial Development Bonds ..................
Agency Stripped MBS (Int. Only and Prin.
Only) ......................................................
in a blended rate for the corresponding portfolio.
That is, the portion of the portfolio below the
threshold would receive a lower risk weight, and
the portion above the threshold would receive a
higher risk weight. The higher risk weight would
be consistent across asset categories as a 50 percent
increase from the base rate. Some comments on the
Original Proposal suggested NCUA should have
combined similar exposures across asset classes,
such as investments and loans. For example,
residential mortgage-backed security concentrations
could have been included with the real estate loan
thresholds due to the similarity of the underlying

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assets. However, given the more liquid nature and
price transparency of a security, the Board believes
including this with the risk thresholds for real
estate lending is not necessary.
86 The concentration threshold for real estate
loans is approximately two standard deviations
from the mean. The concentration threshold for
commercial loans is over five standard deviations
from the mean.
87 Based on NCUA’s analysis of call report data,
approximately 90 percent of complex credit unions
operate at levels below the concentration thresholds

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proposed for residential real estate loans. Over 99
percent of complex credit unions operate at levels
below the concentration thresholds proposed for
commercial loans. See also, e.g., 12 CFR 324.32(f)
and (g) (corresponding FDIC risk weights).
88 NCUA has attempted to simplify certain
aspects of this proposed rule to take into account
the cooperative character of credit unions while
still imposing risk-based capital standards that are
substantially similar and equivalent in rigor to the
standards imposed on banks. See 12 U.S.C.
1790d(b)(1)(B).

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SUMMARY OF PROPOSED RISK WEIGHTS—Continued
0%

Mutual Funds Part 703 Compliant ............
Value of General Account Insurance
(BOLI/CUOLI) ........................................
Corporate Perpetual Capital .....................
Mortgage Servicing Assets .......................
Separate Account Life Insurance .............
Publicly Traded Equity Investment (non
CUSO) ...................................................
Mutual Funds Part 703 Non-Compliant ....
Non-Publicly Traded Equity Inv. (non
CUSO) ...................................................
Subordinated Tranche of Any Investment
Consumer Loans:
Share-Secured ..........................................
Current Secured ........................................
Current Unsecured ....................................
Non-Current ..............................................
Real Estate Loans:
Share-Secured ..........................................
Current First Lien < 35% of Assets ..........
Current First Lien > 35% of Assets ..........
Not Current First Lien ...............................
Current Junior Lien < 20% of Assets .......
Current Junior Lien > 20% of Assets .......
Noncurrent Junior Lien .............................
Commercial Loans:
Share-Secured ..........................................
Portion of Commercial Loans with Compensating Balance .................................
Commercial Loans < 50% of Assets ........
Commercial Loans > 50% of Assets ........
Non-current ...............................................
Miscellaneous:
Loans to CUSOs .......................................
Equity Investment in CUSO ......................
Other Balance Sheet Items not Assigned

20%

50%

75%

100%

150%

250%

300%

400%

1250%

X*

............

............

............

............

............

X*

............
X

............
............
X

............
............
............
X*

............
............
............
............

............
............
............
............

X
X*

............
............

............
............

X

............
X **

X

............

............
X

............
............
X

............
............
............
X

............
............
............
............

............
............
............
............

............
............
............
............

............
............
............
............

X

............
X

............
............
X

............
............
............
X
X

............
............
............
............
............
X
X

............
............
............
............
............
............
............

............
............
............
............
............
............
............

............
............
............
............
............
............
............

............
............
............
............
............
............
............

X

............

............

............

............

............

............

............

............

X

............

............

............
X

............
............
X
X

............
............
............
............

............
............
............
............

............
............
............
............

............
............
............
............

X

............
X
............

............
............
............

............
............
............

............
............
............

............
............
............

X

wreier-aviles on DSK4TPTVN1PROD with PROPOSALS2

* With the option to use the look-through options.89
** With the option to use the gross-up approach.90

The Board notes that FDIC’s capital
standards are the ‘‘minimum capital
requirements and overall capital
adequacy standards for FDIC-supervised
institutions . . . include[ing]
methodologies for calculating minimum
capital requirements . . .’’ 91
The FDIC may require an FDICsupervised institution to hold an
amount of regulatory capital greater
than otherwise required under its
capital rules if the FDIC determines that
the institution’s capital requirements
under its capital rules are not
commensurate with the institution’s
credit, market, operational, or other
risks.92
89 The ‘‘look-through’’ approaches are discussed
in more detail in part of the preamble discussing
§ 702.103(c)(4) of this proposal.
90 The ‘‘gross-up’’ approach is discussed in more
detail in part of the preamble discussing
§ 702.103(c)(4) of this proposal.
91 See, e.g., 12 CFR 324.1(a).
92 See, e.g., 12 CFR 324.1(d).

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Further, the September 10, 2013
preamble to part 324 of FDIC’s
regulations states that:
The FDIC’s general risk-based capital rules
indicate that the capital requirements are
minimum standards generally based on broad
credit-risk considerations. The risk-based
capital ratios under these rules do not
explicitly take account of the quality of
individual asset portfolios or the range of
other types of risk to which FDIC-supervised
institutions may be exposed, such as interestrate risk, liquidity, market, or operational
risks . . . In light of these considerations, as
a prudent matter, an FDIC-supervised
institution is generally expected to operate
with capital positions well above the
minimum risk-based ratios and to hold
capital commensurate with the level and
nature of the risks to which it is exposed,
which may entail holding capital
significantly above the minimum
requirements.93

As indicated above, FDIC’s approach
to risk weights is calibrated to be the
minimum regulatory capital standard.
Similarly, this proposal is calibrated to
93 78

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be the minimum regulatory capital
standard. Therefore, the Board believes
it is necessary to incorporate a broader
regulatory provision requiring complex
credit unions to maintain capital
commensurate with the level and nature
of all risks to which they are exposed,
and to maintain a written strategy for
assessing capital adequacy and
maintaining an appropriate level of
capital.
Proposed new § 702.101(b) is based
on a similar provision in the Other
Banking Agencies’ rules.94 This
provision would not affect a complex
credit union’s PCA classification. It
would, however, support NCUA’s
assessment of complex credit unions’
capital adequacy in the supervisory
process (e.g., assigning CAMEL and risk
ratings). Following the publication of a
final risk-based capital rule, NCUA
would develop and publish supervisory
guidance for examiners and credit
unions on the application of this
provision. Please refer to the section-by94 See,

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e.g., 12 CFR 324.10(d)(1) and (2).

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wreier-aviles on DSK4TPTVN1PROD with PROPOSALS2

section analysis part of this preamble for
a more detailed discussion of this new
provision and the related supervisory
process considerations.
Because of this proposed new capital
adequacy provision, existing
enforcement authority for unsafe and
unsound conditions or practices,95
NCUA’s authority to reclassify an
insured credit union into a lower net
worth category,96 and comments on the
Original Proposal, the Board has
decided to eliminate the provision in
the Original Proposal for imposing an
IMCR.
Under the Original Proposal,
proposed § 702.105(a) would have
introduced rules and procedures to
permit the Board, on a case-by-case
basis, to impose an IMCR that exceeds
the risk-based capital requirement that
otherwise would apply to a credit union
under subpart A of part 702.
Under the Original Proposal,
§ 702.105(a) would have prescribed
criteria to determine when a credit
union’s capital is, or may become,
inadequate, making it appropriate to
impose a higher capital requirement. It
then would have prescribed standards
to determine what heightened capital
requirement to impose in such cases,
based not only on mathematical and
objective criteria, but on subjective
judgment grounded in agency expertise.
Under the Original Proposal, a stafflevel decision to impose a discretionary
supervisory action (DSA) under part
702,97 and a decision to impose an
IMCR would have been treated as a
‘‘material supervisory determination.’’ 98
As such, proposed § 747.2006 would
have required NCUA to provide the
affected credit union with reasonable
notice of a proposed IMCR, and it
established an independent process by
which to challenge the proposed IMCR,
culminating in Board review.
With a few notable exceptions,99 the
comments addressing the IMCR were
critical of the concept itself, NCUA’s
legal authority to impose an IMCR, the
scope of an IMCR, the criteria and
procedures for imposing it, the
subjectivity and discretion involved, or
the lack of an option for review by an
independent third party.
Now that the IMCR provision in this
proposal has been removed, the
95 See § 702.1(d) of this proposed rule and the
current rule.
96 See section 1790(d)(h) of the Federal Credit
Union Act, and § 702.102(b) of this proposed rule
and the current rule.
97 E.g., 12 CFR 702.202(b) and (c).
98 12 U.S.C. 1790d(k).
99 Several trade association commenters
advocated limiting the scope of the IMCR to IRR
and concentration risk only, otherwise excluding
those two risks from the scope of the proposed rule.

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commenters’ concerns with the various
aspects of the IMCR are no longer
relevant. NCUA would be able to
address any deficiencies in a credit
union’s capital levels relative to its risk
by: (1) Reclassifying the credit union
into a lower net worth category under
§ 702.102(b) of this proposal and
FCUA; 100 (2) determining in relation to
proposed § 702.101(b) that capital levels
are not commensurate with the level or
nature of the risks to which the credit
union is exposed; or (3) using other
supervisory authorities to address
unsafe or unsound conditions or
practices as noted in § 702.1(d) of this
proposal and the current rule. As a
practical matter, in using these
authorities, NCUA may provide specific
metrics for necessary reductions in risk
levels, increases in capital levels beyond
those otherwise required under this
part, and some combination of risk
reduction and increased capital so it is
clear how the credit union can address
NCUA’s supervisory concerns. Then it
would be up to the credit union to
decide which particular option to
pursue to remedy NCUA’s enforcement
action.
As discussed earlier in this preamble,
the Original Proposal would have
required that credit union meet different
risk-based capital ratio levels for the
adequately capitalized category (eight
percent) and the well capitalized
category (10.5 percent). Commenters on
the Original Proposal questioned
NCUA’s legal authority to require
complex credit unions to meet one riskbased capital ratio to be adequately
capitalized and a different, higher riskbased capital ratio to be classified as
well capitalized. As explained in the
legal authority section of this preamble,
the Board has the authority under the
FCUA to take this approach.
However, the Board supports
lowering the risk-based capital ratio
level required for a complex credit
union to be classified as well capitalized
from 10.5 percent to 10 percent. The
Board agrees with commenters that a 10
percent risk-based capital ratio level for
well capitalized credit unions simplifies
the comparison with the Other Banking
Agencies’ rules 101 by removing the
effect of the capital conservation
buffer.102 Capital ratio thresholds are
largely a function of risk weights. As
discussed in other parts of this proposal,
the Board is now proposing to more
closely align NCUA’s risk weights with
100 12

U.S.C. 1790d(h).
e.g., 12 CFR 324.403.
102 The ‘‘capital conservation buffer’’ is explained
in more detail in the discussion on proposed
§ 702.102(a) in the section-by-section analysis part
of the preamble.
101 See,

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4359

those assigned by the Other Banking
Agencies,103 so it follows that the riskbased capital ratio thresholds should
also align as much as possible. The
proposed 10 percent risk-based capital
ratio level for well capitalized credit
unions, along with the eight percent
risk-based capital ratio level for
adequately capitalized credit unions,
would be comparable to the total riskbased capital ratio requirements
contained in the Other Banking
Agencies’ capital rules.104
The Original Proposal would have
applied to all credit unions with over
$50 million in total assets. Based on
NCUA’s analysis of the comments
received on the Original Proposal, the
Board is now proposing to define a
credit union as ‘‘complex’’ if it has
assets of more than $100 million.105
Credit unions meeting this threshold
have a portfolio of assets and liabilities
that are complex, based upon the
products and services in which they are
engaged. Credit unions with $100
million in assets or less generally do not
have a complex structure of assets and
liabilities and are a small share of the
overall assets in the credit union
system, thereby limiting the exposure of
the NCUSIF to these institutions. As
discussed later in this document, the
$100 million asset threshold is a clear
demarcation above which all credit
unions engage in complex activities,
and where almost all such credit unions
(99 percent) are involved in multiple
complex activities, in stark contrast to
credit unions with $100 million in
assets or less.
The Board believes an asset threshold
would be clear, logical, and easy to
administer when compared to the more
complicated formula credit unions are
required to follow under the current
rule 106 to determine if they are
complex. Using a more straightforward
proxy for complex credit unions would
also help account for the fact that credit
unions have boards of directors that
consist primarily of volunteers. The
$100 million dollar asset size threshold
would exempt almost 80 percent of
credit unions 107 from any regulatory
burden associated with complying with
this rule, while covering nearly 90
percent of the assets in the credit union
system. The threshold would also be
consistent with the fact that the majority
103 See,

e.g., 12 CFR 324.32.
e.g., 12 CFR 324.403.
105 There is no exemption for banks from the riskbased capital requirements of the other banking
agencies. There are 1,975 FDIC-insured banks with
assets less than $100 million as of June 2014.
106 12 CFR 702.106.
107 Based upon December 31, 2013 Call Report
data.
104 See,

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of losses (as measured as a proportion
of the total dollar cost) to the NCUSIF
result from credit unions with assets
greater than $100 million. For a more
detailed discussion of the rationale the
Board considered in defining complex,
see the discussion associated with
proposed § 702.103 in the section-bysection analysis part of the preamble.
The Original Proposal would have
provided an 18-month implementation
period for credit unions to adjust to the
new requirements. The Board agrees
with the comments received on the
Original Proposal that a longer
implementation period is necessary due
to the complexity of this rule and the
changes needed in the Call Report.
Therefore, the Board is proposing to
more than double the implementation
period by extending it to January 1,
2019, to provide both credit unions and
NCUA sufficient time to make the
necessary adjustments, such as systems,
processes, and procedures, and to
reduce the burden on affected credit
unions in meeting the new
requirements.
IV. Section-by-Section Analysis
Part 702—Capital Adequacy

wreier-aviles on DSK4TPTVN1PROD with PROPOSALS2

Revised Structure of Part 702
Consistent with the Original Proposal,
this proposed rule would reorganize
part 702 by consolidating NCUA’s PCA
requirements, which are currently
included under subsections A, B, C, and
D, under proposed subparts A and B.
Proposed subpart A would be titled
‘‘Prompt Corrective Action’’ and
proposed subpart B would be titled
‘‘Alternative Prompt Corrective Action
for New Credit Unions.’’ 108 The
reorganization of the proposed rule is
designed so that credit unions need only
reference the subpart applying to their
institution to identify the applicable
minimum capital standards and PCA
regulations. The Board believes that
consolidating these sections would
reduce confusion and save credit union
staff from having to frequently flip back
and forth through the four subparts of
the current PCA rule.
In general, this proposed rule would
restructure part 702 by consolidating
most of the rules relating to capital and
PCA that are applicable to credit unions
that are not ‘‘new’’ credit unions under
108 Under both current § 702.301(b) and proposed
§ 702.201(b), a credit union is ‘‘new’’ if it is ‘‘a
federally-insured credit union that both has been in
operation for less than ten (10) years and has total
assets of not more than $10 million. A credit union
which exceeds $10 million in total assets may
become ‘new’ if its total assets subsequently decline
below $10 million while it is still in operation for
less than 10 years.’’

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new subpart A. This change is intended
to simplify the structure of part 702. The
specific sections that would be included
in new subpart A and the proposed
changes to those sections are discussed
in more detail below.
Similarly, this proposed rule would
consolidate most of NCUA’s rules
relating to alternative capital and PCA
requirements for ‘‘new’’ credit unions
under new subpart B. This change is
intended to simplify the structure of
part 702. The sections under new
subpart B would remain largely
unchanged from the requirements of
current part 702 relating to alternative
capital and PCA, except for revisions to
the sections relating to reserves and the
payment of dividends. The specific
sections included in new subpart B and
the specific changes to the sections
under new subpart B are discussed in
more detail below.
Finally, this proposed rule would
retain subpart E of part 702, Stress
Testing, but would re-designate and renumber the current subpart as subpart
C. Other than re-designating and renumbering the subpart, the language
and requirements of current subpart E
would remain unchanged.
Section 702.1 Authority, Purpose,
Scope, and Other Supervisory Authority
Consistent with the Original Proposal,
proposed § 702.1 would remain
substantially similar to current § 702.1,
but would be amended to update
terminology and internal cross
references within the section, consistent
with the changes that are being
proposed in other sections of part 702.
No substantive changes to the section
are intended.
The Board received a number of
comments expressing concerns
regarding the Boards authority to issue
the Original Proposal. Several
commenters stated that the Board lacks
legal authority to issue a rule
implementing the risk-based capital
requirement as proposed. Other
commenters suggested that the Board
did not adequately account for the
unique nature of credit unions in the
Original Proposal. Another commenter
suggested that the language of the FCUA
does not mean that there should be one
approach and one universal algorithm
applied to all risk in the same fashion.
Other commenters suggested that the
Original Proposal was inconsistent with
the statutory requirement for the Board
to design a system of PCA that is
comparable to that of FDIC. Other
commenters argued that the proposed
risk-based capital requirement was
inconsistent with the FCUA because
they believed it ignored the fact that

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most credit unions raise net worth only
through retained earnings.
The Board has carefully considered
these comments and generally disagrees
with commenters’ reading of the FCUA.
Section 216(b)(1) of the FCUA requires
the Board to adopt by regulation a
system of PCA for insured credit unions
that is ‘‘comparable to’’ the system of
PCA prescribed in the FDI Act, that is
also ‘‘consistent’’ with the requirements
of section 216 of the FCUA, and that
takes into account the cooperative
character of credit unions.109 Paragraph
(d)(1) of the same section requires that
NCUA’s system of PCA include ‘‘a riskbased net worth requirement for insured
credit unions that are complex . . .’’
When read together, these sections grant
the Board broad authority to design
reasonable risk-based capital regulations
to carry out the stated purpose of
section 216, which is to ‘‘resolve the
problems of [federally] insured credit
unions at the least possible long-term
loss to the [National Credit Union Share
Insurance] Fund.’’ 110 As explained in
more detail below, the Board believes
that this proposed rule is comparable,
although not identical in detail, to the
PCA and risk-based capital
requirements for banks. In addition, as
explained throughout the preamble to
this proposed rule, this proposal
deviates from the PCA and risk-based
capital requirements applicable to banks
as required by section 216 of the FCUA
and takes into account the cooperative
character of credit unions. Accordingly,
the Board believes that this proposed
rule would implement the risk-based
net worth requirement consistent with
section 216 of the FCUA.
Section 702.2—Definitions
Under the Original Proposal,
proposed § 702.2 would have retained
many of the definitions in current
§ 702.2 with no substantive changes.
The Original Proposal would, however,
have removed the paragraph number
assigned to each of the definitions under
current § 702.2 and would have
reorganized the section so the new and
existing definitions were listed in
alphabetic order. This reformatting
would have made § 702.2 more
consistent with current §§ 700.2, 703.2
and 704.2 of NCUA’s regulations.111 In
addition, the originally proposed § 702.2
would have added a number of new
definitions, and amended some existing
definitions in § 702.2. These changes
were intended to help clarify the
109 12

U.S.C. 1790d(b)(1).
1790d(a)(1).
111 12 CFR 700.2; 12 CFR 703.2; 12 CFR 704.2.
110 Section

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meaning of terms used in the Original
Proposal.
The Board received no comments on
these technical changes to § 702.2 and
has decided to retain the changes
described above in this second proposal.
Consistent with section 202 of the
FCUA,112 the Board has incorporated
the phrase ‘in accordance with GAAP’
into many of the definitions to clarify
that generally accepted accounting
principles would be used determine
how an item is recorded on the
statement of financial condition from
which it would be incorporated into the
risk-based capital calculation. The
following definitions, some of which
were included in the Original Proposal,
would be added, amended, or removed
under this proposed rule:
Allowances for loan and lease losses
(ALLL). Under the Original Proposal, the
term ‘‘allowance for loan and lease loss’’
would have been defined as reserves
that have been established through
charges against earnings to absorb future
losses on loans, lease financing
receivables, or other extensions of
credit.
The Board received no comments on
the definition of ALLL in the Original
Proposal and has decided to retain the
term and definition in this second
proposal with the following changes. As
discussed in more detail below, the
Board is now proposing to amend the
definition of ALLL to address the
importance of maintaining ALLL in
accordance with GAAP since the
integrity of the risk-based capital ratio is
dependent upon an accurate ALLL,
particularly now that this second
proposal would allow the entire ALLL
balance to be included in the risk-based
capital ratio numerator. A credit union
maintaining ALLL in accordance with
GAAP will make timely adjustments to
the ALLL including the timely charge
off of loan losses. Accordingly, under
this proposed rule, the term ‘‘ALLL’’
would be defined as valuation
allowances that have been established
through a charge against earnings to
cover estimated credit losses on loans,
lease financing receivables or other
extensions of credit as determined in
accordance with GAAP.
Amortized cost. Under this proposed
rule, the new term ‘‘amortized cost’’
would be defined as the purchase price
of a security adjusted for amortizations
of premium or accretion of discount if
the security was purchased at other than
par or face value.
This proposed new term is being
added because investments accounted
for as held-to-maturity are reported on
112 12

U.S.C. 1782(a)(6)(C)(i).

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the balance sheet at amortized cost
while investments accounted for as
available-for-sale are reported on the
balance sheet at fair value. As explained
in more detail below, to ensure
consistency in the measure of minimum
capital for held-to-maturity or availablefor-sale investments, the risk weights
will be applied to the amortized cost.
Appropriate regional director. This
proposed rule would amend the
definitions section to remove the
definition of the term ‘‘appropriate
regional director’’ from the current rule.
The definition is unnecessary and
redundant because the term ‘‘Regional
Director’’ is already defined for
purposes of NCUA’s regulations in
§ 700.2.
Appropriate state official. Under this
proposed rule, the term ‘‘appropriate
state official’’ would be defined as the
state commission, board or other
supervisory authority having
jurisdiction over the credit union. The
proposal would amend the current
definition of ‘‘appropriate state official’’
to provide additional clarity by adding
the italicized words above (‘‘state’’ and
‘‘the’’) to the definition, and by
removing the words ‘‘chartered by the
state which chartered the affected credit
union,’’ which the Board believes are
unnecessary.
Call Report. Under the Original
Proposal, the term ‘‘Call Report’’ would
have been defined as the Call Report
required to be filed by all credit unions
under § 741.6(a)(2).
The Board received no comments on
the definition of ‘‘Call Report’’ and has
decided to retain the definition
unchanged in this proposal.
Carrying value. Under this proposed
rule, the new term ‘‘carrying value’’
would be defined, with respect to an
asset, as the value of the asset on the
statement of financial condition of the
credit union, determined in accordance
with GAAP. Under this proposed rule,
for many assets, the carrying value
would be the amount subject to the
application of the associated risk
weight.
Central counterparty (CCP). Under
this proposed rule, the new term
‘‘central counterparty’’ would be
defined as a counterparty (for example,
a clearing house) that facilitates trades
between counterparties in one or more
financial markets by either guaranteeing
trades or novating contracts. The Board
is proposing to add this term to coincide
with amendments it is making in the
derivatives section of this proposal.
Commercial loan. Under this
proposed rule, the new term
‘‘commercial loan’’ would be defined as
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(including any unfunded commitments)
to individuals, sole proprietorships,
partnerships, corporations, or other
business enterprises for commercial,
industrial, and professional purposes,
but not for investment or personal
expenditure purposes. The definition
would also provide that the term
commercial loan excludes loans to
CUSOs, first- or junior-lien residential
real estate loans, and consumer loans.
The Board is proposing to adopt a
different approach from the Original
Proposal, in which it applied risk
weights to assets that fell within the
statutory definition of MBLs, and is now
proposing to assign specific risk weights
to all loans meeting the new definition
of commercial loans provided above.
The proposed definition of commercial
loans is more reflective of the risk of
these loans than the previously defined
term MBL, which would no longer be
used in proposed § 702.104, and, as
discussed in more detail below, is
intended to better identify the loans
made for a commercial purpose and
having similar risk characteristics.
Classification of a loan as a commercial
loan would be based upon the purpose
of the loan, the use of the proceeds of
the loan, and the type of underlying
collateral. Commercial loans may take
the form of direct or purchased loans.
For example, commercial loans would
generally include the following types of
loans: 113
• Loans for commercial, industrial
and professional purposes to:
Æ Mining, oil- and gas-producing, and
quarrying companies;
Æ Manufacturing companies of all
kinds, including those which process
agricultural commodities;
Æ Construction companies;
Æ Transportation and
communications companies and public
utilities;
Æ Wholesale and retail trade
enterprises and other dealers in
commodities;
Æ Cooperative associates including
farmers’ cooperatives;
Æ Service enterprises such as hotels,
motels, laundries, automotive service
stations, and nursing homes and
hospitals operated for profit;
Æ Insurance agents; and
Æ Practitioners of law, medicine and
public accounting.
• Loans for the purpose of financial
capital expenditures and current
operations.
• Loans to finance agricultural
production and other loans to farmers,
including:
113 Many of the descriptions below overlap and
are not intended to be an all-inclusive list.

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Æ Loans and advances made for the
purpose of financing agricultural
production, including the growing and
storing of crops, the marketing or
carrying of agricultural products by the
growers thereof, and the breeding,
raising, fattening, or marketing of
livestock;
Æ Loans and advances made for the
purpose of financial fisheries and
forestries, including loans to
commercial fishermen;
Æ Agricultural notes and other notes
of farmers that the credit union has
discounted, or purchased from,
merchants and dealers, either with or
without recourse to the seller;
Æ Loans and advances to farmers for
purchase of farm machinery, equipment,
and implements;
Æ Loans and advances to farmers for
all other purposes associated with the
maintenance or operations of the farm.
• Loan secured by multifamily
residential properties with 5 or more
dwelling units in structures (including
apartment buildings and apartment
hotels) used primarily to accommodate
a household on a more or less
permanent basis and cooperative-type
apartment buildings containing 5 or
more dwelling units.114
• Loans secured by real estate as
evidenced by mortgages or other liens
on business and industrial properties,
hotels, churches, hospitals, educational
and charitable institutions, dormitories,
clubs, lodges, association buildings,
‘‘homes’’ for aged persons and orphans,
golf courses, recreational facilities, and
similar properties.
• Loans to finance leases for fleets of
vehicles used for commercial purposes.
Commitment. Under the Original
Proposal, the term ‘‘commitment’’
would have been defined as any legally
binding arrangement that obligated the
credit union to extend credit or to
purchase assets.
The Board received no comments on
the definition of ‘‘commitment’’ and has
decided to retain the definition in this
proposal, but with a minor change. In
this proposal, the term ‘‘commitment’’
would be defined as any legally binding
arrangement that obligates the credit
union to extend credit, to purchase or
sell assets, or enter into a financial
transaction. The italicized words would
be added to expand the definition to
provide additional clarity and to
encompass a broader range of financial
transactions than just extending credit
or purchasing assets.
Consumer loan. Under this proposed
rule, the new term ‘‘consumer loan’’
114 Under this proposal, loans secured by one-tofour family residential property are defined as first
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would be defined as a loan to one or
more individuals for household, family,
or other personal expenditures,
including any loans secured by vehicles
generally manufactured for personal,
family, or household use regardless of
the purpose of the loan. The proposed
definition would provide further that
the term consumer loan excludes
commercial loans, loans to CUSOs, firstand junior-lien residential real estate
loans, and loans for the purchase of fleet
vehicles.
For example, under this proposed
rule, consumer loans would include
direct and indirect loans for the
following purposes:
• Purchases of new and used
passenger cars and other vehicles such
as minivans, sport-utility vehicles,
pickup trucks, and similar light trucks
or heavy duty trucks generally
manufactured for personal, family, or
household use and not used as fleet
vehicles or to carry fare-paying
passengers;
• Purchases of household appliances,
furniture, trailers, and boats;
• Repairs or improvements to the
borrower’s residence (that do not meet
the definition of a loan secured by real
estate);
• Education expenses, including
student loans;
• Medical expenses;
• Personal taxes;
• Vacations;
• Consolidation of personal debts;
• Purchases of real estate or mobile
homes to be used as the borrower’s
primary residence (that do not meet the
definition of a loan secured by real
estate); and
• Other personal expenses.
The Board is proposing to add this
new term and definition to part 702 to
distinguish loans made for a consumer
purpose from real estate loans and
commercial loans so each can be
assigned to an appropriate risk weight
category.
Contractual compensating balance.
Under this proposed rule, the new term
‘‘contractual compensating balance’’
would be defined as the funds a
commercial loan borrower must
maintain on deposit at the lender credit
union as security for the loan in
accordance with the loan agreement,
subject to a proper account hold and on
deposit as of the measurement date.
The Board is proposing this new term
because it recognizes that the portion of
commercial loans covered by
contractual compensating balances
present a lower credit risk, and thus
should be assigned a lower risk weight
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hold and maintains the compensating
balance.
Credit conversion factor (CCF). Under
this proposed rule, the new term ‘‘credit
conversion factor’’ would be defined as
the percentage used to assign a credit
exposure equivalent amount for selected
off-balance sheet accounts.
This definition is being proposed to
help clarify the process used to
calculate the credit exposure equivalent
for off-balance sheet items. Specific offbalance sheet items have a probability of
becoming an actual credit exposure and
shifting on to the balance sheet. The
CCF is an estimate of this probability.
Credit union. Under this proposed
rule, the term ‘‘credit union’’ would be
defined as a federally insured, naturalperson credit union, whether federally
or state-chartered. The proposal would
amend the current definition of the term
‘‘credit union’’ to remove the words ‘‘as
defined by 12 U.S.C. 1752(6)’’ from the
end of the definition because they are
unnecessary, and could mistakenly be
read to limit the definition of ‘‘credit
unions’’ to state-chartered credit unions.
Current. Under this proposed rule, the
new term ‘‘current’’ would be defined to
mean, with respect to any loan, that the
loan is less than 90 days past due, not
placed on non-accrual status, and not
restructured.
Commenters suggested that loans
carried on non-accrual status should not
be included with delinquent loans, and
that the Original Proposal did not take
into consideration the balances in the
ALLL if the credit union is able, under
GAAP, to reserve for individual losses.
Other commenters suggested that the
definition of ‘‘delinquent loans’’ should
be amended to match the Other Banking
Agencies’ regulations, which count
loans as delinquent only if they are 90
days or more past due.
The Board is now proposing to count
loans as non-current if they are 90 days
past due (rather than 60 days past due),
and, as explained in more detail below,
to assign them to the higher risk weight
category associated with past due loans.
This change would better align this
proposal with the definition of ‘‘current
loan’’ under the Other Banking Agencies
regulations.115 The change to 90 days
past due would also be consistent with
§ 741.3(b)(2), which specifies that a
credit union’s written lending policies
must include ‘‘loan workout
arrangements and nonaccrual standards
that include the discontinuance of
interest accrual on loans past due by 90
days or more.’’
In general, loans that are more than 90
days past due, or restructured, tend to
115 See,

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have higher incidences of default
resulting in losses. The Board is aware
that the historical and individual loan
losses are reflected in the balance of the
ALLL, and believes that removal of the
1.25 percent of assets limit on the ALLL
addresses the concerns expressed by
commenters that, under the Original
Proposal, there was a potential for
negative consequences for maintaining
an adequate ALLL for delinquent loans.
This definition would replace the
term ‘‘delinquent loans,’’ which was
used in the Original Proposal, when
referring to whether a loan is past due,
placed on non-accrual status, modified,
or restructured. The Board believes
using the term ‘‘current’’ when referring
to loans will eliminate confusion caused
by using the term ‘‘delinquent loan’’ in
reference to regulatory reporting
requirements or proper accounting
treatment. Under this second proposed
rule, loans are either current or noncurrent for purposes of determining
their appropriate risk weight category.
CUSO. Under the Original Proposal,
the term ‘‘CUSO’’ would have been
defined as a credit union service
organization as defined in parts 712 and
741.
The Board received no comments on
the proposed definition of ‘‘CUSO’’ and
has decided to retain the definition
unchanged in this proposal.
Custodian. Under this proposed rule,
the new term ‘‘custodian’’ would be
defined as a financial institution that
has legal custody of collateral as part of
a qualifying master netting agreement,
clearing agreement or other financial
agreement. The Board is proposing to
add this new term to coincide with
other changes it is proposing to make in
the derivatives section of this proposal.
Depository institution. Under this
proposed rule, the new term
‘‘depository institution’’ would be
defined as a financial institution that
engages in the business of providing
financial services; that is recognized as
a bank or a credit union by the
supervisory or monetary authorities of
the country of its incorporation and the
country of its principal banking
operations; that receives deposits to a
substantial extent in the regular course
of business; and that has the power to
accept demand deposits. The definition
provides further that the term
depository institution includes all
federally insured offices of commercial
banks, mutual and stock savings banks,
savings or building and loan
associations (stock and mutual),
cooperative banks, credit unions and
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privately insured state-chartered credit
unions.
The term depository institution would
primarily be used to address the risk
weights assigned to deposits in
depository institutions.
Derivatives Clearing Organization
(DCO). Under this proposed rule the
term ‘‘Derivatives Clearing Organization
(DCO)’’ would be defined as having the
same definition as provided by the
Commodity Futures Trading
Commission in 17 CFR 1.3(d). The
Board is proposing to add this new term
to coincide with other changes it is
proposing to make in the derivatives
section of this proposal.
Derivative contract. Under this
proposed rule, the term ‘‘derivative
contract’’ would be defined as a
financial contract whose value is
derived from the values of one or more
underlying assets, reference rates, or
indices of asset values or reference rates.
The definition would provide further
that the term derivative contract
includes interest rate derivative
contracts, exchange rate derivative
contracts, equity derivative contracts,
commodity derivative contracts, and
credit derivative contracts. The
definition would also provide that the
term derivative contract also includes
unsettled securities, commodities, and
foreign exchange transactions with a
contractual settlement or delivery lag
that is longer than the lesser of the
market standard for the particular
instrument.
The Board received no comments on
the proposed definition of ‘‘derivatives
contract.’’ This proposal, however,
includes a slightly modified definition
of derivative contract to state derivative
means a financial contract whose value
is derived from the values of one or
more underlying assets, reference rates,
or indices of asset values or reference
rates. Derivative contracts include
interest rate derivative contracts,
exchange rate derivative contracts,
equity derivative contracts, commodity
derivative contracts, and credit
derivative contracts. Derivative
contracts also include unsettled
securities, commodities, and foreign
exchange transactions with a
contractual settlement or delivery lag
that is longer than the lesser of the
market standard for the particular
instrument. The Board believes this
modification will make this proposal
more clear and accurate.
Equity investment. Under this
proposed rule, the new term ‘‘equity
investment’’ would be defined as
investments in equity securities, and
any other ownership interests,
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partnerships and limited liability
companies.
This term would be primarily used to
address the risk weights assigned to
equity exposures. The Board recognizes
that equity investments contain
significant credit risk as they are
generally in the first loss position and
depend upon continued profitable
operations of a business entity to retain
value. The liquidity of equity
investments can vary depending upon if
the investment is publicly traded or
closely held.
Equity investment in CUSOs. The
Original Proposal would have defined
the term ‘‘investment in CUSO’’ as the
unimpaired value of the credit union’s
aggregate CUSO investments as
measured under generally accepted
accounting principles on an
unconsolidated basis.
The Board received no comments on
the definition of ‘‘investments in
CUSO.’’ However, the Board has
decided to change the term and the
definition as follows. Under this
proposed rule, the new term ‘‘equity
investment in CUSOs’’ would be
defined as the unimpaired value of the
credit union’s equity investments in a
CUSO as recorded on the statement of
financial condition in accordance with
GAAP.
The Board renamed this term and
amended the definition in this proposal
to emphasize the importance of
recording equity investments in CUSOs
in accordance with GAAP and clarify
how the equity investment in a CUSO
for the assignment of risk weights is
determined. By following GAAP:
• For an unconsolidated CUSO, a
credit union must assign the risk weight
to the unimpaired value of the equity
investment as presented on the
statement of financial condition;
• For a consolidated CUSO, a credit
union’s equity investment is normally
zero since the consolidation entries
eliminate the intercompany transaction.
Exchange. Under this proposed rule
the new term ‘‘exchange’’ would be
defined as a central financial clearing
market where end users can trade
derivatives. The Board is proposing to
add this new term to coincide with
other changes it is proposing to make in
the derivatives section of this proposal.
Excluded goodwill, and excluded
other intangible assets. Under this
proposed rule, the new term ‘‘excluded
goodwill’’ would be defined as the
outstanding balance, maintained in
accordance with GAAP, of any goodwill
originating from a supervisory merger or
combination that was completed no
more than 29 days after publication of
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Register. The definition would provide
further that the term excluded goodwill
and its accompanying definition will
expire on January 1, 2025.
This proposed rule would also define
the new term ‘‘excluded other intangible
assets’’ as the outstanding balance,
maintained in accordance with GAAP,
of any other intangible assets such as
core deposit intangibles, member
relationship intangibles, or trade name
intangible originating from a
supervisory merger or combination that
was completed no more than 29 days
after publication of this rule in final
form in the Federal Register. The
definition would provide further that
the term excluded other intangible
assets and its accompanying definition
will expire on January 1, 2025.
The Board added these two
definitions as part of a response to
certain comments on the Original
Proposal and seeks to take into account
the impact goodwill or other intangible
assets recorded from transactions
defined as supervisory mergers or
combinations has on the calculation of
the risk-based capital ratio upon
implementation. This proposed
exclusion would apply to supervisory
mergers or combinations that are
completed prior to a date that is 30 days
from the date of publication of this rule
in final form in the Federal Register.
The Board intends to allow this
additional time (until approximately
2024) for supervisory mergers or
combinations related goodwill and other
intangible assets to be absorbed under
the proposed risk-based capital ratio.
Under this proposal, the amount of
goodwill deducted from the risk-based
capital ratio numerator would be
reduced by the balance of excluded
goodwill or excluded other intangible
assets recorded in accordance with
GAAP as of the measurement date.
However, credit unions would still need
to conform to GAAP in the
measurement and disclosure of goodwill
and other intangible assets. This
proposed exclusion would end on
January 1, 2025 so the last quarter-end
date with this exclusion will be
December 31, 2024. This means that any
remaining goodwill or other intangible
assets would be required to be deducted
from the risk-based capital ratio
numerator after January 1, 2025.
Exposure amount. Under this
proposed rule, the new term ‘‘exposure
amount’’ would be defined as:
• The amortized cost for investments
classified as held-to-maturity and
available-for-sale, and the fair value for
trading securities.
• The outstanding balance for Federal
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Facility Stock, Federal Home Loan Bank
Stock, nonperpetual capital and
perpetual contributed capital at
corporate credit unions, and equity
investments in CUSOs.
• The carrying value for non-CUSO
equity investments, and investment
funds.
• The carrying value for the credit
union’s holdings of general account
permanent insurance, and separate
account insurance.
• The amount calculated under
§ 702.105 of this part for derivative
contracts.
This definition would be used to
ensure the specific assets are assigned
consistent risk weights based on the
treatment of the specific assets.
Fair value. Under this proposed rule,
the new term ‘‘fair value’’ would be
defined as having the same meaning as
provided in GAAP. This definition is
important because the proper
accounting for some specific assets
subject to risk weights are recorded on
the statement of financial condition at
fair value.
Financial collateral. Under this
proposed rule, the new term ‘‘financial
collateral’’ would be defined as
collateral approved by both the credit
union and the counterparty as part of
the collateral agreement in recognition
of credit risk mitigation for derivative
contracts. The Board is proposing to add
this new term to coincide with other
changes it is proposing to make in the
derivatives section of this proposal.
First-lien residential real estate loan.
Under this proposed rule, the new term
‘‘first-lien residential real estate loan’’
would be defined as a loan or line of
credit primarily secured by a first-lien
on a one-to-four family residential
property where: (1) The credit union
made a reasonable and good faith
determination at or before
consummation of the loan that the
member will have a reasonable ability to
repay the loan according to its terms;
and (2) in transactions where the credit
union holds the first-lien and juniorlien(s), and no other party holds an
intervening lien, for purposes of this
part the combined balance will be
treated as a single first-lien residential
real estate loan.
Under the Original Proposal, the term
‘‘first mortgage real estate loan’’ would
have been defined as loans and lines of
credit fully secured by first-liens on real
estate (excluding MBLs), where the
original amortization of the mortgage
exposure does not exceed 30 years; the
loan underwriting took into account all
the borrower’s obligations, including
mortgage obligations, principal, interest,
taxes, insurance (including mortgage

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guarantee insurance) and assessments;
and the loan underwriting concluded
the borrower is able to repay the
exposure using the maximum interest
rate that may apply in the first five
years, the maximum contract exposure
over the life of the mortgage, and
verified income.
A number of commenters stated that
they believed the proposed definition of
first mortgage real estate loan would
conflict with rules promulgated by the
Consumer Financial Protection Bureau
(CFPB), which may prevent credit
unions from originating mortgage loans
that qualify as ‘‘qualified mortgages’’
under CFPB’s regulations, or are
otherwise permitted under those rules,
without incurring an additional capital
charge. One commenter suggested that
the proposed definition of first mortgage
real estate loan should be amended to
read as follows: ‘‘A loan on realty with
the benefit of a senior security interest
to all others.’’ Other commenters stated
that the definition of first mortgage real
estate loan is overbroad and should be
revised to exclude home equity lines of
credit because the risks associated with
30-year fixed-rate first-lien mortgages
and HELOCs are vastly different and
should not be assigned the same risk
weight.
In response to the comments received
on the Original Proposal, the Board is
now proposing to eliminate the term
‘‘first mortgage real estate loan’’ and the
accompanying definition and instead
use the new term ‘‘first-lien residential
real estate loan’’ for purposes of this
proposal.
The Board believes that the credit risk
for all first-lien residential real estate
loans, in which the credit union has
conducted a reasonable analysis of the
ability of the borrower to repay, are
sufficiently similar to justify a lower
risk weight than most other types of
loans. Accordingly, the Board is
proposing to remove from the definition
of first-lien residential real estate loans
the requirement that such loans not
have an amortization period exceeding
30 years.
The Board also believes, however,
that first-lien residential real estate
loans with amortizations longer than 30
years contain additional risks and must
be underwritten with great care and
monitored closely. Accordingly, the low
risk weight assigned to first-lien
residential real estate loans should not
be viewed as encouraging certain real
estate loan features which can be
harmful to the credit quality of the loan,
including an interest-only period,
negative amortization, balloon
payments, or excess upfront points and
fees.

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Credit unions must continue to make
a good-faith effort to determine before
the loan is made whether a borrower is
likely to be able to repay the loan. In
practice this means credit unions must
generally ascertain, consider, and
document a borrower’s income, assets,
employment status and stability, credit
history and current and proposed
monthly expenses.116 NCUA does not
intend for this definition to conflict
with rules promulgated by CFPB.
Rather, the Board believes the
requirement that the credit union make
a reasonable and good-faith effort that
the member has the ability to repay the
loans is consistent with CFPB
regulations and ensures the grouping of
loans receiving this relatively low risk
weight would be substantially similar in
credit quality.
The definition of first-lien residential
real estate loan would include first-lien
residential real estate loans that are not
owner occupied. First-lien residential
real estate loans that are over $50,000
and not the primary residence of the
borrower would continue to count
toward the credit union’s total of
member business loans for the purpose
of monitoring and compliance with the
statutory limitation on MBLs. However,
they would be included in the
definition of first-lien residential real
estate loans for the purpose of this part
and would be risk-weighted
accordingly.
If a credit union holds both the firstand junior-liens on a residential real
estate loan without an intervening lien
holder and the loan otherwise meets
this definition, the entire combined
balance of the loans would be assigned
the risk weight for first-lien residential
real estate loans.
GAAP. Under the Original Proposal,
the term ‘‘GAAP’’ would have been
defined as generally accepted
accounting principles as used in the
United States.
The Board received no comments on
the definition of ‘‘GAAP’’ and has
decided to retain the term in this
proposal with the following changes.
Under this proposed rule, the term
‘‘GAAP’’ would be defined as generally
accepted accounting principles in the
United States as set forth in the
Financial Accounting Standards Board’s
(FASB) Accounting Standards
Codification (ASC).
The Board is proposing to define
‘‘GAAP’’ narrowly to retain its
conventional meaning. However, credit
116 See NCUA Regulatory Alert, 14–RA–01,
Ability-to-Repay and Qualified Mortgage
Requirements from the Consumer Financial
Protection Bureau (CFPB), January 2014 for
additional information.

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unions should also follow joint
accounting issuances by the chief
accountants’ of the federal financial
institution regulatory agencies
(including NCUA) that provide
implementation guidance consistent
with GAAP practice. The guidance
issued jointly by the federal financial
institution regulatory agencies’ chief
accountants’ does not add to or modify
existing financial reporting
requirements under GAAP but often
narrows GAAP practice to address
supervisory considerations related to
financial institutions. The federal
financial institution regulatory agencies’
chief accountants have a practice of
clearing such guidance implementing
GAAP through the FASB and the SEC’s
Office of the Chief Accountant.
General account permanent
insurance. Under this proposed rule, the
new term ‘‘general account permanent
insurance’’ would be defined as an
account into which all premiums,
except those designated for separate
accounts are deposited, including
premiums for life insurance and fixed
annuities and the fixed portfolio of
variable annuities, whereby the general
assets of the insurance company support
the policy.
Under this proposal, general account
permanent insurance would include
direct obligations to the insurance
provider. This would mean that the
credit risk associated with general
account permanent insurance is to the
insurance company, which generally
makes these insurance accounts have a
lower credit risk than separate account
insurance, which is a segregated
accounting and reporting account held
separately from the insurer’s general
assets.
General obligation. Under this
proposed rule, the new term ‘‘general
obligation’’ would be defined as a bond
or similar obligation that is backed by
the full faith and credit of a public
sector entity.
The Board is proposing to add this
definition to clarify that general
obligation bonds or debt are generally
backed by the credit and ‘‘taxing power’’
of the issuing jurisdiction rather than
the revenue from a given project.
Goodwill. Under the Original
Proposal, the term ‘‘goodwill’’ would
have been defined as an intangible asset
representing the future economic
benefits arising from other assets
acquired in a business combination (i.e.,
merger) that are not individually
identified and separately recognized.
The Board received no comments on
the definition of ‘‘goodwill’’ and has
decided to retain the definition in this
proposed rule, with the addition that

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goodwill must be maintained in
accordance with GAAP and does not
include a new term ‘‘excluded
goodwill.’’ Accordingly, under this
proposal, the term ‘‘goodwill’’ would be
defined as an intangible asset,
maintained in accordance with GAAP,
representing the future economic
benefits arising from other assets
acquired in a business combination
(e.g., merger) that are not individually
identified and separately recognized.
Goodwill does not include excluded
goodwill. These proposed changes are
intended to clarify the definition and
make it consistent with other changes
being made in this proposal.
Government guarantee. Under this
proposed rule, the new term
‘‘government guarantee’’ would be
defined as a guarantee provided by the
U.S. Government, FDIC, NCUA or other
U.S. Government agencies, or a public
sector entity.
The Board recognizes that government
guarantees provide enhanced credit
protection, particularly to loans, and
revised the risk weights for the portion
of loans with a government guarantee to
a lower risk weight.
Government-sponsored enterprise
(GSE). Under this proposed rule, the
new term ‘‘government-sponsored
enterprise’’ would be defined as an
entity established or chartered by the
U.S. Government to serve public
purposes specified by the U.S. Congress,
but whose debt obligations are not
explicitly guaranteed by the full faith
and credit of the U.S. Government.
Guarantee. Under this proposed rule,
the new term ‘‘guarantee’’ would be
defined as a financial guarantee, letter of
credit, insurance, or similar financial
instrument that allows one party to
transfer the credit risk of one or more
specific exposures to another party. The
Board is proposing to add this definition
to provide clarity.
Identified losses. Under the Original
Proposal, the term ‘‘identified losses’’
would have been defined as those items
that have been determined by an
evaluation made by a state or federal
examiner, as measured on the date of
examination, to be chargeable against
income, capital and/or valuation
allowances such as the allowance for
loan and lease losses. That proposed
definition also would have provided the
following examples of identified losses:
Assets classified as losses, off-balance
sheet items classified as losses, any
provision expenses that are necessary to
replenish valuation allowances to an
adequate level, liabilities not shown on
the books, estimated losses in
contingent liabilities, and differences in
accounts that represent shortages.

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The Board received no comments on
the proposed definition of ‘‘identified
losses.’’ Nevertheless, the Board is now
proposing to amend the definition of
‘‘identified losses’’ from the Original
Proposal to ensure that identified losses
would be measured in accordance with
GAAP. Accordingly, under this
proposal, the term ‘‘identified losses’’
would be defined as those items that
have been determined by an evaluation
made by NCUA, or in the case of a statechartered credit union, the appropriate
state official, as measured on the date of
examination in accordance with GAAP,
to be chargeable against income, equity
or valuation allowances such as the
allowances for loan and lease losses.
The definition would provide further
that examples of identified losses would
be assets classified as losses, off-balance
sheet items classified as losses, any
provision expenses that are necessary to
replenish valuation allowances to an
adequate level, liabilities not shown on
the books, estimated losses in
contingent liabilities, and differences in
accounts that represent shortages.
Industrial development bond. Under
this proposed rule, the new term
‘‘industrial development bond’’ would
be defined as a security issued under
the auspices of a state or other political
subdivision for the benefit of a private
party or enterprise where that party or
enterprise, rather than the government
entity, is obligated to pay the principal
and interest on the obligation.
This definition would be added to
ensure the ultimate obligor’s risk weight
is used for risk-based capital
calculations.
Intangible assets. Under the Original
Proposal, the term ‘‘intangible assets’’
would have been defined as those assets
that are required to be reported as
intangible assets on a credit union’s Call
Report, including but not limited to
purchased credit card relationships,
goodwill, favorable leaseholds, and core
deposit value.
The Board received no comments on
the definition of ‘‘Intangible assets’’, but
is proposing to revise the definition for
clarity. Accordingly, under this
proposal, the term ‘‘intangible assets’’
would be defined as assets, maintained
in accordance with GAAP, other than
financial assets, that lack physical
substance. This proposed change would
not affect the substance of the
definition, but will make the definition
clearer. Additionally, the Board is
proposing to add a definition for ‘‘other
intangibles’’, which are a subset of
‘‘intangible assets,’’ and discussed in
more detail below.
Investment fund. Under this proposed
rule, the new term ‘‘investment fund’’

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would be defined as an investment with
a pool of underlying investment assets.
The proposed definition would provide
further that the term investment fund
includes an investment company that is
registered under § 8 of the Investment
Company Act of 1940, as amended, and
collective investment funds or common
trust investments that are unregistered
investment products that pool fiduciary
client assets to invest in a diversified
pool of investments.
The Board is proposing to define the
term ‘‘investment fund’’ broadly to
capture more than SEC-registered
investment companies and funds
offered by banks. This broader
definition is intended to allow for the
use of the look-through approaches used
in the Other Banking Agencies’ capital
regulations,117 which are discussed in
more detail below, to separate account
insurance or other pooled investments.
Junior-lien residential real estate loan.
Under this proposed rule, the new term
‘‘junior-lien residential real estate loan’’
would be defined as a loan or line of
credit secured by a subordinate lien on
a one-to-four family residential
property.
Due to the observed higher
delinquency and losses of junior lien
residential real estate loans, and
consistent with the risk weights
assigned by the Other Banking
Agencies,118 the Board proposes
assigning higher risk weights for juniorlien residential real estate loans than for
first-lien residential real estate loans.
This definition would generally include
all residential real estate loans that do
not meet the definition of a first-lien
residential real estate loans since the
credit union is secured by a second or
subsequent lien on the residential
property loan.
Loan to a CUSO. Under the Original
Proposal, the term ‘‘loans to CUSO’’
would have been defined as the
aggregate outstanding loan balance,
available line(s) of credit from the credit
union, and guarantees the credit union
has made to or on behalf of a CUSO.
The Board received no comments on
the definition of ‘‘Loans to CUSOs’’ and
has decided to retain the term in this
proposal with the following changes to
the term and the definition. Under this
proposed rule the term ‘‘loan to a
CUSO’’ would be defined as the
outstanding balance of any loan from a
credit union to a CUSO as recorded on
the statement of financial condition in
accordance with GAAP.
The Board originally proposed to add
this definition to capture the importance
117 See,
118 See,

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of recording loans to a CUSO in
accordance with GAAP and to clarify
how the assignment of risk weights
would be determined. By following
GAAP:
• For an unconsolidated CUSO, a
credit union must assign the risk weight
to the outstanding balance of the loans
to the CUSO as presented on the
statement of financial condition;
• For a consolidated CUSO, the loan
to a CUSO is normally zero since the
consolidation entries eliminate the
intercompany transaction.
Loan secured by real estate. Under
this proposed rule, the new term ‘‘loan
secured by real estate’’ would be
defined as a loan that, at origination, is
secured wholly or substantially by a
lien(s) on real property for which the
lien(s) is central to the extension of the
credit. The definition would provide
further that a lien is ‘‘central’’ to the
extension of credit if the borrowers
would not have been extended credit in
the same amount or on terms as
favorable without the lien(s) on real
property. The definition would also
provide that, for a loan to be ‘‘secured
wholly or substantially by a lien(s) on
real property,’’ the estimated value of
the real estate collateral at origination
(after deducting any more senior liens
held by others) must be greater than 50
percent of the principal amount of the
loan at origination.
The Board proposes using this term to
ensure consistency in the assignment of
risk weights for real estate loans. The
definition would clarify that the terms
of the loan are predicated on the
existence of the lien on real property
and that the real estate value at
origination of the loans must be at least
50 percent of the principal amount of
the loan to meet the definition. The
Board does not intend for this to mean
that a real estate loan with a 50 percent
loan-to-value ratio is an appropriate
credit risk but rather such a loan only
meets the definition of secured by real
estate.
Loans transferred with limited
recourse. Under the Original Proposal,
the term ‘‘loans transferred with limited
recourse’’ would have been defined as
the total principal balance outstanding
of loans transferred, including
participations, for which the transfer
qualified for true sale accounting
treatment under GAAP, and for which
the transferor credit union retained
some limited recourse (i.e., insufficient
recourse to preclude true sale
accounting treatment). The proposed
definition would also have clarified that
the term does not include transfers that
qualify for true sale accounting
treatment but contain only routine

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representation and warranty paragraphs
that are standard for sale on the
secondary market, provided the credit
union is in compliance with all other
related requirements such as capital
requirements.
Commenters suggested that the
proposed definition be amended to
represent the true risk associated with
that product. Commenters stated that
the proposed definition mirrors the Call
Report field and includes the ‘‘total
principal balance outstanding of loans
transferred . . . for which the transferor
credit union retained some limited
recourse.’’ Although commenters stated
they appreciated NCUA’s efforts to align
defined terms with existing Call Report
fields, they countered that contingent
liabilities should be taken into account
only to the extent the credit union
retains contractual and legal liability on
the exposure. On partial recourse loans,
commenters suggested that the credit
union only retains a small fraction of
the liability and is not exposed on the
total principal balance. However,
commenters stated that, under the
Original Proposal, a credit union would
be treated as holding the full balance as
a contingent liability. Commenters
suggested that this was a significant
misrepresentation of the risk and
created a disincentive for credit unions
to utilize limited recourse loan sale
relationships, which provide credit
unions with a valuable option in
managing liquidity risk and IRR, while
still incentivizing the credit union to
make high-quality loans. Commenters
stated that the proposal would penalize
credit unions that have utilized these
programs prudently and effectively as
part of a safe and sound asset
management program. To remedy this
problem, commenters suggested the
definition of the term ‘‘loans transferred
with limited recourse’’ and the
corresponding Call Report field should
be amended to reflect the true recourse
exposure of the credit union.
In response to these comments, the
Board is now proposing to amend the
calculation for determining the riskbased capital requirement for loans
transferred with limited recourse to
more accurately align the capital
requirement with the true recourse
exposure. Whereas the Original
Proposal would have required the credit
union to multiply the face amount, or
notional value, of the loans transferred
with limited recourse by the appropriate
credit conversion factor and then apply
the appropriate risk weight, this
proposed rule would amend the
calculation to require a credit union to
multiply the off-balance sheet exposure
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factor and then apply the appropriate
risk weight. A new definition for offbalance sheet exposure is included in
this proposal and is discussed in more
detail below. In addition, the definition
of ‘‘loans transferred with limited
recourse’’ is revised by amending all
references to ‘‘warranty paragraphs’’ to
read ‘‘warranty clauses’’ to clarify that it
is the content of the document and not
its length that is important.
Accordingly, under this proposed
rule, the term ‘‘Loans transferred with
limited recourse’’ would be defined as
the total principal balance outstanding
of loans transferred, including
participations, for which the transfer
qualified for true sale accounting
treatment under GAAP, and for which
the transferor credit union retained
some limited recourse (i.e., insufficient
recourse to preclude true sale
accounting treatment). The definition
would provide further that the term
loans transferred with limited recourse
excludes transfers that qualify for true
sale accounting treatment but contain
only routine representation and
warranty clauses that are standard for
sales on the secondary market, provided
the credit union is in compliance with
all other related requirements, such as
capital requirements.
Mortgage-backed security (MBS).
Under this proposed rule, the new term
‘‘mortgage-backed security’’ would be
defined as a security backed by first- or
junior-lien mortgages secured by real
estate upon which is located a dwelling,
mixed residential and commercial
structure, residential manufactured
home, or commercial structure. This
definition would be similar to the
definition of MBS in part 704 of NCUA’s
regulations. The only difference is that
the phrase ‘‘first- or junior-lien
mortgages’’ in the proposed part 702
definition replaces the phrase ‘‘first or
second mortgage’’ in the definition in
part 704. This makes the proposed part
702 definition more consistent with the
terminology used throughout the
proposal.
Mortgage partnership finance
program. Under this proposed rule, the
new term ‘‘mortgage partnership finance
program’’ would be defined as any
Federal Home Loan Bank program
through which loans are originated by a
depository institution that are
purchased or funded by the Federal
Home Loan Banks, where the depository
institutions receive fees for managing
the credit risk of the loans and servicing
them. The definition would provide
further that the credit risk must be
shared between the depository
institutions and the Federal Home Loan
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Adding this definition is necessary
because this proposal would apply a
separate risk weight to the off-balance
sheet exposure resulting from loans
transferred under the defined program.
Additionally, the method that would be
used to calculate the risk-based capital
requirement for loans in the defined
program would be different from other
loans transferred with limited recourse.
A separate definition and risk weight for
loans sold under this program would
result in a risk-based capital
requirement consistent with the credit
loss history of this program.
Mortgage servicing assets. Under the
Original Proposal, the term ‘‘mortgage
servicing asset’’ would have been
defined as those assets (net of any
related valuation allowances) resulting
from contracts to service loans secured
by real estate (that have been securitized
or owned by others) for which the
benefits of servicing are expected to
more than adequately compensate the
servicer for performing the servicing.
The Board received no comments on
the definition of ‘‘mortgage servicing
asset’’ and has decided to retain the
proposed definition in this proposal
with the following changes for clarity.
Credit unions are expected to follow
GAAP when reporting assets, which is
intended to clarify that credit unions
must report mortgage servicing assets
net of any related valuation allowance
because it is required by GAAP.
Accordingly, under this proposed rule,
the term ‘‘mortgage servicing assets’’
would be defined as those assets,
maintained in accordance with GAAP,
resulting from contracts to service loans
secured by real estate (that have been
securitized or owned by others) for
which the benefits of servicing are
expected to more than adequately
compensate the servicer for performing
the servicing.
NCUSIF. Under the Original Proposal,
the term ‘‘NCUSIF’’ means the National
Credit Union Share Insurance Fund as
defined by 12 U.S.C. 1783. The Board
received no comments on the definition
of ‘‘NCUSIF’’ and has decided to retain
the term in this proposal without
modification.
Net worth. Generally consistent with
the current rule, under this proposed
rule the term ‘‘net worth’’ would be
defined as:
• The retained earnings balance of the
credit union at quarter-end as
determined under GAAP, subject to
bullet 3 of this definition.
• For a low-income-designated credit
union, net worth also includes
secondary capital accounts that are
uninsured and subordinate to all other

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claims, including claims of creditors,
shareholders, and the NCUSIF.
• For a credit union that acquires
another credit union in a mutual
combination, net worth also includes
the retained earnings of the acquired
credit union, or of an integrated set of
activities and assets, less any bargain
purchase gain recognized in either case
to the extent the difference between the
two is greater than zero. The acquired
retained earnings must be determined at
the point of acquisition under GAAP. A
mutual combination, including a
supervisory combination, is a
transaction in which a credit union
acquires another credit union or
acquires an integrated set of activities
and assets that is capable of being
conducted and managed as a credit
union.
• The term ‘‘net worth’’ also includes
loans to and accounts in an insured
credit union, established pursuant to
§ 208 of the FCUA, provided such loans
and accounts:
Æ Have a remaining maturity of more
than five years;
Æ Are subordinate to all other claims
including those of shareholders,
creditors, and the NCUSIF;
Æ Are not pledged as security on a
loan to, or other obligation of, any party;
Æ Are not insured by the NCUSIF;
Æ Have non-cumulative dividends;
Æ Are transferable; and
Æ Are available to cover operating
losses realized by the insured credit
union that exceed its available retained
earnings.’’
The Original Proposal did not revise
the definition of the term ‘‘net worth,’’
and NCUA did not receive any
comments on the definition. This
proposal, however, would delete from
the current definition of net worth the
sentence ‘‘Retained earnings consists of
undivided earnings, regular reserve, and
any other appropriations designed by
management or regulatory authorities,’’
which is included in paragraph (f)(1) of
the current definition. That sentence
lists items that are included in retained
earnings and is not necessary. No
substantive change is intended by this
amendment.
Paragraph (f)(3) of the current
definition would also be revised to
clarify that the term ‘‘mutual
combination’’ includes a ‘‘supervisory
combination’’ because this proposal
introduces the new term supervisory
merger to part 702, which is a specific
type of mutual combination.
Net worth ratio. Under the Original
Proposal, the term ‘‘net worth ratio’’
means the ratio of the net worth of the
credit union to the total assets of the
credit union truncated to two decimal

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places. The Board received no
comments on the definition of ‘‘net
worth ratio’’ and has decided to retain
the term in this proposal without
modification.
New credit union. To provide clarity
and reduce the number of redundant
rule sections, under this proposed rule,
the term ‘‘new credit union’’ would be
defined as having the same meaning as
in § 702.201. No substantive changes to
the current definition of ‘‘new credit
union’’ are intended.
Nonperpetual capital. Under this
proposed rule, the new term
‘‘nonperpetual capital’’ would be
defined as having the same meaning as
in 12 CFR 704.2 for consistency.
Off-balance sheet items. Under the
Original Proposal, the term ‘‘off-balance
sheet items’’ would have been defined
as items such as commitments,
contingent items, guarantees, certain
repo-style transactions, financial
standby letters of credit, and forward
agreements that are not included on the
balance sheet but are normally included
in the financial statement footnotes.
The Board received no comments on
the definition of ‘‘off-balance sheet
items,’’ but is proposing to change the
words ‘‘balance sheet’ in the definition
to ‘‘statement of financial condition.’’
Accordingly, under this proposed rule,
the term ‘‘off-balance sheet items’’
would be defined as items such as
commitments, contingent items,
guarantees, certain repo-style
transactions, financial standby letters of
credit, and forward agreements that are
not included on the statement of
financial condition, but are normally
reported in the financial statement
footnotes.
The Board is proposing to make this
change in a number of places
throughout the rule to make the rule
more accurate and to clarify the
definition for the reader.
Off-balance sheet exposure. Under
this proposed rule, the new term ‘‘offbalance sheet exposure’’ would be
defined as follows, depending on the
type of exposure: (1) For loans sold
under the Federal Home Loan Bank
mortgage partnership finance (MPF)
program, the outstanding loan balance
as of the reporting date, net of any
related valuation allowance; (2) for all
other loans transferred with limited
recourse or other seller-provided credit
enhancements and that qualify for true
sales accounting, the maximum
contractual amount the credit union is
exposed to according to the agreement,
net of any related valuation allowance;
(3) for unfunded commitments, the
remaining unfunded portion of the
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The Board added the definition of offbalance sheet exposure to clarify the
amount of the off-balance sheet item
that will be used to calculate a credit
union’s risk-based capital ratio.
On-balance sheet. Under this
proposal, the term ‘‘on-balance sheet’’
would be defined as a credit union’s
assets, liabilities, and equity, as
disclosed on the statement of financial
condition at a specific point in time.
Other intangible assets. Under this
proposed rule, the new term ‘‘other
intangible assets’’ would be defined as
intangible assets, other than servicing
assets and goodwill, maintained in
accordance with GAAP. The definition
would provide further that other
intangible assets does not include
excluded other intangible assets.
Under the Original Proposal, the term
‘‘intangible assets’’ would have been
defined as those assets that are required
to be reported as intangible assets on a
credit union’s Call Report, including but
not limited to purchased credit card
relationships, goodwill, favorable
leaseholds, and core deposit value.
The Board received no comments on
the proposed definition of ‘‘intangible
assets,’’ but has taken the opportunity in
this proposed rule to clarify the
definition. The term intangible asset is
typically defined by GAAP and includes
goodwill. However, in the context of
deductions from the numerator of the
risk-based capital ratio, goodwill is
already a deduction. Further, servicing
assets are also typically considered an
intangible asset. However, because
servicing assets can typically be readily
sold in the marketplace, the Board
believes that intangible assets excluded
from the risk-based capital ratio
numerator should not include servicing
assets. To simplify this issue, the Board
has defined the term ‘‘other intangible
assets’’ to be those assets defined under
GAAP as intangible assets, except
goodwill and servicing assets. The
Board notes that this is not a substantive
change between the two proposals, but
merely a clarification to make the rule
easier to read and understand.
Over-the-counter (OTC) interest rate
derivative contract. Under this proposed
rule, the new term ‘‘over-the-counter
(OTC) interest rate derivative contract’’
would be defined as a derivative
contract that is not cleared on an
exchange. The Board is proposing to
add this new term to coincide with
other changes it is proposing to make in
the derivatives section of this proposal.
Perpetual contributed capital. Under
this proposed rule, the new term
‘‘perpetual contributed capital’’ would
be defined as having the same meaning
as in § 704.2 of this chapter.

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Public sector entity (PSE). Under this
proposed rule, the new term ‘‘public
sector entity’’ would be defined as a
state, local authority, or other
governmental subdivision of the United
States below the sovereign level.
Qualifying master netting agreement.
Under this proposed rule, the term
‘‘qualifying master netting agreement’’
would be defined as a written, legally
enforceable agreement, provided that:
• The agreement creates a single legal
obligation for all individual transactions
covered by the agreement upon an event
of default, including upon an event of
conservatorship, receivership,
insolvency, liquidation, or similar
proceeding, of the counterparty;
• The agreement provides the credit
union the right to accelerate, terminate,
and close out on a net basis all
transactions under the agreement and to
liquidate or set off collateral promptly
upon an event of default, including
upon an event of conservatorship,
receivership, insolvency, liquidation, or
similar proceeding, of the counterparty,
provided that, in any such case, any
exercise of rights under the agreement
will not be stayed or avoided under
applicable law in the relevant
jurisdictions, other than in receivership,
conservatorship, resolution under the
Federal Deposit Insurance Act, Title II
of the Dodd-Frank Wall Street Reform
and Consumer Protection Act, or under
any similar insolvency law applicable to
GSEs;
• The agreement does not contain a
walkaway clause (that is, a provision
that permits a non-defaulting
counterparty to make a lower payment
than it otherwise would make under the
agreement, or no payment at all, to a
defaulter or the estate of a defaulter,
even if the defaulter or the estate is a net
creditor under the agreement); and
• In order to recognize an agreement
as a qualifying master netting agreement
for purposes of this part, a credit union
must conduct sufficient legal review, at
origination and in response to any
changes in applicable law, to conclude
with a well-founded basis (and maintain
sufficient written documentation of that
legal review) that:
Æ The agreement meets the
requirements of paragraph (2) of this
definition; and
Æ In the event of a legal challenge
(including one resulting from default or
from conservatorship, receivership,
insolvency, liquidation, or similar
proceeding), the relevant court and
administrative authorities would find
the agreement to be legal, valid, binding,
and enforceable under the law of
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The Board has retained this definition
from the Original Proposal with only
minor clarifying amendments.
Recourse. Under this proposed rule,
the new term ‘‘recourse’’ would be
defined as a credit union’s retention, in
form or in substance, of any credit risk
directly or indirectly associated with an
asset it has transferred that exceeds a
pro-rata share of that credit union’s
claim on the asset and disclosed in
accordance with GAAP. The definition
would provide further that if a credit
union has no claim on an asset it has
transferred, then the retention of any
credit risk is recourse. The definition
would also provide that a recourse
obligation typically arises when a credit
union transfers assets in a sale and
retains an explicit obligation to
repurchase assets or to absorb losses due
to a default on the payment of principal
or interest or any other deficiency in the
performance of the underlying obligor
or some other party. Finally, the
definition would provide that recourse
may also exist implicitly if the credit
union provides credit enhancement
beyond any contractual obligation to
support assets it has transferred.
Residential mortgage-backed security.
Under this proposed rule, the new term
‘‘residential mortgage-backed security’’
would be defined as a mortgage-backed
security backed by loans secured by a
first-lien on residential property.
The Board proposes to define
‘‘residential mortgage-backed security’’
similarly to the conventional usage of
that term. This definition was added to
allow for non-subordinated mortgagebacked securities backed by first-lien
real estate loans to receive the same risk
weight as first-lien residential real estate
loans.
Residential property. Under this
proposed rule, the new term
‘‘residential property’’ would be defined
as a house, condominium unit,
cooperative unit, manufactured home,
or the construction thereof, and
unimproved land zoned for one-to-four
family residential use. The definition
would provide further that the term
residential property excludes boats and
motor homes, even if used as a primary
residence, and timeshare property.
The purpose of this new term is to
broadly define the types of property that
will be considered residential property.
The definition is intended to allow for
the inclusion of single family residential
construction loans. The definition is
intended to exclude larger scale
speculative residential land
transactions, which would be
considered commercial loans for
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Restructured. Under this proposed
rule, the new term ‘‘restructured’’ would
be defined, with respect to any loan, as
a restructuring of the loan in which a
credit union, for economic or legal
reasons related to a borrower’s financial
difficulties, grants a concession to the
borrower that it would not otherwise
consider. According to the definition of
‘‘current’’ loan in this proposal, as
restructured loan would not be
considered a ‘‘current’’ loan. The
definition would provide further that
the term restructured excludes loans
modified or restructured solely pursuant
to the U.S. Treasury’s Home Affordable
Mortgage Program.
The restructuring of a loan may
include, but is not necessarily limited
to: (1) The transfer from the borrower to
the lending credit union of real estate,
receivables from third parties, other
assets, or an equity interest in the
borrower, in full or partial satisfaction
of a loan; (2) a modification of the loan
terms, such as a reduction of the stated
interest rate, principal, or accrued
interest or an extension of the maturity
date at a stated interest rate lower than
the current market rate for new debt
with similar risk; or (3) a combination
of the above.119 A loan extended or
renewed at a stated interest rate equal to
the current market interest rate for new
debt with similar risk is not a
restructured loan.
The Board proposes to add the
definition of ‘‘restructured’’ because a
loan that is restructured contains
elements, as addressed above, which
increase the credit risk of the loan and
therefore is assigned a higher risk
weight associated with non-current
loans. This definition also enables the
definition of current loan to better align
with the Other Banking Agencies 120
while addressing the same exception for
loans modified or restructured pursuant
to the U.S. Treasury’s Home Affordable
Mortgage Program.
Revenue obligation. Under this
proposed rule, the new term ‘‘revenue
obligation’’ would be defined as a bond
or similar obligation that is an
obligation of a PSE, but which the PSE
is committed to repay with revenues
from the specific project financed rather
than general tax funds.
Revenue obligation bonds or debt are
generally paid with revenues from the
specific project financed rather than the
general credit and taxing power of the
issuing jurisdiction.
Risk-based capital ratio. Under the
Original Proposal, the term ‘‘risk-based
119 FASB ASC 310–40, ‘‘Troubled Debt
Restructuring by Creditors.’’
120 See 12 U.S.C. 324.32(g).

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capital ratio’’ would have been defined
as the percentage, rounded to two
decimal places, of the risk-based capital
ratio numerator to total risk weighted
assets, as calculated in accordance with
§ 702.104(a).
A number of commenters raised
concerns with the proposed changes
that would have been made to the
terminology in the current rule,
including adding the new term ‘‘riskbased capital ratio’’ to the rule. Several
commenters suggested that the Board
would be redefining a statutorily
defined term by using the proposed
term ‘‘risk-based capital ratio’’ in the
rule instead of the statutory term ‘‘riskbased net worth ratio’’ in the proposed
rule.
The Board disagrees with this
comment for reasons that are discussed
in more detail in the portion of the
preamble relating to § 702.102 below.
Other than the comment above, the
Board received no comments on the
substance of the definition of ‘‘riskbased capital ratio’’ and has decided to
retain the definition in this proposal
with only non-substantive changes.
Accordingly, under this proposed rule
the term ‘‘risk-based capital ratio’’
would be defined as the percentage,
rounded to two decimal places, of the
risk-based capital ratio numerator to risk
weighted assets, as calculated in
accordance with § 702.104(a).
Risk-weighted assets. Under the
Original Proposal, the term ‘‘riskweighted assets’’ would have been
defined as the total risk-weighted assets
as calculated in accordance with
§ 702.104(c).
The Board received no comments on
the definition of ‘‘risk-weighted assets’’
and has decided to retain the definition
unchanged in this proposal.
Secured consumer loan. Under this
proposed rule, the new term ‘‘secured
consumer loan’’ would be defined as a
consumer loan associated with
collateral or other item of value to
protect against loss where the creditor
has a perfected security interest in the
collateral or other item of value.
The Board recognizes that a secured
consumer loan has lower credit risk
than an unsecured consumer loan and,
therefore, the Board assigns secured
consumer loans to a lower risk weight
than unsecured consumer loans.
Secured consumer loans generally have
lower delinquency rates and lower
charge-off rates than unsecured
consumer loans. Secured consumer
loans generally include those
collateralized by new and used vehicles,
all-terrain vehicles, recreational
vehicles, boats, motorcycles, and other
items with a title and could also include

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a perfected security interest in furniture,
fixtures, equipment, antiques,
investments and collectables.
Senior executive officer. Under the
Original Proposal, the term ‘‘senior
executive officer’’ would have been
defined as a senior executive officer as
defined by § 701.14(b)(2).
The Board received no comments on
the definition of ‘‘senior executive
officer’’ and has decided to retain the
definition unchanged in this proposal.
Separate account insurance. Under
this proposed rule, the new term
‘‘separate account insurance’’ would be
defined as an account into which a
policyholder’s cash surrender value is
supported by assets segregated from the
general assets of the carrier.
The Board added the definition of
separate account insurance. The credit
risk associated with separate account
insurance may be higher than for
general account permanent insurance
because the separate account insurance
is a segregated accounting and reporting
account held separately from the
insurer’s general assets. The
investments in the separate account
would typically not be permissible for
federal credit unions; therefore the
separate account insurance is treated as
if it were a non-part 703 compliant
investment fund.
Shares. Under the Original Proposal,
the term ‘‘shares’’ means deposits,
shares, share certificates, share drafts, or
any other depository account authorized
by federal or state law. The Board did
not receive any comments on this term
and, therefore, has retained it in this
proposal, without modification.
Share-secured loan. Under this
proposed rule, the new term ‘‘sharesecured loan’’ would be defined as a
loan fully secured by shares on deposit
at the credit union making the loan, and
does not included the imposition of a
statutory lien under 12 CFR 701.39.
The Board recognizes that sharesecured loans have a low credit risk. It
added this new definition to clarify
which loans can be classified as share
secured and, therefore, assigned a 20
percent risk weight. A credit union
should have proper internal controls to
ensure that pledged shares are not
withdrawn prior to the full payment of
the loan they secure. This definition
specifically excludes a loan upon which
a credit union has impressed a statutory
lien pursuant to § 701.39 of NCUA’s
regulations, where the subject loan was
not originated as share-secured.
STRIPS. Under this proposed rule, the
new term ‘‘STRIPS’’ would be defined
as separate traded registered interest
and principal security.

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The Board proposes to define
‘‘STRIPS’’ similarly to its conventional
usage. This definition is meant to define
investments that are created by
separating a coupon paying security into
distinct interest-only and principal-only
securities.
Structured product. Under this
proposed rule, the new term ‘‘structured
product’’ would be defined as an
investment that is linked, via return or
loss allocation, to another investment or
reference pool.
The Board proposes to define
‘‘structured product’’ to include
investments that are created to behave
like other investments. This definition
is meant to ensure bonds that are
indexed to equities are treated as
equities for risk weight purposes. This
definition is also meant to ensure that
debentures that have losses that are
allocated similarly to subordinated
securities are treated as subordinated
securities.
Subordinated. Under this proposed
rule, the new term ‘‘subordinated’’
would mean, with respect to an
investment, that the investment has a
junior claim on the underlying collateral
or assets to other investments in the
same issuance. The definition would
provide further that the term
subordinated does not apply to
securities that are junior only to money
market fund eligible securities in the
same issuance.
The Board recognizes that
subordinated investments can contain
substantial and complicated credit risk
elements. The definition of
subordinated is designed to encompass
all investments that take losses before a
more senior claim takes losses. This
definition would not include an
investment that was once subordinate to
a senior investment, but then became
non-subordinate because the previously
senior investment paid off.
Supervisory merger or combination.
Under this proposed rule, the new term
‘‘supervisory merger or combination’’
would be defined as a transaction that
involved the following:
• An assisted merger or purchase and
assumption where funds from the
NCUSIF are provided to the continuing
credit union;
• A merger or purchase and
assumption classified by NCUA as an
‘‘emergency merger’’ where the acquired
credit union is either insolvent or ‘‘in
danger of insolvency’’ as defined under
appendix B to part 701 of this chapter;
or
• A merger or purchase and
assumption that included NCUA’s or
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identification and selection of the
continuing credit union.
The Board has added this definition
to clarify which merger or combination
transactions would be subject to an
extended time period for absorbing the
directly related goodwill and other
intangible assets that are part of the
transaction.
Swap dealer. Under this proposed
rule, the new term ‘‘swap dealer’’ would
be defined as having the same meaning
as defined by the Commodity Futures
Trading Commission in 17 CFT 1.3(ggg).
The Board is proposing to add this new
term to coincide with other changes it
is proposing to make in the derivatives
section of this proposal.
Total assets. The Original Proposal
would have retained the definition of
‘‘total assets’’ in current § 702.2, but
would have restructured the definition
and provided additional clarifying
language. Under proposed paragraph (1)
under the definition of ‘‘total assets,’’ for
each quarter, a credit union must elect
one of the four measures of total assets
listed in paragraph (2) of the definition
to apply for all purposes under part 702
except §§ 702.103 through 702.105 (riskbased capital requirement). Proposed
paragraph (2) under the definition of
total assets would have provided that
‘‘total assets’’ means a credit union’s
total assets as measured by either: (i)
The credit union’s total assets measured
by the average of quarter-end balances
of the current and three preceding
calendar quarters; (ii) the credit union’s
total assets measured by the average of
month-end balances over the three
calendar months of the applicable
calendar quarter; (iii) the credit union’s
total assets measured by the average
daily balance over the applicable
calendar quarter; or (iv) the credit
union’s total assets measured by the
quarter-end balance of the applicable
calendar quarter as reported on the
credit union’s Call Report.
The Board received no comments on
the definition of ‘‘total assets’’ and has
decided to retain the definition in this
proposal with only minor conforming
changes.
Tranche. Under this proposed rule,
the new term ‘‘tranche’’ would be
defined as one of a number of related
securities offered as part of the same
transaction. The definition would
provide further that the term tranche
includes a structured product if it has a
loss allocation based off of an
investment or reference pool.
The Board proposes to define
‘‘tranche’’ similarly to its conventional
usage for securitizations. Structured
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if they are allocated losses based on a
reference investment or reference pool.
Unsecured consumer loan. Under this
proposed rule, the new term ‘‘unsecured
consumer loan’’ would be defined as a
consumer loan not secured by collateral.
The Board recognizes that unsecured
consumer loans generally have a higher
credit risk than secured consumer loans.
Unsecured consumer loans have higher
delinquency rates and higher charge-off
rates than secured consumer loans.
Unsecured consumer loans generally
include credit card loans, signature
loans, and co-maker and cosigner loans.
Accordingly, the Board assigns
unsecured consumer loans to a higher
risk weight category than secured
consumer loans.
U.S. Government agency. Under the
Original Proposal, the term ‘‘U.S.
Government agency’’ would have been
defined as an instrumentality of the U.S.
Government whose obligations are fully
and explicitly guaranteed as to the
timely payment of principal and interest
by the full faith and credit of the U.S.
Government.
The Board received no comments on
the definition of ‘‘U.S. Government
agency’’ and has decided to retain the
proposed definition unchanged in this
proposal.
Weighted-average life of investments.
Under this proposed rule, the definition
of ‘‘weighted-average life of
investments’’ and the entirety of current
§ 702.105 of NCUA’s regulation would
be removed. The use of weightedaverage life (WAL) of investments for
the assignment of risk weights is in the
current risk-based capital measure and
would have been modified with lower
capital requirements for shorter average
life investments in the Original
Proposal. Many commenters objected to
the use of WAL for the assignment of
risk weights for investments because the
risk weights are based primarily on
interest rate and liquidity risks, not
credit risk.
In response to the comments, the
Board now proposes to assign
investment risk weights primarily based
on credit risk with risk weights more
comparable to the risk weights assigned
by the Other Banking Agencies.121 This
adjustment would require additional
granularity in the reporting of
investments on the Call Report.
The Board requests comments on the
definitions included in this proposal.
A. Subpart A—Prompt Corrective
Action
The Original Proposal would have
established new subpart A titled
121 See,

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‘‘Prompt Corrective Action.’’ New
subpart A would have contained the
sections of part 702 relating to capital
measures, supervisory PCA actions,
requirements for net worth restoration
plans, and reserve requirements for all
credit unions not defined as ‘‘new’’
pursuant to § 216(b)(2) of the FCUA.122
The Board received no comments on
these changes and has decided to retain
the changes in this proposal.
Section 702.101 Capital Measures,
Capital Adequacy, Effective Date of
Classification, and Notice to NCUA
Under the Original Proposal, the
requirements of proposed § 702.101
would have remained largely
unchanged from current § 702.101. The
title of proposed § 702.101, however,
would have been changed to ‘‘Capital
measures, effective date of
classification, and notice to NCUA’’ to
better reflect the three major topics that
would have been covered in the section.
In addition, the Original Proposal would
have replaced the terms ‘‘net worth
measures’’ with ‘‘capital measures,’’
‘‘net worth classification’’ with ‘‘capital
classification,’’ and ‘‘net worth
category’’ with ‘‘capital category’’ to
reflect the terminology changes being
made throughout the proposal, which
were discussed above and are discussed
in further detail below.
A number of commenters raised
concerns with the proposed changes
that would have been made to the
terminology in the current rule. The
Board disagrees with these commenters
for reasons that are discussed in more
detail in the portion of the preamble
relating to § 702.102. Other than the
comments discussed in more detail
below, the Board received no other
comments on proposed changes to
§ 702.101 and has decided to retain the
changes in this proposal.
Capital helps to ensure that
individual credit unions can continue to
serve as credit intermediaries even
during times of stress, thereby
promoting the safety and soundness of
the overall U.S. financial system. As a
prudential matter, the NCUA has a longestablished policy that federally insured
credit unions should hold capital
commensurate with the level and nature
of the risks to which they are exposed.
In some cases, this may entail holding
capital above the minimum
requirements, depending on the nature
of the credit union’s activities and risk
profile.
The Board notes that Other Banking
Agencies’ capital standards are the
‘‘minimum capital requirements and
122 Section

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overall capital adequacy standards for
FDIC-supervised institutions . . .
include[ing] methodologies for
calculating minimum capital
requirements . . . .’’ 123
The FDIC may require an FDICsupervised institution to hold an
amount of regulatory capital greater
than otherwise required under this part
if the FDIC determines that the
institution’s capital requirements under
this part are not commensurate with the
institution’s credit, market, operational,
or other risks.124
Further, the September 10, 2013
preamble to art 324 of FDIC’s
regulations state that:

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The FDIC’s general risk-based capital rules
indicate that the capital requirements are
minimum standards generally based on broad
credit-risk considerations. The risk-based
capital ratios under these rules do not
explicitly take account of the quality of
individual asset portfolios or the range of
other types of risk to which FDIC-supervised
institutions may be exposed, such as interestrate risk, liquidity, market, or operational
risks . . . In light of these considerations, as
a prudent matter, an FDIC-supervised
institution is generally expected to operate
with capital positions well above the
minimum risk-based ratios and to hold
capital commensurate with the level and
nature of the risks to which it is exposed,
which may entail holding capital
significantly above the minimum
requirements.125

As indicated above, FDIC’s approach
to risk weights is calibrated to be the
minimum regulatory capital standard.
This NCUA proposal would also be
calibrated to be the minimum regulatory
capital standard, similar to the FDIC’s
rule, as suggested by commenters on the
Original Proposal. Therefore, the Board
believes it is necessary to incorporate a
broader regulatory provision requiring
complex credit unions to maintain
capital commensurate with the level
and nature of all risks to which they are
exposed, and to maintain a written
strategy for assessing capital adequacy
and maintaining an appropriate level of
capital. Proposed new § 702.101(b) is
based on a similar provision in the
Other Banking Agencies’ rules and
within the Board’s authority under the
FCUA.126 The Board notes that it has
broad legal authority to take action to
ensure the safety and soundness of
credit unions and the NCUSIF and to
carry out the powers granted to the
Board.127 Requiring credit unions to
maintain capital adequacy is part of
123 See,

e.g., 12 CFR 324.1(a).
e.g., 12 CFR 324.1(d).
125 78 FR 55362, Tuesday, September 10, 2013.
126 See, e.g., 12 CFR 324.10(d)(1) and (2).
127 12 U.S.C. 1786 and 1789.
124 See,

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ensuring safety and soundness, and is
not a new concept.128 Rather, as
discussed in more detail below, NCUA
long-standing practice is to monitor and
enforce capital adequacy through the
supervisory process. Therefore,
proposed § 702.10(b) is a proper use of
NCUA’s broad legal authority to ensure
safety and soundness and to carry out
its administrative powers, is consistent
with its long-standing supervisory
practices, and furthers comparability
with the Other Banking Agencies’ risk
based capital rules.
As the Other Banking Agencies’
approach to risk assigning risk weights
is calibrated to be the minimum
regulatory capital standard, and this
proposal is calibrated predominantly
based on the Other Banking Agencies’
rules as suggested by commenters on the
Original Proposal, the Board has
concluded it is necessary to require
complex credit unions to maintain
capital commensurate with the level
and nature of all risks to which they are
exposed, and a written strategy for
assessing capital adequacy and
maintaining an appropriate level of
capital. This provision would
complement NCUA’s existing regulatory
framework by working in tandem with
other regulatory requirements, such as
those related to liquidity, interest rate,
and credit risk.
Accordingly, proposed § 702.101
would amend current § 702.101 to
include a new capital adequacy
provision based on a similar provision
in FDIC’s rule.129 The new capital
adequacy provision would be added as
proposed § 702.101(b) and paragraphs
(b) and (c) of current § 702.101 would be
renumbered as paragraphs (d) and (e) of
proposed § 702.101. The new capital
adequacy provision would not affect
credit unions’ PCA capital category.
However, the Board believes it would
support the assessment of capital
adequacy in the supervisory process
(assigning CAMEL and risk ratings).
A complex credit union is generally
expected to have internal processes for
assessing capital adequacy that reflect a
full understanding of its risks and to
ensure that it holds capital
corresponding to those risks to maintain
overall capital adequacy.130 The nature
of such capital adequacy assessments
should be commensurate with the credit
union’s size, complexity, and riskprofile. Consistent with longstanding
128 See, e.g. 78 FR 55340, 55362(September 10,
2013).
129 12 CFR 324.10 Minimum capital requirements.
130 The Basel framework incorporates similar
requirements under Pillar 2 of Basel II.

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NCUA practice,131 the supervisory
assessment of capital adequacy will take
account of whether a credit union plans
appropriately to maintain an adequate
level of capital given its activities and
risk profile, as well as risks and other
factors that can affect its financial
condition; including, for example, the
level and severity of problem assets and
its exposure to operational risk, IRR and
significant asset concentrations. In
addition to evaluating the
appropriateness of a credit union’s
capital level given its overall risk
profile, the supervisory assessment
takes into account the quality and
trends in a credit union’s capital
composition, whether the credit union
is entering new activities or introducing
new products. The assessment also
considers whether a credit union is
receiving special supervisory attention,
has or is expected to have losses
resulting in capital inadequacy, has
significant exposure due to risks from
nontraditional activities, or has
significant exposure to IRR or
operational risk. For these reasons,
NCUA’s supervisory assessment of
capital adequacy may differ from
conclusions that might be drawn solely
from the calculation of a complex credit
union’s regulatory capital ratios.
An effective capital planning process
involves an assessment of the risks to
which a credit union is exposed and its
processes for managing and mitigating
those risks, an evaluation of its capital
adequacy relative to its risks, and
consideration of the potential impact on
its earnings and capital base from
current and prospective economic
conditions. While elements of a
supervisory review of capital adequacy
would be similar across credit unions,
evaluation of the level of sophistication
of an individual credit union’s capital
adequacy process should be
commensurate with the institution’s
size, sophistication, and risk profile,
similar to the current supervisory
practice. NCUA would develop and
publish supervisory guidance for
examiners on how to apply this
provision.
Some commenters stated that they
manage their capital so that they operate
with a buffer over the regulatory
minimum and that examiners expect
such a buffer. These commenters
expressed concern that examiners will
expect even higher capital levels. The
Board notes that the credit union system
is generally very well capitalized, and
131 NCUA Letter to Credit Unions No. 07–CU–12,
December 2007, CAMEL Rating System and NCUA
Letter to Credit Unions No. 09–CU–03, November
2009, Reviewing Adequacy of Earnings.

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this provision merely reflects existing
supervisory standards for individual
complex credit unions. However, NCUA
plans to incorporate in its National
Supervision Policy Manual procedural
controls on the discretion examiners
employ in relation to a complex credit
union being deemed out of compliance
with this provision.

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101(b) Capital Adequacy
For the reasons discussed above, this
proposal would add new capital
adequacy provisions to current
§ 702.101(b). The proposed new capital
adequacy provisions would be added as
§ 702.101(b), and the proposal would
redesignate paragraphs (b) and (c) of
current § 702.101 as paragraphs (d) and
(e) of proposed § 702.101. Proposed
§ 702.101(b) would provide that:
• Notwithstanding the minimum
requirements in this part, a credit union
defined as complex must maintain
capital commensurate with the level
and nature of all risks to which the
institution is exposed.
• A credit union defined as complex
must have a process for assessing its
overall capital adequacy in relation to
its risk profile and a comprehensive
written strategy for maintaining an
appropriate level of capital.
Section 702.102 Capital Classifications
Under the Original Proposal, the title
of § 702.102 would have been changed
from ‘‘statutory net worth categories’’ to
‘‘capital classifications.’’ The section
would also have continued to list the
five statutory capital categories that are
provided in § 216(c) of the FCUA.132
A number of commenters expressed
concerns with the changes in
terminology that were made in this and
other sections of the regulation.
Commenters suggested that by using the
terms ‘‘risk-based capital,’’ ‘‘capital
categories,’’ ‘‘capital classifications,’’
and other terms not specifically
included in the FCUA, the Board was
redefining the statutorily defined terms
‘‘net worth’’ and ‘‘net worth ratio’’ with
terms that do not encompass the same
things.
The Board disagrees. As the Board
explained in the Original Proposal,
although § 216(c) of the FCUA uses the
general term ‘‘net worth categories,’’ the
Board believes the term ‘‘capital
categories’’ is less confusing for industry
practitioners and better describes the
two measurements, ‘‘net worth ratio’’
and ‘‘risk-based net worth,’’ that make
up the categories listed in the statute. It
is clear, from the distinct uses of the
terms ‘‘net worth’’ and ‘‘risk-based net
132 Section

1790d(c).

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worth’’ in the FCUA that Congress
intended those terms to have different
meanings.133 Moreover, the new terms
were defined in the Original Proposal in
a manner consistent with both the
statutory terms and the FCUA’s
requirements. The Board has considered
the use of these new terms, as well as
the comments received, and believes
that the new terminology would not
alter or otherwise be inconsistent with
the requirements of the FCUA. Rather,
the Board continues to believe that the
use of these new terms will help to
clarify the requirements of the
regulation for credit unions and other
interested parties. Therefore, the Board
has decided to retain the changes and
new terminology in this proposal.
102(a) Capital Categories
Under the Original Proposal,
proposed § 702.102(a) would have
replaced current § 702.102(a) and would
have set forth new minimum capital
measures for complex credit unions.
Consistent with sections 216(c)(1)(A)
through (E) of the FCUA, the net worth
ratio measures listed in proposed
§§ 702.102(a)(1) through (5) would have
continued to match those listed in the
statute for each capital category, and
would have used both the net worth
ratio and the proposed risk-based
capital ratio as elements of the capital
categories for ‘‘well capitalized,’’
‘‘adequately capitalized,’’ and
‘‘undercapitalized’’ credit unions. The
risk-based capital ratio would have
included components that required
higher capital levels to reflect increased
risk due to IRR, concentration risk,
credit risk, market risk, and liquidity
risk.
The Original Proposal also would
have introduced a new, scaled riskbased capital ratio measurement
approach for assigning capital
classifications for well capitalized,
adequately capitalized, and
undercapitalized credit unions. This
scaled approach would have recognized
the relationship between higher riskbased capital ratios and the
creditworthiness of credit unions.
The Board received numerous general
comments concerning the capital
categories, nearly all advocating a
reduction in all of the risk-based capital
ratios for complex credit unions. Some
133 Compare section 1790d(c)(1)(A) (providing
that a credit union is ‘‘well capitalized’’ if it meets
both the seven percent net worth ratio requirement
and any applicable risk-based net worth
requirement), and section 1790d(d) (requiring the
Board to design a risk-based net worth
requirement), with section 1790d(o) (defining the
term ‘‘net worth,’’ but not defining the term riskbased net worth ratio).

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commenters suggested the following
risk-based ratios for complex credit
unions: Eight percent or greater for well
capitalized, 5.5 percent to 7.99 percent
for adequately capitalized, and 5.5
percent or lower for undercapitalized.
Other commenters suggested that, in
light of the historical performance of
credit unions through the recent
financial crisis, the risk-based capital
ratio ratios should be: 8.5 percent or
greater to be well capitalized, six
percent to 8.49 percent to be adequately
capitalized, and six percent or less to be
undercapitalized. Still other
commenters suggested a reduction in
the risk-based capital ratios for each
capital category by a minimum of 50
basis points to avoid harming the credit
union industry by limiting credit
unions’ ability to make loans,
decreasing their earnings, and
hampering current business strategies.
After carefully considering the
comments, the Board is now proposing
to reduce the risk-based capital ratio
threshold for well capitalized from 10.5
percent to 10 percent. All of the other
risk-based capital ratio thresholds from
the Original Proposal would remain
unchanged. As discussed below, the
Board believes this structure is within
its legal authority to implement, and
that this well capitalized ratio threshold
both achieves parity with Other Banking
Agencies’ regulations 134 and simplifies
NCUA’s proposed risk-based capital
ratio measure by not including the
capital conservation buffer that is part of
the Other Banking Agencies’ risk-based
capital regulations.
102(a)(1) Well Capitalized
Under the Original Proposal,
proposed § 702.102(a)(1) would have
required a credit union to maintain a net
worth ratio of seven percent or greater
and, if it were a complex credit union,
a risk-based capital ratio of 10.5 percent
or greater to be classified as well
capitalized. The higher proposed riskbased capital requirement for the well
capitalized classification was designed
to boost the resiliency of complex credit
unions throughout financial cycles and
align them with the standards used by
the Other Banking Agencies.135 The
proposed 10.5 percent risk-based capital
ratio target was comparable to the Other
Banking Agencies’ eight percent total
risk-based capital ratio to be adequately
capitalized plus the 2.5 percent capital
conservation buffer that banks will be
required to meet when the capital
conservation buffer is fully
134 See,
135 See,

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implemented in 2019.136 To be well
capitalized, the Other Banking Agencies
require a total risk-based capital ratio of
10 percent. Therefore, a bank can be
well capitalized with a total risk-based
capital ratio of 10 percent, but its
inadequate capital conservation buffer
would still limit its ability to make
capital distributions and discretionary
bonus payments. The Original Proposal
included a 10.5 percent risk-based
capital ratio requirement, rather than
the Other Banking Agencies’ 10
percent,137 to avoid the complexity of a
capital conservation buffer.
The Board received a substantial
number of comments regarding the
proposed risk-based capital ratio for a
credit union to be classified as well
capitalized. As a threshold matter, a
number of commenters questioned the
Board’s authority to impose any riskbased net worth requirement on well
capitalized credit unions. Specifically,
commenters suggested that § 1790d(d) of
the FCUA, which they argued provides
the entirety of the language in the FCUA
dealing with the risk-based component
of PCA, directs NCUA to connect the
risk-based net worth requirement to the
sufficiency of a credit union’s net worth
only for the adequately capitalized
classification. Commenters further
maintained that requiring a higher riskbased capital ratio level for well
capitalized credit unions than the level
required for adequately capitalized
credit unions contravened both
Congressional intent and the Board’s
statutory authority. They argued that,
not only does the FCUA itself prohibit
the Board from imposing a higher riskbased capital ratio for the well
capitalized threshold, but that sound
public policy also supports applying the
risk-based net worth requirement only
to the adequately capitalized threshold.
They cited the seven percent net worth
ratio for well capitalized credit unions
as support for this argument, stating that
this net worth ratio renders a separate,
higher risk-based capital ratio level
unnecessary for well capitalized credit
unions.
Similarly, another commenter
recommended that the Board impose the
same risk-based capital ratio on both
well capitalized and adequately
capitalized credit unions, and the
commenter encouraged the Board not to
increase that risk-based capital ratio
above eight percent. As support, the
commenter noted that, in the preamble
136 On September 10, 2013, FDIC published an
interim final rule that revised its risk-based and
leverage capital requirements for FDIC-supervised
institutions. 78 FR 55339 (Sept. 10, 2013).
137 See, e.g., 12 CFR 324.403.

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to the Original Proposal, the Board
stated that the proposed risk-based
capital ratio of eight percent would have
been reasonable for an adequately
capitalized credit union. The
commenter further suggested that
because adequately capitalized and well
capitalized credit unions have higher
net worth ratio requirements than
similarly situated banks, an eight
percent risk-based capital ratio would
be sufficient and that it would be
unreasonable to require adequately
capitalized credit unions to maintain a
10.5 percent risk-based capital ratio.
Other commenters suggested that the
proposed 10.5 percent risk-based capital
ratio for a credit union to be classified
as well capitalized is not appropriate
because it unfairly incorporates the
capital conservation buffer into the PCA
framework for credit unions. These
commenters noted that a bank can be
classified as well capitalized with an
eight percent total risk-based capital
ratio, even if the bank fails to hold the
2.5 percent capital conservation buffer
required under the Other Banking
Agencies’ capital regulations, although
the commenters acknowledged that any
such failure to meet the capital
conservation buffer would limit that
bank’s ability to make capital
distributions and discretionary bonus
payments. These commenters
maintained that by directly
incorporating the capital conservation
buffer into NCUA’s PCA framework, the
Board would disadvantage credit unions
by making them more vulnerable to
downgrades in their PCA capital
classification level, a course of action
which the Other Banking Agencies
specifically declined to adopt.
Commenters further stated that because
the capital conservation buffer was
designed to absorb losses in stressful
periods, the Other Banking Agencies
believed that it was appropriate for a
depository institution to be able to use
some of its capital conservation buffer
without being considered less than well
capitalized for PCA purposes.
Commenters suggested that the Board
should, at a minimum, provide credit
unions the same flexibility. Other
commenters suggested that the Other
Banking Agencies adopted the capital
conservation buffer as a means to
restrict banks from paying dividends to
shareholders and ‘‘substantial
discretionary bonuses’’ to management,
which occurred even as banks’ financial
conditions weakened during the last
financial crisis. These commenters
noted that even failed credit unions
were not engaging in this practice and,
therefore, the concern is not relevant to

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the credit union industry. Accordingly,
the commenters argued that including
the capital conservation buffer in the
risk-based capital proposal and setting
the risk-based capital ratio at 10.5
percent was arbitrary.
Another commenter suggested that
the capital conservation buffer for banks
applies only in periods of significant
credit growth, while NCUA’s proposed
risk-based capital ratio of 10.5 percent
would apply at all times in a financial
cycle. Other commenters suggested that
the Original Proposal would have
applied the capital conservation buffer
only to the well capitalized
classification, thereby subjecting
adequately capitalized credit unions
only to the eight percent total risk-based
capital ratio used by the Other Banking
Agencies. Commenters maintained that,
for the sake of consistency and
comparability among banks and credit
unions, the Board should remove the 2.5
percent capital conservation buffer from
the well capitalized category and adjust
the other levels accordingly.
Alternatively, they argued that the
Board should, at a minimum, allow
credit unions an equivalent five-year
implementation period to build capital
reserves without sacrificing member
services or dramatically increasing fees.
One commenter supported the
proposed 10.5 percent risk-based capital
ratio level as the appropriate level to be
considered well capitalized.138 This
commenter maintained, however, that
there should not be an associated
increase in this risk-based capital
requirement if NCUA determines to
include the NCUSIF deposit in the riskbased capital ratio numerator.
Other commenters questioned why
well capitalized credit unions would be
subject to a risk-based capital ratio of
10.5 percent when banks only need a
risk-based capital ratio of 10 percent.
Finally, still other commenters
suggested that credit unions receiving
an overall capital classification of well
capitalized be granted blanket waivers,
fixed asset exemptions, longer exam
cycles, and other incentives under any
final risk-based capital rule.
As noted in the legal authority section
of this preamble, the Board has carefully
considered these comments and
generally disagrees with commenters’
reading and interpretation of the FCUA.
For the reasons stated in that
discussion, it is within NCUA’s legal
authority to promulgate this proposal
and to impose a separate, higher riskbased capital ratio requirement on well
capitalized credit unions than the one
imposed on adequately capitalized
138

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credit unions. NCUA’s interpretation of
its legal authority to require credit
unions to meet different risk-based
capital ratio levels to be classified as
either well capitalized or adequately
capitalized is further supported by the
Other Banking Agencies’ PCA statute
and regulations, which require different
risk-based capital ratio levels for banks
to be classified as well capitalized,
adequately capitalized,
undercapitalized, or significantly
undercapitalized.139 Section 38(c)(1)(A)
of the FDI Act requires that the Other
Banking Agencies’ relevant capital
measures ‘‘include (i) a leverage limit;
and (ii) a risk-based capital
requirement.’’ 140 Therefore, by setting
different risk-based capital ratio levels
for credit unions to be adequately and
well capitalized, NCUA’s risk-based
capital requirement is more
‘‘comparable’’ to the Other Banking
Agencies’ risk-based capital
requirement.
The Board also notes there are sound
policy reasons for setting a higher riskbased capital ratio threshold for the well
capitalized category than the one for the
adequately capitalized category. Under
the current rule, a credit union’s capital
classification could rapidly decline
directly from well capitalized to
undercapitalized if it fails to meet the
required risk-based net worth ratio
level.141 Moreover, credit unions
classified as well capitalized are
generally considered financially sound,
afforded greater latitude under some
other regulatory provisions,142 and are
not subject to most mandatory or
discretionary supervisory actions. In
contrast, credit unions that fall to the
undercapitalized category are
financially weak and are subject to
various mandatory and discretionary
supervisory actions intended to resolve
the capital deficiency and limit risk
taking until capital levels are restored to
prudent levels. The lack of graduated
thresholds in the current rule’s
construct for the risk-based net worth
requirement does not effectively provide
for earlier reflection in a credit union’s
net worth category. Under the current
rule, a change in the credit union’s risk
profile, capital levels, or both that
results in a decline in the risk-based net
worth ratio does not affect its net worth
category until it results in the credit
union falling to the point where the
139 See

12 U.S.C. 1831o, and 12 CFR 324.403(b).
U.S.C. 1831o(c)(1)(A) (emphasis added).
141 Per the FCUA, ‘‘undercapitalized’’ is the
lowest PCA category in which a failure to meet the
risk-based net worth requirement can result.
142 See 12 CFR 745.9–2 and 12 CFR 723.7.
140 12

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situation requires mandatory or
discretionary supervisory actions.
The Board believes a more effective
policy is to adopt a higher threshold for
the well capitalized category than for
the adequately capitalized category to
provide a more graduated framework
where a credit union does not
necessarily drop directly from well
capitalized to undercapitalized. In fact,
this policy objective is reflected in how
Congress, in section 216(c) of the FCUA,
and the Other Banking Agencies, in
their risk-based capital regulations,
designed the graduated PCA capital
categories.
For a given risk asset, the amount of
capital required to be held for that risk
asset is calculated by multiplying the
dollar amount of the risk asset times the
risk weight times the desired capital
level. To illustrate, where the threshold
for well capitalized is 10 percent, a
credit union that has one dollar in a risk
asset assigned a 50 percent risk weight
would need to hold capital of five cents
($1 multiplied by 50 percent multiplied
by 10 percent). The point of this
illustration is that the risk weights are
interdependent with the thresholds set
for the regulatory capital categories. The
Board notes the risk weights in this
proposal are based predominantly on
those used by the Other Banking
Agencies, as suggested by commenters
on the Original Proposal. For the total
capital-to-risk assets ratio, the Other
Banking Agencies establish a threshold
of 10 percent to be well capitalized.143
For NCUA’s risk-based capital
requirement to be comparable, it should
also be equivalent in rigor to the Other
Banking Agencies’ risk-based capital
requirement.144 The rigor of a regulatory
capital standard is primarily a function
of how much capital an institution is
required to hold for a given type of
asset. Thus, if NCUA chose any
threshold below 10 percent for the
minimum required level of regulatory
capital, it would either result in
systematically lower incentives for
credit unions to accumulate capital or
the risk weights would need to be
adjusted commensurately to offset the
effect of the lower threshold. For
example, if a uniform threshold for both
well and adequately capitalized were
maintained and set at only 8 percent, as
143 The Other Banking Agencies’ Total Risk-Based
Capital ratio is the most analogous standard for
credit unions given the proposed broadening of the
definition of capital to include accounts that would
not be included in the definition of Tier 1 capital,
such as the allowance for loan and lease losses and
secondary capital for low-income designated credit
unions.
144 See S. Rep. No. 193, 105th Cong., 2d Sess.
(1998).

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some commenters suggested, there
would be a decline in the overall rigor
of the risk-based capital ratio.
Alternatively, the risk weights for
various assets could be increased by 20
percent to offset this effect. The Board
believes adjusting the risk weights in
this manner would create more
difficulty in comparing asset types and
risk weights across financial
institutions, and no doubt lead to
misunderstanding and controversy.
Conversely, a uniform threshold for
the well capitalized and adequately
capitalized categories could be
maintained, but raised to maintain the
rigor of the risk-based capital standard
and avoid adjusting the risk weights.
This approach would set a higher point
at which credit unions would fall to
undercapitalized, and therefore be
subject to mandatory and discretionary
supervisory actions. The Board does not
believe this would be optimal, as the
supervisory consequences for credit
unions with risk-based capital ratios
between eight percent and ten percent
would be worse than for institutions
operating under the Other Banking
Agencies’ rules.
Maintaining the rigor of the risk-based
net worth requirement is also important
for another key policy objective of the
Board: Ensuring the risk-based net
worth requirement is relevant and
meaningful. A relevant and meaningful
risk-based net worth requirement will
result in capital levels better correlated
to risk, and better inform credit union
decision making.145 To be relevant and
meaningful, the risk-based net worth
requirement must result in minimum
regulatory capital levels on par with the
net worth ratio for credit unions with
elevated risk, and be the governing ratio
(require more capital than the net worth
ratio) for credit unions with
extraordinarily high risk profiles. If the
highest threshold for the risk-based
capital ratio were set as low as 8 percent
for well capitalized credit unions, as
some commenters suggested, the riskbased net worth requirement would
govern very few, if any, credit unions.
If the highest risk-based capital ratio
threshold were set at eight percent,
NCUA estimates at most seven credit
unions would have the proposed riskbased ratio be the governing
requirement, with only one credit union
currently holding insufficient capital to
meet the requirement. Further, only
credit unions with risk assets greater
145 The benefits of a capital system better
correlated to risk are discussed in the Summary
section of this preamble.

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than 90 percent of total assets would be
bound by the risk-based requirement.
Further, capital is a lagging indicator
because it is founded primarily on
accounting standards, which by their
nature are largely based on past
performance. The net worth ratio is
even more so a lagging indicator
because it applies capital—a lagging
measure in itself—to total assets. Thus,
the net worth ratio does not distinguish
among risky assets or changes in a
balance sheet’s composition. A riskbased capital ratio is more prospective
by accounting for asset allocation
choices and driving capital
requirements before losses occur and
capital levels decline. The more relevant
the risk-based net worth requirement is,
the more likely that credit unions will
build capital sufficient to prevent
precipitous declines in their PCA
capital classifications that could result
in greater regulatory oversight and even
failure.
To be relevant and meaningful, the
risk-based net worth requirement also
needs to incent credit unions to build
and maintain capital as they increase
risk to be able to absorb any
corresponding unexpected losses. A
graduated, or tiered, system of capital
category thresholds that distinguishes
between the well capitalized and
adequately capitalized categories will
incentivize credit unions to hold sound
levels of capital without invoking
supervisory action before necessary.
While there is no requirement for a
credit union to be well capitalized, and
there are no supervisory interventions
required for a credit union with an
adequately capitalized classification,
there are some regulatory privileges and
other benefits for a credit union that is
well capitalized. Chief among those
benefits is the accumulation of
sufficient capital to weather financial
and economic stress. During the recent
financial crisis, credit unions
experienced large losses in a
compressed timeframe, resulting in a
rapid deterioration of net worth. Some
credit unions that historically had been
classified as well capitalized were
quickly downgraded to
undercapitalized. As noted in the
summary section, credit unions that
failed at a loss to the NCUSIF on average
were very well capitalized, based on
their net worth ratios, 24 months prior
to failure (average net worth ratio of 12
percent). Over the last 10 years, more
than 80 percent of all credit union
failures involved institutions that were
well capitalized in the 24 months
immediately preceding their failure.
Unlike the net worth ratio, which is
indifferent to the composition of assets,

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a well-designed risk-based net worth
requirement would reflect material
shifts in the risk profile of assets.
The Board believes that a risk-based
capital framework that encourages and
promotes capital accumulation benefits
not only those credit unions that
achieve the well-capitalized
classification, but the entire credit
union system. Thus, the Board remains
committed to implementing the riskbased requirement under a graduated
(multi-tiered) capital category
framework.
As noted earlier in this preamble, the
Board supports lowering the well
capitalized risk-based capital ratio
threshold from 10.5 percent to 10
percent. The Board agrees with the
commenters who suggested that a 10
percent risk-based capital ratio would
simplify the comparison with the Other
Banking Agencies’ rules by removing
the effect of the capital conservation
buffer. The 10 percent threshold for well
capitalized credit unions, along with the
eight percent threshold for adequately
capitalized credit unions, would also be
consistent with the total risk-based
capital ratio requirements contained in
the Other Banking Agencies’ capital
rules.
Capital ratio thresholds are largely a
function of risk weights. As discussed in
other parts of this proposal, the Board
is now proposing to more closely align
NCUA’s risk weights with those
assigned by the Other Banking
Agencies. Therefore, the Board believes
that NCUA’s risk-based capital ratio
threshold levels should also align with
those of the Other Banking Agencies as
closely as possible.
102(a)(2) Adequately Capitalized
Under the Original Proposal,
proposed § 702.102(a)(2) would have
required a credit union to maintain a net
worth ratio of six percent or greater and,
if it were a complex credit union, a riskbased capital ratio of eight percent or
greater to be classified as adequately
capitalized. This risk-based capital ratio
level is comparable to the eight percent
total risk-based capital ratio level
required by the Other Banking Agencies
for a bank to be adequately capitalized.
Other than the comments discussed
above and in other parts of this
preamble, the Board received no
comments on the Original Proposal’s
adequately capitalized risk-based capital
ratio level. Therefore, the Board has
decided to retain the changes, with only
minor adjustments for clarity.
This proposal would also add
proposed § 702.102(a)(2)(iii), which
would clarify that a credit union is
adequately capitalized only if it meets

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the net worth and risk-based capital
criteria in proposed paragraphs (a)(2)(i)
and (ii), and does not meet the
definition of a well capitalized credit
union.
102(a)(3) Undercapitalized
Under the Original Proposal,
proposed § 702.102(a)(3) would have
classified a credit union as
undercapitalized if the credit union
maintained a net worth ratio of four
percent or greater but less than six
percent and, if it were a complex credit
union, a risk-based capital ratio of less
than eight percent.
Other than the comments discussed
above and other parts of this preamble,
the Board received no comments on the
Original Proposal’s undercapitalized
risk-based capital ratio requirement.
However, to provide additional clarity
the Board is proposing to make
additional minor adjustments to the
paragraph in this proposal.
Under this proposal, § 702.102(a)(3)
would provide that a credit union is
undercapitalized if: (1) The credit union
has a net worth ratio of four percent or
more but less than six percent; or (2) the
credit union, if complex, has a riskbased capital ratio of less than eight
percent.
102(a)(4) Significantly Undercapitalized
Under the Original Proposal,
proposed § 702.102(a)(4) would have
classified a credit union as significantly
undercapitalized if: (1) It had a net
worth ratio of less than five percent and
had received notice that its net worth
restoration plan had not been
approved; 146 (2) the credit union had a
net worth ratio of two percent or more
but less than four percent; or (3) the
credit union had a net worth ratio of
four percent or more but less than five
percent, and the credit union either
failed to submit an acceptable net worth
restoration plan within the time
prescribed in § 702.110, or materially
failed to implement a net worth
restoration plan approved by NCUA.
The Original Proposal would have made
some clarifying changes to the language
in current § 702.102(a)(4), but would not
have changed the criteria for being
classified as significantly
undercapitalized under part 702.
The Board received no comments on
the proposed changes to this paragraph
and has decided to retain the changes in
this proposal with several adjustments
for clarity.
146 To qualify for a higher net worth
classification, a significantly undercapitalized
credit union must have a net worth restoration plan
approved by NCUA.

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Under this proposal, § 702.102(a)(4)
would provide that a credit union is
significantly undercapitalized if:
• The credit union has a net worth
ratio of two percent or more but less
than four percent; or
• The credit union has a net worth
ratio of four percent or more but less
than five percent, and either—
Æ Fails to submit an acceptable net
worth restoration plan within the time
prescribed in § 702.111;
Æ Materially fails to implement a net
worth restoration plan approved by the
Board; or
Æ Receives notice that a submitted net
worth restoration plan has not been
approved.
102(a)(5) Critically Undercapitalized
Under the Original Proposal,
proposed § 702.102(a)(5) would have
classified a credit union as critically
undercapitalized if it had a net worth
ratio of less than two percent. The
Original Proposal would have made
some minor technical amendments to
the language in current 702.102(a)(5),
but would not have changed the criteria
for being classified as critically
undercapitalized under part 702.
The Board received no comments on
the proposed changes to this paragraph
and, therefore, it has decided to retain
the changes in this proposal.
102(b) Reclassification Based on
Supervisory Criteria Other Than Net
Worth
The Original Proposal would have
retained current § 702.102(b), with only
a few amendments to update
terminology and make minor edits for
clarity. No substantive changes were
intended.
The Board received no comments or
suggested changes to this paragraph and
has decided to retain the changes in this
proposal.

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102(c) Non-Delegation
Proposed § 702.102(c) would have
been unchanged from current
§ 702.102(c).
The Board received no comments or
suggested changes to this paragraph and
has decided to make no changes in this
proposal.
102(d) Consultation With State Officials
Proposed § 702.102(d) would have
retained current § 702.102(d) with only
a few small amendments for consistency
with other sections of NCUA’s
regulations. No substantive changes
were intended.
The Board received no comments or
suggested changes to this paragraph and
has decided to retain the changes in this
proposal.

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Section 702.103 Applicability of the
Risk-Based Capital Ratio Measure
Under the Original Proposal,
proposed § 702.103 would have changed
the title of current § 702.103 from
‘‘Applicability of risk-based net worth
requirement’’ to ‘‘Applicability of riskbased capital ratio measure.’’ Proposed
§ 702.103 would have provided that, for
purposes of § 702.102, a credit union is
defined as ‘‘complex,’’ and a risk-based
capital ratio requirement is applicable,
only if the credit union’s quarter-end
total assets exceed $50 million, as
reflected in its most recent Call Report.
Under the current rule, credit unions
are ‘‘complex’’ and subject to the riskbased net worth requirement only if
they have quarter-end total assets over
$50 million and they have a risk based
net worth requirement exceeding six
percent. The Original Proposal would
have eliminated current § 702.103(b)
and defined all credit unions with over
$50 million in assets as ‘‘complex.’’
The Board received a significant
number of comments on the proposed
definition of complex credit unions.
Many commenters pointed out that
NCUA already has a complexity index
based on deposit account types, member
services, loan and investment types, and
portfolio composition, and given the
availability of such a measure, which
takes into account ‘‘the portfolio of
assets and liabilities’’ of credit unions.
Commenters stated that it seemed odd
that the Board would define complex
based solely on credit unions’ asset size
given the fact that the NCUA already
has a complexity index.
Commenters suggested that section
1790d(d)(1) of the FCUA directs the
Board to establish a risk-based net worth
system for ‘‘complex’’ credit unions, but
does not give the Board complete
discretion on how the system must be
structured and applied to credit unions.
Commenters argued that defining
‘‘complex’’ using only an asset size
threshold fails to comply with the
requirement in section 1790d(d)(1) that
the Board take into account the
‘‘portfolios of assets and liabilities of
credit unions’’ when defining complex
credit unions.
Commenters also suggested that a
single-dimension definition of
‘‘complex’’ credit union does not
account for actual operational
complexity. Other commenters
suggested that the proposed definition
of ‘‘complex’’ was arbitrary and is too
simplistic a measure because it did not
take into account a credit union’s
comprehensive book of assets, including
all loans, investments, and liabilities, as
well as whether a credit union’s

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operations are sufficiently diverse to
warrant a ‘‘complex’’ designation.
Other commenters stated that
determining whether a credit union is
complex should be influenced by
whether they do real estate lending,
member business lending, have risky
investments, and many other factors
contributing to the composition of a
credit union’s balance sheet and overall
operation. Commenters claimed that
many larger credit unions have limited
service offerings or narrow portfolio
composition and are not complex
institutions. Commenters suggested that
NCUA’s own complexity index shows
that using asset size alone does not
result in an accurate measure of
complexity for credit unions.
One commenter suggested that all
federally insured credit unions with
assets above $250 million and that have
an NCUA complexity index value of 17
or higher be required to meet risk-based
capital requirements. Another
commenter suggested that, consistent
with NCUA’s final liquidity rule, credit
unions with over $250 million in assets
have a great degree of
interconnectedness with other market
entities, and when they experience
unexpected or severe liquidity
constraints they are more likely to
adversely affect the credit union system,
public perception, and the NCUSIF. The
commenter suggested that setting the
size threshold at $250 million will
encourage mid-size credit union growth.
Other commenters believed the Board
has defined complex in NCUA’s
derivatives regulation and for
examinations as $250 million in assets.
Other commenters suggested the
Board raise that threshold to $500
million given the burden they believe
would be imposed by the rule and the
potential for unintended consequences.
The commenters further suggested it
would be wise to phase-in the
application of the rule slowly by starting
with credit unions with assets of $500
million or more to ensure smooth
implementation of the rule without
threatening the viability of smaller
institutions.
Other commenters questioned
whether the Board cares about the safety
and soundness of credit unions with
$50 million in assets or less. Several of
those commenters suggested the riskbased capital requirements should apply
to all credit unions regardless of size
because if they are not subject to the
capital regulation they will be
unprepared when they reach $50
million size threshold.
Some commenters suggested that the
situation is further compounded by the
number of credit unions that have

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received a low-income designation.
They envisioned a difficult transition
for low-income credit unions going from
no caps on commercial lending and
commercial loan participations, to
tiered risk weights that could become
problematic in terms of regulatory
compliance.
A small number of commenters
suggested the Board should adjust for
inflation any asset-size threshold used
in the definition of complex.
Another commenter suggested that
any credit union that is identified as
‘‘complex’’ by NCUA should be able to
present evidence to the agency as to
why it is not complex and should not
be subject to risk-based capital
requirements. The commenter suggested
the process for contesting an agency
designation of ‘‘complex’’ should also
be detailed in the rule.
Other commenters suggested the rule
should acknowledge the differences
between credit unions of different asset
sizes and assign different risk weights
for credit unions of different asset sizes.
The Board has carefully considered
the comments received and generally
agrees that a higher asset size threshold
is appropriate. Based on comments
received on the Original Proposal, the
Board is now proposing to use $100
million in assets as a proxy for
determining whether a credit union is
complex. Under this proposal, the title
of current § 702.103 would continue to
be changed from ‘‘Applicability of riskbased net worth requirement’’ to
‘‘Applicability of risk-based capital ratio
measure.’’
However, after diligently considering
the comments on the Original Proposal
and further analyzing the ‘‘portfolios of
assets and liabilities of credit unions,’’
the Board now believes that $100
million in assets would be a more
appropriate threshold level for defining
‘‘complex’’ credit unions. Accordingly,
consistent with requirements of
§ 216(d)(1) of the FCUA, this proposed
§ 702.103 would now provide that, for
purposes of § 702.102, a credit union is
defined as ‘‘complex,’’ and a risk-based
capital ratio requirement is applicable,
only if the credit union’s quarter-end
total assets exceed $100 million, as
reflected in its most recent Call Report.
The Board would periodically evaluate
this threshold as part of NCUA’s annual
review of one-third of its regulations.
Under the current rule, credit unions
are ‘‘complex’’ and subject to the riskbased net worth requirement only if
they have quarter-end total assets over
$50 million and they have a risk-based
net worth ratio over six percent. In
effect, this means that all credit unions
with over $50 million in assets are

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subject to the current risk-based net
worth requirement unless their level of
risk assets is relatively low.
Consistent with requirements of
section 216(d)(1) of the FCUA, the
Board is proposing to eliminate the
additional complexity measure in
current § 702.103(b) and declines to
propose a complexity measure in
addition to the $100 million asset sized
threshold for defining ‘‘complex’’ credit
unions. Accordingly, this proposal
would eliminate current § 702.103(b)
and define all credit unions with over
$100 million in assets as ‘‘complex.’’
For reasons described more fully below,
the Board believes that defining the
term ‘‘complex’’ credit union using a
single asset size threshold of $100
million as a proxy for a credit union’s
complexity would be accurate and
reduce the complexity of the rule,
would provide regulatory relief for
smaller institutions, and would
eliminate the complexity and potential
unintended consequences of having a
checklist of activities that would
determine whether or not a credit union
is subject to the risk-based capital
requirement.
Under this proposal, the term
‘‘complex’’ is defined only for purposes
of the risk-based capital ratio measure.
The Board believes there are a number
of products and services, which under
GAAP are reflected as the credit unions
portfolio of assets and liabilities, in
which credit unions are engaged 147 that
are inherently complex based on the
nature of their risk and the expertise
and operational demands necessary to
manage and administer such activities
effectively. The Board believes that
credit unions offering such products
and services have complex portfolios of
assets and liabilities for purposes of
NCUA’s risk-based net worth
requirement. In particular, the Board
believes that the following products and
services engaged in by credit unions are
good indicators of complexity:
• Member business loans,
• Participation loans,
• Interest-only loans,
• Indirect loans,
• Real estate loans,
• Non-federally guaranteed student
loans,
• Investments with maturities of
greater than five years (where the
147 Products and services comprise a portfolio of
assets and liabilities through the accounts and fixed
assets that must be maintained to operate, the
resources of staff and funds necessary to operate the
credit union, and the liabilities that may arise from
contractual obligations, among other things.
Altogether, these products and services are
accounted for on the balance sheet through the
assets and liabilities according to GAAP.

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investments are greater than one percent
of total assets),
• Non-agency mortgage-backed
securities,
• Non-mortgage-related securities
with embedded options,
• Collateralized mortgage obligations/
real estate mortgage investment
conduits,
• Commercial mortgage-related
securities,
• Borrowings,
• Repurchase transactions,
• Derivatives, or
• Internet banking.
Based on a review of Call Report data
as of June 30, 2014, all credit unions
with more than $100 million in assets
were engaged in the products and
services listed above, with 99 percent
having more than one complex activity,
and 87 percent having four or more. On
the other hand, less than two-thirds of
credit unions below $100 million in
assets are involved in even a single
complex activity, and only 15 percent
have four or more. Moreover, credit
unions with total assets less than $100
million are a small share (approximately
10 percent) of the overall assets in the
credit union system—which limits the
exposure of the Share Insurance Fund to
these institutions. Accordingly, the
Board believes $100 million in assets is
a clear demarcation above which
complex activities are always present,
and where credit unions are almost
always engaged in one or more complex
activities, in contrast to credit unions
$100 million or less in assets.
As discussed earlier, and consistent
with section 216(d)(1) of the FCUA, the
Board believes $100 million in assets is
an accurate proxy for complexity based
on credit unions’ portfolios of assets and
liabilities. It is logical, clear, and easy to
administer. This proposed approach
would also benefit credit union boards
of directors, which consist primarily of
volunteers. Based on December 31, 2013
Call Report data, this proposed
approach would exempt almost 80
percent of credit unions from the
regulatory burden associated with
complying with the risk-based net worth
requirement, while still covering 90
percent of the assets in the credit union
system. It is also consistent with the fact
that the majority of losses (68 percent as
measured as a proportion of the total
dollar cost 148) to the NCUSIF over the
last 10 years have come from credit
unions with assets greater than $100
million.149 Accordingly, this proposal
148 Based

on NCUA’s loss and failure data.
performed back testing analysis of Call
Report and failure data to determine whether this
proposed regulation would have resulted in earlier
149 NCUA

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would eliminate current § 702.103(b)
and amend current § 702.103 to define
all credit unions with over $100 million
in assets as ‘‘complex.’’
In addition, the Board is requesting
comment on an alternative
measurement for the definition of
‘‘complex.’’ This alternative approach
would define ‘‘complex’’ as engaging in
a threshold number of products and
services, such as those listed above,
which the Board believes make up a
complex portfolio of assets and
liabilities. For example, this alternative
approach could define a credit union as
complex if it engaged in one or more of
the products and services listed above.
In addition to general comments on this
approach, the Board is requesting
comments on the following aspects of
this alternative measurement for the
definition of ‘‘complex’’:
1. What specific products and services
should the Board include in the list of
products and services used to determine
whether a credit union’s portfolio of
assets and liabilities is ‘‘complex,’’ and
why?
2. What number of complex products
and services should a credit union be
allowed to engage in before being
designated as ‘‘complex,’’ and why?
Section 702.104 Risk-Based Capital
Ratio
Under the Original Proposal, the
Board proposed changing the title of
current § 702.104 from ‘‘Risk portfolio
defined’’ to ‘‘Risk-based capital ratio
measures.’’ In addition, the Board
originally proposed entirely replacing
the requirements for calculating the
risk-based net worth requirement for
‘‘complex’’ credit unions under current
§ 702.104 with a new risk-based capital
ratio measure.150 The proposed section
would have required all ‘‘complex’’
credit unions to calculate their riskbased capital ratio as directed in the
section. The proposed risk-based capital
ratio was designed to enhance sound
capital management and help ensure
that credit unions maintain adequate
levels of loss-absorbing capital going
forward, strengthening the stability of
the credit union system and ensuring
credit unions serve as a source of credit
in times of stress.
NCUA received a number of general
comments on the proposed § 702.104.
identification of emerging risks and possibly
reduced losses to the NCUSIF. We evaluated the
impact of this proposal on more recent failures of
credit unions with total assets over $100 million.
This testing revealed that maintaining a risk-based
capital ratio in excess of 10 percent would have
triggered eight out of nine such failing credit unions
to hold additional capital, which could have
prevented failure or reduced losses to the NCUSIF.
150 12 U.S.C. 1790d(d).

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Commenters argued that the proposed
risk-based capital calculation did not
match the real risk in the system. Other
commenters suggested the proposed
risk-based capital calculation was an
oversimplification of risk.
Some commenters stated that they
generally supported the proposed
calculation for the risk-based capital
ratio. Other commenters stated that the
proposed changes would make the riskbased capital ratio calculations more
reflective of comparable calculations
required by FDIC, provide clarity and
understandability to a complex
calculation, and make the resulting
analysis more valuable and useable.
Other commenters suggested that the
funding source of the credit union’s
assets should also be factored into the
risk-based capital ratio measure, and
that credit unions that fund assets solely
with member deposits should be given
a credit compared to credit unions that
fund assets with borrowing and/or
broker deposits. These commenters
stated that the proposal would regulate
only one side of the balance sheet—the
assets—while not allowing credit
unions the flexibility to deal with this
new capital requirement through
supplementary capital or the matching
of term liabilities to specific assets.
Similarly, other commenters suggested
that the proposal did not effectively
consider a credit union’s liabilities as a
source of funds matched against its
assets. The commenters suggested that
the cost at which some credit unions
can borrow funds to then loan out or
invest is very low and carry a healthy
spread, but they believed the proposal
would have penalized credit unions on
the asset side of the balance sheets
irrespective of their management of
matching sources and uses of funds.
Other commenters suggested that
applying higher risk weights on longterm assets to deal with IRR is
misleading without considering
liabilities.
Commenters stated that NCUA assigns
a CAMEL rating based on a number of
factors, including management
effectiveness, and that an institution
with a more effective management team
can adequately manage an increased
level of risk. Commenters suggested that
by not taking risk management
techniques and qualities into account in
the proposed rule when determining the
required risk-based capital ratios, credit
unions with strong management
effectiveness would be essentially
limited in how well they could utilize
the skills that reside on their team.
One commenter suggested that credit
unions should be given a credit for
checking and savings non-maturity

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deposits. Another commenter suggested
that the Original Proposal appeared to
concentrate on risks faced by credit
unions in a low interest rate
environment, but that the rule should be
amended to be flexible enough to also
work in high interest rate environments
that may occur in the future.
As discussed in more detail below,
the Board believes most of the
comments outlined above would be
addressed by removing the IRR
components from the risk weights in
this proposal. Accordingly, consistent
with the Original Proposal, the Board is
now proposing to change the title of
current § 702.104 from ‘‘Risk portfolio
defined’’ to ‘‘Risk-based capital ratio.’’
In addition, the Board is now proposing,
with some minor changes from the
Original Proposal, to entirely replace the
requirements for calculating the riskbased net worth ratio for ‘‘complex’’
credit unions under current § 702.104
with a new risk-based capital ratio
measure.151
Proposed § 702.104 would continue to
require all ‘‘complex’’ credit unions to
calculate the risk-based capital ratio as
directed in the section. The Board
believes the proposed risk-based capital
ratio would enhance sound capital
management and help ensure that credit
unions maintain adequate levels of lossabsorbing capital going forward,
strengthen the stability of the credit
union system, provide a more leading
indicator of deteriorating strength than
the net worth ratio, and ensure credit
unions serve as a source of credit in
times of stress.
104(a) Calculation of Capital for the
Risk-Based Capital Ratio
Under the Original Proposal,
proposed § 702.104(a) would have
provided that to determine its risk-based
capital ratio, a complex credit union
must calculate the percentage, rounded
to two decimal places, of its risk-based
capital ratio numerator as described in
§ 702.104(b) to its total risk-weighted
assets denominator as described in
§ 702.104(c). The proposed method of
calculating risk-based capital would
have been generally consistent with the
methods used in other sectors of the
financial services industry. As with the
current risk-based net worth
requirement, the proposed risk-based
capital ratio calculation would have
been calculated primarily using
information credit unions already report
on the Call Report form required under
§ 741.6(a)(2) of NCUA’s regulations.
The Board received a number of
comments regarding the Original
151 12

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Proposal’s reliance primarily on
information credit unions already report
on the Call Report form. A number of
commenters stated that the Call Report
is sufficient and should not be amended
or expanded. Commenters generally
appreciated the Board’s awareness of
the regulatory burdens on credit unions
relating to reporting requirements.
Other commenters suggested the Call
Report information currently collected
should be modified to properly capture
risks associated with assets and
liabilities in more detail. One
commenter suggested that by supporting
and ensuring strong risk-based capital
calculations through enhanced Call
Report data, the Board could help to
improve communications between
credit unions and examiners during the
examination process, which could result
in more efficient examinations and
would help alleviate regulatory burdens
on credit unions.
Other commenters suggested that
adopting investment risk weights
consistent with the Other Banking
Agencies’ regulations would require
additional reporting in the Call Reports,
but stated additional reporting would be
a small issue for some credit unions and
a non-event for others.
One commenter suggested that the
Board’s goal should be to produce the
best risk-based capital proposal
regardless of the current reporting
structure and the proposal should be
rewritten and the effort begun anew
without the instructions to minimize
changes to the current call report form.
Another commenter suggested that the
call report should be amended to
include a separate line item labeled,
‘‘deposits in Federal Reserve Banks,’’
and that such a change would not be
burdensome, either for credit unions or
NCUA.
Several commenters stated that the
revised Call Report would make the
reporting process more costly and
complicated for credit unions due to the
amount of new information that credit
unions would be required to provide
under the Original Proposal because
gathering new data would require
changes by data processors, additional
staff time and staff training, all of which
costs money.
Conversely, one commenter suggested
that the vast majority of credit unions
that would be affected by the Original
Proposal either use systems developed
by, or outsourced their investment
accounting and reporting to, firms who
already provide the required
information to banks, and it would
require little relative effort to modify the
reports provided to credit unions to be
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Call Reports. Another commenter stated
that the Board should overhaul the
current call reporting platform to better
align credit union Call Report data with
the Call Report data collected by the
other U.S. regulated depository
institutions to build a consistent
framework for both the assignment of
appropriate risk weights, as well as the
comparability of capital adequacy across
institutions. Still another credit union
commenter stated that it captures credit
scores and current loan-to-value (LTV)
ratios and would gladly report
additional loan information to NCUA in
its Call Report rather than be subject to
the proposed risk-based capital
standards.
The Board has decided to retain the
original changes to § 702.104(a) in this
proposal with only minor, nonsubstantive edits. However, the Board is
aware that changes to the Call Report
could create a reporting burden on
credit unions. The Board agrees with
commenters who encouraged Call
Report data enhancement which would
improve the assignment of appropriate
risk weights using more granular data.
While this approach would require
more call report data, it would also
result in improved precision of capital
requirements, and more granular data
that would also enhance NCUA’s offsite
supervision capabilities. As NCUA has
done in the past (most recently in
October 2012), the agency will provide
credit unions with prior notification of
significant reporting changes to the Call
Report,152 and credit unions will have
an opportunity to comment via the
related Paperwork Reduction Act filing
through the U.S. Office of Management
and Budget (OMB). The assignment and
discussion of specific risk weights for
assets that would be identified within
the Call Report is contained in
§ 702.104(c).
104(b) Risk-Based Capital Ratio
Numerator
Under the Original Proposal,
proposed § 702.104(b) would have
provided that the risk-based capital ratio
numerator is the sum of certain specific
capital elements listed in
§ 702.104(b)(1), minus certain regulatory
adjustments listed in § 702.104(b)(2).
The proposed numerator for the riskbased capital ratio would have
continued to consist primarily of the
components of a credit union’s net
worth. In order to capture all of the
material risks while keeping the
calculation from becoming overly
152 NCUA Letter to Credit Unions No. 12–CU–12,
October 2012, Changes Planned for Upcoming Call
Reports.

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complicated, the Original Proposal
would have added some additional
equity and loss allowance items and
other specified balance sheet items
would be subtracted. The goal of the
proposed risk-based capital ratio
numerator was to achieve a measure
that reflects a more accurate amount of
equity and reserves available to cover
losses.
A number of commenters suggested
that the Board should focus more on the
numerator of the risk-based capital ratio
in the rule by allowing credit unions to
hedge IRR by obtaining ‘‘credits’’ for
low-risk assets such as certificates of
deposit. Other commenters made
similar statements suggesting that credit
unions should be given a credit when
they build their own insurance through
certificates of deposit or long-term
borrowing because such investments are
considered additional insurance that are
being used to hedge IRR.
The Board determined these
comments are related to the IRR
components of the risk weights in the
Original Proposal and, as previously
stated, this proposal would not include
IRR components in the risk weights
assigned to investments. The Board also
determined quantifying ‘‘credits’’ for
specific types of shares and liabilities
would be extraordinarily complicated
and require a large amount of additional
data, and be inconsistent with how the
Other Banking Agencies approach riskbased capital requirements.
The Original Proposal maintained the
structure of the computation of the riskbased capital ratio numerator with some
revisions, which are addressed under
the discussion on each of the individual
elements below. Accordingly, the Board
is now proposing to retain § 702.104(b)
of the Original Proposal without change.
104(b)(1) Capital Elements of the RiskBased Capital Ratio Numerator
Section 702.104(b)(1) of the Original
Proposal would have listed the capital
elements of the risk-based capital ratio
numerator as follows: undivided
earnings (including any regular reserve);
appropriation for non-conforming
investments; other reserves; equity
acquired in merger; net income; ALLL,
limited to 1.25 percent of risk assets;
secondary capital accounts included in
net worth (as defined in § 702.2); and
§ 208 assistance included in net worth
(as defined in § 702.2). Consistent with
the Original Proposal, § 702.104(b)(1) of
this proposal would list the elements of
the risk-based capital ratio numerator.
The Board received a significant
number of comments suggesting various
changes or additions to the list of capital
elements included in the Original

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Proposal, which are discussed in more
detail below.
The Board generally disagrees with
the comments received and has, with
the exception of the ALLL, decided to
retain the language from the Original
Proposal without change. As explained
above, the FCUA gives NCUA broad
discretion in designing the risk-based
net worth requirement. Thus, this
proposal incorporates a broadened
definition of capital for purposes of
calculating the proposed new risk-based
capital ratio that would serve as the
risk-based net worth requirement. The
Board proposes to do this to provide for
a more comparable measure of capital
across all financial institutions and
better account for related elements of
the financial statement that are available
(or not) to cover losses and protect the
NCUSIF. This broader definition of
capital would contribute over 50 basis
points, on average, to affected credit
unions’ risk-based capital ratio.
Undivided Earnings
The Original Proposal would have
included undivided earnings (including
any regular reserve) in the risk-based
capital ratio numerator.
The Board received no comments on
the inclusion of this capital element in
the risk-based capital ratio numerator.
Accordingly, the Board has decided to
retain this aspect of the Original
Proposal with a minor change. The
reference to regular reserve would be
removed, as the regular reserve account
is a part of undivided earnings and this
proposal seeks to eliminate the
provisions of the rule relating to
maintenance of the regular reserve
account.
Appropriation for Nonconforming
Investments

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The Original Proposal would have
included the appropriation for
nonconforming investments in the riskbased capital ratio numerator.
The Board received no comments on
the inclusion of this capital element in
the risk-based capital ratio numerator.
Accordingly, the Board has decided to
retain this aspect of the Original
Proposal without change.
Other Reserves
The Original Proposal would have
included other reserves in the risk-based
capital ratio numerator.
The Board received no comments on
the inclusion of this capital element in
the risk-based capital ratio numerator.
Accordingly, the Board has decided to
retain this aspect of the Original
Proposal without change.

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Equity Acquired in Merger
Under the Original Proposal, the
proposed risk-based capital ratio
numerator would have included the
equity acquired in merger component of
the balance sheet. This equity item
would have been used in place of the
total adjusted retained earnings
acquired through business combinations
amount that credit unions report on the
PCA net worth calculation worksheet in
the Call Report. The equity acquired in
merger is the GAAP equity recorded in
a business combination and can vary
from the amount of total adjusted
retained earnings acquired through
business combinations, which is not a
GAAP accounting item. The use of
equity acquired in a merger, as
measured using GAAP, would have
more accurately reflected the overall
value of the business combination
transaction.
The Board received no comments on
the inclusion of this capital element in
the risk-based capital ratio numerator.
Accordingly, the Board has decided to
retain this aspect of the Original
Proposal without change.
Net Income
The Original Proposal would have
included net income in the risk-based
capital ratio numerator.
The Board received no comments on
the inclusion of this capital element in
the risk-based capital ratio numerator.
Accordingly, the Board has decided to
retain this aspect of the Original
Proposal without change.
ALLL
The Original Proposal would have
included the ALLL in the risk-based
capital ratio numerator. The Board
noted in the Original Proposal that the
ALLL would have been included in the
risk-based capital ratio numerator
because it is available to cover expected
levels of loan losses at a credit union.
The Original Proposal, however, would
have limited the amount of the ALLL
that a credit union could include in the
risk-based capital ratio numerator to
1.25 percent of total risk-weighted
assets. In the preamble to the Original
Proposal, the Board stated that this
approach would have been consistent
with the Basel III framework and the
Other Banking Agencies’ capital
regulations,153 and it also would have
induced credit unions to grant quality
loans and record loan losses in a timely
manner.
The Board received a number of
comments regarding the proposed
inclusion of the ALLL in the risk-based
153 See,

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capital ratio numerator. A substantial
number of commenters stated that the
ALLL is a dedicated item on the balance
sheet and should not be limited or
restricted in any way. Commenters
suggested that GAAP will not allow the
ALLL to be an excessive amount, so the
reasoning for limiting the ALLL in the
Original Proposal was unclear, even if
the Other Banking Agencies’ rules treat
it that way. Commenters suggested that,
rather than implementing a 1.25 percent
cap to capture risks in credit unions that
are holding excess ALLL, the Board
should address the risks that the cap
was intended to address one-on-one
with ‘‘overly conservative’’ credit
unions. Commenters suggested that risk
reserved for within the ALLL for credit
risk should not be duplicated under the
risk-based capital ratio measure. Other
commenters stated that limiting the
ALLL would have minimal practical
effect on the way credit unions
underwrite loans or record losses, but it
could create a disincentive for credit
unions to hold higher reserves.
Some commenters suggested that for
banks, the 1.25 percent limitation
prevents the use of the ALLL as a means
to control taxable revenue by
maintaining excessive reserves, but that
credit unions have no incentive to
manipulate the reserve in such a
manner so the Board should include the
full ALLL balance in the risk-based
capital ratio numerator.
Other comments stated that the
allocation of 1.5 percent of loans in the
current rule more appropriately
captures the insulating contribution that
the ALLL provides to capital,
particularly during times of economic
stress.
Still other commenters stated that
credit unions with portfolios of
agricultural and business loans, which
are allowed by GAAP to reserve for each
loan individually in the ALLL rather
than just using historical data, would be
adversely affected by the original
proposal because credit unions would
have a lot less incentive to include
economic downturns as part of their
calculations under the rule.
A small number of commenters
suggested that the ALLL in excess of
1.25 percent of risk assets should be
recognized as a reduction of risk-based
loans at 100 percent consistent with the
treatment by the Other Banking
Agencies.
Conversely, some other commenters
stated that both the inclusion of the
ALLL in the risk-based capital ratio
numerator and the 1.25 percent limit
were appropriate based on the current
environment.

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However, another commenter
suggested that by excluding the amount
of the ALLL above 1.25 percent, the
Original Proposal would have implicitly
encouraged credit unions to cap their
ALLL at 1.25 percent, ignoring the
responsibility to develop the ALLL
based on portfolio risk.
In response to the comments received,
the Board is now proposing to remove
the 1.25 percent of risk asset limit on
the amount of the ALLL that can be
included in the risk-based capital ratio
numerator. Under this proposal, all of
the ALLL, maintained in accordance
with GAAP, would be included in the
risk-based capital ratio numerator. The
proposed removal of the limit on the
ALLL would result in this reserve fully
counting as capital. The Board believes
this is appropriate given that credit
unions will have already expensed
through the income statement the
expected credit losses on the loan
portfolio. In times of financial stress,
while risk may be increasing (such as
rising non-current loans), an uncapped
inclusion of the ALLL in the risk-based
capital ratio numerator would allow a
properly funded ALLL to somewhat
offset the impact of the financial
stressors on the risk-based capital ratio.
The Board also believes that this
proposed change is appropriate given
the high quality of credit union capital.
The quality of credit union capital
should eliminate concerns that the
ALLL could account for too much of the
capital required to be held against total
risk-weighted assets.
Further, the Board agrees with
commenters that NCUA’s supervision
process could address any concerns
with uncapping inclusion of the ALLL,
such as artificially slow charge-offs to
manipulate capital requirements.
Removal of the limitation in the amount
of the ALLL included in risk-based
capital ratio would also address the
treatment of excess ALLL that was
excluded from the calculation.
A significant number of commenters
also stated that if the Financial
Accounting Standards Board (FASB)
changes the accounting standards that
cause more than inconsequential
increases to the normal levels of ALLL,
the Board should increase the limit of
ALLL to be included in the risk-based
capital ratio numerator comparable to
the additional levels of normal ALLL.
Other commenters suggested that the
Board eliminate the ALLL cap of 1.25
percent of risk-weighted assets given the
high risk weight associated with noncurrent loans. Further, commenters
suggested elimination of the ALLL cap
based on the FASB’s proposed
accounting for credit losses, which, if

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finalized, could result in an increase of
credit unions’ ALLL by more than 50
percent. Another commenter suggested
that language be added to the rule that
states that the ALLL credit will be
increased if FASB proposal is
implemented. Other commenters
suggested that reducing the ALLL
allocation would be inconsistent with
the expected accounting conventions for
future allowance methodologies.
The Board notes that eliminating the
cap on ALLL inclusion in the risk-based
capital ratio numerator would address
concerns with FASB’s proposed related
changes to GAAP.154 However, FASB
has implied its intent in the upcoming
Current Expected Credit Loss Model to
change current GAAP and require
entities to establish a day one credit loss
allowance on Purchased Credit
Impaired (PCI) assets.
As the entire credit loss allowance
would be included in a credit union’s
risk-based capital ratio numerator under
the proposed rule, the Board is
requesting specific comment on how a
final rule should mitigate strategies by
credit unions to ‘‘purchase’’ a credit loss
allowance by acquiring PCI assets in an
acquisition or merger, and thus,
artificially increase their risk-based
capital ratio numerator.
Secondary Capital Accounts
The Original Proposal would have
included secondary capital accounts
included in net worth (as defined in
§ 702.2) in the risk-based capital ratio
numerator.
The Board received no comments on
the inclusion of this capital element in
the risk-based capital ratio numerator.
Accordingly, the Board has decided to
retain this aspect of the Original
Proposal in this proposal without
change.
Section 208 Assistance
The Original Proposal would have
included § 208 assistance included in
net worth (as defined in § 702.2) in the
risk-based capital ratio numerator.
The Board received no comments on
the inclusion of this capital element in
the risk-based capital ratio numerator.
Accordingly, the Board has decided to
retain this aspect of the Original
Proposal in this proposal without
change.
Call Report Equity Items Not Included
in the Risk-Based Capital Ratio
Numerator
Under the Original Proposal, the
proposed risk-based capital ratio
154 FASB

Financial Instruments-Credit Losses
Subtopic 825–15 (exposure drafted dated December
20, 2012).

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numerator would not have included the
following Call Report equity items:
accumulated unrealized gains (losses)
on available for sale securities;
accumulated unrealized losses for other
than temporary impairment (OTTI) on
debt securities; accumulated unrealized
net gains (losses) on cash flow hedges;
and other comprehensive income. In
designing the proposed rule, the Board
recognized that the items listed above
reflected a credit union’s actual loss
absorption capacity at a specific point in
time, but included gains or losses that
may or may not be realized. The Board
also recognized that including these
items in the risk-based ratio numerator
could lead to volatility in the risk-based
capital ratio measure, difficulty in
capital planning and asset-management,
and other unintended consequences.155
Accordingly, the Board chose to exclude
these items from the risk-based capital
ratio numerator in the Original
Proposal.
The Board received a number of
comments on the exclusion of
accumulated unrealized gains and
losses from the risk-based capital ratio
numerator in the proposed rule.
Commenters suggested that to offset the
effect of unrealized gains or losses,
credit unions should be allowed to net
the gain or loss against the investment
that created it, which would mean
valuing the investment at book.
Commenters stated that this would
make adjustments to the unrealized
gains or losses have no net effect on the
calculation. Commenters stated further
that under the Original Proposal an
unrealized gain would increase the
value of the investment in the
denominator and an unrealized loss
would decrease the value of the
investment in the denominator, creating
volatility. Commenters also suggested
that with an unrealized loss there is no
deduction from net worth and the asset
is still decreased in the risked-based
asset calculation; thus, a large
unrealized loss could hide a risk that
the net worth would have to be reduced
if the credit union was liquidated. Other
commenters agreed that including
unrealized gains and losses could lead
to volatility in the risk-based capital
measure, difficulty in capital planning
and asset-management, and other
unintended consequences as the
unrealized gain or loss expands and
contracts.
Still other commenters suggested that
while the Original Proposal would have
155 The Other Banking Agencies’ regulatory
capital rules (12 CFR 324.22) allow institutions to
make an opt-out election for similar accounts. See,
e.g., 78 FR 55339 (Sept. 10, 2013).

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appropriately left unrealized gains and
losses on available-for-sale securities
out of the risk-based capital ratio
numerator, and explains NCUA’s sound
reasoning behind that position, the
proposed high risk weights applied to
investments would almost completely
offset this for many credit unions. These
commenters suggested the high risk
weights applied to investments would
reduce some credit unions’ risk-based
capital ratios as if they had already sold
their entire portfolio at the loss in
market values they would expect in an
unrealized, instantaneous, ‘‘up 300 basis
points’’ rate-shock scenario.
As noted earlier, this proposal
removes the IRR components contained
in the risk weights, so related concerns
raised by commenters on the investment
risk weights should now be moot.
Due to the changes this proposal
would make to the assignment of risk
weights for investments, and in
response to the comments in agreement
with the concerns about volatility in the
risk-based capital ratio that can occur
with investments, the Board has
decided to retain this aspect of the
Original Proposal without change. The
proposed application of excluding
accumulated unrealized gains (losses)
on available-for-sale securities;
accumulated unrealized losses for OTTI
on debt securities; accumulated
unrealized net gains (losses) on cash
flow hedges, and other comprehensive
income also would eliminate the added
complication of an opt-in or opt-out
approach.
Other Supplemental Forms of Capital
Under the Original Proposal, forms of
supplemental capital, other than
secondary capital accounts included in
net worth (as defined in § 702.2), would
not have been included in the risk-based
capital ratio numerator. For naturalperson credit unions, the only form of
supplemental capital the FCUA
includes in the definition of ‘‘net
worth’’ is secondary capital that it
authorizes for low-income credit
unions.156 The Board did not propose
including other supplemental forms of
capital in the risk-based capital ratio
numerator.
As a result, the Board received a
substantial number of comments
expressing concern about the omission
of supplemental capital from the riskbased capital ratio numerator.
A number of commenters suggested
that the Original Proposal would have
regulated only the asset side of the
156 12 U.S.C. 1757(6), 1790d(o)(2)(C) (defining
‘‘net worth’’), and proposed § 702.2 (defining ‘‘net
worth’’).

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balance sheet, representing the riskbased capital ratio denominator, while
depriving credit unions of the flexibility
to use supplemental capital to address
the newly introduced capital
requirement through the risk-based
capital ratio numerator. Other
commenters stated that, in order for any
credit unions but low-income credit
unions to use supplemental capital to
meet the risk-based net worth
requirement, Congress would have to
amend the FCUA to give NCUA the
authority to permit that use of
supplemental capital. In that regard,
commenters contended that the Board
should have raised the supplemental
capital issue with Congress before
issuing the proposed rule.
Without being able to include
supplemental capital in the risk-based
capital ratio numerator, some
commenters stated that credit unions
would be forced to address capital
concerns by increasing profitability
(through higher fees and loan rates,
etc.), shrinking assets, or both; none of
which they suggested would be in a
credit union’s best interest.
A small number of commenters
suggested that credit unions would not
need supplemental capital to be
effective if the Board were to devise a
risk-based capital regulation that
enabled credit unions to grow in a
manner consistent with safety and
soundness.
Other commenters protested that
since the Board had altered the
definition of capital in the Original
Proposal, it therefore should also extend
the risk-based capital ratio numerator to
include supplemental capital. In making
the same argument, others noted that
the risk-based capital ratio numerator as
proposed already included items that
are not part of ‘‘net worth’’ as defined
by the FCUA.
Commenters generally acknowledged
that counting supplemental capital as
part of a credit union’s net worth
requirement (for all but low-income
credit unions) would require an
authorizing amendment to the FCUA,
but they maintain that, in contrast,
nothing in the Act prohibits the Board
from including supplemental capital in
the risk-based capital ratio numerator.
More expansively, some commenters
interpreted the absence of an express
prohibition in the Act barring the use of
supplemental capital by any credit
union for any purpose as implicit
support for allowing it to be used for
risk-based purposes only. Under either
interpretation, commenters urged the
Board to make supplemental capital a
component of the risk-based capital
ratio numerator consistent with the

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proposed definition of capital as
‘‘equity, as measured by GAAP,
available to a credit union to cover
losses.’’ 157
In contrast to the lack of authority for
federally chartered credit unions, other
than low-income credit unions, to
currently accept secondary capital,
several commenters suggested that the
laws of some states authorize their
federally insured state chartered credit
unions to raise other supplemental
forms of capital. Therefore, the
commenters suggested the rule should
permit those federally insured state
chartered credit unions that are
authorized to raise other forms of capital
under state law to also count that capital
in the risk-based capital ratio
numerator.
Commenters suggested that the FCUA
already authorizes federally chartered
credit unions to issue certificates of
indebtedness, which function as loans
from the holder to the credit union with
interest paid to the holder, as well as to
offer subordinated debt instruments to
members and non-members. They urged
the Board to allow FCUs to count those
certificates of indebtedness, and those
instruments that meet GAAP capital
requirements, in the risk-based capital
ratio numerator.
Having considered the comments on
supplemental capital, the Board
declines to permit credit unions (other
than low-income credit unions) to
include other supplemental forms of
capital in the risk-based capital ratio
numerator as part of this proposal,
pending potential Congressional action
and more specific comments as
described below.158
Members of Congress have introduced
legislation in the past that would
authorize all federally insured credit
unions to accept supplemental
capital.159 Individual Board members
have publicly supported such
legislation in the past. At this time the
Board prefers to await the outcome of
previously proposed legislation that, if
passed by Congress, would expressly
authorize supplemental capital as a
component of net worth,160 and permit
157 See 79 FR 11183, 11211 (Feb. 27, 2014)
(Proposing to define ‘‘capital’’ as ‘‘the equity, as
measured by GAAP, available to a credit union to
cover losses.’’).
158 702.104(b)(2)
159 See, e.g., HR 719, 113th Cong. (2013) (HR 719
would have amended the FCUA to allow the Board
to authorize certain forms of supplemental capital
that could be counted toward a credit union’s ‘‘net
worth,’’ as that term is defined in section
1790d(o)(2)).
160 The Capital Access for Small Businesses and
Jobs Act, HR 719, was introduced in the House of
Representatives and referred to the House Financial
Services Committee during the 113th Congress.

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the Board to decide whether or how to
include such capital in the net worth
ratio and the risk-based net worth
requirement. Individual Board members
have publicly supported such
legislation in the past.
Such authority would also raise a host
of other complicated issues that would
need to be addressed through additional
changes to NCUA’s regulations,
including providing consumer
protections, amending NCUSIF payout
priorities, and imposing prudent
limitations on the ability of non-lowincome credit union to offer and include
supplemental capital.
Although the FCUA does authorize
federally chartered credit unions to
issue certificates of indebtedness and
subordinated debt instruments to
members and non-members, the ability
to include them in the risk-based capital
ratio numerator depends on whether
such supplemental forms of capital are
structured to satisfy prudential capital
and consumer protection
requirements—issues not addressed in
this rulemaking.
The Board does, however, specifically
request comment on the following
questions regarding additional
supplemental forms of capital.
1. Should additional supplemental
forms of capital be included in the riskbased capital ratio numerator and how
would including such capital protect
the NCUSIF from losses?
2. If yes, to be included in the riskbased capital ratio numerator, what
specific criteria should such additional
forms of capital reasonably be required
to meet to be consistent with GAAP and
the FCUA, and why?
3. If certain forms of certificates of
indebtedness were included in the riskbased capital ratio numerator, what
specific criteria should such certificates
reasonably be required to meet to be
consistent with GAAP and the FCUA,
and why?
4. In addition to amending NCUA’s
risk-based capital regulations, what
additional changes to NCUA’s
regulations would be required to count
additional supplemental forms of
capital in NCUA’s risk-based capital
ratio numerator?
5. For state-chartered credit unions,
what specific examples of supplemental
capital currently allowed under state
law do commenters believe should be
included in the risk-based capital ratio
numerator, and why should they be
included?
6. What investor suitability, consumer
protection, and disclosure requirements
should be put in place related to
additional forms of supplemental
capital?

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104(b)(2) Risk-based Capital Ratio
Numerator Deductions
Under the Original Proposal,
proposed § 702.104(b)(2) would have
provided that the elements deducted
from the sum of the capital elements of
the risk-based capital ratio numerator
are: (1) The NCUSIF Capitalization
Deposit; (2) goodwill; (3) other
intangible assets; and (4) identified
losses not reflected in the risk-based
capital ratio numerator.
The Board received a significant
number of comments, which are
outlined in detail below, regarding the
capital elements that would have been
deducted from the risk-based capital
ratio numerator. However, for the
reasons explained in more detail below,
the Board has decided to retain most of
these aspects of the Original Proposal
with a few changes that are discussed in
more detail below.
NCUSIF capitalization deposit. The
Original Proposal would have addressed
concerns about the NCUSIF
capitalization deposit being reflected on
the NCUSIF’s balance sheet both as
equity to pay losses and as an asset of
the insured credit unions. Under the
Original Proposal, the NCUSIF
capitalization deposit would have been
subtracted from both the numerator and
denominator of the risk-based capital
ratio.161 This treatment of the risk-based
capital ratio would not have altered the
NCUSIF capitalization deposit’s
accounting treatment for credit unions.
The Board received a number of
comments expressing concerns about
the Original Proposal’s treatment of the
NCUSIF capitalization deposit. A
majority of commenters disagreed with
or questioned the treatment of the
NCUSIF deposit. Commenters suggested
that the NCUSIF deposit should not be
deducted from the risk-based capital
ratio numerator or denominator.
Commenters stated that if the riskbased capital ratio numerator is
intended to reflect ‘‘equity available to
cover losses in the event of liquidation,’’
then the NCUSIF deposit should be
included because it is one of the most
reliable assets available to credit unions
to cover losses. Commenters suggested
that the only condition under which it
would not be available is during a
system-wide catastrophe, in which case
most other credit union assets, other
than cash, would similarly be subject to
substantial losses. Those commenters
argued there is no reason to believe the
161 See U.S. Govt. Accountability Office, GAO–
04–849, Available Information Indicates No
Compelling Need for Secondary Capital (2004),
available at http://www.gao.gov/assets/250/
243642.pdf.

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NCUSIF capitalization deposit would
not be available to cover losses or that
it should be excluded from the
numerator of the risk-based capital ratio.
Other commenters suggested that
NCUA has control of these funds so
credit unions should be able to count
the deposit toward their capital
requirement (i.e., the deposit should be
included in the risk-based capital ratio
numerator and be counted only as a
zero-risk item in the risk-based capital
ratio denominator).
Other commenters stated that
although banks expense their deposit
insurance, credit unions treat the
deposit as an asset. Commenters stated
that while it is true that the bank’s
deposit insurance premiums have
reduced the bank’s capital, a credit
union’s capital has been reduced in real
terms by the lost income the credit
union would have earned had it placed
the funds in an earning asset rather than
in a non-interest-bearing deposit to
NCUSIF.
Another commenter stated that it
appeared that the Board was attempting
to make the risk-based capital ratio
numerator comparable to banks, which
expense their insurance premiums paid
by eliminating the NCUSIF
capitalization, but that banks pay and
expense their premiums for each period
due and cannot get those funds back.
The commenter stated further that
federally insured credit unions, on the
other hand, not only pay an upfront
deposit of one percent of insured shares
and record that as an asset, but also pay
for and immediately expense periodic
assessments from NCUA needed to
bolster the NCUSIF. In addition, the
commenter stated that federally insured
credit unions can have their deposits
returned if, for example, they convert to
a bank, elect private insurance (in the
nine states where private insurance is
permitted), or complete a voluntary
liquidation, and the NCUSIF
capitalization deposit is an asset as
recognized by GAAP, is tangible, and
easily measured.
Some commenters suggested that this
accounting difference is already
captured as part of the higher leverage
ratio for credit unions as compared to
banks. They believe Congress
established a capital level for credit
unions two percentage points higher
than the capital level for banks because
one percent of a credit union’s capital
is dedicated to the NCUSIF and another
one percent of the typical credit union’s
capital is dedicated to its corporate
credit union. Those commenters stated
that if the Board excludes the NCUSIF
deposit it will create an uneven playing
field between banks and credit unions

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that will disadvantage credit unions by
adjusting for the deposit twice.
Commenters generally suggested that
this new approach could bring the
accounting treatment of the NCUSIF
deposit into question; that if the deposit
is not available to cover a credit union’s
risks during liquidation then that leads
to the question of whether or not the
deposit is an asset. Going further, other
commenters suggested the Board
reconsider this aspect of the Original
Proposal, as it implies that the deposit
is worthless and should be expensed
versus the current method of
capitalizing the deposit.
Conversely, another commenter stated
that after experiencing the corporate
credit union meltdown, it has become
evident that NCUA has the superior
claim on the deposit and that the credit
union really cannot claim to own it.
Still another commenter stated that
perhaps the NCUSIF deposit should
have been expensed all along, but
writing it down now comes at a time
when generating earnings is already a
big challenge.
One commenter suggested that the
NCUSIF deposit should be treated as an
investment like Federal Home Loan
Bank stock, which would mean
assigning a risk weight to account for
the possibility of the NCUSIF having to
use the credit union’s funds beyond
normal premiums and losing some of
the credit union’s equity in the NCUSIF.
The commenter suggested that leaving
the NCUSIF deposit on the balance
sheet, assigning it a risk weight, and
removing the deduction from net worth
is the best option for accurately
measuring the ability of each credit
union to weather losses. Other
commenters suggested that the deposit
should be assigned a risk weight of 100
percent or lower.
It was suggested that the NCUSIF
deposit should not be excluded from the
calculation of risk-based capital ratios at
all, but that excluding it from the
denominator penalizes more than
excluding it from the risk-based capital
ratio numerator.
Yet other commenters disagreed,
suggesting that the NCUSIF deposit be
excluded from the calculation of riskbased capital altogether.
One commenter suggested that the
deposit be treated like any other illiquid
asset instead of contra-equity.
The Board has carefully considered
the comments received and continues to
believe exclusion of the NCUSIF deposit
from both the risk-based capital ratio
numerator and denominator is the
appropriate way to handle its risk-based
capital treatment. Accordingly, for all
the reasons discussed below, the Board

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has decided to retain this aspect of the
Original Proposal without change.
The 1997 U.S. Treasury Report on
Credit Unions supports NCUA’s current
position of excluding the NCUSIF
deposit from the risk-based capital ratio
calculation. The Treasury report
concluded that the NCUSIF deposit is
double counted because it is an asset on
credit union balance sheets and equity
in the NCUSIF.162 The Treasury noted
that, in lieu of expensing the NCUSIF
deposit, holding additional capital is
necessary to offset risk of loss from
required credit union replenishment.
According to comments within the 1997
Treasury Report, Congress established a
higher statutory leverage ratio for credit
unions in part to offset the risk of loss
from required credit union
replenishment.163
The Board believes the NCUSIF
deposit deduction needs to be addressed
in the risk-based capital ratio, not just
the leverage ratio, to correct for the
double-counting concern in those credit
unions where the risk-based capital
ratio is the governing requirement.
The NCUSIF deposit is not available
for a credit union to cover losses from
risk exposures on its own individual
balance sheet in the event of
insolvency.164 The purpose of the
NCUSIF deposit is to cover losses in the
credit union system. The Board is
required to assess premiums necessary
to restore and maintain the NCUSIF
equity ratio at 1.2 percent. Premiums
were necessary from 2009 through 2011
as a result of losses. A series of NCUA
Letters to Credit Unions issued during
2009 discuss the necessary write-down
of the one percent NCUSIF deposit and
required NCUSIF premium expenses
needed to restore the NCUSIF equity
ratio.165
The NCUSIF deposit is refundable in
the event of voluntary credit union
charter cancellation or conversion.
However, this aspect does not change
the unavailability of the NCUSIF
deposit to cover individual losses while
the credit union is an active going
162 Department of U.S. Treasury Report titled;
Credit Unions, 1997, Page 58: ‘‘The one percent
deposit does present a double-counting problem.
And it would be feasible for credit unions to
expense the deposit now, when they are healthy
and have strong earnings. However, expensing the
deposit would add nothing to the Share Insurance
Fund’s reserves, and—as we will explain—better
ways of protecting the Fund are available.
Accordingly, we do not recommend changing the
accounting treatment of the 1 percent deposit.’’
163 Id. at page 4–5 and 55–59
164 12 U.S.C. 1782(c)(1)(B)(iii).
165 NCUA Letter 09–CU–20, Premium
Assessments; NCUA Letter 09CU–14, Corporate
Stabilization Fund Implementation; NCUA Letter
09–CU–02, Letter Corporate Credit Union System
Strategy.

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concern, or its at risk stature in the
event of major losses to the NCUSIF.
NCUA refunds the NCUSIF deposit only
in the event a solvent credit union
voluntarily liquidates, or converts to a
bank charter or private insurance.
Consistent with its exclusion from the
risk-based capital ratio numerator, the
NCUSIF deposit would also be deducted
from the denominator under proposed
§ 702.104(c)(1), which would properly
adjust the risk-based capital ratio
calculation and reduce the impact of the
adjustment.
Neither the Original Proposal nor this
second proposal would adjust for the
NCUSIF deposit twice or put credit
unions at a disadvantage in relation to
banks because banks have expensed
premiums to build the Deposit
Insurance Fund.
The Board does not agree with
commenters who suggested that the
NCUSIF deposit should be treated as an
investment similar to FHLB stock. The
NCUSIF deposit and FHLB stock have
several fundamental differences. The
deposit in the NCUSIF results in double
counting of capital within the credit
union system. Investments in FHLB
stock do not. A financial institution
does not need to change its charter for
a FHLB stock redemption as a credit
union must do for a NCUSIF deposit
refund. Further, unlike FHLB stock, the
NCUSIF deposit is not an incomeproducing asset. The NCUSIF deposit
has not paid a dividend since 2006. The
NCUSIF cannot pay another dividend
while the Corporate Stabilization Fund
loan from the Treasury is still
outstanding.
The Board is not requiring credit
unions to expense the NCUSIF deposit,
and does not believe the risk-based
capital treatment will lead to a change
in how this asset is accounted for under
GAAP. The Board agrees with the U.S.
Treasury position as stated in its 1997
Report on Credit Unions. Treasury
stated expensing the NCUSIF deposit
would not strengthen the NCUSIF. The
financial structure of the NCUSIF is
reasonable and works well for credit
unions.
The assignment of a risk weight for
the NCUSIF has the potential to create
additional criticisms, as a low risk
weight may not capture the true nature
of the account and a high risk weight
could produce unnecessary concern
about risk of the NCUSIF. The NCUSIF
is treated similarly to other intangible
assets, (e.g. goodwill and core deposits
intangible assets), as they are not
available assets upon liquidation.

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Goodwill and Other Intangible Assets
Under the Original Proposal, goodwill
and other intangible assets would have
been deducted from both the risk-based
capital ratio numerator and
denominator in order to achieve a riskbased capital ratio numerator reflecting
equity available to cover losses in the
event of liquidation.
Goodwill and other intangible assets
contain a high level of uncertainty
regarding a credit union’s ability to
realize value from these assets,
especially under adverse financial
conditions.
The Board received a number of
comments regarding the treatment of
goodwill under the proposal.
Commenters suggested that credit
unions should not be required to
subtract goodwill even though doing so
is consistent with Basel III and the
Other Banking Agencies’ capital
regulations. One commenter suggested
that the proposed rule and the treatment
of goodwill should follow GAAP.
Another commenter suggested that
goodwill is an asset and should be
counted as such.
Other commenters suggested that
goodwill should be excluded from the
risk-based capital calculation because
goodwill is not immediately available to
absorb losses in accordance with the
intended purpose of regulatory capital,
but that the Board should also consider
what impact such a change could have
on merger incentives in the industry.
Another commenter suggested that
goodwill not be immediately deducted
from the numerator of the risk-based
capital ratio, but instead be phased out
over a 10-year period, or longer on a
case-by-case basis.
Commenters generally suggested that
the exclusion of goodwill disincentives
merger activity, which would prevent
healthy industry consolidation and the
combining of unhealthy credit unions
with stronger ones in the future.
Other commenters suggested that not
including intangibles resulting from a
merger in the risk-based capital ratio
numerator causes a reduction in the
risk-based capital ratio for non-goodwill
intangibles, which are not included in
the numerator and are deducted from
the numerator when amortized.
Other commenters stated they agree
with the proposed treatment of
goodwill, but that the Board should only
deduct those items initially included,
and only to the extent of current (net)
assets.
The Board also received a few
comments on the treatment of other
intangible assets under the proposed
rule. Commenters suggested the Board

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should rethink the treatment of the core
deposit intangible and let GAAP
determine how core deposit intangible
is to be written off in fairness to the
surviving credit union and to encourage
future mergers of both healthy and
distressed institutions whether credit
unions or banks.
The Board has considered the
comments and, as explained above, has
decided to retain the definition of
goodwill and to clarify the definition of
other intangibles. However, the Board
recognizes that requiring the exclusion
of goodwill and other intangibles
associated with supervisory mergers and
combinations that occurred prior to this
proposal would directly reduce the
credit union’s risk-based capital ratio.
The Board is now proposing to amend
the Original Proposal in a manner that
would allow credit unions to include
certain goodwill and other intangibles
in the risk-based capital ratio
numerator. In particular, this second
proposed rule would exclude from the
definition of goodwill which must be
deducted from the risk-based capital
ratio numerator, any goodwill acquired
by a credit union in a supervisory
merger or consolidation that occurred
before the publication of this rule in
final form.
The Board notes, however, that this
proposed change would not change
financial reporting requirements for
credit unions to use GAAP to determine
how certain intangibles are valued over
time.
Under this proposal, credit unions
would still need to account for goodwill
in accordance with GAAP and the
amount of excluded goodwill and other
intangibles is based on the outstanding
balance of the goodwill directly related
to supervisory mergers.
The Board is proposing to allow the
excluded goodwill until December 31,
2024. The Board believes this date
would allow most, if not all, credit
unions to adjust to this change as they
continue to value goodwill and other
intangibles in accordance with GAAP.
Also, the Board notes that this provision
would only apply to goodwill and other
intangibles acquired through
supervisory mergers or consolidations,
as that term is defined above, and is not
available for goodwill and other
intangibles acquired from mergers or
consolidations that do not meet this
definition. This change would allow
affected credit unions time to revise
business practices to ensure goodwill
and other intangibles directly related to
supervisory mergers do not adversely
impact their risk-based capital
calculation.

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In response to commenters who
sought to include goodwill and other
intangibles in the risk-based capital
ratio numerator, the Board reiterates
that there is a high level of uncertainty
regarding the ability of credit unions to
realize the value of these items,
particularly in times of adverse
conditions. In addition, the Board notes
that its proposed approach to other
intangibles generally mirrors the
treatment by the Other Banking
Agencies.166 However, the longer
implementation period included in this
proposal would serve to mitigate some
of the commenters’ concerns regarding
existing goodwill and other intangibles
because it would provide affected credit
unions with approximately a 10-year
period to write down the goodwill or
otherwise adjust their balance sheet.
While the Board is proposing to
include a provision to address goodwill
and other intangibles acquired through
supervisory mergers and consolidations
completed prior to this rule, the Board
is now proposing to retain the
requirement that all other goodwill and
other intangibles be excluded from the
risk-based capital ratio numerator as
they are not available to cover losses.
Credit unions will need to consider the
impact future combinations will have
on both the net worth and risk-based
capital ratios. For mergers involving
financial assistance from the NCUSIF,
this means a credit union with higher
capital may be able to outbid a
competing credit union. A credit union
will need to consider the impact on its
capital when determining the
components of a merger proposal,
which may result in higher costs to the
NCUSIF. However, stronger capital and
a risk-based capital measure that is less
lagging should reduce the number and
cost of failures, resulting in a net
positive benefit to the NCUSIF and the
industry.
Finally, in order to improve clarity
about which particular intangible assets
are deducted from the risk-based capital
ratio numerator, the Board is proposing
to revise the definition of other
intangible assets. Specifically, the Board
is proposing to exclude servicing assets
from the amount of intangible assets
deducted from the risk-based capital
ratio numerator since they have the
potential for value in the event of
liquidation.
Identified Losses Not Reflected in the
Risk-Based Capital Ratio Numerator
The Original Proposal would have
included a provision to allow for
identified losses, not reflected as
166 See,

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adjustments in the risk-based capital
ratio numerator, to be deducted. The
inclusion of identified losses would
have allowed for the calculation of an
accurate risk-based capital ratio.
The Board received no comments on
this aspect of the proposal. Accordingly,
the Board has decided to retain this
aspect of the Original Proposal without
change. However, the definition for
identified losses was modified, for
reasons articulated above, to make it
clear any such items would be measured
in accordance with GAAP.

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104(c) Risk-weighted Assets
In developing the proposed risk
weights included in the Original
Proposal, the Board reviewed the Basel
accords and the U.S. and various
international banking systems’ existing
risk weights.167 The Board considered
the comments contained in MLRs
prepared by the NCUA’s OIG and
comments by GAO in their respective
reviews of the financial services
industry’s implementation of PCA.168
As previously mentioned, the FCUA
requires the risk-based measure to
include all material risks. Accordingly,
in assigning the originally proposed risk
weights, the Board considered credit
risk, concentration risk, market risk,
IRR, operational risk, and liquidity risk.
The Board received a number of
comments expressing general concerns
about the proposed risk weights. A
significant number of commenters
suggested that the Original Proposal did
not contain sufficient statistical analysis
of credit union losses or failures,
quantified and summarized data on
historical NCUSIF loss experiences, and
comparisons of the loss or failure rates
at banks to rationalize the proposed
asset risk weights. One commenter
suggested that the risk weights reflect
‘‘socio-economic reasons’’ instead of
‘‘reasoned judgment about actual risks.’’
A number of commenters argued that
the absence of rigorous quantitative
analysis accompanying the proposal’s
risk weights raises many questions and
167 The Basel Committee on Banking Supervision
(BCBS) published Basel III in December 2010 and
revised it in June 2011, available at http://
www.bis.org/publ/bcbs189.htm.
168 Section 988 of the Dodd-Frank Wall Street
Reform and Consumer Protection Act obligates
NCUA’s OIG to conduct MLRs of credit unions that
incurred a loss of $25 million or more to the
NCUSIF. In addition, section 988 requires NCUA’s
OIG to review all losses under the $25 million
threshold to assess whether an in-depth review is
warranted due to unusual circumstances. The MLRs
are available at http://www.ncua.gov/about/
Leadership/CO/OIG/Pages/
MaterialLossReviews.aspx; see also GAO/GGD–98–
153 (July 1998); GAO–07–253 (Feb. 2007), GAO–
11–612 (June 2011), GAO–12–247 (Jan. 2012), and
GAO–13–71 (Jan. 2013).

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makes it exceedingly difficult to
respond fully to the agency’s proposal.
Other commenters contended that the
proposal provides no explanation of
how the risk-based ratings were derived
and how they would directly correlate
to risks the proposal attempts to
mitigate. Commenters suggested that the
Board’s proposed increases to various
risk weights were excessively blunt
given the small number of failures and
the MLR narratives cited in the
proposed rule. Other commenters
suggested that some of the risk weights
appear to be excessive, arbitrary, and/or
appear to cover all types of risk by
adopting excessive risk weight amounts.
A number of commenters suggested
that the proposed risk weights would
encourage credit unions to increase
levels of poorer credit quality consumer
loans at the expense of higher levels of
even the strongest, most secure MBLs,
real estate loans, and longer-term
investments. A significant number of
commenters expressed concerns that the
Original Proposal would have been
inconsistent in the treatment of the real
risks associated with some on-balance
sheet assets when the risk weights of
various assets were compared to one
another; e.g., the risk weights for
delinquent first mortgage loans,
buildings, prepaid expenses, foreclosed
properties, investments in CUSOs, and
any investment with a weighted-average
life of more than 5 years.
Other commenters suggested that the
Board reconsider the limitations of any
single metric at assessing risk and match
the consequences of a low risk-based
capital ratio to the limitations and
potential inaccuracy of that metric.
One commenter suggested that, based
on the proposal, the implied balance
sheet structure of most credit unions
would be as follows: (1) Commercial
lending would be limited to roughly 15
percent of assets, because of the heavier
risk weight at higher thresholds; (2) real
estate lending would be limited to
approximately 35 percent of assets
regardless of the repricing structure of
the loans; (3) home equity loans/second
lien mortgage loans would be limited to
10 percent of assets; and (4) the
remainder of a credit union’s balance
sheet would be limited to consumer
loans and very short-term investments
because of the risk weights.
A number of commenters suggested
that asset quality (e.g., number of
delinquencies, classified loans, and
charge-offs) should also be taken into
account in setting the risk weights to
avoid penalizing credit unions that are
doing their jobs well. Other commenters
suggested that the calculation should

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provide relief to well-run credit unions
that manage their risk appropriately.
A number of commenters suggested
that the Original Proposal was biased
toward lending and against investments,
but that many credit unions have no
other option but to purchase
investments to improve their interest
income to boost their overall earnings.
Other commenters stated that the
proposal created a bias in favor of
consumer loans and short-term assets,
which, along with the investment
portfolio risk weights, would have
forced credit unions down the yield
curve to short-duration assets and
impeded their ability to build capital. A
number of commenters suggested that
the risk weight categories and asset
categories were over generalized.
A small number of commenters
suggested that the rule would be better
balanced if credit to the risk weights
could be established with a rolling
average to reward credit unions
effectively managing their loan risks.
The Board generally agrees with
comments related to the need for more
consistency of risk weights across asset
classes, and that IRR and credit risk
should not be commingled in the risk
weights. Therefore, the Board has
decided to make corresponding changes
to the risk weights in this proposal. In
this second proposal, the Board would
address credit risk and concentration
risk to be comparable to the Other
Banking Agencies.169 The Board
believes the other types of risks that
would have been addressed in the
Original Proposal are either currently
addressed through supervision or will
be addressed through alternative
approaches in the future. In response to
the comments received, particularly
those related to investments and
residential real estate loans, the Board
believes deviating from the current
rule’s and Original Proposal’s method
for assigning risk weights would be
more consistent with the associated
credit risk and the risk weights assigned
by the Other Banking Agencies.
This proposal would substantially
change how the risk weights for
investments would be assigned. Instead
of assigning the investment risk weights
based on weighted average life, the
investment risk weights would be
assigned based primarily on the credit
quality of the underlying collateral or
repayment ability of the issuer. This
adjustment addresses the
inconsistencies between the risk
weights for loans and investments.
For example, under this proposal
most first-lien residential real estate
169 See,

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loans receive a 50 percent risk weight
and an investment backed by similar
assets would receive a 50 percent risk
weight. Under this proposal, a credit
union managing assets well by avoiding
concentrations, non-current loans and
risky investments would realize lower
total risk-assets and thus a higher riskbased capital ratio. Further details on
the changes to individual assets are
addressed in the discussion on
proposed § 702.104(c)(2) below.
Regarding support for the risk weights
themselves, the Board notes that given
the requirement in section
216(b)(1)(A)(ii) to maintain
comparability with the Other Banking
Agencies’ PCA requirements, NCUA
generally relied on risk weights assigned
to various asset classes within the Basel
Accords and established by the Other
Banking Agencies’ risk-based capital
regulations to develop this proposal.
Based on the comments received, the
Board believes it has more precisely
defined the risk weights. NCUA has
tailored risk weights in this proposal for
assets unique to credit unions, or where
a demonstrable and compelling case
existed based on contemporary and
sustained performance differences as
shown in Call Report data to
differentiate for certain asset classes
between banks and credit unions, or
where a provision of the FCUA
necessitated doing so. Thus, when
compared to the Original Proposal, this
second proposal would adjust asset
classes and recalibrate risk weights, and
is more comparable to the risk weights
in the Other Banking Agencies’ capital
regulations.170
104(c)(1) General
Under the Original Proposal,
proposed § 702.104(c)(1) would have
provided that total risk weighted assets
include risk-weighted on-balance sheet
assets as described in § 702.104(c)(2),
plus the risk-weighted off-balance sheet
assets in § 702.104(c)(3), plus the riskweighted derivative contracts in
§ 702.104(c)(4), minus the risk-based
capital ratio numerator deductions in
§ 702.104(b)(2). The proposal would
have required a complex credit union to
calculate its risk-weighted asset amount
for its on- and off-balance sheet
exposures. In the proposal, riskweighted asset amounts would have
generally been determined by assigning
an on-balance sheet asset to broad risk
weight categories according to the asset
type, collateral, and level of
concentration. Similarly, risk-weighted
assets amounts for off-balance sheet
items would have been calculated using
170 See,

e.g., 12 CFR 324.32.

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a two-step process: (1) Multiplying the
notational principal or face value of the
off-balance sheet item by a credit
conversion factor (CCF) to determine a
credit equivalent amount, and (2)
assigning the credit equivalent amount
to the relevant risk weighted category. A
credit union would determine its total
risk weighted assets by calculating (1)
its risk weighted assets, minus (2)
goodwill and other intangibles, and
minus (3) the NCUSIF deposit.
The Board received no comments on
the language in this paragraph and has
decided to retain this aspect of the
Original Proposal with the following
two changes.
First, the Board proposes to add the
following language to this subsection to
address the assignment of a risk weight
should a particular on- or off-balance
sheet item meet more than one defined
risk weight category: ‘‘If a particular
asset, derivative contract, or off-balance
sheet item has features or characteristics
that suggest it could potentially fit into
more than one risk weight category,
then a credit union shall assign the
asset, derivative contract, or off-balance
sheet item to the risk weight category
that most accurately and appropriately
reflects its associated credit risk.’’ A
thorough evaluation of the true credit
risk associated with such an item would
be the determining factor for the
appropriate risk weight.
Second, the Board proposes to make
minor conforming amendments to the
language to further clarify the
requirements.
Accordingly, under this proposal
§ 702.104(c)(1) would provide that riskweighted assets includes risk-weighted
on-balance sheet assets as described in
§§ 702.104(c)(2) and (c)(3), plus the riskweighted off-balance sheet assets in
§ 702.104(c)(4), plus the risk-weighted
derivatives in § 702.104(c)(5), less the
risk-based capital ratio numerator
deductions in § 702.104(b)(2). In
addition, the section would provide
further that if a particular asset,
derivative contract, or off balance sheet
item has features or characteristics that
suggest it could potentially fit into more
than one risk weight category, then a
credit union shall assign the asset,
derivative contract, or off-balance sheet
item to the risk weight category that
most accurately and appropriately
reflects its associated credit risk. The
Board is proposing to add this language
to account for the evolution of financial
products that could lead to such
products meeting the definition of more
than one risk asset category. If
necessary, NCUA would publish
guidance to address these products, if
and when developed.

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104(c)(2) Risk Weights for On-Balance
Sheet Assets
Under the Original Proposal,
proposed § 702.104(c)(2) would have
defined the risk categories and risk
weights to be assigned to each
specifically defined on-balance sheet
asset. All on-balance sheet assets would
be assigned to one of the 10 categories
and risk weights.
The Board received a significant
number of comments on the proposed
risk-weight categories and the risk
weights assigned to particular assets and
has decided to make a number of
changes to this subsection, which are
discussed in more detail below.
Material Risks
In accordance with section 216(d)(2)
of the FCUA, which requires NCUA’s
risk-based capital requirement ‘‘to take
account of any material risks against
which the [6 percent] net worth ratio
required for an insured credit union to
be adequately capitalized may not
provide adequate protection,’’ 171 the
risk weights under the Original Proposal
would have included elements to
address credit, concentration, market
risk, interest rate, and liquidity risk. In
doing so, proposed § 702.104(c) of the
Original Proposal would have addressed
concentration risk by assigning higher
risk weights to larger percentages of
assets in MBLs and real estate loans in
§ 702.104(c). The concentration
threshold amounts were generally based
on the average percentage of assets held
in the asset types.
The Board has addressed comments
received on the Original Proposal
related to specific assets in the preamble
parts corresponding to the various types
of assets covered by this proposal
below. However, the Board received a
number of general comments on total
risk-weighted assets.
A number of commenters stated that
NCUA did not adequately support the
proposed risk weights nor show a
significant correlation between losses
and the current risk-based capital
structure. Some commenters argued that
the proposed risk weights were arbitrary
and unsupported. Other commenters
noted that the proposed risk weights did
not take into account the quality of
assets, the ability of credit unions to
manage capital, liabilities on credit
unions’ balance sheets, or the actual loss
experience of credit unions. A few
commenters believed the proposal
would create a bias against long-term
lending and investments in favor of
short-term assets. One commenter stated
171 12

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that all risk weights should be capped
at 100 percent. One commenter stated
that the proposal would essentially
structure the balance sheet for most
credit unions so that commercial
lending would be limited to 15 percent
of assets, real estate lending would be
limited to 35 percent of assets, HELOCs
and second-lien mortgages would be
limited to 10 percent of assets, and the
remainder of the balance sheet would be
limited to short-term investments and
consumer loans.

After diligently considering all of the
comments, and as discussed in more
detail in the applicable sections, the
Board is now proposing to make
significant revisions to the current rule
and the Original Proposal, which are
discussed in more detail below, to
address many of the concerns raised by
commenters.
Cash and investment risk weights. In
general, the Original Proposal would
have retained the approach used in the
current rule for measuring risk weights
for most cash items and investments.

4389

Consistent with the current rule, the risk
weights for specific investments
generally would have been based upon
the weighted-average life of investments
(WAL). The WAL is generally calculated
based on the average time until a dollar
of principal is repaid.172 Under the
current rule, a higher risk weight is
generally assigned to an investment
with a longer WAL.
Under the Original Proposal, the
proposed risk weights for cash and
investments would have been assigned
as follows:

ORIGINAL PROPOSAL—RISK WEIGHTS FOR CASH AND INVESTMENTS
Proposed
risk weight
percent

Item

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Cash on hand ..........................................................................................................................................................................................
NCUA and FDIC issued Guaranteed Notes ............................................................................................................................................
Direct, unconditional U.S. Government obligations .................................................................................................................................
Cash on deposit .......................................................................................................................................................................................
Cash equivalents .....................................................................................................................................................................................
Total investments with WAL ≤ 1-year .....................................................................................................................................................
Total investments with WAL > 1-year and ≤ 3-years ..............................................................................................................................
Total investments with WAL > 3-year and ≤ 5-years ..............................................................................................................................
Corporate credit union nonperpetual capital ...........................................................................................................................................
Total investments with WAL > 5-year and ≤ 10-years ............................................................................................................................
Total investments with WAL > 10-years .................................................................................................................................................
Corporate credit union perpetual capital .................................................................................................................................................

The Original Proposal would have
also lowered the risk weight for direct
and unconditional U.S. Government
obligations (FDIC-issued Guaranteed
Notes, and other U.S. Government
obligations) from the WAL measure to
zero percent risk weight, and
maintained the current zero percent risk
weight for NCUA-guaranteed assets.
Finally, the Original Proposal would
have removed nonperpetual and
perpetual capital in corporate credit
unions from the >1–3 year WAL
category under the current rule and
assigned those assets their own specific
risk weights based on factors other than
the WAL.
The Board received a large number of
comments on the risk weights for
investments. Generally, commenters
disagreed with the proposed risk
weights. Specifically, many commenters
felt that the risk weights were not the
appropriate place to address IRR and
that many of the risk weights could act
to limit credit unions’ investments in a
way that would be detrimental to the
individual credit unions and the credit
union industry. In addition, many
commenters cited inconsistencies
between the risk weights for certain

investments and the risk weights for the
underlying assets, arguing that this may
have the unintended consequence of
encouraging credit unions to obtain
riskier assets with lower risk weights
rather than relatively safe investments
that have much higher risk weights.
Commenters who sought lower risk
weights for investment varied in exactly
how to lower risk weights. Some
commenters argued that no investment
should have a risk weight over 100
percent. Other commenters requested a
reduced number of risk weight tiers,
stating that it is more appropriate to
have a 20 percent risk weight on
investments with WALs up to five years
and a risk weight of 100 percent for
investments that have a WAL greater
than 5 years. Commenters suggested that
overall the proposed risk weight
structure penalizes credit unions for
investing and unfairly discriminates
against longer-term investments. Several
commenters also sought an ‘‘other’’
category for investments that would
allow credit unions to demonstrate why
certain investments do not warrant the
risk weight associated with their WAL.
Still other commenters asked that the
Board adopt the weights for investments

that are included in FDIC’s interim final
rule.
In addition to requesting lower overall
risk weights, many of the commenters
addressing this topic also requested all
agency and GSE securities receive a
lower risk weight. Most commenters felt
that securities offered by a federal
agency or GSE and overnight Fed Fund
deposits should have the same zero
percent risk weight that is applied to
NCUA- and FDIC-issued guaranteed
notes and direct, unconditional U.S.
Government obligations. These
commenters argued that securities
offered by agencies other than NCUA
and FDIC and overnight Fed Fund
deposits pose little to no risk to the
investing credit unions and have an
implicit or, in some cases, explicit
guarantee of the U.S. Government.
Further, commenters contend that
without a lower risk weight on agency
securities and overnight Fed Fund
deposits, credit unions are actually
incentivized to avoid these low-risk
investments in favor of investments that
carry greater credit risk, but offer the
potential for a higher return as both
types of investments carry the same risk
weight. Commenters provided the

172 There are a few exceptions, most notably
calculating WAL until the next adjustment date for
variable-rate obligations.

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following example to illustrate this
point: A credit union can invest in a
private-label, asset-backed security with
a 5.5-year WAL, or a security backed by
the guarantee of a GSE with the same
WAL, and both investments would have
carried a 150 percent risk weight.
Some commenters also asked for
clarification on the risk weight for longterm CDs purchased from FDIC-insured
institutions and investments in Federal
Home Loan Banks.
Further, a majority of the commenters
addressing this section of the proposed
rule argued that risk-based capital is not
the appropriate medium to address IRR.
Commenters stated that NCUA’s attempt
to regulate IRR through the risk-based
capital requirement appeared arbitrary
and was inconsistent with treatment
provided to banks by the Other Banking
Agencies. One commenter stated that, if
NCUA uses the risk-based capital
requirement to regulate IRR, it should
note that shocks of 300 basis points are
rare and have not been seen since the
early 1980’s. Further, commenters stated
that basing risk weights on the WAL
does not take into account credit risk,
the funding source for the investments,
whether the investment is fixed- or
variable-rate, actual maturity of the
investment, optionality, or the benefit of
longer-term investments—all of which,
commenters argue, provide a better
evaluation of the risk associated with an
investment than the WAL.
Some commenters also noted that the
proposed risk weights for investments
would lead to inconsistent treatments
among various assets. Specifically,
commenters argued that the risk weights
on some long-term investments that
pose a low degree of risk are weighted
higher than other, riskier assets. To
support these arguments, commenters
cited examples that included: A member
business loan with a seven-year balloon
would carry a lower risk weight than a
seven-year bullet agency security; a
current credit card loan would have a
lower risk weight than a 5.5-year

security guaranteed by a GSE; and an
indirect auto loan with a 130 percent
loan-to-value would have a lower risk
weight than a 5.5-year GSE guaranteed
security. Other commenters questioned
why the risk weight for a mortgagebacked security is higher than the
underlying 30-year mortgage that backs
the security.
Several commenters questioned how
the proposal affects the authority in
§ 701.19, which allows a federal credit
union to purchase investments to fund
employee benefit plans without being
subject to NCUA’s investment rules.
Generally, commenters requested lower
risk weights for investments held to
fund employee benefit plans and life
insurance contracts held by the credit
union on its executive-level employees.
Commenters contend that credit unions
may be less likely to offer and fund
employee benefit plans because of the
risk weights. Further, one commenter
stated that the proposal does not take
into account the purpose of the
investments and their applicability to
benefit plan funding, potentially
creating risks from both a fiduciary
standpoint and the loyalty of executives
and employees. Several commenters
also requested that the Board include
specific risk weights for annuities and
mutual funds used to fund employee
benefit programs based on the
underlying accounts and investment
strategies. One commenter suggested
that mutual funds be weighted based on
the underlying investment strategy. This
commenter suggested the following
breakdown: State and federal
government funds—20 percent;
Municipal bond strategies—50 percent;
Asset-backed, mortgage-backed, and
bank loan funds—100 percent; Other
funds—150 percent; Bonds—WAL;
Equity securities—200 percent. Another
commenter stated that life insurance
contracts owned by the credit union
should be rated at 20 percent for AAAand AA-rated insurers.

The Board generally agrees with
commenters’ concerns regarding the
differences between the current riskbased requirements, the Original
Proposal’s investment risk weights, and
the risk weights assigned by the Other
Banking Agencies. As discussed in the
summary part of the preamble above,
the Board believes that measures of IRR
should be based on a credit union’s
entire balance sheet to take into account
the offsetting risk effects of assets and
liabilities (including any benefits from
derivative transactions). The Board also
generally agrees with commenters that
the use of asset-duration risk weights in
the risk-based capital scheme is overly
simplistic and does not fully take into
account potential risk mitigation
benefits, such as liabilities and
derivatives.
The Board agrees that the approach
taken in the Original Proposal should be
revised. Accordingly, the Board is now
proposing to change the risk weights in
the investment area to more closely
align them with the risk weights in the
Other Banking Agencies’ regulations,173
and to handle IRR outliers through
alternative approaches and possibly a
separate subsequent rulemaking.
In particular, the Board is now
proposing to eliminate the process of
assigning risk weights for investments
based on WAL of investments in favor
of a credit-risk centered approach for
investments. As discussed earlier in the
document, the credit risk approach to
assigning risk weights under this
proposal is based on applying lower risk
weights to safer investment types and
higher risk weights to riskier investment
types.174 The proposed investment risk
weights would be similar to the risk
weights assigned to investments under
the Other Banking Agencies’
regulations,175 which are based on the
credit-risk elements of the issuer and
the position of the particular type of
investment. The proposed changes to
the risk weights assigned to investments
are outlined in the following table:

THIS PROPOSAL—RISK WEIGHTS FOR CASH AND INVESTMENTS
Proposed
risk weight
(percent)

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Item
• The balance of cash, currency and coin, including vault, automatic teller machine, and teller cash .................................................
• The exposure amount of:
Æ An obligation of the U.S. Government, its central bank, or a U.S. Government agency that is directly and unconditionally
guaranteed, excluding detached security coupons, ex-coupon securities, and principal and interest only mortgage-backed
STRIPS.
Æ Federal Reserve Bank stock and Central Liquidity Facility stock.
• Insured balances due from FDIC-insured depositories or federally insured credit unions .................................................................
173 See,

e.g., 12 CFR 324.32.
the Board evaluates the risk of an
investment type, it is based on criteria such as
174 When

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volatility, historical performance of the
investments, and standard market conventions.
175 See, e.g., 12 CFR 324.32.

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THIS PROPOSAL—RISK WEIGHTS FOR CASH AND INVESTMENTS—Continued
Proposed
risk weight
(percent)

Item

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• The uninsured balances due from FDIC-insured depositories, federally insured credit unions, and all balances due from privately-insured credit unions .................................................................................................................................................................
• The exposure amount of:
Æ A non-subordinated obligation of the U.S. Government, its central bank, or a U.S. Government agency that is conditionally
guaranteed, excluding principal and interest only mortgage-backed STRIPS.
Æ A non-subordinated obligation of a GSE other than an equity exposure or preferred stock, excluding principal and interest
only GSE obligation STRIPS.
Æ Securities issued by PSEs in the United States that represent general obligation securities.
Æ Investment funds whose portfolios are permitted to hold only part 703 permissible investments that qualify for the zero or
20 percent risk categories.
Æ Federal Home Loan stock.
• Balances due from Federal Home Loan Banks.
• The exposure amount of:
Æ Securities issued by PSEs in the U.S. that represent non-subordinated revenue obligation securities.
Æ Other non-subordinated, non-U.S. Government agency or non-GSE guaranteed, residential mortgage-backed securities, excluding principal and interest only STRIPS.
• The exposure amount of:
Æ Industrial development bonds.
Æ All stripped mortgage-backed securities (interest only and principal only STRIPS).
Æ Part 703 compliant investment funds, with the option to use the look-through approaches.
Æ Corporate debentures and commercial paper.
Æ Nonperpetual capital at corporate credit unions.
Æ General account permanent insurance.
Æ GSE equity exposure and preferred stock.
• All other assets listed on the statement of financial condition not specifically assigned a different risk weight.
• The exposure amount of perpetual contributed capital at corporate credit unions .............................................................................
• The exposure amount of:
Æ Publicly traded equity investment, other than a CUSO investment.
Æ Investment funds that are not in compliance with part 703 of this Chapter, with the option to use the look-through approaches.
Æ Separate account insurance, with the option to use the look-through approaches.
• The exposure amount of non-publicly traded equity investments, other than equity investments in CUSOs ....................................
• The exposure amount of any subordinated tranche of any investment, with the option to use the gross-up approach ...................

The Board disagrees with commenters
who suggested that all investments
should be assigned a risk weight of 100
percent or less. Assigning a maximum of
100 percent risk weight to all
investments would not sufficiently
capture the risk of equity or leveraged
investments, and would unjustifiably
differ from the risk weights used by the
Other Banking Agencies. Based on the
extensive analyses performed by the
Basel Committee 176 and the Other
Banking Agencies in the development of
their regulations, the Board believes the
Other Banking Agencies’ risk weights
sufficiently reflect the credit risk in
their respective categories. As the same
type of investment will perform on a
credit risk basis identically for credit
unions and banks, in general, variations
in this proposal from the approach
taken by the Other Banking Agencies’
176 Basel Committee on Banking Supervision,
‘‘International Convergence of Capital Measurement
and Capital Standards: A Revised Framework,
Comprehensive Version’’ 214 (June 2006) available
at http://www.bis.org/publ/bcbs128.pdf (Basel II)
and Basel Committee on Banking Supervision, ‘‘An
Explanatory Note on the Basel II IRB Risk Weight
Functions’’ (July 2005).

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regulations 177 are due to differences in
credit union investments, the
investment authorities of credit unions,
or are intended to offer credit unions a
simplified but equivalent approach for
applying risk weights.
Another area where commenters
expressed concern was with the risk
weights assigned to U.S. Government
agency and GSE securities under the
Original Proposal. The Board believes it
has addressed these concerns in this
second proposed rule by removing the
IRR component from the risk weights for
investments. The Board also believes
this concern would be addressed for
these and other investment types by
assigning risk weights on long-term
assets only based on the credit risk, and
not IRR. For example, an 11-year WAL
non-subordinated mortgage-backed
security issued by a GSE would have
been assigned a 200 percent risk weight
under the Original Proposal, while a 2year WAL of the same security type
would have been assigned a 50 percent
risk weight. Conversely, under this
second proposed rule, both securities
would be assigned a 20 percent risk
177 See,

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20

50

100

150
300

400
1,250

weight, which is based only on the
credit risk of the investment type.
The Board has also assigned risk
weights to types of investments, such as
corporate bonds, asset-backed securities
and corporate equities, which are
generally not available to federal credit
unions. These risk weights were
assigned to account for the fact that
federally insured state chartered credit
unions sometimes have investment
authorities that allow then to invest in
assets not available to FCUs. In
addition, § 701.19 permits federal credit
unions to purchase investments to fund
employee benefits that are not otherwise
available to federal credit unions under
NCUA’s investment regulations. For
these types of assets, the Board has
assigned risk weights that it believes
reflect the risk of the assets that could
be used to fund employee benefit plans.
The Board disagrees with commenters
who suggested lower risk ratings should
be applied to such assets because they
were purchased for employee benefit
plans. However, the Board does seek
comment on whether lower risk weights
should be applied to investments that
fund employee benefit plans in which
all of the risk of loss is held by the

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beneficiary. For example, how should
NCUA assign a risk weight to an equity
investment on a credit union’s
statement of financial condition that
represents a holding in a credit union
executive’s 457(b) plan?
The Board chose not to assign risk
weights based on credit ratings, as at
least one commenter requested.
Consistent with the Dodd-Frank Wall
Street Reform and Consumer Protection
Act of 2010, which required agencies to
remove all references to credit ratings,
NCUA does not use credit ratings to
determine risk weights for part 702.178
Loans generally. NCUA received a
substantial number of comments
regarding the risk weights assigned to
loans in general. A number of
commenters stated that the proposed
risk weights for various types of loans
were overly broad, arbitrary, punitive,
and did not take into account the
individual underwriting terms, pricing
and risk management of individual
credit unions. Other commenters
suggested that the proposed risk weights
for loans failed to consider loan-to-value
ratios, fixed- versus variable-rate loans,
repricing opportunities, maturity length,
and other risk mitigation strategies. Still
other commenters stated that the quality
of the loan portfolio is the most
determinant of risk to capital. A number
of commenters stated that all loans are
not the same like the rule is treating
them. Other commenters objected to
laddering quantitative risk-based
metrics for loans because doing so
ignores credit union’s strategic and
business plans, taking growth
management away from the board of
directors.
However, the Board cannot uniformly
use these criteria to measure minimum
capital requirements for credit unions
because of the indeterminate reporting
that would be necessary and the myriad
of variables available to establish a
sound lending program. This second
proposed rule is consistent with the
regulatory capital models under the
Basel framework, which are portfolio
invariant.179 Being ‘‘portfolio invariant’’
means that the capital charge for a
particular loan category is consistent
among all credit union portfolios based
178 Public Law 111–203, Title IX, Subtitle C,
section 939A, 124 Stat. 1376, 1887 (July 21, 2010).
179 Basel Committee on Banking and Supervision,
An Explanatory Note on the Basel II IRB Risk
Weight Functions, July 2005, available at http://
www.bis.org/bcbs/irbriskweight.htm. ‘‘The model
should be portfolio invariant, i.e. the capital
required for any given loan should only depend on
the risk of that loan and must not depend on the
portfolio it is added to. This characteristic has been
deemed vital in order to make the new IRB
framework applicable to a wider range of countries
and institutions.’’

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on the loan characteristics, rather than
the individual credit union’s portfolio
performance or characteristics. Taking
into account each credit union’s
individual characteristics would be too
complicated for both credit unions and
NCUA for minimum regulatory capital
requirements.
A number of commenters stated that
assigning risk weights to loans based on
the risk of the underlying loans makes
more sense than on the size of the
portfolio. Other commenters suggested
that if IRR is included in investment
risk weights, it should also be included
in loan risk weights.
As noted in the summary section, the
Board believes the revised loan
concentration risk thresholds and
corresponding risk weights under this
proposal would address only credit risk
exposures, and to a limited extent
concentration risk exposures. While
certain loans contain a substantial
amount of IRR, the Board does plan to
consider alternative approaches to
address IRR separately from this
rulemaking.
Several commenters suggested that
the Board remove the higher-risk
components for delinquent loans
because the ALLL balance is already
factored into the formula. Conversely,
other commenters stated that they
appreciated that the Original Proposal
assigned delinquent and non-delinquent
loans different risk weights.
At least one commenter suggested that
troubled debt restructuring loans be
risk-weighted at 50 percent.
This proposal would maintain a
separate, higher risk weight for loans
that are not current, but would also, as
discussed in detail above, eliminate the
1.25 percent cap on the ALLL in the
risk-based capital ratio numerator. The
Board believes the proposed higher risk
weight that would be assigned to noncurrent loans is warranted because such
loans have a higher probability of
default when compared to current loans.
Non-current loans are more likely to
default because repayment is already
impaired making them one step closer
to default compared to current loans.
Additionally, a higher risk weight for
non-current loans is consistent with the
risk weights assigned by the Other
Banking Agencies.180
A small number of commenters
suggested that share-secured loans
should have a risk weight between zero
and 25 percent since they are fully
secured. Also, some commenters noted
that secured consumer loans generally
pose less risk than unsecured consumer
loans. The Board generally agrees that
180 See,

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share-secured loans pose less risk to
credit unions than other types of
secured loans. Accordingly, under this
second proposal share-secured loans
would be assigned a 20 percent risk
weight. The board does not believe a
risk weight of zero percent is warranted
because of the small amount of
operational and transaction risk present
in share-secured loans. A risk weight of
20 percent for share-secured loans is
proposed because it recognizes the low
amount of risk and is consistent with
the 20 percent risk weight for
contractual compensating balances on
commercial loans that are also secured
by shares on deposit.
The Board also agrees unsecured
consumer loans generally pose more
risk than secured consumer loans, and
is therefore proposing to assign a lower
risk weight of 75 percent to secured
consumer loans and a higher risk weight
of 100 percent to unsecured consumer
loans. The 100 percent risk weight for
unsecured consumer loans would be
comparable to the Other Banking
Agencies’ risk weight for consumer
loans.181 Because secured consumer
loans pose less risk to a credit union
than unsecured consumer loans, the
Board is proposing to assign secured
consumer loans a lower risk weight of
75 percent compared to the 100 percent
risk weight for unsecured consumer
loans.
A small number of commenters
suggested that loans held for sale should
have a 25 percent risk weight. Other
commenters suggested that loans held
for sale should have a 50 percent risk
weight.
After considering the comments
received, the Board continues to believe
that loans held for sale carry identical
risks to the originating credit union as
other loans held in the credit union’s
portfolio until transfer to the purchaser
is final. Until the originating credit
union transfers the loan to the
purchaser, the originating credit union
bears the risk of the loan defaulting. If
the loan defaults prior to the finalization
of the transfer, the originating credit
union must account for any loss from
the defaulting loan, similar to other
loans held on the credit union’s books.
Because they carry the same risks, loans
held for sale would be assigned a risk
weight based on the loan’s type.
Commercial Loans. The Original
Proposal would have increased the risk
weights for member business loans
(MBLs) from the current rule to address
the historical correlation between high
concentrations of MBLs and higher risk
to the credit union. As noted in the
181 See,

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Original Proposal, many of the largest
losses the NCUSIF has experienced over
its history have occurred in credit
unions with high concentrations of
MBLs.182 In addition, the failures of
many small banks between 2008 and
2011 were largely driven by high
concentrations of commercial loans.183
For purposes of the Original Proposal,
‘‘member business loans outstanding’’

would have consisted of loans
outstanding that qualified as MBLs
under NCUA’s definition,184 or under a
state’s NCUA-approved definition.185 If
a loan qualified as a MBL when it is
originated, it would have remained so
until it had been repaid in full, sold, or
otherwise disposed of.
Consistent with the current rule, the
Original Proposal would have applied

4393

risk weights to MBLs as a percentage of
total assets. As a credit union’s
concentration in particular asset classes
increased, incrementally higher levels of
capital would have been required.186
The following table shows a comparison
of the current rule and the Original
Proposal:

COMPARISON—MBL COMPONENTS OF THE CURRENT RULE AND ORIGINAL PROPOSAL
Current rule MBL risk
weights187—
(converted for 8% adequately capitalized level)

Total MBLs

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0 to 15% of Assets ..................................................................................................................
>15 to 25% of Assets ..............................................................................................................
Amount over 25% ....................................................................................................................

75%
100%
175%

Original proposal MBL
risk weights
100%188
150%
200%

Under the Original Proposal, MBLs
that were at least 75 percent guaranteed
by the federal government, typically by
the Small Business Administration
(SBA) or U.S. Department of
Agriculture, would have received a risk
weight of 20 percent regardless of the
percent of the credit union assets they
represented.189
A substantial number of commenters
addressed MBLs and generally
disagreed with the proposed risk
weights in the Original Proposal, noting
that the risk weight assigned to
commercial loans under the Other
Banking Agencies’ capital regulations
would have been lower for such loans
when held in higher concentrations.
There were, however, a few
commenters that agreed that higher risk
weights should be applied to MBLs held
in higher concentrations.
Many commenters objected to the
Board’s methodology for assigning risk
weights to MBLs based on
concentration. Other commenters
disagreed with NCUA’s methodology of
assigning risk weights based on
concentrations of MBLs compared to

total assets. These commenters argued
that risk weights based on concentration
levels do not take into account all
pertinent information to accurately
determine risk. Some commenters
believed that risk weights should be
assigned based on the type of loan,
specifically separating loans by business
purpose (commercial, agricultural, or
construction and development). Some of
these commenters suggested the Board
should address concentration risk
through supervision rather than through
a rulemaking.
Some commenters questioned the
interplay between exemptions from the
statutory cap on MBLs and higher risk
weights for credit unions that exceed
the cap. These commenters pointed out
that many credit unions have been given
an exemption from the statutory MBL
concentration limit. Some of these
commenters stated that the proposed
risk weights would nullify the
exemptions included in the Federal
Credit Union Act and may lead some
credit unions to discontinue business
lending, particularly in the area of
agriculture. To that end, commenters

requested a variety of solutions. Some
commenters believed credit unions
exempt from the statutory MBL cap
should be given more time to comply
with the MBL risk weights, while other
commenters argued there should be a
separate set of risk weights for exempt
credit unions. Finally, some
commenters requested that the Board
allow credit unions exempt from the
statutory MBL cap to continue following
the risk weights in the current rule.
Higher capital requirements for
concentrations of MBLs exist in the
current rule and the Board believes
completely eliminating them would be
a step backwards in matching risks with
minimum risk-based capital
requirements. Credit unions with high
commercial loan concentrations are
particularly susceptible to changes in
business conditions that can affect
borrower cash flow, collateral value,
and other factors increasing the
probability of default.
NCUA does currently review credit
concentrations during examinations as
commenters recommended. However, as
discussed in the summary section, the

182 GAO found in its 2012 report that credit
unions who failed had more MBLs as a percentage
of total assets than peers and the industry average.
See. U.S. Govt. Accountability Office, GAO–12–247,
Earlier Actions Are Needed to Better Address
Troubled Credit Unions 17 (Jan. 2012) available at
http://www.gao.gov/products/GAO-12-247.
183 U.S. Government Accountability Office, GAO–
13–704T, Causes and Consequences of Recent
Community Bank Failures 4 (June 12, 2013)
available at http://www.gao.gov/assets/660/
655193.pdf.
184 See 12 CFR 723.1.
185 See 12 CFR 723.20.
186 Under the current rule, the Original Proposal
and this second proposal, concentration risk is
accounted for in commercial and real estate loans
because historically this is where credit unions
have experienced concentration risk problems.

187 The current MBL risk weights were converted
to a comparable risk weight by dividing the current
risk weight by eight percent, with eight percent
representing the level of risk weighted capital
needed to be adequately capitalized. In the current
rule total MBLs less than the threshold 15 percent
of assets receive a six percent risk weight, which
is equivalent to a 75 percent risk weight under this
proposal (six percent divided by eight percent). The
next threshold in the current regulation for total
MBLs from 15 percent to 25 percent of assets
received an eight percent risk weight, which is
equivalent to a 100 percent risk weight under this
proposal (eight percent divided by eight percent)
and the highest concentrations of MBLs received a
14 percent risk weight, which is equivalent to a 175
percent risk weight under the proposal (14 percent
divided by eight percent).
188 This is consistent with the Other Banking
Agencies’ capital rules (e.g., 12 CFR 324.32), which

maintain a 100 percent risk weight for commercial
real estate (CRE) and includes a 150 percent risk
weigh for loans defined as high-volatility
commercial real estate (HVCRE). See, e.g., 78 FR
55339 (Sept. 10, 2013).
189 Under the current rule the entire balance of
MBLs outstanding, including any amount partially
guaranteed by a U.S. Government agency, is
included in the risk weight for MBLs (i.e., the
equivalent risk-weight under the current rule for an
MBL that is 75 percent government guaranteed is
the same as the risk weight for any other MBL.
Thus, this proposed rule would be more favorable
because it would assign a low risk weight of 20%
to the portion of the commercial loan with a U.S.
Government guarantee. This is in addition to the
lower risk weight that would be assigned to nonowner occupied one-to-four-family residential real
estate loans that would not be risk-weighted as
commercial loans under this proposal.

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FCUA requires that NCUA’s risk-based
net worth requirement account for
material risks that the six percent net
worth ratio may not provide adequate
protection, which would include credit
concentration risks.190
Basel II states, ‘‘risk concentrations
are arguably the single most important
cause of major problems in banks.’’ 191
In addition, GAO specifically
recommended that the Board continue
to address concentration risk in the riskbased capital requirement. GAO found
in its 2012 report that credit unions that
failed had more MBLs as a percentage
of total assets than peers and the
industry average.192 GAO advised the
Board to revise NCUA’s PCA
requirements to take into account credit
unions with a high percentage of MBLs
to total assets. In addition, NCUA’s OIG
recommended in MLRs that the Board
increase the risk weights assigned to
MBLs, citing numerous and excessive
NCUSIF losses related to MBLs,
including a number of large credit
unions with high concentrations of
MBLs.193

However, after consideration of the
comments, the Board is proposing to
modify the approach to MBLs taken in
the Original Proposal assigning risk
weights to ‘‘commercial loans’’ rather
than ‘‘MBLs.’’ Under this second
proposal the risk weights assigned to
commercial loans would generally be
consistent with those assigned by Other
Banking Agencies and with the
objectives of the Basel Committee on
Banking Supervision.194 This proposal
reduces the number of commercial loan
concentration thresholds from two to
one, with a single concentration
threshold at 50 percent of total assets.
Applicable commercial loans less than
the 50 percent threshold would be
assigned a 100 percent risk weight, and
commercial loans over the threshold
would be assigned a 150 percent risk
weight. Commercial loans that are not
current would be assigned a 150 percent
risk weight. This change to a single,
higher concentration risk threshold
would simplify the risk weight
framework and calibrate it to only pick
up outliers. The concentration threshold

for commercial loans is well over two
standard deviations from the mean.
Based on December 2013 Call Report
data, all but 12 credit unions with total
assets of $100 million or greater operate
at a level in which the risk weights
assigned to commercial loans would be
similar to the risk weight assigned by
the Other Banking Agencies.195
Further, the 50 percent threshold and
the risk weights of 100 percent and 150
percent result in nearly identical capital
requirements, as compared to the
current rule, for high concentrations of
commercial loans. This creates parity to
the Other Banking Agencies’ rules196 for
virtually all credit unions, and allows
credit unions exempt from the MBL cap
(with very high concentration levels) to
continue to operate under effectively the
same capital requirements of the current
rule. Further, none of the credit unions
that would be subject to the
concentration threshold have material
variations in the type of their MBLs. So
such an approach would add significant
complexity to the rule with no benefit.

Commercial loan concentration (percent of total assets)
15%
Effective Capital Rate:197
Current Rule .....................................................................................
This Proposal ....................................................................................

The Board also disagrees that
concentration thresholds for commercial
loans should vary based on the business
purpose or underlying collateral.
Utilizing specific commercial loan type
or collateral loss history is not a reliable
or consistent method for assigning risk
weights in a regulatory model. Nor is it
consistent with the Basel framework or
the Other Banking Agencies’ capital
models. All commercial asset classes
experience performance fluctuations
with variations in business cycles. Some
sectors that have experienced minimal
losses are now pre-disposed to
heightened credit risk. Both NCUA and
FDIC have recently addressed these
190 See

12 U.S.C. 1790d(d)(2).
Convergence of Capital
Measurement and Capital Standards—June 2006.
Basel Committee on Banking Supervision.
192 See U.S. Govt. Accountability Office, GAO–
12–247, Earlier Actions Are Needed to Better
Address Troubled Credit Unions (Jan. 2012)
available at http://www.gao.gov/products/GAO–12–
247.
193 OIG Capping Report on Material Loss Reviews,
Report # OIG–10–20, November 23, 2010. Also see
Material Loss Review of Telesis Community Credit
Union, Report # OIG–13–05, March 15, 2013.
194 This is comparable with the other Federal
Banking Regulatory Agencies’ capital rules (e.g., 12

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191 International

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20%

6.0%
10.0%

50%

6.5%
10.0%

10.4%
10.0%

75%
11.6%
11.7%

100%
12.2%
12.5%

types of exposures in respective Letters
to Credit Unions and Financial
Institution Letters.198
A large number of commenters
addressing MBLs argued that the risk
weights for credit unions should be
lower than the risk weights employed
by FDIC for banks. Commenters noted
that the proposed risk weight of 100
percent for total MBLs of zero to 15
percent of total assets was the same as
the risk weight for commercial loans
under FDIC’s interim final regulation.
Commenters argued, however, that
credit unions have historically had a
lower loss rate on MBLs than
community banks had for commercial

loans. These commenters argued that
since credit unions have a lower
historical loss rate than banks, the risk
weights assigned to MBLs should also
be lower. Other commenters noted that
NCUA’s MBL regulation is more
conservative than commercial lending
regulations for banks, and, therefore, at
a minimum the Board should adopt a
100 percent risk weight, regardless of
concentration, to mirror the commercial
loan risk weights for banks.
The Board does not believe the
contemporary variances between bank
and credit union losses on commercial
loans are substantial enough to warrant
assigning lower risk weights to

CFR 324.32), which maintain a 100 percent riskweight for commercial real estate (CRE) and
includes a 150 percent risk-weight for loans defined
as high volatility commercial real estate (HVCRE).
See, e.g., 78 FR 55339 (Sept. 10, 2013). Basel
Committee on Banking Supervision, International
Convergence of Capital Measurement and Capital
Standards, June 2006, ‘‘In view of the experience
in numerous countries that commercial property
lending has been a recurring cause of troubled
assets in the banking industry over the past few
decades, Committee holds to the view that
mortgages on commercial real estate do not, in
principle, justify other than a 100% risk weight of

the loans secured.’’ Available at http://www.bis.org/
publ/bcbs128.htm.
195 See, e.g., 12 CFR 324.32(f).
196 Id.
197 The effective capital rate represents the
blended percentage of capital necessary for a given
level of commercial loan concentration. For this
proposal’s figures, the calculation uses 10% as the
level of risk-based capital to be well capitalized
under this proposal.
198 NCUA Letter to Credit Unions, 14–CU–06,
Taxi Medallion Lending, April 2014. Financial
Institution Letter, Prudent Management of
Agricultural Credits Through Economic Cycles,
FIL–39–2014, July 16, 2014.

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commercial loans held by credit unions.
Credit unions’ commercial loan loss

experience is comparable to community
banks after adjusting for asset size. The

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and banks is very similar.
3 Year average loss history
Credit unions
>$100M in
assets

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Commercial & Industrial ..........................................................................................................................................

Further, credit unions’ long-term
historical MBL losses are somewhat
understated because the NCUA’s Call
Report did not collect separate MBL
data until 1992. Thus, significant MBL
losses experienced in the late 1980s and
early 1990s are not included in the longterm historical credit union MBL loss
data.199
Some commenters also questioned the
disparity between NCUA’s treatment of
unfunded commitments and the
treatment in Basel III. For this second
proposal, the Board has adjusted the
treatment for unfunded MBL
commitments to be more comparable to
the Other Banking Agencies’ rules.200
Under this proposal, the definition of
‘‘commercial loans,’’ as discussed in the
definition section of this preamble,
would: (1) include all commercial
purpose loans regardless of dollar
amount; (2) exclude one-to-four-family
non-owner occupied first-lien real estate
loans, which would be considered
residential real estate loans for the
purpose of assigning risk weights in this
proposal; (3) exclude any loans secured
by a vehicle generally manufactured for
personal use; (4) assign to the portion of
a commercial loan that is insured or
guaranteed by the U.S. Government,
U.S. Government agency, or a public
sector entity a lower risk weight of 20
percent and not count such loans
toward the 50 percent of assets
concentration threshold; and (5) assign
to any amount of a contractual
compensating balance associated with a
commercial loan and on deposit in the
credit union a 20 percent risk weight
and not count such amounts toward the
50 percent of assets concentration
threshold. The revised definition of
commercial loan would better capture
the loans made for a commercial
purpose that have similar risk
characteristics. The portion of a
commercial loan that is insured or
guaranteed by the U.S. Government,
199 NCUSIF losses from MBLs are a recurring
historical trend. The U.S. Treasury Report on Credit
Union Member Business Lending discusses 16
credit union failures from 1987 to 1991 that cost the
NCUSIF over $100 million. Department of the
Treasury, Credit Union Member Business Lending
(Washington DC January 2001).
200 See, e.g., 12 CFR 324.33.

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U.S. Government agency, or a public
sector entity would be assigned a lower
risk weight of 20 percent and would not
count toward the 50 percent of asset
threshold. This provision is comparable
to the Other Banking Agencies.201 The
amount of a contractual compensating
balance associated with a commercial
loan and on deposit in the credit union
would receive a 20 percent risk weight
and not count toward the 50 percent of
assets concentration threshold since the
credit union has the ability to apply the
compensating balance against the
amount owed, lowering the potential
loss exposure. This provision would be
unique to credit unions but
appropriately reduces the risk weight
due to the existence of the
compensating balances. The Board
believes these changes would encourage
the use of government guarantees and
compensating balances and provide
credit unions with additional methods
to serve commercial borrowers while
reducing their minimum capital
requirement without increasing risk to
the NCUSIF for commercial loan losses.
Residential real estate loans. The
current standard approach to assigning
risk weights in part 702 of NCUA’s
regulations establishes higher capital
requirements for only ‘‘long term’’ real
estate loans, and excludes loans that reprice, refinance, or mature within five
years or less. By excluding loans that reprice, refinance, or mature within five
years or less from higher capital
requirements, as a result, the current
rule does not adequately account for
credit unions that have high real estate
loan concentrations.
Additionally, junior-lien real estate
loans, which have a significantly higher
loss history, are assigned the same risk
weight as first-lien mortgage real estate
loans under the current rule. As a result,
the current real estate loan risk weights
incentivize credit unions to structure
their mortgage products to minimize
their capital requirements, which can
impact the marketability of such loans.
As discussed in more detail below, the
Original Proposal would have made a
201 See,

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Banks $100M
to $10B in
assets
0.78

number of changes to the current rule to
address these concerns.
Consistent with the current rule, the
Original Proposal would have continued
to exclude from the real estate risk
weights those real estate loans reported
as MBLs. The Original Proposal would
have recognized the lower loss history
for current, prudently written first-lien
real estate-secured loans by assigning a
lower risk weight of 50 percent to the
first 25 percent of assets.202 To account
for concentration risk, the proposal
would have raised the risk weight for
first-lien real estate loans between 25
and 35 percent of assets from 50 percent
to 75 percent. First-lien real estate loans
over 35 percent of assets would have
been assigned a 100 percent risk weight.
The threshold of 25 percent was based
on the average percentage of first-lien
real estate loans to total assets, which,
as of June 30, 2013, was 24.9 percent for
complex credit unions, as defined under
the current rule.
Under the Original Proposal, if a
credit union held the first- and juniorliens on a property, and no other party
held an intervening lien, the credit
union could have treated the combined
exposure as a single loan secured by a
first lien for the purpose of assigning the
risk weight. First-lien real estate loans
assigned to the 50 percent risk weight
category could not have been
restructured or modified loans. Firstlien real estate loans modified or
restructured on a permanent or trial
basis solely under the U.S. Treasury’s
Home Affordability Mortgage Program
(HAMP) would not have been
considered restructured or modified.
First-lien real estate loans guaranteed
by the federal government through the
Federal Housing Administration (FHA)
or the Department of Veterans Affairs
(VA) generally would have been riskweighted at 20 percent. While a U.S.
Government guarantee against default
mitigates credit risk, normally the loans
202 This is comparable with the Other Banking
Agencies’ capital rules (e.g., 12 CFR 324.32), which
maintained the 50 percent risk weight for one-tofour-family real estate loans that are prudently
underwritten, not 90 days or more past due, and not
restructured or modified, and a 100 percent risk
weight for such loans otherwise. See, e.g., 78 FR
55339 (Sept. 10, 2013).

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are not fully guaranteed and routinely
subject the credit union to meeting loan
underwriting and servicing
requirements.
Under the Original Proposal, real
estate-secured loans that did not meet
the definition of a ‘‘first mortgage real
estate loan’’ would have been defined as
‘‘other real estate loans’’ and assigned a
higher risk weight. First-lien real estate
loans delinquent for 60 days or more, or
carried on non-accrual status, would
have been included in the category of
other real estate loans for the purpose of
assigning the risk weight. Other real
estate loans would have been assigned
a risk weight of 100 percent for the first
10 percent of assets. To account for
concentration risk, the risk weight for
other real estate loans would increase to
125 percent for loans between 10 and 20
percent of assets, and other real estate
loans over 20 percent of assets would
have been risk-weighted at 150 percent.
The threshold of 10 percent was based
on the average percentage of other real
estate loans to total assets, which, as of
June 30, 2013, was 6.85 percent for
complex credit unions.
Under the Original Proposal, the
aggregate minimum capital requirement
for first- and junior-lien real estate loans
would have been slightly less than the
current minimum requirement.203 The
originally proposed risk weights for real
estate loans, however, would have
resulted in a higher variance in the
minimum capital requirement for
individual affected credit unions
because the risk weights better
differentiated between the risks
associated with lien position and
concentration.
NCUA received a significant number
of comments on the proposed risk
weights for real estate loans. Most
commenters generally disagreed with
the proposed risk weights, stating that
they were too high. Commenters
suggested that, given lower historical
loss rates on residential mortgage loans
at credit unions compared to
community banks and the fact that
credit unions with higher
concentrations of these loans tend to
experience lower loss rates than their
peers, the risk weights and
203 Credit unions predominantly offering first lien
real estate loans would have had lower capital
requirements than the current rule. Credit unions
predominantly offering junior-lien real estate loans
would have had higher capital requirements than
the current rule. Analysis of December 31, 2013,
Call Report data indicates that the originally
proposed risk weights produce an aggregate
minimum capital requirement, at the well
capitalized level, of 97 percent of the current
minimum risk-based net worth ratio required for
real estate loans when applied to affected credit
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concentration thresholds for real estate
loans should be far lower than the
Original Proposal indicated and lower
than what banks must meet.
Commenters generally acknowledged
that the proposed 50 percent risk weight
(i.e., excluding the higher weights for
concentration risk) for first mortgage
loans was equal to the bank risk weight,
but argued that credit union losses on
these loans historically have been lower
than community bank loss totals. One
commenter claimed that credit unions’
losses on first mortgage loans were in
fact equal to 60 percent of community
bank loss totals over the long term, since
the start of the Great Recession, and at
peak value losses. Based on this
historical performance, the commenter
suggested that if the appropriate bank
risk weights for residential first
mortgages is indeed 50 percent, the
history-based risk weights for credit
unions ought to be closer to 30 percent
(i.e., 60 percent of 50 percent).
The Board does not believe the
contemporary variances between bank
and credit union losses on real estate
loans are substantial enough to warrant
assigning lower risk weights. Based on
the credit union Call Reports and FDIC
Quarterly Banking reports for the years
ended December 31, 2011, 2012, and
2013, credit union real estate loan loss
experience is comparable to community
banks. Credit unions with over $100
million in assets have an average overall
real estate loan loss ratio of 0.58 percent
over the past three years. Banks with
assets up to $10 billion have an average
real estate loan loss ratio of 0.65 percent
over the same time period. Credit union
first mortgage loan losses average 0.34
percent over the last three years
compared to 0.49 percent for banks.
Credit union home equity loan losses
average 0.96 percent over the last three
years compared to 0.73 percent for
banks.
Another commenter suggested that
NCUA’s tiered risk weight approach for
real estate-secured loans for both the
current risk-based net worth ratio
framework and the proposed risk-based
capital ratio framework is arbitrary and
unsupported by the administrative
record, and that NCUA has not offered
specific analyses or other evidence to
support either framework’s implied
assumption that there is a correlative
relationship between the size of a credit
union’s portfolio of real estate secured
loans and the risk that portfolio presents
to the NCUSIF.
Other commenters believed the
proposed risk weights would
discriminate against homeownership
because home loans bring a positive
reputation value that the rule cannot

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factor, and that any additional capital
requirement for providing home loans to
the common family is destructive.
Commenters also suggested that the
proposed risk weights would limit
credit unions’ ability to help lowincome members and members with
troubled real estate and impact credit
unions’ ability to provide members with
a low cost source of funds for financing
their primary residence by discouraging
credit unions from making real estate
loans over 25 percent or 35 percent of
their total assets.
A small number of commenters
suggested that the rule allow some type
of waiver when it is apparent that a
credit union can make sound real estate
loans. Another commenter suggested
that the rule exclude some parts of a
credit union’s first-lien mortgage
portfolio.
Some commenters suggested that
although significant losses did occur
during the recent economic downturn,
first-lien residential mortgage loans
have historically been a low credit risk
and an important part of credit unions’
presence and mission in their
communities. One commenter stated
that major progress has been made in
underwriting first mortgage loans
following the recent recession, that
high-risk mortgage products are no
longer common, and the CFPB and
Dodd-Frank Act regulations have
eliminated the likelihood of a repeat of
the circumstances that caused extensive
losses for first-lien residential mortgage
loans during the recession. Therefore,
the commenters suggested the Board
should eliminate the higher risk weights
for a concentration of first-lien
residential mortgage loans.
A small number of commenters
acknowledged that there is a great deal
of differentiation across mortgage
products that make it difficult to
determine the best framework to
identify those higher-risk mortgages
without imposing an untenable
reporting requirement. Given the
delicate balance between regulatory
burden and meaningful reporting, many
commenters suggested the Board should
maintain the proposed definition for
non-delinquent first mortgage real estate
loans and risk weight them all at 50
percent, regardless of concentration
level. Commenters argued that such a
change would provide parity with the
banking system and obviate the need for
more onerous reporting. Commenters
argued the Board should adopt a similar
approach for other real estate-secured
loans by eliminating the concentration
thresholds and, consistent with the
Other Banking Agencies’ rules, riskweight them all at 100 percent.

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A number of other commenters
suggested various specific risk weight
schemes for real estate loans, but did
not explain why their suggested risk
weights would more accurately account
for risk than those originally proposed
by the Board.
Higher capital requirements for
concentrations of real estate loans exists
in the current rule, and the Board
believes completely eliminating them
would be a step backwards in matching
risks with minimum risk-based capital
requirements. Credit unions with high
real estate loan concentrations are
particularly susceptible to changes in
the economy and housing market
because a significant portion of their
assets are focused in one industry.
NCUA does currently review credit
concentrations during examinations as
commenters recommended. However, as
discussed in the summary section, the
FCUA requires that NCUA’s risk-based
capital requirement account for material
risks that the 6 percent net worth ratio
may not provide adequate protection,

including credit and concentration
risks.204
Credit concentration risk can be a
material risk under certain
circumstances. The Board generally
agrees that CFPB’s new ability-to-repay
regulations should improve credit
quality. However, the extent to which
this will alter loss experience rates
remains to be seen.
NCUA has also been advised by its
OIG and GAO to address real estate
credit concentration risk. NCUA’s OIG
completed several MLRs where failed
credit unions had large real estate loan
concentrations. The NCUSIF incurred
losses of at least $25 million in each of
these cases. The credit unions reviewed
held substantial residential real estate
loan concentrations in either first-lien
mortgages, home equity lines of credit,
or both.205 In addition, in 2012 GAO
recommended that NCUA address the
credit concentration risk concerns the
NCUA OIG raised.206 The 2012 GAO
report notes credit concentration risk
contributed to 27 of 85 credit union

failures that occurred between January
1, 2008, and June 30, 2011. The report
indicated that the Board should revise
PCA so that minimum net worth levels
emphasize credit concentration risk.
Accordingly, the Board believes
eliminating the concentration
dimension for risk weights entirely
would be inconsistent with the concerns
raised on concentration risk by GAO
and the MLRs conducted by NCUA’s
OIG.
However, after consideration of the
comments, the Board proposes to
modify the real estate loan risk weights
presented in the Original Proposal.
Under this second proposal the risk
weights assigned to residential real
estate loans would generally be
consistent with those assigned by Other
Banking Agencies.207 This proposal
would reduce the number of first- and
junior-lien residential real estate loan
concentration thresholds from two to
one, with single concentration
thresholds at 35 percent and 20 percent
of total assets respectively.

RESIDENTIAL REAL ESTATE LOANS CONCENTRATION THRESHOLDS

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First-Lien ............................
Junior-Lien .........................

50%

75%

100%

Current <35% of Assets ...
...........................................

Current ≥35% of Assets.
...........................................

Current <20% of Assets ...

First- and junior-lien residential real
estate loans that are not current would
be assigned 100 percent and 150 percent
risk weights respectively. This change to
a single, higher concentration risk
threshold would simplify the risk
weight framework and calibrate it to
only pick up outliers. The concentration
thresholds are roughly two standard
deviations from the mean for both first
and junior-liens. This means that
roughly 90 percent of credit unions with
more than $100 million in assets operate
at levels below the concentration
thresholds proposed for residential real
estate loans, and only two credit unions
operate above both thresholds (based on
December 2013 Call Report data). Thus,
most credit unions would operate at a
level in which the risk weights assigned
to residential real estate loans would be
the same as the risk weights of the Other
Banking Agencies.208
The Board believes the single higher
concentration threshold would simplify
the risk weight framework and better
204 See

12 U.S.C. 1790d(d)(2).
OIG–10–03, Material Loss Review of Cal
State 9 Credit Union (April 14, 2010), OIG–11–07,
Material Loss Review OF Beehive Credit Union
(July 7, 2011), OIG–10–15, Material Loss Review OF
Ensign Federal Credit Union, (September 23, 2010),
205 See

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150%
Current ≥20% of Assets

calibrate it to apply only to credit
unions with outlying levels of
concentration risk. The revised
approach taken in this second proposal
would be more comparable with the
approaches taken by the Other Banking
Agencies’ rules 209 and Basel III, while
also maintaining higher minimum
capital requirements for large
concentrations of real estate loans as
recommended by GAO and OIG. The
Board believes the proposed risk
weights would also be consistent with
credit union loss history and recent
NCUSIF losses reviewed by OIG.
The Board does not agree that the
proposed risk weights would slow
residential real estate loan origination,
stifle homeownership, or limit credit
unions’ ability to assist low-income
members because the revised risk
weights provide credit unions with
continued flexibility to assist members
in a sustainable manner while
maintaining sufficient minimum capital.
Commenters stated that credit unions
should not be penalized for having high-

quality, performing first mortgage loan
portfolios, suggesting that risk weights
should be lowered on first mortgage real
estate portfolios that demonstrate strong
performance through lower charge-off
ratios. Numerous commenters suggested
that the risk weights should take
underwriting into account that offsets
the risk of these loans (e.g., a portfolio
made up of borrowers with high credit
scores is less risky than one that is made
of low-credit-score borrowers).
A small number of commenters
suggested the mortgage risk weights
could be better balanced by providing
credit unions with some type of earned
credit based on managed risk
performance.
Another commenter suggested that
low-income credit unions that are
Community Development Financial
Institutions have loan portfolios that are
primarily made up of non-prime and
sub-prime loans, which have a greater
propensity for delinquency. The
commenter suggested that such
institutions should not be penalized for

available at http://www.ncua.gov/about/
Leadership/CO/OIG/Pages/MaterialLoss
Reviews.aspx
206 See U.S. Govt. Accountability Office, GAO–
12–247, Earlier Actions are Needed to Better

Address Troubled Credit Unions (2012), available
at http://www.gao.gov/products/GAO–12–247.
207 See, e.g., 12 CFR 324.32(g).
208 See, e.g., 12 CFR 324.32(g).
209 Id.

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serving historically disenfranchised and
marginalized populations.
The Board agrees with commenters
that credit scores, loan underwriting,
portfolio seasoning, and portfolio
performance are good measures to
evaluate a residential real estate lending
program. However, broadly applicable
regulatory capital models are portfolio
invariant. This means the capital charge
for a particular loan category is
consistent among all credit union
portfolios based on the loan
characteristics, rather than the
individual credit union’s portfolio
performance or characteristics. Taking
into account each credit union’s
individual characteristics would be too
complicated for many credit unions and
NCUA for minimum capital
requirements.210 Further, such an
approach would not be comparable to
the risk weight framework used by the
other banking agencies.
NCUA will continue to take into
account loan underwriting practices,
portfolio performance and loan
seasoning as part of the examination
and supervision process. This method of
review is consistent with the Basel
three-pillar framework: minimum
capital requirements, supervisory
review, and market discipline.211 Credit
unions should use criteria from their
own internal risk models and loan
underwriting in developing their
internal risk management systems.
The Board also agrees LTV ratios are
an informative measure to assess risk.
However, it is not a practical measure to
assess minimum capital requirements
because of volatility in values and the
corresponding reporting burden for
credit unions tracking LTVs and
keeping them current. There also is no
historical data across institutions upon
which to base varying risk weights
according to LTVs and other
underwriting criteria (like credit scores).
Examiners take LTVs into consideration
during the examination process.
210 Basel Committee on Banking and Supervision,
An Explanatory Note on the Basel II IRB Risk
Weight Functions, July 2005, available at http://
www.bis.org/bcbs/irbriskweight.htm: ‘‘The model
should be portfolio invariant, i.e. the capital
required for any given loan should only depend on
the risk of that loan and must not depend on the
portfolio it is added to. This characteristic has been
deemed vital in order to make the new IRB
framework applicable to a wider range of countries
and institutions.’’
211 Basel Committee on Banking Supervision,
International Convergence of Capital Measurement
and Capital Standards, June 2006, available at
http://www.bis.org/publ/bcbs128.htm. ‘‘The
Committee notes that, in their comments on the
proposals, banks and other interested parties have
welcomed the concept and rationale of the three
pillars (minimum capital requirements, supervisory
review, and market discipline) approach on which
the revised Framework is based.’’

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Supervisory experience has
demonstrated LTV verification requires
on-site review and application of credit
analytics to validate the most current
information. On-site review also
minimizes reporting requirements on
credit unions.
Commenters questioned why real
estate loans were risk-weighted
differently than GSE and other
mortgage-backed securities. Under the
Original Proposal, a 30-year first
mortgage loan would have been
assigned a 50 percent risk weight while
a federal agency mortgage-backed
security that has an average life of six
years would have been assigned a 150
percent risk weight. Numerous
commenters remarked that the
differences between these two risk
weights seemed inappropriate because
the two assets have similar interest-rate
risk, and that the security has less credit
risk and is more marketable.
Commenters stated that one way credit
unions can lower the risk of holding
first mortgage loans on their balance
sheets is to securitize them, making
them more readily available to serve as
collateral to borrow against or to sell as
a security. Commenters also suggested
that the higher risk weight that would
apply to securitized mortgages would
discourage credit unions from using this
strategy.
The Board agrees with the
commenters’ concerns regarding
consistency of risk weights across assets
classes. As noted above, by removing
consideration of IRR from the risk
weights for purposes of this second
proposal, analogous risk across loans
and investments would be more
consistently risk-weighted.
Commenters suggested that the rule
should distinguish between variablerate first mortgage loans and fixed-rate
first mortgage loans, with lower risk
weights associated with the variable-rate
loans and shorter-term fixed-rate loans
in order to capture the lower IRR
associated with such loans as compared
to 30-year fixed-rate first mortgage
loans. Other commenters suggested that
the capital requirement for adjustablerate mortgages and shorter-maturity
fixed-rate mortgage loans should be
lowered to take into consideration the
reduced risk associated with these
adjustable and shorter-term mortgage
loan products. Commenters also
suggested that the IRR may in fact be
lower for junior-lien loans because
many are home equity lines of credit
with variable rates. The Board notes, as
discussed above, removal of
consideration of IRR from the risk
weights for purposes of this second

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proposal resolves these commenters’
concerns.
Commenters questioned the risk
weight for junior-lien mortgage loans,
suggesting such loans represent no more
risk than first mortgage loans if
underwritten at appropriate loan-tovalue ratios. Some of these commenters
stated that many credit unions have
established loan-to-value and combined
loan-to-value limits for junior-lien real
estate loans of 75–80 percent (or less) as
a means of managing risk. Commenters
suggested that consideration should also
be given to the equity position and not
just the lien position when setting risk
weights.
A small number of commenters stated
that no clear explanation or rationale
was offered for why junior-lien
mortgage loans have higher risk weights
than first mortgage loans.
Conversely, other commenters stated
that while they have many concerns
about the risk weights, they agree that
the proposed risk weights for home
equity/second mortgages seem
appropriate based on losses at
comparable banks and credit unions.
The Board continues to believe juniorlien residential real estate loans warrant
a higher risk weight based on loss
history. Call Report data indicates credit
unions over $100 million in asset size
reported three times the rate of loan
losses (0.96 percent) on other real estate
loans 212 when compared to first
mortgage real estate loans (0.34 percent)
during the past three years. In addition,
the base risk weight for junior-lien
residential real estate loans in this
proposal is comparable to the Other
Banking Agencies.213
After carefully considering the
comments, the Board is now proposing
to modify the definitions and risk
weights for loans secured by residential
real estate. Three substantive changes
are discussed in more detail below.
First, one-to-four family non-owneroccupied residential real estate loans
would now be included in the
definition of either first- or junior-lien
residential real estate loan.214 The Board
believes this change is consistent with
the credit risk inherent in these loans
and corresponding risk weights assigned
by the Other Banking Agencies.215
Second, for a loan to be included in
the definition of a first-lien residential
212 Junior-lien real estate loans are currently
reported on the Call Report as part of ‘‘other real
estate loans.’’
213 See, e.g., 12 CFR 324.32(g)(2).
214 Under the Original Proposal, one-to-fourfamily non-owner occupied residential real estate
loans greater than $50,000 would have been defined
as member business loans.
215 See, e.g., 12 CFR 324.32(g).

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real estate loan, a reasonable and good
faith determination must have been
made to determine that the borrower
had the ability to repay the loan
according to its terms. The Board
believes this change is consistent with
existing legal requirements for
residential real estate secured loans and
prudential underwriting expectations in
the Other Banking Agencies’ risk weight
definitions, and would provide some
standard of quality to justify residential
real estate loans receiving a lower risk
weight. Under this second proposal a
credit union would not be required to
underwrite ‘‘qualified mortgages’’ to
receive a lower risk weight. However, a
first-lien residential real estate loan
would receive the proposed 50 percent
risk weight only if the credit union
underwrites them in accordance with
CFPB’s ability-to-repay requirements
under § 1026.43 of this title.216
Finally, this second proposal would
provide a risk weight of 20 percent for
the portion of real estate loans with a
government guarantee and exclude this
amount from the calculation of the
concentration threshold. The Board
believes this change would better reflect
the risk and encourage credit unions to
take advantage of available programs
designed to reduce their risk of loss.
Current consumer loans. Consumer
loans (unsecured credit card loans, lines
of credit, automobile loans, and leases)
are generally highly desired credit
union assets and a key element of
providing basic financial services.217
For most current consumer loans, the
Original Proposal would have assigned
a risk weight of 75 percent.218 Nonfederally guaranteed student loans,
which contain higher risks (e.g., default
risk and extension risk), would have
been risk-weighted at 100 percent under
the Original Proposal. Federally
guaranteed student loans would have
received a zero percent risk weight.219
216 The Ability-to-Repay requirements include
eight loan underwriting factors a credit union will
need to consider and verify. These include the
following: (1) current or reasonably expected
income or assets; (2) current employment status; (3)
the monthly payment on the covered transaction;
(4) the monthly payment on any simultaneous loan;
(5) the monthly payment for mortgage-related
obligations; (6) current debt obligations; (7) the
monthly debt-to-income ratio or residual income;
and (8) credit history. See, e.g., 78 FR 6407 at 6585
(Jan. 30, 2013).
217 Per Call Report data for years ending
December 31, 2012 and 2013, consumer loans were
greater than 40 percent of loans in credit unions
with total assets greater than $100 million.
218 The Other Banking Agencies’ capital rules
maintained the 100 percent risk weight for current
consumer loans. See, e.g., 12 CFR 324.32 and 78 FR
55339 (Sept. 10, 2013).
219 Up until 2010, guaranteed student loans were
available through private lending institutions under
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The Board received a number of
comments regarding the risk weights for
consumer loans. A number of
commenters recommended the Board
lower the risk weights for performing
collateralized consumer loans, and that
data on such loans is reflected on the
Call Report and could easily be
incorporated into the risk weights.
Several commenters asked why a
secured auto loan was assigned the
same risk weight as an unsecured credit
card loan under the Original Proposal
when credit card loans have a
delinquency rate more than four times
that of auto loans.
Other commenters stated the rule
should take into account the type of
consumer loan (unsecured versus
secured, loss history, and term of the
loan) and generation source (direct
versus indirect) because different loan
types and generation sources have
different performance experiences
historically and should be evaluated as
part of the rulemaking.
Another commenter stated that the
proposal would have made no
distinction between indirect loans and
loans originated in-house, which would
have encouraged ‘‘buy rate’’ indirect
lending (i.e., markups by dealer), which
is bad for consumers.
Other commenters suggested different
risk weights should be applied to
consumer loans based on credit score
ranges.
A small number of commenters
suggested that consumer loans have
significantly less IRR than first-mortgage
loans, but are assigned a 75 percent risk
weight while first-mortgage loans are
assigned a 50 percent risk weight,
suggesting that only credit risk was
considered in setting the risk weight for
consumer loans.
A small number of commenters
suggested that consumer loans should
be assigned a 20 percent risk weight
because credit loss risk is covered in the
ALLL.
A number of other commenters
suggested that the proposed risk weights
for consumer loans seemed appropriate
based on losses at comparable banks
and credit unions.
The Board generally agrees with
commenters who suggested that secured
and unsecured consumer loans have
different levels of risk exposure. To
(FFELP). These loans were funded by the federal
government and administered by approved private
lending organizations. In effect, these loans were
underwritten and guaranteed by the federal
government, ensuring that the private lender would
assume no risk should the borrower ultimately
default. Loans issued under this program prior to
June 30, 2012 will remain on the books of credit
unions for many years.

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4399

address the different risks between these
two loan types, this second proposal
would assign separate risk weights for
secured and unsecured consumer loans.
To differentiate between these two loan
types, this proposed rule would include
new definitions for secured consumer
loans and unsecured consumer loans.
Loans meeting the definition of a
current secured consumer loan would
receive a risk weight of 75 percent, and
those meeting the definition of a current
unsecured consumer loan would be
assigned a 100 percent risk weight. This
would account for the higher risk
associated with unsecured loans given
their lack of collateral.
The Board also generally agrees that
credit scores, staff qualifications, loan
underwriting, portfolio seasoning, and
portfolio performance are good
measures to evaluate a lending program.
However, the Board cannot uniformly
use these criteria to measure minimum
capital requirements for all credit
unions because of the indeterminate
reporting requirements that would be
necessary and the myriad variables used
to establish sound lending programs.
The Board disagrees that credit loss
risk would be entirely covered in the
ALLL. The ALLL is intended to cover
expected losses as of the balance sheet
date. The ALLL is not intended to cover
unexpected losses. While a credit
union’s funding of the ALLL through
provision expenses decreases retained
earnings, the proposed new risk-based
capital ratio calculation would add back
in the balance of the ALLL without
limit.
Non-current consumer loans. The
current risk-based capital measure does
not contain a higher risk weight for noncurrent consumer loans. Increasing
levels of non-current loans are an
indicator of increased risk. To reflect the
impaired credit quality of past-due
loans, the Original Proposal would have
required credit unions to assign a 150
percent risk weight to loans (other than
real estate loans) 60 days or more past
due or in nonaccrual status. The higher
risk weight on past-due exposures
ensures sufficient regulatory capital for
the increased probability of unexpected
losses on these exposures. The higher
risk weights were intended to capture
the risk associated with the impaired
credit quality of these exposures, and
were consistent with the risk weights
used by Basel III and the Other Banking
Agencies.220
A small number of commenters
questioned why delinquent consumer
loans were assigned a 150 percent risk
weight under the Original Proposal
220 See,

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when such loans are assigned only a 100
percent risk weight under the Other
Banking Agencies’ capital rules.
However, in fact, a 150 percent risk
weight is consistent with the risk weight
for past-due consumer loans under the
Other Banking Agencies’ regulations 221
and would result in a risk-based capital
measure that is more responsive to
changes in the credit performance of the
loan portfolio. Thus, this proposal
would retain the 150 percent risk weight
for consumer loans that are not current.
Loans to CUSOs and CUSO Investments.
Under the Original Proposal,
investments in CUSOs were assigned a
risk weight of 250 percent and loans to
CUSOs were assigned a risk weight of
100 percent. A majority of the
commenters addressed these risk
weights and, nearly unanimously,
opposed them. There were, however, a
few commenters who generally agreed
with the proposed risk weights.
In brief, commenters generally
maintained that the originally proposed
risk weight for investments in CUSOs
was too high. Some commenters argued
that the Original Proposal was arbitrary
and unsupported by analytical data.
Others stated that the risk weights did
not take into account the requirements
of the CUSO regulation or the nature
and business of individual CUSOs.
Finally, some commenters believed the
Original Proposal would have a chilling
effect on CUSOs and could lead credit
unions to seek out more expensive
third-party vendors.
Some commenters questioned why
the Original Proposal included different
risk weights for investments and loans.
Other commenters argued that there
should be only one risk weight and that
it should not exceed 100 percent.
Several commenters suggested risk
weights below 100 percent, stating that
higher risk weights would diminish the
cooperative nature of credit unions. A
few commenters advocated eliminating
risk weights for CUSOs altogether,
claiming that assigning risk weights to
these assets would be detrimental to
credit unions forming and utilizing
CUSOs.
Other commenters stated that NCUA
should address risk in CUSOs through
supervision of the credit union
investors, rather than assigning risk
weights to investments and loans.
One commenter expressed concern
about investments in CUSOs being
included in the risk-based capital ratio
calculation on an unconsolidated basis,
combined with including a CUSO’s
mortgage servicing assets (MSAs) on a
221 See,

e.g., 12 CFR 324.32(k).

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consolidated basis. This commenter
stated that if mortgage servicing assets
represent a significant portion of the
equity of a CUSO on an unconsolidated
basis, then the credit union’s MSAs
would effectively be weighted at 500
percent.
Several commenters argued that the
risk weights for CUSO loans and
investments should be lower because
the actual degree of risk from CUSOs is
relatively low. A few commenters noted
that credit unions have less than 0.2
percent of total assets invested in
CUSOs, which, they argued, is an
immaterial risk to the credit union
industry.
Other commenters stated that the
requirements in the recently finalized
CUSO rule effectively reduce risk from
CUSOs, thereby eliminating the need for
higher risk weights.
Several commenters expressed
concern that the 250 percent risk weight
on investments in CUSOs would restrict
or reduce the benefits from using
CUSOs. Some of these commenters
argued that credit unions would be
forced to contract with higher-priced
third-party vendors for services because
third-party vendors do not carry a
capital risk weight.
Several commenters also questioned
the mechanics of the two risk weights
that would have applied to CUSOs. One
commenter stated that the risk weight
for loans did not take into account
collateral for the loan or the quality of
any such collateral.
Another commenter stated that there
was no reason for a risk weight if the
amount of an investment in a CUSO was
fully offset by net income or cost
savings generated by the CUSO. Other
commenters suggested that NCUA not
apply a risk weight to both the cash
investment made in the CUSO and the
CUSO’s appreciated value.
Several commenters stated that the
Original Proposal would have double
counted exposure for majority-owned
CUSOs. They reasoned that because
risk-based capital is based on a credit
union’s consolidated balance sheet,
adding a schedule that shows
unconsolidated results is essentially
double counting.
Several commenters addressed a
comparison made in the Original
Proposal between CUSOs and an
unsecured equity investment by a bank
in a non-publicly traded entity. These
commenters argued that this
comparison is not analogous and NCUA
should abandon this approach. These
commenters stated further that the
regulations applying to credit union
investments in CUSOs and the
collaborative platform between CUSOs

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and credit unions makes this
relationship sufficiently different, such
that it should not be treated the same as
a bank’s unsecured equity investment in
a non-publicly traded entity.
Finally, several commenters requested
that risk weights for CUSOs take into
account certain aspects of the specific
CUSO. Many of these commenters
stated that they supported risk weights
that were based on the CUSO’s business
function. Others stated that risk weights
should take into account the CUSO’s
historical profitability, if it is generating
income for its investors, the complexity
of the CUSO’s operations, or how long
it has been in operation. Several
commenters argued that a ‘‘one-sizedfits-all’’ approach is not sufficient to
accurately risk weight investments in
CUSOs.
After diligent consideration of the
comments discussed above, the Board
has decided to rely on GAAP accounting
standards to determine the reporting
basis upon which any CUSO equity
investments and loans are assigned risk
weights. For CUSOs subject to
consolidation under GAAP, the amount
of CUSO equity investments and loans
are eliminated from the consolidated
financial statements because the loans
and investments are intercompany
transactions. The related CUSO assets
that are not eliminated are added to the
consolidated financial statement and
receive risk-based capital treatment as
part of the credit union’s statement of
financial condition. For CUSOs not
subject to consolidation, the recorded
value of the credit union’s equity
investment would be assigned a 150
percent risk weight, and the balance of
any outstanding loan would be assigned
a 100 percent risk weight.
NCUA recognizes the uniqueness of
CUSOs and the support they provide.
However, an equity investment in a
CUSO is an unsecured, at-risk equity
investment (first loss position), which is
analogous to an investment in a nonpublicly traded entity. There is no price
transparency and extremely limited
marketability associated with CUSO
equity exposures. In addition, unlike the
Other Banking Agencies, NCUA has no
enforcement authority over third-party
vendors, including CUSOs.
The Board recognizes there are
statutory limits on how much a federal
credit union can loan to and invest in
CUSOs. However, the limitations are not
as stringent for some state charters, and
only binding for federal credit unions at
the time the loan or investment is made
(that is, the position can grow in
proportion to assets over time). In
setting capital standards (e.g., Basel and
FDIC), the risk of loss is central to

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determining the risk weight—not the
size of the exposure.
In addition, while a CUSO must
predominantly serve credit unions or
their members (more than 50 percent) to
be a CUSO, it can be owned and
controlled primarily by persons and
organizations other than credit unions.
Therefore, it may not only serve noncredit unions, it can be majoritycontrolled by a party or parties with
interests not necessarily aligned with
the credit union’s interests.222
Also, given the equity investment in
a CUSO is in a first loss position, is an
unsecured equity investment in a nonpublicly traded entity, the significant
history of losses to the NCUSIF related
to CUSOs, and the fact NCUA lacks
vendor authority, the risk weight should
be higher than 100 percent.
Loans to CUSOs, on the other hand,
have a higher payout priority in the
event of bankruptcy of a CUSO and
therefore warrant a lower risk weight of
100 percent, which corresponds to the
base risk weight for commercial loans.
The Board notes it may be possible to
make more meaningful risk distinctions
between the risk various types of CUSOs
pose once the CUSO registry is in place
and sufficient trend information has
been collected.
Under the Original Proposal, the risk
weights were derived from a review of
FDIC’s capital treatment of bank service
organizations. FDIC’s rule looks across
all equity exposures.223 If the total is
‘‘non-significant’’ (less than 10 percent
of the institution’s total capital), the
entire amount receives a risk weight of
100 percent. Otherwise, all the
exposures are matched against a
complicated risk weight framework that
runs from a minimum of 250 percent to
600 percent risk weight, with some
subsidiary equity having to be deducted
from capital. The equity investment in
a CUSO would be treated the same as an
equity investment in a non-publicly
traded entity (limited marketability and
valuation transparency), which would
receive a 400 percent risk weight unless
the cumulative level of all equity
exposures held by the institution were
‘‘non-significant.’’
The Board recognizes the complexity
of FDIC’s approach and continues to
believe that a simplified risk weight
222 Further, not all CUSOs are closely held. They
can have wider ownership distributed among many
credit unions, none of which may have significant
control. If a particular credit union has significant
control, it will likely have to consolidate under
GAAP and then there will be no risk weight
associated with the loan or investment for the
controlling credit union since it will be netted out
on a consolidated basis.
223 See, e.g., 12 CFR 324.52.

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approach is more appropriate given the
limited amount of credit union assets in
CUSOs and the value CUSOs provide to
credit unions in achieving economies of
scale.
Mortgage Servicing Assets (MSAs).
The Original Proposal would have
assigned a 250 percent risk weight to
MSAs to address the complexity and
volatility of these assets. In the
preamble to the Original Proposal, the
Board noted that MSAs typically lose
value when interest rates fall and
borrowers refinance or prepay their
mortgage loans, leading to earnings
volatility and erosion of capital.
A large number of commenters
addressed this provision and generally
disagreed with the 250 percent risk
weight. Most commenters addressing
this topic maintained that the risk
weight was too high and would have
been punitive to credit unions. Further,
some of these commenters noted that
MSAs are an important hedge for credit
unions and that MSAs are very liquid
assets with an active secondary market.
A few commenters provided
suggestions on how to amend this
provision of the rule. Most suggested
lowering the risk weight to 100 percent.
Others, however, suggested a phase-in
approach of the 250 percent risk weight
or assigning a risk weight above 100
percent when a credit union reaches a
certain concentration level of MSAs.
One commenter suggested that
assigning the same risk weight to all
MSAs, as if they are all equivalent, is
not an accurate representation of the
actual risk involved. One other
commenter stated that the rule should
include a mechanism for differentiating
between loans sold with and without
recourse.
Another commenter stated, ‘‘For
many credit unions, maintaining the
personal member relationship
throughout the life of a transaction is of
strategic importance. If the practical
effect of a regulation is to force the sale
of a mortgage or the servicing rights, the
supervisory necessity of such a
regulation must be unquestionably
clear.’’
Finally, a few commenters predicted
that a 250 percent risk weight on MSAs
could discourage loan participations
and limit the options available to
manage balance sheet risk. One
commenter further suggested that risk
weights for loan participations should
be lowered not to exceed the weight of
the underlying loan participated.
After considering these comments, the
Board continues to believe that the 250
percent risk weight is appropriate in
light of the relatively greater risks

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inherent in these assets, and to maintain
comparability with the risk weight
assigned to these assets by the Other
Banking Agencies.224 Specifically, MSA
valuations are highly sensitive to
unexpected shifts in interest rates and
prepayment speeds. MSAs are also
sensitive to the costs associated with
servicing. These risks contribute to the
high level of uncertainty regarding the
ability of credit unions to realize value
from these assets, especially under
adverse financial conditions, and
support assigning a 250 percent risk
weight to MSAs.
While the Board acknowledges that
MSAs may provide some hedge against
falling rates under certain
circumstances, it further believes that
MSAs’ effectiveness as a hedge, relative
to particular credit unions’ balance
sheets, is subject to too many variables
to conclude that MSAs warrant a lower
risk weight. More importantly, since IRR
has been removed from the risk weights
of this proposal, this argument is no
longer directly applicable.
Furthermore, NCUA does not agree
with commenters who suggested that
the proposed 250 percent risk weight
assigned to this relatively small asset
class would significantly disincentivize
credit unions from granting loans,
engaging in loan participations, and
retaining servicing of their member
loans. NCUA notes that banks have been
subject to at least as stringent (if not
more so) of a risk weight for MSAs for
some time and continue to sell loans
and retain MSAs.
The Board believes the proposed
January 1, 2019 effective date for this
rule would provide credit unions
sufficient time to adjust to this second
proposal and would provide credit
unions with a phase-in period
comparable to that given to banks
following a similar change to the Other
Banking Agencies’ capital
regulations.225
Other on-balance sheet assets. The
current risk-based measure for all other
balance sheet assets not otherwise
assigned a specific risk weight is 100
percent of the risk-based target. Under
the Original Proposal, these same assets
would have received a 100 percent risk
weight.226
224 See,

e.g., 12 CFR 324.32(l)(4)(i).
e.g., 12 CFR 324.1(f).
226 This is comparable to the Other Banking
Agencies’ capital rules (e.g., 12 CFR 324.32), which
maintained the 100 percent risk weight for assets
not assigned to a risk weight category. See, e.g., 78
FR 55339 (Sept. 10, 2013).
225 See,

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ORIGINAL PROPOSAL—RISK WEIGHTS example, premises, fixed assets, and
FOR OTHER ON-BALANCE SHEET other real estate owned would receive a
risk weight of 100 percent.
ASSETS
Other asset type

Proposed
risk weight
(percent)

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Loans Held for Sale ..................
Foreclosed and Repossessed
Assets ...................................
Land and Building .....................
Other Fixed Assets ...................
Accrued Interest on Loans .......
Accrued Interest on Investments ....................................
All Other Assets not otherwise
specifically assigned a risk
weight ....................................

100
100
100
100
100
100
100

The Board received a number of
comments regarding the proposed risk
weights for other on-balance sheet
assets.
A small number of commenters
suggested that under Basel III loans held
for sale are risk-weighted at zero as long
as they are sold within 120 days because
such assets are more of a receivable than
a loan.
Commenters suggested that a 100
percent risk weight for land and
building was excessive and that
speculative land should be risk
weighted at 50 percent and a financial
institution building should be riskweighted at 25 percent, less
depreciation. Other commenters stated
that all credit unions must invest in
fixed assets (such as buildings, furniture
and equipment) and that the current 5
percent cap on fixed assets helps to
manage risk and credit unions seeking
to exceed the 5 percent cap must obtain
prior NCUA approval. Commenters
suggested that consideration should be
given to assigning a lower risk weight to
investments in fixed assets when the 5
percent cap is maintained. Other
commenters suggested that assigning a
100 percent risk weight on land,
building and fixed assets would
discourage investments in growing
branch networks or modernizing
equipment.
A small number of commenters
suggested that accounts receivable,
prepaid income items, accrued interest,
and other small items that have no
credit risk or IRR should be assigned a
zero percent risk weight. These
commenters suggested that a 100
percent risk weight assigned to accrued
interest on loans and accrued interest on
investments is excessive.
As with the Original Proposal, in this
second proposal, where the rule does
not assign a specific risk weight to an
asset or exposure type, the applicable
risk weight would be 100 percent. For

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The Board determined the 100
percent risk weight would be
appropriate for this class of assets since
the difference between the book balance
of some particular fixed assets and the
value of the assets in the event of
liquidation can be substantial. For
example, in an area that has
experienced a decline in the value of
real estate, the book value of a fairly
recently constructed credit union
headquarters could be well below the
fair value. Differentiating between the
risks of types of assets not otherwise
identified is not currently possible due
to lack of data, would add complexity
to the rule, and require even more Call
Report data.
The 100 percent risk weight would
also be appropriate when considering
that most assets in this group are
predominately non-earning assets which
can hinder a credit union’s ability to
increase capital.
Further, the proposed risk weights
match the risk weights in the Other
Banking Agencies’ capital
regulations.227
This proposal would include loans
held for sale within the pool of loans
subject to assignment of risk weights by
loan type to avoid the added complexity
of determining the age of the loans held
for sale.
104(c)(2)(i) Category 1—Zero Percent
Risk Weight
Proposed § 702.104(c)(2)(i) would
provide that a credit union must assign
a zero percent risk weight to the
following on-balance sheet assets:
• The balance of cash, currency and
coin, including vault, automatic teller
machine, and teller cash.
• The exposure amount of:
Æ An obligation of the U.S.
Government, its central bank, or a U.S.
Government agency that is directly and
unconditionally guaranteed, excluding
detached security coupons, ex-coupon
securities, and principal and interest
only mortgage-backed STRIPS.
Æ Federal Reserve Bank stock and
Central Liquidity Facility stock.
• Insured balances due from FDICinsured depositories or federally
insured credit unions.
Consistent with the Original Proposal,
this second proposal would continue to
assign a zero percent risk weight for
cash, which includes the balance of
cash, currency and coin, including
vault, automatic teller machine, and
other teller cash.
227 See,

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This proposal would change the
assignment of risk weights for cash on
deposit, assigning a zero percent risk
weight to insured cash on deposit and
a 20 percent risk weight for all
uninsured 228 cash on deposit as
outlined in the proposed changes to the
revised risk weights. Cash items in
process of collection (currently included
in cash on deposit) would not be
specifically measured or assigned a risk
weight. This change would be
comparable with the risk weights
applicable to banks.229 The Board
believes having two risk weights for
cash on deposit is appropriate because
of the different risk profiles between
insured and uninsured deposits.
This proposal would apply a risk
weight of zero percent to the exposure
amounts of an obligation of the U.S.
Government, its central bank, or a U.S.
Government agency that is directly and
unconditionally guaranteed—excluding
detached security coupons, ex-coupon
securities, and principal and interest
only mortgage-backed STRIPS. This zero
percent risk weight would also exclude
indirect ownership and securities
collateralized with zero percent risk
weight assets.
This proposal would apply a risk
weight of zero percent to these types of
exposures because they have no or very
limited credit risk.
However, exposures that are through
a trust, or similar vehicle, would not
receive a zero percent risk weight. In
addition, conditional guarantees that
can be revoked if a condition(s) is not
met would not receive a zero percent
risk weight.
For example, the following types of
investment exposures would be
assigned a zero percent risk weight: 230
• U.S. Treasury Securities
• GNMA securities (not including
principal and interest only STRIPS)
• SBA pools (not including principal
and interest only STRIPS)
• SBA loan participations
• FDIC-guaranteed securities
• NCUA-guaranteed securities
This proposal would also apply a zero
percent risk weight to Federal Reserve
Bank stock and Central Liquidity
Facility stock. Under the applicable
statutes, these two types of ‘‘stocks’’ do
not carry a risk of loss of principal 231
228 Privately insured balances are included with
uninsured deposits and assigned a risk weight of 20
percent as outlined in the proposed rule language.
229 See 12 CFR 324.32(a)(1)(i)(B) and (d)(1).
230 The list provided is not meant to be
comprehensive. Any exposure in a principal- or
interest-only mortgage-backed strip would not be
assigned a zero percent risk weight.
231 See 12 U.S.C. 287 and 12 U.S.C. 1795f(a).

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and, therefore, the Board believes they
warrant a zero percent risk weight.
This proposed rule would materially
increase the amount of zero riskweighted investments compared to the
current rule. The proposed zero percent
risk weight category is consistent with
risk weights applicable to banks.232 The
Board believes it is appropriate to assign
a zero percent risk weight to additional
investments under this proposal
because IRR would no longer be
included in the proposed risk weights.
The Board requests comments on
whether any items currently listed in
this category should be assigned a
higher risk weight and why. In addition,
the Board requests comments on
whether additional items should be
assigned a zero percent risk weight and
why.
104(c)(2)(ii) Category 2—20 Percent Risk
Weight
Proposed § 702.104(c)(2)(ii) would
provide that a credit union must assign
a 20 percent risk weight to the following
on-balance sheet assets:
• The uninsured balances due from
FDIC-insured depositories, federally
insured credit unions, and all balances
due from privately insured credit
unions.
• The exposure amount of:
Æ A non-subordinated obligation of
the U.S. Government, its central bank,
or a U.S. Government agency that is
conditionally guaranteed, excluding
principal and interest only mortgagebacked STRIPS.
Æ A non-subordinated obligation of a
GSE other than an equity exposure or
preferred stock, excluding principal and
interest only GSE obligation STRIPS.
Æ Securities issued by public sector
entities in the United States that
represent general obligation securities.
Æ Investment funds whose portfolios
are permitted to hold only part 703
permissible investments that qualify for
the zero or 20 percent risk categories.
Æ Federal Home Loan Bank stock.
• The balances due from Federal
Home Loan Banks.
• The balance of share-secured loans.
• The portions of outstanding loans
with a government guarantee.
• The portions of commercial loans
secured with contractual compensating
balances.
This proposal would apply a 20
percent risk weight to uninsured
balances due from FDIC-insured
depositories and federally insured credit
unions, and all balances due from
privately insured credit unions. The
proposed 20 percent risk weight is

consistent with the risk weights
applicable to banks.233 The Board
believes it is an appropriate risk weight
due to the low risk of loss with these
types of exposures.
This proposal would also apply a risk
weight of 20 percent to nonsubordinated obligations of the U.S.
Government, its central bank, or a U.S.
Government agency that is conditionally
guaranteed, excluding principal- and
interest-only mortgage-backed STRIPS.
This 20 percent risk weight is also
applied to indirect and unconditionally
guaranteed exposures to the U.S.
Government, its central bank, or a U.S.
Government agency. Additionally, a risk
weight of 20 percent would be applied
to non-subordinated exposures of a GSE,
other than an equity exposure or
preferred stock, excluding principaland interest-only GSE obligation
STRIPS.
The following are exposures that
would be assigned a 20 percent risk
weight:
• Farm Credit System
• Federal Home Loan Bank System
• Federal Home Loan Mortgage
Corporation
• Federal National Mortgage
Association
• Financing Corporation
• Resolution Funding Corporation
• Tennessee Valley Authority
• United States Postal Service
The above list is not meant to be
comprehensive and includes mortgagebacked securities issued and guaranteed
by U.S. Government agencies and GSEs,
excluding principal- and interest-only
mortgage-backed STRIPS that are
assigned a 100 percent risk weight. The
above risk weights are generally
consistent with the risk weights
applicable to banks,234 as several
commenters requested. Many
commenters also requested that U.S.
Government agency and GSE exposures
be measured based on their risk, and not
WAL, which is addressed by the risk
weights above. The Board believes it is
appropriate to assign these investments
a 20 percent risk weight due to the fact
that GSEs generally do not have the full
faith and credit of the U.S. Government
guaranteeing payment of their
obligations. It is common, however, for
GSEs to have an assigned federal
regulator and an ability to borrow from
the U.S. Treasury.
This proposal would also apply a 20
percent risk weight to securities issued
by public sector entities in the United
States that represent a general
obligation. General obligation securities
233 See,

232 See,

e.g., 12 CFR 324(a)(i).

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234 See,

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e.g., 12 CFR 324.32(d)(1).
e.g., 12 CFR 324.32(a)(1)(ii) and (c).

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are backed by the full faith and credit
of a public sector entity, which warrants
the low risk weight. This risk weight is
consistent with risk weights applicable
to banks.235 The Board believes it is an
appropriate risk weight due to the low
risk and full faith and credit of the
public sector entities.
Indirect unconditionally guaranteed
exposures to the U.S. Government, its
Central Bank, or a U.S. Government
agency would receive a 20 percent risk
weight. An example is U.S. Treasury
securities in a trust that are sold to an
investor. The U.S. Treasury security
would be an indirect obligation since
the obligation is to the trust and not the
credit union. Being indirect adds a layer
of risk, which would increase the level
of risk from risk-free to low, which
warrants the 20 percent risk weight.
This risk weight is also consistent with
Other Banking Agencies’ corresponding
risk weight.236
Another example of an indirect
unconditional guarantee would be a
U.S. Treasury security in an investment
fund. The obligation is to the
investment fund, and not the owner of
the fund. This is why an investment
fund, or individual asset in an
investment fund, cannot have a risk
weight of less than 20 percent. This
proposal would apply a 20 percent risk
weight to investment funds with
portfolios permitted to hold only part
703 permissible investments that qualify
for the zero to 20 percent risk categories.
This restriction must be stated in the
fund documentation (e.g. prospectus),
and must be binding (e.g. intent alone
is not sufficient).
Based on June 2014 Call Report data,
approximately 93 percent of
investments held by complex credit
unions would receive a risk weight of 20
percent or less, with the majority of
investments receiving a 20 percent risk
weight.237
As discussed earlier, the Board agrees
with commenters who suggested that
share-secured loans present a lower risk
than other loan types and has added a
new category in this proposal for sharesecured loans under the 20 percent risk
weight, as well as for portions of
compensating balances on commercial
loans.
The Board requests comments on
whether any items currently listed in
this category should be assigned a
higher or lower risk weight and why. In
addition, the Board requests comments
235 See,

e.g., 12 CFR 324.32(e).
e.g., 12 CFR 324.53.
237 This analysis assumes immaterial exposures to
subordinated tranches and interest-only and
principal-only STRIPS.
236 See,

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on whether additional items should be
assigned a 20 percent risk weight and
why.
104(c)(2)(iii) Category 3—50 Percent
Risk Weight
Proposed § 702.104(c)(2)(iii) would
provide that a credit union must assign
a 50 percent risk weight to the following
on-balance sheet assets:
• The outstanding balance (net of
government guarantees), including loans
held for sale, of current first-lien
residential real estate loans less than or
equal to 35 percent of assets.
• The exposure amount of:
Æ Securities issued by PSEs in the
U.S. that represent non-subordinated
revenue obligation securities.
Æ Other non-subordinated, non-U.S.
Government agency or non-GSE
guaranteed, residential mortgage-backed
security, excluding principal- and
interest-only STRIPS.
As discussed earlier, this proposal
would include the use of a single
concentration threshold for current firstlien residential real estate loans. All
current first-lien residential real estate
loans less than or equal to 35 percent of
assets would receive a 50 percent risk
weight.
The proposal would also apply a risk
weight of 50 percent to the exposure
amount of securities issued by PSE in
the U.S. that represent nonsubordinated revenue obligation
securities (revenue bonds). These
securities are backed by the revenue
assigned when the security is issued. An
example is a revenue security backed by
tolls on the toll road for which the
funding was used. This risk weight is
comparable to the Other Banking
Agencies’ capital regulations,238 which
some commenters recommended. This
risk weight also reflects the greater risk
that non-subordinated revenue
obligations have compared to securities
issued by a PSE that represent general
obligation securities.
The proposal would also apply a risk
weight of 50 percent to other nonsubordinated, non-agency and non-GSE
guaranteed, residential mortgage-backed
securities (RMBS), excluding principaland interest-only STRIPS. The
underlying loans in the security must be
first-lien residential real estate loans, in
order to qualify. Furthermore, the
security must be in the most senior
position in the securitization if losses
are applied to the securitization. The
senior position is not based on
allocation of principal, only losses. This
risk weight would be consistent with
the 50 percent risk weight that would be

assigned to first-lien residential real
estate loans under this proposal and
FDIC’s capital regulation.239 Many
commenters wanted risk weights more
aligned with the collateral risk weight,
which this risk weight does.
Furthermore, this risk weight would be
comparable with the FDIC’s approach
for calculating the risk weight for
RMBSs 240 as some other commenters
requested.
The Board requests comments on
whether certain items currently listed in
this category should be assigned a
higher or lower risk weight and why. In
addition, the Board requests comments
on whether additional items should be
assigned a 50 percent risk weight and
why.
104(c)(2)(iv) Category 4—75 Percent
Risk Weight
Proposed § 702.104(c)(2)(iv) would
provide that a credit union must assign
a 75 percent risk weight to the
outstanding balance (net of government
guarantees), including loans held for
sale, of the following on-balance sheet
assets:
• Current first-lien residential real
estate loans greater than 35 percent of
assets.
• Current secured consumer loans.
This proposal would apply to the
amount of first-lien residential real
estate loans above the single
concentration threshold of 35 percent of
assets, which is a reduction in the
amount of capital required due to
exceeding the concentration thresholds
when compared to the Original
Proposal.
This proposed rule would apply
separate risk weights for current
consumer loans based on whether they
are secured or unsecured. Current
secured consumer loans would receive
a 75 percent risk weight because they
generally have a lower credit risk than
unsecured consumer loans due to the
collateral available for secured loans.
The Board requests comments on
whether any items currently listed in
this category should be assigned a
higher or lower risk weight and why. In
addition, the Board requests comments
on whether additional items should be
assigned a 75 percent risk weight and
why.
104(c)(2)(v) Category 5—100 Percent
Risk Weight
Proposed § 702.104(c)(2)(v) would
provide that a credit union must assign
a 100 percent risk weight to the
following on-balance sheet assets:
239 See,

238 See,

e.g., 12 CFR 324.32(e)(1)(ii).

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240 12

PO 00000

e.g., 12 CFR 324.32(g)(1).
CFR 324.43(e).

• The outstanding balance (net of
government guarantees), including loans
held for sale, of:
Æ First-lien residential real estate
loans that are not current.
Æ Current junior-lien residential real
estate loans less than or equal to 20
percent of assets.
Æ Current unsecured consumer loans.
Æ Current commercial loans, less
contractual compensating balances that
comprise less than 50 percent of assets.
Æ Loans to CUSOs.
• The exposure amount of:
Æ Industrial development bonds.
Æ All stripped mortgage-backed
securities (interest only and principal
only STRIPS).
Æ Part 703 compliant investment
funds, with the option to use the lookthrough approaches in § 702.104(c)(3)(ii)
of this section.
Æ Corporate debentures and
commercial paper.
Æ Nonperpetual capital at corporate
credit unions.
Æ General account permanent
insurance.
Æ GSE equity exposure or preferred
stock.
• All other assets listed on the
statement of financial condition not
specifically assigned a different risk
weight under this subpart.
Unless otherwise noted below, the
investment risk weights are also
consistent with the risk weights
applicable to banks,241 which some
commenters requested. The Board
believes the 100 percent risk weight for
these investments would be appropriate
due to their risk of loss.
Industrial development bonds (IDB)
are issued under the auspices of a state
or political subdivision but are an
obligation of a private party or
enterprise and are therefore akin to a
corporate exposure. An example of an
IDB is a security issued by an airport
authority for a terminal of an airliner.
The security would be issued by the
airport authority and be an obligation of
the airliner.
Stripped mortgage-backed securities
(interest-only and principal-only
STRIPS) represent either the payments
of principal or interest from an
underlying pool of mortgages. The
Board believes the increased risk
associated with these two structures
warrants a higher risk weight compared
to non-principal-only and non-interestonly STRIPS with similar collateral. The
Board chose to include principal-only
STRIPS in the 100 percent risk weight
category due to the explicit prohibition
of this structure in part 703. The Board

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Federal Register / Vol. 80, No. 17 / Tuesday, January 27, 2015 / Proposed Rules
requests comments on whether risk
weights for principal-only STRIPS
should be more comparable to the Other
Banking Agencies and assign a risk
weight for STRIPS based on the
underlying guarantor or collateral.
The proposal would assign a risk
weight of 100 percent to part 703
compliant investment funds, with the
option to use the look-through
approaches in the proposal. For an
investment fund to be assigned a 100
percent risk weight, compliance with
part 703 of NCUA’s regulations must be
stated in the investment fund’s
documentation (such as the prospectus)
and must be binding (intent alone is
insufficient).
The credit union also has the ability
to choose an alternate approach for
investment funds. The risk weight for
investment funds deviates slightly from
the approach applicable to banks. The
Board has added a standard risk weight
of 100 percent for part 703 compliant
funds, in addition to adopting the
approach applicable to banks,242 as an
additional option for credit unions.
However, the Board believes the
approach for investment funds is
consistent with recommendations
received from commenters who
suggested the risk weights be based on
the underlying accounts and investment
strategies.
The proposal would assign a risk
weight of 100 percent to the balance of
nonperpetual capital at corporate credit
unions. Nonperpetual capital is
subordinate to deposits in a corporate
credit union, which warrants a higher
risk weight than deposits.
The proposal would apply the 100
percent risk weight to general account
permanent insurance. This type of
insurance is typically associated with
the funding of employee benefits.
General account permanent insurance
with returns indexed to equity returns
should have the same risk weight as
publically traded equity investments,
unless it has a positive return floor. The
100 percent risk weight is reflective of
the moderate risk associated with this
asset.
Some commenters argued for lower
risk weights for investments funding
employee benefits. However, the Board
disagrees with those commenters and,
consistent with the general approach
taken in assigning risk weights under
this proposal, believes that the risk
weight assigned to investments funding
employee benefits should be based on
the credit risk and not the purpose of
the asset. The Board notes this is

comparable to the approach taken by the
Other Banking Agencies.243
Under this proposal, first-lien
residential real estate loans that are not
current would be assigned a 100 percent
risk weight reflecting the increased
credit risk and consistent with the risk
weights for similar loans held by banks
under the Other Banking Agencies’
regulations.244 The Board believes the
proposed higher risk weight that would
be assigned to non-current loans is
warranted because such loans have a
higher probability of default when
compared to current loans. Non-current
loans are more likely to default because
repayment is already impaired making
them one step closer to default
compared to current loans.
Additionally, a higher risk weight for
non-current loans is consistent with the
risk weights assigned by the Other
Banking Agencies.
Under this proposal, current juniorlien residential real estate loans under
the single concentration threshold
would be assigned a 100 percent risk
weight, which would be consistent with
the risk weight for similar residential
real estate loans assigned by the Other
Banking Agencies.245
The 125 percent risk category that was
included in the Original Proposal would
be eliminated. The 125 percent risk
category applied to the portion of other
real estate loans that made up between
10 to 20 percent of a credit union’s total
assets. The reduction in the number of
concentration thresholds applicable to
junior-lien real estate loans resulted in
the elimination of the 125 percent risk
weight.
Under this proposal, secured and
unsecured consumer loans would be
separated into different risk-weight
categories, with current unsecured
consumer loans assigned a 100 percent
risk weight. The higher risk weight for
current unsecured consumer loans
would reflect the elevated risk from this
loan type compared to current secured
consumer loans. Generally, unsecured
loans reflect higher levels of
delinquency and charge-offs, as reported
on the quarterly Call Report, and,
therefore, expose the credit union to
higher risk than secured loans.
The Board notes that under this
proposal, student loans would be
incorporated into the definition of
consumer loans and risk-weighted
accordingly.
The approach for assigning the risk
weight for commercial loans would be
comparable to the Other Banking
243 See,

e.g., 12 CFR 324.32.
e.g., 12 CFR 324.32(g)(2).
245 See, e.g., 12 CFR 324.32(g)(2).
244 See,

242 See,

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Agencies’ rules.246 As discussed
previously, the changes to the definition
of commercial loans would align the
risk weights with actual credit risk
exposure instead of assigning risk
weights based on the $50,000 exemption
as it relates to the statutory MBL cap 247
(which commenters pointed out). The
change would result in improved and
more easily reconcilable call reporting,
and enhance NCUA’s ability to account
for all loans that support commercial
ventures.248
Consistent with the Original Proposal,
this proposed rule would assign a 100
percent risk weight to the outstanding
balance of unconsolidated loans to
CUSOs.
This proposal would assign a 100
percent risk weight to all other balance
sheet assets not specifically assigned a
different risk weight under this subpart,
but reported on the statement of
financial condition. This 100 percent
risk weight is consistent with the risk
weight applicable to banks 249 and the
Board believes this risk weight is
appropriate for assets not specifically
assigned a risk weight.
104(c)(2)(vi) Category 6—150 Percent
Risk Weight
Proposed § 702.104(c)(2)(vi) would
provide that a credit union must assign
a 150 percent risk weight to the
following on-balance sheet assets:
• The outstanding balance, net of
government guarantees and including
loans held for sale, of:
Æ Current junior-lien residential real
estate loans that comprise more than 20
percent of assets.
Æ Junior-lien residential real estate
loans that are not current.
Æ Consumer loans that are not
current.
Æ Current commercial loans (net of
contractual compensating balances),
which comprise more than 50 percent of
assets.
Æ Commercial loans (net of
contractual compensating balances),
which are not current.
• The exposure amount of:
Æ Perpetual contributed capital at
corporate credit unions.
Æ Equity investments in CUSOs.
Under the Original Proposal, the risk
weight for perpetual contributed capital
at corporate credit unions would have
246 See, e.g., 12 CFR 324.32(f) (standard
commercial loans) and 324.32(j) (high volatility
commercial real estate loans).
247 See. 12 CFR 723.1(b).
248 Other than auto secured loans, business
purpose loans below $50,000 would still receive a
100 percent risk weight as an unsecured consumer
loan or fall into the ‘‘all other assets’’ category.
249 See, e.g., 12 CFR 324.32(l)(5).

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4406

been 200 percent. This proposal would
lower the risk weight for perpetual
contributed capital at corporate credit
unions to 150 percent. Perpetual
contributed capital at corporate credit
unions would receive a higher risk
weight than nonperpetual capital at
corporate credit unions because
perpetual contributed capital is
available to absorb losses before
nonperpetual capital. The Board
believes the 150 percent risk weight is
appropriate due to heightened risk of
loss compared to the 100 percent riskweighted nonperpetual capital.
Under this proposal, current juniorlien residential real estate loans that
exceed 20 percent of assets would be
assigned a 150 percent risk weight.
Additionally, any junior-lien residential

real estate loans that are not current, as
defined in the proposal, would receive
the 150 percent risk weight reflecting
the higher credit risk of such loan than
current junior-lien real estate loans up
to 20 percent of assets, which would
receive a 100 percent risk weight.
The Board also proposes that
consumer loans that are non-current be
assigned a 150 percent risk weight, as in
the Original Proposal. The Board
believes the proposed higher risk weight
that would be assigned to non-current
loans is warranted because such loans
have a higher probability of default
when compared to current loans. Noncurrent loans are more likely to default
because repayment is already impaired
making them one step closer to default
compared to current loans. This rule

would more clearly define those loans
that are assigned a 150 percent risk
weight through new definitions for
consumer loan and current loan. The
150 percent risk weight for non-current
consumer loans is also consistent with
the risk weight for non-current
consumer loans assigned by the Other
Banking Agencies.250
This proposal would maintain higher
risk weights for high concentrations of
commercial loans as GAO and OIG
recommend. A high concentration is
defined as commercial loans over 50
percent of assets, which would receive
the 150 percent risk weight. The amount
of commercial loans subject to the 150
percent concentration risk weight would
be determined as follows:

As discussed earlier, due to the higher
credit risk of non-current commercial
loans, they would receive a 150 percent
risk weight.
The Board requests comments on
whether any items currently listed in
this category should be assigned a
higher or lower risk weight and why. In
addition, the Board requests comments
on whether additional items should be
assigned a 150 percent risk weight and
why.

As noted above, MSAs are also sensitive
to the costs associated with servicing.
These risks contribute to the high level
of uncertainty regarding the ability of
credit unions to realize value from such
assets, especially under adverse
financial conditions, and support this
proposed rule’s treatment for MSAs.
Given there is no differentiation
between the risk as it relates to MSAs
for credit unions versus banks, the
Board believes this treatment would
generally maintain comparability with
the Other Banking Agencies’ capital
regulations.251
The Board requests comments on
whether any items currently listed in
this category should be assigned a
higher or lower risk weight and why. In
addition, the Board requests comments
on whether additional items should be
assigned a 250 percent risk weight and
why.

104(c)(2)(viii) Category 8—300 Percent
Risk Weight
Proposed § 702.104(c)(2)(viii) would
provide that a credit union must assign
a 300 percent risk weight to the
exposure amount of the following onbalance sheet assets:
• Publicly traded equity investments,
other than a CUSO investment.
• Investment funds that are not in
compliance with 12 CFR part 703, with
the option to use the look-through
approaches in § 702.104(c)(3)(ii) of this
section.
• Separate account insurance, with
the option to use the look-through
approaches in § 702.104(c)(3)(ii).
The 300 percent risk weight category
would be a new category relative to
current rule and the Original Proposal.
This second proposal would apply a 300
percent risk weight to the exposure
amount of publicly traded equity

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104(c)(2)(vii) Category 7—250 Percent
Risk Weight
Proposed § 702.104(c)(2)(vii) would
provide that a credit union must assign
a 250 percent risk weight to the carrying
value of mortgage servicing assets
(MSAs) held on-balance sheet.
As discussed above, MSA valuations
are highly sensitive to unexpected shifts
in interest rates and prepayment speeds.
250 See,

e.g., 12 CFR 324.32(k)(1).

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investments, other than a CUSO
investment. This proposal would also
apply a 300 percent risk weight to
investment funds that do not comply
with part 703, and to separate account
insurance, with the option to use the
look-through approaches for both. The
300 percent risk weight is due to the
heightened level of uncertainty and
potential risks within these assets as
discussed below.
Publicly traded equities have no
contractual returns, no maturity date,
and are generally considered more
volatile than fixed-income investments.
Furthermore, publically traded equities
have a greater risk of loss since they are
in a first loss position versus the debt of
a company. Non-part 703 compliant
investment funds and separate account
insurance may contain equities, or other
volatile and risky investments, which
warrants the 300 percent risk weight.
The risk exposure of both of these
investments comes from the underlying
assets supporting the investment fund
or separate account insurance. Thus,
credit unions would have the option of
applying one of the look-through
approaches discussed in more detail
below for investment funds and separate
account insurance risk weights to lower
risk weights for investment funds and
separate account insurance, if a credit
union chooses to use one of the
alternative approaches.
This proposal would allow the 300
percent risk weight to apply to all
publicly traded equity exposures, both
directly and indirectly. The 300 percent
risk weight for publicly traded equities
is generally consistent with the risk
weight applicable to banks 252 and the
Board believes this risk weight is
appropriate due the elevated risk of loss
with publicly traded equities. This
would include direct exposure via
purchasing an equity investment or
having exposure to publicly traded
equities through some other structure.
An example of public equity exposure
through other structures would be
general account permanent insurance
where the returns are indexed off of the
Standard and Poor’s 500 Index. A
minimum positive return floor is
sufficient to exclude general account
permanent insurance from the 300
percent risk weight. Structured products
can also be structured to have returns
based off the return of an index or one
or more publicly traded equities.
The risk weights for investment funds
and separate account insurance deviate
slightly from the Other Banking
Agencies’ capital regulations.253 This

proposal adds a standard risk weight of
300 percent for non-part 703 compliant
funds, in addition to the approach
applicable to banks,254 as an additional
option for credit unions. The approach
for investment funds and separate
account insurance is consistent with
several commenters who requested risk
weights be based on the underlying
accounts and investment strategies.
The Board believes the 300 percent
risk weight that would be assigned to
non-part 703 compliant investment
funds and separate account insurance is
appropriate due to the potential risk the
underlying assets may have. The risk
weight of 300 percent for these
exposures is due to the wide availability
of equity-based investment funds and
equity-based separate account insurance
in the market. The Board notes that
credit unions may get a lower risk
weight if they use a look-through
approach for investment funds and
separate account insurance.
The Board requests comments on
whether any items currently listed in
this category should be assigned a
higher or lower risk weight and why. In
addition, the Board requests comments
on whether additional items should be
assigned a 300 percent risk weight and
why.
104(c)(2)(ix) Category 9—400 Percent
Risk Weight
Proposed § 702.104(c)(2)(ix) would
provide that a credit union must assign
a 400 percent risk weight to the
exposure amount of non-publicly traded
equity investments that are held onbalance sheet, other than equity
investments in CUSOs.
This 400 percent risk weight is due to
the greater relative risk versus publicly
traded equity investments, which have
a 300 percent risk weight. The greater
risk is due to non-publicly traded equity
investments not having the reporting
requirements and active market that a
publicly traded equity has. The 400
percent risk weight for non-publicly
traded equity investments is consistent
with the risk weight applicable to
banks 255 and the Board believes this
risk weight is appropriate due to the
increased risk of non-publicly traded
equities versus publicly traded equities.
The 400 percent risk weight category
is a new category when compared to the
current rule and the Original Proposal.
This risk weight is unlikely to have an
effect on most credit unions due to
federal and state restrictions on credit
union purchases of these types of
investments. The Board, however,

4407

believes it is a necessary category to
have in the unlikely event a credit
union would own a non-publically
traded non-CUSO investment. The
proposed addition of this category
would also be comparable to the Other
Banking Agencies’ capital
regulations.256
The Board requests comments on
whether any items currently listed in
this category should be assigned a
higher or lower risk weight and why. In
addition, the Board requests comments
on whether additional items should be
assigned a 400 percent risk weight and
why.
104(c)(2)(x) Category 10—1,250 Percent
Risk Weight
Under the Original Proposal,
proposed § 702.104(c)(2)(x) would have
required a credit union to assign a 1,250
percent risk weight to an asset-backed
investment for which the credit union is
unable to demonstrate, as required
under § 702.104(d), a comprehensive
understanding of the features of the
asset-backed investment that would
materially affect its performance. A
1,250 percent risk weight is equivalent
to holding capital equal to 100 percent
of the investment’s balance sheet
value.257
During the recent financial crisis, it
became apparent that many federally
insured financial institutions relied
exclusively on ratings issued by
Nationally Recognized Statistical
Organizations (NRSOs) and did not
perform internal credit analysis of assetbacked investments.
Complex credit unions must be able
to demonstrate a comprehensive
understanding of any investment,
particularly an understanding of the
features of an asset-backed investment
that would materially affect its
performance. Upon purchase, and on an
ongoing basis, the credit union must
evaluate, review, and update as
appropriate the analysis performed on
an asset-backed investment. In the event
a credit union is unable to demonstrate
a comprehensive understanding of an
asset-backed investment, the Original
Proposal would have provided for
assigning a risk weight of 1,250 percent
to that investment.
The Board received a significant
number of comments on the assignment
of the 1,250 percent risk weight to
certain investments and the proposed
due diligence requirements in
§ 702.104(d). Commenters generally
agreed that credit unions should have a
256 Id.

252 See,

e.g., 12 CFR 324.52(b)(5).
253 See, e.g., 12 CFR 324.53.

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255 See, e.g., 12 CFR 324.52(b)(6).

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257 The eight percent adequately capitalized level
times 1,250 percent = 100 percent.

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Federal Register / Vol. 80, No. 17 / Tuesday, January 27, 2015 / Proposed Rules

comprehensive understanding of any
investments they purchase. Several
commenters objected to assigning a
1,250 percent risk weight to investments
credit unions do not understand.
One commenter stated that the
proposal gave the Board broad
discretion to require dollar-for-dollar
capital on asset-backed investments that
NCUA determines the credit union is
unable to demonstrate a comprehensive
understanding. The commenter stated
that while such an investment may
represent a significant safety and
soundness concern, an elevated capital
requirement is not an appropriate means
of addressing that risk. The commenter
suggested that if a credit union does not
understand an investment on its books,
the regulator should rectify the situation
through the supervisory process. The
commenter stated further that, although
this provision was adopted in the bank
rule, use of these types of products is
more limited in the credit union
industry and risks can and should be
addressed through examinations.
Other commenters suggested that the
Board minimize the regulatory burdens
of this provision by limiting the
proposed reporting requirements to
investments identified during the
supervisory process as a potential
concern.
A number of commenters expressed
concern that NCUA would not apply the
requirements in a fair and consistent
manner across credit unions. A small
number of commenters suggested that
the Board should be required to perform
an on-site evaluation and reach a joint
determination with the state regulator
before recommending a 1,250 percent
risk weight on a state-chartered
institution.
Commenters suggested that the rule
should clarify the administrative level
within NCUA at which this
determination will be made because
such a finding could have a dramatic
impact on a credit union’s PCA
classification and major implications for
that credit union’s balance sheet and
management structure. Other
commenters suggested that the rule
should specify that a 1,250 percent risk
weight constitutes a material
supervisory determination that is
subject to appeal.
A number of commenters stated that
the term ‘‘asset-backed investment’’ is
not defined, which they stated could
lead to wide interpretation both of the
1,250 percent risk weight as well as
potential examiner expectations of the
initial and ongoing depth of the review,
analysis, and documentation of assetbacked investments. Commenters
suggested that such depth of review is

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appropriate for some types of
investments, but not others. For
example, commenters contended that a
government agency-guaranteed
mortgage-backed security does not
warrant the type of analysis and
documentation outlined in the Original
Proposal because the lack of inherent
credit risk in the government agency
security should reduce the concern of a
large credit loss on the investment and
therefore should reduce the depth of
review and analysis.
Other commenters suggested if the
Board determines it can provide a clear
definition of ‘‘asset-backed
investments,’’ it should do so in a new
proposed rule that also outlines
reasonable expectations and provides a
method for fair and consistent
application of the due diligence
requirements.
One commenter agreed that complex
asset backed investments (private label)
with inherent credit risk exposure
should have additional due diligence
requirements, but argued a 250 percent
risk weight would be more appropriate.
Another commenter suggested that the
rule should make it clear that the due
diligence requirement does not apply to
any asset backed investments
guaranteed by the U.S. Government or
any U.S. Government agency.
Based on a diligent review of these
comments the Board has significantly
revised this section and now proposes
to require a 1,250 percent risk weight
only for subordinated tranches of any
investments. Specifically, the Board is
proposing to change application of a
1,250 percent risk weight from ‘‘assetbacked investments,’’ to ‘‘subordinated
tranche’’ investments.
Commenters requested clarity on the
interpretation on what investments
would be considered asset-backed
investments. The Board believes
subordinated tranche is a clearer term,
has provided a corresponding
definition, and thus will eliminate the
ambiguity cited by commenters.
The Board also believes this proposed
change will more accurately apply risk
weights based on risk while providing
clarity and consistency.
However, NCUA still expects credit
unions to perform appropriate credit
analysis on non-subordinated tranches
of mortgage- and asset-backed securities.
NCUA will address deficiencies in the
credit analysis of non-subordinated
tranches through the supervision
process.
The Board is also proposing changes
to address concerns raised by
commenters with respect to securities
issued by the U.S. Government and

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NCUA’s ability to use its discretion to
apply a 1,250 percent risk weight.
First, the Board is proposing to
specifically exclude senior tranches and
most securities issued by the U.S.
Government, any U.S. Government
agency, or GSEs. The Board believes this
change would address a major concern
expressed by commenters.
The Board is also proposing to remove
the discretion for NCUA to impose a
1,250 percent risk weight by allowing
credit unions to choose the standard
1,250 percent risk weight or allowing
credit unions the option to use the
gross-up approach, which is explained
in more detail below. The Board
believes that removing NCUA discretion
to impose a 1,250 risk weight also
addresses a major concern by
commenters. As previously noted,
deficiencies in credit analysis will be
addressed in supervision.
The Board believes a 1,250 percent
risk weight is appropriate for
subordinated tranches based on the
leveraged nature of the credit risk in
these investments. In addition, this
approach is consistent with the
approach applicable to banks,258 which
some commenters requested.
The Board intends for the 1,250
percent risk weight to apply to
subordinated tranches of MBS, assetbacked securities, revenue bonds, and
areas where there is subordinated credit
risk in a structured product.
Subordinated MBS and asset-backed
securities are the most common form of
subordinated tranches, and include any
MBS or asset-backed securities that take
credit losses before a more senior class.
Senior mezzanine tranches 259 would be
considered subordinated unless the
more senior tranches have paid off. A
subordinated tranche can become a nonsubordinated tranche if the more senior
tranches pay off.
Subordinated revenue bonds would
typically involve a bond similar to an
asset-backed security that is issued as a
revenue bond. An example is a
subordinated revenue bond issued by a
state corporation that facilitates the
granting of student loans. The
performance of these types of
subordinated bonds is based on the
revenue provided by the underlying
loans, as in the case of an asset-backed
security.
258 See, e.g., 12 CFR 324.43(e) and 324.44; Note,
the Board is not offering the option for the
Simplified Supervisory Formula Approach
permitted under the Other Banking Agencies’
capital regulations due to its complexity and
limited applicability.
259 Senior mezzanine tranches are subordinated to
more senior tranches at issuance.

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Structured products that take credit
losses based on a reference pool would
be considered subordinated tranches.
An example would be the loss sharing
bonds that are issued by Fannie Mae
and Freddie Mac. These structured
securities are Fannie Mae or Freddie
Mac debentures that pay less than par
to investors if the reference pool takes
a certain amount of losses. In this case
the majority of the credit risk comes
from the principal payout formula, not
the issuer.
As discussed above, subordinated
tranches are leveraged. This leverage
allocates a disproportionate amount of
losses to subordinated tranches in
relation to the pool of collateral, or
reference pool. By applying a 1,250
percent risk weight, the Board is
ensuring that the risk of highly
leveraged subordinated tranches would
be captured.
The Board is also proposing to
provide credit unions with the ability to
use the gross-up approach to apply a
lower risk weight to less leveraged
subordinated tranches, which may
result in a lower risk weight. The grossup approach is discussed in more detail
below.
Accordingly, under this proposal,
§ 702.104(c)(2)(x) would provide that a
credit union must assign a 1,250 percent
risk weight to the exposure amount of
any subordinated tranche of any
investment held on balance sheet, with
the option to use the gross-up approach
in § 702.104(c)(3)(i).260
The Board is not retaining the due
diligence requirement that would have
been contained in § 702.104(d) of the
Original Proposal. Proposed
§ 702.104(d) would have contained a list
of due diligence requirements credit
unions would have been required to
implement to demonstrate a
comprehensive understanding of the
features of an asset-backed investment
and a requirement that if a credit union
is unable to demonstrate a
comprehensive understanding of the
features of an asset-backed investment
exposure that would materially affect

104(c)(3) Alternative Risk Weights for
Certain On-Balance Sheet Assets
Proposed § 702.104(c)(3) would
provide that instead of using the risk
weights assigned in § 702.104(c)(2), a
credit union may determine the risk
weight of investment funds and
subordinated tranches of any
investment using the approaches which
are discussed in more detail below. The
Board believes these alternative
approaches would provide a credit
union with the ability to risk weight
based on the underlying exposure of the
subordinated tranche or investment
fund without exposing the NCUSIF to
additional risk. This approach may also
allow for lower risk weights compared
to the standard risk weights proposed.

the Other Banking Agencies’ capital
rules, when applying risk weights to
subordinated tranches of any
investment. The Board believes this
approach is appropriate in applying risk
weights, if the credit union chooses to
use it, since it captures the total
exposure the subordinate tranche is
supporting.
However, the credit union can only
use one methodology to calculate the
risk weight for subordinate tranches,
either the gross-up approach or a 1,250
percent risk weight.
The basic logic behind the gross-up
approach is that the risk weight should
reflect the entire amount of exposure the
subordinated tranche is supporting.
Said another way, the credit union must
hold capital for the subordinated
tranche, as well as all the senior
tranches for which the subordinated
tranche provides credit support.
When calculating the risk weight
using the gross-up approach, the credit
union must have the following
information:
• Exposure amount of the
subordinated tranche;
• Current outstanding par value of the
credit union’s subordinated tranche;
• Current outstanding par value of the
total amount of the entire tranche where
the credit union has exposure;
• Current outstanding par value of the
more senior positions in the
securitization that are supported by the
tranche the credit union owns the
subordinated tranche; and
• The weighted average risk weight
applicable to the assets underlying the
securitization.
The following is an example of the
application of the gross-up approach: 261

104(c)(3)(i) Gross-up Approach
Proposed § 702.104(c)(3)(i) would
provide that a credit union may use the
gross-up approach under 12 CFR
324.43(e) to determine the risk weight of
the carrying value of any subordinated
tranche of any investment. As noted
above, the Board is allowing for the use
of the gross-up approach, included in

A credit union owns $4 million (exposure
amount and outstanding par value) of a
subordinated tranche of a private label
mortgage-backed security backed by first-lien
residential mortgages. The total outstanding
par value of the subordinated tranche that the
credit union owns part of is $10 million. The
current outstanding par value for the
tranches that are senior to and supported by
the credit union’s tranche is $90 million.

the performance of the exposure, the
credit union must assign a 1,250 percent
risk weight to the asset-backed
investment exposure. The Original
Proposal would have also required that
the credit union’s analysis be
commensurate with the complexity of
the asset-backed investment and the
materiality of the position in relation to
regulatory capital according to this part.
As noted above, the Board is deleting
this section from this proposal in
conjunction with the changes it is
making to the requirements to apply a
1,250 percent risk weight.
While it remains a best practice for
credit unions to understand the features
that would affect the performance of all
investments, not just asset-based
investments, any weakness with
investment purchase analysis and
documentation can be addressed
through the supervision process.
The Board requests comments on this
provision of the proposal.

Calculation

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A ........................

B ........................

Current outstanding par value of the credit union’s
subordinated tranche divided by the current outstanding par value of the entire tranche where
the credit union has exposure.
Current outstanding par value of the senior positions in the securitization that are supporting the
tranche the credit union owns.

260 Based on June 30, 2014, Call Report data,
NCUA estimates that 93.3 percent of all investments
for credit unions with more than $100 million in

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4409

$4,000,000/$10,000,000 ..........................................

40%

..................................................................................

$90,000,000

assets would receive a risk weight of 20 percent or
less; and, 96.1 percent of all investments would
receive a risk weight of 100 percent or less.

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261 More simple terminology than the FDIC rule
language is used to make this example easier to
follow.

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Calculation

C ........................

D ........................
E ........................
F ........................
G ........................

Pro-rata share of the more senior positions outstanding in the securitization that is supported
by the credit union’s subordinated tranche: (A)
multiplied by (B).
Current exposure amount for the credit union’s
subordinated tranche.
Enter the sum of (C) and (D) ..................................
The higher of the weighted average risk weight applicable to the assets underlying the
securitization or 20%.
Risk-weighted asset amount of the credit union’s
purchased subordinated tranche: (E) multiplied
by (F).

In this example, under the gross-up
approach, the credit union would be
required to risk weight the subordinated
tranche at $20,000,000. Conversely,
under the 1,250 percent risk weight
approach, the credit union would be
required to risk weight the subordinated
tranche at $50 million (1250 percent
times $4 million). The Board believes
this example shows the benefit to credit
unions of the proposed inclusion of the
gross-up approach.
In the case of master trust 262 type
structures and structured products,263
credits unions should calculate the prorata share of the more senior positions
using the prospectus and current
servicing/reference pool reports.
104(c)(3)(i) Look-Through Approaches
Proposed § 702.104(c)(3)(ii) would
provide that a credit union may use one
of the look-through approaches under
12 CFR 324.53 to determine the risk
weight of the fair value of mutual funds
that are not in compliance with part 703
of this chapter, the recorded value of
separate account insurance; or part 703
compliant mutual funds. The Board is
proposing this approach to allow credit

Result

40% times $90,000,000 ...........................................

$36,000,000

..................................................................................

$4,000,000

$36,000,000 + $4,000,000 ......................................
50% primary risk weight for 1st lien residential real
estate loan.

$40,000,000
50%

$40,000,000 times 50% ...........................................

$20,000,000

unions to use the look-through approach
in the Other Banking Agencies’
regulations for investment funds. This
proposed provision responds to
commenters who requested this
authority.
Specifically, for purposes of applying
risk weights to investment funds, the
Board is proposing to give credit unions
the option of using the three lookthrough approaches that FDIC allows its
regulated institutions to use under 12
CFR 324.53 of its regulations, instead of
using the standard risk weights of 20,
100 and 300 percent that would be
assigned under proposed
§ 702.104(c)(2). The Board believes that
including these alternative approaches
makes NCUA’s risk-based capital
requirement more comparable to the
Other Banking Agencies’ regulations
and grants credit unions additional
flexibility.
The first of the three full look-through
approaches under 12 CFR 324.53 would
require a credit union to look at the
underlying assets owned by the
investment fund and apply an
appropriate risk weight. The other two
approaches under 12 CFR 324.53 would

require a credit union to use the
information provided in the investment
fund’s prospectus. The minimum risk
weight for any investment fund asset
would be 20 percent, regardless of
which approach was used.
The Board notes that regardless of the
look-through approach selected, the
credit union must include any
derivative contract that is part of the
investment fund, unless the derivative
contract is used for hedging rather than
speculative purposes and does not
constitute a material portion of the
fund’s exposure.264
The following examples outline each
of the three look-through approaches:
Full look-through approach. The full
look-through approach would allow
credit unions to weight the underlying
assets in the investment fund as if they
were owned separately, with a
minimum risk weight of 20 percent for
all underlying assets. Credit unions
would be required to use the most
recently available holdings reports
when utilizing the full look-through
approach. An example of the
application of the full look-through
approach is as follow:

CREDIT UNION INVESTMENT—$10,000,000
Fund holding (% of
fund):

Fund investment:

wreier-aviles on DSK4TPTVN1PROD with PROPOSALS2

U.S. Treasury Notes: .......................
FNMA PACs: ...................................
PSE Revenue Bonds: ......................
Subordinated MBS 267 .....................

50
30
17.5
2.5

262 Master trust subordinated tranches do not
support any particular senior tranche in the trust.
The subordinated tranche supports an amount of
senior tranches as defined in the prospectus and the
current servicing reports.
263 Structured products may allocate losses based
on other securities or a reference pool. The credit
union should calculate the pro-rata senior tranche
based on the amount the subordinated tranche
would support if it were an actual tranched
security.

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Credit union
exposure 265:
$5,000,000
3,000,000
1,750,000
250,000

Risk weight:

Dollar risk weight:

20% 266 ............................................
20% .................................................
50% .................................................
1,250% ............................................

$1,000,000.
$600,000.
$875,000.
$3,125,000.

264 At this time FCUs are not permitted to engage
in derivative contract activity for the purpose of
speculation. However, federally insured, statechartered credit unions may be permitted to use
derivative contracts for speculative purposes under
applicable state law, and thus the Board is
including this statement to address those scenarios.
265 Fund holdings (percent of fund) multiplied by
the credit union investment.

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266 Minimum 20 percent risk weight for assets in
an investment fund, even if the individual risk
weight is zero percent.
267 Use 1,250 percent risk weight or gross-up
calculation.
268 The weighted average risk weight was
calculated by dividing the amount of risk assets
($5,600,000) by the credit union exposure
($10,000,000).

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CREDIT UNION INVESTMENT—$10,000,000—Continued
Fund holding (% of
fund):

Fund investment:
Totals ........................................

Credit union
exposure 265:

....................

Using the above example, the
investment fund would have a weighted
average risk weight of 56 percent, which
would be lower than the 100 percent
standard risk weight for part 703
compliant investment funds or the
standard 300 percent risk weight for

10,000,000

Risk weight:

Dollar risk weight:

56% 268 ............................................
(weighted average risk weight) .......

$5,600,000 (amount of risk assets).

investment fund’s prospectus. Credit
unions should use the most recently
available prospectus to determine
investment permissibility for an
investment fund. An example of the
application of the simple modified lookthrough approach is as follow:

investment funds not compliant with
part 703.
Simple modified look-through
approach. The simple modified lookthrough approach would allow credit
unions to risk weight their holdings in
an investment fund by the highest risk
weight of any asset permitted by the

CREDIT UNION INVESTMENT—$10,000,000
Fund limits
(% of fund):

Permissible investments:
U.S. Treasury Notes: ...............................................................................................................................................
Agency MBS (non IO or PO): ..................................................................................................................................
PSE GEO Bonds: ....................................................................................................................................................
PSE Revenue Bonds: ..............................................................................................................................................
Non-Government/Subordinated/IO/PO MBS ...........................................................................................................
Subordinated MBS ...................................................................................................................................................

Using the above example, the
investment fund would have a risk
weight of 1,250 percent using the simple
modified look-through approach
because the investment fund can hold
1,250 percent risk-weighted
subordinated MBS. In this case, the
credit union would most likely use a
100 percent standard risk weight for the

100
50
20
20
30
10

Risk weight
(percent):
269 20

20
20
50
50
270 1,250

applying the risk weights to the limits
in the prospectus. In the case where the
aggregate limits in the prospectus
exceed 100 percent, the credit union
must assume the fund will invest in the
highest risk-weighted assets first. An
example of the application of the simple
modified look-through approach is as
follows:

part 703 compliant investment fund or
the standard 300 percent risk weight for
investment funds not in compliance
with part 703.
Alternative modified look-through
approach. The alternative modified
look-through approach would allow
credit unions to risk weight their
holdings in an investment fund by

CREDIT UNION INVESTMENT—$10,000,000
Fund limits
(% of fund):

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Permissible investments:

Risk weight:

CU Exposure:

Dollar risk weight:

U.S. Treasury Notes: ......................
Agency MBS (non IO or PO): ........
PSE GEO Bonds: ...........................
PSE Revenue Bonds: .....................
Non-Government/ ...........................
Subordinated/IO/PO MBS ..............
Subordinated MBS .........................

100
50
20
20
30

20% 271 ...........................................
20% ................................................
20% ................................................
50% ................................................
50% ................................................

$0
2,000,000
2,000,000
2,000,000
3,000,000

400,000.
400,000.
1,000,000.
1,500,000.

10

1,250% 272 ......................................

1,000,000

12,500,000.

Total .........................................

........................

158% 273 (weighted average risk
weight).

$10,000,000

15,800,000 (Amount of Risk Assets).

Using the example above, the
investment fund would have a weighted
average risk weight of 158 percent using
the alternative modified look-through
approach. In this case, the credit union
would most likely use a 100 percent
standard risk weight for part 703

compliant investment funds or the
alternative modified look-through
approach for risk weights for investment
funds that are not compliant with part
703.

104(c)(4) Risk Weights for Off-Balance
Sheet Activities

269 Minimum 20 percent risk weight for assets in
an investment fund, even if the individual risk
weight is zero percent.
270 Use 1,250 percent risk weight unless the
prospectus limits gross-up risk weight.

271 Minimum 20 percent risk weight for assets in
an investment fund, even if the individual risk
weight is zero percent.
272 Use 1,250 percent risk weight unless the
prospectus limits gross-up risk weights.

273 The weighted average risk weight was
calculated by dividing the amount of risk assets
($15,800,000) by the credit union exposure
($10,000,000).

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Under the Original Proposal,
proposed § 702.104(b)(3), which has
been re-numbered as § 702.104(b)(4)
under this proposal, would have

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provided that the risk-weighted
amounts for all off-balance sheet items
are determined by multiplying the
notional principal, or face value, by the
appropriate conversion factor and the
assigned risk weight as follows:
• A 75 percent conversion factor with
a 100 percent risk weight for unfunded
commitments for MBLs.
• A 75 percent conversion factor with
a 100 percent risk weight for MBLs
transferred with limited recourse.
• A 75 percent conversion factor with
a 50 percent risk weight for first
mortgage real estate loans transferred
with limited recourse.
• A 75 percent conversion factor with
a 100 percent risk weight for other real
estate loans transferred with limited
recourse.
• A 75 percent conversion factor with
a 100 percent risk weight for nonfederally guaranteed student loans
transferred with limited recourse.
• A 75 percent conversion factor with
a 75 percent risk weight for all other
loans transferred with limited recourse.
• A 10 percent conversion factor with
a 75 percent risk weight for total
unfunded commitments for nonbusiness loans.
Under the Original Proposal, a credit
union would have calculated the
exposure amount of an off-balance sheet
component, which is typically the
contractual amount multiplied by the
applicable credit conversion factor
(CCF). This treatment would have
applied to specific off-balance sheet
items, including loans transferred with
limited recourse, unfunded
commitments for business loans, and
other unfunded commitments. The
Original Proposal would have improved
risk sensitivity and implemented capital
requirements for certain exposures
through a simple methodology.
The Board received a number of
comments on the proposed risk weights
for off-balance sheet activities.
Commenters suggested that the offbalance sheet computations seemed
excessive and added unnecessary risk
assets.
One commenter disagreed with the 75
percent conversion factor with a 100
percent risk weight for unfunded
commitments for MBLs, if that meant
that a $10,000 line of credit that is
funded to $6,000 would require a riskbased capital funding of $10,000 times
0.75, which would equal $7,500 for a
$4,000 unfunded commitment.
A number of commenters suggested
that under the proposed rule, credit
unions would have been penalized for
having unfunded commitments on nonbusiness loans and business loans.
Other commenters suggested that

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unfunded commitments on nonbusiness loans and business loans
should be assigned lower risk weights
because the proposed risk weights
would encourage credit unions to
terminate or decrease lines of credit to
consumers or small business owners to
improve their risk-based capital
classification. Another commenter
agreed with including off-balance sheet
activities in the assets denominator.
Others stated the 75 percent
conversion factor for unfunded business
loans did not give appropriate
consideration to the liability side of offbalance sheet items to offset some of
this risk or other risks needs to be
considered for lowering the assets
denominator. Another commenter
appreciated the proposed approach to
capture off-balance sheet items.
Still others stated that the reporting of
off-balance sheet loans sold with limited
recourse creates a negative impact on a
credit union’s balance sheet. One other
commenter suggested that the rule
should include a mechanism for
differentiating between loans sold with
and without recourse.
A number of commenters stated that
some credit unions that sell conforming
first mortgages through the Federal
Home Loan Banks’ (FHLB) mortgage
partnership finance (MPF) program
retain a limited contractual portion of
the credit risk. Those commenters
suggested that the proposed risk weight
is much too high for these loans because
credit unions must generate their net
earnings on such transactions at
origination. Those commenters stated
further that to generate sufficient
income under the proposed risk
weights, credit unions would have to
charge rates on the MPF loans that
would be very high and would not be
competitive with bank rates for the same
types of mortgages. Other commenters
suggested that MPF loans sold to FHLBs
should be assigned a conversion factor
of 50 percent or less (along with the
proposed 50 percent risk weight)
because of their low risk exposure and
to allow credit unions to compete in the
mortgage market. Those commenters
observed that the MPF program is a
unique secondary market outlet for
conforming fixed rate residential
mortgages, in which participating FHLB
members provide a credit enhancement
(CE) based on the characteristics of
mortgages being originated and sold
under the Program. Those commenters
stated further that the CE is a fixed
dollar exposure for a specific pool of
loans or Master Commitment, and one
piece of the credit support that absorbs
losses in a specific loan pool which
exceed homeowners’ equity, primary

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mortgage insurance and an FHLBprovided first loss account (FLA). Those
commenters explained that in exchange
for providing the CE, members receive
ongoing credit enhancement fee income
over the life of the loans. Those
commenters stated that this approach
rewards FHLB-member credit unions for
quality underwriting and provides a
superior execution because it removes
inefficiencies associated with charging
guarantee fees based on the possible
future performance of loans because,
instead of assessing charges to cover
projected losses, actual losses are
covered by private capital provided by
the FHLB and its members, resulting in
strong historic performance of the MPF
loans. In addition, those commenters
suggested that due to the FLA covering
the majority of the credit risk on MPF
loans, participating member credit
unions do not retain any interest rate or
concentration risk on the sold loans.
Those commenters recommended that,
based on the historic performance of
MPF loans and the very small amount
of sustained credit losses, the capital
charge under the Original Proposal was
too high and a lower conversion factor
should be used that recognizes the FLA
and the strong historic performance of
MPF loans.
After considering the comments, the
Board continues to believe that the risks
associated with recourse loans and
unfunded commitments are analogous
to those associated with similar onbalance sheet loans. For this reason,
these items will continue to be included
in the risk-based capital ratio
calculation. The Board generally agrees,
however, that some specific changes
should be made to more accurately
measure the risks this subsection of the
proposal is intended to account.
In particular, the Board generally
agrees that a credit union’s risk-based
capital ratio calculation relating to offbalance sheet items should be limited to
the amount of the credit union’s
contractual exposure. Accordingly, the
Board has amended this proposal to
require that the credit equivalent
amount that is applied to the
appropriate risk weight category for all
off-balance sheet items be determined
by multiplying the off-balance sheet
exposure, which is newly defined in
this rule, by the appropriate credit
conversion factor.
This proposal would retain the 10
percent credit conversion factor for noncommercial unused lines of credit.
Commenters suggested that to improve
their risk-based capital ratio credit
unions would have looked to either
terminate or decrease their lines of
credit to consumers. Open lines of

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credit to consumers, even those that are
unconditionally cancellable, can
quickly result in a credit union shifting
assets from low risk weight investments
to higher risk weight loans. Credit
unions can be hesitant to cancel or
reduce consumer lines of credit due to
the potential for negative reputation
risk. Credit unions need to monitor the
amount and type of outstanding unused
lines of credit. The Board believes the
proposed 10 percent credit conversion
factor for unused consumer lines of
credit would encourage credit unions to
manage open consumer lines of credit
through active monitoring and review of
trends and exposures, and is consistent
with the calculation of off-balance sheet
exposure measures contained in Basel
III.274
The Board generally agrees with
commenters’ who stated that the credit
conversion factor for unfunded
commercial loans, in the Original
Proposal, was too high and could have
created a competitive disadvantage for
credit unions in relation to banks.
Accordingly, the Board is proposing to
reduce the credit conversion factor for
commercial loans from 75 percent to 50
percent. This change would be
consistent with the credit conversion
factor applied to longer-term
commitments not unconditionally
cancelable under the Other Banking
Agencies’ regulations.275
The Board also generally agrees with
commenters that, based on the structure
of the CE provided through the FHLBs’
MPF or similar programs, loans sold
under these programs should be
categorized and risk-weighted
separately from other types of loans
transferred with limited recourse. In an
effort to better match the minimum

capital requirements for loans sold as
part of the MPF or similar programs, the
proposed credit conversion factor,
which converts the off-balance sheet
exposure to a credit equivalent amount,
would be set at 20 percent and applied
a 50 percent risk weight (the same risk
weight applied to first-lien residential
real estate loans), resulting in an
effective minimum capital requirement
of one percent of the outstanding
balance.276 Applying the CCF against
the outstanding loan balance would
reduce the risk-based capital
requirement as loans in the MPF pool
pay down. The Board believes this
proposed methodology and CCF would
result in a risk-based capital
requirement consistent with historic
credit losses in this program. The Board
believes such treatment is appropriate
because a credit union incurring higher
than normal levels of losses from loans
in the MPF or similar programs would
have to record a reserve for losses that
would reduce the credit union’s
retained earnings.
In addition, under this proposed rule,
credit unions would be able to deduct
any associated established valuation
allowance when determining the offbalance sheet exposure amount that is
multiplied by the CCF to obtain the
credit equivalent amount.
The Board recognizes commenters’
concerns that the conversion factors and
risk weights applicable to loans
transferred with limited recourse could
result in a competitive disadvantage.
Therefore, the Board has changed its
approach with respect to loans
transferred with limited recourse to
amend the conversion factors to better
match those used by the Other Banking
Agencies. Under this proposed rule, the

Board has further clarified that the
conversion factors and risk weights only
apply to the maximum amount of the
loan exposure, rather than the whole
loan 277 as in the Original Proposal. The
maximum amount of exposure is the
portion of the loan that a credit union
could be required to take back under the
recourse provision of a loan sales
contract.
As shown in the charts and proposed
rule text below, the Board has amended
many of the conversion factors and
applicable risk weights in an effort to
lower the burden on credit unions while
still retaining the necessary safety and
soundness components of this section of
the rule.
First, the Board has lowered the
conversion factor for unfunded
commitments for commercial loans to
achieve parity with the Other Banking
Agencies’ approach.278 Further, the
conversion factors for loans transferred
with limited recourse would be
consistent with the conversion factors
assigned for banks under the Other
Banking Agencies’ rules.
However, under this proposal the
conversion factor is applied only to the
credit union’s off-balance sheet
exposure. The Board is also proposing
to apply a lower credit conversion factor
to loans sold under the FHLBs’ MPF to
more accurately account for historical
losses in this program and to reduce the
risk-based capital requirement as each
loan pays down.
The following tables summarize the
risk weights and conversion factors
included in this proposal:
Loans Sold With Recourse

ORIGINAL PROPOSAL
Conversion factor
(applied to the
outstanding loan
balance)
(percent)

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MBLs sold with recourse ...................................................................................................................................
First mortgage real estate loans sold with recourse .........................................................................................
Other real estate loans sold with recourse .......................................................................................................
Non-federally guaranteed student loans sold with recourse .............................................................................
All other loans sold with recourse .....................................................................................................................

274 Basel III was published in December 2010 and
revised in June 2011. The text is available at http://
www.bis.org/publ/bcbs189.htm.
275 See, e.g., 12 CFR 324.33.

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276 This proposed approach is based on historical
loss information regarding the MPF program that
was provided to NCUA by the Federal Home Loan
Banks.

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Risk weight
(percent)

75
75
75
75
75

277 As noted earlier, FHLBs’ MPF loans are
handled separately.
278 See, e.g., 12 CFR 324.33.

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50
100
100
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Federal Register / Vol. 80, No. 17 / Tuesday, January 27, 2015 / Proposed Rules
THIS PROPOSAL
Conversion factor
(applied to the offbalance sheet
exposure)
(percent)

Loan type transferred with limited recourse

Outstanding balance of loans sold under the FHLB’s mortgage partnership finance or similar program .......
Commercial loans ..............................................................................................................................................
First-lien residential real estate loans ................................................................................................................
Junior-lien residential real estate loans .............................................................................................................
Secured consumer loans ...................................................................................................................................
Unsecured consumer loans ...............................................................................................................................

Risk weight
(percent)

20
100
100
100
100
100

50
100
50
100
75
100

Unfunded Commitments

ORIGINAL PROPOSAL
Conversion factor
(percent)
Total unfunded commitments for non-business loans ......................................................................................
Unused MBL commitments ...............................................................................................................................

Risk weight
(percent)

10
75

75
100

THIS PROPOSAL
Conversion factor
(percent)

Loan Type of Unfunded Commitment

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Commercial loans ..............................................................................................................................................
First-lien residential real estate loans ................................................................................................................
Junior-lien residential real estate loans .............................................................................................................
Secured consumer loans ...................................................................................................................................
Unsecured consumer loans ...............................................................................................................................

For the reasons discussed above, the
Board has revised this section of the
proposed rule and lowered many of the
conversion factors and applicable risk
weights. Accordingly, proposed
§ 702.104(b)(4) would provide that the
risk-weighted amounts for all offbalance sheet items are determined by
multiplying the off-balance sheet
exposure amount by the appropriate
credit conversion factor and the
assigned risk weight as follows:
• For the outstanding balance of loans
transferred to a Federal Home Loan
Bank under the MPF program, a 20
percent CCF and a 50 percent risk
weight.
• For other loans transferred with
limited recourse, a 100 percent CCF
applied to the off-balance sheet
exposure and:
Æ For commercial loans, a 100
percent risk weight.
Æ For first-lien residential real estate
loans, a 50 percent risk weight.
Æ For junior-lien residential real
estate loans, a 100 percent risk weight.
Æ For all secured consumer loans, a
75 percent risk weight.
Æ For all unsecured consumer loans,
a 100 percent risk weight.
• For unfunded commitments:

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Æ For commercial loans, a 50 percent
CCF with a 100 percent risk weight.
Æ For first-lien residential real estate
loans, a 10 percent CCF with a 50
percent risk weight.
Æ For junior-lien residential real
estate loans, a 10 percent CCF with a
100 percent risk weight.
Æ For all secured consumer loans, a
10 percent CCF with a 75 percent risk
weight.
Æ For all unsecured consumer loans,
a 10 percent CCF with a 100 percent risk
weight.
The Board requests comments on this
provision of the proposal.
104(c)(5) Derivatives
This section of the Original Proposal
addressed the risk weights for derivative
contracts. Based on NCUA’s recently
finalized derivatives rule, the Board is
proposing to make minor changes and
additions to the treatment of derivative
contracts. Further, the Board is
proposing to move derivative contracts
to its own section of the rule for clarity
and ease of reading. The full discussion
of derivative contracts is included
below in § 702.105.

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Risk weight
(percent)

50
10
10
10
10

100
50
100
75
100

Current § 702.105 Weighted-Average
Life of Investments
As discussed above, proposed new
§ 702.105 below would replace current
§ 702.105 regarding weighted-average
life of investments. The definition of
weighted-average life of investments
and the term ‘‘weighted-average life of
investments’’ would be removed from
this proposed rule altogether.
Section 702.105

Derivatives

This proposal separates derivatives
into its own section, § 702.105, and
includes a cross reference in the general
risk weight category that indicates that
all derivatives must be risk-weighted in
accordance with § 702.105. This new
proposed section includes all of the
language from § 702.104(c)(4) of the
Original Proposal, with only a few
minor amendments. In addition, this
proposed section addresses cleared
transactions, provides further authority
for recognizing the credit risk mitigation
benefits of collateral, and addresses
derivatives transactions by federally
insured state chartered credit unions
that are impermissible under NCUA’s
rules.
Derivatives rule. The Board finalized
NCUA’s derivatives rule at its January

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Federal Register / Vol. 80, No. 17 / Tuesday, January 27, 2015 / Proposed Rules
2014 open meeting. In brief, that final
rule allows FCUs to use specific types
of derivatives for the purpose of
mitigating IRR. The final rule also
addressed ‘‘clearing,’’ which was not
addressed in the proposed derivatives
rule. Specifically, the final derivatives
rule permits FCUs to clear derivatives
transactions, provided the FCU follows
applicable Commodity and Futures
Trading Commission (CFTC)
regulations. The Board notes, however,
that NCUA’s derivatives rule only
applied to FCUs. As discussed in the
preamble to the final rule, federally
insured, state-chartered credit unions
engaging in derivatives are required to
follow applicable state regulations.
Proposed risk based capital treatment
of derivatives. Based on its recently
finalized derivatives rule, the Board is
now proposing to adopt an approach to
assign risk weights to derivatives that is
generally consistent with the approach
adopted by FDIC in its recently issued
interim final rule regarding regulatory
capital.279 Under FDIC’s interim rule,
derivatives transactions covered under
clearing arrangements are treated
differently than non-cleared
transactions. The Board addresses
clearing separately below.
The Board is proposing to focus only
on interest rate related derivatives in the
proposed rule and to refer credit unions
to FDIC’s rules for all non-interest-raterelated derivatives. The Board is making
this distinction because federal credit
unions are restricted to interest raterelated contracts under the final
derivatives rule approved in January
2014; however, federally insured, statechartered credit unions may have
broader authorization to use noninterest-rate contracts if approved by the
respective state banking authorities. As
of September 30th, 2014, NCUA is not
aware of any non-interest rate derivative
contracts being used by federally
insured, state-chartered credit unions
(as per the Call Report data) for
derivative contracts.
OTC derivatives transaction risk
weight. The Original Proposal only
assigned risk weights to OTC derivatives
transactions. While the Board received
few comments on the general language
in this section, the Board is now
proposing to make two amendments.
First, the Board is proposing to state that
the current credit exposure is the greater
of the fair value or zero rather than the
mark to fair value or zero. This change
is non-substantive and only intended as
a clarifying correction.
Second, the Board is proposing to
delete two subsections from the Original
279 See

78 FR 55339 (Sept. 10, 2013).

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Proposal’s section on potential future
credit exposure, §§ 702.104(d)(4)(B)(2)
and (3) of the Original Proposal. Section
702.104(d)(4)(B)(2) stated that for a
derivatives contract that is structured
such that on specified dates any
outstanding exposure is settled and the
terms are reset so that the fair value of
the contract is zero, the remaining
maturity equals the time until the next
reset date. Section 702.104(d)(4)(B)(3)
stated that for an interest rate derivative
contract with a remaining maturity of
greater than one year that meets these
criteria, the minimum conversion factor
is 0.005. In place of these two sections,
the Board is now proposing to add the
following:
A credit union must use an OTC interest
rate derivative contract’s effective notional
principal amount (that is, the apparent or
stated notional principal amount multiplied
by any multiplier in the OTC interest rate
derivative contract) rather than the apparent
or stated notional principal amount in
calculating potential future exposure (PFE).

The Board is making these changes to
improve how credit unions will
calculate the PFE given the high
probability of only having interest raterelated contracts. The Board believes
these proposed changes make the rule
clearer and more closely align this
section with other changes it is
proposing throughout this rule.
Including the changes discussed
above, the following is a description of
the process a credit union would
undertake under this proposal to
determine the risk weight for OTC
derivative contracts. The Board is
proposing to require that to determine
the risk-weighted asset amount for a
derivatives contract; under this
proposal, a credit union would first
determine its exposure amount for the
contract. It would then recognize the
credit mitigation of financial collateral,
if qualified, and then apply to that
amount a risk weight based on the
counterparty or recognized collateral or
exchange (Derivatives Clearing
Organization or DCO). For a single
interest rate derivatives contract that is
not subject to a qualifying master
netting agreement, the proposed rule
would require the exposure amount to
be the sum of (1) the credit union’s
current credit exposure (CCE), which is
the greater of fair value or zero, and (2)
PFE, which is calculated by multiplying
the notional principal amount of the
derivatives contract by the appropriate
conversion factor, in accordance with
the table below. Non-interest rate
derivative contract conversion factors
can be referenced in 12 CFR 324.34 of
the FDIC rule.

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4415

PROPOSED CONVERSION FACTOR MATRIX FOR INTEREST RATE DERIVATIVES CONTRACTS
Remaining maturity
One year or less .................
Greater than one year and
less than or equal to five
years ...............................
Greater than five years .......

IRR hedge
derivatives
0.00
0.005
0.015

For multiple interest rate derivatives
contracts subject to a qualifying master
netting agreement, a credit union would
calculate the exposure amount by
adding the net CCE and the adjusted
sum of the PFE amounts for all
derivatives contracts subject to that
qualifying master netting agreement.
The net CCE is the greater of zero and
the net sum of all positive and negative
fair values of the individual derivatives
contracts subject to the qualifying
master netting agreement. The adjusted
sum of the PFE amounts would be
calculated as described in proposed
§ 702.105(a)(2)(ii)(B).
Under this proposal, to recognize the
netting benefit of multiple derivatives
contracts, the contracts would have to
be subject to the same qualifying master
netting agreement. For example, a credit
union with multiple derivatives
contracts with a single counterparty
could net the counterparty exposure if
the transactions fall under the same
International Swaps and Derivatives
Association, Inc. (ISDA) Master
Agreement and Schedule.
If a derivatives contract is
collateralized by financial collateral, a
credit union would first determine the
exposure amount of the derivatives
contract as described in §§ 702.105(a)(i)
or (ii). Next, to recognize the credit risk
mitigation benefits of the financial
collateral, the credit union would use
the approach for collateralized
transactions as described in § 702.105(c)
of the proposed rule, which is discussed
in more detail below.
Cleared derivatives risk weight. As
discussed above, under the Original
Proposal, the Board did not include a
discussion of cleared derivatives
contracts, but generally tried to mirror
the Other Banking Agencies’ approach
to derivatives, which treats derivatives
transactions covered under clearing
arrangements differently than noncleared transactions. NCUA’s Original
Proposal, however, proposed a single
regulatory capital approach regardless of
the credit union’s derivatives
transaction clearing status, because most
credit unions would qualify for an
exemption or exception from clearing

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under CFTC’s regulations. The
exemption and exception applicable to
credit unions is discussed below.
As noted above, the Board received
only a few comments on the proposed
derivatives section of the Original
Proposal. However, the majority of the
comments the Board did receive
requested that NCUA’s rules align with
the rules for banks. Specifically,
commenters pointed out that the
derivatives industry is migrating toward
clearing and that clearing provides a
valuable risk- reducing component to a
derivatives transaction.
Other commenters requested
examples of calculations and
clarification on the process by which a
credit union can recognize the risk
mitigation benefits of collateral and how
derivatives in federally insured, statechartered credit unions would be
treated under the Original Proposal.
After carefully considering the
comments and its recent final
derivatives rule, the Board agrees that
NCUA’s risk-based capital regulations
should more closely align with the
Other Banking Agencies’ capital
regulations. To that end, the Board is
now proposing to include provisions to
address clearing, a more robust
collateral process, and the treatment of
derivatives outside of NCUA’s rule. The
Board notes that this is consistent with
its statement in the Original Proposal
that it would amend any final rule
regarding NCUA’s risk-based capital
requirements to take into account
changes made in the final derivatives
rule.
As noted above, the Board is now
proposing to include a separate risk
weight for cleared derivatives
transactions. The approach in this
section mirrors the approach taken by
the Other Banking Agencies and will
allow credit unions to account for the
lower degree of risk for cleared
transactions.
In NCUA’s final derivatives rule, the
Board discussed recent CFTC final
rules 280 on cleared derivatives and
included a section allowing FCUs to
elect to clear under CFTC rules. The
Board noted that CFTC’s final rules
provide credit unions with an exception
and an exemption from clearing. The
CTFC exception and exemption are the
End-User Exception, which applies to
financial institutions with total assets of
$10 billion or less and the Cooperative
Exemption, which applies to entities
with assets greater than $10 billion
where the entity is a cooperative.281
280 78

FR 52285 (Aug. 22, 2013); see also 17 CFR

50.51.
281 Id.

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CFTC’s definition scope includes credit
unions. Therefore, all credit unions
have the right, as cooperatives, to elect
to either clear swaps or engage in a
traditional bilateral agreement. The
Board notes that the clearing structure
only applies to swaps.
For cleared derivatives transactions,
each party to the swap submits the
transaction to a DCO 282 for clearing.
This reduces counterparty risk for the
original swap participants in that they
each bear the same risk attributable to
facing the intermediary DCO as their
counterparty. In addition, DCOs exist
for the primary purpose of managing
credit exposure from the swaps being
cleared and therefore DCOs are effective
at standardizing transactions and
mitigating counterparty risk through the
use of exchange-based risk management
frameworks. Finally, swap clearing
requires both counterparties to post
collateral (i.e., initial margin) with the
clearinghouse when they enter into a
swap. The clearinghouse can use the
posted collateral to cover defaults in the
swap. As the valuation of the swap
changes, the clearinghouse determines
the fair market value of the swap and
may collect additional collateral (i.e.,
variation margin) from the
counterparties in response to
fluctuations in market values. The
clearinghouse can apply this collateral
to cover defaults in payments under the
swap.
Proposed § 702.105 would adopt an
approach to assign risk weights to
derivatives that is generally consistent
with the approach adopted by the Other
Banking Agencies.283 Under this
proposed rule, a credit union would be
required to calculate a trade exposure
amount, determine the risk mitigation of
any financial collateral, and multiply
that amount by the applicable risk
weight. The Board notes that this
approach allows credit unions to take
into account the lower degree of risk
associated with cleared derivatives
transactions and the benefit of collateral
associated with these transactions. In
addition, this approach also accounts
for the risk of loss associated with
collateral posted by a credit union.
Trade exposure amount. The trade
exposure amount, in this proposal,
would equal the amount of the
derivative, calculated as if it were an
OTC transaction under subsection (b) of
this section, added to the fair value of
the collateral posted by the credit union
and held by a DCO, clearing member or
282 DCO has the meaning as defined by the
Commodity Futures Trading Commission in 17 CFR
1.3(d)
283 See 78 FR 55339 (Sept. 10, 2013).

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custodian. This calculation would take
into account the exposure amount of the
derivatives transaction and the exposure
associated with any collateral posted by
the credit union. The Board notes that
this is the same approach employed by
the Other Banking Agencies.284
Cleared transaction risk weights.
Under this proposal, after a credit union
determines its trade exposure amount, it
would be required to apply a risk weight
that is based on agreements preventing
risk of loss of the collateral posted by
the counterparty to the transaction. The
proposed rule would require credit
unions to apply a two percent risk
weight if the collateral posted by a
counterparty is subject to an agreement
that prevents any losses caused by the
default, insolvency, liquidation, or
receivership of the clearing member or
any of its clients. To qualify for this risk
weight, a credit union would also have
conducted a sufficient legal review and
determined that the agreement to
prevent risk of loss is legal, valid,
binding, and enforceable. If a credit
union does not meet either or both of
these requirements, the credit union
would have to apply a four percent risk
weight to the transaction.
The differing risk weights for cleared
transactions take into account the risk
that collateral will not be there because
of a default or other event, which
further exposes the credit union to loss.
However, cleared transactions pose very
low probability that collateral will not
be available in the event of a default,
which is reflected in the low overall risk
weights. Again, the Board notes that this
is the same approach employed by the
Other Banking Agencies.285
Collateralized transactions. Under the
Original Proposal, NCUA proposed to
permit a credit union to recognize riskmitigating effects of financial collateral
in OTC transactions. The collateralized
portion of the exposure would receive
the risk weight applicable to the
collateral. In all cases, (1) The collateral
must be subject to a collateral agreement
(for example, an ISDA Credit Support
Annex) for at least the life of the
exposure; (2) the credit union must
revalue the collateral at least every three
months; and (3) the collateral and the
exposure must be denominated in U.S.
dollars.
Generally, the risk weight assigned to
the collateralized portion of the
exposure would be no less than 20
percent. However, the collateralized
portion of an exposure may be assigned
a risk weight of less than 20 percent for
the following exposures. Derivatives
284 See,
285 See,

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contracts that are marked to fair value
on a daily basis and subject to a daily
margin maintenance agreement could
receive: (1) A zero percent risk weight
to the extent that contracts are
collateralized by cash on deposit; or (2)
a 10 percent risk weight to the extent
that the contracts are collateralized by
an exposure that qualifies for a zero
percent risk weight under
§ 702.104(c)(2)(i) of this proposed rule.
In addition, a credit union could assign
a zero percent risk weight to the
collateralized portion of an exposure
where the financial collateral is cash on
deposit. It also could do so if the
financial collateral is an exposure that
qualifies for a zero percent risk weight
under § 702.104(c)(2)(i) of this proposed
rule, and the credit union has
discounted the fair value of the
collateral by 20 percent. The credit
union would be required to use the
same approach for similar exposures or
transactions.
Risk management guidance for
recognizing collateral. The Board is
proposing to include a new subsection
in this section to address recognizing
the risk mitigation of collateral. In the
Original Proposal, this section was
included in the discussion on assigning
risk weights to OTC derivatives
transactions. The Board recognizes,
however, that derivative contracts are
collateralized for risk mitigation
purposes whether OTC or cleared.
Collateralizing derivatives transactions
is now industry practice and widely
accepted to reduce and mitigate the
credit risk and default impact of a
counterparty to a transaction not being
able to meet its obligations of the
contract. A collateral agreement
between two counterparties or exchange
will stipulate the type of collateral that
may be used, otherwise known as
‘‘eligible collateral.’’ As such, this
proposed subsection will be applicable
to both types of transactions.
Under this proposal, before a credit
union recognizes collateral for credit
risk mitigation purposes, it should: (1)

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Conduct sufficient legal review to
ensure, at the inception of the
collateralized transaction and on an
ongoing basis, that all documentation
used in the transaction is binding on all
parties and legally enforceable in all
relevant jurisdictions; (2) consider the
correlation between risk of the
underlying direct exposure and
collateral in the transaction; and (3)
fully take into account the time and cost
needed to realize the liquidation
proceeds and the potential for a decline
in collateral value over this time period.
A credit union should also ensure that
the legal mechanism under which the
collateral is pledged or transferred
ensures that the credit union has the
right to liquidate or take legal
possession of the collateral in a timely
manner in the event of the default,
insolvency, or bankruptcy (or other
defined credit event) of the counterparty
and, where applicable, the custodian
holding the collateral.
Finally, a credit union should ensure
that it: (1) Has taken all steps necessary
to fulfill any legal requirements to
secure its interest in the collateral so
that it has, and maintains, an
enforceable security interest; (2) has set
up clear and robust procedures to
ensure satisfaction of any legal
conditions required for declaring the
borrower’s default and prompt
liquidation of the collateral in the event
of default; (3) has established
procedures and practices for
conservatively estimating, on a regular
ongoing basis, the fair value of the
collateral, taking into account factors
that could affect that value (for example,
the liquidity of the market for the
collateral and deterioration of the
collateral); and (4) has in place systems
for promptly requesting and receiving
additional collateral for transactions
with terms requiring maintenance of
collateral values at specified thresholds.
When collateral other than cash is
used to satisfy a margin requirement,
then a haircut is applied to incorporate
the credit risk associated with collateral,

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4417

such as securities. The Board is
proposing to include this concept in the
revised rule so that credit unions can
accurately recognize the risk mitigation
benefit of collateral. The Board notes
that this is the same approach taken by
the Other Banking Agencies.
The table below illustrates an
example of the calculations for Risk
Weighted Asset Amounts for both OTC
and clearing derivatives agreements. For
this example both the OTC and clearing
are considered to be a multiple contracts
under a Qualified Master Netting
Agreement. Credit unions can use this
as a guide in confirming the calculations
involved to produce a risk-weighted
asset for derivatives. (See the number
references below for each line number
of the table example.)
1. The Agreement Type indicates the
transaction legal agreement between the
credit union and the counterparty.
2. The examples provide, but are not
limited to the basis calculations
required for various collateral and
agreement approaches.
3. Variation Margin (amount as basis
for margin calls which are satisfied with
collateral) collateral used for these
examples.
4. The Risk Weight of Collateral is
applied when utilizing the Simple
Approach in the recognition of credit
risk of collateralized derivative
contracts.
5. To recognize the risk-mitigating
effects of financial collateral, a credit
union may use the ‘‘Simple Approach’’
or the ‘‘Collateral Haircut Approach’’.
6. The Collateral Haircut is
determined by using Table 2 to
§ 702.105 in the rule text: ‘‘Standard
Supervisor Market Price Volatility
Haircuts.’’
7. Counterparty risk weights are
determined in § 702.104 for OTC and
§ 702.105 for clearing.
8–16. Are calculations based on the
approach and types of agreement,
collateral, fair values and notional
amounts of the credit union derivatives
transactions.

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Federally insured, state-chartered
credit unions’ derivative transactions.
As noted above, the Original Proposal
did not specifically address derivatives
transactions entered into by federally
insured, state-chartered credit unions
under state law that are impermissible
under NCUA’s regulations for FCUs. In
this proposal, the Board is proposing to
include language that would require
federally insured, state-chartered credit
unions to calculate risk weights in
accordance with FDIC’s rules for
derivatives transactions that are not
permissible under NCUA’s derivatives
rule.
The Board has also considered the
following two approaches to addressing
derivatives held by FISCUs that are not
permissible under NCUA’s rules, and
invites stakeholders to comment on
each:
• Additional risk weights. The Board
has considered including an additional
risk weight that would address any
derivative entered into by a federally

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insured, state-chartered credit union
that would be impermissible for an FCU
to enter into. The Board notes that this
risk weight would have to account for
the added risk of additional types of
transactions that are not permitted
under its rules.
• Adopting FDIC’s rules verbatim.
Finally, the Board has considered
incorporating FDIC’s risk weights and
rules for derivatives verbatim and
creating a separate appendix for
derivatives transactions. Incorporating
FDIC’s rules verbatim would add a high
degree of complexity to a final riskbased capital rule and would likely
address transactions into which
federally insured, state chartered credit
unions, while permitted to engage in,
would likely not enter into.
The Board is interested in the
comments of stakeholders on the pros
and cons of each of these approaches, as
well as any other approaches that may
adequately address derivatives

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transactions by federally insured, statechartered credit unions.
Current Section 702.106 Standard
Calculation of Risk-based Net Worth
Requirement
Consistent with the Original Proposal,
this proposed rule would eliminate
current § 702.106 regarding the standard
RBNW requirement. The current rule is
structured so that credit unions have a
standard measure and optional
alternatives for measuring a credit
union’s RBNW. The proposed rule, on
the other hand, would contain only a
single measurement for calculating a
credit union’s risk-based capital ratio.
Accordingly, current § 702.106 would
no longer be necessary and would be
removed by this proposed rule.
Current Section 702.107 Alternative
Component for Standard Calculation
Consistent with the Original Proposal,
this proposed rule would eliminate
current § 702.107 regarding the use of

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alternative risk weight measures. The
Board believes the current alternative
risk weight measures add unnecessary
complexity to the rule. The current
alternative risk weights focus almost
exclusively on IRR, which has resulted
in some credit unions with higher risk
operations reducing their regulatory
minimum capital requirement to a level
inconsistent with the risk of the credit
union’s business model. The proposed
risk weights would provide for lower
risk-based capital requirements for those
credit unions making good quality
loans, investing prudently, and avoiding
excessive concentrations of assets.
Current Section 702.108 Risk
Mitigation Credit
The Original Proposal would have
eliminated current § 702.108 regarding
the risk mitigation credit. The risk
mitigation credit provides a system for
reducing a credit union’s risk-based
capital requirement if it can
demonstrate significant mitigation of
credit risk or IRR. Credit unions have
rarely taken advantage of risk mitigation
credits; only one credit union has ever
received a risk mitigation credit.
The Board did receive a few
comments regarding the elimination of
the provision for risk mitigation credit
in the current rule. Commenters
suggested that there should continue to
be a risk mitigation credit and that the
agency has well-developed procedures
for credit unions under current
§ 701.108, as well as for examiners
under its ‘‘Guidelines for Evaluation of
an Application for a PCA Risk
Mitigation Credit.’’ Commenters
suggested that this authority could
provide an important incentive for
credit unions to manage certain risks
more proactively—and receive an added
benefit of seeing their risk-based capital
requirements at least somewhat reduced
as a result. Other commenters suggested
that by not allowing for some method of
recognizing credit unions’ ability to
manage risks, the Board runs the risk of
de-incentivizing credit unions to invest
in the resources necessary to manage
and mitigate risks, which could
encourage a dangerous mind-set among
credit unions to hold additional capital
in place of a well-managed risk
mitigation program.
Consistent with the Original Proposal,
this proposed rule would eliminate
current § 702.108 regarding the risk
mitigation credit. The review of a credit
union’s application for a risk mitigation
credit requires a substantial
commitment of NCUA and credit union
resources. In practice, it is very difficult
to determine the validity of the credit
union’s mitigation efforts and how

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much mitigation credit to allow. The
Board appreciates the issues raised by
commenters, but continues to believe
that maintaining the risk mitigation
credit option is unjustified given the
burden it imposes on NCUA and credit
unions, its limited use in the past, and
its improbable use in the future.
Mandatory and Discretionary
Supervisory Actions
Section 216(a)(2) of the FCUA directs
the Board to take ‘‘prompt corrective
action to resolve the problems of
insured credit unions.’’ 286 To facilitate
this purpose, the FCUA defined five
regulatory capital categories that
include capital thresholds for a defined
net worth ratio and risk-based capital
measure for ‘‘complex’’ credit unions.
These five PCA categories are: Well
capitalized, adequately capitalized,
undercapitalized, significantly
undercapitalized, and critically
undercapitalized. Credit unions that fail
to meet these capital measures are
subject to increasingly strict limits on
their activities.287
This proposal would generally
maintain the existing mandatory and
discretionary supervisory actions (PCA
actions) currently contained in
§§ 702.201 through 702.204,288 with
certain additions that are discussed in
more detail below. The PCA actions
assist the Board in accomplishing the
statutory purpose of section 219 289 of
the FCUA and provide a transparent
guide to the supervisory actions that a
credit union can expect as capital
measures decline.
Section 702.106 Prompt Corrective
Action for Adequately Capitalized
Credit Unions
Generally consistent with the Original
Proposal, this proposed rule would
renumber current § 702.201 as proposed
§ 702.106, and would make only minor
conforming amendments to the text of
the section. Consistent with the
proposed elimination of the regular
reserve requirement in current
§ 702.401(b), proposed § 702.106(a)
would be amended to remove the
requirement that adequately capitalized
credit unions transfer the earnings
retention amount from undivided
earnings to their regular reserve
account.
286 12

U.S.C. 1790d(a)(2).
unions defined as ‘‘new credit unions’’
under section 1790(d)(2) of the FCUA are subject to
an alternative PCA system.
288 The requirements would be moved to
proposed §§ 702.106 through 702.109.
289 12 U.S.C. 1790d(a).
287 Credit

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Section 702.107 Prompt Corrective
Action for Undercapitalized Credit
Unions
Generally consistent with the Original
Proposal, this proposed rule would
renumber current § 702.202 as proposed
§ 702.107, and would make only minor
conforming amendments to the text of
the section. Consistent with the
proposed elimination of the regular
reserve requirement in current
§ 702.401(b), proposed § 702.107(a)(1)
would be amended to remove the
requirement that undercapitalized credit
unions transfer the earnings retention
amount from undivided earnings to
their regular reserve account.
Section 702.108 Prompt Corrective
Action for Significantly
Undercapitalized Credit Unions
Generally consistent with the Original
Proposal, this proposed rule would
renumber current § 702.203 as proposed
§ 702.108, and would make only minor
conforming amendments to the text of
the section. Consistent with the
proposed elimination of the regular
reserve requirement in current
§ 702.401(b), proposed § 702.108(a)(1)
would be amended to remove the
requirement that significantly
undercapitalized credit unions transfer
the earnings retention amount from
undivided earnings to their regular
reserve account.
Section 702.109 Prompt Corrective
Action for Critically Undercapitalized
Credit Unions
Generally consistent with the Original
Proposal, this proposed rule would
renumber current § 702.204 as proposed
§ 702.109, and would make only minor
conforming amendments to the text of
the section. Consistent with the
proposed elimination of the regular
reserve requirement in current
§ 702.401(b), proposed § 702.109(a)(1)
would be amended to remove the
requirement that critically
undercapitalized credit unions transfer
the earnings retention amount from
undivided earnings to their regular
reserve account.
Section 702.110 Consultation with
State Official on Proposed Prompt
Corrective Action
Generally consistent with the Original
Proposal, this proposed rule would
renumber current § 702.205 as proposed
§ 702.110, and would make only minor
conforming amendments to the text of
the section.

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Section 702.111 Net Worth Restoration
Plans (NWRPs)
Generally consistent with the Original
Proposal, this proposed rule would
renumber current § 702.206 as proposed
§ 702.111, and would make only minor
conforming amendments to the text of
most of the subsections, with a few
exceptions discussed in more detail
below.

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111(c) Contents of NWRP
Consistent with the Original Proposal,
proposed § 702.111(c)(1)(i) would
provide that the contents of an NWRP
must specify a quarterly timetable of
steps the credit union will take to
increase its net worth ratio and riskbased capital ratio, if applicable, so that
it becomes adequately capitalized by the
end of the term of the NWRP, and will
remain so for four consecutive calendar
quarters. The italicized words above
‘‘and risk-based capital ratio, if
applicable’’ would be added to clarify
that an NWRP prepared by a complex
credit union must specify the steps the
credit union will take to increase its
risk-based capital ratio. This proposal
would remove the sentence ‘‘If complex,
the credit union is subject to a riskbased net worth requirement that may
require a net worth ratio higher than six
percent to be adequately capitalized.’’
This statement would be removed as
repetitive and unnecessary because
proposed § 702.102(a)(2)(i) already
states clearly that a complex credit
union must also attain a net worth ratio
of higher than six percent to be
adequately capitalized. No substantive
changes to the requirements of this
paragraph are intended by these
revisions.
In addition, consistent with the
proposed elimination of the regular
reserve requirement in current
§ 702.401(b), proposed
§ 702.111(c)(1)(ii) would be amended by
removing the requirement that credit
unions transfer the earnings retention
amount from undivided earnings to
their regular reserve account.
111(g)(4) Submission of Multiple
Unapproved NWRPs
Consistent with the Original Proposal,
proposed § 702.111(g)(4) would provide
that the submission of more than two
NWRPs that are not approved is
considered an unsafe and unsound
condition and may subject the credit
union to administrative enforcement
actions under section 206 of the
FCUA.290 NCUA regional directors have
expressed concerns that some credit
unions have in the past submitted
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multiple NWRPs that could not be
approved due to non-compliance with
the requirements of the current rule,
resulting in delayed implementation of
actions to improve the credit union’s net
worth. The proposed amendments are
intended to clarify that submitting
multiple NWRPs that are rejected by
NCUA, or the applicable state official,
because of the inability of the credit
union to produce an acceptable NWRP
is an unsafe and unsound practice and
may subject the credit union to further
actions as permitted under the FCUA.
111(j) Termination of NWRP
Consistent with the Original Proposal,
proposed § 702.111(j) would provide
that, for purposes of part 702, an NWRP
terminates once the credit union has
been classified as adequately capitalized
or well capitalized and for four
consecutive quarters. The proposed
paragraph would also provide as an
example that if a credit union with an
active NWRP attains the classification as
adequately capitalized on December 31,
2015, this would be quarter one and the
fourth consecutive quarter would end
September 30, 2016. The proposed
paragraph is intended to provide
clarification for credit unions on the
timing of an NWRP’s termination.
Section 702.112 Reserves
Generally consistent with the Original
Proposal, this proposed rule would
renumber current § 702.401 as proposed
§ 702.112. Consistent with the text of
current § 702.401(a), this proposal also
would require that each credit union
shall establish and maintain such
reserves as may be required by the
FCUA, by state law, by regulation, or, in
special cases, by the Board or
appropriate state official.
Regular Reserve Account
As mentioned above, this proposed
rule would eliminate current
§ 702.401(b) regarding the regular
reserve account from the earnings
retention process. The process and
substance of requesting permission for
charges to the regular reserve would be
eliminated upon the effective date of a
final rule. Upon the effective date of a
final rule, a federal credit union would
close out the regular reserve balance
into undivided earnings. A statechartered, federally insured credit union
may, however, still be required to
maintain a regular reserve account by its
respective state supervisory authority.
In the past, the Board initially
included the regular reserve in part 702
for purposes of continuity from past
regulatory expectations that involved
this account to ease credit unions’

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transition to the then-new PCA rules.
The regular reserve account is not
necessary to satisfying the statutory
‘‘earnings retention requirement’’ and is
not required under GAAP. CUMAA
requires credit unions that are not well
capitalized to ‘‘annually set aside as net
worth an amount equal to not less than
0.4 percent of its total assets.’’ 291 The
earnings retention requirement in
current § 702.201(a) requires a credit
union that is not well capitalized to
increase the ‘‘dollar amount of its net
worth either in the current quarter, or
on average over the current and three
preceding quarters by an amount
equivalent to at least 1/10th percent of
total assets.’’ Under the same section of
the current rule, the credit union must
then ‘‘quarterly transfer that amount’’
from undivided earnings to the regular
reserve account. Increasing net worth
alone satisfies the statutory earnings
retention requirement. The additional
step of transferring earnings from the
undivided earnings account to the
regular reserve account is not necessary
to meet the PCA statutory requirement.
The regular reserve was initially
incorporated into the earnings retention
process because of familiarity. Prior to
PCA, credit unions used the regular
reserve account under the former
reserving process prescribed by the
now-repealed section 116 of the
FCUA.292 However, NCUA examiner
experience indicates that, since PCA
was first implemented, the regular
reserve account in part 702 has been a
source of unnecessary confusion. Some
credit unions have continued to make
transfers as if the repealed section 116
were still in force. Other credit unions
have confused the purpose of the
regular reserve in the current PCA
process. Thus, some credit unions have
made earnings transfers that are not
required and others have done so
without first increasing net worth.
For these reasons, the Board considers
the regular reserve account requirement
to be obsolete and is proposing to
eliminate it upon the effective date of a
final rule. The proposed rule would also
eliminate the cross references to the
regular reserve requirement as discussed
in more detail in each corresponding
part of the section-by-section analysis.
Section 702.113 Full and Fair
Disclosure of Financial Condition
Generally consistent with the Original
Proposal, this proposed rule would
renumber current § 702.402 as proposed
§ 702.113, and would make only minor
conforming amendments to the text of
291 12
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Federal Register / Vol. 80, No. 17 / Tuesday, January 27, 2015 / Proposed Rules
the section with the exception of the
changes to proposed § 702.113(d) that
are discussed in more detail below.
113(d) Charges for Loan and Lease
Losses
Consistent with the proposed
elimination of the regular reserve
requirement which is discussed above,
proposed § 702.113(d) would remove
paragraph (d)(4) of the current rule,
which provides that the maintenance of
an ALLL shall not affect the requirement
to transfer earnings to a credit union’s
regular reserve when required under
subparts B or C of part 702.
In addition, the proposed rule would
remove paragraph (d)(3) of the current
rule, which provides that adjustments to
the valuation ALLL will be recorded in
the expense account ‘‘Provision for Loan
and Lease Losses.’’ This is to clarify that
the ALLL is to be maintained in
accordance with GAAP, as discussed
above.
The remaining provisions in
paragraph (d) of the current rule would
be amended as follows:

wreier-aviles on DSK4TPTVN1PROD with PROPOSALS2

(d)(1)
Proposed § 702.113(d)(1) would
amend current § 702.401(d)(1) to
provide that charges for loan and lease
losses shall be made timely and in
accordance with GAAP. The proposal
would add the italicized words ‘‘and
lease’’ and ‘‘timely and’’ to the language
in the current rule to clarify that the
requirement also applies to lease losses
and to require that credit unions make
charges for loan and lease losses in a
timely manner. As with the section
above, this section was changed to
clarify that charges for potential lease
losses are to be recorded in accordance
with GAAP through the same allowance
account as loan losses. In addition,
timely recording is critical to maintain
full and fair disclosure as required
under this section.
(d)(2)
Proposed § 702.113(d)(2) would
amend current § 702.401(d)(2) to
eliminate the detailed requirement and
simply provide that the ALLL must be
maintained in accordance with GAAP.
This is necessary to provide full and fair
disclosure to a credit union member,
NCUA, or, at the discretion of a credit
union’s board of directors, to creditors
to fairly inform them of the credit
union’s financial condition and
operations.
(d)(3)
Proposed § 702.113(d)(3) would retain
the language in current § 702.401(d)(5)
with no changes.

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Section 702.114 Payment of Dividends
Generally consistent with the Original
Proposal, this proposed rule would
renumber current § 702.402 as proposed
§ 702.114 and make a number of
amendments to the text of paragraphs
(a) and (b).
The Board received several comments
to the Original Proposal regarding the
proposed restrictions on the payments
of dividends. Commenters generally
stated that the rule should not prohibit
states from authorizing FISCUs to
declare dividends. Other commenters
suggested that NCUA should not be able
to restrict dividend payments.
The Board disagrees with commenters
and continues to believe that reasonable
restrictions on dividend payments for
credit unions that are less than
adequately capitalized are necessary to
protect the NCUSIF. The restrictions in
§ 702.402 of the current rule are prudent
restrictions that were brought forward
into the Original Proposal and now into
this proposal. The changes would
simply clarify what funds are available
for dividends under GAAP.
Accordingly, the Board is proposing the
following amendments to the current
rule.
Since the implementation of PCA for
credit unions, FASB has issued
accounting standards that impact the
accounting for credit union equity
items. Most specifically in December
2007, the FASB issued Accounting
Standards Codification (ASC) Topic
805, Business Combinations.293 Under
ASC 805, all business combinations
were to be accounted for by applying
the acquisition method starting in late
2008.
In June of 2010, Interagency
Supervisory Guidance on Bargain
Purchases and FDIC- and NCUAAssisted Acquisitions was released and
principally focused on bargain purchase
gains and business combinations in
general. The supervisory guidance
addressed the special considerations to
regulatory capital reporting for credit
unions involved in combinations and
specifically that acquired equity
generated as a result of a business
combination for credit unions is part of
GAAP equity, but not part of net worth.
Consistent with the statutory definition
of net worth, a credit union includes an
amount equal to the acquired credit
unions retained earnings as measured in
accordance with GAAP. This special
consideration can result in a credit
union reporting a negative balance in
undivided earnings while reporting a
293 Pre-codification reference: Statement of
Financial Accounting Standards No. 141(R),
Business Combinations.

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much larger positive balance of acquired
equity which produces a total positive
GAAP equity position and different
positive total net worth. The changes to
this section seek to address this issue.
114(a) Restriction on Dividends
Current § 702.402(a) permits credit
unions with a depleted undivided
earnings balance to pay dividends out of
the regular reserve account without
regulatory approval, as long as the credit
union will remain at least adequately
capitalized. Under this proposal,
§ 702.114(a), however, only credit
unions that have substantial net worth,
but no undivided earnings, would be
allowed to pay dividends without
regulatory approval. Due to the removal
of the regular reserve account, as
discussed above, and to conform with
GAAP, this proposal would amend the
language to further clarify that
dividends may be paid when there is
sufficient net worth. Net worth may
incorporate accounts in addition to
undivided earnings. Accordingly,
§ 702.114(a) of this proposal would
provide that dividends shall be
available only from net worth, net of
any special reserves established under
§ 702.112, if any.
114(b) Payment of Dividends and
Interest Refunds
This proposed rule would eliminate
the language in current § 702.403(b) and
§ 702.114(b) and (c) of the Original
Proposal entirely and replace it with a
new provision. Under this proposal,
§ 702.114(b) would provide that the
board of directors must not pay a
dividend or interest refund that will
cause the credit union’s capital
classification to fall below adequately
capitalized under subpart A of part 702
unless the appropriate regional director
and, if state-chartered, the appropriate
state official, have given prior written
approval (in an NWRP or otherwise).
Paragraph (b) would provide further that
the request for written approval must
include the plan for eliminating any
negative retained earnings balance.
Historically, credit unions with a net
worth ratio below adequately
capitalized were restricted from making
a dividend payment without regional
director approval and, if state-chartered,
approval of the appropriate state
official. This proposed rule would not
remove the existing regulatory
requirement for credit unions to obtain
prior approval from the regional director
and, if state-chartered, the appropriate
state official, to pay a dividend if the
credit union’s net worth classification
is, or if the dividend payment will cause
the credit union’s net worth

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classification to fall below, adequately
capitalized.
However, as addressed above, special
circumstances can result in a credit
union reporting a negative balance in
retained earnings while reporting a
much larger positive balance of acquired
equity which produces a total positive
GAAP equity position and a different
amount of positive total net worth. The
Board believes it is prudent for credit
unions with negative retained earnings
to develop a plan to eliminate that
negative balance to ensure long-term
viability and sustainability. As such,
this proposal would require a credit
union that must request written
approval to pay dividends because the
payment would cause its net worth
classification to fall below adequately
capitalized to also include a plan for
eliminating the negative retained
earnings balance as part of the written
request. This will ensure credit unions
that are classified below adequately
capitalized and have negative retained
earnings have in place a plan to increase
retained earnings and thereby increase
net worth.

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B. Subpart B—Alternative Prompt
Corrective Action for New Credit Unions
Consistent with the Original Proposal,
this proposed rule would add new
subpart B, which would contain most of
the capital adequacy rules that apply to
‘‘new’’ credit unions. Section 216(b)(2)
of the FCUA requires NCUA to prepare
regulations that apply to new credit
unions.294
The current net worth measures, net
worth classification, and text of the PCA
requirements applicable to new credit
unions would be renumbered. They
would remain mostly unchanged under
the proposed rule, except for minor
conforming changes and the following
substantive amendments:
(1) Clarification of the language in
current § 702.301(b) regarding the
ability of credit unions to become
‘‘new’’ again due to a decrease in asset
size after having exceed the $10 million
threshold.
(2) Elimination of the regular reserve
account requirement in current
§ 702.401(b) and all cross references to
the requirement;
(3) Addition of new § 701.206(f)(3)
clarifying that the submission of more
than two revised business plans would
be considered and unsafe and unsound
condition; and
(4) Amendment of the language of
current § 702.402 regarding the full and
fair disclosure of financial condition.

(5) Amendment of the requirements of
current § 702.403 regarding the payment
of dividends.
Section 702.201 Scope
Consistent with the Original Proposal,
this proposed rule would renumber
current § 702.301 as proposed § 702.201.
The proposed rule would also clarify
that a credit union may not regain a
designation of ‘‘new’’ after reporting
total assets in excess of $10 million.
Section 216(b)(2)(B)(iii) of the FCUA
defines a ‘‘new’’ credit union as one that
has been in operation for 10 years or
less, or has $10 million or less in total
assets.295 Section 216(b)(2)(B)(v) of the
FCUA further requires that rules for new
credit unions prevent evasion of the
purpose of § 216, which provides new
credit unions a period of time to
accumulate net worth.296 NCUA
recently conducted a postmortem
review of a credit union failure that
caused a loss to the NCUSIF. The review
revealed that the credit union
intentionally reduced its total assets
below $10 million to regain the
designation as a ‘‘new’’ credit union
under current part 702 and the
associated lower net worth requirement.
Shifting back and forth between the
minimum capital requirement for
‘‘new’’ and all other credit unions
resulted in slowed capital
accumulation, which contributed to the
loss incurred by the NCUSIF.
Accordingly, consistent with the current
rule, proposed § 702.201(b) would
amend the definition of ‘‘new’’ credit
union in current § 702.301(b) to provide
that a ‘‘new’’ credit union for purposes
of subpart B is a credit union that both
has been in operation for less than 10
years and has total assets of not more
than $10 million. In addition, consistent
with section 216(b)(2) of the FCUA,
proposed paragraph (b) would further
provide that once a credit union reports
total assets of more than $10 million on
a Call Report, the credit union is no
longer new, even if its assets
subsequently decline below $10 million.
In general, credit unions attaining an
asset size of $10 million begin to offer
a greater range of services and loans,
which increase the credit union’s
sophistication and risk to the NCUSIF.
In the event a new credit union reports
total assets of over $10 million and then
subsequently declines to under $10
million, the additional PCA regulatory
requirements under the proposed rule
would not be substantially increased.
Both new credit unions and non-new
credit unions with net worth ratios of
295 12

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U.S.C. 1790d(b)(2)(B)(iii).
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U.S.C. 1790d(b)(2).

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less than 6 percent, but over 2 percent,
are required under either § 702.206 or
§ 702.111 of the proposal to operate
under substantially similar plans to
restore their net worth. For example, a
new credit union with a net worth ratio
of 5 percent is required to operate under
a revised business plan, and a non-new
credit union with a net worth ratio of 5
percent is required to operate under a
NWRP. Accordingly, the Board believes
any burden associated with the
proposed change to the requirements of
part 702 would be minimal.
Section 702.202 Net Worth Categories
for New Credit Unions
Consistent with the Original Proposal,
this proposed rule would renumber
current § 702.302 as proposed § 702.202,
and would make only minor technical
edits and conforming amendments to
the text of the section.
Section 702.203 Prompt Corrective
Action for Adequately Capitalized New
Credit Unions
Consistent with the Original Proposal,
this proposed rule would renumber
current § 702.303 as proposed § 702.203,
and would make only minor conforming
amendments to the text of the section.
Consistent with the proposed
elimination of the regular reserve
requirement in current § 702.401(b),
proposed § 702.203 would also be
amended to remove the requirement
that adequately capitalized credit
unions transfer the earnings retention
amount from undivided earnings to
their regular reserve account.
Section 702.204 Prompt Corrective
Action for Moderately Capitalized,
Marginally Capitalized or Minimally
Capitalized New Credit Unions
Consistent with the Original Proposal,
this proposed rule would renumber
current § 702.304 as proposed § 702.204,
and would make only minor conforming
amendments to the text of the section.
Consistent with the proposed
elimination of the regular reserve
requirement in current § 702.401(b),
which is discussed in more detail
below, proposed § 702.204(a)(1) would
be amended to remove the requirement
that such credit unions transfer the
earnings retention amount from
undivided earnings to their regular
reserve account.
Section 702.205 Prompt Corrective
Action for Uncapitalized New Credit
Unions
Consistent with the Original Proposal,
this proposed rule would renumber
current § 702.305 as proposed § 702.205,

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Federal Register / Vol. 80, No. 17 / Tuesday, January 27, 2015 / Proposed Rules
and would make only minor conforming
amendments to the text of the section.
Section 702.206 Revised Business
Plans (RBP) for New Credit Unions
Consistent with the Original Proposal,
this proposed rule would renumber
current § 702.306 as proposed § 702.206,
would make mostly minor conforming
amendments to the text of the section,
and would add new § 702.206(g)(3).
Consistent with the proposed
elimination of the regular reserve
requirement in current § 702.401(b),
which is discussed in more detail
below, proposed § 702.206(b)(3) would
be amended to remove the requirement
that new credit unions transfer the
earnings retention amount from
undivided earnings to their regular
reserve account.
206(g)(3) Submission of Multiple
Unapproved Revised Business Plans
Consistent with the Original Proposal,
proposed § 702.206(g)(3) would provide
that the submission of more than two
RBPs that were not approved is
considered an unsafe and unsound
condition and may subject the credit
union to administrative enforcement
actions under section 206 of the
FCUA.297 NCUA regional directors have
expressed concerns that some credit
unions have in the past submitted
multiple RBPs that could not be
approved due to non-compliance with
the requirements of the current rule,
resulting in delayed implementation of
actions to improve the credit union’s net
worth. The proposed amendment is
intended clarify that submitting
multiple RBPs that are rejected by
NCUA, or the state official, because of
the failure of the credit union to
produce an acceptable RBP is an unsafe
and unsound practice and may subject
the credit union to further actions as
permitted under the FCUA.

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Section 702.207 Incentives for New
Credit Unions
Consistent with the Original Proposal,
this proposed rule would renumber
current § 702.307 as proposed § 702.207,
and would make only minor conforming
amendments to the text of the section.
Section 702.208 Reserves
Consistent with the Original Proposal,
this proposed rule would add new
§ 702.208 regarding reserves for new
credit unions to the rule and, consistent
with the text of the current reserve
requirement in § 702.401(a), would
require that each new credit union
establish and maintain such reserves as
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may be required by the FCUA, by state
law, by regulation, or in special cases,
by the Board or appropriate state
official.
As explained under § 702.112, the
proposed rule would eliminate the
regular reserve account under current
§ 702.402(b) from the earnings retention
requirement. Additionally, the process
and substance of requesting permission
for charges to the regular reserve would
be eliminated upon the effective date of
a final rule. Upon the effective date of
a final rule, a federal credit union would
close out the regular reserve balance
into undivided earnings. A federally
insured, state-chartered credit union
would still be required to maintain a
regular reserve account as per state law
or its state supervisory authority.
Section 702.209 Full and Fair
Disclosure of Financial Condition
Generally consistent with the Original
Proposal, this proposed rule would
renumber current § 702.402 as § 702.209
and would make only minor conforming
amendments to the text of this section
with the exception of the changes to
paragraph (d) that are discussed in more
detail below.
209(d) Charges for Loan and Lease
Losses
Consistent with the proposed
elimination of the regular reserve
requirement in current § 702.401(b),
proposed § 702.209(d) would remove
paragraph (d)(4) of the current rule,
which provides that the maintenance of
an ALLL shall not affect the requirement
to transfer earnings to a credit union’s
regular reserve when required under
subparts B or C of part 702. In addition,
this proposed rule would remove
paragraph (d)(3) of the current rule,
which provides that adjustments to the
valuation ALLL will be recorded in the
expense account ‘‘Provision for Loan
and Lease Losses.’’ As discussed in
§ 702.113, the changes in the section
emphasize the need to record the ALLL
in accordance with GAAP.
The remaining provisions in
paragraph (d) of the current rule would
be amended as follows:
(d)(1)
Proposed § 702.209(d)(1) would
amend current § 702.401(d)(1) to
provide that charges for loan and lease
losses shall be made timely and in
accordance with GAAP. The proposal
would add the italicized words ‘‘and
lease’’ and ‘‘timely and’’ to the language
in the current rule to clarify that the
requirement also applies to lease losses
and to require that credit unions make
charges for loan and lease losses in a

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4423

timely manner. As with the section
above, this section was changed to
clarify that charges for potential lease
losses should be recorded in accordance
with GAAP through the same allowance
account as loan losses. In addition,
timely recording is critical to maintain
full and fair disclosure as required
under this section.
(d)(2)
Proposed § 702.209(d)(2) would
amend current § 702.401(d)(2) to
eliminate the detailed requirement and
simply provide that the ALLL must be
maintained in accordance with GAAP.
This is necessary to provide full and
fair disclosure to a credit union
member, NCUA, or, at the discretion of
a credit union’s board of directors, to
creditors to fairly inform them of the
credit union’s financial condition and
operations.
(d)(3)
Proposed § 702.209(d)(3) would retain
the language in current § 702.401(d)(5)
with no changes.
Section 702.210 Payment of Dividends
Generally consistent with the Original
Proposal, this proposed rule would
reorganize the rules regarding the
payment of dividends contained in the
current § 702.403, which also apply to
new credit unions, to new § 702.210 of
the proposed rule. The proposed rule
also would make a number of
amendments to the text of paragraphs
(a) and (b) of the current rule. Each of
these changes is discussed in more
detail below.
210(a) Restriction on Dividends
Current § 702.402(a) permits small
credit unions with a depleted undivided
earnings balance to pay dividends out of
the regular reserve account without
regulatory approval, as long as the credit
union will remain at least adequately
capitalized. Proposed § 702.210(a),
however, would provide that, for small
credit unions, dividends shall be
available only from net worth, net of
any special reserves established under
§ 702.208, if any.
210(b) Payment of dividends if retained
earnings depleted
This proposed rule would eliminate
the language in current § 702.403(b) and
§ 702.210(b) and (c) of the Original
Proposal entirely and replace it with a
new provision. Under this proposal,
§ 702.210 would provide that the board
of directors must not pay a dividend or
interest refund that will cause the credit
union’s capital classification to fall
below adequately capitalized under

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subpart B of part 702 unless the
appropriate regional director and, if
state-chartered, the appropriate state
official, have given prior written
approval (in an RBP or otherwise).
Paragraph (b) would provide further that
the request for written approval must
include the plan for eliminating any
negative retained earnings balance.
As noted earlier in the section of this
preamble associated with § 702.114(b),
the changes in this section would retain
the restrictions on payment of dividends
included in the current rule. However,
this proposal would require a credit
union that must request written
approval to pay dividends because the
payment would cause its net worth
classification to fall below adequately
capitalized to also include a plan for
eliminating the negative retained
earnings balance as part of the written
request. This will ensure credit unions
that are classified below adequately
capitalized and have negative retained
earnings to have in place a plan to
increase retained earnings and thereby
increase net worth.
C. Other Conforming Changes to the
Regulations
In addition to the amendments
discussed above, and consistent with
the Original Proposal, this proposed
rule would make minor conforming
amendments to §§ 700.2, 701.21, 701.23,
701.34, 703.14, 713.6, 723.7, 747.2001,
747.2002, and 747.2003. The
conforming amendments would
primarily involve updating terminology
and cross citations to proposed part 702
and proposed § 747.2006. No
substantive changes are intended by
these amendments.
V. Effective Date

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How much time would credit unions
have to implement these new
requirements?
The Original Proposal included an
effective date of 18 months from the
date of publication of a final rule. An
overwhelming majority of commenters
addressed this provision and nearly all
disagreed with an 18-month effective
date. They argued that 18 months would
be insufficient to allow credit unions to
make adjustments to internal systems,
balance sheets, and operations in
advance of the effective date.
Some commenters cited the phased-in
implementation period that the Other
Banking Agencies’ rules provided in
their final rules on risk-based capital for
banks, and requested that the Board
consider the same. Other commenters
suggested implementation time frames
from three years to nine years, with

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some suggesting each credit union have
its own implementation period based on
the complexity of its operations. The
majority position, however, was that the
effective date be three years from the
date of publication of a final rule.
The Board agrees with the comments
that a longer implementation period is
necessary. Therefore, the Board is
proposing an implementation date of
January 1, 2019 to provide both credit
unions and NCUA sufficient time to
make the necessary adjustments, such as
systems, processes, and procedures, and
to reduce the burden on affected credit
unions in meeting the new
requirements.
In response to commenters who asked
the Board to phase in the
implementation, the Board has
concluded that phasing in the new
capital rules for credit unions would
add additional complexity with
minimal benefit, and therefore has
provided for an extended
implementation period. The Board
believes this increase would provide
credit unions with sufficient time to
make the necessary adjustments to
systems and operations before the
effective date of this final rule. In
addition, as noted above, an extended
effective date would generally coincide
with the full phase-in of FDIC’s.
VI. Impact of the Proposed Regulation
A substantial number of commenters
on the Original Proposal suggested
NCUA underestimated the adverse
effect the proposal would have had on
credit unions. A number of commenters
stated that they believed that more
credit unions than the Board indicated
in the proposal would be impacted
because their net worth would fall to
just barely over well capitalized or
adequately capitalized levels. The Board
has considered the concerns that were
raised by commenters and has made
substantial modifications in this
proposal, as summarized above, to
refine the scope and improve the
targeting of the proposed risk-based
capital requirements. These changes
would reduce the number of affected
credit unions substantially.
This proposal would apply to credit
unions with $100 million or greater in
total assets. As of December 31, 2013,
there were 1,455 credit unions (21.5
percent of all credit unions) with assets
of $100 million or greater. This proposal
would therefore exempt almost 80
percent of all credit unions.298 The
298 The Original Proposal applied to credit unions
with total assets of more than $50 million. At the
time, 2,237 credit unions had total assets greater
than $50 million. Thus, the original proposal would

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Board notes that the risk-based capital
requirements in this proposed rule
would apply only to credit unions with
assets of $100 million or more,
compared to the Other Banking
Agencies’ rules that apply to banks of all
sizes.299
Based on December 2013 Call Report
data, NCUA estimates over 98 percent of
credit unions with over $100 million in
assets already have sufficient capital to
remain well capitalized under this
proposal.300 NCUA estimates this
proposal (based on December 2013 data)
would cause fewer than 20 credit
unions (with total assets of $10.9
billion) to experience a decline in their
capital classification from well
capitalized to adequately capitalized.301
NCUA estimates that these credit unions
would need to retain an additional
$53.6 million in eligible capital in total
to be well capitalized, assuming no
adjustments to asset distributions.302
Based on December 2013 Call Report
data, NCUA estimates that if the riskbased capital requirements in the
current proposal were applied today,
the proposed risk weights would result
in a ratio of total risk-weighted assets (in
the aggregate) to total assets of 57.4
percent. Further, the aggregate average
risk-based capital ratio would be 18.2
percent with an average risk-based
capital ratio of 19.3 percent.303 As
have exempted over two-thirds of all credit unions.
For those credit unions that would have been
subject to the Original Proposal, over 90 percent
would have remained well capitalized.
299 There are 1,975 FDIC-insured banks with
assets less than $100 million as of June 2014.
300 Of the 1,455 impacted credit unions, only 27,
or 1.86%, would have less than the 10 percent riskbased capital requirement to be well capitalized. Of
these, eight have net worth ratios less than seven
percent and therefore are already categorized as less
than well capitalized.
301 One credit union declines to undercapitalized
in the estimate. However, given the proposal’s
provision to phase in supervisory goodwill over a
longer period, which the estimation methodology
could not separate out from total goodwill, this
credit union’s capital category would not actually
decline.
302 NCUA estimated the original proposal (based
on June 2013 data) would cause 189 credit unions
to experience a decline in their PCA classification
from well capitalized to adequately capitalized, and
10 well capitalized credit unions to experience a
decline to undercapitalized. Assuming no other
adjustments to the balance sheet structure, NCUA
estimated that the 10 credit unions that would
experience a decline to undercapitalized would
have needed to retain an additional $63 million
(total) in risk-based capital to become adequately
capitalized; the 189 credit unions would have
needed to add roughly $700 million in capital to be
restored to well capitalized.
303 Based on June 2013 Call Report data, NCUA
estimated that if risk-based capital requirements in
the original Proposal were applied at that time, the
aggregate risk-based capital ratio for credit unions
subject to the proposed risk-based capital measure
would be 14.6 percent and the average risk-based
capital ratio would be 15.7 percent. By way of

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shown in the two tables below, almost
all complex credit unions would operate
well above the proposed 10 percent

requirement for classification as well
capitalized.

DISTRIBUTION OF PROPOSED RISK BASED CAPITAL RATIO
Proposed RBC Ratio

<10%

10–13%

13–16%

16–20%

20–30%

30–50%

>50%

# of CUs ...............................................................................

27

169

365

408

382

86

18

DISTRIBUTION OF NET WORTH RATIO AND PROPOSED RISK BASED CAPITAL RATIO
Less than well
capitalized

# of CUs

Net Worth Ratio ...................................................................
Proposed RBC Ratio ...........................................................

Various commenters suggested that as
many as 1,000 credit unions would have
been required to raise anywhere from $2
billion to $7 billion in additional capital
under the original proposal to retain the
same ‘‘buffers’’ that exist today to be
considered well capitalized.
Commenters stated that credit unions
cannot easily manage their capital to the
exact dollar level that equates to
NCUA’s proposed standards, and that
the management of credit unions
typically strives to maintain sufficient
space or buffers between their actual net
worth ratios and the minimum required
levels to be well capitalized because the
consequences of missing the net worth
standards would be very serious.
Commenters stated that to regain their
buffer, credit unions would only have
three choices: (1) Rebalance their assets,
recognizing an opportunity cost when
they forego higher earnings which
would diminish their ability to grow; (2)
ration services, stifling asset and
membership growth; or (3) ask members
to pay more, resulting in fewer member
benefits and increased competition from
banks.
The Board believes sound capital
levels are vital to the long-term health
of all financial institutions. Further,
provided it is not otherwise unsafe or

Well
capitalized to
well + 2%

16
27

Well
capitalized +
2% to + 3.5%

Well
capitalized +
3.5% to + 5%

430
118

332
181

339
99

unsound, it is a business decision on the
part of a credit union to maintain capital
levels above those required by
regulation. Balancing proper capital
accumulation with product offering and
pricing strategies helps ensure credit
unions are able to provide affordable
member services over time. Credit
unions are already expected to
incorporate into their business models
and strategic plans provisions for
maintaining prudent levels of capital.
This proposal is intended to ensure
minimum regulatory capital levels are
better correlated to risk. Regulatory
capital levels correlated to risk help
reduce the incentive for credit unions to
hold levels of capital significantly
higher than required, unless it is the
credit union’s choice to do so to meet
member service and strategic objectives.
The Board does recognize that unduly
high minimum regulatory capital
requirements could lead to less than
optimal outcomes.
Some commenters suggested that for
some credit unions the Original
Proposal would have increased the
amount of capital required to be wellcapitalized above the current level of
seven percent of total assets depending
on the ratio of risk assets to total assets.
The commenter claimed that on net,

Greater than
well
capitalized +
5%
338
1,030

across all potentially affected credit
unions (those with more than $40
million in assets), the total amount of
capital necessary to be well capitalized
would increase by $7.6 billion, or in
other words, that the proposal would
have increased the net worth ratio
required to be well capitalized, on
average, from seven percent to 7.76
percent. It is not the Board’s intent to
systematically increase capital
requirements for all credit unions.
Rather, the Board’s goals are to ensure
capital is commensurate with risk,
thereby aligning incentives for
managing risk with required capital
levels, and to increase regulatory tools
for addressing outliers. The Board
believes this proposal will be effective
in achieving these goals.
As shown in the table below, this
proposal is estimated to raise minimum
required capital levels above the current
net worth ratio requirement for only 59
complex credit unions (four percent of
the credit unions subject to the
proposal). The proposed risk-based
capital rule achieves a reasonable
balance between requiring credit unions
posing an elevated risk of failure to hold
more capital while not over burdening
lower-risk credit unions.

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DISTRIBUTION OF RISK-BASED LEVERAGE EQUIVALENT RATIO 304
Proposed RBC ratio—leverage equivalent

< 6%

6–7.5%

7.5–8.5%

8.5–9.5%

9.5–11%

> 11%

Average

# of CUs ...............................................................................

878

518

42

11

6

0

5.74%

comparison, the bank aggregate total risk-weighted
assets to total assets is 67.8 percent, with an average
total risk-based capital ratio of 18.4 percent.
304 This computation calculates the amount of
capital required by multiplying the proposed risk

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weighted assets by 10 percent (the level to be well
capitalized), and then dividing this result by total
assets. This provides a measure comparable to the
net worth ratio. Since the risk-based capital
provisions provide for a broader definition of
capital included in the risk-based capital ratio

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numerator, which on average benefits credit unions
by approximately 50 basis points, the appropriate
comparison point for the leverage equivalent is 7.5
percent, not the 7 percent level for well capitalized
for the net worth ratio.

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Unlike the Original Proposal, which
was more closely tied to existing Call
Report data, there are greater limitations
in estimating the impact of this second
proposal. Some of the key differences
between the Original Proposal and the
current proposal include: Assigning a
risk weight to loans secured by nonowner-occupied residential property
(First-Lien, 1–4 Family) of 50 percent
rather than 100 percent; assigning a risk
weight to insured and Federal Reserve
deposits of zero percent; and assigning
a risk weight to all loans with

government guarantees or portions of
commercial loans with compensating
balances on deposit of 20 percent. These
differences, among others, would
benefit credit unions, as the lower riskweights would result in lower capital
requirements than those measured
under the Original Proposal. Thus,
NCUA reasonably believes, based on its
estimates using the Call Report data
currently available, that this second
proposal would have a lower impact
than the Original Proposal. Further,
these estimates are believed to be

conservative, with the expected benefit
to credit unions likely being larger than
projected, potentially resulting in even
fewer adversely impacted credit unions
than estimated.
As noted earlier, concentration risk is
a material risk that NCUA addresses in
this proposed rule. Based on December
31, 2013 Call Report data, if this
proposal were applied today, NCUA
estimates that this additional capital
requirement for concentration risk
would have the following impact:

Number of credit unions
with total assets greater
than $100 million as of
12/31/2013

Concentration threshold

First Lien Residential Real Estate (≤ 35% of Total Assets) ....................................................
Junior Lien Residential Real Estate (≤ 20% of Total Assets) .................................................
Commercial Loans (Used MBLs as a proxy) 305 > 50% of Total Assets) ...............................

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VII. Regulatory Procedures
Regulatory Flexibility Act
The Regulatory Flexibility Act (RFA)
generally requires that, in connection
with a notice of proposed rulemaking,
an agency prepare and make available
for public comment an initial regulatory
flexibility analysis that describes the
impact of a proposed rule on small
entities. A regulatory flexibility analysis
is not required, however, if the agency
certifies that the rule will not have a
significant economic impact on a
substantial number of small entities
(defined for purposes of the RFA to
include credit unions with assets less
than $50 million) and publishes its
certification and a short, explanatory
statement in the Federal Register
together with the rule.
The proposed amendments to part
702 would primarily affect complex
credit unions, which are those with
$100 million or more in assets. As a
result, small credit unions with assets
less than $50 million are much less
affected by the proposed rule. NCUA
recognizes, however, that even small
credit unions will be affected by the
proposed amendments to some minor
extent in that credit unions may need to
collect additional data for the NCUA
Call Report.
In particular, the proposed rule, if
finalized as-is, would likely impose
some one-time minimal costs on credit
unions mostly related to training and
updates to internal data systems. NCUA
estimates that for any small credit union
that does have to change its current
305 Using MBL data as the current Call Report
does not capture commercial loan data as defined
in this proposal.

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practices to deal with the expanded
reporting required, it would take, on
average, less than an additional three
hours per quarter per credit union. For
many small credit unions, it would take
even less time because they would not
need to collect as much data because of
the simplicity of their operations and
products and services offered. The costs
associated with this would also be
minimal. The Call Report changes
prompted by this proposed rule are the
kind that would easily be handled as
part of the normal and routine
maintenance of a credit union’s data
reporting system. Accordingly, the costs
and other effects of this proposal on
small credit unions are minor, and
NCUA certifies that this proposal will
not have a significant economic impact
on a substantial number of small credit
unions.
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.306 For
purposes of the PRA, a paperwork
burden may take the form of a reporting,
disclosure or recordkeeping
requirement, each referred to as an
information collection. The proposed
changes to part 702 impose new
information collection requirements.
NCUA has determined that the
proposed changes to part 702 will have
costs associated with updating internal
policies, and updating data collection
and reporting systems for preparing Call
Reports. Based on December 2013 Call
306 44

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149
67
12

Percentage of 1,455
credit unions with total
assets greater than
$100 million
10.2%
4.6%
0.8%

Report data, NCUA estimates that all
6,554 credit unions would have to
amend their procedures and systems for
preparing Call Reports. NCUA will
address the costs and provide notice of
these changes in other collections, such
as the NCUA Call Report and Profile as
part of its regular amendments separate
from this proposed rule.
Finally, NCUA estimates that
approximately 21.5 percent, or 1,455
credit unions, will be defined as
‘‘complex’’ under the proposed rule and
would have additional data collection
requirements related to the new riskbased capital requirements.
Title of Information Collection: RiskBased Capital policy implications for
complex credit unions
Affected Public: Complex Credit Unions
Estimated Number of Respondents:
1,455
Estimated Burden Per Respondent: Onetime policy review and revision, 40
hours
Estimated Cost Per Respondent: $1,276
Title of Information Collection: RiskBased Capital policy implications for
non-complex credit unions
Affected Public: Non-Complex Credit
Unions
Estimated Number of Respondents:
5,099
Estimated Burden Per Respondent: Onetime policy review and revision, 20
hours
Estimated Cost Per Respondent: $638
Total Estimated One-Time:
One-time burden for policy review
and revision, (20 hours times 5,099
credit unions (non-complex), or 40
hours times 1,455 credit unions
(complex)). The total one-time cost for
non-complex credit unions totals
101,980 hours or $3,252,142, an average

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Federal Register / Vol. 80, No. 17 / Tuesday, January 27, 2015 / Proposed Rules
of $638 per credit union. The total onetime cost for complex credit unions
totals 58,200 hours or $1,855,998, an
average of $1,276 per credit union.
Submission of comments. NCUA
considers comments by the public on
this proposed collection of information
in:
Evaluating whether the proposed
collection of information is necessary
for the proper performance of the
functions of NCUA, including whether
the information will have a practical
use;
Evaluating the accuracy of NCUA’s
estimate of the burden of the proposed
collection of information, including the
validity of the methodology and
assumptions used;
Enhancing the quality, usefulness,
and clarity of the information to be
collected; and
Minimizing the burden of collection
of information on those who are to
respond, including through the use of
appropriate automated, electronic,
mechanical, or other technological
collection techniques or other forms of
information technology; e.g., permitting
electronic submission of responses.

well-being within the meaning of
section 654 of the Treasury and General
Government Appropriations Act, 1999,
Public Law 105–277, 112 Stat. 2681
(1998).

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 principles of the
executive order to adhere to
fundamental federalism principles. This
proposed rule will apply to all federally
insured natural-person credit unions,
including federally insured, statechartered natural-person credit unions.
Accordingly, it may have, to some
degree, a 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. The Board
believes this impact is minor, and it is
an unavoidable consequence of carrying
out the statutory mandate to adopt a
system of PCA to apply to all federally
insured, natural person credit unions.
Throughout the rulemaking process,
NCUA has consulted with
representatives of state regulators
regarding the impact of PCA on statechartered credit unions. Comments and
suggestions of those state regulators are
reflected in this proposed rule.

12 CFR Part 747

Assessment of Federal Regulations and
Policies on Families
NCUA has determined that this
proposed rule will not affect family

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List of Subjects
12 CFR Part 700

et seq.; 42 U.S.C. 1981 and 3601–3610.
Section 701.35 is also authorized by 42
U.S.C. 4311–4312.
§ 701.21

[Amended]

4. Amend § 701.21(h)(4)(iv) by
removing ‘‘§ 702.2(f)’’ and adding in its
place ‘‘§ 702.2’’.

■

§ 701.23

Credit unions.

4427

[Amended]

5. Amend § 701.23(b)(2) introductory
text by removing the words ‘‘net worth’’
and adding in their place the word
‘‘capital’’, and removing the words ‘‘or,
if subject to a risk-based net worth
(RBNW) requirement under part 702 of
this chapter, has remained ‘‘well
capitalized’’ for the six (6) immediately
preceding quarters after applying the
applicable RBNW requirement’’.

■

12 CFR Part 701
Credit, Credit unions, Insurance,
Reporting and recordkeeping
requirements.
12 CFR Part 702
Credit unions, Reporting and
recordkeeping requirements.
12 CFR Part 703
Credit unions, Investments, Reporting
and recordkeeping requirements.
12 CFR Part 713
Bonds, Credit unions, Insurance.
12 CFR Part 723
Credit unions, Loan programsbusiness, Reporting and recordkeeping
requirements.

§ 701.34

[Amended]

5. Amend § 701.34 as follows:
a. In paragraph (b)(12) remove the
words ‘‘§§ 702.204(b)(11), 702.304(b)
and 702.305(b)’’ and add in their place
the words ‘‘part 702’’.
■ b. In paragraph (d)(1)(i) remove the
words ‘‘net worth’’ and add in their
place the word ‘‘capital’’.
■
■

Appendix to § 701.34 [Amended]
6. In the appendix to § 701.34, amend
the paragraph beginning ‘‘8. Prompt
Corrective Action’’ by removing the
words ‘‘net worth classifications (see 12
CFR 702.204(b)(11), 702.304(b) and
702.305(b), as the case may be)’’ and
adding in their place the words ‘‘capital
classifications (see 12 CFR part 702)’’.

■

Administrative practice and
procedure, Bank deposit insurance,
Claims, Credit unions, Crime, Equal
access to justice, Investigations,
Lawyers, Penalties.
By the National Credit Union
Administration Board on January 15, 2015.
Gerard Poliquin,
Secretary of the Board.

PART 702—CAPITAL ADEQUACY

For the reasons discussed above, the
Board proposes to amend 12 CFR parts
700, 701, 702, 703, 713, 723, and 747 as
follows:

■

PART 700—DEFINITIONS

§ 702.1 Authority, purpose, scope, and
other supervisory authority.

1. The authority citation for part 700
continues to read as follows:

■

Authority: 12 U.S.C. 1752, 1757(6), 1766.
§ 700.2

[Amended]

2. Amend the definition of ‘‘net
worth’’ in § 700.2 by removing
‘‘§ 702.2(f)’’ and adding in its place
‘‘§ 702.2’’.

■

PART 701—ORGANIZATION AND
OPERATION OF FEDERAL CREDIT
UNIONS
3. The authority citation for part 701
continues to read as follows:

■

Authority: 12 U.S.C. 1752(5), 1755, 1756,
1757, 1758, 1759, 1761a, 1761b, 1766, 1767,
1782, 1784, 1786, 1787, 1789. Section 701.6
is also authorized by 15 U.S.C. 3717. Section
701.31 is also authorized by 15 U.S.C. 1601

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7. The authority citation for part 702
continues to read as follows:
Authority: 12 U.S.C. 1766(a), 1790d.

■

8. Revise § 702.1 to read as follows:

(a) Authority. Subparts A and B of this
part and subpart L of part 747 of this
chapter are issued by the National
Credit Union Administration (NCUA)
pursuant to sections 120 and 216 of the
Federal Credit Union Act (FCUA), 12
U.S.C. 1776 and 1790d (section 1790d),
as revised by section 301 of the Credit
Union Membership Access Act, Public
Law 105–219, 112 Stat. 913 (1998).
(b) Purpose. The express purpose of
prompt corrective action under section
1790d is to resolve the problems of
federally insured credit unions at the
least possible long-term loss to the
National Credit Union Share Insurance
Fund. Subparts A and B of this part
carry out the purpose of prompt
corrective action by establishing a
framework of minimum capital

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requirements, and mandatory and
discretionary supervisory actions
applicable according to a credit union’s
capital classification, designed
primarily to restore and improve the
capital adequacy of federally insured
credit unions.
(c) Scope. Subparts A and B of this
part implement the provisions of section
1790d as they apply to federally insured
credit unions, whether federally- or
state-chartered; to such credit unions
defined as ‘‘new’’ pursuant to section
1790d(b)(2); and to such credit unions
defined as ‘‘complex’’ pursuant to
section 1790d(d). Certain of these
provisions also apply to officers and
directors of federally insured credit
unions. Subpart C applies capital
planning and stress testing to credit
unions with $10 billion or more in total
assets. This part does not apply to
corporate credit unions. Unless
otherwise provided, procedures for
issuing, reviewing and enforcing orders
and directives issued under this part are
set forth in subpart L of part 747 of this
chapter.
(d) Other supervisory authority.
Neither section 1790d nor this part in
any way limits the authority of the
NCUA Board or appropriate state
official under any other provision of law
to take additional supervisory actions to
address unsafe or unsound practices or
conditions, or violations of applicable
law or regulations. Action taken under
this part may be taken independently of,
in conjunction with, or in addition to
any other enforcement action available
to the NCUA Board or appropriate state
official, including issuance of cease and
desist orders, orders of prohibition,
suspension and removal, or assessment
of civil money penalties, or any other
actions authorized by law.
■ 9. Revise § 702.2 to read as follows:

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§ 702.2

Definitions.

Unless otherwise provided in this
part, the terms used in this part have the
same meanings as set forth in FCUA
sections 101 and 216, 12 U.S.C. 1752,
1790d. The following definitions apply
to this part:
Allowances for loan and lease losses
(ALLL) means valuation allowances that
have been established through a charge
against earnings to cover estimated
credit losses on loans, lease financing
receivables or other extensions of credit
as determined in accordance with
GAAP.
Amortized cost means the purchase
price of a security adjusted for
amortizations of premium or accretion
of discount if the security was
purchased at other than par or face
value.

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Appropriate state official means the
state commission, board or other
supervisory authority having
jurisdiction over the credit union.
Call Report means the Call Report
required to be filed by all credit unions
under § 741.6(a)(2) of this chapter.
Carrying value means, with respect to
an asset, the value of the asset on the
statement of financial condition of the
credit union, determined in accordance
with GAAP.
Central counterparty (CCP) means a
counterparty (for example, a clearing
house) that facilitates trades between
counterparties in one or more financial
markets by either guaranteeing trades or
novating contracts.
Commercial loan means any loan, line
of credit, or letter of credit (including
any unfunded commitments) to
individuals, sole proprietorships,
partnerships, corporations, or other
business enterprises for commercial,
industrial, and professional purposes,
but not for investment or personal
expenditure purposes. Commercial loan
excludes loans to CUSOs, first- or
junior-lien residential real estate loans,
and consumer loans.
Commitment means any legally
binding arrangement that obligates the
credit union to extend credit, to
purchase or sell assets, or enter into a
financial transaction.
Consumer loan means a loan to one or
more individuals for household, family,
or other personal expenditures,
including any loans secured by vehicles
generally manufactured for personal,
family, or household use regardless of
the purpose of the loan. Consumer loan
excludes commercial loans, loans to
CUSOs, first- and junior-lien residential
real estate loans, and loans for the
purchase of fleet vehicles.
Contractual compensating balance
means the funds a commercial loan
borrower must maintain on deposit at
the lender credit union as security for
the loan in accordance with the loan
agreement, subject to a proper account
hold and on deposit as of the
measurement date.
Credit conversion factor (CCF) means
the percentage used to assign a credit
exposure equivalent amount for selected
off-balance sheet accounts.
Credit union means a federally
insured, natural person credit union,
whether federally- or state-chartered.
Current means, with respect to any
loan, that the loan is less than 90 days
past due, not placed on non-accrual
status, and not restructured.
CUSO means a credit union service
organization as defined in part 712 and
741 of this chapter.

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Custodian means a financial
institution that has legal custody of
collateral as part of a qualifying master
netting agreement, clearing agreement,
or other financial agreement.
Depository institution means a
financial institution that engages in the
business of providing financial services;
that is recognized as a bank or a credit
union by the supervisory or monetary
authorities of the country of its
incorporation and the country of its
principal banking operations; that
receives deposits to a substantial extent
in the regular course of business; and
that has the power to accept demand
deposits. Depository institution
includes all federally insured offices of
commercial banks, mutual and stock
savings banks, savings or building and
loan associations (stock and mutual),
cooperative banks, credit unions and
international banking facilities of
domestic depository institutions, and all
privately insured state chartered credit
unions.
Derivatives Clearing Organization
(DCO) means the same as defined by the
Commodity Futures Trading
Commission in 17 CFR 1.3(d).
Derivative contract means a financial
contract whose value is derived from
the values of one or more underlying
assets, reference rates, or indices of asset
values or reference rates. Derivative
contracts include interest rate derivative
contracts, exchange rate derivative
contracts, equity derivative contracts,
commodity derivative contracts, and
credit derivative contracts. Derivative
contracts also include unsettled
securities, commodities, and foreign
exchange transactions with a
contractual settlement or delivery lag
that is longer than the lesser of the
market standard for the particular
instrument.
Equity investment means investments
in equity securities and any other
ownership interests, including, for
example, investments in partnerships
and limited liability companies.
Equity investment in CUSOs means
the unimpaired value of the credit
union’s equity investments in a CUSO
as recorded on the statement of financial
condition in accordance with GAAP.
Exchange means a central financial
clearing market where end users can
trade derivatives.
Excluded goodwill means the
outstanding balance, maintained in
accordance with GAAP, of any goodwill
originating from a supervisory merger or
combination that was completed no
more than 29 days after publication of
this rule in final form in the Federal
Register. This term and definition will
expire on January 1, 2025.

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Excluded other intangible assets
means the outstanding balance,
maintained in accordance with GAAP,
of any other intangible assets such as
core deposit intangible, member
relationship intangible, or trade name
intangible originating from a
supervisory merger or combination that
was completed no more than 29 days
after publication of this rule in final
form in the Federal Register. This term
and definition will expire on January 1,
2025.
Exposure amount means:
(1) The amortized cost for investments
classified as held-to-maturity and
available-for-sale, and the fair value for
trading securities.
(2) The outstanding balance for
Federal Reserve Bank Stock, Central
Liquidity Facility Stock, Federal Home
Loan Bank Stock, nonperpetual capital
and perpetual contributed capital at
corporate credit unions, and equity
investments in CUSOs.
(3) The carrying value for non-CUSO
equity investments, and investment
funds.
(4) The carrying value for the credit
union’s holdings of general account
permanent insurance, and separate
account insurance.
(5) The amount calculated under
§ 702.105 of this part for derivative
contracts.
Fair value has the same meaning as
provided in GAAP.
Financial collateral means collateral
approved by both the credit union and
the counterparty as part of the collateral
agreement in recognition of credit risk
mitigation for derivative contracts.
First-lien residential real estate loan
means a loan or line of credit primarily
secured by a first-lien on a one-to-four
family residential property where:
(1) The credit union made a
reasonable and good faith determination
at or before consummation of the loan
that the member will have a reasonable
ability to repay the loan according to its
terms; and
(2) In transactions where the credit
union holds the first-lien and junior
lien(s), and no other party holds an
intervening lien, for purposes of this
part the combined balance will be
treated as a single first-lien residential
real estate loan.
GAAP means generally accepted
accounting principles in the United
States as set forth in the Financial
Accounting Standards Board’s (FASB)
Accounting Standards Codification
(ASC).
General account permanent insurance
means an account into which all
premiums, except those designated for
separate accounts are deposited,

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including premiums for life insurance
and fixed annuities and the fixed
portfolio of variable annuities, whereby
the general assets of the insurance
company support the policy.
General obligation means a bond or
similar obligation that is backed by the
full faith and credit of a public sector
entity.
Goodwill means an intangible asset,
maintained in accordance with GAAP,
representing the future economic
benefits arising from other assets
acquired in a business combination
(e.g., merger) that are not individually
identified and separately recognized.
Goodwill does not include excluded
goodwill.
Government guarantee means a
guarantee provided by the U.S.
Government, FDIC, NCUA or other U.S.
Government agency, or a public sector
entity.
Government-sponsored enterprise
(GSE) means an entity established or
chartered by the U.S. Government to
serve public purposes specified by the
U.S. Congress, but whose debt
obligations are not explicitly guaranteed
by the full faith and credit of the U.S.
Government.
Guarantee means a financial
guarantee, letter of credit, insurance, or
similar financial instrument that allows
one party to transfer the credit risk of
one or more specific exposures to
another party.
Identified losses means those items
that have been determined by an
evaluation made by NCUA, or in the
case of a state chartered credit union the
appropriate state official, as measured
on the date of examination in
accordance with GAAP, to be chargeable
against income, equity or valuation
allowances such as the allowances for
loan and lease losses. Examples of
identified losses would be assets
classified as losses, off-balance sheet
items classified as losses, any provision
expenses that are necessary to replenish
valuation allowances to an adequate
level, liabilities not shown on the books,
estimated losses in contingent
liabilities, and differences in accounts
that represent shortages.
Industrial development bond means a
security issued under the auspices of a
state or other political subdivision for
the benefit of a private party or
enterprise where that party or
enterprise, rather than the government
entity, is obligated to pay the principal
and interest on the obligation.
Intangible assets mean assets,
maintained in accordance with GAAP,
other than financial assets, that lack
physical substance.

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Investment fund means an investment
with a pool of underlying investment
assets. Investment fund includes an
investment company that is registered
under section 8 of the Investment
Company Act of 1940, and collective
investment funds or common trust
investments that are unregistered
investment products that pool fiduciary
client assets to invest in a diversified
pool of investments.
Junior-lien residential real estate loan
means a loan or line of credit secured
by a subordinate lien on a one-to-four
family residential property.
Loan to a CUSO means the
outstanding balance of any loan from a
credit union to a CUSO as recorded on
the statement of financial condition in
accordance with GAAP.
Loan secured by real estate means a
loan that, at origination, is secured
wholly or substantially by a lien(s) on
real property for which the lien(s) is
central to the extension of the credit. A
lien is ‘‘central’’ to the extension of
credit if the borrowers would not have
been extended credit in the same
amount or on terms as favorable without
the liens on real property. For a loan to
be ‘‘secured wholly or substantially by
a lien(s) on real property,’’ the estimated
value of the real estate collateral at
origination (after deducting any more
senior liens held by others) must be
greater than 50 percent of the principal
amount of the loan at origination.
Loans transferred with limited
recourse means the total principal
balance outstanding of loans transferred,
including participations, for which the
transfer qualified for true sale
accounting treatment under GAAP, and
for which the transferor credit union
retained some limited recourse (i.e.,
insufficient recourse to preclude true
sale accounting treatment). Loans
transferred with limited recourse
excludes transfers that qualify for true
sale accounting treatment but contain
only routine representation and
warranty clauses that are standard for
sales on the secondary market, provided
the credit union is in compliance with
all other related requirements, such as
capital requirements.
Mortgage-backed security (MBS)
means a security backed by first- or
junior-lien mortgages secured by real
estate upon which is located a dwelling,
mixed residential and commercial
structure, residential manufactured
home, or commercial structure.
Mortgage partnership finance
program means a Federal Home Loan
Bank program through which loans are
originated by a depository institution
that are purchased or funded by the
Federal Home Loan Banks, where the

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depository institutions receive fees for
managing the credit risk of the loans
and servicing them. The credit risk must
be shared between the depository
institutions and the Federal Home Loan
Banks.
Mortgage servicing assets mean those
assets, maintained in accordance with
GAAP, resulting from contracts to
service loans secured by real estate (that
have been securitized or owned by
others) for which the benefits of
servicing are expected to more than
adequately compensate the servicer for
performing the servicing.
NCUSIF means the National Credit
Union Share Insurance Fund as defined
by 12 U.S.C. 1783.
Net worth means:
(1) The retained earnings balance of
the credit union at quarter-end as
determined under GAAP, subject to
paragraph (3) of this definition.
(2) For a low income-designated
credit union, net worth also includes
secondary capital accounts that are
uninsured and subordinate to all other
claims, including claims of creditors,
shareholders, and the NCUSIF.
(3) For a credit union that acquires
another credit union in a mutual
combination, net worth also includes
the retained earnings of the acquired
credit union, or of an integrated set of
activities and assets, less any bargain
purchase gain recognized in either case
to the extent the difference between the
two is greater than zero. The acquired
retained earnings must be determined at
the point of acquisition under GAAP. A
mutual combination, including a
supervisory combination, is a
transaction in which a credit union
acquires another credit union or
acquires an integrated set of activities
and assets that is capable of being
conducted and managed as a credit
union.
(4) The term ‘‘net worth’’ also
includes loans to and accounts in an
insured credit union, established
pursuant to section 208 of the Act [12
U.S.C. 1788], provided such loans and
accounts:
(i) Have a remaining maturity of more
than 5 years;
(ii) Are subordinate to all other claims
including those of shareholders,
creditors, and the NCUSIF;
(iii) Are not pledged as security on a
loan to, or other obligation of, any party;
(iv) Are not insured by the NCUSIF;
(v) Have non-cumulative dividends;
(vi) Are transferable; and
(vii) Are available to cover operating
losses realized by the insured credit
union that exceed its available retained
earnings.

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Net worth ratio means the ratio of the
net worth of the credit union to the total
assets of the credit union rounded to
two decimal places.
New credit union has the same
meaning as in § 702.201.
Nonperpetual capital has the same
meaning as in § 704.2 of this chapter.
Off-balance sheet items means items
such as commitments, contingent items,
guarantees, certain repo-style
transactions, financial standby letters of
credit, and forward agreements that are
not included on the statement of
financial condition, but are normally
reported in the financial statement
footnotes.
Off-balance sheet exposure means:
(1) For loans transferred under the
Federal Home Loan Bank mortgage
partnership finance program, the
outstanding loan balance as of the
reporting date, net of any related
valuation allowance.
(2) For all other loans transferred with
limited recourse or other seller-provided
credit enhancements and that qualify for
true sales accounting, the maximum
contractual amount the credit union is
exposed to according to the agreement,
net of any related valuation allowance.
(3) For unfunded commitments, the
remaining unfunded portion of the
contractual agreement.
On-balance sheet means a credit
union’s assets, liabilities, and equity, as
disclosed on the statement of financial
condition at a specific point in time.
Other intangible assets means
intangible assets, other than servicing
assets and goodwill, maintained in
accordance with GAAP. Other
intangible assets does not include
excluded other intangible assets.
Over-the-counter (OTC) interest rate
derivative contract means a derivative
contract that is not cleared on an
exchange.
Perpetual contributed capital has the
same meaning as in § 704.2 of this
chapter.
Public sector entity (PSE) means a
state, local authority, or other
governmental subdivision of the United
States below the sovereign level.
Qualifying master netting agreement
means a written, legally enforceable
agreement, provided that:
(1) The agreement creates a single
legal obligation for all individual
transactions covered by the agreement
upon an event of default, including
upon an event of conservatorship,
receivership, insolvency, liquidation, or
similar proceeding, of the counterparty;
(2) The agreement provides the credit
union the right to accelerate, terminate,
and close out on a net basis all
transactions under the agreement and to

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liquidate or set off collateral promptly
upon an event of default, including
upon an event of conservatorship,
receivership, insolvency, liquidation, or
similar proceeding, of the counterparty,
provided that, in any such case, any
exercise of rights under the agreement
will not be stayed or avoided under
applicable law in the relevant
jurisdictions, other than in receivership,
conservatorship, resolution under the
Federal Deposit Insurance Act, Title II
of the Dodd-Frank Wall Street Reform
and Consumer Protection Act, or under
any similar insolvency law applicable to
GSEs;
(3) The agreement does not contain a
walkaway clause (that is, a provision
that permits a non-defaulting
counterparty to make a lower payment
than it otherwise would make under the
agreement, or no payment at all, to a
defaulter or the estate of a defaulter,
even if the defaulter or the estate is a net
creditor under the agreement); and
(4) In order to recognize an agreement
as a qualifying master netting agreement
for purposes of this part, a credit union
must conduct sufficient legal review, at
origination and in response to any
changes in applicable law, to conclude
with a well-founded basis (and maintain
sufficient written documentation of that
legal review) that:
(i) The agreement meets the
requirements of paragraph (2) of this
definition; and
(ii) In the event of a legal challenge
(including one resulting from default or
from conservatorship, receivership,
insolvency, liquidation, or similar
proceeding), the relevant court and
administrative authorities would find
the agreement to be legal, valid, binding,
and enforceable under the law of
relevant jurisdictions.
Recourse means a credit union’s
retention, in form or in substance, of
any credit risk directly or indirectly
associated with an asset it has
transferred that exceeds a pro rata share
of that credit union’s claim on the asset
and disclosed in accordance with
GAAP. If a credit union has no claim on
an asset it has transferred, then the
retention of any credit risk is recourse.
A recourse obligation typically arises
when a credit union transfers assets in
a sale and retains an explicit obligation
to repurchase assets or to absorb losses
due to a default on the payment of
principal or interest or any other
deficiency in the performance of the
underlying obligor or some other party.
Recourse may also exist implicitly if the
credit union provides credit
enhancement beyond any contractual
obligation to support assets it has
transferred.

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Residential mortgage-backed security
means a mortgage-backed security
backed by loans secured by a first-lien
on residential property.
Residential property means a house,
condominium unit, cooperative unit,
manufactured home, or the construction
thereof, and unimproved land zoned for
one-to-four family residential use.
Residential property excludes boats or
motor homes, even if used as a primary
residence, or timeshare property.
Restructured means, with respect to
any loan, a restructuring of the loan in
which a credit union, for economic or
legal reasons related to a borrower’s
financial difficulties, grants a
concession to the borrower that it would
not otherwise consider. Restructured
excludes loans modified or restructured
solely pursuant to the U.S. Treasury’s
Home Affordable Mortgage Program.
Revenue obligation means a bond or
similar obligation that is an obligation of
a PSE, but which the PSE is committed
to repay with revenues from the specific
project financed rather than general tax
funds.
Risk-based capital ratio means the
percentage, rounded to two decimal
places, of the risk-based capital ratio
numerator to risk-weighted assets, as
calculated in accordance with
§ 702.104(a).
Risk-weighted assets means the total
risk-weighted assets as calculated in
accordance with § 702.104(c).
Secured consumer loan means a
consumer loan associated with
collateral or other item of value to
protect against loss where the creditor
has a perfected security interest in the
collateral or other item of value.
Senior executive officer means a
senior executive officer as defined by
§ 701.14(b)(2) of this chapter.
Separate account insurance means an
account into which a policyholder’s
cash surrender value is supported by
assets segregated from the general assets
of the carrier.
Shares means deposits, shares, share
certificates, share drafts, or any other
depository account authorized by
federal or state law.
Share-secured loan means a loan fully
secured by shares on deposit at the
credit union making the loan, and does
not include the imposition of a statutory
lien under § 701.39 of this chapter.
STRIPS means a separately traded
registered interest and principal
security.
Structured product means an
investment that is linked, via return or
loss allocation, to another investment or
reference pool.
Subordinated means, with respect to
an investment, that the investment has

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a junior claim on the underlying
collateral or assets to other investments
in the same issuance. Subordinated does
not apply to securities that are junior
only to money market fund eligible
securities in the same issuance.
Supervisory merger or combination
means a transaction that involved the
following:
(1) An assisted merger or purchase
and assumption where funds from the
NCUSIF were provided to the
continuing credit union;
(2) A merger or purchase and
assumption classified by NCUA as an
‘‘emergency merger’’ where the acquired
credit union is either insolvent or ‘‘in
danger of insolvency’’ as defined under
appendix B to part 701 of this chapter;
or
(3) A merger or purchase and
assumption that included NCUA’s or
the appropriate state official’s
identification and selection of the
continuing credit union.
Swap dealer has the meaning as
defined by the Commodity Futures
Trading Commission in 17 CFT 1.3(ggg).
Total assets means a credit union’s
total assets as measured 1 by either:
(1) Average quarterly balance. The
credit union’s total assets measured by
the average of quarter-end balances of
the current and three preceding
calendar quarters;
(2) Average monthly balance. The
credit union’s total assets measured by
the average of month-end balances over
the three calendar months of the
applicable calendar quarter;
(3) Average daily balance. The credit
union’s total assets measured by the
average daily balance over the
applicable calendar quarter; or
(4) Quarter-end balance. The credit
union’s total assets measured by the
quarter-end balance of the applicable
calendar quarter as reported on the
credit union’s Call Report.
Tranche means one of a number of
related securities offered as part of the
same transaction. Tranche includes a
structured product if it has a loss
allocation based off of an investment or
reference pool.
Unsecured consumer loan means a
consumer loan not secured by collateral.
U.S. Government agency means an
instrumentality of the U.S. Government
whose obligations are fully and
explicitly guaranteed as to the timely
payment of principal and interest by the
full faith and credit of the U.S.
Government.
1 For each quarter, a credit union must elect one
of the measures of total assets listed in paragraph
(2) of this definition to apply for all purposes under
this part except §§ 702.103 through 702.106 (riskbased capital requirement).

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4431

10. Revise subpart A to read as
follows:

■

Subpart A—Prompt Corrective Action
Sec.
702.101 Capital measures, capital adequacy,
effective date of classification, and notice
to NCUA.
702.102 Capital classifications.
702.103 Applicability of the risk-based
capital ratio measure.
702.104 Risk-based capital ratio.
702.105 Derivative contracts.
702.106 Prompt corrective action for
adequately capitalized credit unions.
702.107 Prompt corrective action for
undercapitalized credit unions.
702.108 Prompt corrective action for
significantly undercapitalized credit
unions.
702.109 Prompt corrective action for
critically undercapitalized credit unions.
702.110 Consultation with state officials on
proposed prompt corrective action.
702.111 Net worth restoration plans
(NWRP).
702.112 Reserves.
702.113 Full and fair disclosure of financial
condition.
702.114 Payment of dividends.

Subpart A—Prompt Corrective Action
§ 702.101 Capital measures, capital
adequacy, effective date of classification,
and notice to NCUA.

(a) Capital measures. For purposes of
this part, a credit union must determine
its capital classification at the end of
each calendar quarter using the
following measures:
(1) The net worth ratio; and
(2) If determined to be applicable
under § 702.103, the risk-based capital
ratio.
(b) Capital adequacy. (1)
Notwithstanding the minimum
requirements in this part, a credit union
defined as complex must maintain
capital commensurate with the level
and nature of all risks to which the
institution is exposed.
(2) A credit union defined as complex
must have a process for assessing its
overall capital adequacy in relation to
its risk profile and a comprehensive
written strategy for maintaining an
appropriate level of capital.
(c) Effective date of capital
classification. For purposes of this part,
the effective date of a federally insured
credit union’s capital classification shall
be the most recent to occur of:
(1) Quarter-end effective date. The
last day of the calendar month following
the end of the calendar quarter;
(2) Corrected capital classification.
The date the credit union received
subsequent written notice from NCUA
or, if state-chartered, from the
appropriate state official, of a decline in
capital classification due to correction

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of an error or misstatement in the credit
union’s most recent Call Report; or
(3) Reclassification to lower category.
The date the credit union received
written notice from NCUA or, if statechartered, the appropriate state official,
of reclassification on safety and
soundness grounds as provided under
§§ 702.102(b) or 702. 202(d).
(d) Notice to NCUA by filing Call
Report. (1) Other than by filing a Call
Report, a federally insured credit union
need not notify the NCUA Board of a
change in its capital measures that
places the credit union in a lower
capital category;
(2) Failure to timely file a Call Report
as required under this section in no way
alters the effective date of a change in
capital classification under paragraph
(b) of this section, or the affected credit
union’s corresponding legal obligations
under this part.

§ 702.102

Capital classification.

(a) Capital categories. Except for
credit unions defined as ‘‘new’’ under
subpart B of this part, a credit union
shall be deemed to be classified (Table
1 of this section)—
(1) Well capitalized if:
(i) Net worth ratio. The credit union
has a net worth ratio of 7.0 percent or
greater; and
(ii) Risk-based capital ratio. The
credit union, if complex, has a riskbased capital ratio of 10 percent or
greater.
(2) Adequately capitalized if:
(i) Net worth ratio. The credit union
has a net worth ratio of 6.0 percent or
greater; and
(ii) Risk-based capital ratio. The
credit union, if complex, has a riskbased capital ratio of 8.0 percent or
greater; and
(iii) Does not meet the definition of a
well capitalized credit union.
(3) Undercapitalized if:

(i) Net worth ratio. The credit union
has a net worth ratio of 4.0 percent or
more but less than 6.0 percent; or
(ii) Risk-based capital ratio. The
credit union, if complex, has a riskbased capital ratio of less than 8.0
percent.
(4) Significantly undercapitalized if:
(i) The credit union has a net worth
ratio of 2.0 percent or more but less than
4.0 percent; or
(ii) The credit union has a net worth
ratio of 4.0 percent or more but less than
5.0 percent, and either—
(A) Fails to submit an acceptable net
worth restoration plan within the time
prescribed in § 702.110;
(B) Materially fails to implement a net
worth restoration plan approved by the
NCUA Board; or
(C) Receives notice that a submitted
net worth restoration plan has not been
approved.
(5) Critically undercapitalized if it has
a net worth ratio of less than 2.0
percent.

TABLE 1 TO § 702.102—CAPITAL CATEGORIES

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A credit union’s capital classification
is . . .

Risk-based capital ratio also
applicable if complex

Net worth ratio

Well Capitalized ................................
Adequately Capitalized .....................

7% or greater ..........
6% or greater ..........

And ...............
And ...............

10.0% or greater.
8% or greater ......................

Undercapitalized ................................
Significantly Undercapitalized ...........

4% to 5.99% ............
2% to 3.99% ............

Or .................
......................

Less than 8%.
N/A ......................................

Critically Undercapitalized .................

Less than 2% ..........

......................

N/A.

(b) Reclassification based on
supervisory criteria other than net
worth. The NCUA Board may reclassify
a well capitalized credit union as
adequately capitalized and may require
an adequately capitalized or
undercapitalized credit union to comply
with certain mandatory or discretionary
supervisory actions as if it were
classified in the next lower capital
category (each of such actions
hereinafter referred to generally as
‘‘reclassification’’) in the following
circumstances:
(1) Unsafe or unsound condition. The
NCUA Board has determined, after
providing the credit union with notice
and opportunity for hearing pursuant to
§ 747.2003 of this chapter, that the
credit union is in an unsafe or unsound
condition; or
(2) Unsafe or unsound practice. The
NCUA Board has determined, after
providing the credit union with notice
and opportunity for hearing pursuant to

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§ 747.2003 of this chapter, that the
credit union has not corrected a material
unsafe or unsound practice of which it
was, or should have been, aware.
(c) Non-delegation. The NCUA Board
may not delegate its authority to
reclassify a credit union under
paragraph (b) of this section.
(d) Consultation with state officials.
The NCUA Board shall consult and seek
to work cooperatively with the
appropriate state official before
reclassifying a federally insured statechartered credit union under paragraph
(b) of this section, and shall promptly
notify the appropriate state official of its
decision to reclassify.
§ 702.103 Applicability of the risk-based
capital ratio measure.

For purposes of § 702.102, a credit
union is defined as ‘‘complex’’ and the
risk-based capital ratio measure is
applicable only if the credit union’s
quarter-end total assets exceed one

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And subject to following condition(s) . . .
And does not meet the criteria to
be classified as well capitalized.
Or if ‘‘undercapitalized at < 5% net
worth and (a) fails to timely submit, (b) fails to materially implement, or (c) receives notice of
the rejection of a net worth restoration plan.

hundred million dollars ($100,000,000),
as reflected in its most recent Call
Report.
§ 702.104

Risk-based capital ratio.

A complex credit union must
calculate its risk-based capital ratio in
accordance with this section.
(a) Calculation of the risk-based
capital ratio. To determine its risk-based
capital ratio, a complex credit union
must calculate the percentage, rounded
to two decimal places, of its risk-based
capital ratio numerator as described in
paragraph (b) of this section, to its total
risk-weighted assets as described in
paragraph (c) of this section.
(b) Risk-based capital ratio
numerator. The risk-based capital ratio
numerator is the sum of the specific
capital elements in paragraph (b)(1) of
this section, minus the regulatory
adjustments in paragraph (b)(2) of this
section.

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(1) Capital elements of the risk-based
capital ratio numerator. The capital
elements of the risk-based capital
numerator are:
(i) Undivided earnings;
(ii) Appropriation for non-conforming
investments;
(iii) Other reserves;
(iv) Equity acquired in merger;
(v) Net income
(vi) ALLL, maintained in accordance
with GAAP;
(vii) Secondary capital accounts
included in net worth (as defined in
§ 702.2); and
(viii) Section 208 assistance included
in net worth (as defined in § 702.2).
(2) Risk-based capital ratio numerator
deductions. The elements deducted
from the sum of the capital elements of
the risk-based capital ratio numerator
are:
(i) NCUSIF Capitalization Deposit;
(ii) Goodwill;
(iii) Other intangible assets; and
(iv) Identified losses not reflected in
the risk-based capital ratio numerator.
(c) Risk-weighted assets. (1) General.
Risk-weighted assets includes riskweighted on-balance sheet assets as
described in paragraphs (c)(2) and (3) of
this section, plus the risk-weighted offbalance sheet assets in paragraph (c)(4)
of this section, plus the risk-weighted
derivatives in paragraph (c)(5) of this
section, less the risk-based capital ratio
numerator deductions in paragraph
(b)(2) of this section. If a particular
asset, derivative contract, or off balance
sheet item has features or characteristics
that suggest it could potentially fit into
more than one risk weight category,
then a credit union shall assign the
asset, derivative contract, or off balance
sheet item to the risk weight category
that most accurately and appropriately
reflects its associated credit risk.
(2) Risk weights for on-balance sheet
assets. The risk categories and weights
for assets of a complex credit union are
as follows:
(i) Category 1—zero percent risk
weight. A credit union must assign a
zero percent risk weight to:
(A) The balance of cash, currency and
coin, including vault, automatic teller
machine, and teller cash.
(B) The exposure amount of:
(1) An obligation of the U.S.
Government, its central bank, or a U.S.
Government agency that is directly and
unconditionally guaranteed, excluding
detached security coupons, ex-coupon
securities, and principal- and interestonly mortgage-backed STRIPS.
(2) Federal Reserve Bank stock and
Central Liquidity Facility stock.
(C) Insured balances due from FDICinsured depositories or federally
insured credit unions.

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(ii) Category 2—20 percent risk
weight. A credit union must assign a 20
percent risk weight to:
(A) The uninsured balances due from
FDIC-insured depositories, federally
insured credit unions, and all balances
due from privately-insured credit
unions.
(B) The exposure amount of:
(1) A non-subordinated obligation of
the U.S. Government, its central bank,
or a U.S. Government agency that is
conditionally guaranteed, excluding
principal- and interest-only mortgagebacked STRIPS.
(2) A non-subordinated obligation of a
GSE other than an equity exposure or
preferred stock, excluding principaland interest-only GSE obligation
STRIPS.
(3) Securities issued by PSEs in the
U.S. that represent general obligation
securities.
(4) Investment funds whose portfolios
are permitted to hold only part 703
permissible investments that qualify for
the zero or 20 percent risk categories.
(5) Federal Home Loan Bank stock.
(C) The balances due from Federal
Home Loan Banks.
(D) The balance of share-secured
loans.
(E) The portions of outstanding loans
with a government guarantee.
(F) The portions of commercial loans
secured with contractual compensating
balances.
(iii) Category 3—50 percent risk
weight. A credit union must assign a 50
percent risk weight to:
(A) The outstanding balance (net of
government guarantees), including loans
held for sale, of current first-lien
residential real estate loans less than or
equal to 35 percent of assets.
(B) The exposure amount of:
(1) Securities issued by PSEs in the
U.S. that represent non-subordinated
revenue obligation securities.
(2) Other non-subordinated, non-U.S.
Government agency or non-GSE
guaranteed, residential mortgage-backed
security, excluding principal- and
interest-only STRIPS.
(iv) Category 4—75 percent risk
weight. A credit union must assign a 75
percent risk weight to the outstanding
balance (net of government guarantees),
including loans held for sale, of:
(A) Current first-lien residential real
estate loans greater than 35 percent of
assets.
(B) Current secured consumer loans.
(v) Category 5—100 percent risk
weight. A credit union must assign a 100
percent risk weight to:
(A) The outstanding balance (net of
government guarantees), including loans
held for sale, of:

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4433

(1) First-lien residential real estate
loans that are not current.
(2) Current junior-lien residential real
estate loans less than or equal to 20
percent of assets.
(3) Current unsecured consumer
loans.
(4) Current commercial loans, less
contractual compensating balances that
comprise less than 50 percent of assets.
(5) Loans to CUSOs.
(B) The exposure amount of:
(1) Industrial development bonds.
(2) All stripped mortgage-backed
securities (principal- and interest-only
STRIPS).
(3) Part 703 compliant investment
funds, with the option to use the lookthrough approaches in paragraph
(c)(3)(ii) of this section.
(4) Corporate debentures and
commercial paper.
(5) Nonperpetual capital at corporate
credit unions.
(6) General account permanent
insurance.
(7) GSE equity exposure or preferred
stock.
(C) All other assets listed on the
statement of financial condition not
specifically assigned a different risk
weight under this subpart.
(vi) Category 6—150 percent risk
weight. A credit union must assign a 150
percent risk weight to:
(A) The outstanding balance, net of
government guarantees and including
loans held for sale, of:
(1) Current junior-lien residential real
estate loans that comprise more than 20
percent of assets.
(2) Junior-lien residential real estate
loans that are not current.
(3) Consumer loans that are not
current.
(4) Current commercial loans (net of
contractual compensating balances),
which comprise more than 50 percent of
assets.
(5) Commercial loans (net of
contractual compensating balances),
which are not current.
(B) The exposure amount of:
(1) Perpetual contributed capital at
corporate credit unions.
(2) Equity investments in CUSOs.
(vii) Category 7—250 percent risk
weight. A credit union must assign a 250
percent risk weight to the carrying value
of mortgage servicing assets.
(viii) Category 8—300 percent risk
weight. A credit union must assign a 300
percent risk weight to the exposure
amount of:
(A) Publicly traded equity investment,
other than a CUSO investment.
(B) Investment funds that are not in
compliance with part 703 of this
Chapter, with the option to use the look-

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through approaches in paragraph
(c)(3)(ii) of this section.
(C) Separate account insurance, with
the option to use the look-through
approaches in paragraph (c)(3)(ii) of this
section.
(ix) Category 9—400 percent risk
weight. A credit union must assign a 400
percent risk weight to the exposure
amount of non-publicly traded equity
investments, other than equity
investments in CUSOs.
(x) Category 10—1,250 percent risk
weight. A credit union must assign a
1,250 percent risk weight to the
exposure amount of any subordinated
tranche of any investment, with the
option to use the gross-up approach in
paragraph (c)(3)(i) of this section.
(3) Alternative risk weights for certain
on-balance sheet assets. Instead of using
the risk weights assigned in paragraph
(c)(2) of this section, a credit union may
determine the risk weight of investment
funds and subordinated tranches of any
investment as follows:
(i) Gross-up approach. A credit union
may use the gross-up approach under
§ 324.43(e) of this title to determine the
risk weight of the carrying value of any
subordinated tranche of any investment.
(ii) Look-through approaches. A credit
union may use one of the look-through
approaches under § 324.53 of this title
to determine the risk weight of the
exposure amount of investment funds
that are not in compliance with part 703
of this chapter, the holdings of separate
account insurance; or part 703
compliant investment funds.
(4) Risk weights for off-balance sheet
activities. The risk weighted amounts
for all off-balance sheet items are
determined by multiplying the offbalance sheet exposure amount by the
appropriate CCF and the assigned risk
weight as follows:
(i) For the outstanding balance of
loans transferred to a Federal Home
Loan Bank under the mortgage
partnership finance program, a 20
percent CCF and a 50 percent risk
weight.
(ii) For other loans transferred with
limited recourse, a 100 percent CCF
applied to the off-balance sheet
exposure and:
(A) For commercial loans, a 100
percent risk weight.
(B) For first-lien residential real estate
loans, a 50 percent risk weight.
(C) For junior-lien residential real
estate loans, a 100 percent risk weight.
(D) For all secured consumer loans, a
75 percent risk weight.
(E) For all unsecured consumer loans,
a 100 percent risk weight.
(iii) For unfunded commitments:

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(A) For commercial loans, a 50
percent CCF with a 100 percent risk
weight.
(B) For first-lien residential real estate
loans, a 10 percent CCF with a 50
percent risk weight.
(C) For junior-lien residential real
estate loans, a 10 percent CCF with a
100 percent risk weight.
(D) For all secured consumer loans, a
10 percent CCF with a 75 percent risk
weight.
(E) For all unsecured consumer loans,
a 10 percent CCF with a 100 percent risk
weight.
(5) Derivative contracts. A complex
credit union must assign a risk-weighted
amount to any derivative contracts as
determined under § 702.105 of this part.

TABLE 1 TO § 702.105—CONVERSION
FACTOR MATRIX FOR INTEREST
RATE DERIVATIVE CONTRACTS 2—
Continued
Remaining maturity
Greater than one year and
less than or equal to five
years .................................
Greater than five years .........

Conversion
factor

0.005
0.015

(ii) Multiple OTC interest rate
derivative contracts subject to a
qualifying master netting agreement.
Except as modified by paragraph (a)(2)
of this section, the exposure amount for
multiple OTC interest rate derivative
contracts subject to a qualifying master
netting agreement is equal to the sum of
§ 702.105 Derivative contracts.
the net current credit exposure and the
(a) OTC interest rate derivative
adjusted sum of the PFE amounts for all
contracts.
OTC interest rate derivative contracts
(1) Exposure amount—(i) Single OTC
subject to the qualifying master netting
interest rate derivative contract. Except
agreement.
as modified by paragraph (a)(2) of this
(A) Net current credit exposure. The
section, the exposure amount for a
net current credit exposure is the greater
single OTC interest rate derivative
of the net sum of all positive and
contract that is not subject to a
negative fair value of the individual
qualifying master netting agreement is
OTC interest rate derivative contracts
equal to the sum of the credit union’s
subject to the qualifying master netting
current credit exposure and potential
future credit exposure (PFE) on the OTC agreement or zero.
(B) Adjusted sum of the PFE amounts
interest rate derivative contract.
(Anet). The adjusted sum of the PFE
(A) Current credit exposure. The
amounts is calculated as Anet = (0.4 ×
current credit exposure for a single OTC
Agross) + (0.6 × NGR × Agross), where:
interest rate derivative contract is the
(1) Agross equals the gross PFE (that
greater of the fair value of the OTC
is, the sum of the PFE amounts as
interest rate derivative contract or zero.
determined under paragraph (a)(1)(i)(B)
(B) PFE. (1) The PFE for a single OTC
of this section for each individual
interest rate derivative contract,
derivative contract subject to the
including an OTC interest rate
qualifying master netting agreement);
derivative contract with a negative fair
and
value, is calculated by multiplying the
(2) Net-to-gross Ratio (NGR) equals
notional principal amount of the OTC
the ratio of the net current credit
interest rate derivative contract by the
exposure to the gross current credit
appropriate conversion factor in Table 1 exposure. In calculating the NGR, the
of this section.
gross current credit exposure equals the
(2) A credit union must use an OTC
sum of the positive current credit
interest rate derivative contract’s
exposures (as determined under
effective notional principal amount (that paragraph (a)(1)(i) of this section) of all
is, the apparent or stated notional
individual derivative contracts subject
principal amount multiplied by any
to the qualifying master netting
multiplier in the OTC interest rate
agreement.
derivative contract) rather than the
(3) Recognition of credit risk
apparent or stated notional principal
mitigation of collateralized OTC
amount in calculating PFE.
derivative contracts. A credit union may
recognize credit risk mitigation benefits
TABLE 1 TO § 702.105—CONVERSION of financial collateral that secures an
FACTOR MATRIX FOR INTEREST OTC derivative contract or multiple
RATE DERIVATIVE CONTRACTS 2
OTC derivative contracts subject to a
qualifying master netting agreement
Conversion
(netting set) by following the
Remaining maturity
factor
requirements of paragraph (c) of this
One year or less ...................
0.00 section.
(b) Cleared transactions for interest
rate derivatives—(1) General
2 Non-interest rate derivative contracts are
requirements. A credit union must use
addressed in paragraph (d) of this section.

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Federal Register / Vol. 80, No. 17 / Tuesday, January 27, 2015 / Proposed Rules
the methodologies described in
paragraph (b) of this section to calculate
risk-weighted assets for a cleared
transaction.
(2) Risk-weighted assets for cleared
transactions. (i) To determine the risk
weighted asset amount for a cleared
transaction, a credit union must
multiply the trade exposure amount for
the cleared transaction, calculated in
accordance with paragraph (b)(3) of this
section, by the risk weight appropriate
for the cleared transaction, determined
in accordance with paragraph (b)(4) of
this section.
(ii) A credit union’s total riskweighted assets for cleared transactions
is the sum of the risk-weighted asset
amounts for all its cleared transactions.
(3) Trade exposure amount. For a
cleared transaction the trade exposure
amount equals:
(i) The exposure amount for the
derivative contract or netting set of
derivative contracts, calculated using
the methodology used to calculate
exposure amount for OTC interest rate
derivative contracts under paragraph (a)
of this section; plus
(ii) The fair value of the collateral
posted by the credit union and held by
the, clearing member, or custodian.
(4) Cleared transaction risk weights. A
credit union must apply a risk weight
of:
(i) Two percent if the collateral posted
by the credit union to the DCO or
clearing member is subject to an
arrangement that prevents any losses to
the credit union due to the joint default
or a concurrent insolvency, liquidation,
or receivership proceeding of the
clearing member and any other clearing
member clients of the clearing member;
and the clearing member credit union
has conducted sufficient legal review to
conclude with a well-founded basis
(and maintains sufficient written
documentation of that legal review) that
in the event of a legal challenge
(including one resulting from an event
of default or from liquidation,
insolvency, or receivership proceedings)
the relevant court and administrative
authorities would find the arrangements
to be legal, valid, binding and
enforceable under the law of the
relevant jurisdictions; or
(ii) Four percent if the requirements of
paragraph (b)(4)(i) are not met.
(5) Recognition of credit risk
mitigation of collateralized OTC
derivative contracts. A credit union may
recognize the credit risk mitigation
benefits of financial collateral that
secures a cleared derivative contract by
following the requirements of paragraph
(c) of this section.

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(c) Recognition of credit risk
mitigation of collateralized interest rate
derivative contracts. (1) A credit union
may recognize the credit risk mitigation
benefits of financial collateral that
secures an OTC interest rate derivative
contract or multiple interest rate
derivative contracts subject to a
qualifying master netting agreement
(netting set) or clearing arrangement by
using the simple approach in paragraph
(c)(3) of this section.
(2) As an alternative to the simple
approach, a credit union may recognize
the credit risk mitigation benefits of
financial collateral that secures such a
contract or netting set if the financial
collateral is marked-to-fair value on a
daily basis and subject to a daily margin
maintenance requirement by applying a
risk weight to the exposure as if it were
uncollateralized and adjusting the
exposure amount calculated under
paragraph (a) or (b) of this section using
the collateral approach in paragraph
(c)(3) of this section. The credit union
must substitute the exposure amount
calculated under paragraphs (b) or (c) of
this section in the equation in paragraph
(c)(3) of this section.
(3) Collateralized transactions. (i)
General. A credit union may use the
approach in paragraph (c)(3)(ii) of this
section to recognize the risk-mitigating
effects of financial collateral.
(ii) Simple collateralized derivatives
approach. To qualify for the simple
approach, the financial collateral must
meet the following requirements:
(A) The collateral must be subject to
a collateral agreement for at least the life
of the exposure;
(B) The collateral must be revalued at
least every six months; and
(C) The collateral and the exposure
must be denominated in the same
currency.
(iii) Risk weight substitution. (A) A
credit union may apply a risk weight to
the portion of an exposure that is
secured by the fair value of financial
collateral (that meets the requirements
for the simple collateralized approach of
this section) based on the risk weight
assigned to the collateral as established
under § 702.104(c).
(B) A credit union must apply a risk
weight to the unsecured portion of the
exposure based on the risk weight
applicable to the exposure under this
subpart.
(iv) Exceptions to the 20 percent risk
weight floor and other requirements.
Notwithstanding the simple
collateralized derivatives approach in
paragraph (c)(3)(ii) of this section:
(A) A credit union may assign a zero
percent risk weight to an exposure to a

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4435

derivatives contract that is marked-tomarket on a daily basis and subject to
a daily margin maintenance
requirement, to the extent the contract
is collateralized by cash on deposit.
(B) A credit union may assign a 10
percent risk weight to an exposure to an
derivatives contract that is marked-tomarket daily and subject to a daily
margin maintenance requirement, to the
extent that the contract is collateralized
by an exposure that qualifies for a zero
percent risk weight under
§ 702.104(c)(2)(i).
(v) A credit union may assign a zero
percent risk weight to the collateralized
portion of an exposure where:
(A) The financial collateral is cash on
deposit; or
(B) The financial collateral is an
exposure that qualifies for a zero
percent risk weight under
§ 702.104(c)(2)(i), and the credit union
has discounted the fair value of the
collateral by 20 percent.
(4) Collateral haircut approach. (i) A
credit union may recognize the credit
risk mitigation benefits of financial
collateral that secures a collateralized
derivative contract by using the
standard supervisory haircuts in
paragraph (c)(3) of this section.
(ii) The collateral haircut approach
applies to both OTC and cleared interest
rate derivatives contracts discussed in
this section.
(iii) A credit union must determine
the exposure amount for a collateralized
derivative contracts by setting the
exposure amount equal to the
max{0,[(exposure amount—value of
collateral)+(sum of current fair value of
collateral instruments * market price
volatility haircut of the collateral
instruments)]}, where:
(A) The value of the exposure equals
the exposure amount for OTC interest
rate derivative contracts (or netting set)
calculated under paragraphs (a)(1)(i)
and (ii) of this section.
(B) The value of the exposure equals
the exposure amount for cleared interest
rate derivative contracts (or netting set)
calculated under paragraph (b)(3) of this
section.
(C) The value of the collateral is the
sum of cash and all instruments under
the transaction (or netting set).
(D) The sum of current fair value of
collateral instruments as of the
measurement date.
(E) A credit union must use the
standard supervisory haircuts for market
price volatility in Table 2 to § 702.105
of this section.

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TABLE 2 TO § 702.105—STANDARD SUPERVISORY MARKET PRICE VOLATILITY HAIRCUTS
[based on a 10 business-day holding period]
Haircut (in percent) assigned
based on:
Residual maturity

Collateral risk weight
(in percent)
Zero

Less than or equal to 1 year ...................................................................................................................................
Greater than 1 year and less than or equal to 5 years ..........................................................................................
Greater than 5 years ...............................................................................................................................................
Cash collateral held .................................................................................................................................................
Other exposure types ..............................................................................................................................................

(d) All other derivative contracts and
transactions. Credit unions must follow
the requirements of the applicable
provisions of Part 324, Title 12, Chapter
3, when assigning risk weights to
exposure amounts for derivatives
contracts not addressed in paragraphs
(a) or (b) of this section.

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§ 702.106 Prompt corrective action for
adequately capitalized credit unions.

(a) Earnings retention. Beginning on
the effective date of classification as
adequately capitalized or lower, a
federally insured credit union must
increase the dollar amount of its net
worth quarterly either in the current
quarter, or on average over the current
and three preceding quarters, by an
amount equivalent to at least 1/10th
percent (0.1%) of its total assets (or
more by choice), until it is well
capitalized.
(b) Decrease in retention. Upon
written application received no later
than 14 days before the quarter end, the
NCUA Board, on a case-by-case basis,
may permit a credit union to increase
the dollar amount of its net worth by an
amount that is less than the amount
required under paragraph (a) of this
section, to the extent the NCUA Board
determines that such lesser amount:
(1) Is necessary to avoid a significant
redemption of shares; and
(2) Would further the purpose of this
part.
(c) Decrease by FISCU. The NCUA
Board shall consult and seek to work
cooperatively with the appropriate state
official before permitting a federally
insured state-chartered credit union to
decrease its earnings retention under
paragraph (b) of this section.
(d) Periodic review. A decision under
paragraph (b) of this section to permit a
credit union to decrease its earnings
retention is subject to quarterly review
and revocation except when the credit
union is operating under an approved
net worth restoration plan that provides

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for decreasing its earnings retention as
provided under paragraph (b) of this
section.
§ 702.107 Prompt corrective action for
undercapitalized credit unions.

(a) Mandatory supervisory actions by
credit union. A credit union which is
undercapitalized must—
(1) Earnings retention. Increase net
worth in accordance with § 702.106;
(2) Submit net worth restoration plan.
Submit a net worth restoration plan
pursuant to § 702.111, provided
however, that a credit union in this
category having a net worth ratio of less
than five percent (5%) which fails to
timely submit such a plan, or which
materially fails to implement an
approved plan, is classified significantly
undercapitalized pursuant to
§ 702.102(a)(4)(i);
(3) Restrict increase in assets.
Beginning the effective date of
classification as undercapitalized or
lower, not permit the credit union’s
assets to increase beyond its total assets
for the preceding quarter unless—
(i) Plan approved. The NCUA Board
has approved a net worth restoration
plan which provides for an increase in
total assets and—
(A) The assets of the credit union are
increasing consistent with the approved
plan; and
(B) The credit union is implementing
steps to increase the net worth ratio
consistent with the approved plan;
(ii) Plan not approved. The NCUA
Board has not approved a net worth
restoration plan and total assets of the
credit union are increasing because of
increases since quarter-end in balances
of:
(A) Total accounts receivable and
accrued income on loans and
investments; or
(B) Total cash and cash equivalents;
or
(C) Total loans outstanding, not to
exceed the sum of total assets plus the
quarter-end balance of unused

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20 or 50
0.5
2.0
4.0

1.0
3.0
6.0

Zero
25.0

commitments to lend and unused lines
of credit provided however that a credit
union which increases a balance as
permitted under paragraphs (a)(3)(ii)(A),
(B) or (C) of this section cannot offer
rates on shares in excess of prevailing
rates on shares in its relevant market
area, and cannot open new branches;
(4) Restrict member business loans.
Beginning the effective date of
classification as undercapitalized or
lower, not increase the total dollar
amount of member business loans
(defined as loans outstanding and
unused commitments to lend) as of the
preceding quarter-end unless it is
granted an exception under 12 U.S.C.
1757a(b).
(b) Second tier discretionary
supervisory actions by NCUA. Subject to
the applicable procedures for issuing,
reviewing and enforcing directives set
forth in subpart L of part 747 of this
chapter, the NCUA Board may, by
directive, take one or more of the
following actions with respect to an
undercapitalized credit union having a
net worth ratio of less than five percent
(5%), or a director, officer or employee
of such a credit union, if it determines
that those actions are necessary to carry
out the purpose of this part:
(1) Requiring prior approval for
acquisitions, branching, new lines of
business. Prohibit a credit union from,
directly or indirectly, acquiring any
interest in any business entity or
financial institution, establishing or
acquiring any additional branch office,
or engaging in any new line of business,
unless the NCUA Board has approved
the credit union’s net worth restoration
plan, the credit union is implementing
its plan, and the NCUA Board
determines that the proposed action is
consistent with and will further the
objectives of that plan;
(2) Restricting transactions with and
ownership of a CUSO. Restrict the credit
union’s transactions with a CUSO, or

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require the credit union to reduce or
divest its ownership interest in a CUSO;
(3) Restricting dividends paid. Restrict
the dividend rates the credit union pays
on shares to the prevailing rates paid on
comparable accounts and maturities in
the relevant market area, as determined
by the NCUA Board, except that
dividend rates already declared on
shares acquired before imposing a
restriction under this paragraph may not
be retroactively restricted;
(4) Prohibiting or reducing asset
growth. Prohibit any growth in the
credit union’s assets or in a category of
assets, or require the credit union to
reduce its assets or a category of assets;
(5) Alter, reduce or terminate activity.
Require the credit union or its CUSO to
alter, reduce, or terminate any activity
which poses excessive risk to the credit
union;
(6) Prohibiting nonmember deposits.
Prohibit the credit union from accepting
all or certain nonmember deposits;
(7) Dismissing director or senior
executive officer. Require the credit
union to dismiss from office any
director or senior executive officer,
provided however, that a dismissal
under this clause shall not be construed
to be a formal administrative action for
removal under 12 U.S.C. 1786(g);
(8) Employing qualified senior
executive officer. Require the credit
union to employ qualified senior
executive officers (who, if the NCUA
Board so specifies, shall be subject to its
approval); and
(9) Other action to carry out prompt
corrective action. Restrict or require
such other action by the credit union as
the NCUA Board determines will carry
out the purpose of this part better than
any of the actions prescribed in
paragraphs (b)(1) through (8) of this
section.
(c) First tier application of
discretionary supervisory actions. An
undercapitalized credit union having a
net worth ratio of five percent (5%) or
more, or which is classified
undercapitalized by reason of failing to
maintain a risk-based capital ratio equal
to or greater than 8 percent under
§ 702.104, is subject to the discretionary
supervisory actions in paragraph (b) of
this section if it fails to comply with any
mandatory supervisory action in
paragraph (a) of this section or fails to
timely implement an approved net
worth restoration plan under § 702.111,
including meeting its prescribed steps to
increase its net worth ratio.

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§ 702.108 Prompt corrective action for
significantly undercapitalized credit unions.

(a) Mandatory supervisory actions by
credit union. A credit union which is
significantly undercapitalized must—
(1) Earnings retention. Increase net
worth in accordance with § 702.106;
(2) Submit net worth restoration plan.
Submit a net worth restoration plan
pursuant to § 702.111;
(3) Restrict increase in assets. Not
permit the credit union’s total assets to
increase except as provided in
§ 702.107(a)(3); and
(4) Restrict member business loans.
Not increase the total dollar amount of
member business loans (defined as
loans outstanding and unused
commitments to lend) as provided in
§ 702.107(a)(4).
(b) Discretionary supervisory actions
by NCUA. Subject to the applicable
procedures for issuing, reviewing and
enforcing directives set forth in subpart
L of part 747 of this chapter, the NCUA
Board may, by directive, take one or
more of the following actions with
respect to any significantly
undercapitalized credit union, or a
director, officer or employee of such
credit union, if it determines that those
actions are necessary to carry out the
purpose of this part:
(1) Requiring prior approval for
acquisitions, branching, new lines of
business. Prohibit a credit union from,
directly or indirectly, acquiring any
interest in any business entity or
financial institution, establishing or
acquiring any additional branch office,
or engaging in any new line of business,
except as provided in § 702.107(b)(1);
(2) Restricting transactions with and
ownership of CUSO. Restrict the credit
union’s transactions with a CUSO, or
require the credit union to divest or
reduce its ownership interest in a
CUSO;
(3) Restricting dividends paid. Restrict
the dividend rates that the credit union
pays on shares as provided in
§ 702.107(b)(3);
(4) Prohibiting or reducing asset
growth. Prohibit any growth in the
credit union’s assets or in a category of
assets, or require the credit union to
reduce assets or a category of assets;
(5) Alter, reduce or terminate activity.
Require the credit union or its CUSO(s)
to alter, reduce, or terminate any
activity which poses excessive risk to
the credit union;
(6) Prohibiting nonmember deposits.
Prohibit the credit union from accepting
all or certain nonmember deposits;
(7) New election of directors. Order a
new election of the credit union’s board
of directors;

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4437

(8) Dismissing director or senior
executive officer. Require the credit
union to dismiss from office any
director or senior executive officer,
provided however, that a dismissal
under this clause shall not be construed
to be a formal administrative action for
removal under 12 U.S.C. 1786(g);
(9) Employing qualified senior
executive officer. Require the credit
union to employ qualified senior
executive officers (who, if the NCUA
Board so specifies, shall be subject to its
approval);
(10) Restricting senior executive
officers’ compensation. Except with the
prior written approval of the NCUA
Board, limit compensation to any senior
executive officer to that officer’s average
rate of compensation (excluding
bonuses and profit sharing) during the
four (4) calendar quarters preceding the
effective date of classification of the
credit union as significantly
undercapitalized, and prohibit payment
of a bonus or profit share to such officer;
(11) Other actions to carry out prompt
corrective action. Restrict or require
such other action by the credit union as
the NCUA Board determines will carry
out the purpose of this part better than
any of the actions prescribed in
paragraphs (b)(1) through (10) of this
section; and
(12) Requiring merger. Require the
credit union to merge with another
financial institution if one or more
grounds exist for placing the credit
union into conservatorship pursuant to
12 U.S.C. 1786(h)(1)(F), or into
liquidation pursuant to 12 U.S.C.
1787(a)(3)(A)(i).
(c) Discretionary conservatorship or
liquidation if no prospect of becoming
adequately capitalized.
Notwithstanding any other actions
required or permitted to be taken under
this section, when a credit union
becomes significantly undercapitalized
(including by reclassification under
§ 702.102(b)), the NCUA Board may
place the credit union into
conservatorship pursuant to 12 U.S.C.
1786(h)(1)(F), or into liquidation
pursuant to 12 U.S.C. 1787(a)(3)(A)(i),
provided that the credit union has no
reasonable prospect of becoming
adequately capitalized.
§ 702.109 Prompt corrective action for
critically undercapitalized credit unions.

(a) Mandatory supervisory actions by
credit union. A credit union which is
critically undercapitalized must—
(1) Earnings retention. Increase net
worth in accordance with § 702.106;
(2) Submit net worth restoration plan.
Submit a net worth restoration plan
pursuant to § 702.111;

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(3) Restrict increase in assets. Not
permit the credit union’s total assets to
increase except as provided in
§ 702.107(a)(3); and
(4) Restrict member business loans.
Not increase the total dollar amount of
member business loans (defined as
loans outstanding and unused
commitments to lend) as provided in
§ 702.107(a)(4).
(b) Discretionary supervisory actions
by NCUA. Subject to the applicable
procedures for issuing, reviewing and
enforcing directives set forth in subpart
L of part 747 of this chapter, the NCUA
Board may, by directive, take one or
more of the following actions with
respect to any critically
undercapitalized credit union, or a
director, officer or employee of such
credit union, if it determines that those
actions are necessary to carry out the
purpose of this part:
(1) Requiring prior approval for
acquisitions, branching, new lines of
business. Prohibit a credit union from,
directly or indirectly, acquiring any
interest in any business entity or
financial institution, establishing or
acquiring any additional branch office,
or engaging in any new line of business,
except as provided by § 702.107(b)(1);
(2) Restricting transactions with and
ownership of CUSO. Restrict the credit
union’s transactions with a CUSO, or
require the credit union to divest or
reduce its ownership interest in a
CUSO;
(3) Restricting dividends paid. Restrict
the dividend rates that the credit union
pays on shares as provided in
§ 702.107(b)(3);
(4) Prohibiting or reducing asset
growth. Prohibit any growth in the
credit union’s assets or in a category of
assets, or require the credit union to
reduce assets or a category of assets;
(5) Alter, reduce or terminate activity.
Require the credit union or its CUSO(s)
to alter, reduce, or terminate any
activity which poses excessive risk to
the credit union;
(6) Prohibiting nonmember deposits.
Prohibit the credit union from accepting
all or certain nonmember deposits;
(7) New election of directors. Order a
new election of the credit union’s board
of directors;
(8) Dismissing director or senior
executive officer. Require the credit
union to dismiss from office any
director or senior executive officer,
provided however, that a dismissal
under this clause shall not be construed
to be a formal administrative action for
removal under 12 U.S.C. 1786(g);
(9) Employing qualified senior
executive officer. Require the credit
union to employ qualified senior

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executive officers (who, if the NCUA
Board so specifies, shall be subject to its
approval);
(10) Restricting senior executive
officers’ compensation. Reduce or, with
the prior written approval of the NCUA
Board, limit compensation to any senior
executive officer to that officer’s average
rate of compensation (excluding
bonuses and profit sharing) during the
four (4) calendar quarters preceding the
effective date of classification of the
credit union as critically
undercapitalized, and prohibit payment
of a bonus or profit share to such officer;
(11) Restrictions on payments on
uninsured secondary capital. Beginning
60 days after the effective date of
classification of a credit union as
critically undercapitalized, prohibit
payments of principal, dividends or
interest on the credit union’s uninsured
secondary capital accounts established
after August 7, 2000, except that unpaid
dividends or interest shall continue to
accrue under the terms of the account to
the extent permitted by law;
(12) Requiring prior approval. Require
a critically undercapitalized credit
union to obtain the NCUA Board’s prior
written approval before doing any of the
following:
(i) Entering into any material
transaction not within the scope of an
approved net worth restoration plan (or
approved revised business plan under
subpart C of this part);
(ii) Extending credit for transactions
deemed highly leveraged by the NCUA
Board or, if state-chartered, by the
appropriate state official;
(iii) Amending the credit union’s
charter or bylaws, except to the extent
necessary to comply with any law,
regulation, or order;
(iv) Making any material change in
accounting methods; and
(v) Paying dividends or interest on
new share accounts at a rate exceeding
the prevailing rates of interest on
insured deposits in its relevant market
area;
(13) Other action to carry out prompt
corrective action. Restrict or require
such other action by the credit union as
the NCUA Board determines will carry
out the purpose of this part better than
any of the actions prescribed in
paragraphs (b)(1) through (12) of this
section; and
(14) Requiring merger. Require the
credit union to merge with another
financial institution if one or more
grounds exist for placing the credit
union into conservatorship pursuant to
12 U.S.C. 1786(h)(1)(F), or into
liquidation pursuant to 12 U.S.C.
1787(a)(3)(A)(i).

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(c) Mandatory conservatorship,
liquidation or action in lieu thereof—(1)
Action within 90 days. Notwithstanding
any other actions required or permitted
to be taken under this section (and
regardless of a credit union’s prospect of
becoming adequately capitalized), the
NCUA Board must, within 90 calendar
days after the effective date of
classification of a credit union as
critically undercapitalized—
(i) Conservatorship. Place the credit
union into conservatorship pursuant to
12 U.S.C. 1786(h)(1)(G); or
(ii) Liquidation. Liquidate the credit
union pursuant to 12 U.S.C.
1787(a)(3)(A)(ii); or
(iii) Other corrective action. Take
other corrective action, in lieu of
conservatorship or liquidation, to better
achieve the purpose of this part,
provided that the NCUA Board
documents why such action in lieu of
conservatorship or liquidation would do
so, provided however, that other
corrective action may consist, in whole
or in part, of complying with the
quarterly timetable of steps and meeting
the quarterly net worth targets
prescribed in an approved net worth
restoration plan.
(2) Renewal of other corrective action.
A determination by the NCUA Board to
take other corrective action in lieu of
conservatorship or liquidation under
paragraph (c)(1)(iii) of this section shall
expire after an effective period ending
no later than 180 calendar days after the
determination is made, and the credit
union shall be immediately placed into
conservatorship or liquidation under
paragraphs (c)(1)(i) and (ii) of this
section, unless the NCUA Board makes
a new determination under paragraph
(c)(1)(iii) of this section before the end
of the effective period of the prior
determination;
(3) Mandatory liquidation after 18
months—(i) Generally. Notwithstanding
paragraphs (c)(1) and (2) of this section,
the NCUA Board must place a credit
union into liquidation if it remains
critically undercapitalized for a full
calendar quarter, on a monthly average
basis, following a period of 18 months
from the effective date the credit union
was first classified critically
undercapitalized.
(ii) Exception. Notwithstanding
paragraph (c)(3)(i) of this section, the
NCUA Board may continue to take other
corrective action in lieu of liquidation if
it certifies that the credit union—
(A) Has been in substantial
compliance with an approved net worth
restoration plan requiring consistent
improvement in net worth since the
date the net worth restoration plan was
approved;

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(B) Has positive net income or has an
upward trend in earnings that the
NCUA Board projects as sustainable;
and
(C) Is viable and not expected to fail.
(iii) Review of exception. The NCUA
Board shall, at least quarterly, review
the certification of an exception to
liquidation under paragraph (c)(3)(ii) of
this section and shall either—
(A) Recertify the credit union if it
continues to satisfy the criteria of
paragraph (c)(3)(ii) of this section; or
(B) Promptly place the credit union
into liquidation, pursuant to 12 U.S.C.
1787(a)(3)(A)(ii), if it fails to satisfy the
criteria of paragraph (c)(3)(ii) of this
section.
(4) Nondelegation. The NCUA Board
may not delegate its authority under
paragraph (c) of this section, unless the
credit union has less than $5,000,000 in
total assets. A credit union shall have a
right of direct appeal to the NCUA
Board of any decision made by
delegated authority under this section
within ten (10) calendar days of the date
of that decision.
(d) Mandatory liquidation of insolvent
federal credit union. In lieu of
paragraph (c) of this section, a critically
undercapitalized federal credit union
that has a net worth ratio of less than
zero percent (0%) may be placed into
liquidation on grounds of insolvency
pursuant to 12 U.S.C. 1787(a)(1)(A).

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§ 702.110 Consultation with state officials
on proposed prompt corrective action.

(a) Consultation on proposed
conservatorship or liquidation. Before
placing a federally insured statechartered credit union into
conservatorship (pursuant to 12 U.S.C.
1786(h)(1)(F) or (G)) or liquidation
(pursuant to 12 U.S.C. 1787(a)(3)) as
permitted or required under subparts A
or B of this part to facilitate prompt
corrective action—
(1) The NCUA Board shall seek the
views of the appropriate state official (as
defined in § 702.2), and give him or her
an opportunity to take the proposed
action;
(2) The NCUA Board shall, upon
timely request of the appropriate state
official, promptly provide him or her
with a written statement of the reasons
for the proposed conservatorship or
liquidation, and reasonable time to
respond to that statement; and
(3) If the appropriate state official
makes a timely written response that
disagrees with the proposed
conservatorship or liquidation and gives
reasons for that disagreement, the
NCUA Board shall not place the credit
union into conservatorship or
liquidation unless it first considers the

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views of the appropriate state official
and determines that—
(i) The NCUSIF faces a significant risk
of loss if the credit union is not placed
into conservatorship or liquidation; and
(ii) Conservatorship or liquidation is
necessary either to reduce the risk of
loss, or to reduce the expected loss, to
the NCUSIF with respect to the credit
union.
(b) Nondelegation. The NCUA Board
may not delegate any determination
under paragraph (a)(3) of this section.
(c) Consultation on proposed
discretionary action. The NCUA Board
shall consult and seek to work
cooperatively with the appropriate state
official before taking any discretionary
supervisory action under §§ 702.107(b),
702.108(b), 702.109(b), 702.204(b) and
702.205(b) with respect to a federally
insured state-chartered credit union;
shall provide prompt notice of its
decision to the appropriate state official;
and shall allow the appropriate state
official to take the proposed action
independently or jointly with NCUA.
§ 702.111
(NWRP).

Net worth restoration plans

(a) Schedule for filing—(1) Generally.
A credit union shall file a written net
worth restoration plan (NWRP) with the
appropriate Regional Director and, if
state-chartered, the appropriate state
official, within 45 calendar days of the
effective date of classification as either
undercapitalized, significantly
undercapitalized or critically
undercapitalized, unless the NCUA
Board notifies the credit union in
writing that its NWRP is to be filed
within a different period.
(2) Exception. An otherwise
adequately capitalized credit union that
is reclassified undercapitalized on
safety and soundness grounds under
§ 702.102(b) is not required to submit a
NWRP solely due to the reclassification,
unless the NCUA Board notifies the
credit union that it must submit an
NWRP.
(3) Filing of additional plan.
Notwithstanding paragraph (a)(1) of this
section, a credit union that has already
submitted and is operating under a
NWRP approved under this section is
not required to submit an additional
NWRP due to a change in net worth
category (including by reclassification
under § 702.102(b)), unless the NCUA
Board notifies the credit union that it
must submit a new NWRP. A credit
union that is notified to submit a new
or revised NWRP shall file the NWRP in
writing with the appropriate Regional
Director within 30 calendar days of
receiving such notice, unless the NCUA
Board notifies the credit union in

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4439

writing that the NWRP is to be filed
within a different period.
(4) Failure to timely file plan. When
a credit union fails to timely file an
NWRP pursuant to this paragraph, the
NCUA Board shall promptly notify the
credit union that it has failed to file an
NWRP and that it has 15 calendar days
from receipt of that notice within which
to file an NWRP.
(b) Assistance to small credit unions.
Upon timely request by a credit union
having total assets of less than $10
million (regardless how long it has been
in operation), the NCUA Board shall
provide assistance in preparing an
NWRP required to be filed under
paragraph (a) of this section.
(c) Contents of NWRP. An NWRP
must—
(1) Specify—
(i) A quarterly timetable of steps the
credit union will take to increase its net
worth ratio, and risk-based capital ratio
if applicable, so that it becomes
adequately capitalized by the end of the
term of the NWRP, and to remain so for
four (4) consecutive calendar quarters;
(ii) The projected amount of net worth
increases in each quarter of the term of
the NWRP as required under
§ 702.106(a), or as permitted under
§ 702.106(b);
(iii) How the credit union will comply
with the mandatory and any
discretionary supervisory actions
imposed on it by the NCUA Board
under this subpart;
(iv) The types and levels of activities
in which the credit union will engage;
and
(v) If reclassified to a lower category
under § 702.102(b), the steps the credit
union will take to correct the unsafe or
unsound practice(s) or condition(s);
(2) Include pro forma financial
statements, including any off-balance
sheet items, covering a minimum of the
next two years; and
(3) Contain such other information as
the NCUA Board has required.
(d) Criteria for approval of NWRP.
The NCUA Board shall not accept a
NWRP plan unless it—
(1) Complies with paragraph (c) of
this section;
(2) Is based on realistic assumptions,
and is likely to succeed in restoring the
credit union’s net worth; and
(3) Would not unreasonably increase
the credit union’s exposure to risk
(including credit risk, interest-rate risk,
and other types of risk).
(e) Consideration of regulatory
capital. To minimize possible long-term
losses to the NCUSIF while the credit
union takes steps to become adequately
capitalized, the NCUA Board shall, in
evaluating an NWRP under this section,

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consider the type and amount of any
form of regulatory capital which may
become established by NCUA
regulation, or authorized by state law
and recognized by NCUA, which the
credit union holds, but which is not
included in its net worth.
(f) Review of NWRP—(1) Notice of
decision. Within 45 calendar days after
receiving an NWRP under this part, the
NCUA Board shall notify the credit
union in writing whether the NWRP has
been approved, and shall provide
reasons for its decision in the event of
disapproval.
(2) Delayed decision. If no decision is
made within the time prescribed in
paragraph (f)(1) of this section, the
NWRP is deemed approved.
(3) Consultation with state officials. In
the case of an NWRP submitted by a
federally insured state-chartered credit
union (whether an original, new,
additional, revised or amended NWRP),
the NCUA Board shall, when evaluating
the NWRP, seek and consider the views
of the appropriate state official, and
provide prompt notice of its decision to
the appropriate state official.
(g) NWRP not approved—(1)
Submission of revised NWRP. If an
NWRP is rejected by the NCUA Board,
the credit union shall submit a revised
NWRP within 30 calendar days of
receiving notice of disapproval, unless it
is notified in writing by the NCUA
Board that the revised NWRP is to be
filed within a different period.
(2) Notice of decision on revised
NWRP. Within 30 calendar days after
receiving a revised NWRP under
paragraph (g)(1) of this section, the
NCUA Board shall notify the credit
union in writing whether the revised
NWRP is approved. The Board may
extend the time within which notice of
its decision shall be provided.
(3) Disapproval of reclassified credit
union’s NWRP. A credit union which
has been classified significantly
undercapitalized shall remain so
classified pending NCUA Board
approval of a new or revised NWRP.
(4) Submission of multiple
unapproved NWRPs. The submission of
more than two NWRPs that are not
approved is considered an unsafe and
unsound condition and may subject the
credit union to administrative
enforcement actions under section 206
of the FCUA, 12 U.S.C. 1786 and 1790d.
(h) Amendment of NWRP. A credit
union that is operating under an
approved NWRP may, after prior written
notice to, and approval by the NCUA
Board, amend its NWRP to reflect a
change in circumstance. Pending
approval of an amended NWRP, the

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credit union shall implement the NWRP
as originally approved.
(i) Publication. An NWRP need not be
published to be enforceable because
publication would be contrary to the
public interest.
(j) Termination of NWRP. For
purposes of this part, an NWRP
terminates once the credit union is
classified as adequately capitalized and
remains so for four consecutive quarters.
For example, if a credit union with an
active NWRP attains the classification as
adequately classified on December 31,
2015 this would be quarter one and the
fourth consecutive quarter would end
September 30, 2016.
§ 702.112

Reserves.

Each credit union shall establish and
maintain such reserves as may be
required by the FCUA, by state law, by
regulation, or in special cases by the
NCUA Board or appropriate state
official.
§ 702.113 Full and fair disclosure of
financial condition.

(a) Full and fair disclosure defined.
‘‘Full and fair disclosure’’ is the level of
disclosure which a prudent person
would provide to a member of a credit
union, to NCUA, or, at the discretion of
the board of directors, to creditors to
fairly inform them of the financial
condition and the results of operations
of the credit union.
(b) Full and fair disclosure
implemented. The financial statements
of a credit union shall provide for full
and fair disclosure of all assets,
liabilities, and members’ equity,
including such valuation (allowance)
accounts as may be necessary to present
fairly the financial condition; and all
income and expenses necessary to
present fairly the statement of income
for the reporting period.
(c) Declaration of officials. The
Statement of Financial Condition, when
presented to members, to creditors or to
NCUA, shall contain a dual declaration
by the treasurer and the chief executive
officer, or in the latter’s absence, by any
other officer designated by the board of
directors of the reporting credit union to
make such declaration, that the report
and related financial statements are true
and correct to the best of their
knowledge and belief and present fairly
the financial condition and the
statement of income for the period
covered.
(d) Charges for loan and lease losses.
Full and fair disclosure demands that a
credit union properly address charges
for loan losses as follows:

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(1) Charges for loan and lease losses
shall be made timely and in accordance
with GAAP;
(2) The ALLL must be maintained in
accordance with GAAP; and
(3) At a minimum, adjustments to the
ALLL shall be made prior to the
distribution or posting of any dividend
to the accounts of members.
§ 702.114

Payment of dividends.

(a) Restriction on dividends.
Dividends shall be available only from
net worth, net of any special reserves
established under § 702.112, if any.
(b) Payment of dividends and interest
refunds. The board of directors must not
pay a dividend or interest refund that
will cause the credit union’s capital
classification to fall below adequately
capitalized under this subpart unless
the appropriate Regional Director and, if
state-chartered, the appropriate state
official, have given prior written
approval (in an NWRP or otherwise).
The request for written approval must
include the plan for eliminating any
negative retained earnings balance.
■ 11. Revise subpart B to read as
follows:
Subpart B—Alternative Prompt Corrective
Action for New Credit Unions
Sec.
702.201 Scope and definition.
702.202 Net worth categories for new credit
unions.
702.203 Prompt corrective action for
adequately capitalized new credit
unions.
702.204 Prompt corrective action for
moderately capitalized, marginally
capitalized, or minimally capitalized
new credit unions.
702.205 Prompt corrective action for
uncapitalized new credit unions.
702.206 Revised business plans (RBP) for
new credit unions.
702.207 Incentives for new credit unions.
702.208 Reserves.
702.209 Full and fair disclosure of financial
condition.
702.210 Payment of dividends.

Subpart B—Alternative Prompt
Corrective Action for New Credit
Unions
§ 702.201

Scope and definition.

(a) Scope. This subpart B applies in
lieu of subpart A of this part exclusively
to credit unions defined in paragraph (b)
of this section as ‘‘new’’ pursuant to
section 216(b)(2) of the FCUA, 12 U.S.C.
1790d(b)(2).
(b) New credit union defined. A
‘‘new’’ credit union for purposes of this
subpart is a credit union that both has
been in operation for less than ten (10)
years and has total assets of not more
than $10 million. Once a credit union

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reports total assets of more than $10
million on a Call Report, the credit
union is no longer new, even if its assets
subsequently decline below $10 million.
(c) Effect of spin-offs. A credit union
formed as the result of a ‘‘spin-off’’ of
a group from the field of membership of
an existing credit union is deemed to be
in operation since the effective date of
the spin-off. A credit union whose total
assets decline below $10 million
because a group within its field of
membership has been spun-off is
deemed ‘‘new’’ if it has been in
operation less than 10 years.
(d) Actions to evade prompt corrective
action. If the NCUA Board determines
that a credit union was formed, or was
reduced in asset size as a result of a
spin-off, or was merged, primarily to
qualify as ‘‘new’’ under this subpart, the
credit union shall be deemed subject to
prompt corrective action under subpart
A of this part.

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§ 702.202 Net worth categories for new
credit unions.

(a) Net worth measures. For purposes
of this part, a new credit union must
determine its capital classification
quarterly according to its net worth
ratio.
(b) Effective date of net worth
classification of new credit union. For
purposes of subpart B of this part, the
effective date of a new credit union’s
classification within a capital category
in paragraph (c) of this section shall be
determined as provided in § 702.101(c);
and written notice of a decline in net
worth classification in paragraph (c) of
this section shall be given as required by
§ 702.101(c).
(c) Net worth categories. A credit
union defined as ‘‘new’’ under this
section shall be classified—
(1) Well capitalized if it has a net
worth ratio of seven percent (7%) or
greater;
(2) Adequately capitalized if it has a
net worth ratio of six percent (6%) or
more but less than seven percent (7%);
(3) Moderately capitalized if it has a
net worth ratio of three and one-half
percent (3.5%) or more but less than six
percent (6%);
(4) Marginally capitalized if it has a
net worth ratio of two percent (2%) or
more but less than three and one-half
percent (3.5%);
(5) Minimally capitalized if it has a
net worth ratio of zero percent (0%) or
greater but less than two percent (2%);
and
(6) Uncapitalized if it has a net worth
ratio of less than zero percent (0%).

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(iii) Has failed to comply with
TABLE 1 TO § 702.202—CAPITAL
CATEGORIES FOR NEW CREDIT UNIONS paragraph (a)(3) of this section; and
A new credit union’s capital classification is
Well Capitalized ..............
Adequately Capitalized ...
Moderately Capitalized ...
Marginally Capitalized ....
Minimally Capitalized ......
Uncapitalized ..................

If it’s net worth
ratio is
7% or above.
6 to 7%.
3.5% to 5.99%.
2% to 3.49%.
0% to 1.99%.
Less than 0%.

(d) Reclassification based on
supervisory criteria other than net
worth. Subject to § 702.102(b), the
NCUA Board may reclassify a well
capitalized, adequately capitalized or
moderately capitalized new credit union
to the next lower capital category (each
of such actions is hereinafter referred to
generally as ‘‘reclassification’’) in either
of the circumstances prescribed in
§ 702.102(b).
(e) Consultation with state officials.
The NCUA Board shall consult and seek
to work cooperatively with the
appropriate state official before
reclassifying a federally insured statechartered credit union under paragraph
(d) of this section, and shall promptly
notify the appropriate state official of its
decision to reclassify.
§ 702.203 Prompt corrective action for
adequately capitalized new credit unions.

Beginning on the effective date of
classification, an adequately capitalized
new credit union must increase the
dollar amount of its net worth by the
amount reflected in its approved initial
or revised business plan in accordance
with § 702.204(a)(2), or in the absence of
such a plan, in accordance with
§ 702.106 until it is well capitalized.
§ 702.204 Prompt corrective action for
moderately capitalized, marginally
capitalized, or minimally capitalized new
credit unions.

(a) Mandatory supervisory actions by
new credit union. Beginning on the date
of classification as moderately
capitalized, marginally capitalized or
minimally capitalized (including by
reclassification under § 702.202(d)), a
new credit union must—
(1) Earnings retention. Increase the
dollar amount of its net worth by the
amount reflected in its approved initial
or revised business plan;
(2) Submit revised business plan.
Submit a revised business plan within
the time provided by § 702.206 if the
credit union either:
(i) Has not increased its net worth
ratio consistent with its then-present
approved business plan;
(ii) Has no then-present approved
business plan; or

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(3) Restrict member business loans.
Not increase the total dollar amount of
member business loans (defined as
loans outstanding and unused
commitments to lend) as of the
preceding quarter-end unless it is
granted an exception under 12 U.S.C.
1757a(b).
(b) Discretionary supervisory actions
by NCUA. Subject to the applicable
procedures set forth in subpart L of part
747 of this chapter for issuing,
reviewing and enforcing directives, the
NCUA Board may, by directive, take one
or more of the actions prescribed in
§ 702.109(b) if the credit union’s net
worth ratio has not increased consistent
with its then-present business plan, or
the credit union has failed to undertake
any mandatory supervisory action
prescribed in paragraph (a) of this
section.
(c) Discretionary conservatorship or
liquidation. Notwithstanding any other
actions required or permitted to be
taken under this section, the NCUA
Board may place a new credit union
which is moderately capitalized,
marginally capitalized or minimally
capitalized (including by
reclassification under § 702.202(d)) into
conservatorship pursuant to 12 U.S.C.
1786(h)(1)(F), or into liquidation
pursuant to 12 U.S.C. 1787(a)(3)(A)(i),
provided that the credit union has no
reasonable prospect of becoming
adequately capitalized.

§ 702.205 Prompt corrective action for
uncapitalized new credit unions.

(a) Mandatory supervisory actions by
new credit union. Beginning on the
effective date of classification as
uncapitalized, a new credit union
must—
(1) Earnings retention. Increase the
dollar amount of its net worth by the
amount reflected in the credit union’s
approved initial or revised business
plan;
(2) Submit revised business plan.
Submit a revised business plan within
the time provided by § 702.206,
providing for alternative means of
funding the credit union’s earnings
deficit, if the credit union either:
(i) Has not increased its net worth
ratio consistent with its then-present
approved business plan;
(ii) Has no then-present approved
business plan; or
(iii) Has failed to comply with
paragraph (a)(3) of this section; and
(3) Restrict member business loans.
Not increase the total dollar amount of
member business loans as provided in
§ 702.204(a)(3).

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(b) Discretionary supervisory actions
by NCUA. Subject to the procedures set
forth in subpart L of part 747 of this
chapter for issuing, reviewing and
enforcing directives, the NCUA Board
may, by directive, take one or more of
the actions prescribed in § 702.109(b) if
the credit union’s net worth ratio has
not increased consistent with its thenpresent business plan, or the credit
union has failed to undertake any
mandatory supervisory action
prescribed in paragraph (a) of this
section.
(c) Mandatory liquidation or
conservatorship. Notwithstanding any
other actions required or permitted to be
taken under this section, the NCUA
Board—
(1) Plan not submitted. May place into
liquidation pursuant to 12 U.S.C.
1787(a)(3)(A)(ii), or conservatorship
pursuant to 12 U.S.C. 1786(h)(1)(F), an
uncapitalized new credit union which
fails to submit a revised business plan
within the time provided under
paragraph (a)(2) of this section; or
(2) Plan rejected, approved,
implemented. Except as provided in
paragraph (c)(3) of this section, must
place into liquidation pursuant to 12
U.S.C. 1787(a)(3)(A)(ii), or
conservatorship pursuant to 12 U.S.C.
1786(h)(1)(F), an uncapitalized new
credit union that remains uncapitalized
one hundred twenty (120) calendar days
after the later of:
(i) The effective date of classification
as uncapitalized; or
(ii) The last day of the calendar month
following expiration of the time period
provided in the credit union’s initial
business plan (approved at the time its
charter was granted) to remain
uncapitalized, regardless whether a
revised business plan was rejected,
approved or implemented.
(3) Exception. The NCUA Board may
decline to place a new credit union into
liquidation or conservatorship as
provided in paragraph (c)(2) of this
section if the credit union documents to
the NCUA Board why it is viable and
has a reasonable prospect of becoming
adequately capitalized.
(d) Mandatory liquidation of
uncapitalized federal credit union. In
lieu of paragraph (c) of this section, an
uncapitalized federal credit union may
be placed into liquidation on grounds of
insolvency pursuant to 12 U.S.C.
1787(a)(1)(A).
§ 702.206 Revised business plans (RBP)
for new credit unions.

(a) Schedule for filing —(1) Generally.
Except as provided in paragraph (a)(2)
of this section, a new credit union
classified moderately capitalized or

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lower must file a written revised
business plan (RBP) with the
appropriate Regional Director and, if
state-chartered, with the appropriate
state official, within 30 calendar days of
either:
(i) The last of the calendar month
following the end of the calendar
quarter that the credit union’s net worth
ratio has not increased consistent with
the-present approved business plan;
(ii) The effective date of classification
as less than adequately capitalized if the
credit union has no then-present
approved business plan; or
(iii) The effective date of classification
as less than adequately capitalized if the
credit union has increased the total
amount of member business loans in
violation of § 702.204(a)(3).
(2) Exception. The NCUA Board may
notify the credit union in writing that its
RBP is to be filed within a different
period or that it is not necessary to file
an RBP.
(3) Failure to timely file plan. When
a new credit union fails to file an RBP
as provided under paragraphs (a)(1) or
(2) of this section, the NCUA Board
shall promptly notify the credit union
that it has failed to file an RBP and that
it has 15 calendar days from receipt of
that notice within which to do so.
(b) Contents of revised business plan.
A new credit union’s RBP must, at a
minimum—
(1) Address changes, since the new
credit union’s current business plan was
approved, in any of the business plan
elements required for charter approval
under chapter 1, section IV.D. of
appendix B to part 701 of this chapter,
or for state-chartered credit unions
under applicable state law;
(2) Establish a timetable of quarterly
targets for net worth during each year in
which the RBP is in effect so that the
credit union becomes adequately
capitalized by the time it no longer
qualifies as ‘‘new’’ per § 702.201;
(3) Specify the projected amount of
earnings of net worth increases as
provided under § 702.204(a)(1) or
§ 702.205(a)(1);
(4) Explain how the new credit union
will comply with the mandatory and
discretionary supervisory actions
imposed on it by the NCUA Board
under this subpart;
(5) Specify the types and levels of
activities in which the new credit union
will engage;
(6) In the case of a new credit union
reclassified to a lower category under
§ 702.202(d), specify the steps the credit
union will take to correct the unsafe or
unsound condition or practice; and
(7) Include such other information as
the NCUA Board may require.

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(c) Criteria for approval. The NCUA
Board shall not approve a new credit
union’s RBP unless it—
(1) Addresses the items enumerated in
paragraph (b) of this section;
(2) Is based on realistic assumptions,
and is likely to succeed in building the
credit union’s net worth; and
(3) Would not unreasonably increase
the credit union’s exposure to risk
(including credit risk, interest-rate risk,
and other types of risk).
(d) Consideration of regulatory
capital. To minimize possible long-term
losses to the NCUSIF while the credit
union takes steps to become adequately
capitalized, the NCUA Board shall, in
evaluating an RBP under this section,
consider the type and amount of any
form of regulatory capital which may
become established by NCUA
regulation, or authorized by state law
and recognized by NCUA, which the
credit union holds, but which is not
included in its net worth.
(e) Review of revised business plan
—(1) Notice of decision. Within 30
calendar days after receiving an RBP
under this section, the NCUA Board
shall notify the credit union in writing
whether its RBP is approved, and shall
provide reasons for its decision in the
event of disapproval. The NCUA Board
may extend the time within which
notice of its decision shall be provided.
(2) Delayed decision. If no decision is
made within the time prescribed in
paragraph (e)(1) of this section, the RBP
is deemed approved.
(3) Consultation with state officials.
When evaluating an RBP submitted by
a federally insured state-chartered new
credit union (whether an original, new
or additional RBP), the NCUA Board
shall seek and consider the views of the
appropriate state official, and provide
prompt notice of its decision to the
appropriate state official.
(f) Plan not approved —(1)
Submission of new revised plan. If an
RBP is rejected by the NCUA Board, the
new credit union shall submit a new
RBP within 30 calendar days of
receiving notice of disapproval of its
initial RBP, unless it is notified in
writing by the NCUA Board that the
new RBP is to be filed within a different
period.
(2) Notice of decision on revised plan.
Within 30 calendar days after receiving
an RBP under paragraph (f)(1) of this
section, the NCUA Board shall notify
the credit union in writing whether the
new RBP is approved. The Board may
extend the time within which notice of
its decision shall be provided.
(3) Submission of multiple
unapproved RBPs. The submission of
more than two RBPs that are not

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approved is considered an unsafe and
unsound condition and may subject the
credit union to administrative
enforcement action pursuant to section
206 of the FCUA, 12 U.S.C. 1786 and
1790d.
(g) Amendment of plan. A credit
union that has filed an approved RBP
may, after prior written notice to and
approval by the NCUA Board, amend it
to reflect a change in circumstance.
Pending approval of an amended RBP,
the new credit union shall implement
its existing RBP as originally approved.
(h) Publication. An RBP need not be
published to be enforceable because
publication would be contrary to the
public interest.
§ 702.207

Incentives for new credit unions.

(a) Assistance in revising business
plans. Upon timely request by a credit
union having total assets of less than
$10 million (regardless how long it has
been in operation), the NCUA Board
shall provide assistance in preparing a
revised business plan required to be
filed under § 702.206.
(b) Assistance. Management training
and other assistance to new credit
unions will be provided in accordance
with policies approved by the NCUA
Board.
(c) Small credit union program. A
new credit union is eligible to join and
receive comprehensive benefits and
assistance under NCUA’s Small Credit
Union Program.
§ 702.208

Reserves.

Each new credit union shall establish
and maintain such reserves as may be
required by the FCUA, by state law, by
regulation, or in special cases by the
NCUA Board or appropriate state
official.

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§ 702.209 Full and fair disclosure of
financial condition.

(a) Full and fair disclosure defined.
‘‘Full and fair disclosure’’ is the level of
disclosure which a prudent person
would provide to a member of a new
credit union, to NCUA, or, at the
discretion of the board of directors, to
creditors to fairly inform them of the
financial condition and the results of
operations of the credit union.
(b) Full and fair disclosure
implemented. The financial statements
of a new credit union shall provide for
full and fair disclosure of all assets,
liabilities, and members’ equity,
including such valuation (allowance)
accounts as may be necessary to present
fairly the financial condition; and all
income and expenses necessary to

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present fairly the statement of income
for the reporting period.
(c) Declaration of officials. The
Statement of Financial Condition, when
presented to members, to creditors or to
NCUA, shall contain a dual declaration
by the treasurer and the chief executive
officer, or in the latter’s absence, by any
other officer designated by the board of
directors of the reporting credit union to
make such declaration, that the report
and related financial statements are true
and correct to the best of their
knowledge and belief and present fairly
the financial condition and the
statement of income for the period
covered.
(d) Charges for loan and lease losses.
Full and fair disclosure demands that a
new credit union properly address
charges for loan losses as follows:
(1) Charges for loan and lease losses
shall be made timely in accordance with
generally accepted accounting
principles (GAAP);
(2) The ALLL must be maintained in
accordance with GAAP; and
(3) At a minimum, adjustments to the
ALLL shall be made prior to the
distribution or posting of any dividend
to the accounts of members.
§ 702.210

Payment of dividends.

(a) Restriction on dividends.
Dividends shall be available only from
net worth, net of any special reserves
established under § 702.208, if any.
(b) Payment of dividends and interest
refunds. The board of directors may not
pay a dividend or interest refund that
will cause the credit union’s capital
classification to fall below adequately
capitalized under subpart A of this Part
unless the appropriate regional director
and, if state-chartered, the appropriate
state official, have given prior written
approval (in an RBP or otherwise). The
request for written approval must
include the plan for eliminating any
negative retained earnings balance.
Subpart C—[Removed]
■

12. Remove subpart C.

Subpart E [Redesignated as Subpart C]
13. Redesignate subpart E as subpart
C and redesignate §§ 702.501 through
702.506 as §§ 702.301 through 702.306
respectively.

■

§ 702.304

Capital planning.

14. Amend the newly redesignated
§ 702.304(b)(4) by replacing the citation
‘‘§ 702.506(c)’’ with ‘‘§ 702.306(c)’’.

■

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§ 702.305

4443

NCUA action on capital plans.

15. Amend the newly redesignated
§ 702.305(b)(4) by replacing the citation
‘‘§ 702.504’’ with ‘‘§ 702.304’’.

■

§ 702.306
testing.

Annual supervisory stress

16. Amend the newly redesignated
§ 702.306(c) by replacing the citation
‘‘§ 702.504’’ with ‘‘§ 702.304’’.

■

PART 703—INVESTMENT AND
DEPOSIT ACTIVITIES
17. The authority citation for part 703
continues to read as follows:

■

Authority: 12 U.S.C. 1757(7), 1757(8),
1757(15).
§ 703.14

[Amended]

18. Amend § 703.14 as follows:
a. In paragraph (i) remove the words
‘‘net worth classification’’ and add in
their place the words ‘‘capital
classification’’, and remove the words
‘‘or, if subject to a risk-based net worth
(RBNW) requirement under part 702 of
this chapter, has remained ‘well
capitalized’ for the six (6) immediately
preceding quarters after applying the
applicable RBNW requirement,’’.
■ b. In paragraph (j)(4) remove the
words ‘‘net worth classification’’ and
add in their place the words ‘‘capital
classification’’, and remove the words
‘‘or, if subject to a risk-based net worth
(RBNW) requirement under part 702 of
this chapter, has remained ‘well
capitalized’ for the six (6) immediately
preceding quarters after applying the
applicable RBNW requirement,’’.
■
■

PART 713—FIDELITY BOND AND
INSURANCE COVERAGE FOR
FEDERAL CREDIT UNIONS
19. The authority citation for part 713
continues to read as follows:

■

Authority: 12 U.S.C. 1761a, 1761b, 1766(a),
1766(h), 1789(a)(11).

20. Amend § 713.6 as follows:
a. In paragraph (a)(1), revise the table;
and
■ b. In paragraph (c) remove the words
‘‘net worth’’ each place they appear and
add in their place the word ‘‘capital’’,
and remove the words ‘‘or, if subject to
a risk-based net worth (RBNW)
requirement under part 702 of this
chapter, has remained ‘well capitalized’
for the six (6) immediately preceding
quarters after applying the applicable
RBNW requirement,’’.
The revision reads as follows:
■
■

§ 713.6 What is the permissible
deductible?

(a)(1) * * *

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Assets

Maximum deductible

$0 to $100,000 ...................................................................
$100,001 to $250,000 ........................................................
$250,000 to $1,000,000 .....................................................
Over $1,000,000 ................................................................

No deductible allowed.
$1,000
$2,000
$2,000 plus 1/1000 of total assets up to a maximum of $200,000; for credit unions
that have received a composite CAMEL rating of ‘‘1’’ or ‘‘2’’ for the last two (2) full
examinations and maintained a capital classification of ‘‘well capitalized’’ under
part 702 of this chapter for the six (6) immediately preceding quarters the maximum deductible is $1,000,000.

*

*

*

*

*

PART 747—ADMINSTRATIVE
ACTIONS, ADJUDICATIVE HEARINGS,
RULES OF PRACTICE AND
PROCEDURE, AND INVESTIGATIONS

PART 723—MEMBER BUSINESS
LOANS
21. The authority citation for part 723
continues to read as follows:

■

Authority: 12 U.S.C. 1756, 1757, 1757A,
1766, 1785, 1789.

Authority: 12 U.S.C. 1766, 1782, 1784,
1785, 1786, 1787, 1790a, 1790d; 42 U.S.C.
4012a; Pub. L. 101–410; Pub. L. 104–134;
Pub. L. 109–351; 120 Stat. 1966.

§ 747.2003

§ 747.2001

■

[Amended]

22. In § 723.7 amend paragraph (c)(1)
by removing the words ‘‘as defined by
§ 702.102(a)(1)’’ and adding in their
place the words ‘‘under part 702’’.

23. The authority citation for part 747
continues to read as follows:

■

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[Amended]

24. In § 747.2001, amend paragraph
(a) by removing the citation
‘‘702.302(d)’’ and adding in its place the
citation ‘‘702.202(d)’’.

■

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[Amended]

25. In § 747.2002, amend paragraph
(a)(1) by removing the words
‘‘§§ 702.202(b), 702.203(b) and
702.204(b)’’ and adding in their place
the words ‘‘§§ 702.107 (b), 702.108(b) or
702.109(b)’’, and by removing the words
‘‘§§ 702.304(b), or 702.305(b)’’ and
adding in their place the words
‘‘§§ 702.204(b) or 702.205(b)’’.

■

■

§ 723.7

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§ 747.2002

[Amended]

26. In § 747.2003, amend paragraph
(a) by removing the citation
‘‘702.302(d)’’ and adding in its place the
citation ‘‘702.202(d)’’.

[FR Doc. 2015–00947 Filed 1–26–15; 8:45 am]
BILLING CODE 7535–01–P

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27JAP2