2015 Final Rule

Vol. 80

Thursday,

No. 209

October 29, 2015

Part II

National Credit Union Administration

mstockstill on DSK4VPTVN1PROD with RULES2

12 CFR Parts 700, 701, 702, 703, et al.
Risk-Based Capital; Final Rule

VerDate Sep<11>2014

22:13 Oct 28, 2015

Jkt 238001

PO 00000

Frm 00001

Fmt 4717

Sfmt 4717

E:\FR\FM\29OCR2.SGM

29OCR2

66626

Federal Register / Vol. 80, No. 209 / Thursday, October 29, 2015 / Rules and Regulations

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: Final rule.
AGENCY:

The NCUA Board (Board) is
amending NCUA’s current regulations
regarding prompt corrective action
(PCA) to require that credit unions
taking certain risks hold capital
commensurate with those risks. The
risk-based capital provisions of this
final rule apply only to federally
insured, natural-person credit unions
with assets over $100 million.
The overarching intent is to reduce
the likelihood of a relatively small
number of high-risk outliers exhausting
their capital and causing systemic
losses—which, by law, all federally
insured credit unions would have to pay
through the National Credit Union
Share Insurance Fund (NCUSIF).
This final rule restructures NCUA’s
PCA regulations and makes various
revisions, including amending the
agency’s current risk-based net worth
requirement by replacing it with a new
risk-based capital ratio for federally
insured, natural-person credit unions
(credit unions).
The risk-based capital requirement set
forth in this final rule is more consistent
with NCUA’s risk-based capital measure
for corporate credit unions and, as the
law requires, more comparable to the
regulatory risk-based capital measures
used by the Federal Deposit Insurance
Corporation (FDIC), Board of Governors
of the Federal Reserve System, and
Office of the Comptroller of Currency
(Other Banking Agencies). The effective
date is intended to coincide with the
full phase-in of FDIC’s risk-based capital
measures in 2019.
The final rule also eliminates several
provisions in NCUA’s current PCA
regulations, including provisions
relating to the regular reserve account,
risk-mitigation credits, and alternative
risk weights.
DATES: This final rule is effective on
January 1, 2019.
FOR FURTHER INFORMATION CONTACT:
Policy and Accounting: 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; John

mstockstill on DSK4VPTVN1PROD with RULES2

SUMMARY:

VerDate Sep<11>2014

22:13 Oct 28, 2015

Jkt 238001

Shook, Loss/Risk Analyst, Division of
Risk Management, Office of
Examination and Insurance, at (703)
518–3799; Steven Farrar, Supervisory
Financial Analyst, Division of Capital
and Credit Markets, Office of
Examination and Insurance, at (703)
518–6393; 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; Aaron Langley, Risk
Management Officer, Division of
Analytics and Surveillance; Office of
Examination and Insurance, at (703)
518–6360; or Legal: John H. Brolin or
Justin Anderson, Senior Staff Attorneys,
Office of General Counsel, at (703) 518–
6540; or by mail at National Credit
Union Administration, 1775 Duke
Street, Alexandria, VA 22314.
SUPPLEMENTARY INFORMATION:
I. Background
II. Summary of the Final Rule
III. Legal Authority
IV. Section-by-Section Analysis
V. Effective Date
VI. Impact of This Final Rule
VII. Regulatory Procedures

I. Background
NCUA’s primary mission is to ensure
the safety and soundness of federally
insured credit unions. NCUA performs
this function by examining and
supervising federally chartered credit
unions, participating in the examination
and supervision of federally insured,
state-chartered credit unions in
coordination with state regulators, and
insuring members’ accounts at all
federally insured credit unions.1 In its
role as the administrator of the NCUSIF,
NCUA insures and regulates
approximately 6,270 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 proposed
amendments were intended to
implement the statutory requirements of
the Federal Credit Union Act (FCUA)
and follow recommendations made by
the Government Accountability Office
(GAO) and NCUA’s Inspector General.
The proposal was also intended to
amend NCUA’s risk-based capital
1 Within

the nine states that allow privately
insured credit unions, approximately 129 statechartered credit unions are privately insured and
are not subject to NCUA regulation or oversight.
2 79 FR 11183 (Feb. 27, 2014).

PO 00000

Frm 00002

Fmt 4701

Sfmt 4700

regulations to be more consistent with
NCUA’s risk-based capital measure for
corporate credit unions and comparable
to the new regulatory risk-based capital
regulations finalized by the Other
Banking Agencies in 2013.3 In response
to the Original Proposal, the Board
received over 2,000 comments with
many suggestions on how to improve
the proposed regulation. The comments
received addressed a wide range of
issues. In general, however, the
commenters nearly all agreed that,
because the proposal assigned higher
risk weights to some credit union asset
classes, it would have placed credit
unions at a competitive disadvantage to
banks. The change most frequently
recommended by commenters to
address this concern was to adopt the
same risk weights as the Other Banking
Agencies. The Board generally agreed
and, after reviewing all of the comments
received, determined that it was
appropriate to issue a second proposed
rule.
So, at its January 2015 meeting, the
Board issued a second proposed rule
(the Second Proposal) 4 to amend
NCUA’s PCA regulations, part 702. The
Second Proposal, which was based
largely on the comments NCUA
received on the Original Proposal,
addressed the competitive disadvantage
concerns raised by commenters and
made the proposal more comparable to
the Other Banking Agencies’ risk-based
capital requirements. Particular changes
from the Original Proposal included: (1)
Amending the definition of ‘‘complex’’
credit union, resulting in an increase in
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
member business loans); (3) assigning
the same risk weights to one-to-four
family non-owner-occupied residential
real estate loans and other types of
residential real estate loans; (4)
eliminating provisions intended to
address interest rate risk (IRR); (5)
eliminating the proposed individual
minimum capital requirement; and (6)
extending the effective date to January
1, 2019. These changes would have,
among other things, substantially
reduced the number of credit unions
subject to the rule, and would have
provided credit unions significantly
3 The Office of the Comptroller of Currency, and
the Board of Governors of the Federal Reserve
System: 78 FR 62017 (Oct. 11, 2013); and the
Federal Deposit Insurance Corporation: 78 FR
55339 (Sept. 10, 2013).
4 80 FR 4339 (Jan. 27, 2015).

E:\FR\FM\29OCR2.SGM

29OCR2

Federal Register / Vol. 80, No. 209 / Thursday, October 29, 2015 / Rules and Regulations

mstockstill on DSK4VPTVN1PROD with RULES2

more time to prepare to implement the
rule’s requirements.
Summary of Public Comments on the
Second Proposal
In response to the Second Proposal,
the Board received over 2,100
comments. While the total number of
comment letters received was higher
than the number received in response to
the Original Proposal, the comment
letters responding to the Second
Proposal were significantly shorter and
raised fewer distinct concerns regarding
the rule’s provisions. In addition,
significantly fewer credit unions sent in
comment letters in response to the
Second Proposal. In response to the
Original Proposal, NCUA received
comment letters from more than 1,100
different credit unions, while only 514
different credit unions sent in comment
letters in response to the Second
Proposal. In addition, more than 900 of
the comment letters received in
response to the Second Proposal
provided no substantive input on the
rule. Nearly all of these non-substantive
letters simply stated that the commenter
believed Congress should ‘‘approve’’ the
rule, or that the commenter wanted to
‘‘vote no’’ on the rule.
A majority of significant comment
letters received stated that the
commenter opposed the proposal in its
entirety and suggested that the Second
Proposal be withdrawn. Most of these
commenters stated they opposed the
rule for one or more of the following
reasons: A substantial number of
commenters suggested that the strong
performance of credit unions and the
NCUSIF during and after the 2007–2009
financial crisis demonstrated there was
no need for the proposal, and that the
Board provided no evidence that the
proposal would have reduced material
losses to the NCUSIF if it had been in
place before the financial crisis. Other
commenters maintained that the
proposal was unnecessary given how
extremely well capitalized the industry
is today. Commenters contended further
that, given NCUA’s own estimates that
fewer than 30 credit unions would be
less than well capitalized under the
proposed risk-based capital ratio if it
went into effect immediately, NCUA’s
current risk-based capital regulations
and other supervisory tools seem to be
doing an adequate job. Several
commenters claimed that most credit
union failures, including the corporate
credit unions (Corporates), and
significant losses to the NCUSIF were
the result of high concentration levels in
risky loans and investments, or were
otherwise related to a lack of internal
controls that should have been

VerDate Sep<11>2014

22:13 Oct 28, 2015

Jkt 238001

identified through the examination
process. Commenters suggested that,
instead of updating NCUA’s risk-based
capital regulations, the Board should
focus on enhanced training to improve
examiner skills. A substantial number of
commenters also claimed that the
proposal would regulate credit unions
in the same general manner as banks.
They argued credit unions should be
regulated differently than banks because
they are structured and operate
differently. Other commenters argued
the proposed rule would place credit
unions at a competitive disadvantage to
banks, because in these commenters’
opinion, the proposed rule would
require credit unions to hold
incrementally more capital than banks
given similar levels of asset
concentration. At least one commenter
suggested that the proposal would drive
the largest credit unions to convert to
bank charters. Other commenters argued
that risk-based capital requirements, to
which banks have been subject for
approximately 25 years, have not
worked well. In addition, they argued
that bank regulators are now moving
away from risk-based capital structures
after they failed to help banks during
the 2007–2009 recession. In support of
this argument, many commenters cited
a statement in which one FDIC Board
Member, the FDIC’s Vice Chairman,
stated publicly that he believed the riskbased capital approach to regulation
was a bad idea. A substantial number of
commenters expressed concern that the
proposal would stifle growth,
innovation, diversification, and member
services within credit unions by
restricting credit unions’ use of capital,
and would impose excessive costs on
credit unions and their members. At
least one commenter suggested that the
proposal would likely cause more risk,
not less risk, to the system as a whole
because the lower risk weightings
assigned in some asset classes compared
to others would force credit unions to
take on excessive concentrations of
lower risk-weighted assets. This, the
commenter argued, would increase
concentration risk compared to a
diverse balance sheet.
Other commenters expressed concern
that the proposal would be detrimental
to the interests of many credit union
members because credit unions would
have to charge their members higher
interest rates and fees and pay lower
interest on deposits to raise the
additional capital required under the
proposal. A significant number of
commenters maintained that the
benefits of the proposal did not

PO 00000

Frm 00003

Fmt 4701

Sfmt 4700

66627

outweigh its costs to the credit union
industry.
A significant number of commenters
opposing the rule also argued that the
Board failed to adequately justify the
proposed changes to NCUA’s current
risk-based net worth requirement. At
least one commenter suggested that the
Board should not base its justification
for the risk-based capital regulation on
global financial trends. Other
commenters claimed that the historical
loss data and other information
provided by NCUA in the proposed rule
did not support establishing a higher
capital standard for credit unions than
banks. Some commenters disagreed
with the Board’s statutory justification
for NCUA to maintain comparability
with the capital rules of FDIC, and
argued that the Board overemphasized
the need for the regulation to be
comparable to the other banking agency
regulations. Commenters acknowledged
that comparability is commendable
where there are truly comparable
institutions. Commenters suggested,
however, that the fundamental structure
of credit unions as not-for profit
financial cooperatives is not comparable
with the for-profit banking system.
Commenters suggested further that
member-owned credit unions generally
have a different risk model than the
profit-oriented banks, so if anything
credit unions should have lower riskbased capital requirements than banks.
Those commenters argued that the
narrative accompanying the Second
Proposal did not indicate sufficient
research and analysis into the
differences between banks and credit
unions had been done or, if it had, that
it was not presented in a transparent
manner that adequately justified the
structure of the proposal.
A substantial number of commenters
pointed out that, of the 1,400 credit
unions with more than $100 million in
assets, only 27 would have a risk-based
capital ratio below the 10 percent level
proposed for a credit union to be well
capitalized. Commenters contended
that, based on these numbers, the
current rule and other supervisory tools
already at NCUA’s disposal were
already doing an adequate job. Other
commenters argued that only 112 credit
unions failed during the 2007–2009
recession, costing the insurance fund
less than $1 billion, which they
suggested was remarkable considering
the dollars and number of commercial
banks that failed. Of the natural-person
credit unions that did fail during the
crisis, the commenters acknowledged
that most were under the $100 million
asset size threshold proposed.
Commenters contended that, from 1998

E:\FR\FM\29OCR2.SGM

29OCR2

mstockstill on DSK4VPTVN1PROD with RULES2

66628

Federal Register / Vol. 80, No. 209 / Thursday, October 29, 2015 / Rules and Regulations

to 2012, the NCUSIF fund losses were
only $989 million; $513 million came
from 7 credit unions in the $200 million
to $500 million asset range, and $343
million came from credit unions under
$100 million that would not have been
covered under the Second Proposal. At
least one commenter claimed that its
analysis of the 26 credit unions with
more than $80 million in assets just
before the crisis (as of December 2007)
that subsequently failed revealed that
only seven would have had a lower
capital classification under Second
Proposal. The commenter suggested that
six of the 21 well-capitalized credit
unions under current rules would have
been downgraded—four to adequately
capitalized and two to
undercapitalized—and that one
adequately capitalized credit union
under the current rules would have
been classified as undercapitalized
under the proposal. In other words, the
commenter maintained, of the 26
failures, a total of three credit unions
would have been demoted to
undercapitalized if the Second Proposal
had been in effect before the crisis. And
the amount of capital they would have
been required to obtain to become
adequately capitalized was only $7
million, as compared to the insurance
loss of over $700 million. The
commenter claimed that the amount of
capital that would have been necessary
for all seven downgraded credit unions
to regain their previous capital
classifications (six to well-capitalized,
one to adequately-capitalized) would
have totaled $43 million.
While most commenters did oppose
finalizing the proposal, a substantial
number of the commenters who
opposed the rule acknowledged that the
Board, in response to comments
received on the Original Proposal, had
made significant improvements to
Second Proposal. Specific
improvements mentioned included: The
removal of the IRR provisions; the new
zero percent risk weight assigned to
cash held at the Federal Reserve; the
reduction of the concentration
thresholds from three to two tiers for
residential mortgages, junior liens, and
commercial loans; the removal of the
1.25 percent cap on allowance for loan
and lease losses (ALLL); the lower 10
percent risk-based capital ratio
threshold level required for credit
unions to be classified as well
capitalized; the removal of the
enumerated processes to require that
individual credit unions hold higher
levels of capital under certain
circumstances; the increase in the asset
size threshold for defining credit unions

VerDate Sep<11>2014

22:13 Oct 28, 2015

Jkt 238001

as ‘‘complex’’; the extended
implementation period; the lower riskweights assigned to many categories of
assets; and the designation of one-tofour family non-owner occupied
mortgage loans as residential loans.
A small number of commenters stated
that they supported the Second
Proposal. These commenters generally
agreed that the credit union system
should have risk-based capital
requirements that protect the Share
Insurance Fund and other well run
credit unions by requiring that credit
unions with more complex balance
sheets hold modestly more capital.
Several commenters supported the
proposal because they felt that the
Board had listened to commenters
following the Original Proposal and had
made substantial improvements to the
Second Proposal. Several commenters
supported the proposal for various other
reasons: One financial services
consulting firm suggested that, overall,
the proposal presented a fair alternative
to the risk-based capital requirements
applicable to banks. At least one state
supervisory authority suggested that, on
the whole, the proposal was sound and
substantially better than NCUA’s
current risk-based capital rule. One
credit union commenter stated that it
supported the proposal because insured
credit unions, which together hold
assets of $1.1 trillion, are backed by the
full faith and credit of the United States.
And if insured credit unions engaging in
high-risk lending fail in significant
enough numbers, then the taxpayer is
left holding the bill. One individual
stated that he supported the proposal
because, in his opinion, it would lower
the number of loans credit unions could
make by imposing higher risk weights
on loans made to higher-risk persons.
Another individual supported the
proposal because he believed it would
lower rates for consumers who utilize
credit unions. Yet another individual
suggested that he supported the
proposal because credit unions should
be given the same scrutiny as other
major lenders and not be given a free
pass because they have good intentions
as non-profits. The commenter
suggested further that credit unions
should be subject to tough and robust
regulations such as the proposed riskbased capital rule.
In addition to the comments on the
Second Proposal discussed above,
NCUA received the following general
comments: At least one commenter
agreed that NCUA’s current risk-based
net worth regulation is outdated and
does not accurately reflect the level of
risk in individual credit unions, but
criticized that the statutory net worth

PO 00000

Frm 00004

Fmt 4701

Sfmt 4700

ratio level is fixed at 7 percent. The
commenter suggested that if the 7
percent net worth ratio level is
inadequate, the Board should convince
Congress to arrive at an appropriate net
worth level rather than address risks
through revisions to NCUA’s risk-based
capital regulations. Another commenter
recommended that a risk-based capital
requirement be developed to replace the
statutory net worth ratio, instead of
imposing a risk-based capital
requirement in addition to the statutory
net worth ratio requirement. The
commenter argued that managing two
different capital limits would place an
unnecessary burden on credit unions
and serve as an additional competitive
disadvantage to the credit union charter.
A significant number of commenters
suggested that the proposed rule went
too far in treating credit unions like
banks, and that if credit unions are
regulated and supervised as banks they
will be forced to act more like banks,
which would be to the detriment of
their members. At least one state
supervisory authority agreed with using
a Basel III style capital model, but
remained concerned that notable
differences continued to exist between
NCUA’s proposed model and the one
employed by FDIC and other federal
bank regulators. In particular, the
commenter suggested that the
differences between the risk weightings
for a number of the proposed asset
categories represented a missed
opportunity to reduce public confusion,
and might actually increase confusion.
The commenter explained that public
users of government-provided Call
Report data could assume that NCUA’s
risk-based capital ratio is the same as
other institutions’ measurements of
capital using the same terminology, but,
under the Second Proposal, the ratios
could be materially different for banks
and credit unions. A bank trade
association recommended the Board
adopt the same Basel III model adopted
by the Other Banking Agencies because
without comparable capital
requirements, credit unions will be
undercapitalized relative to community
banks, and such undercapitalization,
along with credit unions’ limited access
to alternative forms of capital when
needed, could increase the bailout risk
faced by the American taxpayer. The
commenter suggested that because
credit unions are not required to pay
federal income taxes on earnings and
can retain a larger percentage of their
earnings than community banks, they
should have little or no difficulty in
maintaining very high levels of Tier 1
capital. The commenter also suggested

E:\FR\FM\29OCR2.SGM

29OCR2

Federal Register / Vol. 80, No. 209 / Thursday, October 29, 2015 / Rules and Regulations
that the Board impose a capital
surcharge of 5 percent on credit unions
when they exceed total consolidated
assets of $10 billion because large credit
unions, with their limited ability to
react to depleted capital levels in times
of economic uncertainty, should be
subjected to increased scrutiny and
additional capital reserves. Other
commenters suggested that, before
issuing a proposed rule, NCUA test
regulatory approaches of the type
included in the Second Proposal
through the examination process and
share the results with the industry.
Some commenters suggested that the
rule does not take into account that the
vast majority of credit unions already
have written policies to deal with
balance sheet risk. At least one
commenter suggested that the rule
would not protect credit unions or
NCUA in the event of another crisis that
requires natural-person credit unions to
pay out huge assessments. A few
commenters recommended that the
proposed risk-based capital ratio
measure should be used as a modeling
tool rather than a rigid rule, similar to
interest rate risk monitoring tools. The
commenters suggested that this would
allow credit union risk to be calculated
as a model by examiners using risk
weights appropriate for each credit
union’s environment, and discuss with
boards and management their views of
risk for various asset classes. A model,
the commenters suggested, would be far
more flexible than a rule, and would
allow for the pragmatic management of
risk rather than through rule-based
estimates of risk, which may or may not
be accurate. Finally, one credit union
supported making the risk-based capital
framework as complicated as it needs to
be to more accurately reflect the unique
needs and structure of the credit union
industry. The commenter suggested that
the Board, for example, took a step in
that direction in the Second Proposal
when it created a risk-weight category
for ‘‘commercial loans’’ as distinct from
traditional member business loans for
purposes of the risk-based capital ratio
measure.

mstockstill on DSK4VPTVN1PROD with RULES2

Discussion
Commenters calling for a withdrawal
of the proposed rule altogether are
ignoring NCUA’s general statutory
requirement to maintain a risk-based
system comparable to the Other Banking
Agencies’ requirements.5 In 2013, the
Other Banking Agencies issued final
5 See 12 U.S.C. 1790d(b)(1)(A)(ii), which requires
that the NCUA’s system of PCA be ‘‘comparable’’
to the PCA requirements in section 1831o of the
Federal Deposit Insurance Act.

VerDate Sep<11>2014

22:13 Oct 28, 2015

Jkt 238001

rules updating the risk-based capital
regulations for insured banks.6 The
changes to the Other Banking Agencies’
risk-based capital regulations, the
lessons learned from the 2007–2009
recession, and the fact that NCUA’s
current risk-based net worth
requirement is ineffective and has not
been materially updated since 2002,
prompted the Board to propose
revisions to NCUA’s current risk-based
net worth ratio requirement and other
aspects of NCUA’s current PCA
regulations. The proposed changes were
also prompted by specific
recommendations to NCUA made by
GAO in its January 2012 review of
NCUA’s system of PCA. In particular,
GAO recommended that NCUA design a
more forward-looking system to detect
problems earlier.7
The Second Proposal addressed the
important role and benefits of capital.
The proposal discussed the impact of a
financial crisis and the benefit a higher
level of capital provided to insulate
certain financial institutions from the
effects of unexpected adverse
developments in assets and liabilities.
Higher levels of capital can reduce the
probability of a systemic crisis, allow
credit unions to continue to serve as
credit providers during times of stress
without government intervention, and
produce benefits that outweigh the
associated costs. The proposal also
emphasized that credit unions’ senior
management and boards are accountable
for ensuring that appropriate capital
levels are in place based on the credit
union’s risk exposure.
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 2007–2009
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.8 While the onset of a
6 78 FR 55339 (Sept. 10, 2013) (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 FDIC’s IFR.).
7 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.
8 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

PO 00000

Frm 00005

Fmt 4701

Sfmt 4700

66629

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.9 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.
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.10 The cited figures are just 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.
9 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.
10 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 Peak-Trough 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

E:\FR\FM\29OCR2.SGM

Continued

29OCR2

66630

Federal Register / Vol. 80, No. 209 / Thursday, October 29, 2015 / Rules and Regulations

mstockstill on DSK4VPTVN1PROD with RULES2

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 2007–2009 financial crisis is
roughly $10 trillion (2014 dollars).11
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.12
Research using bank data across
several countries and time periods
indicates that higher levels of capital
insulate financial institutions from the
effects of unexpected adverse
developments in their asset portfolio or
their deposit liabilities.13 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.14 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.15
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
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.
11 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.
12 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.
13 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.
14 Id.
15 Id.

VerDate Sep<11>2014

22:13 Oct 28, 2015

Jkt 238001

roughly 0.6 percent to GDP each year
(permanently).16
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.17 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.18 The
research also shows that the long-run
reduction in output (real GDP)
consistent with a one percentage point
increase in the Tier 1 common equity 19
to risks assets ratio would be on the
order of 0.1 percent.20 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 2007–2009 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
16 Id.
17 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.
18 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).
19 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.
20 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.

PO 00000

Frm 00006

Fmt 4701

Sfmt 4700

intervention in the form of capital
infusions.21
Credit unions also experienced
elevated losses and the need for
government intervention. From 2008
through 2012, five corporate credit
unions failed. Had NCUA not
intervened in 2009 and 2010 by
providing over $20 billion in liquidity
assistance, over $100 billion in
guarantees, and borrowing over $5
billion from the U.S. Treasury, the
resulting losses to consumer credit
unions on their uninsured funds
invested at these institutions would
have exceeded $30 billion. NCUA
estimates as many as 2,500 consumer
credit unions would have failed at
additional cost to the Share Insurance
Fund.
In addition, during that same period,
27 consumer credit unions with assets
greater than $50 million failed at a cost
of $728 million to the NCUSIF.22 NCUA
performed back-testing of the 9 complex
credit unions (those with over $100
million in assets) that failed during this
period to determine whether this final
rule would have resulted in earlier
identification of emerging risks and
reduced losses to the NCUSIF. The
back-testing revealed that maintaining a
risk-based capital ratio in excess of 10
percent would have required 8 of the 9
complex credit unions that failed to
hold additional capital.
The failure of the 27 consumer credit
unions was 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.23 Although the
credit union officials were provided
with notice of the capital deficiencies,
they ignored the supervisory concerns
21 For a readable overview of the 2007–2009
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.
22 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.
23 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
Credit Union, (Sept. 23, 2010), OIG–10–03, Material
Loss Reviews of Cal State 9 Credit union (April 14,
2010).

E:\FR\FM\29OCR2.SGM

29OCR2

66631

Federal Register / Vol. 80, No. 209 / Thursday, October 29, 2015 / Rules and Regulations
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.
From 2008 to 2012, over a dozen very
large consumer credit unions, and
numerous smaller ones, also were in
danger of failing and required extensive
NCUA intervention, financial
assistance, or both, along with increased
reserve levels for the NCUSIF.24 NCUA
estimates these actions saved the
NCUSIF over $1 billion in losses.
The clear implication from the impact
of the 2007–2009 recession on the credit
unions noted above 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.

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.25 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 2007–2009 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
Net worth ratio in 2006Q4
<6%
<8 percent ............................................................................
8–10 percent ........................................................................
≥10 percent ..........................................................................

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 2007–2009

6–7%

44.0
13.0
1.9

7–8%

36.0
19.6
2.8

20.0
38.0
9.4

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

8–10%

≥10%

0.0
29.4
38.8

Number
of credit
unions

Total

0.0
0.0
47.1

100.0
100.0
100.0

50
316
830

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.

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

mstockstill on DSK4VPTVN1PROD with RULES2

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.

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.

24 As most of these credit unions are still active
institutions, or have merged into other active
institutions, NCUA cannot provide additional
details publicly.

25 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.

VerDate Sep<11>2014

22:13 Oct 28, 2015

Jkt 238001

PO 00000

Frm 00007

Fmt 4701

Sfmt 4700

E:\FR\FM\29OCR2.SGM

29OCR2

Federal Register / Vol. 80, No. 209 / Thursday, October 29, 2015 / Rules and Regulations

mstockstill on DSK4VPTVN1PROD with RULES2

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.26 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.
BILLING CODE 7535–01–P

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

VerDate Sep<11>2014

22:13 Oct 28, 2015

Jkt 238001

PO 00000

Frm 00008

Fmt 4701

Sfmt 4725

E:\FR\FM\29OCR2.SGM

29OCR2

ER29OC15.000

66632

mstockstill on DSK4VPTVN1PROD with RULES2

BILLING CODE 7535–01–C

The table above shows that credit
unions with high net worth ratios can
and have failed, demonstrating that a
leverage ratio alone has not always
proven to be an adequate predictor of a
credit union’s future viability. However,
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.27
27 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

VerDate Sep<11>2014

22:13 Oct 28, 2015

Jkt 238001

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.
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.

PO 00000

Frm 00009

Fmt 4701

Sfmt 4700

66633

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.
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.

E:\FR\FM\29OCR2.SGM

29OCR2

ER29OC15.001

Federal Register / Vol. 80, No. 209 / Thursday, October 29, 2015 / Rules and Regulations

mstockstill on DSK4VPTVN1PROD with RULES2

66634

Federal Register / Vol. 80, No. 209 / Thursday, October 29, 2015 / Rules and Regulations

This final rule replaces the current
method for calculating a credit union’s
risk-based net worth ratio with a new
method for calculating a credit union’s
risk-based capital ratio. Under the
current risk-based net worth ratio
measure, a lower ratio is reflective of
financial strength. So the current
measure is not intuitive, and, more
importantly, can’t be compared against
the risk-based capital measures of other
financial institutions. The new riskbased capital ratio, however, is more
commonly applied to depository
institutions worldwide. Generally, the
new risk-based capital ratio is the
percentage of equity and accounts
available to cover losses divided by riskweighted assets. Under this approach, a
higher risk-based capital ratio is an
indicator of financial strength.
The new risk-based capital ratio
adopted in this final rule is designed to
complement the statutory net worth
ratio, which is often referred to as the
leverage ratio. The net worth ratio is a
measure of statutorily defined capital
divided by total assets. The net worth
ratio does not assign relative risk
weights among asset classes, making it
more difficult to manipulate and
provides a simple picture of a financial
institution’s ability to absorb losses,
regardless of the source of the loss. The
new risk-based capital ratio, on the
other hand, is a measure of loss
absorption ability to assets weighted
based on the associated risk, and is
intended to be more forward looking
and reactive to changes in the risk
profile of a credit union. In general, a
risk-based capital requirement increases
capital requirements at those
institutions with asset portfolios that
are, on average, higher risk. Conversely,
risk-based capital standards generally
decrease capital requirements at
institutions with lower risk profiles. 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.
Many commenters suggested that the
Board withdraw the Second Proposal
and retain the existing risk-based capital
requirement and the related riskweights, which are based largely on
interest rate risk and liquidity risk.
Ironically, most of the commenters
objected to the Original Proposal
because it included IRR and liquidity
risk in the proposed risk weights. As
discussed in the Original Proposal,
since its implementation, the current
risk-based net worth requirement has
required less than a handful of credit

VerDate Sep<11>2014

22:13 Oct 28, 2015

Jkt 238001

unions to hold higher levels of capital
than required by the net worth ratio.
Under the current risk-based net worth
requirement, those credit unions that
invest in longer-term, low-credit risk
investments experience a higher riskbased net worth requirement and thus
have a lower buffer above the net worth
ratio than they will have under the final
rule.
The current risk-based net worth
requirement also fails to allow for
comparison of capital adequacy on a
risk-weighted level across financial
institutions. A creditor or uninsured
depositor is able to obtain and
understand the capital measures
available for all banks. Creditors
generally know that, for banks, a higher
capital ratio is an indication of better
financial strength and a reduction in
their risk of loss. Creditors and
uninsured shareholders in credit
unions, however, generally do not
understand the application of the riskbased net worth requirement where a
lower ratio is an indicator of financial
strength; nor are they generally aware
that the risk-based net worth
requirement is only available by
reviewing a specific page of the Call
Report. The current lack of a
comparable risk-based capital measure
for credit unions deprives creditors and
uninsured shareholders of a useful
measure in determining the financial
strength of credit unions.
The Board also disagrees with
commenters who called for a
withdrawal of the Second Proposal
because a limited number of credit
unions may experience a decline in
their capital classification, or because
commenters claimed that back-testing
the proposal would have resulted in
only minor savings to the NCUSIF had
the proposal’s capital requirement been
in place during the 2007–2009
recession. The Original Proposal would
have imposed higher risk-weights for
concentrations of MBLs, junior-lien real
estate loans, and equity investments,
which would have resulted in
approximately 199 credit unions
experiencing a decline in their capital
classification and could have reduced
losses to the NCUSIF to a greater degree
had those requirements been in place
prior to the 2007–2009 recession. Due to
legitimate concerns raised by
commenters regarding the impacts of
the Original Proposal, however, the
Board reduced the risk-weights for
concentrations of MBLs and real estate
loan concentrations in the Second
Proposal. Thus, the potential impacts of
the Second Proposal were lower, but
still require that credit unions taking
higher levels of risk hold higher levels

PO 00000

Frm 00010

Fmt 4701

Sfmt 4700

of capital. Based on the comments
received on the Original Proposal and
the Second Proposal, the risk weights in
the Second Proposal are calibrated to
appropriately balance the impact of the
proposed changes on credit unions
while also providing meaningful
improvement to the risk-based capital
standards to which credit unions will be
held in the future.
The Board disagrees with commenters
who suggested that the Board not
finalize the proposal and instead focus
on enhancing training to improve
examiner skills to reduce the number of
failures and losses to the NCUSIF.
NCUA already continually seeks to
enhance the training and skills of
examiner staff within budget
limitations. NCUA already performs
analyses of all material losses to the
NCUSIF, including material loss
reviews prepared by NCUA’s Inspector
General on losses that exceed $25
million. The loss reviews include
analyses of NCUA’s and the State
Supervisory Authorities’ supervision of
credit unions and include
recommendations to addresses any
weaknesses in related supervision
policies and approaches. Additionally,
not issuing a final rule would result in
retention of the current risk-based net
worth measure, which is not a
comparable measure across financial
institutions and contains risk-weights
that are less closely associated with
credit risk.
Moreover, the Board disagrees with
commenters who suggested that credit
unions should have less stringent
regulatory capital standards than banks.
The combined statutory requirement for
a minimum net worth ratio and the riskbased capital requirement, supported by
the supervision process, is the backbone
of protection for both the credit union
and bank insurance funds. In addition,
prudent capital standards serve to
protect taxpayers who ultimately must
fund any reliance by the insurance
funds on the full faith and credit of the
United States.
Commenters claimed that the Second
Proposal would place credit unions at a
competitive disadvantage to banks by
requiring credit unions to hold
incrementally more capital than banks
given similar asset-concentration levels.
The net worth ratio, which is defined by
statute, requires credit unions to hold
more capital than banks are required to
hold using the comparable Tier 1
leverage ratio for banks.28 Congress
28 The net worth ratio and a bank’s Tier 1 leverage
ratio are both based on the total assets of the
institution. Congress set the net worth ratio 200
basis points higher than the Tier 1 leverage ratio

E:\FR\FM\29OCR2.SGM

29OCR2

Federal Register / Vol. 80, No. 209 / Thursday, October 29, 2015 / Rules and Regulations
required NCUA to develop PCA
regulations that are comparable to those
of banks, including the risk-based net
worth requirement for complex credit
unions. The Board ensured compliance
with the law while issuing the Second
Proposal, which would not place credit
unions at a competitive disadvantage to
banks. The vast majority of risk weights
for credit unions would be comparable
to the risk weights for banks, and some
risk weights for credit unions would
actually be lower than the risk weights
for banks. Because the Second Proposal

generally used the same overall riskbased capital levels as banks, the
differences in the individual elements of
the calculation can be easily identified
and understood. For example, the
proposed risk weight for secured
consumer loans, which represent about
20 percent of total assets for complex
credit unions, is 25 basis points less
than the corresponding risk weight for
banks. The Second Proposal also would
not cap credit unions’ allowance for
loan and lease losses at 1.25 percent of
risk assets, while the Other Banking

66635

Agencies impose such a cap in the riskbased capital ratio calculation for banks.
In the few instances where the risk
weights are higher for credit unions,
they apply to a very low percentage of
total assets and are directly tied to
sources of higher losses to the NCUSIF,
primarily concentrations of real estate
and business assets.
The table below contains an estimate
of how risk-weights generally compare
between the risk-weights in this final
rule to the risk-weights applied to FDIC
insured institutions.
Sub-category
as % of total
assets

Category as %
of total assets

Lower Risk Weight Than FDIC
Secured Consumer Loans .......................................................................................................................................

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

21.09%

1.19%
0.11%
0.13%
0.02%
1.46%

........................
........................
........................
........................
2.91%

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

0.34%

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

75.66%

More Conservative Risk Weight Than FDIC
First-Lien Real Estate Loans >35 percent of assets ...............................................................................................
Junior-Lien Real Estate Loans >20 percent of assets ............................................................................................
Commercial Loans >50 percent of assets ...............................................................................................................
Non-Current Junior-Lien Real Estate Loans ...........................................................................................................
Unfunded Non-Commercial Loans ..........................................................................................................................
Not Directly Comparable to FDIC
CUSO Investments and Corporate Capital .............................................................................................................
Comparable Risk Weight to FDIC

mstockstill on DSK4VPTVN1PROD with RULES2

All Other Assets .......................................................................................................................................................

Commenters asserted that bank
regulators are moving away from riskbased capital structures and referenced
the FDIC Vice Chairman’s related
statements. The FDIC Vice Chairman,
however, has favored higher generally
accepted accounting principles (GAAP)
equity ratios at banks of at least 10
percent of assets as an alternative to
risk-based capital structures.29 The
NCUA Board lacks authority to impose
higher GAAP equity-to-asset ratios
because the FCUA specifically defines
the net worth ratio for credit unions and
sets forth the minimum ratio levels
required. Moreover, the current
statutory net worth ratio requirement,
combined with a reasonable risk-based
capital ratio requirement to address
institutions taking higher levels of risk,
provides a well targeted level of
protection to the NCUSIF.
The Board disagrees with commenters
who suggested that the proposal would
stifle growth, innovation,
diversification, and member services.
The commenters’ suggested revisions to
the proposal revealed there is clear

disagreement among credit unions and
other interested parties regarding how
the proposal would have impacted
factors such as growth, innovation,
diversification, and member services at
credit unions. This final rule better
reflects each individual credit union’s
risk profile, provides for more active
management of risk in relation to
capital, further ensures individual credit
unions can continue to serve as credit
providers even during times of stress,
and promotes the safety and soundness
of the credit union system.
Commenters asserted that credit
unions would need to charge higher
interest rates, higher fees, and pay lower
rates on deposits to raise capital because
of the new risk-based capital measure.
Credit unions, however, would have
more than three years before the new
risk-based capital requirement goes into
effect. A credit union that determines it
is in danger of having a risk-based
capital ratio level below the required
minimum level has the option of:
Reducing the amount of risk-weighted
assets it holds; raising additional

capital, primarily through earnings; or
both.
NCUA’s analysis of credit union Call
Report data indicates that the
overwhelming majority of complex
credit unions already have sufficient
capital to comply with the proposed
risk-based capital regulation. In
particular, NCUA estimates that over 98
percent of complex credit unions would
be in compliance with the regulatory
capital minimums under the final rule
if it were in effect today. The final rule
is designed to ensure that these credit
unions maintain their capacity to absorb
losses in the future. A few credit unions,
however, will likely want to take
advantage of the three-year
implementation period provided in this
final rule to accumulate retained
earnings, reduce their level of riskassets, or both. As noted above, the
overwhelming majority of credit unions
have sufficient capital to comply with
the revised capital rules, and the
resulting improvements to the stability
and resilience of the credit union

level for banks due to the nature of the 1 percent
NCUSIF deposit, the level of investment within the
corporate credit union system, and credit unions’
limited access to capital other than retained

earnings. U.S. Department of Treasury, Credit
Unions (1997).
29 Thomas M. Hoening, American Banker, The
Safe Way to Give Traditional Banks Regulatory

Relief, (June 22, 2015), available at https://
www.fdic.gov/news/letters/reg-relief.html.

VerDate Sep<11>2014

22:13 Oct 28, 2015

Jkt 238001

PO 00000

Frm 00011

Fmt 4701

Sfmt 4700

E:\FR\FM\29OCR2.SGM

29OCR2

66636

Federal Register / Vol. 80, No. 209 / Thursday, October 29, 2015 / Rules and Regulations

system outweigh any costs associated
with its implementation.
In this final rule, the Board complied
with the statutory requirement to take
into account the cooperative character
of credit unions in that they are not-forprofit, do not issue capital stock, must
rely on retained earnings to build net
worth, and have boards of directors that
consist primarily of volunteers. To do
this, the Board avoided undue
complexity within the rule by, among
other things, not implementing a
complex conservation buffer
requirement; establishing a simple and
straightforward proxy for the definition
of a complex credit union; reducing the
number of asset concentration
thresholds; and requiring only complex
credit unions to have a written strategy
for maintaining an appropriate level of
capital.
Accordingly, and for the reasons
discussed in more detail below, the
Board is now adopting this final rule to
revise NCUA’s current regulations
regarding PCA to require that complex
credit unions taking certain risks hold
capital commensurate with those risks.

mstockstill on DSK4VPTVN1PROD with RULES2

II. Summary of the Final Rule
This final rule replaces the method
currently used by complex credit unions
to apply risk weights to their assets with
a new risk-based capital ratio measure
that is generally comparable to that
applied to depository institutions
worldwide. As discussed in more detail
in the Legal Authority part of this
preamble, the FCUA gives NCUA broad
discretion in designing the risk-based
net worth requirement applicable to
complex credit unions. Accordingly,
this final rule revises part 702 of
NCUA’s current regulations to establish
a risk-based capital ratio measure that is
the percentage of a credit union’s capital
available to cover losses, divided by the
credit union’s defined risk-weighted
asset base.
This final rule adopts a broadened
definition of capital to be used as the
numerator in the new risk-based capital
ratio measure. The Board is adopting
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 specifically
available to cover losses and protect the
NCUSIF. This broader definition of
capital more accurately reflects the
amount of capital that is actually
available at a credit union to absorb
losses.
In terms of the denominator for the
risk-based capital ratio measure, section

VerDate Sep<11>2014

22:13 Oct 28, 2015

Jkt 238001

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.’’ 30 Section 216(d)(2) of the
FCUA differs from the corresponding
provision in section 38 of the FDI Act,31
which requires the Other Banking
Agencies to implement risk-based
capital requirements, because section
216(d)(2) specifically requires that
NCUA’s risk-based requirement address
‘‘any material risks.’’ Accordingly, the
Board is required to account for any
material risks in the risk-based
requirement unless the risk is deemed
immaterial because of the existence of
another 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, 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. Based
on long-term balance sheet trends at
credit unions, the comments received
on the Second Proposal, and NCUA’s
experiences dealing with problem
institutions, however, the Board
concluded that NCUA can adequately
address IRR through its other
regulations and supervisory processes.
Accordingly, the final rule generally
excludes IRR from NCUA’s risk-based
capital ratio calculation. But the Board
may consider adopting additional
regulatory or supervisory approaches for
addressing IRR at credit unions if the
need arises in the future.
With the removal of the IRR
component from the current rule, this
final rule narrows the list of risks
accounted for in the denominator of the
new risk-based capital ratio measure.
The methodology for assigning risk
weights in this final rule primarily
accounts for credit risk and
concentration risk.
This final rule incudes a tiered risk
weight framework 32 for high
30 12

U.S.C. 1790d(d)(2) (emphasis added).
U.S.C. 1831o.
32 The tiered framework would provide for an
incrementally higher capital requirement resulting
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
31 12

PO 00000

Frm 00012

Fmt 4701

Sfmt 4700

concentrations of residential real estate
loans and commercial loans 33 in
NCUA’s risk-based capital ratio
measure. As a credit union’s
concentration in these asset classes
increases, incrementally higher levels of
capital are required. This approach
addresses concentration risk as it relates
to minimum required capital levels
through a transparent, standardized,
regulatory requirement. The
concentration thresholds do not limit a
credit union’s lending activity; rather,
the thresholds merely require the credit
union to hold additional capital to
account for the elevated concentration
risk. The inclusion of concentration risk
in the final rule does not put credit
unions at a competitive disadvantage to
banks because most real estate and
member business loans (except for loans
held in high concentrations) would still
be assigned risk weights similar to those
applicable to banks.
Consistent with many commenters
and 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 relied primarily on the risk
weights assigned to various asset classes
under the Basel Accords and the Other
Banking Agencies’ risk-based capital
regulations for this final rule.34 So this
final rule provides for greater
comparability to the Other Banking
Agencies’ risk weights than NCUA’s
current risk-based net worth regulation.
The Board, however, has tailored the
risk weights in this final rule for certain
assets that are unique to credit unions
or where a demonstrable and
compelling case exists, based on
contemporary and sustained
performance differences, to differentiate
for certain asset classes (such as
consumer loans) between banks and
credit unions, or where a provision of
the FCUA requires doing so.
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
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.
33 The definition of commercial loans and the
differences between commercial loans and MBLs
are discussed in more detail in the section-bysection analysis.
34 The Board has simplified certain aspects of this
final rule to take into account the cooperative
character of credit unions while still imposing riskbased 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).

E:\FR\FM\29OCR2.SGM

29OCR2

Federal Register / Vol. 80, No. 209 / Thursday, October 29, 2015 / Rules and Regulations
The following is a table showing a
summary of the risk weights included in

this final rule. See the section-bysection analysis part of the preamble

66637

below for more details on the changes
to the asset classes and risk weights.

SUMMARY OF THE RISK WEIGHTS

Cash/Currency/Coin ............................................................
Investments:
Unconditional Claims—U.S. Government ...................
Balances Due from Federal Reserve Banks ...............
Federally Insured Deposits in Financial Institutions ....
Debt Instruments issued by NCUA and FDIC .............
Central Liquidity Facility Stock ....................................
Uninsured deposits at U.S. Federally Insured Institutions ..........................................................................
Agency Obligations ......................................................
FNMA and FHLMC pass through Mortgage Backed
Securities (MBS) ......................................................
General Obligation Bonds Issued by State or Political
Subdivisions .............................................................
Federal Home Loan Bank Stock and Balances ..........
Senior Agency Residential MBS or Asset-Backed Securities (ABS) Structured .........................................
Revenue Bonds Issued by State or Political Subdivisions .........................................................................
Senior Non-Agency Residential MBS Structured ........
Corporate Membership Capital ....................................
Industrial Development Bonds .....................................
Agency Stripped MBS (Interest Only) .........................
Part 703 Compliant Investment Funds a ......................
Value of General Account Insurance (bank owned life
insurance, and credit union owned life insurance) a
Corporate Perpetual Capital ........................................
Mortgage Servicing Assets ..........................................
Separate Account Life Insurance a ..............................
Publicly Traded Equity Investment (non-CUSO) .........
Mutual Funds Part 703 Non-Compliant a .....................
Non-Publicly Traded Equity Investments (non-CUSO)
Subordinated Tranche of Any Investment b .................
Consumer Loans:
Share-Secured (shares held at the credit union) ........
Share-Secured (shares held at another depository institution) ....................................................................
Current Secured ..........................................................
Current Unsecured ......................................................
Non-Current .................................................................
Real Estate Loans:
Share-Secured (shares held at the credit union) ........
Share-Secured (shares held at another depository institution) ....................................................................
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 (shares held at the credit union) ........
Share-Secured (shares held at another depository institution) ....................................................................
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 ...................

0%

20%

50%

75%

100%

150%

250%

300%

400%

1250%

X

..........

..........

..........

..........

..........

..........

..........

..........

...........

X
X
X
X
X

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

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

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

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

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

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

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

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

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

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

X
X

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

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

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

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

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

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

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

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

..........

X

..........

..........

..........

..........

..........

..........

..........

...........

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

X
X

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

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

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

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

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

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

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

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

..........

X

..........

..........

..........

..........

..........

..........

..........

...........

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

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

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

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

..........
..........
Xc
X
X
X

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

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

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

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

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

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

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

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

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

X
Xc
..........
..........
Xc
..........
Xc
..........

..........
Xc
..........
..........
..........
..........
..........
..........

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

..........
..........
..........
X
Xc
X
..........
..........

..........
..........
..........
..........
..........
..........
Xc
..........

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

X

..........

..........

..........

..........

..........

..........

..........

..........

...........

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

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

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

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

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

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

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

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

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

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

X

..........

..........

..........

..........

..........

..........

..........

..........

...........

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

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

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

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

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

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

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

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

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

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

X

..........

..........

..........

..........

..........

..........

..........

..........

...........

..........

X

..........

..........

..........

..........

..........

..........

..........

...........

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

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

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

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

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

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

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

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

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

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

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

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

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

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

X
Xc
X

..........
Xc
..........

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

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

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

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

a With

the option to use the look-through options.35
the option to use the gross-up approach.36
c If a credit union’s total equity exposures are ‘‘non-significant’’ 37 under § 702.104(c)(3)(i), then the risk weight is 100 percent. This lowers the
risk weight to 100 percent for CUSO equity exposures, corporate perpetual capital, and all other equity investments when they are part of a credit union’s non-significant equity exposures.

mstockstill on DSK4VPTVN1PROD with RULES2

b With

35 The ‘‘look-through’’ approaches are discussed
in more detail in the part of this preamble
discussing § 702.104(c)(3)(iii)(B).
36 The ‘‘gross-up’’ approach is discussed in more
detail in the part of this preamble discussing
§ 702.104(c)(3)(iii)(A).

VerDate Sep<11>2014

22:13 Oct 28, 2015

Jkt 238001

37 Under § 702.104(c)(3)(i) of this final rule, a
credit union has non-significant equity exposures if
the aggregate amount of its equity exposures does
not exceed 10 percent of the sum of the credit
union’s capital elements of the risk-based capital
ratio numerator (as defined under paragraph
§ 702.104(b)(1)). To determine its aggregate amount
of its equity exposures, the credit union must

PO 00000

Frm 00013

Fmt 4701

Sfmt 4700

include the total amounts (as recorded on the
statement of financial condition in accordance with
GAAP) of the following (1) equity investments in
CUSOs, (2) perpetual contributed capital at
corporate credit unions, (3) nonperpetual capital at
corporate credit unions, and (3) equity investments
subject to a risk weight in excess of 100 percent.

E:\FR\FM\29OCR2.SGM

29OCR2

66638

Federal Register / Vol. 80, No. 209 / Thursday, October 29, 2015 / Rules and Regulations

The following table provides an
estimate of the risk weighting for

aggregate assets held by complex credit
union assets as of December 31, 2014.

Risk weight

0% ................................................................................................................................................
20% ..............................................................................................................................................
50% ..............................................................................................................................................
75% ..............................................................................................................................................
100% ............................................................................................................................................
150% ............................................................................................................................................
250% or greater ...........................................................................................................................

The following table compares onbalance sheet risk weights in this final
rule to the applicable risk weights

Complex credit
union assets
(in millions) 38

Percent of
complex credit
union assets

Cumulative
percent of
complex credit
union assets

$18,713
289,932
224,618
270,440
217,159
8,017
1,195

1.82
28.15
21.81
26.24
21.08
0.78
0.12

1.82
29.97
51.78
78.02
99.01
99.88
100.00

assigned by other federal banking
agencies:

mstockstill on DSK4VPTVN1PROD with RULES2

NCUA
Risk-weight

FDIC
Risk-weight

Cash/Currency/Coin .................................................................................................................................................
Investments:
Unconditional Claims—U.S. Government ........................................................................................................
Balances Due from Federal Reserve Banks ....................................................................................................
Federally Insured Deposits in Financial Institutions .........................................................................................
Debt Instruments issued by NCUA and FDIC .................................................................................................
Central Liquidity Facility Stock .........................................................................................................................
Uninsured deposits at U.S. Federally Insured Institutions ...............................................................................
Agency Obligations ...........................................................................................................................................
FNMA and FHLMC pass through Mortgage Backed Securities (MBS) ...........................................................
General Obligation Bonds Issued by State or Political Subdivisions ..............................................................
Federal Home Loan Bank Stock and Balances ...............................................................................................
Senior Agency Residential MBS or Asset-Backed Securities (ABS) Structured .............................................
Revenue Bonds Issued by State or Political Subdivisions ..............................................................................
Senior Non-Agency Residential MBS Structured .............................................................................................

0%

0%

0%
0%
0%
0%
0%
20%
20%
20%
20%
20%
20%
50%
50%

Corporate Membership Capital ........................................................................................................................
Industrial Development Bonds .........................................................................................................................
Agency Stripped MBS (Interest Only) ..............................................................................................................
Part 703 Compliant Investment Funds .............................................................................................................
Value of General Account Insurance (bank owned life insurance, and credit union owned life insurance) a
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 Investments (non-CUSO) ....................................................................................
Subordinated Tranche of Any Investment ........................................................................................................

100%
100%
100%
100% a
100%
100%/150% c
250%
300% a
100%/300% c
300% a
100%/400% c
1,250% b

0%
0%
0%
0%
n/a
20%
20%
20%
20%
20%
20%
50%
Gross-up or
Simplified
Supervisory
Formula
n/a
100%
100%
n/a
100%
n/a
250%
Look-through
300%
n/a
400%
Gross-up or
Simplified
Supervisory
Formula

Consumer Loans:
Share-Secured (shares held at the credit union) .............................................................................................
Share-Secured (shares held at another depository institution) .......................................................................
Current Secured ...............................................................................................................................................
Current Unsecured ...........................................................................................................................................
Non-Current Consumer ....................................................................................................................................
Real Estate Loans:
Share-Secured (shares held at the credit union) .............................................................................................
Share-Secured (shares held at another depository institution) .......................................................................
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:

38 Includes off-balance sheet items after
application of the credit conversion factor.

VerDate Sep<11>2014

22:13 Oct 28, 2015

Jkt 238001

PO 00000

Frm 00014

Fmt 4701

Sfmt 4700

E:\FR\FM\29OCR2.SGM

29OCR2

0%
20%
75%
100%
150%

0%
20%
100%
100%
150%

0%
20%
50%
75%
100%
100%
150%
150%

0%
20%
50%
50%
100%
100%
100%
100%

Federal Register / Vol. 80, No. 209 / Thursday, October 29, 2015 / Rules and Regulations
NCUA
Risk-weight
Share-Secured (shares held at the credit union) .............................................................................................
Share-Secured (shares held at another depository institution) .......................................................................
Portion of Commercial Loans with Compensating Balance .............................................................................
Commercial Loans <50% of Assets .................................................................................................................
Commercial Loans >50% of Assets .................................................................................................................
Non-current Commercial ..................................................................................................................................
Miscellaneous:
Loans to CUSOs ..............................................................................................................................................
Equity Investment in CUSO .............................................................................................................................
Other Balance Sheet Items not Assigned ........................................................................................................

66639
FDIC
Risk-weight

0%
20%
20%
100%
150%
150%

0%
20%
n/a
100%/150% d
100/150% d
150%

100%
100%/150% c
100%

100%
100%–600%
100%

a With

the option to use the look-through options.
the option to use the gross-up approach.
a credit union’s total equity exposures are ‘‘non-significant’’ under § 702.104(c)(3)(i), then the risk weight is 100 percent. This lowers the risk
weight to 100 percent for CUSO equity exposures, corporate perpetual capital, and all other equity investments when they are part of a credit
union’s non-significant equity exposures.
d FDIC identifies certain commercial loans as High Volatility Commercial Real Estate (HVCRE) and assigns a 150% risk weight.
b With

mstockstill on DSK4VPTVN1PROD with RULES2

c If

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 . . . .’’ 39 In other
words, FDIC may require an FDICsupervised institution to hold an
amount of regulatory capital greater
than otherwise required under its
capital rules if 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.40
As indicated above, FDIC’s approach
to risk weights is calibrated to be the
minimum regulatory capital standard.
Similarly, this final rule is calibrated to
be the minimum regulatory capital
standard. Accordingly, the final rule
incorporates a broader regulatory
provision reminding complex credit
unions that, as a matter of safety and
soundness, they are required to
maintain capital commensurate with the
level and nature of all risks to which
they are exposed.41 In addition, the final
rule adds a new provision requiring
complex credit unions to maintain a
written strategy for assessing capital
adequacy and maintaining an
appropriate level of capital.
Capital ratio thresholds are largely a
function of risk weights; and this final
rule more closely aligns NCUA’s risk
weights with those assigned by the
Other Banking Agencies.42 Accordingly,
the final rule adopts a 10 percent riskbased capital ratio level for well
capitalized credit unions, and an 8
percent risk-based capital ratio level for
adequately capitalized credit unions. To
take into account the cooperative
39 See,

e.g., 12 CFR 324.1(a).
e.g., 12 CFR 324.1(d).
41 See, e.g., 12 U.S.C. 1786.
42 See, e.g., 12 CFR 324.32; and 12 CFR 324.403.
40 See,

VerDate Sep<11>2014

22:13 Oct 28, 2015

Jkt 238001

character of credit unions, the Board set
the risk-based capital ratio level for well
capitalized credit unions at 10 percent,
and omitted the capital conservation
buffer imposed on banks.43 The
omission of the capital conservation
buffer simplifies NCUA’s risk-based
capital requirement relative to the Other
Banking Agencies’ rules without
appreciably lowering the protections
provided by NCUA’s risk-based capital
regulations.44
The final rule defines a credit union
as ‘‘complex’’ if it has assets of more
than $100 million.45 Credit unions
meeting this threshold have a portfolio
of assets and liabilities that is complex,
based upon the products and services in
which they are engaged. As discussed
later in this document, the $100 million
asset threshold is a proxy measure based
on detailed analysis, and a clear
demarcation line above which all credit
unions engage in complex activities and
where almost all such credit unions (99
percent) are involved in multiple
complex activities.
An asset size threshold is clear,
logical, and easy to administer when
compared with the more complicated
formula used to determine whether a
credit union is complex under the
current rule.46 Using a more
straightforward proxy for determining
complexity also helps account for the
cooperative character of credit unions,
particularly, the fact that credit unions
have boards of directors that consist
primarily of volunteers. The $100
million asset size threshold exempts
43 The ‘‘capital conservation buffer’’ is explained
in more detail in the discussion on § 702.102(a) in
the section-by-section analysis part of this
preamble.
44 See, e.g., 12 CFR 324.403.
45 There is no exemption for banks from the riskbased capital requirements of the other banking
agencies. There are 1,872 FDIC-insured banks with
assets less than $100 million as of December 2014.
46 12 CFR 702.106.

PO 00000

Frm 00015

Fmt 4701

Sfmt 4700

approximately 76 percent of credit
unions 47 from many of the regulatory
burdens associated with complying with
this rule; yet it will cover almost 90
percent of the assets in the credit union
system. The threshold is consistent with
the fact that the majority 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
detailed discussion associated with
section 702.103 in the Section-BySection Analysis part of the preamble
below.
In response to public comments
received, the final rule also makes a
number of changes to the Second
Proposal. These changes include:
Assigning a lower risk weight to nonsignificant equity exposures and certain
share-secured loans; giving credit
unions the option to assign a 100
percent risk weight to certain charitable
donation accounts; permitting credit
unions to use the gross-up approach for
non-subordinated investment tranches;
assigning principal-only mortgagebacked-security STRIPS a risk-weight
based on the underlying collateral;
extending the period during which
credit unions can count supervisory
goodwill and supervisory other
intangible assets in the risk-based
capital ratio numerator; and
incorporating the text of the gross-up
and look-through approaches into a new
appendix A to the PCA regulation. As
discussed in more detail below, for
certain assets, these changes will lower
the risk weights that would have been
assigned under the Second Proposal,
extend the period during which certain
assets can be included in a credit
union’s risk-based capital ratio
47 Based upon December 31, 2014 Call Report
data.

E:\FR\FM\29OCR2.SGM

29OCR2

66640

Federal Register / Vol. 80, No. 209 / Thursday, October 29, 2015 / Rules and Regulations

numerator—effectively lowering certain
credit unions’ overall capital
requirement for 10 years—and lower the
impact of the rule for certain complex
credit unions. The final rule also makes
conforming and other minor changes to
NCUA’s regulations, which are also
discussed in more detail below.
To provide 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, the
revisions adopted in this final rule will
not become effective until January 1,
2019. This effective date is intended to
coincide with the full phase-in of FDIC’s
risk-based capital measures in 2019.
III. Legal Authority
In 1998, Congress enacted the Credit
Union Membership Access Act
(CUMAA).48 Section 301 of CUMAA
added new section 216 to the FCUA,49
which requires the Board to maintain,
by regulation, a system of PCA to restore
the net worth of credit unions that
become inadequately capitalized.
Section 216(b)(1)(A) requires that
NCUA’s system of PCA for federally
insured credit unions be ‘‘consistent
with’’ section 216 of the FCUA, and
‘‘comparable to’’ section 38 of the
Federal Deposit Insurance Act (FDI
Act).50 Section 216(b)(1)(B) requires that
the Board, in designing the PCA system,
take into account credit unions’
cooperative character: 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.51 In 2000, the
Board first implemented the required
system of PCA 52 and, prior to this
rulemaking, had made only minor
adjustments to the rule’s original
requirements.53
48 Public

Law 105–219, 112 Stat. 913 (1998).
U.S.C. 1790d.
50 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).
51 12 U.S.C. 1790d(b)(1)(B).
52 See 65 FR 8584 (Feb. 18, 2000); and 65 FR
44950 (July 20, 2000) (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.)
53 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 riskbased 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

mstockstill on DSK4VPTVN1PROD with RULES2

49 12

VerDate Sep<11>2014

22:13 Oct 28, 2015

Jkt 238001

The stated 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].’’ 54 To carry out that purpose,
Congress set forth a basic structure for
PCA in section 216 that consists of three
principal components: (1) A statutory
framework that requires certain
mandatory classifications of credit
unions and that NCUA take certain
mandatory and discretionary actions
against credit unions based on their
classification; (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’’
that applies to credit unions that NCUA
defines as ‘‘complex.’’ This final 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 final rule.
Among other things, section 216(c) of
the FCUA requires that NCUA use a
credit union’s net worth ratio to
determine its classification among the
five ‘‘net worth categories’’ set forth in
the FCUA.55 Section 216(o) generally
defines a credit union’s ‘‘net worth’’ as
its retained earnings balance,56 and a
credit union’s ‘‘net worth ratio’’ 57 as the
ratio of its net worth to its total assets.58
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.59
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, ‘‘a
risk-based net worth requirement 60 for
by NCUA. 76 FR 16234 (Mar. 23, 2011). 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).
54 12 U.S.C. 1790d(a)(1).
55 12 U.S.C. 1790d(c).
56 12 U.S.C. 1790d(o)(2).
57 Throughout this document the terms ‘‘net
worth ratio’’ and ‘‘leverage ratio’’ are used
interchangeably.
58 12 U.S.C. 1790d(o)(3).
59 12 U.S.C. 1790d(c)–(g); and 12 CFR 702.204(a)
& (b).
60 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 unions. The term
‘‘risk-based capital ratio’’ is 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

PO 00000

Frm 00016

Fmt 4701

Sfmt 4700

insured credit unions that are complex,
as defined by the Board . . . .’’ 61
Unlike the terms ‘‘net worth’’ and ‘‘net
worth ratio,’’ which are specifically
defined in section 216(o), the term
‘‘risk-based net worth’’ is not defined in
the FCUA.62 While Congress prescribed
the net worth ratio requirement in detail
in section 216, it elected not to define
the term ‘‘risk-based net worth,’’ leaving
the details of the risk-based net worth
requirement to be filled in by the Board
through the notice and comment
rulemaking process. Section 216, when
read as a whole, grants the Board broad
authority to design reasonable PCA
regulations, including a risk-based net
worth requirement, so long as the
regulations are comparable to the Other
Banking Agencies’ PCA requirements,
are consistent with the requirements of
section 216 of the FCUA, and take into
account the cooperative character of
credit unions.
Section 216(d)(1) of the FCUA directs
NCUA, in determining which credit
unions will be subject to the risk-based
net worth requirement, to base its
definition of complex ‘‘on the portfolios
of assets and liabilities of credit
unions.’’ 63 The statute does not require,
as some commenters have argued, that
the Board adopt a definition of
‘‘complex’’ that takes into account the
portfolio of assets and liabilities of each
credit union on an individualized basis.
Rather, section 216(d)(1) authorizes the
Board to develop a single definition of
complex that takes into account the
portfolios of assets and liabilities of all
credit unions.
In addition, section 216(d)(2) specifies
that the risk-based 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)] may not
provide adequate protection.’’ 64 In the
Senate Report on CUMAA, Congress
expressed its intent with regard to the
design of the risk-based net worth
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
Other Banking Agencies and the international
banking community 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.
61 12 U.S.C. 1790d(d)(1).
62 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.’’).
63 12 U.S.C. 1790d(d).
64 12 U.S.C. 1790d(d)(2) (emphasis added).

E:\FR\FM\29OCR2.SGM

29OCR2

Federal Register / Vol. 80, No. 209 / Thursday, October 29, 2015 / Rules and Regulations
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.65

mstockstill on DSK4VPTVN1PROD with RULES2

As indicated by the language above,
Congress intended the Board, in
designing the risk-based net worth
requirement, to address any risks that
may not be adequately accounted for by
the statutory 6 percent net worth ratio
requirement. The legislative history is
silent on why Congress chose to tie the
provision in section 216(d)(2) to the
statutory 6 percent net worth ratio
requirement for adequately capitalized
credit unions and not the 7 percent net
worth ratio requirement for well
capitalized credit unions.
Section 216(c) of the FCUA provides
that, if a credit union meets the
definition of ‘‘complex’’ and it meets or
exceeds the net worth ratio requirement
to be classified as either adequately
capitalized or well capitalized, the
credit union must also satisfy the
corresponding risk-based net worth
requirement to be classified as either
adequately capitalized or well
capitalized.66 Accordingly, under the
separate risk-based net worth
requirement, a complex credit union
must, in addition to meeting the
statutory net worth ratio requirement,
also meet or exceed the corresponding
minimum risk-based net worth
requirement in order to receive a capital
classification of adequately capitalized
or well capitalized, as the case may be.67
For example, a complex credit union
must meet or exceed both the applicable
net worth ratio requirement and the
applicable risk-based net worth
65 S. Rep. No. 193, 105th Cong., 2d Sess. 13
(1998).
66 See 12 U.S.C. 1790d(c)(1)(A) & (c)(1)(B).
67 The 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) & (c)(1)(B)(ii).

VerDate Sep<11>2014

22:13 Oct 28, 2015

Jkt 238001

requirement to be classified as well
capitalized. If the credit union fails to
meet either requirement, it is classified
in the lowest category for which it meets
both the net worth ratio requirement
and the risk-based net worth
requirement.
If a 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 minimum risk-based
net worth requirement to be adequately
capitalized, then the credit union’s
capital classification is
‘‘undercapitalized’’ based on the riskbased net worth requirement. Similarly,
if a complex credit union’s net worth
ratio meets or exceeds the requirement
that corresponds to the well capitalized
category, but its risk-based net worth
ratio meets only the requirement that
corresponds with the adequately
capitalized capital category, then that
credit union’s capital classification is
adequately capitalized. In either case,
the credit union is subject to the
mandatory supervisory and
discretionary supervisory actions
applicable to its capital classification
category.68
In response to the Second Proposal, a
significant number of commenters
questioned the Board’s legal authority to
impose a risk-based net worth
requirement on both well capitalized
and adequately capitalized credit
unions. As also discussed in the
Section-by-Section part of the preamble
below, the commenters’ selective
reading of section 216 of the FCUA is
a misinterpretation. NCUA is legally
authorized to impose a risk-based net
worth requirement on both well
capitalized and adequately capitalized
credit unions 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)(A)(ii)
provides that a credit union must meet
any applicable risk-based net worth
requirement under section 216(d) of this
section to be classified as well
capitalized. The plain language of
sections 216(c)(1)(A)(ii) and
(c)(1)(B)(ii),, read in conjunction with
the language in section 216(d), indicates
Congress’ intent to authorize the Board
to impose risk-based net worth
requirements on both well capitalized
and adequately capitalized credit
unions.
Section 216(d)(2) of the FCUA sets
forth specific requirements for the
68 12

PO 00000

U.S.C. 1790d(c)(1)(c)(ii).

Frm 00017

Fmt 4701

Sfmt 4700

66641

design of the risk-based net worth
requirement mandated under section
216(d)(1).69 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.’’70 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.71 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 that may not be
addressed adequately through the
statutory 6 percent net worth ratio
required for a credit union to be
adequately capitalized.72
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
should 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, that Congress’s use of the term
‘‘adequately capitalized’’ in section
216(d)(2) somehow limits the Board’s
authority to require that complex credit
unions maintain a higher risk-based
capital ratio level to be classified as well
capitalized. Rather than prohibiting the
Board from imposing a higher risk-based
capital ratio level for credit unions to be
classified as well capitalized, section
216(d)(2) simply requires that the Board
design the risk-based net worth
requirement to take into account those
risks that may not adequately be
addressed by the statute’s six percent
net worth ratio requirement. Thus, the
plain language of section 216(d) does
not support those commenters’
interpretation.
The Board’s 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
69 12

U.S.C. 1790d(d).
U.S.C. 1790d(d)(2) (emphasis added).
71 12 U.S.C. 1790d(c)(1)(B).
72 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.’’).
70 12

E:\FR\FM\29OCR2.SGM

29OCR2

66642

Federal Register / Vol. 80, No. 209 / Thursday, October 29, 2015 / Rules and Regulations

mstockstill on DSK4VPTVN1PROD with RULES2

Agencies’ PCA statute and regulations.73
Some commenters have argued that
Congress’s use of the singular noun
‘‘requirement’’ in Section 216(d) of the
FCUA indicates its intent that there be
only one risk-based net worth ration
level tied to the adequately capitalized
level. Section 38(c)(1)(A) of the FDI Act,
upon which section 216 of the FCUA
was modeled,74 however, requires that
the Other Banking Agencies’ ‘‘relevant
capital measures’’ include ‘‘(i) a leverage
limit; and (ii) a risk-based capital
requirement.’’ 75 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. Moreover, the United
States Code addresses the singular—
plural question in its rules of statutory
construction: ‘‘In determining the
meaning of any Act of Congress, unless
the context indicates otherwise . . .
words importing the singular include
and apply to several persons, parties, or
things; words importing the plural
include the singular . . .’’ 76 Therefore,
setting different risk-based capital ratio
levels for credit unions to be adequately
and well capitalized, is consistent with
the requirements of section 216 of the
FCUA and is ‘‘comparable’’ to the Other
Banking Agencies’ PCA regulations.
As explained in the Second Proposal,
the FCUA requires NCUA to establish a
risk-based capital system that is
comparable to that in place for FDIC
insured banks, and to take into account
the cooperative character of credit
unions. Some commenters criticized,
however, that the Second Proposal took
into account only the comparability
requirement, and ignored the
requirement to take into consideration
the cooperative nature of credit unions.
In support of their assertion, the
commenters suggested that, because of
their unique cooperative structure,
strong member focus, and the absence of
stock options for executives or pressure
from stockholders, credit unions eschew
excessive risk taking. The commenters
73 See 12 U.S.C. 1831o, and, e.g., 12 CFR
324.403(b).
74 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.’’).
75 12 U.S.C. 1831o(c)(1)(A) (emphasis added).
76 1 U.S.C. 1.

VerDate Sep<11>2014

22:13 Oct 28, 2015

Jkt 238001

suggested further, that in the face of the
2007–2009 financial crisis, credit
unions—unlike their counterparts in the
for-profit banking sector—served as both
a counter-cyclical force and a safe
haven, with much stronger loan and
deposit growth than banking
institutions. Accordingly, many
commenters suggested that the Board, to
take into account the cooperative
character of credit unions, must impose
risk-based capital requirements that are
equal to or lower than the standards
applicable to banks.
The Board disagrees with the claim
that NCUA failed to take into account
the cooperative character of credit
unions in designing the risk-based
capital requirement. In the Original
Proposal, which varied to a greater
degree from the Other Banking
Agencies’ capital regulations than the
Second Proposal, the Board proposed a
significant number of alternative
provisions, many of which were
specifically intended to take into
account the cooperative character of
credit unions. The overwhelming
response from credit unions in relation
to that proposed approach, however,
was to recommend that the Board revise
the proposal to be more like the capital
requirements adopted by the Other
Banking Agencies to avoid putting
credit unions at a competitive
disadvantage to banks. As discussed in
more detail below, the Board generally
agreed with commenters’
recommendations in that regard, and
designed the Second Proposal to be
more like the Other Banking Agencies’
capital regulations. In the preamble to
the Second Proposal, however, the
Board specifically discussed ways in
which the proposal continued to deviate
from the Other Banking Agencies’
capital requirements to take into
account the cooperative character of
credit unions. Furthermore, while it
may generally be true that ‘‘credit
unions eschew excessive risk taking,’’ as
suggested by some commenters, that fact
alone does not support assigning lower
risk weights to credit union assets, or
requiring that credit unions meet lower
risk-based capital ratio levels to be
adequately or well capitalized. To the
contrary, for reasons explained in more
detail below, a credit union that
eschews excessive risk taking should
have no trouble maintaining a high riskbased capital ratio level under this final
rule.
At least one commenter also
suggested that credit unions’ reliance
primarily on retained earnings to build
capital and operate make their
operational structures both unique and
challenging. Thus, the commenter

PO 00000

Frm 00018

Fmt 4701

Sfmt 4700

concluded that, by requiring a higher
risk-based capital ratio level for well
capitalized credit unions, the Second
Proposal failed to take these factors into
consideration, as required by section
216(b)(1)(B) of the FCUA. The Board
disagrees. Credit unions’ limited access
to supplemental forms of capital and
reliance primarily on retained earnings
for building capital suggests, if
anything, that requiring credit unions to
maintain higher levels of capital is
appropriate. In a financial downturn,
the retained earnings of a financial
institution are likely to decrease. Under
such circumstances, an institution with
limited access to other alternative forms
of capital needs a higher level of capital
on hand to ensure its survival. In the
case of NCUA’s capital requirements,
that higher level of capital is already
required under the statutory net worth
ratio requirement, which requires credit
unions maintain higher leverage (net
worth) ratios than banks. Accordingly,
consistent with the Second Proposal,
the risk-based capital ratio levels
adopted in this final rule for adequately
and well capitalized credit unions are
designed to be generally equivalent to
the corresponding risk-based capital
ratio levels required for banks.
IV. Section-by-Section Analysis
Part 702—Capital Adequacy
Revised Structure of Part 702
Consistent with the Second Proposal,
this final rule reorganizes part 702 by
consolidating NCUA’s PCA
requirements, which are currently
included under subsections A, B, C, and
D, under new subparts A and B. New
subpart A is titled ‘‘Prompt Corrective
Action’’ and new subpart B is titled
‘‘Alternative Prompt Corrective Action
for New Credit Unions.’’ The
reorganization is designed so that a
credit union need only reference the
subpart that applies to its institution,
rather than having to flip back-and-forth
between multiple subparts in part 702 to
identify the applicable minimum capital
standards and PCA regulations.
Consolidating these sections reduces
confusion and will save credit union
staff from having to frequently flip back
and forth through the four subparts of
the current PCA rule.
In general, this final rule restructures
part 702 by consolidating most of the
sections relating to capital and PCA that
are applicable to only credit unions that
are not ‘‘new’’ under new subpart A.
The specific sections that would be
included in new subpart A and the
changes to those sections are discussed
in more detail below.

E:\FR\FM\29OCR2.SGM

29OCR2

Federal Register / Vol. 80, No. 209 / Thursday, October 29, 2015 / Rules and Regulations

mstockstill on DSK4VPTVN1PROD with RULES2

Similarly, this final rule consolidates
most of NCUA’s rules relating to
alternative capital and PCA
requirements for ‘‘new’’ credit unions
under new subpart B. The sections
under new subpart B 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 are
discussed in more detail below.
Finally, this final rule retains subpart
E of part 702, Stress Testing, but redesignates and re-numbers the current
subpart as subpart C. Other than redesignating and re-numbering the
subpart, the language and requirements
of current subpart E are unchanged by
this final rule.
Section 702.1 Authority, Purpose,
Scope, and Other Supervisory Authority
Consistent with the Proposal, § 702.1
of the final rule remains substantially
similar to current § 702.1, but is
amended to update terminology and
internal cross references within the
section, consistent with the changes that
are being made in other sections of part
702. No substantive changes to the
section are intended.
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.77
Paragraph (d)(1) of the same section
requires that NCUA’s system of PCA
include ‘‘a risk-based 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.’’ 78 As explained in more detail
below, this final 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 final rule, this rule deviates from
the PCA and risk-based capital
requirements applicable to banks as
required by section 216 of the FCUA,
77 12
78 12

U.S.C. 1790d(b)(1).
U.S.C. 1790d(a)(1).

VerDate Sep<11>2014

22:13 Oct 28, 2015

and to take into account the cooperative
character of credit unions. Accordingly,
the revised risk-based net worth
requirement and this final rule are
consistent with section 216 of the
FCUA.
Section 702.2—Definitions
The Second Proposal would have
removed the paragraph numbers
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. Many of the
definitions in current § 702.2 were
retained, however, with no substantive
changes. The reorganization of the
section and the removal of the
paragraph numbering made proposed
§ 702.2 more consistent with current
§§ 700.2, 703.2 and 704.2 of NCUA’s
regulations.79 In addition, proposed
§ 702.2 included a number of new
definitions, and would have amended
some of the definitions in current
§ 702.2.
Consistent with section 202 of the
FCUA,80 the Second Proposal also
incorporated the phrase ‘in accordance
with GAAP’ into many of the definitions
to clarify that generally accepted
accounting principles must 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.
This proposed change was intended to
help clarify the meaning of terms used
in the Second Proposal.
The Board received no comments on
the proposed technical changes to
§ 702.2. The Board did, however,
receive one general comment on the
definitions section: At least one
commenter stated that the revisions to
the definitions, particularly those that
now rely on GAAP definitions, seemed
fair and reasonable. At least one
commenter also suggested that the
proposed changes to the definitions
were all for the better and made the rule
much clearer. The Board agrees with the
commenters and has decided to retain
the changes described above in this final
rule.
The following definitions, consistent
with the Second Proposal, are also
added to, amended in, or removed from
§ 702.2 by this final rule:
Allowances for loan and lease losses
(ALLL). The Second Proposal defined
the term ‘‘allowances for loan and lease
losses’’ as valuation allowances that
have been established through a charge
against earnings to cover estimated
79 12
80 12

Jkt 238001

PO 00000

CFR 700.2; 12 CFR 703.2; and 12 CFR 704.2.
U.S.C. 1782(a)(6)(C)(i).

Frm 00019

Fmt 4701

Sfmt 4700

66643

credit losses on loans, lease financing
receivables or other extensions of credit
as determined in accordance with
GAAP.
The Board received no comments on
the proposed definition and has decided
to retain the definition in this final rule
without change.
Amortized cost. The Second Proposal
defined the term ‘‘amortized cost’’ 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.
The Board received no comments on
the proposed definition and has decided
to retain the definition in this final rule
without change.
Appropriate regional director. The
Second Proposal would have amended
current § 702.2 to remove the definition
of the term ‘‘appropriate regional
director’’ from the current rule.
The Board received no comments on
this proposed revision and has decided
to retain the revision in this final rule
without change.
Appropriate state official. Under the
Second Proposal, the Board proposed
revising the definition of the term
‘‘appropriate state official’’ by adding
the italicized words (‘‘state’’ and ‘‘the’’)
to the current definition, and by
removing the words ‘‘chartered by the
state which chartered the affected credit
union.’’ The revised definition would
have provided that the term
‘‘appropriate state official’’ means the
state commission, board or other
supervisory authority having
jurisdiction over the credit union.
Public Comments on the Second
Proposal
One commenter suggested that,
although the proposed revision to the
definition was meant to provide clarity,
it might obfuscate the role of state
supervisors in the PCA process because
several states could have ‘‘jurisdiction’’
over a given credit union on a particular
issue. In contemplating the possible
effects of the proposed revision, the
commenter asked a number of
questions: Will NCUA consult with all
state regulators where an affected credit
union has a branch or member when
taking discretionary supervisory
action? 81 Will a credit union have to
obtain approval from all states that it
operates in before issuing dividends
when less than adequately
capitalized? 82 The commenter
suggested further that while timely
sharing of information across all
81 12
82 12

E:\FR\FM\29OCR2.SGM

CFR 702.110(c).
CFR 702.114(b).

29OCR2

66644

Federal Register / Vol. 80, No. 209 / Thursday, October 29, 2015 / Rules and Regulations

affected regulators was a laudable goal,
crucial and time sensitive decisions
regarding the reclassification or
conservatorship of a credit union should
be made by only the primary chartering
authority of the institution in
consultation with the deposit insurer.
Accordingly, the commenter
recommended that the Board should
amend this definition to read ‘‘the state
commission, board or other supervisory
authority which chartered the affected
credit union.’’

mstockstill on DSK4VPTVN1PROD with RULES2

Discussion
The Board generally agrees with the
commenter and is adopting the
proposed revisions to the definition of
‘‘appropriate state official’’ by making
the following changes: At the end of the
proposed the definition, the final rule
deletes the words ‘‘having jurisdiction
over the’’ from the proposed definition,
and adds in their place the words ‘‘that
chartered the affected.’’ This change
clarifies that NCUA must consult with
only the state authority that chartered
the credit union; not every state agency
having some form of jurisdiction over
the credit union.
Accordingly, the final rule defines
‘‘appropriate state official’’ as the state
commission, board or other supervisory
authority that chartered the affected
credit union.
Call Report. The Second Proposal
defined the term ‘‘Call Report’’ 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 and has decided to retain
the proposed definition in this final rule
without change.
Carrying value. The Second Proposal
defined the term ‘‘carrying value,’’ 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.
The Board received no comments on
the proposed definition, but is clarifying
in this final rule that ‘‘carrying value’’
applies to both assets and liabilities.
Accordingly, this final rule defines
‘‘carrying value’’ as the value of the
asset or liability on the statement of
financial condition of the credit union,
determined in accordance with GAAP.
Central counterparty (CCP). The
Second Proposal defined the term
‘‘central counterparty’’ 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 received no comments on
the definition and has decided to retain

VerDate Sep<11>2014

22:13 Oct 28, 2015

Jkt 238001

the proposed definition in this final rule
without change.
Charitable donation account. The
Second Proposal did not use or define
the term ‘‘charitable donation account.’’
Under the proposal, such accounts,
which federal credit unions are
authorized to establish under
§ 721.3(b)(2) of NCUA’s regulations,
would have been assigned a risk weight
based on the risk-weight of each
individual asset type in the account.
Public Comments on the Second
Proposal
NCUA received several comments
regarding the risk weights assigned to
charitable donation accounts under the
Second Proposal. Commenters
suggested that the proposed risk weights
assigned to charitable donation accounts
would contravene the appeal for credit
unions to put money into these
investments to fund charitable
activities. The commenters pointed out
that the risk-based capital regulation
from the Office of the Comptroller of the
Currency (OCC) recognizes the
importance of community development
investments and assigns a risk weight of
100 percent to such assets. Commenters
suggested that the NCUA Board should
adopt a similar approach to encourage
charitable donation accounts to support
charitable goals and purposes.
Discussion
The Board generally agrees with the
commenters and, as also discussed in
the part of the preamble associated with
§ 702.104(c), has decided to assign a 100
percent risk weight to certain charitable
donation accounts under this final rule,
at the credit union’s option. Under the
Second Proposal, the assets held in a
charitable donation account were each
assigned a risk weight based on each
individual asset type in the account.
After reviewing the comments received,
however, the Board generally agrees
with commenters who suggested that
charitable donation account equity
exposures, which are held at credit
unions, have a role analogous to
community development equity
exposures, which are held at banks, and
therefore warrant assigning such
accounts an equivalent risk weight.
Community development equity
exposures are assigned a 100 percent
risk weight under the Other Banking
Agencies’ regulations. Thus, this final
rule gives credit unions the option for
risk weighting charitable donation
accounts in a manner that is generally
equivalent to the Other Banking
Agencies’ 100 percent risk weight for
community development investment
equity exposures. Under this final rule,

PO 00000

Frm 00020

Fmt 4701

Sfmt 4700

a credit union has the option of
applying risk weights to the individual
assets within a charitable donation
account, or just applying a 100 percent
risk weight to the whole charitable
donation account. A credit union
cannot, however, use a combination of
the two methods described to assign a
risk weight to the same charitable
donation account.
In defining ‘‘charitable donation
account,’’ the Board chose to limit the
types of accounts that would qualify for
the 100 percent risk weight. In
particular, the Board chose allow such
treatment for accounts only if they met
certain restrictions in 12 CFR
721.3(b)(2)(i), (b)(2)(ii), and (b)(2)(v).
Thus, to qualify for the optional 100
percent risk weight under
§ 702.104(c)(3)(ii) of this final rule, an
account must meet the following
criteria:
• The book value of the credit union’s
investments in all charitable donation
accounts (CDAs), in the aggregate, as
carried on its statement of financial
condition prepared in accordance with
generally accepted accounting
principles, must be limited to 5 percent
of the credit union’s net worth at all
times for the duration of the accounts,
as measured every quarterly Call Report
cycle. This means that regardless of how
many CDAs the credit union invests in,
the combined book value of all such
investments must not exceed 5 percent
of its net worth. The credit union must
bring its aggregate accounts into
compliance with the maximum
aggregate funding limit within 30 days
of any breach of this limit.
• The assets of a charitable donation
account must be held in a segregated
custodial account or special purpose
entity and must be specifically
identified as a charitable donation
account.
• The credit union is required to
distribute to one or more qualified
charities, no less frequently than every
5 years, and upon termination of a
charitable donation account regardless
of the length of its term, a minimum of
51 percent of the account’s total return
on assets over the period of up to 5
years. Other than upon termination, the
credit union may choose how frequently
charitable donation account
distributions to charity will be made
during each period of up to 5 years. For
example, the credit union may choose to
make periodic distributions over a
period of up to 5 years, or only a single
distribution as required at the end of
that period. The credit union may
choose to donate in excess of the
minimum distribution frequency and
amount;

E:\FR\FM\29OCR2.SGM

29OCR2

mstockstill on DSK4VPTVN1PROD with RULES2

Federal Register / Vol. 80, No. 209 / Thursday, October 29, 2015 / Rules and Regulations
The three criteria above are included
in the definition of charitable donation
account to ensure that such accounts, if
assigned a 100 percent risk weight, will
be used primarily for charitable
purposes and not present a material risk
to a credit union regardless of the types
of assets held in the accounts. The
definition includes a 5 percent of net
worth limit on charitable donation
accounts to reflect an amount that
allows a credit union to generate income
for the charity while ensuring any risks
associated with such accounts do not
pose safety and soundness issues. In
determining the 5 percent of net worth
limit, the Board considered the
investment types a credit union could
purchase in a charitable donation
account, which can include investments
with significant credit risk. The Board
determined that a 5 percent of net worth
limit was reasonable given NCUA’s
charitable donation account regulations
and necessary to ensure that the
accounts were small enough to not pose
a safety and soundness issue to the
NCUSIF if assigned a 100 percent risk
weight.
The definition also specifies that
charitable donation accounts must be
held in segregated custodial accounts or
special purpose entities, and must be
specifically identified as charitable
donation accounts, to ensure holdings
can be measured for exposure and
monitored for performance and
distribution. The Board determined the
segregation of accounts is necessary to
ensure a credit union and NCUA could
measure compliance with the net worth
and distribution criteria, consistent with
safety and soundness and the account’s
purpose.
Finally, the definition specifies that
distributions must be made in a
particular manner to ensure such
accounts are used primarily for
charitable giving. By specifying the
distribution manner, the definition of
charitable donation account ensures that
the account will primarily be used for
charitable giving. This distinction is
generally consistent with the Other
Banking Agencies’ regulations, which
assign a 100 percent risk-weight to
community development investment
equity exposures.
Without each of the three criteria
discussed above, a charitable donation
account would primarily be an
investment vehicle for a credit union
and could present a material risk to the
credit union and the NCUSIF.
Accordingly, this final rule defines
‘‘charitable donation account’’ as an
account that satisfies all of the
conditions in 12 CFR 721.3(b)(2)(i),
(b)(2)(ii), and (b)(2)(v).

VerDate Sep<11>2014

22:13 Oct 28, 2015

Jkt 238001

Commercial loan. The Second
Proposal defined the new term
‘‘commercial loan’’ as 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. The definition would have
also provided that the term commercial
loan excludes loans to CUSOs, first- or
junior-lien residential real estate loans,
and consumer loans.
Public Comments on the Second
Proposal
The Board received many comments
regarding the proposed new term
‘‘commercial loan’’ and its definition.
Several commenters agreed with
creating a category of ‘‘commercial
loans’’ as distinct from traditional
member business loans for purposes of
the risk-based capital ratio requirement.
At least one commenter stated that,
while differentiating between
‘‘commercial loans’’ for risk-based
capital purposes and ‘‘member-business
loans’’ as defined for lending purposes
is appropriate, the subtle differences in
these definitions may cause confusion.
Similarly, another commenter suggested
that even though it would require
changes to the call report and how
credit union classify these loans, the
Board was right to use the broader
definition of commercial loans in the
proposal because there is no difference
in the credit risk of member business
loans and commercial loans.
Conversely, other commenters
suggested that replacing the term
‘‘member business loan,’’ which credit
unions and NCUA’s regulations already
use, with the new term ‘‘commercial
loan’’ for purposes of the risk-based
capital regulation would cause
unnecessary confusion. Other
commenters suggested that the proposed
definition of ‘‘commercial loan’’ should
be revised to be consistent with the
definition of ‘‘member business loan’’ in
part 723 of NCUA’s regulations because
they believed the differences between
the two definitions were immaterial to
a credit union’s capital requirement, but
would add unnecessary administrative
burden to the Call Report.
In addition, a trade association
commenter pointed out that the
proposed definition of a ‘‘commercial
loan’’ specifies that it is a loan ‘‘to
individuals, sole proprietorships,
partnerships, corporations, or other
business enterprises,’’ and explicitly
excludes loans to CUSOs, first- or
junior-lien residential real estate loans,

PO 00000

Frm 00021

Fmt 4701

Sfmt 4700

66645

and consumer loans. The commenter
pointed out, however, that the preamble
to the Second Proposal seemed to
indicate that whether or not a loan is
‘‘commercial’’ will be based exclusively
on the purpose of the loan, use of the
proceeds, and type of collateral. The
Commenter suggested that if a loan can
be considered commercial regardless of
the type of borrower, the Board should
consider removing the list of potential
borrowers and simply retaining the
exclusions of specific loan types. The
commenter suggested further that the
proposal specified that a commercial
loan is a loan made for ‘‘commercial,
industrial, and professional purposes,
but not for investment or personal
expenditure purposes.’’ But, under part
723 of NCUA’s regulations, MBLs are
made for commercial, corporate, other
business investment property or
venture, or agricultural purposes.83 The
commenter recommending clarifying
the alignment of these two definitions in
the final rule, and that if the only
intended differences in treatment arise
from the definitions of loans to CUSOs,
first- or junior-lien residential real estate
loans, and consumer loans, then the
Board should consider adopting the
member business loan language and
retaining those explicit exclusions. At
least one commenter also pointed out
that current § 723.1(d) and (e) of
NCUA’s member business lending
regulations reference treatment of
purchased member and non-member
loans and loan participations for riskweight purposes under part 702, and
encouraged the Board to review those
sections for consistency with the
proposed definition of commercial loan.
Another commenter requested that the
Board clarify whether the definition of
‘‘commercial loans’’ includes loans to
non-profits. One state supervisory
authority commenter requested
clarification on whether the definition,
which lists a number of specific asset
types, would include agricultural loans.
Discussion
As stated in the Second Proposal, the
new term ‘‘commercial loan’’ and its
proposed definition more accurately
capture the risks these loans present
than the term MBL, and better identifies
loans that are made for a commercial
purpose and have similar risk
characteristics. While there could be
some initial confusion associated with
the use of this new term, the Board
notes that such confusion can be
addressed during the implementation
period and in guidance before the final
rule becomes effective in 2019.
83 12

E:\FR\FM\29OCR2.SGM

CFR 723.1(a).

29OCR2

mstockstill on DSK4VPTVN1PROD with RULES2

66646

Federal Register / Vol. 80, No. 209 / Thursday, October 29, 2015 / Rules and Regulations

Guidance contained in the Call Report
for the proper reporting of commercial
loans will also provide information to
credit unions to ensure proper reporting
of both ‘‘commercial’’ loans for the
purpose of assigning risk weights and
the reporting of MBLs for the purpose of
monitoring compliance with the
statutory limit.
The Board agrees, however, with
commenters who suggested that the
purpose of a loan determine its
classification as a ‘‘commercial’’ loan.
The risks associated with a commercial
loan are related to its purpose.
Moreover, the proposed list of entities
that could have received the loans
encompassed all possibilities, including
non-profit organizations. Thus the
removal of the list of parties who could
receive the loans would be
inconsequential. Accordingly, the Board
is amending the definition of
‘‘commercial loan’’ to remove the words
‘‘to individuals, sole proprietorships,
partnerships, corporations, or other
business enterprises.’’
The Board maintains, however, that
the listing of commercial purposes in
the proposed definition was adequate
and plainly included agricultural loans
if they are granted for a commercial or
industrial purpose. Similarly, it is clear
that a loan purchased by a credit union,
which was made for a commercial
purpose, was also included within the
proposed definition of a commercial
loan, whether it is a loan to member or
non-member. Thus no additional
changes to the definition are necessary.
Accordingly, this final rule defines
‘‘commercial loan’’ as any loan, line of
credit, or letter of credit (including any
unfunded commitments) for
commercial, industrial, and professional
purposes, but not for investment or
personal expenditure purposes. The
definition provides further that the term
commercial loan excludes loans to
CUSOs, first- or junior-lien residential
real estate loans, and consumer loans.
Commitment. The Second Proposal
defined the term ‘‘commitment’’ 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 Board received no comments on
the proposed definition, but has decided
to clarify in this final rule that a
‘‘commitment’’ can also refer to funding
transactions. Accordingly, this final rule
would define ‘‘commitment’’ as any
legally binding arrangement that
obligates the credit union to extend
credit, purchase or sell assets, enter into
a borrowing agreement, or enter into a
financial transaction.

VerDate Sep<11>2014

22:13 Oct 28, 2015

Jkt 238001

Consumer loan. The Second Proposal
defined the term ‘‘consumer loan’’ 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 have provided 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.

Discussion
The Board agrees with the commenter
who suggested that a consumer loan
should be defined by the purpose of the
loan and not depend on the type of
entity receiving the loan, be it an
individual, corporation, or some other
business. The material risks associated
with holding a prudently underwritten
consumer loan are related to its
purpose, not on the type of borrower.
Accordingly, this final rule amends the
proposed definition of consumer loan to
remove the words ‘‘to one or more
individuals’’ from the definition.
The Board also generally agrees with
the commenter who suggested the final
rule should further clarify the reference
to ‘‘fleet vehicles’’ in the proposed
definition of consumer loans. As
pointed out by the commenter, NCUA’s
General Counsel issued a legal opinion
letter in 2012 that interprets the term
‘‘fleet’’ for purposes of § 723.7(e) of

NCUA’s regulations.85 The letter
provides that a fleet means ‘‘five or
more vehicles that are centrally
controlled and used for a business
purpose, including for the purpose of
transporting persons or property for
commission or hire.’’ The meaning of
the term ‘‘fleet,’’ as used in the proposed
definition of consumer loan, should be
consistent with the use of the term in
§ 723.7(e). While the Second Proposal
did not propose adopting the definition
of ‘‘fleet’’ provided in the 2012 legal
opinion letter, the term should have the
same meaning. The term does not need
to be defined in this final rule. Future
changes in market realities surrounding
the use of the term ‘‘fleet’’ make
adopting a fixed definition of the term
impractical. The Board agrees, however,
that revising the proposed use of the
term ‘‘fleet’’ in the definition of
consumer loan to be more consistent
with the use of the term fleet in
§ 723.7(e) will help avoid confusion
regarding the term’s meaning.
Accordingly, the final rule revises the
last clause in the second sentence of the
definition of the term ‘‘consumer loan’’
to provide, ‘‘and loans for the purchase
of one for more vehicles to be part of a
fleet of vehicles.’’
NCUA will provide separate examiner
guidance on the application of the
definition of consumer loans to ensure
consistent interpretation of the
definition in the future. NCUA’s Call
Report instructions will also contain
appropriate guidance for the proper
reporting of consumer loans. For the
reasons discussed above, this final rule
defines the term ‘‘consumer loan’’ as a
loan for household, family, or other
personal expenditures, including any
loans that, at origination, are wholly or
substantially secured by vehicles
generally manufactured for personal,
family, or household use regardless of
the purpose of the loan. The definition
provides further that the term consumer
loan excludes commercial loans, loans
to CUSOs, first- and junior-lien
residential real estate loans, and loans
for the purchase of one or more vehicles
to be part of a fleet of vehicles.
Contractual compensating balance.
The Second Proposal defined the term
‘‘contractual compensating balance’’ 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.

84 NCUA, Definition of Fleet, Legal Opinion Letter
12–0764 (Sept. 13, 2012), available at http://
www.ncua.gov/Legal/Pages/OL2012-12-0764.aspx.

85 NCUA, Definition of Fleet, Legal Opinion Letter
12–0764 (Sept. 13, 2012), available at http://
www.ncua.gov/Legal/Pages/OL2012-12-0764.aspx.

Public Comments on the Second
Proposal
The proposed definition of ‘‘consumer
loan’’ referenced loans ‘‘to one or more
individuals . . . including any loans
secured by vehicles generally
manufactured for personal, family, or
household use regardless of the purpose
of the loan.’’ At least one commenter
requested that the Board clarify whether
the same loan would still be considered
a consumer loan if made to an
incorporated entity. If the definition is
not dependent on the type of borrower,
the commenter suggested that the words
‘‘one or more individuals’’ were not
necessary. The commenter also
requested that the Board clarify the
definition of a loan ‘‘for the purchase of
fleet vehicles,’’ and, to maximize ease of
compliance, recommended the Board
incorporate the definition of ‘‘fleet’’
contained in a 2012 NCUA legal opinion
directly into the definition.84

PO 00000

Frm 00022

Fmt 4701

Sfmt 4700

E:\FR\FM\29OCR2.SGM

29OCR2

Federal Register / Vol. 80, No. 209 / Thursday, October 29, 2015 / Rules and Regulations

mstockstill on DSK4VPTVN1PROD with RULES2

The Board received no comments on
the definition and has decided to retain
the proposed definition in this final rule
without change.
Credit conversion factor (CCF). The
Second Proposal defined the term
‘‘credit conversion factor’’ as the
percentage used to assign a credit
exposure equivalent amount for selected
off-balance sheet accounts.
The Board received no comments on
this definition and has decided to retain
the proposed definition in this final rule
without change.
Credit union. The Second Proposal
defined the term ‘‘credit union’’ as a
federally insured, natural-person credit
union, whether federally or statechartered. The proposal would have
amended 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 were unnecessary, and could
mistakenly be read to limit the
definition of ‘‘credit unions’’ to statechartered credit unions.
The Board received no comments on
the proposed revisions to the definition
of ‘‘credit union’’ and has decided to
retain the proposed definition in this
final rule without change.
Current. The Second Proposal defined
the term ‘‘current,’’ with respect to any
loan, as less than 90 days past due, not
placed on non-accrual status, and not
restructured.
Public Comments on the Second
Proposal
The Board received only a small
number of comments on the proposed
definition of the term ‘‘current.’’ Most
commenters who mentioned it
supported the proposed definition of
‘‘current.’’ One credit union commenter,
however, suggested that the Board
should define ‘‘current’’ as loans that
are 60 days past due, which was the
period provided in the Original
Proposal, because expanding the
delinquency loans to 90 days has more
risk and greater exposer to potential
loss. Another commenter recommended
that the definition of ‘‘current’’ be
revised so it does not automatically
exclude all restructured loans. Another
commenter argued that while it is
understandable to require a higher riskweighting for non-current loans,
lumping restructured loans into this
same category and treatment would be
punitive. The commenter suggested that
the definition of ‘‘restructured loans’’ be
amended to specifically address loans
that the commenter referred to as
‘‘troubled debt relief assets,’’ which are
loans that have been modified because
of financial hardship in the face of some

VerDate Sep<11>2014

22:13 Oct 28, 2015

Jkt 238001

type of credit impairment. According to
the commenter, the Financial
Accounting Standards Board already
requires excess reserves be held for
these assets based on the difference
between the net present value of the
loans under the original terms versus
the modified terms. The commenter
contended that credit unions currently
hold reserves of over 10 percent against
loans that are performing and have very
low incidents of future default.
Therefore, the commenter concluded,
treating a ‘‘troubled debt relief asset’’ as
a non-current loan would not reflect the
fact that a modification has been made
to a loan and it is performing. The
commenter suggested that such
restructurings aid the future
performance of such loans.
Discussion
The Board believes that the proposed
definition of ‘‘current’’ is 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,’’ and aligns well with the
definition of ‘‘current loan’’ under the
Other Banking Agencies’ regulations.86
In general, loans that are more than 90
days past due, or restructured, tend to
have higher incidences of default
resulting in losses. The proposed
definition is consistent with the
definition used under the Other Banking
Agencies’ risk-based capital rules and is
not dependent upon, nor contradictory
to, related accounting pronouncements.
Additional guidance will be provided to
credit unions in the future regarding
reporting troubled debt restructuring
(TDR) loans through supervisory
guidance and in the instructions on the
Call Report. Accordingly, the Board has
decided to retain the proposed
definition in this final rule without
change.
CUSO. The Second Proposal defined
the term ‘‘CUSO’’ as a credit union
service organization as defined in parts
712 and 741.
The Board received no comments on
this definition and has decided to retain
the proposed definition in this final rule
without change.
Custodian. The Second Proposal
defined the term ‘‘custodian’’ as a
financial institution that has legal
custody of collateral as part of a
qualifying master netting agreement,
clearing agreement or other financial
agreement.
86 See,

PO 00000

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

Frm 00023

Fmt 4701

Sfmt 4700

66647

The Board received no comments on
this definition and has decided to retain
the proposed definition in this final rule
without change.
Depository institution. The Second
Proposal defined the term ‘‘depository
institution’’ 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 provided
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 international banking
facilities of domestic depository
institutions, and all privately insured
state-chartered credit unions.
The Board received no comments on
this definition and has decided to retain
the proposed definition in this final rule
without change.
Derivatives Clearing Organization
(DCO). The Second Proposal defined the
term ‘‘Derivatives Clearing Organization
(DCO)’’ as having the same definition as
provided by the Commodity Futures
Trading Commission in 17 CFR 1.3(d).
The Board received no comments on
this definition and has decided to retain
the proposed definition in this final rule
without change.
Derivative contract. The Second
Proposal defined the term ‘‘derivative
contract’’ 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 provided
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 also provided 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 or five business days.
The Board received no comments on
this definition and has decided to retain
the proposed definition in this final rule
without change.
Equity investment. The Second
Proposal defined the term ‘‘equity

E:\FR\FM\29OCR2.SGM

29OCR2

mstockstill on DSK4VPTVN1PROD with RULES2

66648

Federal Register / Vol. 80, No. 209 / Thursday, October 29, 2015 / Rules and Regulations

investment’’ as investments in equity
securities, and any other ownership
interests, including, for example,
investments in partnerships and limited
liability companies.
The Board received no comments on
this definition and has decided to retain
the proposed definition in this final rule
without change.
Equity investment in CUSOs. The
Second Proposal defined the term
‘‘equity investment in CUSOs’’ 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 received no comments on
this definition and has decided to retain
the proposed definition in this final rule
without change.
Exchange. The Second Proposal
defined the term ‘‘exchange’’ as a
central financial clearing market where
end users can trade derivatives.
The Board received no comments on
this definition, but has decided to
clarify in this final rule that derivatives
are engaged in through agreements and
not traded like securities. Accordingly,
this final rule would define ‘‘exchange’’
as a central financial clearing market
where end users can enter into
derivative transactions.
Excluded goodwill, and excluded
other intangible assets. The Second
Proposal defined the term ‘‘excluded
goodwill’’ 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 this rule in final
form in the Federal Register. The
definition provided further that the term
excluded goodwill and its
accompanying definition would expire
on January 1, 2025.
The Second Proposal would have also
defined the 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 provided further that the term
excluded other intangible assets and its
accompanying definition would expire
on January 1, 2025.
Public Comments on the Second
Proposal
The Board received many comments
regarding the proposed treatment of
goodwill and other intangible assets

VerDate Sep<11>2014

22:13 Oct 28, 2015

Jkt 238001

under NCUA’s risk-based capital
requirement. A significant number of
commenters requested that the terms
‘‘excluded goodwill’’ and ‘‘excluded
intangible assets’’ and their proposed
treatment be retained permanently (or, if
not retained permanently, commenters
requested that the time period during
which they are allowed be extended).
The specific comments received and a
more detailed description of the Board’s
response are provided below in the part
of the preamble associated with
§ 702.104(b)(2).
Discussion
The Board generally agrees with
commenters who suggested the time
periods allowed for these proposed
exclusions be extended. The Board
added these two definitions to take into
account the impact goodwill or other
intangible assets recorded from
transactions defined as supervisory
mergers or combinations have on the
calculation of the risk-based capital
ratio upon implementation. The
proposed exclusions would have
applied to supervisory mergers or
combinations that were completed prior
to the date of publication of this final
rule in the Federal Register. The
proposed exclusion would have ended
on January 1, 2025. For the reasons
discussed below in the part of the
preamble associated with
§ 702.104(b)(2), the Board has decided
to revise the proposed definitions of
‘‘excluded goodwill’’ and ‘‘excluded
other intangible assets’’ to extend the
period during which credit unions can
count these assets in the risk-based
capital ratio numerator to January 1,
2029. In addition, the Board is
extending the period, after the
publication of this final rule in the
Federal Register, during which credit
unions can obtain ‘‘excluded goodwill’’
and ‘‘excluded other intangible assets’’
to 60 days to allow credit unions
additional time to adjust to the changes
made by this final rule.
Accordingly, this final rule defines
‘‘excluded goodwill’’ as the outstanding
balance, maintained in accordance with
GAAP, of any goodwill originating from
a supervisory merger or combination
that was completed on or before a date
to be set upon publication, which will
be 60 days after publication of this final
rule in the Federal Register. The
definition provides further that the term
and definition expire on January 1,
2029.
Similarly, this final rule also defines
‘‘excluded other intangible assets’’ as
the outstanding balance, maintained in
accordance with GAAP, of any other
intangible assets such as core deposit

PO 00000

Frm 00024

Fmt 4701

Sfmt 4700

intangible, member relationship
intangible, or trade name intangible
originating from a supervisory merger or
combination that was completed on or
before a date to be set upon publication,
which will be 60 days after publication
of this final rule in the Federal Register.
The definition provides further that the
term and definition expire on January 1,
2029.
Exposure amount. The Second
Proposal defined the term ‘‘exposure
amount’’ 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
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.
• 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.
The Board received no comments on
this definition and has decided to retain
the proposed definition in this final rule
without change.
Fair value. The Second Proposal
defined the term ‘‘fair value’’ as having
the same meaning as provided in GAAP.
The Board received no comments on
this definition and has decided to retain
the proposed definition in this final rule
without change.
Financial collateral. The Second
Proposal defined the term ‘‘financial
collateral’’ 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 received no comments on
this definition and has decided to retain
the proposed definition in this final rule
without change.
First-lien residential real estate loan.
The Second Proposal defined the term
‘‘first-lien residential real estate loan’’ 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 junior-

E:\FR\FM\29OCR2.SGM

29OCR2

mstockstill on DSK4VPTVN1PROD with RULES2

Federal Register / Vol. 80, No. 209 / Thursday, October 29, 2015 / Rules and Regulations
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.
The Board received no comments on
this definition and has decided to retain
the proposed definition in this final rule
without change.
GAAP. The Second Proposal defined
the term ‘‘GAAP’’ 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 received no comments on
this definition and has decided to retain
the proposed definition in this final rule
without change.
General account permanent
insurance. The Second Proposal defined
the term ‘‘general account permanent
insurance’’ 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 the
proposed definition, general account
permanent insurance would have
included direct obligations to the
insurance provider. This would have
meant that the credit risk associated
with general account permanent
insurance was to the insurance
company, which generally makes such
insurance accounts have a lower credit
risk than separate account insurance. A
separate account insurance is a
segregated accounting and reporting
account held separately from the
insurer’s general assets.
The Board received no comments on
this definition and has decided to retain
the proposed definition in this final rule
without change.
General obligation. The Second
Proposal defined the term ‘‘general
obligation’’ as a bond or similar
obligation that is backed by the full faith
and credit of a public sector entity.
The Board received no comments on
this definition and has decided to retain
the proposed definition in this final rule
without change.
Goodwill. The Second Proposal
defined the term ‘‘goodwill’’ 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. The Proposed definition
provided further that goodwill does not
include excluded goodwill.

VerDate Sep<11>2014

22:13 Oct 28, 2015

Jkt 238001

The Board received no comments on
this definition and has decided to retain
the proposed definition in this final rule
without change.
Government guarantee. The Second
Proposal defined the term ‘‘government
guarantee’’ as a guarantee provided by
the U.S. Government, FDIC, NCUA or
other U.S. Government agencies, or a
public sector entity.
Public Comments on the Second
Proposal
One state supervisory authority
commenter requested clarification on
the definition of ‘‘government
guarantee,’’ and whether the definition
includes any type of guarantee from a
state government, state government
agency, or municipality.
Discussion
The Board definition of ‘‘government
guarantee’’ does include guarantees
from a state government, state
government agency, or municipality.
The definition expressly includes a
guarantee provided by a ‘‘public sector
entity,’’ which the second proposal
defines separately in § 702.2 as a state,
local authority, or other governmental
subdivision of the United States below
the sovereign level. The proposed
definition of ‘‘public sector entity’’
would include state governments, state
government agencies, and
municipalities. Accordingly, the Board
has decided to retain the proposed
definition of ‘‘government guarantee’’ in
this final rule without change.
Government-sponsored enterprise
(GSE). The Second Proposal defined the
term ‘‘government-sponsored
enterprise’’ 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.
The Board received no comments on
this definition and has decided to retain
the proposed definition in this final rule
without change.
Guarantee. The Second proposal
defined the term ‘‘guarantee’’ 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 received no comments on
this definition and has decided to retain
the proposed definition in this final rule
without change.
Identified losses. The Second
Proposal defined the term ‘‘identified
losses’’ as those items that have been
determined by an evaluation made by

PO 00000

Frm 00025

Fmt 4701

Sfmt 4700

66649

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.
The definition provided 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.
Public Comments on the Second
Proposal
At least one commenter requested that
the Board specify in the definition of
‘‘identified losses’’ that such losses are
only chargeable against losses.
Discussion
The commenter’s suggested revision
to the proposed definition is not
consistent with generally accepted
accounting principles. The definition of
‘‘identified losses’’ specifies that it be
recorded in accordance with GAAP to
appropriately address this matter and
any further limiting conditions could
run afoul of GAAP reporting.
Accordingly, the Board has decided to
retain the proposed definition in this
final rule without change.
Industrial development bond. The
Second Proposal defined the term
‘‘industrial development bond’’ 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.
The Board received no comments on
this definition and has decided to retain
the proposed definition in this final rule
without change.
Intangible assets. The Second
Proposal defined the term ‘‘intangible
assets’’ as assets, maintained in
accordance with GAAP, other than
financial assets, that lack physical
substance.
The Board received no comments on
this definition and has decided to retain
the proposed definition in this final rule
without change.
Investment fund. The Second
Proposal defined the term ‘‘investment
fund’’ as an investment with a pool of
underlying investment assets. The
proposed definition provided further
that the term investment fund includes
an investment company that is

E:\FR\FM\29OCR2.SGM

29OCR2

66650

Federal Register / Vol. 80, No. 209 / Thursday, October 29, 2015 / Rules and Regulations

registered under section 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 received no comments on
this definition and has decided to retain
the proposed definition in this final rule
without change.
Junior-lien residential real estate loan.
The Second Proposal defined the term
‘‘junior-lien residential real estate loan’’
as a loan or line of credit secured by a
subordinate lien on a one-to-four family
residential property. The proposed
definition generally included all
residential real estate loans that did not
meet the definition of a first-lien
residential real estate loan because the
credit union is secured by a second or
subsequent lien on the residential
property loan.
The Board received no comments on
this definition and has decided to retain
the proposed definition in this final rule
without change.
Limited Recourse. The Second
Proposal did not define the term
‘‘limited recourse.’’

mstockstill on DSK4VPTVN1PROD with RULES2

Public Comments on the Second
Proposal
At least one commenter suggested that
the Board define ‘‘limited recourse’’ as
provided under GAAP and clarify that
the definition excludes normal reps and
warranties in a loan sale transaction.
Discussion
There is no need to define ‘‘limited
recourse’’ because the Second Proposal
and this final rule define the term
‘‘loans transferred with limited
recourse.’’ That definition provides
sufficient information regarding the
rule’s use of the term ‘‘limited
recourse,’’ and adequately addresses the
normal representations and warranties
associated with limited recourse.
Accordingly, the Board has decided not
to separately define the term ‘‘limited
recourse’’ in this final rule.
Loan to a CUSO. The Second Proposal
defined the term ‘‘loan to a CUSO’’ 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 received no comments on
this definition and has decided to retain
the proposed definition in this final rule
without change. 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 risk weight of

VerDate Sep<11>2014

22:13 Oct 28, 2015

Jkt 238001

a loan to a CUSO is normally zero since
the consolidation entries eliminate the
intercompany transaction.
Loan secured by real estate. The
Second Proposal defined the term ‘‘loan
secured by real estate’’ 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 provided 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 also
provided 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 received no comments on
this definition and has decided to retain
the proposed definition in this final rule
without change.
Loans transferred with limited
recourse. The Second Proposal defined
the term ‘‘Loans transferred with limited
recourse’’ 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 provided 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.
The Board received no comments on
this definition and has decided to retain
the proposed definition in this final rule
without change.
Mortgage-backed security (MBS). The
Second Proposal defined the term
‘‘mortgage-backed security’’ 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.
The Board received no comments on
this definition and has decided to retain
the proposed definition in this final rule
without change.
Mortgage partnership finance
program. The Second Proposal defined

PO 00000

Frm 00026

Fmt 4701

Sfmt 4700

the term ‘‘mortgage partnership finance
program’’ 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 Banks.
Public Comments on the Second
Proposal
The Board received several comments
on the proposed definition of ‘‘mortgage
partnership finance program.’’ One
commenter explained that the Federal
Home Loan Banks have programs
through which they acquire
conventional and government-issued
residential mortgage loans from certain
of their members, called Participating
Financial Institutions (PFIs). The
commenter explained that the Mortgage
Partnership Finance (MPF) Program is
offered today by most Federal Home
Loan Banks, but that the Federal Home
Loan Banks of Cincinnati and
Indianapolis each independently
operate a similar member product called
the Mortgage Purchase Program (MPP).
According to the commenter, both the
MPP and MPF Programs operate
pursuant to Federal Housing Finance
Agency regulation and the majority of
PFIs that sell mortgage loans under
these programs are small to mid-sized
community banks, thrifts, and credit
unions. Several commenters suggested
that NCUA’s proposed definition of
‘‘Mortgage Partnership Finance
Program,’’ could be reasonably
construed to only apply to MPF Program
loans that a credit union services. If the
intent of the rule is to treat all MPF
program loans the same, regardless of
whether the credit union retains or sells
the servicing, then the commenters
recommended the Board clarify the
definition by deleting the words ‘‘and
servicing them’’ from the definition of
‘‘Mortgage Partnership Finance
Program.’’
Commenters also suggested that,
although the MPP and the MPF
Programs are similar in many respects,
there is an important difference
regarding recourse risk. According to
the commenters, the MPF Program
achieves credit enhancement by creating
a contingent liability for PFIs while the
MPP achieves credit enhancement by
creating a contingent asset for the PFI.
Because credit unions retain recourse
risk on MPF loans but not on MPP
loans, the commenters recommended

E:\FR\FM\29OCR2.SGM

29OCR2

Federal Register / Vol. 80, No. 209 / Thursday, October 29, 2015 / Rules and Regulations

mstockstill on DSK4VPTVN1PROD with RULES2

that the Board amend the proposed
definition of ‘‘Mortgage Partnership
Finance Program’’ to clarify that the
term expressly excludes MPP loans. In
particular, the commenters
recommended that the Board add the
words ‘‘in a manner other than by
establishing a contingent asset for the
benefit of or payable to the depository
institution’’ at the end of the definition
of Member Partnership Finance
Program.
Discussion
The Board generally agrees with the
commenters who suggested removing
the words ‘‘and servicing them’’ from
the proposed definition of ‘‘mortgage
partnership finance program.’’ The
Board’s intent is to treat all MPF
program loans the same under the final
rule regardless of whether the credit
union retains or sells the servicing.
Accordingly, this final rule revises the
definition of mortgage partnership
finance program to remove the words
‘‘and servicing them.’’
The Board also agrees with
commenters who suggested there is an
important difference between the MPP
and the MPF Programs regarding
recourse risk. MPF loans are not the
same as MPP loans with regard to risk
because credit unions retain recourse
risk through a credit enhancement
obligation to the Federal Home Loan
Bank for credit losses on MPF loans.
Loans sold under the MPP program are
risk-weighted based on the contractual
recourse obligation, if any. Thus the
commenters’ suggested change to the
definition of MPF Programs is
necessary.
Accordingly, this final rule defines
‘‘mortgage partnership finance program’’
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 institution receives fees for
managing the credit risk of the loans.
The definition provides further that the
credit risk must be shared between the
depository institution and the Federal
Home Loan Banks.
Mortgage servicing assets. The Second
Proposal defined the term ‘‘mortgage
servicing asset’’ 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.
The Board received no comments on
this definition and has decided to retain

VerDate Sep<11>2014

22:13 Oct 28, 2015

Jkt 238001

the proposed definition in this final rule
without change.
NCUSIF. The Second Proposal
defined the term ‘‘NCUSIF’’ as the
National Credit Union Share Insurance
Fund as defined by 12 U.S.C. 1783.
The Board received no comments on
this definition and has decided to retain
the proposed definition in this final rule
without change.
Net worth. Generally consistent with
the current rule, the Second Proposal
defined the term ‘‘net worth’’ 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
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
section 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 Board received no comments on
this definition and has decided to retain
the proposed definition in this final rule
without change.
Net worth ratio. The Second Proposal
defined the term ‘‘net worth ratio’’ as
the ratio of the net worth of the credit
union to the total assets of the credit
union rounded to two decimal places.

PO 00000

Frm 00027

Fmt 4701

Sfmt 4700

66651

The Board received no comments on
this definition and has decided to retain
the proposed definition in this final rule
without change.
New credit union. The Second
Proposal would have revised the
definition of ‘‘new credit union’’ by
removing the definition provided in
current § 702.2 and providing that the
term has the same meaning as in
§ 702.201.
The Board received no comments on
this definition and has decided to retain
the proposed definition in this final rule
without change.
Nonperpetual capital. The Second
Proposal defined the term
‘‘nonperpetual capital’’ as having the
same meaning as in 12 CFR 704.2.
The Board received no comments on
this definition and has decided to retain
the proposed definition in this final rule
without change.
Off-balance sheet items. The Second
Proposal defined the term ‘‘off-balance
sheet items’’ 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 received no comments on
this definition and has decided to retain
the proposed definition in this final rule
without change.
Off-balance sheet exposure. The
Second Proposal defined the term ‘‘offbalance sheet exposure’’ as: (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
contractual agreement.
The Board received no comments on
this definition and has decided to retain
the proposed definition in this final rule
without change.
On-balance sheet. The Second
Proposal defined the term ‘‘on-balance
sheet’’ as a credit union’s assets,
liabilities, and equity, as disclosed on
the statement of financial condition at a
specific point in time.
The Board received no comments on
this definition and has decided to retain

E:\FR\FM\29OCR2.SGM

29OCR2

66652

Federal Register / Vol. 80, No. 209 / Thursday, October 29, 2015 / Rules and Regulations

the proposed definition in this final rule
without change.
Other intangible assets. The Second
Proposal defined the term ‘‘other
intangible assets’’ as intangible assets,
other than servicing assets and
goodwill, maintained in accordance
with GAAP. The definition provided
further that other intangible assets does
not include excluded other intangible
assets.
The Board received no comments on
this definition and has decided to retain
the proposed definition in this final rule
without change.
Over-the-counter (OTC) interest rate
derivative contract. The Second
Proposal defined the term ‘‘over-thecounter (OTC) interest rate derivative
contract’’ as a derivative contract that is
not cleared on an exchange.
The Board received no comments on
this definition and has decided to retain
the proposed definition in this final rule
without change.
Part 703 compliant investment fund.
The Second proposal used the term
‘‘part 703 compliant investment fund,’’
but did not specifically define the term
in § 702.2. The discussion in the
preamble to the proposal, however, used
the term to mean an investment fund
that is restricted to holding only
investments that are permissible under
12 CFR 703.14(c).

mstockstill on DSK4VPTVN1PROD with RULES2

Public Comments on the Second
Proposal
The Board received many comments
on the risk weights assigned to ‘‘part
703 compliant investment funds.’’ Some
of the comments received seemed to
indicate that credit unions and other
interested parties were unclear
regarding the rule’s use of the term. The
specific comments received regarding
investment funds and part 703
compliance are discussed in more detail
below in the part of preamble associated
with § 702.104(c).
Discussion
The Board has decided to define the
term ‘‘part 703 compliant investment
funds’’ in § 702.2 to clarify the meaning
of the term and avoid possible
confusion in the future. Accordingly,
this final rule defines ‘‘part 703
compliant investment fund’’ as an
investment fund that is restricted to
holding only investments that are
permissible under 12 CFR 703.14(c).
Perpetual contributed capital. The
Second Proposal defined the term
‘‘perpetual contributed capital’’ as
having the same meaning as in 12 CFR
704.2.
The Board received no comments on
this definition and has decided to retain

VerDate Sep<11>2014

22:13 Oct 28, 2015

Jkt 238001

the proposed definition in this final rule
without change.
Public sector entity (PSE). The Second
Proposal defined the term ‘‘public sector
entity’’ as a state, local authority, or
other governmental subdivision of the
United States below the sovereign level.
The Board received no comments on
this definition and has decided to retain
the proposed definition in this final rule
without change.
Qualifying master netting agreement.
The Second Proposal defined the term
‘‘qualifying master netting agreement’’
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

PO 00000

Frm 00028

Fmt 4701

Sfmt 4700

administrative authorities would find
the agreement to be legal, valid, binding,
and enforceable under the law of
relevant jurisdictions.
The Board received no comments on
this definition and has decided to retain
the proposed definition in this final rule
without change.
Recourse. The second Proposal
defined the term ‘‘recourse’’ 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 provided 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 also provided 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 provided that
recourse may also exist implicitly if the
credit union provides credit
enhancement beyond any contractual
obligation to support assets it has
transferred.
The Board received no comments on
this definition and has decided to retain
the proposed definition in this final rule
without change.
Residential mortgage-backed security.
The Second Proposal defined the term
‘‘residential mortgage-backed security’’
as a mortgage-backed security backed by
loans secured by a first-lien on
residential property.
The Board received no comments on
this definition and has decided to retain
the proposed definition in this final rule
without change.
Residential property. The Second
Proposal defined the term ‘‘residential
property’’ 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
provided further that the term
residential property excludes boats and
motor homes, even if used as a primary
residence, and timeshare property.
The Board received no comments on
this definition and has decided to retain
the proposed definition in this final rule
without change.
Restructured. The Second Proposal
defined the term ‘‘restructured,’’ with
respect to any loan, as a restructuring of
the loan in which a credit union, for
economic or legal reasons related to a

E:\FR\FM\29OCR2.SGM

29OCR2

Federal Register / Vol. 80, No. 209 / Thursday, October 29, 2015 / Rules and Regulations
borrower’s financial difficulties, grants a
concession to the borrower that it would
not otherwise consider. The definition
provided further that the term
restructured excludes loans modified or
restructured solely pursuant to the U.S.
Treasury’s Home Affordable Mortgage
Program.

mstockstill on DSK4VPTVN1PROD with RULES2

Public Comments on the Second
Proposal
At least one commenter argued that
the definition of the term
‘‘restructured,’’ as it applied to loans,
and the accompanying footnote in the
preamble to the Second Proposal were
troublesome.87 The commenter believed
that the footnote accompanying the
preamble discussion on the definition of
‘‘restructured’’ suggested that a loan that
was restructured was what FASB calls
a TDR. The commenter was confused
further by the following statement in the
preamble: ‘‘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.’’ 88 According to the commenter,
however, such a loan would be treated
as a restructured loan for accounting
purposes by FASB and under the TDR
guidance. To avoid confusion, the
commenter recommended that the
Board amend the definition of
‘‘restructured’’ to be consistent with the
standards and guidance set by FASB.
Discussion
The proposed definition of
‘‘restructured’’ was based on the
classification of restructured loans for
the purpose of assigning appropriate
risk weights. The proposed definition is
consistent with the definition used
under the Other Banking Agencies’ riskbased capital rules and is not dependent
upon nor contradictory to related
accounting pronouncements. Additional
guidance will be provided to credit
unions in the future regarding riskweighting restructured loans through
supervisory guidance and in the
instructions on the Call Report.
Accordingly, the Board has decided to
retain the proposed definition of
‘‘restructured’’ in this final rule without
change.
Revenue obligation. The Second
Proposal defined the term ‘‘revenue
obligation’’ as a bond or similar
obligation that is an obligation of a
public sector entity, but which the
public sector entity is committed to
repay with revenues from the specific
87 See 80 FR 4339, 4369 (Jan. 27, 2015) (Footnote
119, referred to by the commenter, relates to
Financial Accounting Standards Board ASC 310–
40, ‘‘Troubled Debt Restructuring by Creditors.’’).
88 Id. at 4369.

VerDate Sep<11>2014

22:13 Oct 28, 2015

Jkt 238001

project financed rather than general tax
funds. Generally, such bonds or debts
are paid with revenues from the specific
project financed rather than the general
credit and taxing power of the issuing
jurisdiction.
The Board received no comments on
this definition and has decided to retain
the proposed definition in this final rule
without change.
Risk-based capital ratio. The Second
Proposal defined the term ‘‘risk-based
capital ratio’’ 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).
The Board received no comments on
this definition and has decided to retain
the proposed definition in this final rule
without change.
Risk-weighted assets. The Second
Proposal defined the term ‘‘riskweighted assets’’ as the total riskweighted assets as calculated in
accordance with § 702.104(c).
The Board received no comments on
this definition and has decided to retain
the proposed definition in this final rule
without change.
Secured consumer loan. The Second
Proposal defined the term ‘‘secured
consumer loan’’ 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 received no comments on
this definition and has decided to retain
the proposed definition in this final rule
without change.
Senior executive officer. The Second
Proposal defined the term ‘‘senior
executive officer’’ as a senior executive
officer as defined by 12 CFR
701.14(b)(2).
The Board received no comments on
this definition and has decided to retain
the proposed definition in this final rule
without change.
Separate account insurance. The
Second Proposal defined the term
‘‘separate account insurance’’ 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 received no comments on
this definition and has decided to retain
the proposed definition in this final rule
without change.
Shares. The Second Proposal defined
the term ‘‘shares’’ as deposits, shares,
share certificates, share drafts, or any
other depository account authorized by
federal or state law.
The Board received no comments on
this definition and has decided to retain

PO 00000

Frm 00029

Fmt 4701

Sfmt 4700

66653

the proposed definition in this final rule
without change.
Share-secured loan. The Second
Proposal defined the term ‘‘sharesecured loan’’ as 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
12 CFR 701.39.
The Board received no comments on
this definition and has decided to retain
the proposed definition in this final rule
with the following conforming changes.
This final rule amends the definition of
share-secured loans to be consistent
with the new zero percent risk weight
assigned to share-secured loans, where
the shares securing the loan are on hold
with the credit union, which is
discussed in more detail below.
Accordingly, this final rule defines the
term ‘‘share-secured loan’’ as a loan
fully secured by shares, and does not
include the imposition of a statutory
lien under § 701.39 of this chapter.
STRIPS. The Second Proposal defined
the term ‘‘STRIPS’’ as separate traded
registered interest and principal
security.
The Board received no comments on
this definition and has decided to retain
the proposed definition in this final rule
without change.
Structured product. The Second
Proposal defined the term ‘‘structured
product’’ as an investment that is
linked, via return or loss allocation, to
another investment or reference pool.
The Board received no comments on
this definition and has decided to retain
the proposed definition in this final rule
without change.
Subordinated. The Second Proposal
defined the term ‘‘subordinated’’ to
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 provided further that the
term subordinated does not apply to
securities that are junior only to money
market fund eligible securities in the
same issuance.
Public Comments on the Second
Proposal
At least one commenter
recommended the Board more clearly
define the term ‘‘subordinated’’ with
respect to a ‘‘tranche.’’ As discussed in
the part of the preamble associated with
§ 702.104(c)(2), commenters also
expressed some confusion regarding
NCUA’s use of the term ‘‘nonsubordinated’’ in the Second Proposal.
Additionally, commenters expressed
their desire to have the risk-weight
assigned to a non-subordinated tranche

E:\FR\FM\29OCR2.SGM

29OCR2

66654

Federal Register / Vol. 80, No. 209 / Thursday, October 29, 2015 / Rules and Regulations

mstockstill on DSK4VPTVN1PROD with RULES2

be based on the underlying collateral in
the tranche.
Discussion
The Second Proposal defined the
terms ‘‘subordinated’’ and ‘‘tranche.’’
These definitions, when read together,
make it clear that a subordinated
tranche is an investment that has a
junior claim to other securities within
the same transaction.
The Board agrees, however, that
clarifying the definition of
‘‘subordinated’’ to clarify the meaning of
the term non-subordinated in § 702.2
will help clarify the meaning of the term
for credit unions and other interested
parties, and clarify that under this final
rule all tranches of investments,
regardless of standing, can be riskweighted using the gross-up approach.
As discussed in more detail below,
commenters suggested that credit
unions be given the option of using the
gross-up approach to risk-weight nonsubordinated tranches of investments. A
non-subordinated instrument is the
most senior tranche in a security with
a senior/subordinated structure. The
Board has decided to further clarify the
definition of ‘‘subordinated’’ for credit
unions using the gross-up approach for
both subordinated and nonsubordinated investment tranches. This
change will benefit credit unions
purchasing non-subordinated tranches
of securities collateralized with lower
credit risk assets.
Accordingly, this final rule defines
the term ‘‘subordinated’’ as meaning,
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 also provides that an
investment that does not have a junior
claim to other investments in the same
issuance on the underlying collateral or
assets is non-subordinated. Finally, the
definition provides that a security that
is junior only to money-market-eligible
securities in the same issuance is also
non-subordinated.
Supervisory merger or combination.
The Second Proposal defined the term
‘‘supervisory merger or combination’’ 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

VerDate Sep<11>2014

22:13 Oct 28, 2015

Jkt 238001

• A merger or purchase and
assumption that included NCUA’s or
the appropriate state official’s
identification and selection of the
continuing credit union.
The Board received no comments on
this definition and has decided to retain
the proposed definition in this final rule
without change.
Swap dealer. The Second Proposal
defined the term ‘‘swap dealer’’ as
having the same meaning as defined by
the Commodity Futures Trading
Commission in 17 CFR 1.3(ggg).
The Board received no comments on
this definition and has decided to retain
the proposed definition in this final rule
without change.
Total assets. The Second Proposal
retained the definition of ‘‘total assets’’
in current § 702.2, but would have
restructured the definition and provided
additional clarifying language. The
proposal amended the definition to
provide that ‘‘total assets’’ means a
credit union’s total assets as measured 89
by either:
• 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;
• 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;
• Average daily balance. The credit
union’s total assets measured by the
average daily balance over the
applicable calendar quarter; or
• 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.
Public Comments on the Second
Proposal
One commenter suggested that the
proposed definition of ‘‘total assets’’
would create inconsistency as to how
risk-based capital results are reported
and would hinder comparability among
credit unions. The commenter
recommended that the Board amend the
definition to require that total assets be
measured by the average of quarter-end
balances of the current and three
preceding calendar quarters.
Discussion
With the exception of a few nonsubstantive amendments, the proposed
89 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).

PO 00000

Frm 00030

Fmt 4701

Sfmt 4700

definition of ‘‘total assets’’ is the same
as the definition in current § 702.2. In
fact, the revision suggested by the
commenter above would reduce the
number of options available to a credit
union in determining which total assets
to apply in calculating its net worth
ratio. Such a narrowing of the definition
is not appropriate. Accordingly, the
Board has decided to retain the
proposed revisions to the definition in
this final rule without change.
Tranche. The Second Proposal
defined the term ‘‘tranche’’ as one of a
number of related securities offered as
part of the same transaction. The
definition provided 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 received no comments on
this definition and has decided to retain
the proposed definition in this final rule
without change.
Unfunded commitment. Neither the
current rule nor the Second Proposal
define the term ‘‘unfunded
commitment.’’
Public Comments on the Second
Proposal
At least one commenter
recommended that the Board define the
term ‘‘unfunded commitment’’ in the
final rule because the commenter
believed the proposed definition was
unclear as to whether a credit union real
estate loan pipeline or outstanding auto
loan convenience check would be
classified as an unfunded commitment.
Discussion
The proposal provides in § 702.2 that
‘‘off-balance sheet exposure’’ means, for
unfunded commitments, the remaining
unfunded portion of the contractual
agreement. The definition of offbalance-sheet exposure defines
unfunded commitment, so adding an
additional separate definition for
unfunded commitment would be
redundant. Additional guidance,
however, will be included in future
supervisory guidance and in the
instructions on the Call Report.
Accordingly, the Board has decided not
to define the term ‘‘unfunded
commitment’’ in this final rule.
Unsecured consumer loan. The
Second Proposal defined the term
‘‘unsecured consumer loan’’ as a
consumer loan not secured by collateral.
The Board received no comments on
this definition and has decided to retain
the proposed definition in this final rule
without change.
U.S. Government agency. The Second
Proposal defined the term ‘‘U.S.
Government agency’’ as an

E:\FR\FM\29OCR2.SGM

29OCR2

Federal Register / Vol. 80, No. 209 / Thursday, October 29, 2015 / Rules and Regulations
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
this definition and has decided to retain
the proposed definition in this final rule
with only minor clarifying amendments.
In particular, the Board clarified in the
definition that NCUA is a U.S.
Government agency, to confirm that
NCUA’s obligations receive a zero
percent risk weight. Accordingly, the
final rule defines ‘‘U.S. Government
agency’’ 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 definition provides
further that the term ‘‘U.S. Government
agency’’ includes NCUA.
Weighted-average life of investments.
Under the Second Proposal, the
definition of ‘‘weighted-average life of
investments’’ and the provisions in
current § 702.105 of NCUA’s regulation
would have been removed completely.
Other than the comments supporting
the removal of IRR from NCUA’s riskbased capital requirement, the Board
received no comments regarding the
removal of this definition and has
decided to retain the proposed
amendment in this final rule without
change.

mstockstill on DSK4VPTVN1PROD with RULES2

A. Subpart A—Prompt Corrective
Action
The Second Proposal would have
established a new subpart A titled
‘‘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 section 216(b)(2) of the
FCUA.90 The Board received no
comments on these revisions and has
decided to retain the proposed
amendments in this final rule.
Section 702.101 Capital Measures,
Capital Adequacy, Effective Date of
Classification, and Notice to NCUA
The Second Proposal retained the
requirements of § 702.101 leaving it
largely unchanged from current
§ 702.101, with a few notable exceptions
that are discussed in more detail below.
The title of proposed § 702.101 would
have been changed to ‘‘Capital
Measures, capital adequacy, effective
90 12

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

VerDate Sep<11>2014

22:13 Oct 28, 2015

date of classification, and notice to
NCUA’’ to better reflect the three major
topics that would have been covered in
the section. In addition, proposed
§ 702.101 would have amended current
§ 702.101 to include a new capital
adequacy provision that was based on a
similar provision in FDIC’s capital
regulations.91 The new capital adequacy
provision was added as proposed
§ 702.101(b). Paragraphs (b) and (c) of
current § 702.101 would have been
renumbered as paragraphs (d) and (e).
The new capital adequacy provision
would not have affected credit unions’
PCA capital category, but could have
supported the assessment of capital
adequacy in the supervisory process
(assigning CAMEL and risk ratings).
Public Comments on the Second
Proposal
A substantial number of commenters
objected to the proposed addition of
capital adequacy provisions to
§ 702.101. Many commenters stated that
they were concerned about the
subjective nature of the capital
adequacy provision. Commenters
contended that if a credit union meets
the net worth and risk-based capital
requirements, NCUA should not have
the ability to require the credit union to
hold additional capital. Other
commenters argued that the proposed
capital adequacy provisions could be
problematic because they would grant
examiners considerable latitude to
determine whether a credit union needs
more capital even if it is well
capitalized according to standard net
worth and risk-based capital ratio
requirements. Commenters argued that
credit unions and the NCUSIF have
functioned well without these
provisions and NCUA has not provided
sufficient justification to support their
imposition now. Still other commenters
noted that credit unions already provide
for capital adequacy through budgeting,
ALM planning, liquidity, interest rate
risk, and risk management, and
speculated that the proposed capital
adequacy provision would subject credit
unions’ capital plans to be judged in an
arbitrary and subjective manner by
hundreds of different NCUA examiners.
The commenters argued that such an
approach would provide examiners
with too much authority to change the
‘‘playing field,’’ especially when there is
no independent entity to which a credit
union can appeal. At least one
commenter suggested that the Board
already has this authority so adding to
the existing authority would be
unnecessary and redundant.
91 12

Jkt 238001

PO 00000

CFR 324.10.

Frm 00031

Fmt 4701

Sfmt 4700

66655

One commenter, however,
acknowledged that codifying the
additional capital adequacy
requirements in § 702.101(b) was
reasonable. But the commenter
suggested that the standards
surrounding the provision’s use should
be made clear because NCUA already
examines credit unions to determine
whether they have sufficient net worth
relative to risk, and whether credit
unions have adequate policies,
practices, and procedures regarding net
worth and capital accounts.92 The
commenter noted further, the proposed
rule indicates that it ‘‘may provide
specific metrics for necessary reductions
in risk levels, increases in capital levels
beyond those otherwise required under
part 702, and some combination of risk
reduction and increased capital.’’ 93 The
commenter recommended that the
Board clarify how it envisions
§ 702.101(b) augmenting NCUA’s
current supervisory process and any
enforcement authority the agency holds
in conjunction with that process.
Another commenter suggested that
credit unions with lower risk profiles
and/or higher capital levels should be
subjected to less rigorous examinations
of risk management. The commenter
also suggested that credit unions with
higher risk levels against a given set of
reasonable thresholds, or those with
lower capital levels, should have their
examination of risk elevated to the risk
management specialists within NCUA.
The commenter suggested that removing
field examiners with little specific
knowledge from the examination
findings and recommendation process
would provide a more consistent exam,
and recommended that NCUA produce
a set of known, published and
reasonable filters to define outlier credit
unions, including a cross-risk look at
risks due to concentration, low capital
or earnings levels, interest rate
exposure, credit quality, etc.
At least one commenter questioned
the Board’s legal authority to adopt a
provision that would require individual
credit unions to hold capital above that
required under the other provisions of
the regulation. The commenter
acknowledged that the FCUA
establishes a risk-based net worth
requirement for complex credit unions,
but suggested it does not grant NCUA
the authority to impose individualized
capital requirements on a credit unionby-credit union basis. Another
92 See LTCU 00–CU–08 (Nov. 2000); see also
NCUA Examiner’s Guide, Ch. 16. available at
http://www.ncua.gov/Legal/GuidesEtc/
ExaminerGuide/chapter16.pdf.
93 80 FR 4340, 4359 (Jan. 27, 2015).

E:\FR\FM\29OCR2.SGM

29OCR2

66656

Federal Register / Vol. 80, No. 209 / Thursday, October 29, 2015 / Rules and Regulations

mstockstill on DSK4VPTVN1PROD with RULES2

commenter suggested if Congress had
intended the capital thresholds required
under PCA to be minimum
requirements, it would have described
the classification as minimally
capitalized. The commenter maintained
that each credit union’s long-term
desired capital ratio will depend on the
credit union’s own assessment of the
risks it faces, and its tolerance for risk.
The commenter recommended the
Board delete the capital adequacy
provisions, because credit unions’
capital plans should not be the subject
of examination and supervision, and the
goals a credit union establishes for its
own capital sufficiency should not
become targets or standards for review
in an examination.
One commenter requested
clarification on how NCUA would
coordinate the requirements of this new
provision with state regulators for
capital planning purposes.
Discussion
The Board has carefully considered
the comments above, and disagrees with
commenters who suggested that the
capital adequacy provisions are
unnecessary. As stated in the preamble
to the Second 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, NCUA
has a long-established 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.
Proposed § 702.101(b) was based on a
similar provision in the Other Banking
Agencies’ rules 94 and is within the
Board’s legal authority under the FCUA.
The FCUA grants NCUA broad 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.95 Requiring credit
unions to maintain capital adequacy is
part of ensuring safety and soundness,
and is not a new concept.96 NCUA’s
long-standing practice has been to
monitor and enforce capital adequacy
through the supervisory process.
Proposed § 702.101(b) would, with the
exception of the written capital
adequacy plan discussed in more detail
94 See,

e.g., 12 CFR 324.10(d)(1) & (2).
U.S.C. 1786; and 1789.
96 See, e.g. 78 FR 55340, 55362 (Sept. 10, 2013).

below, merely codify the existing
statutory requirement. The proposed
new capital adequacy provision would
not affect credit unions’ PCA capital
category, but would support the
assessment of capital adequacy in the
supervisory process (assigning CAMEL
and risk ratings).
Section 206 of the FCUA provides the
Board with broad authority to intervene
and require credit unions to take actions
to correct unsafe or unsound practices,
including requiring individual credit
unions to hold capital above that
required under NCUA’s PCA
regulation.97 And section 209 of the
FCUA specifically authorizes the Board
to prescribe such rules and regulations
as it may deem necessary or appropriate
to carry out the provisions of subchapter
II of the FCUA, which includes section
206. Accordingly, NCUA clearly has the
legal authority to include proposed
§ 702.101(b) in this final rule.
Accordingly, the Board has decided to
retain the proposed capital adequacy
provisions in this final rule without
change.
101(b) Capital Adequacy
For the reasons discussed above, the
new capital adequacy provisions are
added as § 702.101(b) of this final rule,
and paragraphs (b) and (c) of current
§ 702.101 are designated as paragraphs
(d) and (e) of § 702.101 of this final rule.
101(b)(1)
The Second Proposal would have
revised § 702.101(b)(1) to provide:
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.
For the reasons discussed above, the
Board has decided to retain the
proposed capital adequacy provision in
proposed § 702.101(b)(1) in this final
rule without change.
101(b)(2)
Proposed § 702.101(b)(2) provided: 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.
Public Comments on the Second
Proposal
A significant number of commenters
specifically objected to the proposed
new provision added as § 702.101(b)(2)
that would require complex credit

95 12

VerDate Sep<11>2014

22:13 Oct 28, 2015

Jkt 238001

97 12

PO 00000

U.S.C. 1786.

Frm 00032

Fmt 4701

Sfmt 4700

unions to have a comprehensive written
strategy for maintaining an appropriate
level of capital. One commenter pointed
out that, while the Board has taken steps
to closely align this proposal with
banking agency requirements in other
areas, it has chosen to deviate from that
standard to add a written reporting
requirement for credit unions under this
provision.98 The commenter suggested
that given that the specific requirements
of the proposed capital adequacy plan
are not delineated in this proposed rule,
but will be subsequently outlined in
supervisory guidance, commenters are
unable to determine the extent of the
burden this requirement might entail.
The commenter noted that all credit
unions with assets of $50 million or
more are already required to have a
written policy on interest rate risk
management and a program to
implement it effectively,99 as well as a
written liquidity policy and contingency
funding plan.100 In addition, the
commenter noted that the largest credit
unions are already required by
regulation to maintain a written capital
policy and capital plan that is approved
annually by NCUA.101 The commenter
recommended the Board explain why it
felt compelled to add a written
requirement to this provision for credit
unions, and make every effort to
streamline it and other similar
requirements to minimize the associated
regulatory burden.
One commenter recommended that if
the Board adopts a written capital
strategy requirement for all complex
credit unions, it utilize that written
strategy to ensure that credit unions are
addressing any heightened risks from
loan concentrations. The commenter
suggested such an approach should
obviate the need for elevated risk
weights in connection with real estate
and commercial loans by allowing
NCUA to address concentration risk in
a more targeted way. The commenter
suggested further that such an approach
would satisfy recommendations from
NCUA’s Office of Inspector General
(OIG) and GAO that NCUA consider
concentration risk as it pertains to
capital adequacy, without creating a
competitive disadvantage for all
complex credit unions in relation to
their banking counterparts. The
commenter also recommended that the
Board incorporate any written capital
strategy required within the credit
98 There is no mandated written element to the
corresponding FDIC provision. 12 CFR 324.1(d); 12
CFR 324.100(d).
99 12 CFR 741.3.
100 12 CFR 741.12.
101 12 CFR 702.501 through 702.506.

E:\FR\FM\29OCR2.SGM

29OCR2

Federal Register / Vol. 80, No. 209 / Thursday, October 29, 2015 / Rules and Regulations

mstockstill on DSK4VPTVN1PROD with RULES2

union’s strategic plan, or another
existing report in order to minimize
duplication of effort across various
reporting requirements. In addition, the
commenter suggested that an exemption
from the requirement be provided to
institutions that are already subject to
capital planning and stress testing
requirements, as the analysis
contemplated by this part would already
be addressed by those existing
requirements. Other commenters
contended that the written capital plan
requirement is not necessary for the vast
majority of complex credit unions based
on their management, risk profiles, and
current levels of capital. And if NCUA
examiners have concerns regarding the
credit unions they supervise, those
commenters argued, those situations
should be addressed on an individual
basis and not through rulemaking that
would apply universal requirements to
all complex credit unions, regardless of
how well managed they may be.
At least one commenter stated that
while NCUA should be able to access
the adequacy of a credit union’s capital
adequacy plan, safeguards should be put
in place to prevent over-zealous
examiners from implementing
individualized minimum capital
requirements during the exam process.
Another commenter suggested that the
concept of a written strategy was not
bad, but that the final rule should
provide additional clarity about what
exactly would be required under the
provision. Yet another commenter
asked: What are the components of the
‘‘comprehensive written strategy’’
contemplated under this provision?
What are the possible consequences of
an examiner determining that a credit
union’s comprehensive written strategy
does not meet the requirements? The
commenter requested that the Board
provide more description in this area
and elaborate on its expectations of
credit unions.
Discussion
The Board disagrees with commenters
who suggested the requirement that
complex credit unions maintain a
written capital strategy be removed from
the final rule. The supervisory
evaluation of a complex credit union’s
capital adequacy, including the
requirement to maintain a written
capital strategy, is focused on the credit
union’s own process and strategy for
assessing and maintaining its overall
capital adequacy in relation to its risk
profile. The supervisory evaluation may
include various factors—such as
whether the credit union is engaged in
merger activity, entering into new
activities, introducing new products,

VerDate Sep<11>2014

22:13 Oct 28, 2015

Jkt 238001

operating in a challenging economic
environment, engaged in nontraditional
activities, or exposed to other risks like
interest rate risk or operational risks.
The assessment evaluates the
comprehensiveness and effectiveness of
the capital planning in light of its
activities. An effective capital planning
process involves an assessment of the
risk to which a credit union is exposed
and its process for managing and
mitigating those risks, an evaluation of
capital relative to those risks, and
consideration of the potential impact on
earnings and capital from current and
prospective economic conditions. Under
the proposal, the evaluation of an
individual credit union’s risk
management strategy and process will
be commensurate with the credit
union’s size, sophistication, and risk
profile—which is similar to the current
supervisory process for credit unions.
For credit unions subject to Capital
Planning and Stress Testing under
subpart E of part 702 of NCUA’s
regulations, compliance with § 702.504
will result in compliance with
§ 702.101(b). Thus, those credit unions
subject to the stress testing regulation
will not be expected to write redundant
capital plans to fulfill the requirements
of this final rule.
For other complex credit unions that
will be expected to write capital plans,
supervisory guidance will be issued to
help those credit unions evaluate their
compliance with § 702.101(b). The
supervisory guidance will also be
designed to provide consistency in the
examination process.
Accordingly, the Board has decided to
retain the proposed capital adequacy
provision in proposed § 702.101(b)(1) in
this final rule without change.
Section 702.102 Capital Classifications
Under the Second Proposal, the title
of § 702.102 would have been changed
from ‘‘statutory net worth categories’’ to
‘‘capital classifications.’’ The section
would have continued to list the five
statutory capital categories that are
provided in § 216(c) of the FCUA.102
The Board received no comments on
these revisions and has decided to
retain the proposed amendments in this
final rule without change.
102(a) Capital Categories
The Second Proposal would have
revised current § 702.102(a) to include
new minimum risk-based capital ratio
levels for complex credit unions.
Consistent with section 216(c)(1)(A)
through (E) of the FCUA, the minimum
net worth ratio levels listed in proposed
102 12

PO 00000

U.S.C. 1790d(c).

Frm 00033

Fmt 4701

Sfmt 4700

66657

§§ 702.102(a)(1) through (5) would have
continued to match the ratio levels
listed in the statute for each capital
category, and would have included 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 new minimum risk-based capital
ratio levels included components that
required higher capital ratio levels to
reflect increased risk due to
concentration risk and credit risk.
The Original Proposal also introduced
a new, scaled approach to assigning
minimum risk-based capital ratio levels
to the capital classifications for well
capitalized, adequately capitalized, and
undercapitalized credit unions. This
scaled approach recognized the
relationship between higher risk-based
capital ratios and the creditworthiness
of credit unions.
Public Comments on the Second
Proposal
The Board received numerous general
comments concerning the capital
categories. Most of those commenters
simply stated that they opposed the
proposed two-tiered risk-based capital
requirement, believed that the Board
generally lacked the legal authority to
impose the risk-based capital
requirement as proposed, or both.
Others specifically suggested that the
language in section 216(d) of the FCUA
prohibits NCUA from adopting different
risk-based capital ratio threshold levels
for well capitalized and adequately
capitalized credit unions. At least one
commenter suggested that section
216(d)(2) expressly ties NCUA’s
statutory authority to its assessment of
whether the 6 percent net worth ratio
threshold provides ‘‘adequate
protection’’ because the term
‘‘adequately capitalized’’ used in the
section refers to the ‘‘adequately
capitalized’’ net worth category defined
in section 216(c)(1)(B)(i) of the FCUA.
The commenter suggested further that
the FCUA limits NCUA, in developing
the risk-based net worth requirement, to
considering only ‘‘whether the 6 percent
requirement provides adequate
protection’’ against the risks faced by
credit unions because section 216(d)(2)
speaks only to whether an institution is
‘‘adequately capitalized,’’ not ‘‘well
capitalized.’’ Accordingly, the
commenter concludes that NCUA lacks
the authority to implement a separate
risk-based net worth threshold level for
the ‘‘well capitalized’’ net worth
category. The commenter argued further
that the legislative history of the FCUA
suggests that section 216(d) bars NCUA

E:\FR\FM\29OCR2.SGM

29OCR2

66658

Federal Register / Vol. 80, No. 209 / Thursday, October 29, 2015 / Rules and Regulations

from implementing a separate RBC ratio
for ‘‘well capitalized’’ credit unions
because an earlier version of CUMAA
passed by the House of Representatives
provided in relevant part:
[NCUA is authorized to] establish
reasonable net worth requirements, including
risk-based net worth requirements in the case
of complex credit unions, for various
categories of credit unions and prescribe the
manner in which net worth is calculated (for
purposes of such requirements) with regard
to various types of investments, including
investments in corporate credit unions,
taking into account the unique nature and
role of credit unions.103

mstockstill on DSK4VPTVN1PROD with RULES2

The language quoted above was never
included in the Senate version of the
CUMAA legislation, which was
ultimately enacted, nor was it ever
included in the FCUA. The commenter
suggested that this legislative change
demonstrates Congress’ express
consideration and rejection of NCUA’s
proposed approach of adopting separate
RBC thresholds for ‘‘well capitalized’’
and ‘‘adequately capitalized’’ credit
unions.
Another commenter suggested that
any credit union, with a 7 percent or
higher net worth ratio, that fails to
exceed its required risk-based capital
ratio level be given consideration in any
prompt corrective action required under
the risk-based capital regulation. In such
a case, the commenter recommended
the Board limit the remedy to a capital
restoration plan that allows the credit
union a reasonable and appropriate
period of time to improve its risk-based
capital ratio—even as they maintain
their statutory net worth ratio above 7
percent.
Discussion
NCUA has the authority to impose the
proposed risk-based capital requirement
on complex credit unions. For the
reasons discussed in both the Second
Proposal and above in the legal
authority part of this preamble,
requiring credit unions to meet different
minimum risk-based capital ratio levels
to be adequately and well capitalized is
consistent with the plain language of
section 216 of the FCUA, is
‘‘comparable’’ to the Other Banking
Agencies’ PCA regulations, and takes
into account the cooperative character
of credit unions. Moreover, the Agency
is not persuaded by the language quoted
above from a prior House bill,104 which
Congress ultimately choose not to
include in CUMAA. Contrary to the
commenter’s suggestion, Congress’
103 H.R. Rep. 105–472, 1998 WL 141880, at *9
(1998).
104 H.R. Rep. 105–472, 1998 WL 141880, at *9
(1998).

VerDate Sep<11>2014

22:13 Oct 28, 2015

Jkt 238001

choice of language in section 216(d)
instead of the language in a prior House
version of CUMAA does not
demonstrate that Congress expressly
considered and rejected NCUA’s
proposed approach of adopting separate
RBC thresholds for well capitalized and
adequately capitalized credit unions.
Furthermore, requiring complex
credit unions to meet a higher riskbased capital ratio threshold to be
classified as well capitalized allows for
a graduated scale, which can measure
either a decline or improvement in a
credit union’s risk-based capital level in
relation to the minimum capital
requirements. Such a system provides
for earlier identification and resolution
of credit unions experiencing gradual
declines in the level of capital held on
a risk-based measure. Under the current
rule, a credit union failing the riskbased net worth requirement is
immediately subject to the mandatory
supervision action for undercapitalized
credit unions and may not have been
fully aware of their declining capital
buffer. The use of a two-tiered riskbased capital measure also allows
stakeholders and creditors, such as
uninured shareholders, to reasonably
compare financial institution capital
measures to the minimum regulatory
requirements on a risk-based level.
The Agency also questions the legality
of the suggestion to amend the final rule
to require only a capital restoration plan
in cases where a credit union fails to
meet or exceed the minimum risk-based
capital requirement, but meets or
exceeds the 7 percent net worth ratio
requirement. Such an approach was not
proposed and appears to conflict with
the mandatory restrictions on
undercapitalized credit unions under
section 216(g) of the FCUA.
Accordingly, the Board has decided to
retain the proposed capital categories in
this final rule without change.
102(a)(1) Well Capitalized
Proposed § 702.102(a)(1) required a
credit union to maintain a net worth
ratio of 7 percent or greater and, if it
were a complex credit union, a riskbased capital ratio of 10 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.105
105 See,

PO 00000

e.g., 12 CFR 324.10; 324.11; and 324.403.

Frm 00034

Fmt 4701

Sfmt 4700

Public Comments on the Second
Proposal
A substantial number of commenters
speculated that the proposed risk-based
capital ratio level for well capitalized
credit unions would place credit unions
at a competitive disadvantage to banks
unless all credit unions are given the
ability to meet the 10 percent
requirement with supplemental (Tier 2)
capital, as banks are allowed to do
under their rules. The commenters
recommended the Board either delay
the final release of the risk-based capital
rule until it has developed a
supplemental capital rule or eliminate
the 10 percent risk-based capital ratio
requirement and establish a single-tier
requirement of 8 percent that aligns
with the banking industry’s Tier 1
capital requirement.
A few commenters suggested that, in
removing the effect of the capital
conservation buffer from the Original
Proposal, the Board should have
lowered the risk-based capital ratio
requirement to 8 percent, not the 10
percent in the Second Proposal. After
examining the makeup of capital at
credit unions and banks, the commenter
suggested that Tier 1 capital is most
similar because both credit union and
bank Tier 1 capital is comprised of
either equity or retained earnings, and
both bank and credit union Tier 1
capital represent the strongest form of
capital on a financial institution’s
balance sheet. Under NCUA’s Second
Proposal, credit unions could count
their ALLL towards their risk-based
capital requirement, which is similar to
banks; however, banks have the added
benefit of counting supplemental capital
as Tier 2 capital. Since NCUA has not
yet authorized all credit unions to use
secondary capital as part of their capital
base for risk-based capital purposes, the
commenter claimed the most logical
point of comparability between banks
and credit unions is Tier 1 capital. The
commenter recommended that the
Board set the risk-based capital ratio
level at 8 percent, which aligns with the
banking industry’s Tier 1 risk-based
capital ratio level for well capitalized
banks, to ensure that credit unions’ and
banks’ risk-based capital requirements
are comparable. The commenter
recommended further that such an
approach would eliminate the capital
benefit from the ALLL to ensure
comparability to the banks’ Tier 1 riskbased capital ratio requirement.
One bank trade association
commenter, however, suggested that the
Board adopt the same Basel III model
that was adopted by prudential banking
regulators. The commenter argued the

E:\FR\FM\29OCR2.SGM

29OCR2

Federal Register / Vol. 80, No. 209 / Thursday, October 29, 2015 / Rules and Regulations

mstockstill on DSK4VPTVN1PROD with RULES2

NCUA’s proposed model would not be
the same because under the Second
Proposal, credit unions were not
subjected to a capital conservation
buffer, which banks are. The commenter
suggested that, because of this
difference, the proposed risk-based
capital ratio level required for a credit
union to be classified as well capitalized
was 50 basis points lower than the
analogous requirement applicable to
banks under the Other Banking
Agencies’ regulations. The commenter
suggested further that credit unions,
with their ability to avoid the payment
of U.S. income taxes and retain all their
earnings, should not be subject to lower
capital requirements than banks while
managing the same risk profile as
community banks that are subject to
taxation.
Other commenters simply stated they
believed the proposal did not
sufficiently justify assigning a risk-based
capital ratio requirement for well
capitalized credit unions that is 3
percent higher than the statutory 7
percent net worth ratio level required
for a credit union to be classified as well
capitalized.
One commenter speculated that the
proposed risk-based capital ratio of 10
percent would limit the ability of credit
unions to allocate resources as they see
fit, directly impacting what credit
unions can do for their members
because credit unions need flexibility to
be successful. The commenter pointed
out that credit union management is
held accountable by fiduciary
responsibility of the Board of Directors,
while some are overseen by both
Certified Public Accountants’ opinion
audits and ongoing NCUA examination,
and are therefore in the best position to
determine the appropriate balance to
best serve the needs of their members.

the exception of a small earnings
retention requirement, are not subject to
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 early reflection through a credit
union’s net worth category, as suggested
in the GAO and OIG reports. Under the
current rule, a change in the credit
union’s risk profile, capital levels, or
both, that results in a decline in the
credit union’s 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
situation mandates that harsh
supervisory actions be taken.
The Board reasons that the more
effective approach and better policy
option 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
Discussion
credit union that has one dollar in a risk
asset assigned a 50 percent risk weight
There are sound policy reasons for
would need to hold capital of five cents
setting a higher risk-based capital ratio
($1 multiplied by 50 percent multiplied
threshold for the well capitalized
category than the one for the adequately by 10 percent). The point of this
illustration is that the risk weights are
capitalized category. Under the current
interdependent with the thresholds set
rule, a credit union’s capital
for the regulatory capital categories. The
classification could rapidly decline
risk weights included in the Second
directly from well capitalized to
Proposal were based predominantly on
undercapitalized if it fails to meet the
those used by the Other Banking
required risk-based net worth ratio
Agencies, as suggested by credit unions
level.106 Moreover, credit unions
and other interested parties who
classified as well capitalized are
submitted comment letters in response
generally considered financially sound,
to the Original Proposal. For the total
afforded greater latitude under some
other regulatory provisions,107 and, with capital-to-risk assets ratio, the Other
Banking Agencies establish a threshold
of 10 percent to be well capitalized.108
106 Per the FCUA, ‘‘undercapitalized’’ is the
lowest PCA category in which a failure to meet the
risk-based net worth requirement can result.
107 See 12 CFR 745.9–2; and 12 CFR 723.7.

VerDate Sep<11>2014

22:13 Oct 28, 2015

Jkt 238001

108 The Other Banking Agencies’ Total Risk-Based
Capital ratio is the most analogous standard for

PO 00000

Frm 00035

Fmt 4701

Sfmt 4700

66659

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.109 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
some commenters suggested, there
would be a decline in the overall rigor
of the risk-based capital ratio. While
NCUA’s proposed risk weights for
various assets could be increased by 20
percent to offset this effect, adjusting the
risk weights in this manner would
create more difficulty in comparing
asset types and risk weights across
financial institutions, and lead to
misunderstanding.
Conversely, the uniform threshold
level 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 (such as
any risk-based capital ratio under 10
percent), and therefore be subject to
mandatory and discretionary
supervisory actions. The Board
concluded this approach would not be
optimal, as the supervisory
consequences for credit unions with
risk-based capital ratios between eight
percent and 10 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
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.
109 See S. Rep. No. 193, 105th Cong., 2d Sess.
§ 301 (1998) (‘‘ ‘Comparable’ here means parallel in
substance though not necessarily identical in detail)
and equivalent in rigor.’’).

E:\FR\FM\29OCR2.SGM

29OCR2

mstockstill on DSK4VPTVN1PROD with RULES2

66660

Federal Register / Vol. 80, No. 209 / Thursday, October 29, 2015 / Rules and Regulations

to risk, and better inform credit union
decision making.110 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 8 percent, NCUA
estimates at most seven credit unions
would have the proposed risk-based
capital ratio be the governing
requirement, with only one credit union
currently holding insufficient capital to
meet the 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 encourage 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,
110 The benefits of a capital system better
correlated to risk are discussed in the Summary of
the Final Rule part of this preamble.

VerDate Sep<11>2014

22:13 Oct 28, 2015

Jkt 238001

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 2007–
2009 financial crisis, some 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
Second Proposal, 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
12.1 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,
a well-designed risk-based net worth
requirement should reflect material
shifts in the risk profile of assets.
A risk-based capital framework that
encourages and promotes capital
accumulation benefits not only those
credit unions that achieve the wellcapitalized classification, but the entire
credit union system. Thus, the Board
remains committed to implementing the
risk-based requirement under a
graduated (multi-tiered) capital category
framework.
The Board agrees with the
commenters who suggested that a 10
percent risk-based capital ratio
threshold 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 8 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 final rule, the Board
is now more closely aligning NCUA’s
risk weights with those assigned by the
Other Banking Agencies. Therefore, for
consistency, the Board reasons that
NCUA’s risk-based capital ratio
threshold levels should likewise align
with those of the Other Banking
Agencies as closely as possible.
The Board plans to address additional
forms of supplemental capital in a
separate proposed rule, with the intent
to finalize a new supplemental capital
rule before the effective date of this risk-

PO 00000

Frm 00036

Fmt 4701

Sfmt 4700

based capital final rule. Therefore there
is no need to delay release of this final
rule. The Board notes the second riskbased capital proposal invited general
comment on supplemental capital much
in the way an advanced notice of
proposed rulemaking would do. A
notice of proposed rulemaking on
supplemental capital with specific
criteria and requirements is necessary
under the Administrative Procedure Act
before the Board could issue a final rule.
Issuing a new, more specific and
detailed proposed rule on supplemental
capital will give interested parties full
opportunity to comment on it.
Accordingly, the Board has decided to
retain proposed § 702.102(a)(1) in this
final rule without change.
102(a)(2) Adequately Capitalized
Under the Second Proposal,
§ 702.102(a)(2) required a credit union
to maintain a net worth ratio of 6
percent or greater and, if it were a
complex credit union, a risk-based
capital ratio of 8 percent or greater to be
classified as adequately capitalized.
This risk-based capital ratio level is
comparable to the 8 percent total riskbased 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 proposed adequately
capitalized risk-based capital ratio level.
Therefore, the Board has decided to
retain proposed § 702.102(a)(2) in this
final rule without change.
102(a)(3) Undercapitalized
Under the Second Proposal,
§ 702.102(a)(3) would have classified a
credit union as undercapitalized if: (1)
The credit union has a net worth ratio
of 4 percent or more but less than 6
percent; or (2) the credit union, if
complex, has a risk-based capital ratio
of less than 8 percent.
Other than the comments discussed
above and other parts of this preamble,
the Board received no comments on the
proposed undercapitalized risk-based
capital ratio requirement. Therefore, the
Board has decided to retain proposed
§ 702.102(a)(3) without change.
102(a)(4) Significantly Undercapitalized
Under the Original Proposal,
proposed § 702.102(a)(4) would have
classified a credit union as significantly
undercapitalized if:
• The credit union has a net worth
ratio of 2 percent or more but less than
4 percent; or

E:\FR\FM\29OCR2.SGM

29OCR2

Federal Register / Vol. 80, No. 209 / Thursday, October 29, 2015 / Rules and Regulations
• The credit union has a net worth
ratio of 4 percent or more but less than
5 percent, and either—
o Fails to submit an acceptable net
worth restoration plan within the time
prescribed in § 702.111;
o Materially fails to implement a net
worth restoration plan approved by the
Board; or
o Receives notice that a submitted net
worth restoration plan has not been
approved.
The Board received no comments on
the revisions to this paragraph and has
decided to retain the proposed
amendments in this final rule without
change.
102(a)(5) Critically Undercapitalized
Under the Second Proposal,
§ 702.102(a)(5) classified a credit union
as critically undercapitalized if it had a
net worth ratio of less than 2 percent.
The Second Proposal would have also
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 revisions to this paragraph and has
decided to retain the proposed
amendments in this final rule without
change.
102(b) Reclassification Based on
Supervisory Criteria Other Than Net
Worth
The Second 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 on
the revisions to this paragraph and has
decided to retain the proposed
amendments in this final rule without
change.
102(c) Non-Delegation
Proposed § 702.102(c) would have
been unchanged from current
§ 702.102(c).
The Board received no comments on
this paragraph and has decided to retain
the paragraph in this final rule without
change.
mstockstill on DSK4VPTVN1PROD with RULES2

102(d) Consultation With State Officials
Proposed § 702.102(d) would have
retained current § 702.102(d) with only
non-substantive amendments for
consistency with other sections of
NCUA’s regulations. No substantive
changes were intended.
The Board received no comments on
this paragraph and has decided to retain

VerDate Sep<11>2014

22:13 Oct 28, 2015

Jkt 238001

the proposed amendments in this final
rule without change.
Section 702.103 Applicability of the
Risk-Based Capital Ratio Measure
The Second Proposal would have
changed the title of current § 702.103
from ‘‘Applicability of risk-based net
worth requirement’’ to ‘‘Applicability of
risk-based capital ratio measure.’’
Proposed § 702.103 would have
provided that, 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 $100
million, as reflected in its most recent
Call Report.
Public Comments on the Second
Proposal
The Board received a large number of
comments on proposed § 702.103.
Several commenters argued that the
FCUA requires the Board to define
‘‘complex’’ credit unions based on the
‘‘portfolios of assets and liabilities of
credit unions,’’ and that the proposed
use of an asset size threshold to define
‘‘complex’’ credit unions would not
comply with the statutory requirement.
A substantial number of commenters
also stated that they opposed the
proposed definition of ‘‘complex’’ credit
union because they believed asset size
should not be a primary qualifier of a
credit union’s complexity.
At least one trade association
commenter, however, acknowledged
that an asset threshold proxy, while less
precise than individual balance sheet
analysis, would allow for a streamlined
application of the rule and would
minimize opportunities for arbitrage.
The commenter suggested that if the
definition of ‘‘complex’’ were tied to
specific activities, credit unions could
be incentivized, on the margin, to
simply avoid those activities in order to
avoid the risk-based capital
requirements. And such conduct could
have unintended consequences and
create new unanticipated risks to capital
adequacy. Similarly, at least one credit
union commenter stated that using an
asset size threshold to define complex
credit unions would give credit unions
a bright line test and eliminate the
difficulty of having to anticipate what
products and services should be
classified as complex. Another credit
union commenter suggested that a rule
that identified specific types of lending
activity that made an institution
complex might mask undue
concentration risk.
A substantial number of commenters
suggested that asset size, if used in the
final rule, should be raised to some

PO 00000

Frm 00037

Fmt 4701

Sfmt 4700

66661

amount above $100 million. Specific
threshold amounts suggested by
commenters ranged from $250 million
to $10 billion. Several commenters
speculated that refining the complexity
analysis and raising the asset size
threshold would not considerably
increase the risk to the Share Insurance
Fund because by the time the final rule
is implemented in 2019, an even greater
percentage of system assets would be
covered. Other commenters maintained
that the final rule should only apply to
credit unions that meet the same asset
size threshold used by the Other
Banking Agencies to define small banks.
One commenter suggested that the
Board should align the definitions of
‘‘complex’’ credit union across all of
NCUA’s regulations so they are the
same, and, at a minimum, the Board
should increase the threshold to $250
million to be consistent with the
definition in the derivatives regulation.
Some commenters contended that the
proposed list of assets and liabilities
identified as complex were much too
broad. One commenter suggested that
Congress limited the application of riskbased capital to complex credit
unions 111 and directed NCUA to design
the risk-based capital standard to
protect against material risks that may
not be adequately captured by the net
worth ratio requirement 112 because
Congress intended that credit unions be
designated as ‘‘complex’’ based on only
their involvement in high-risk activities
that the net worth ratio requirement
may not account for. The commenter
noted further that the list of complex
assets and liabilities used by the Board
to set the asset size threshold at $100
million included several standard
activities that are already contemplated
by the statutory net worth ratio
requirement. The commenter believed,
for example, that real estate loans,
investments with maturities greater than
five years, and internet banking are
staple activities of financial services
institutions in today’s marketplace and
should not be considered complex; and
that other activities only become
complex when undertaken in significant
volumes—for example, a credit union
that lends a member $60,000 to
purchase new equipment for his bakery
is engaged in member business lending,
but that credit union should not be
designated as complex by virtue of that
single loan. The commenter contended
that the size of the portfolio and its
significance to the credit union’s overall
business strategy drives complexity; so
the commenter concluded that member
111 12
112 12

E:\FR\FM\29OCR2.SGM

U.S.C. 1790d(d)(1).
U.S.C. 1790d(d)(2).

29OCR2

mstockstill on DSK4VPTVN1PROD with RULES2

66662

Federal Register / Vol. 80, No. 209 / Thursday, October 29, 2015 / Rules and Regulations

business, indirect, interest-only, and
participation loans should only indicate
complexity where the activity exceeds a
certain percentage of total assets, and
borrowings should only denote
complexity where they constitute a
significant element of the credit union’s
funding strategy. Other commenters
suggested that a credit union be defined
as ‘‘complex’’ only if it engages in three
or more of the following assets or
liabilities: Member business loans,
participation loans, interest-only loans,
indirect loans, non-federally guaranteed
student loans, borrowings, and
derivatives. Still other commenters
suggested that the definition of
‘‘complex’’ be based on the following
activities: Participation loans, interestonly loans, indirect loans, real estate
loans, non-agency mortgage backed
securities, non-mortgage related
securities with embedded options,
collateralized mortgage obligations/real
estate mortgage investment conduits,
commercial mortgage-related securities,
and derivatives.
In addition, commenters argued that
because they do not adequately
represent complexity, the Board should
not use the following assets or
liabilities: Real estate loans, obligations
fully guaranteed by the U.S.
Government, investments with
maturities of greater than five years,
non-agency mortgage-backed securities,
non-mortgage-related securities with
embedded options, collateralized
mortgage obligations/real estate
mortgage investment conduits,
commercial mortgage-related securities,
and internet banking. In addition, one
commenter argued that internet
banking, a service that credit unions
provide, is neither an asset nor a
liability so the FCUA bars NCUA from
considering internet banking when
considering complexity.
One commenter recommended that
the asset size threshold should be set
where all or most credit unions are
engaged in four or more of the activities
the Board identifies as complex. The
commenter claimed that the FCUA,
which requires NCUA to specify which
credit unions are ‘‘complex’’ based on
the portfolios of assets and liabilities of
credit unions,113 prohibits a credit
union from being classified based on a
single complex activity.
Another commenter suggested that
using an asset size threshold alone to
define complexity was appropriate and
that the presence of more complex
lending products should not necessarily
define a complex credit union because
financial institutions in general become
113 12

U.S.C. 1790(d)(1).

VerDate Sep<11>2014

22:13 Oct 28, 2015

Jkt 238001

more complex with size and by moving
into more complex/sophisticated
financial transactions such as mortgagebacked securities, derivatives, loan sales
or purchases, mortgage pipelines and
servicing assets. The commenter
suggested that these types of financial
transactions are not ordinary in smaller
asset size institutions because they
generally require more scale and
overhead of a larger institution to
manage and understand.
Other commenters recommended that
the Board define complexity using a
credit union’s product offerings, in a
manner similar to that used in the
current rule. The commenters suggested
that the most analogous approach would
be a ratio of risk-weighted assets to total
assets greater than 67 percent as
measure by the proposal’s risk weights.
At least one of those commenters,
however, acknowledged that the 67
percent threshold might not be a
meaningful measure of risk, but that
using different thresholds yielded
similar results.
At least one commenter suggested that
all federally insured credit unions with
assets of $500 million or less should be
excluded from the definition of
‘‘complex,’’ and that only those credit
unions with $500 million or more in
assets and that have an NCUA
Complexity Index (discussed in the
Supplementary Information to the
Original Proposal) value of 17 or higher
should be required to meet NCUA’s riskbased capital requirement. Similarly,
another commenter suggested that all
federally insured credit unions with
assets of $500 million or less should be
excluded from the definition of
‘‘complex,’’ and that only those credit
unions with $500 million or more in
assets and that have an NCUA
Complexity Index value of 20 or higher
should be required to meet NCUA’s riskbased capital requirement. Yet another
commenter suggested that all federally
insured credit unions with assets of $1
billion or less should be excluded from
the definition of ‘‘complex,’’ and that
only those credit unions with assets
above $1 billion and that have an NCUA
Complexity Index value of 20 or higher
should be required to meet NCUA’s riskbased capital requirement.
Additional suggestions provided by
commenters for defining credit unions
as ‘‘complex’’ included:
• Defining ‘‘complex’’ with attributes
such as deposit account features,
member services, loan and investment
products, and portfolio makeup.
• Defining ‘‘complex’’ based on
whether a credit union engages in a
combination of activities including,
participation loans, non-agency

PO 00000

Frm 00038

Fmt 4701

Sfmt 4700

mortgage-backed securities, repurchase
transactions, and derivatives.
• Defining ‘‘complex’’ as credit
unions with over $100 million or more
in assets and that provide member
business loans and invest in derivatives.
• Defining ‘‘complex’’ as credit
unions with $500 million or more in
assets and/or that are engaged in over 50
percent of all of the categories,
especially the investment section, noted
in the preamble to the Second Proposal.
• Defining ‘‘complex’’ as credit
unions with $500 million or more in
assets, and that invest in non-agency
mortgage-backed securities and nonmortgage related securities with
embedded options.
As an alternative, one trade
organization commenter suggested that
with credit unions exiting an extreme
financial crisis where many of these
institutions failed due to lack of highquality capital and elevated risk
profiles, the Board should be focusing
its attention on raising the minimum
regulatory capital levels for all credit
unions.
Other credit union commenters
argued that the risk-based capital
requirements should apply to all credit
unions because recent data on credit
union failures contradict claims that
there is less risk in credit unions with
less than $100 million in assets.
Granted, the commenters suggested, in
rural areas and in a few other special
circumstances, small credit unions play
a crucial role, and in such cases NCUA
should offer waivers. A small credit
union commenter suggested that many
credit unions with $100 million or less
in assets have the same, and often times
more, risk on their balance sheets and
in their operations than credit unions
with over $100 million in assets. The
commenter believed that smaller credit
unions engage in complex activities for
the following reasons: (1) If they do not
offer products and services that the
bigger credit unions do, their members
will leave and the credit unions will
(eventually) be forced to merge (not an
outcome they wanted); (2) they need
products that increase their income and
capital (e.g., business loans,
participation loans, and indirect
lending); (3) they recognize they do not
have the expertise they should have but
it is expensive and hard to attract
expertise based on their compensation
structure. Another credit union
commenter claimed that smaller credit
unions have failed at a higher rate and
have had a higher incidence of
catastrophic failure due to a lack of
comprehensive internal management
and process controls that can lead to
fraud. The commenter maintained that a

E:\FR\FM\29OCR2.SGM

29OCR2

Federal Register / Vol. 80, No. 209 / Thursday, October 29, 2015 / Rules and Regulations

mstockstill on DSK4VPTVN1PROD with RULES2

credit union charter is a privilege and
not a right and that all credit unions
should be subject to the same risk-based
capital requirements and examination
standards.
One commenter suggested that it is
very likely that a small credit union
could pose a much larger risk to the
NCUSIF than a larger credit union, and
that using asset size as a threshold for
complexity suggests that capital is not
as critical for smaller institutions. The
commenter suggested further that
‘‘complexity’’ should be defined based
on the quality of the management of the
risks undertaken by the institution,
which is ideally measured by the ‘‘M’’
in the CAMEL rating. The commenter
recommended that identifying the credit
unions to which the risk-based capital
requirement applies is best done
through the supervision process so that
those credit unions posing a higher risk
to the NCUSIF have higher standards
and expectations by which to abide. The
commenter suggested that this solution
would reduce the ‘‘broad-brush’’ effect
of the current proposal, applying more
stringent standards to those institutions
that may benefit from regulatory risk
management and thus provide greater
protection to the NCUSIF.
A significant number of commenters
requested that the asset size threshold,
if used, be indexed so that it does not
apply to smaller and smaller credit
unions through time due to inflation.
And at least one 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 thus, should
not be subject to risk-based capital
requirements. The commenter suggested
further that the process for contesting an
agency designation of ‘‘complex’’
should be detailed in the final rule.
Discussion
The proposed use of an asset size
threshold to define ‘‘complex’’ does
comply with section 216 of the FCUA.
As discussed in the Legal Authority part
of this preamble, section 216(d)(1)
directs NCUA, in determining which
credit unions will be subject to the riskbased net worth requirement, to base its
definition of complex ‘‘on the portfolios
of assets and liabilities of credit
unions.’’ 114 The statute does not
require, as some commenters have
argued, that the Board adopt a definition
of ‘‘complex’’ that takes into account the
portfolio of assets and liabilities of each
credit union on an individualized basis.
Rather, section 216(d)(1) authorizes the
Board to develop a single definition of
114 12

U.S.C. 1790d(d).

VerDate Sep<11>2014

22:13 Oct 28, 2015

Jkt 238001

‘‘complex’’ that takes into account the
portfolios of assets and liabilities of all
credit unions. Consistent with section
216(d)(1), the proposed definition of a
‘‘complex’’ credit union included an
asset size threshold that, as explained in
more detail below, was designed by
taking into account the portfolios of
assets and liabilities of all credit unions.
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 6 percent. In effect,
this means that all credit unions with
over $50 million in assets compute the
risk-based net worth requirement to
determine if they meet the complex
definition.
For reasons described more fully
below, the Board maintains 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 is accurate, reduces
the complexity of the rule, provides
regulatory relief for smaller institutions,
and eliminates the 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 the Second Proposal, the term
‘‘complex’’ was defined only for
purposes of the risk-based capital ratio
measure. For the purpose of defining a
complex credit union, assets include
tangible and intangible items that are
economic resources (products and
services) that are expected to produce
economic benefit (income), and
liabilities are obligations (expenses) the
credit union has to outside parties. The
Board recognizes there are products and
services—which under GAAP are
reflected as the credit unions’ portfolio
of assets and liabilities 115—in which
credit unions are engaged 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. Thus, credit unions offering
such products and services have
complex portfolios of assets and
liabilities for purposes of NCUA’s riskbased net worth requirement.
Consistent with the Second Proposal,
the following products and services, if
115 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.

PO 00000

Frm 00039

Fmt 4701

Sfmt 4700

66663

engaged in by a credit union, are
accurate 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
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
• Internet Banking
NCUA’s review of Call Report data as
of June 30, 2014 and March 31, 2015,
showed that all credit unions with more
than $100 million in assets were
engaged in offering at least one of the
products and services listed above; 99
percent engaged in two or more
complex activities, and 87 percent
engaged in four or more. On the other
hand, less than two-thirds of credit
unions below $100 million in assets
were involved in even a single complex
activity, and only 15 percent had four or
more. Moreover, credit unions with total
assets of less than $100 million are only
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, a $100
million asset size threshold is a clear
demarcation above which complex
activities are always present, and where
credit unions are almost always engaged
in multiple complex activities.
Additionally, the percentage of credit
unions engaged in multiple activities
using asset size thresholds above $100
million does not produce a significant
demarcation between credit unions
when compared to the differences
observed at the $100 million threshold.
Conversely, using a credit union’s
percentage of risk assets to total assets
as the factor for determining whether
the credit union is complex would
require all credit unions to understand,
monitor, and apply a complex measure
their risk asset to asset ratio each
quarter. This would be an additional
and unnecessary burden for credit
unions below the $100 million asset size
threshold.

E:\FR\FM\29OCR2.SGM

29OCR2

66664

Federal Register / Vol. 80, No. 209 / Thursday, October 29, 2015 / Rules and Regulations

As discussed earlier, $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.
Based on December 31, 2014 Call Report
data, this approach exempts
approximately 76 percent of credit
unions from the regulatory burden
associated with complying with the
risk-based net worth requirement and
capital adequacy plan, 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) 116 to the
NCUSIF spanning the last 12 years have
come from credit unions with assets
greater than $100 million.117
Accordingly, consistent with
requirements of § 216(d)(1) of the FCUA,
the final rule eliminates current
§ 702.103(b) and defines all credit
unions with over $100 million in assets
as ‘‘complex.’’
Section 702.104
Ratio

Risk-Based Capital

mstockstill on DSK4VPTVN1PROD with RULES2

Under the Second Proposal, the Board
proposed changing the title of current
§ 702.104 from ‘‘Risk portfolio defined’’
to ‘‘Risk-based capital ratio.’’ In
addition, the Board 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.118
The proposed section would have
required all ‘‘complex’’ credit unions to
calculate their risk-based capital ratio as
directed under 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 lossabsorbing 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.
116 Based on an analysis of loss and failure data
collected by NCUA.
117 NCUA performed backtesting analysis of Call
Report and failure data to determine whether this
final regulation would have resulted in earlier
identification of emerging risks and possibly
reduced losses to the NCUSIF. The impact of the
final rule on more recent failures of credit unions
with total assets over $100 million was also
evaluated. The 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.
118 12 U.S.C. 1790d(d).

VerDate Sep<11>2014

22:13 Oct 28, 2015

Jkt 238001

Public Comments on the Second
Proposal
NCUA received many general
comments on the proposed § 702.104.
Many commenters simply stated that
they opposed the new risk-based capital
ratio measure altogether, and preferred
maintaining the current risk-based net
worth measure. Others objected to
specific aspects of the calculation,
which are discussed in more detail
below.
Discussion
As discussed above and in more detail
below, the proposed changes are
necessary 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. The
proposed risk-based capital ratio
employed the method for computing the
risk-based capital measures used by the
Other Federal Banking Agencies: A
higher ratio reflects the existence of a
higher level of funds available to cover
losses in relation to risk-weighted
assets. Because the risk weights in the
final rule are generally comparable to
those used by banks, the risk-based
capital ratio will allow an interested
party to compare risk-based capital
measures across institutions to obtain a
relative measure of their financial
strength. Additionally, the current riskbased net worth requirement assigns
high risk weights to low-credit-risk
assets to account for interest rate risk—
such as investments in Treasury
securities with maturities in excess of
five years—which results in a higher
risk-based capital requirement for credit
unions holding these types of lowcredit-risk investments. Thus, the Board
concluded it is no longer appropriate to
retain NCUA’s current risk-based net
worth measure.
Consistent with the Second Proposal,
this final rule changes the title of
current § 702.104 from ‘‘Risk portfolio
defined’’ to ‘‘Risk-based capital ratio.’’
In addition, this final rule entirely
replaces the requirements for
calculating the risk-based net worth
ratio for ‘‘complex’’ credit unions under
current § 702.104 with a new risk-based
capital ratio measure.119
104(a) Calculation of Capital for the
Risk-Based Capital Ratio
Under the Second Proposal,
§ 702.104(a) provided that to determine
its risk-based capital ratio, a complex
credit union must calculate the
percentage, rounded to two decimal
119 12

PO 00000

U.S.C. 1790d(d).

Frm 00040

Fmt 4701

Sfmt 4700

places, of its risk-based capital ratio
numerator as described in § 702.104(b)
to its total risk-weighted assets as
described in § 702.104(c). The proposed
method of calculating risk-based capital
was generally consistent with the
methods used in other sectors of the
financial services industry.
Other than the comments discussed
elsewhere in the preamble, the Board
received no comments on the proposed
revisions to this paragraph and has
decided to retain the amendments in
this final rule without change.
104(b) Risk-Based Capital Ratio
Numerator
Under the Second Proposal,
§ 702.104(b) provided that the riskbased capital ratio numerator is the sum
of certain specific capital elements
listed in § 702.104(b)(1), minus
regulatory adjustments listed in
§ 702.104(b)(2).
Other than the comments discussed
elsewhere in the preamble, the Board
received no comments on the proposed
revisions to this paragraph and has
decided to retain the amendments in
this final rule without change.
104(b)(1) Capital Elements of the RiskBased Capital Ratio Numerator
Under the Second Proposal,
§ 702.104(b)(1) 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;
secondary capital accounts included in
net worth (as defined in § 702.2); and
section 208 assistance included in net
worth (as defined in § 702.2). Consistent
with the Second Proposal,
§ 702.104(b)(1) listed the elements of the
risk-based capital ratio numerator.
Public Comments on the Second
Proposal
The Board received a significant
number of comments suggesting various
amendments or additions to the capital
elements included in the Second
Proposal, which are discussed in more
detail below.
Discussion
The Board generally disagrees with
the comments concerning capital
elements and has, for the reasons
discussed in more detail below, decided
to retain the language in proposed
§ 702.104(b)(1) in this final rule. The
Board proposed § 702.104(b)(1) to
provide for a more comparable measure
of capital across all financial
institutions and better account for

E:\FR\FM\29OCR2.SGM

29OCR2

Federal Register / Vol. 80, No. 209 / Thursday, October 29, 2015 / Rules and Regulations
related elements of the financial
statement that are available (or not) to
cover losses and protect the NCUSIF. As
explained above, the FCUA gives NCUA
broad discretion in designing the riskbased net worth requirement.
Accordingly, this final rule incorporates
the proposed broadened definition of
capital for purposes of calculating the
new risk-based capital ratio.
Undivided Earnings
The Second Proposal included
undivided earnings 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 Second Proposal in this
final rule without change.
Appropriation for Nonconforming
Investments
The Second Proposal included the
appropriation for nonconforming
investments 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
Second Proposal in this final rule
without change.

mstockstill on DSK4VPTVN1PROD with RULES2

Other Reserves
The Original Proposal 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
Second Proposal in this final rule
without change.
Equity Acquired in Merger
Under the Second Proposal, the riskbased capital ratio numerator included
the equity acquired in merger
component of the balance sheet. This
equity item was used in place of the
total adjusted retained earnings
acquired through business combinations
amount that credit unions currently
report on the PCA net worth calculation
worksheet in the Call Report. 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, more accurately
reflects the overall value of the business
combination transaction.
The Board received no comments on
the inclusion of this capital element in

VerDate Sep<11>2014

22:13 Oct 28, 2015

Jkt 238001

the risk-based capital ratio numerator.
Accordingly, the Board has decided to
retain this aspect of the Second Proposal
in this final rule without change.
Net Income
The Second Proposal 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
Second Proposal in this final rule
without change.
ALLL
The Second Proposal included the
total amount of the ALLL, maintained in
accordance with GAAP, in the riskbased capital ratio numerator. Credit
unions already expense 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.
Public Comments on the Second
Proposal
The vast majority of commenters who
mentioned the treatment of ALLL stated
that they agreed with its proposed
treatment in the Second Proposal. A few
commenters, however, did argue that
the ALLL should be limited to 1.25
percent of risk assets in determining the
risk-based capital ratio numerator.
These commenters suggested that if the
loan loss reserves are established for
identified losses, then they do not
possess the essential characteristic of
capital—the ability to absorb
unidentified losses—and should not be
included in the capital base. The
commenters suggested further that
because it is not always possible to
clearly distinguish between identified
and unidentified losses, the Other
Banking Agencies capped the amount of
ALLL being counted as capital at 1.25
percent of risk assets. These
commenters argued further that limiting
ALLL to 1.25 percent of risk assets
would not create a disincentive for
complex credit unions to fully fund the
ALLL above the 1.25 percent ceiling
because complex credit unions are
bound by generally accepted accounting
principles to fully fund their ALLL, so
not doing so would constitute an unsafe
and unsound practice. Finally, these
commenters argued that removing the
1.25 percent cap on ALLL would

PO 00000

Frm 00041

Fmt 4701

Sfmt 4700

66665

overstate the amount of capital that
complex credit unions have available to
absorb unexpected losses, and would
make the comparison between bank and
credit union risk-based capital ratios
more difficult.
Discussion
The Board disagrees with the
commenters who suggested that the ALL
should be limited to 1.25 percent of risk
assets. All of the ALLL, maintained in
accordance with GAAP, should be
included in the risk-based capital ratio
numerator because 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 will allow a properly funded
ALLL to somewhat offset the impact of
the financial stressors on the risk-based
capital ratio. Further, NCUA’s
supervision process can address any
concerns with inclusion of the ALLL,
such as ensuring proper funding.
Accordingly, the Board has decided to
retain this aspect of the Second Proposal
in this final rule without change.
Secondary Capital Accounts
The Second Proposal included
secondary capital accounts included in
net worth (as defined in § 702.2) in the
risk-based capital ratio numerator.
While there was overwhelming
support for allowing credit unions to
count secondary capital accounts in the
risk-based capital ratio numerator
(including support for access for
additional forms of supplemental
capital), the Board received no
comments opposing its inclusion.
Accordingly, the Board has decided to
retain this aspect of the Second Proposal
in this final rule without change.
The Board plans to address comments
supporting additional forms of
supplemental capital in a separate
proposed rule, with the intent to finalize
a new supplemental capital rule before
the effective date of this risk-based
capital final rule.
Section 208

Assistance

The Second Proposal included section
208 assistance that is included in net
worth (as defined in § 702.2) 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 Second Proposal
in this final rule without change.

E:\FR\FM\29OCR2.SGM

29OCR2

66666

Federal Register / Vol. 80, No. 209 / Thursday, October 29, 2015 / Rules and Regulations

Call Report Equity Items Not Included
in the Risk-Based Capital Ratio
Numerator
Under the Second Proposal, the riskbased capital ratio numerator did not
include 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.120
The Board received no comments on
the exclusion of these elements in the
risk-based capital ratio numerator.
Accordingly, the Board has decided to
retain this aspect of the Second Proposal
in this final rule without change.

mstockstill on DSK4VPTVN1PROD with RULES2

Other Supplemental Forms of Capital
Under the Second Proposal,
supplemental forms of capital, other
than those discussed above, were not
included in the risk-based capital ratio
numerator. The Board, however, did
specifically request comment on
specific detailed questions regarding
whether revisions should be made to
NCUA’s regulations through a separate
rulemaking to allow additional
supplemental forms of capital to be
included in the risk-based capital ratio.
Public Comments on the Second
Proposal
A majority of the commenters who
mentioned supplemental capital stated
that it was imperative the Board
consider allowing credit unions ready
access to additional supplemental forms
of capital. Commenters suggested it was
particularly important as risk-based
capital goes into effect, as credit unions
are at a disadvantage in the financial
market because of lack of access to
additional capital outside of retained
earnings. Commenters suggested that if
supplemental capital were to count
toward regulatory capital, it would
benefit the credit union by allowing it
to expand products and services
120 The

Other Banking Agencies’ regulatory
capital rules allow institutions to make an opt-out
election for similar accounts. See, e.g., 12 CFR
324.22; and 78 FR 55339 (Sept. 10, 2013).

VerDate Sep<11>2014

22:13 Oct 28, 2015

Jkt 238001

without diluting its regulatory capital,
and it would protect the NCUSIF by
incentivizing credit unions to attract
private capital that could absorb losses
before causing a loss to the Insurance
Fund.
Some commenters suggested further
that the Board include (as a placeholder
in this final rule) supplemental forms of
capital, as defined by the Board and
approved by NCUA or the appropriate
state supervisory authority, in the riskbased capital numerator. Those
commenters suggested the specific
criteria could then be developed
between finalizing the rule and its
effective date in 2019.
Other commenters acknowledged that
because Congress did not speak directly
to the calculation of risk-based capital,
the Board need not be limited by section
216(0)(2) of the FCUA in defining what
elements, including supplemental
capital, constitute the ratio. Several
commenters, however, suggested that
not allowing all credit unions to use
additional supplemental forms of
capital to meet their risk-based capital
requirements would create a more
stringent capital requirement for credit
unions, which would place credit
unions at a competitive disadvantage to
banks. One commenter argued the Board
failed to meet the requirement to
establish a capital framework that is
comparable to the Other Banking
Agencies because credit unions will be
disadvantaged to banks.
Other commenters recommended that
the Board delay the publication of the
final risk-based capital rule so that it
can coincide with the publication of a
final supplemental capital rule.
Discussion
Consistent with the Second Proposal,
this final rule would not include
additional supplemental forms of
capital in the risk-based capital ratio
numerator at this time.
The authorization of additional
supplemental forms of capital for
federal credit unions, and the inclusion
of such forms of capital and the various
forms of capital authorized for federally
insured state-chartered credit unions in
the risk-based capital ratio numerator, is
beyond the scope of this rulemaking.
Delaying the issuance of this final rule
until a separate supplemental capital
proposal could be issued and then
finalized, as several commenters
suggested, would only reduce the
amount of time credit unions have to
prepare to comply with this final rule.
The Board, however, appreciates the
comments requesting access to
additional supplemental forms of
capital for credit unions. Board

PO 00000

Frm 00042

Fmt 4701

Sfmt 4700

Chairman Debbie Matz has formed a
working group at NCUA to consult with
stakeholders and develop a separate
proposed rule regarding supplemental
forms of capital that could be included
in the numerator of the risk-based
capital ratio. The working group has
reviewed the comments received on this
issue, studied the alternative forms of
capital used internationally and within
the cooperative system, and obtained
additional insight from industry
practitioners who were highly interested
or experienced with alternative forms of
capital.
In the near future, the working group
plans to present its recommendations to
the Board for revisions that could be
made to NCUA’s regulations through a
separate rulemaking to allow additional
supplemental forms of capital to be
included in the risk-based capital ratio.
The Board’s intent is to finalize a new
supplemental capital rule before the
effective date of this risk-based capital
final rule.
The Board also continues to support
amending the FCUA to provide all
credit unions access to additional
supplemental forms of capital that,
subject to certain reasonable restrictions
and consumer protections, could be
counted toward a credit union’s net
worth ratio requirement and its riskbased capital requirement.
104(b)(2) Risk-Based Capital Ratio
Numerator Deductions
Under the Second Proposal,
§ 702.104(b)(2) would have provided
that the elements deducted from the
sum of the capital elements of the riskbased 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 Second Proposal in
this final rule without change.
NCUSIF capitalization deposit. Under
the Second Proposal, the NCUSIF
capitalization deposit was subtracted
from both the numerator and
denominator of the risk-based capital
ratio.121 This treatment of the risk-based
capital ratio would not have altered the
121 See U.S. Govt. Accountability Office,
Available Information Indicates No Compelling
Need for Secondary Capital, GAO–04–849 (2004),
available at http://www.gao.gov/assets/250/
243642.pdf.

E:\FR\FM\29OCR2.SGM

29OCR2

Federal Register / Vol. 80, No. 209 / Thursday, October 29, 2015 / Rules and Regulations
NCUSIF capitalization deposit’s
accounting treatment for credit unions.

mstockstill on DSK4VPTVN1PROD with RULES2

Public Comments on the Second
Proposal
The Board received many comments
expressing concerns about the Second
Proposal’s treatment of the NCUSIF
capitalization deposit. A minority of
commenters suggested that they agreed
with the proposed treatment of the
NCUSIF deposit. A majority of
commenters who mentioned the
NCUSIF deposit, however, noted that
credit unions treat their NCUSIF
capitalization deposit as an asset on
their books. Those commenters
suggested that while banks expense
their deposit insurance and can never
reclaim it, a credit union’s deposit will
be returned if it decides to liquidate,
convert to another charter, or convert to
private insurance. The commenters
recommended that the Board
acknowledge the difference in treatment
of insurance deposits between the two
systems and assign a capital value to the
NCUSIF capitalization deposit for credit
unions. Another commenter suggested
that, compared to banks, credit unions
on average have 1 percent less capital
than the net worth ratio suggests
because credit unions carry the NCUSIF
capitalization deposit as an asset: Prepaid NCUSIF premiums, which the
commenter argued should be amortized.
The commenter speculated that if credit
unions amortized their NCUSIF
premium at eight basis points per year,
it would have about the same effect as
stabilization premiums and credit
unions would, over 12 years, write off
the deposit. The commenter suggested
further that the deposit adds to the risk
in economic downturns because it poses
the danger of increased pressure on
earnings and capital during a financial
crisis. Another commenter argued that
GAAP recognizes the NCUSIF
capitalization deposit as an asset so it
does not make sense to treat the deposit
as an intangible asset given that it is
easily measured and can be returned or
refunded. Finally, some commenters
recommended that the NCUSIF
capitalization deposit be treated as a
credit union asset with a risk weighting
of 100 percent or lower.
Discussion
As stated in the Second Proposal, the
1997 U.S. Treasury Report on Credit
Unions supports NCUA’s position of
excluding the NCUSIF capitalization
deposit from the risk-based capital ratio
calculation. The Treasury report
concluded that the NCUSIF
capitalization deposit is double counted
because it is an asset on credit union

VerDate Sep<11>2014

22:13 Oct 28, 2015

Jkt 238001

balance sheets and equity in the
NCUSIF.122 The Treasury noted that, in
lieu of expensing the NCUSIF
capitalization deposit, holding
additional capital is necessary to offset
the 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.123
The NCUSIF capitalization deposit
deduction needs to be addressed in the
risk-based capital ratio, not just the
leverage ratio, to correct for the doublecounting concern in those credit unions
where the risk-based capital ratio is the
governing requirement.
The NCUSIF capitalization 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.124 The purpose of the
NCUSIF capitalization 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 1 percent
NCUSIF capitalization deposit and
required NCUSIF premium expenses
needed to restore the NCUSIF equity
ratio.125
The NCUSIF capitalization 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 capitalization deposit to cover
individual losses while the credit union
is an active going concern, or its at-risk
stature in the event of major losses to
the NCUSIF. NCUA refunds the NCUSIF
capitalization deposit only in the event
a solvent credit union voluntarily
liquidates, or converts to a bank charter
or private insurance.
122 U.S. Dep’t of Treasury, Credit Unions 58
(1997) (‘‘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 [. . .]
better ways of protecting the Fund are available.
Accordingly, we do not recommend changing the
accounting treatment of the 1 percent deposit.’’).
123 Id. at 4–5 & 55–59.
124 12 U.S.C. 1782(c)(1)(B)(iii).
125 NCUA, Premium Assessments, Letter to Credit
Unions 09–CU–20 (Oct. 2009); NCUA, Corporate
Stabilization Fund Implementation, Letter to Credit
Unions 09–CU–14 (June 2009); NCUA, Corporate
Credit Union System Strategy, Letter to Credit
Unions 09–CU–02 (Jan. 2009).

PO 00000

Frm 00043

Fmt 4701

Sfmt 4700

66667

Consistent with its exclusion from the
risk-based capital ratio numerator, the
NCUSIF capitalization deposit was also
deducted from the denominator under
proposed § 702.104(c)(1), which
properly adjusted the risk-based capital
ratio calculation and reduced the impact
of the adjustment.
Neither the Second Proposal nor this
final rule adjusts for the NCUSIF
capitalization deposit twice or puts
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 capitalization deposit should
be treated as an investment similar to
Federal Home Loan Bank (FHLB) stock.
The NCUSIF capitalization 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 capitalization deposit
refund. Further, unlike FHLB stock, the
NCUSIF capitalization deposit is not an
income-producing asset. The deposit
has not paid a dividend since 2006. And
it 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
capitalization deposit, and does not
believe the risk-based capital treatment
will lead to a change in how this asset
is accounted under GAAP. The Board
agrees with the U.S. Treasury position
as stated in its 1997 Report on Credit
Unions. Treasury stated that expensing
the NCUSIF capitalization deposit
would not strengthen the NCUSIF. The
financial structure of the NCUSIF is
reasonable and works well for credit
unions.
The assignment of an appropriate risk
weight for the NCUSIF capitalization
deposit, based on its credit risk, 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 deposit. The
NCUSIF capitalization deposit is treated
similarly to other intangible assets, (e.g.
goodwill and core deposits intangible
assets), as they are not available assets
upon liquidation.
Accordingly, for all the reasons
discussed above, the Board has decided
to retain this aspect of the Second
Proposal in this final rule without
change.

E:\FR\FM\29OCR2.SGM

29OCR2

mstockstill on DSK4VPTVN1PROD with RULES2

66668

Federal Register / Vol. 80, No. 209 / Thursday, October 29, 2015 / Rules and Regulations

Goodwill and Other Intangible Assets
Under the Second Proposal, goodwill
and other intangible assets were
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, however, recognized that
requiring the exclusion of goodwill and
other intangibles associated with
supervisory mergers and combinations
of credit unions that occurred prior to
this proposal could directly reduce a
credit union’s risk-based capital ratio.
Accordingly, the Board also proposed
allowing credit unions to include
certain goodwill and other intangibles
in the risk-based capital ratio
numerator. In particular, the Second
Proposal would have excluded from the
definition of goodwill, which must be
deducted from the risk-based capital
ratio numerator, any goodwill or other
intangible assets acquired by a credit
union in a supervisory merger or
consolidation that occurred before the
publication of this rule in final form.
The Second Proposal would not have
changed the financial reporting
requirements for credit unions, which
requires they use GAAP to determine
how certain intangibles are valued over
time. Under the proposal, credit unions
would have still been required to
account for goodwill in accordance with
GAAP, and the amount of excluded
goodwill and other intangible assets
would have been based on the
outstanding balance of the goodwill
directly related to supervisory mergers.
The Board proposed allowing the
excluded goodwill and other intangible
assets to be counted until December 31,
2024, to allow affected credit unions to
adjust to this change as they continue to
value goodwill and other intangibles in
accordance with GAAP. The proposed
exclusions would have applied only to
goodwill and other intangible assets
acquired through supervisory mergers or
consolidations and would not have been
available for goodwill and other
intangible assets acquired from mergers
or consolidations that did not meet this
definition. This change would have
provided affected credit unions time to
revise their business practices to ensure
goodwill and other intangible assets
directly related to supervisory mergers
would not adversely impact their riskbased capital ratio.

VerDate Sep<11>2014

22:13 Oct 28, 2015

Jkt 238001

Public Comments on the Second
Proposal
At least one commenter stated that
they agreed with the proposed treatment
of goodwill and other intangible assets.
A significant number of commenters,
however, suggested that the Board
include all goodwill and other
intangible assets in the risk-based
capital ratio numerator so long as these
intangible assets meet GAAP
requirements (subjected to annual
goodwill impairment testing).
Commenters reasoned that the exclusion
of non-supervisory goodwill from the
numerator would discourage some well
managed and well capitalized credit
unions from participating in mergers,
and many mergers serve to benefit the
members of both the surviving and nonsurviving credit union. Similarly,
commenters reasoned that mergers can
also have a favorable influence on safety
and soundness—producing institutions
that in combination have stronger
financials and are able to weather more
extreme economic swings.
At least one commenter suggested
that, as an alternative to including all
goodwill and intangible assets in the
risk-based capital ratio numerator, the
Board might limit the retention of nonsupervisory goodwill and other
intangible assets in the numerator of the
risk-based capital ratio for those credit
unions that are well capitalized on the
basis of the net worth ratio. The
commenter suggested further that, at a
minimum, non-supervisory goodwill
that meets annual impairment testing
should be retained in the numerator
over a 10-year phase-out period, and all
previous supervisory goodwill should
be grandfathered without time limit,
subject to regular impairment testing.
The commenter suggested three reasons
for taking such an approach: First, those
credit unions that engaged in such
transactions almost certainly reduced
insurance losses to the Share Insurance
Fund, and should not be penalized after
the fact. Second, they did so with an
understanding of current rules at that
time. Many of these transactions would
likely not have occurred had the
proposed treatment of goodwill been
known; so no longer counting this
goodwill at some point in the future
would be changing the rules midstream.
Third, the amount of previous
supervisory goodwill is a known, fixed,
and relatively small quantity. Only 20
credit unions with more than $100
million in assets have goodwill
amounting to more than 5 percent of net
worth, and the average goodwill to net
worth ratio at these credit unions is 12.8
percent. Supervisory goodwill likely

PO 00000

Frm 00044

Fmt 4701

Sfmt 4700

represents no more than three quarters
of that goodwill (approximately 10
percent of net worth). Considering
future growth, the commenter suggested
that supervisory goodwill will decline
in proportion to net worth and assets
going forward, and grandfathering it
would protect those credit unions that
in the past reduced NCUSIF resolution
costs from a cliff reduction in their RBC
ratios in the future.
Other commenters suggested that
excluding goodwill from the risk-based
capital ratio numerator would harm
credit unions by: (1) Penalizing credit
unions who have recently gone through
a merger, and (2) dis-incentivizing
merger activity, which could prevent
healthy industry consolidation and the
combining of unhealthy credit unions
with stronger ones in the future. Some
commenters suggested that if a wellsituated credit union relies on goodwill
as a component of a merger, and is no
longer able to justify such as a business
decision because of a lack of allowance
for goodwill, NCUA is then forced to
step in, which would negatively impact
the NCUSIF and could require the
payment of additional premiums by all
credit unions. Use of goodwill allows a
well-situated credit union to absorb a
struggling credit union without
negatively impacting the NCUSIF,
which the commenter suggested should
be incentivized. Thus, the commenter
recommended that goodwill arising
from both previous and future mergers
should continue to be counted without
a time limitation, so long as it meets
GAAP requirements.
Several commenters suggested that
the rule grandfather credit unions that
have included goodwill on their books,
and not impose the 10-year limit, since
it has been used by the credit union in
the past and was sanctioned by NCUA.
Another commenter suggested that if
mergers were part of a strategic plan
accomplished before the risk-based
capital rule is finalized, then any
goodwill acquired through those
mergers should be grandfathered.
Some commenters contended that
goodwill acquired through a supervisory
merger should not be treated differently
than goodwill acquired through a
strategic merger. Goodwill acquired
through both types of mergers have
value according to GAAP. One
commenter argued that separating
goodwill and other intangibles derived
through a merger of healthy credit
unions versus those assisted by a
regulator does not make sense for the
following reasons: (1) Some mergers that
involve troubled credit unions may have
had informal assistance from state or
federal regulators, but may not meet the

E:\FR\FM\29OCR2.SGM

29OCR2

mstockstill on DSK4VPTVN1PROD with RULES2

Federal Register / Vol. 80, No. 209 / Thursday, October 29, 2015 / Rules and Regulations
definition outlined in the proposal as
supervisory-assisted. This will create
inconsistency in the application of the
rule. (2) The treatment is inconsistent
and provides potentially more risk to
the NCUSIF as the risk-based capital
ratio may not reflect the actual risk of
future impairment of those assets. (3)
The proposal favors troubled credit
union mergers while discouraging
healthy credit union consolidation due
to the negative impact on the risk-based
capital ratio. (4) Using a 10-year life for
supervisory-assisted transactions
provides only temporary relief for those
credit unions impacted and it overstates
the risk-based capital ratios until the
phase-out period is over.
One commenter argued that the
proposed treatment of goodwill would
place credit unions that acquired failing
or insolvent credit unions (under
supervisory/emergency merger
conditions)—including those where
NCUA, the NCUSIF, and the credit
union industry realized benefits from
the acquisition activities—at a
competitive disadvantage. The
commenter suggested that the proposed
10-year deferral of goodwill is an
equitable solution for those credit
unions that acquired failed credit
unions and received some level of
funded assistance from the NCUSIF, as
the amount of goodwill carried on their
books would typically be less than
goodwill carried by those credit unions
that did not receive assistance. The
commenter explained that this is due to
the fact that the funded amount of
assistance from the NCUSIF upon
receipt by the continuing credit union is
recorded as a reduction to the goodwill
determined at the time the failed credit
union was acquired. The commenter
argued that other credit unions,
however, that acquired failed credit
unions relying on the current risk-based
net worth regulations, but did not
receive funded assistance from the
NCUSIF would be penalized under the
proposed 10-year deferral of goodwill.
The commenter speculated that these
credit unions would be forced to forgo
many opportunities in lieu of having to
meet changed regulator risk-based
capital targets, while their competitors
(for the next 10 years) would have the
opportunity to focus on survival,
service, product innovation, community
reinvestment and growth. Accordingly,
the commenter recommended the Board
grant a one-time permanent exemption
of goodwill to credit unions that made
significant, capital-impacting decisions
under the current risk-based net worth
regulations.

VerDate Sep<11>2014

22:13 Oct 28, 2015

Jkt 238001

Discussion
There is a high level of uncertainty
regarding the ability of credit unions to
realize the value of goodwill and other
intangibles, particularly in times of
adverse conditions. Thus, the proposed
approach to other intangibles generally
mirrors the treatment by the Other
Banking Agencies.126
However, as discussed in the
definitions part of this rule above, the
longer implementation period included
in this final rule will serve to mitigate
some of the commenters’ concerns
regarding existing goodwill and other
intangibles because it provides affected
credit unions more than 13 years to
write down the goodwill or otherwise
adjust their balance sheet.
While the final rule includes a
provision to address goodwill and other
intangibles acquired through
supervisory mergers and consolidations
that were completed 60 days following
this rule’s publication, the final rule
retains 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.
Consistent with the comments, the
Board recognizes that only 15 credit
unions report total goodwill and
intangible assets of more than 1 percent
of assets, and notes that the valuation
under GAAP of these existing assets will
be immaterial by the end of the
extended sunset date.
In future combinations, a credit union
will need to consider the impacts a
combination will have on both its net
worth ratio and its risk-based capital
ratio. 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.
Accordingly, for all the reasons
discussed above, the Board has decided
to retain this aspect of the Second
Proposal in this final rule without
change.
Identified Losses Not Reflected in the
Risk-Based Capital Ratio Numerator
The Second Proposal allowed for
identified losses, not reflected as
126 See,

PO 00000

e.g., 12 CFR 324.22.

Frm 00045

Fmt 4701

Sfmt 4700

66669

adjustments in the risk-based capital
ratio numerator, to be deducted. The
inclusion of identified losses allowed
for the calculation of an accurate riskbased capital ratio.
The Board received no comments on
this aspect of the proposal. Accordingly,
the Board has decided to retain this
aspect of the Second Proposal in this
final rule without change.
104(c) Risk-Weighted Assets
In developing the proposed risk
weights included in the Second
Proposal, the Board reviewed the Basel
accords and the U.S. and various
international banking systems’ existing
risk weights.127 The Board considered
the comments contained in Material
Loss Reviews (MLRs) prepared by
NCUA’s OIG and comments by GAO in
their respective reviews of the financial
services industry’s implementation of
PCA.128 The Second Proposal was
designed to address credit risk and
concentration risk in a manner
comparable to the Other Banking
Agencies’ capital regulations.129 As a
result, the Second Proposal would have
substantially changed how the risk
weights for nearly all credit union assets
are assigned. For example, instead of
assigning an investment a risk weight
based on its weighted average life, the
Second Proposal assigned risk weights
to investments based primarily on the
credit quality of the underlying
collateral or repayment ability of the
issuer. These and other adjustments
were intended to address, where
possible depending on the particular
requirements of section 216 of the
FCUA, inconsistencies between the risk
weights assigned to assets under the
Other Banking Agencies’ capital
regulations and NCUA’s current PCA
regulations.
Public Comments on the Second
Proposal
The Board received many general
comments regarding the proposed risk
127 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.
128 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).
129 See, e.g., 12 CFR 324.32.

E:\FR\FM\29OCR2.SGM

29OCR2

mstockstill on DSK4VPTVN1PROD with RULES2

66670

Federal Register / Vol. 80, No. 209 / Thursday, October 29, 2015 / Rules and Regulations

weights. At least one commenter
suggested the proposal significantly
improved the various risk weightings
and that most of the proposed risk
weightings seemed appropriate. Most
commenters who mentioned the risk
weights also acknowledged that the
Board had made significant
improvements to the risk-weight
categories from the original risk-based
capital proposal, and many of the
adjustments and more detailed asset
categories included in the Second
Proposal were significant
improvements.
A substantial number of the
commenters, however, argued that the
proposed risk weights remained too
high in key areas, given credit unions’
level of risk, and suggested they should
be lower than what the federal bank
regulators require for assets such as
mortgage loans, member business loans,
servicing and certain investments.
These commenters suggested that lower
risk weightings for credit union assets
are appropriate given their different
incentives to manage risk as compared
to banks, and lower loss history based
on their comparison to the banking
industry.
A significant number of commenters
complained that the proposed riskweighting scheme was overly complex.
At least one commenter suggested that
credit unions have assets on their books
at fair value; the change to fair value is
accounted for in either the profit and
loss statement or in other
comprehensive income. The commenter
recommended that the Board clarify the
application of the risk weight for these
assets when a component of their book
value has already impacted capital
through earnings or other
comprehensive income. Other
commenters recommended that the risk
weights and concentration percentages
take into account the standard credit
risk factors such as loan-to-value ratio,
credit score, origination channel, etc.
One commenter suggested that credit
risk is a function of underwriting, the
economy, loan portfolio diversity,
institutional structure, business strategy,
profitability demands, time horizons,
performance-monitoring capacity,
funding stability and other factors. But,
the commenter argued, the proposal
ignores these local, individual factors in
favor of a one-size-fits-all risk
weighting.
Interest rate risk. The Board also
received many comments regarding the
proposed removal of IRR from the riskweight calculation. A majority of the
commenters who mentioned IRR stated
that they agreed with the proposed
removal of interest rate risk from the

VerDate Sep<11>2014

22:13 Oct 28, 2015

Jkt 238001

rule. Moreover, they suggested a
separate IRR standard was not needed to
reasonably account for IRR at credit
unions because NCUA’s current
framework of policies and regulations
sufficiently address the risk. One credit
union commenter did recommend,
however, that NCUA expand the data it
gathers in the 5300 Call Reports and use
that information to facilitate both RBC
compliance and interest rate risk
management. The commenter suggested
Call Reports also be used to monitor
investment losses for credit unions that
invest in complex securities, which
would show the direction a credit union
is trending and provide regulators with
an objective basis for determining which
credit unions need capital buffers that
exceed regulatory minimums.
Concentration risk. The Board
received a substantial number of
comments regarding the Second
Proposal’s retention of concentration
risk measures in the risk weightings of
certain categories of assets. A majority
of the commenters who mentioned it
suggested that concentration risk is best
addressed through the examination
process as it is for banks, and thus,
should be dropped from the risk weights
in the final rule. At least one commenter
argued that the proposed concentration
threshold requirements violate the
FCUA, which requires the Board to
‘‘prescribe a system of prompt corrective
action’’ that is ‘‘comparable to section
1831o’’ of the Federal Deposit Insurance
Act.
One commenter noted that while
NCUA did cite to specific credit union
failures that involved high
concentrations of certain assets, the
Material Loss Reviews associated with
those failures revealed that fraud or
board mismanagement played a pivotal,
if not a determining, role in the failure
of the credit unions. Other commenters
claimed that, based on 2007 and 2014
data, there was no meaningful
difference in the performance of credit
unions with higher or lower levels of
concentration in mortgages or home
equity loans. The proposal would
require credit unions to hold more
capital than banks at certain levels of
asset concentration, which commenters
argued would not create a ‘‘comparable’’
capital framework and would put credit
unions at a competitive disadvantage.
The commenters contended this is
particularly true for mortgages and
home equity loans where the capital
requirements materially increase even at
relatively lower levels of concentration
(35 percent and 20 percent of assets,
respectively).
One commenter claimed the Board
did not provided any evidence the

PO 00000

Frm 00046

Fmt 4701

Sfmt 4700

proposed concentration risk thresholds
aligned with increased capital at risk,
and insisted that the historical loss data
provided by NCUA did not support
establishing a higher capital standard
for credit unions than banks. The
commenter argued that the data in the
Second Proposal showing the
differences in asset concentrations
between those credit unions that failed
and those that survived was insufficient.
And for real estate loans, the commenter
claimed the data was inconclusive
because credit unions that failed had 58
percent of their assets in real estate
whereas those credit unions that
survived had 49 percent. While there
was a higher concentration of real estate
assets for those that failed, the
commenter suggested the difference of 9
percent was not a firm basis on which
to assert higher concentrations of real
estate loans were a significant
contributing factor to the credit union’s
failure such that it warrants higher
capital levels for all complex credit
unions. Similarly, the commenter
argued that the data for commercial
loans would not support a concentration
risk threshold of 50 percent, and alleged
that the Board examined the current
level of real estate exposure across the
industry and set the capital
requirements such that roughly the top
10 percent of the industry would see
their capital requirements increase.
Further, the commenter argued that the
methodology was unsupported by the
evidence, that there was no empirical
evidence to support that either (a) two
standard deviations is the right basis for
determining this threshold, or (b) the
resultant risk thresholds correlated
directly to higher degrees of risk such
that additional capital should be held by
these institutions. The commenter
insisted that, based on the comparability
requirement in the FCUA, the Board
should eliminate the concentration risk
thresholds for these asset classes and set
the risk weights equal to those applied
to the banking industry (50 percent for
mortgages and 100 percent for both
home equity loans and commercial
loans).
Another commenter noted that the
examples given by the Board in support
of adopting concentration risk elements
did not acknowledge the fact that
mortgage and home equity line of credit
(HELOC) underwriting standards have
tightened, and claimed that credit
unions have generally divested away
from residential real estate, and that the
proposal fails to anticipate where the
credit union asset mix will likely
migrate in the future. Based on this
claim, the commenter speculated that

E:\FR\FM\29OCR2.SGM

29OCR2

mstockstill on DSK4VPTVN1PROD with RULES2

Federal Register / Vol. 80, No. 209 / Thursday, October 29, 2015 / Rules and Regulations
the proposed concentration limits may
not prudently attain the desired goal of
portfolio invariance and may, in fact,
threaten the long-term viability of many
credit unions. The commenter
recommended that the Board adopt one
of the following alternative approaches:
(1) Do away with the concentration risk
element altogether; (2) use current
demarcation points as a trigger for
expanded reporting in the Call Report,
thereby allowing NCUA to assess if
there is in fact additional risk; or (3)
increase the current threshold levels
that call for increased weighting—for
example, by moving the mortgage
threshold to 50 percent to match the
commercial loan threshold, and
increasing the residential junior lien
threshold from 20 percent to 25 percent.
One commenter argued that the
proposed approach of including
concentration risk thresholds in the risk
weights was fundamentally flawed
because it considered the relative size of
the portfolio and not the benefit of
diversification. Another commenter
speculated that without more specific
information to capture diversification
within a lending portfolio,130 the
proposal would have limited value in
providing early warning of truly unsafe
concentrations. Instead, the commenter
recommended NCUA address outlier
credit unions through the timely
application of supervisory tools or, if
necessary, by applying the capital
adequacy planning requirements of
section 702.101(b) to credit unions
flagged as outliers. The commenter
suggested that using capital adequacy
plans to address concentration risk
would control for asset concentrations
that pose safety and soundness risk
without placing the wider credit union
system at a competitive disadvantage to
banks. The commenter speculated
further that, given the shifting landscape
of the financial services market and the
credit union industry, building risk
parameters around the current shape of
the market may not align with future
risks.
Yet another commenter suggested that
if concentration risk is maintained in
the final rule, the concentration
threshold level for all secured loan
categories should be 50 percent, and
only unsecured loans should have a
concentration threshold level below 50
percent.
Finally, one commenter argued that
there is no need for the rule to address
concentration risk, claiming that
concentration risk would address itself
since the dollar amount applied against
130 For example, diversification based on
geography, industry, credit profile, or product type.

VerDate Sep<11>2014

22:13 Oct 28, 2015

Jkt 238001

the risk weight increases as
concentration increases.
Discussion
After carefully considering the
comments received, the Board generally
agrees with commenters who suggested
that IRR concerns can be addressed
through NCUA guidance, supervision,
and other regulations. NCUA’s
guidance, supervision, and other
regulations are designed to address how
IRR is managed and reported in a
manner that is appropriate to the size,
complexity, risk profile, and scope of
each credit union’s operations. The
Board has determined not to include
IRR in the risk-based net worth
requirement 131 given the other
mechanisms available to NCUA to
address such risk. NCUA will continue
to monitor credit unions’ exposure to
IRR through the supervision process and
plans to provide additional supervisory
guidance in the future.
The Board, however, disagrees with
commenters who suggested further
reductions in the scope of the use of risk
weights to address concentration risk.
Under the Second Proposal, the Board
substantially reduced the risk-based
capital requirements related to
concentration risk by using one
concentration threshold, set at a higher
level, for assets that NCUA determined
are vulnerable to concentration risk. As
stated in the preamble to the Second
Proposal, the concept of addressing
concentration risk with the assignment
of risk weights is consistent with the
risk-based net worth requirement under
current part 702. Higher risk weights are
assigned to real estate loans and MBLs
held in higher concentrations under the
current rule. Elimination or additional
reductions in the concentration risk
dimension of the risk-based net worth
requirement would be inconsistent with
concerns regarding concentration risk
raised by GAO and in MLRs conducted
by NCUA’s OIG.132 The preamble also
131 See 12 U.S.C. 1790d(d)(2) (‘‘The Board shall
design the risk-based net worth requirement to take
account of any material risks against with the net
worth ratio required for an insured credit union to
be adequately capitalized may not provide adequate
protection.’’).
132 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; 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

PO 00000

Frm 00047

Fmt 4701

Sfmt 4700

66671

noted that the Basel Committee on
Banking Supervision has stated that
‘‘risk concentrations are arguably the
single most important cause of major
problems in banks.’’ 133
It is not appropriate to rely solely on
the supervisory process to address
concentration risk because the holding
of additional capital for concentration
risk should occur prior to the
development of the concentration risk,
and is difficult to achieve after a
concern with concentration risk is
identified during the supervisory
process.
The concentration risk thresholds
were adjusted in the Second Proposal to
focus on material levels of concentration
risk and for more consistency with the
current effective impact of the
concentration risk on capital
requirements for commercial loans. As a
result of the risk-weight adjustments,
very few credit unions would be subject
to the marginally higher risk weights
due to concentration risk. Credit unions
subject to the concentration risk weights
will not be placed at a competitive
disadvantage, because all banks are
required to maintain capital
commensurate with the level and nature
of all risks, including concentration risk,
to which they are exposed.134
Regarding support for the risk weights
themselves, given the statutory
requirement to maintain comparability
with the Other Banking Agencies’ PCA
requirements,135 NCUA relied primarily
on the 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. The Board,
however, did tailor the proposed risk
weights for assets unique to credit
unions, where contemporary and
sustained performance differences
existed (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.
The Board generally agrees with
commenters who suggested that credit
risk factors such as loan-to-value ratio
(LTV), credit score, origination and
other individual factors are meaningful
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.
133 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.
134 See 12 CFR 324.10(d).
135 See 12 U.S.C. 1790d(b)(1)(A)(ii).

E:\FR\FM\29OCR2.SGM

29OCR2

66672

Federal Register / Vol. 80, No. 209 / Thursday, October 29, 2015 / Rules and Regulations

and should be evaluated. However,
reporting loan data on LTVs and credit
scores to NCUA would be
administratively burdensome. For
example, establishing regulations on
how the LTV would be measured would
be complex when considering such
items as how to take into account
private mortgage insurance as the
financial strength of mortgage insurers
varies, or the LTV of a restructured loan.
NCUA also lacks credit union industry
data on loan performance based on LTV
ratios that could be used to establish a
framework for LTV-based risk weights.
And risk weights based on LTVs for real
estate loans would not be comparable to
the risk weight framework used by the
other banking agencies.
Accordingly, the Board has decided to
maintain the proposed approach to riskweighting assets in this final rule.
104(c)(1) General
Under the Second Proposal,
§ 702.104(c)(1) provided that riskweighted assets include 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). The
section provided 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
proposed adding 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.
The Board received no comments on
the language in this paragraph of the
proposal. Accordingly, the Board has
decided to retain the language in this
proposed paragraph in this final rule
without change.
104(c)(2) Risk Weights for On-Balance
Sheet Assets
Under the Second Proposal,
§ 702.104(c)(2) defined the risk
categories and risk weights to be
assigned to each defined on-balance
sheet asset. All on-balance sheet assets

were assigned to one of 10 risk-weight
categories.
The Board received a significant
number of comments, which are
discussed in more detail below, on the
proposed risk-weight categories and the
risk weights assigned to particular
assets.
Cash and Investment Risk Weights
Under the Second Proposal, the Board
proposed eliminating the process of
assigning risk weights for investments
based on the weighted average life of
investments in favor of a credit-risk
centered approach for investments. The
credit risk approach to assigning risk
weights under the Second Proposal was
based on applying lower risk weights to
safer investment types and higher risk
weights to riskier investment types.136
The proposed investment risk weights
are similar to the risk weights assigned
to investments under the Other Banking
Agencies’ regulations,137 which are
based on the credit-risk elements of the
issuer, the underlying collateral, and the
payout position of the particular type of
investment. The proposed changes to
the risk weights assigned to investments
are outlined in the following table:

SECOND PROPOSAL: RISK WEIGHTS FOR CASH AND INVESTMENTS
Proposed
(percent)
risk weight

mstockstill on DSK4VPTVN1PROD with RULES2

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.
• 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.
136 When the Board evaluates the risk of an
investment type, it is based on criteria such as

VerDate Sep<11>2014

22:13 Oct 28, 2015

Jkt 238001

volatility, historical performance of the
investments, and standard market conventions.

PO 00000

Frm 00048

Fmt 4701

Sfmt 4700

137 See,

E:\FR\FM\29OCR2.SGM

e.g., 12 CFR 324.32.

29OCR2

0

20

50

100

Federal Register / Vol. 80, No. 209 / Thursday, October 29, 2015 / Rules and Regulations

66673

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

Item
•
•
•
•

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 equity investments in CUSOs.
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 ...............

mstockstill on DSK4VPTVN1PROD with RULES2

Public Comments on the Second
Proposal
The Board received many general
comments regarding the proposed
investment risk weights. At least one
commenter maintained that the
proposal would unfairly penalize credit
unions by using investment risk weights
to compensate for interest rate risk,
which the commenter argued would
create a bias towards lending and
against investments. Other commenters,
however, suggested that, in general, the
revised risk weights for investments
were reasonable, including the zero risk
weighting for investments issued by the
U.S. Government, including NCUA and
FDIC. Some commenters suggested the
20 percent weight for governmentsponsored enterprises (GSEs) seemed
reasonable given that they are quasigovernment entities.
The Board also received other
comments regarding the risk weights
assigned to the following particular
investments:
Deposits in banks or credit unions.
One commenter contended that the
proposed risk weightings for
investments were mute on weights for
deposits in banks or credit unions. The
commenter believed such deposits
should have some level of risk
weighting, at least for any uninsured
amounts on deposit at banks and credit
unions, because they can be a part of a
smaller credit union’s investment
portfolio.
Part 703 compliant investment funds.
At least one commenter objected to a
default risk weight of 100 percent for
part 703 compliant investment funds,
and 300 percent for non-part 703
compliant funds. The commenter
believed the 200 percent increase in a
default risk weight would be punitive
138 The 1,250 percent risk-weight amount is based
on holding capital dollar-for-dollar at the 8 percent
adequately capitalized level for the risk-based
capital ratio (8 percent adequately capitalized level
*1,250 percent = 100 percent).

VerDate Sep<11>2014

22:13 Oct 28, 2015

Jkt 238001

and would create a disadvantage for
state-chartered credit unions. The
commenter suggested there are several
non-conforming, state-authorized
investments that are not based in
equities or other ‘‘volatile and risky
investments’’ and that do not warrant a
300 percent risk weight. The commenter
argued further that, by using part 703 as
a threshold, the Board was assigning a
significantly lower baseline assumption
of risk on the basis of the regulator that
approved the investment, which would
single out state-chartered institutions
and force them to undertake lookthrough calculations on their
investments when federal charters may
be able to rely on the default risk
weight. The commenter recommended
that the default thresholds be tied to the
underlying holdings and investment
strategy of the fund.
At least one commenter
recommended that investment funds
that hold only investments that qualify
for a zero or 20 percent risk weight
should receive a 20 percent risk weight
regardless of whether the underlying
investments are part 703 compliant.
One commenter complained that the
proposed risk-weight categories for nonloan investments were too general,
lumping together assets with widely
varying risks, especially when
considering risks beyond those tied to
interest rate fluctuations. The
commenter suggested that additional
risk-weighting tools within categories
were needed to properly take account of
issuer- and security-specific issues for
both debt and equity securities and nonpart 703 compliant funds. The
commenter speculated further that the
proposed approach would discourage
responsible employee benefit prefunding by penalizing those
investments, and provide incentives for
excessively aggressive equity investing
in pursuit of higher returns to offset the
especially high reserve requirements.
The commenter recommended that the
baseline risk weights should be

PO 00000

Frm 00049

Fmt 4701

Sfmt 4700

150
300

400
138 1,250

presumptive only, so that if a credit
union can present good reasons why a
lower risk weight should be assigned to
its investments within a certain
category, those lower weights should be
applied going forward. Another
commenter suggested that, while the
proposed 100 percent risk weight
assigned to all private issuer corporate
debt is not a punitive level, there ought
to be some ability for a credit union to
demonstrate that the corporate debt it
holds qualifies for a lower weighting,
closer to the 20 percent for state and
local debt, or the 50 percent for revenue
bonds, which are limited for repayment
to the revenue generated by a specific
facility and thus often are in reality
private issuer obligations. The
commenter believed that a flat 100
percent weighting for all corporate debt
takes no account of actual issuerspecific repayment risk, and could serve
to distort reasonable investment
decisions by credit unions looking to
include such issues in their employee
benefit pre-funding portfolios. The
commenter recommended some issue/
issuer-specific risk assessment be
allowed to more rationally, precisely
equal risk and risk weights.
Non-significant equity exposures.
Several commenters suggested that
banks are permitted to apply a 100
percent risk weight to certain equity
exposures deemed non-significant. The
commenters suggested further that nonsignificant exposures mean an equity
exposure that does not exceed 10
percent of the bank’s total capital. The
commenters recommended that NCUA
adopt a similar treatment if the publicly
traded equities and equity allocation
within an investment fund are less than
10 percent of a credit union’s total
capital; then a risk weight of 100
percent shall be applied to the equity
exposure. The commenters suggested
this would reduce the complexity of the
look-through approach and simplify the
overall risk-weighting process for nonsignificant equity exposure.

E:\FR\FM\29OCR2.SGM

29OCR2

mstockstill on DSK4VPTVN1PROD with RULES2

66674

Federal Register / Vol. 80, No. 209 / Thursday, October 29, 2015 / Rules and Regulations

Community development investments.
Several commenters suggested that
OCC’s risk-based capital regulation
recognizes the importance of
community development investments
and assigns a risk weight of 100 percent
rather than the standard 300 percent
factor. The commenters suggested
further that the public policy embraced
by OCC with this allowance is to
encourage investments to support
charitable goals and purposes.
Commenters recommended that NCUA
embrace a similar policy and assign a
risk weight of 100 percent for any equity
or corporate bond exposure in a
community development investment.
The commenters suggested that such
treatment would support broader
participation by credit unions with
community development investments
and enhance the goodwill and
reputation of the credit union industry
as it builds an investment resource to
support charitable contributions.
Employee benefit plan investments.
Some commenters argued that the 300
percent risk weighting assigned to
publicly traded equity investments
should be much lower so that credit
unions are not unduly limited in their
investments for employee benefit
funding. One commenter recommended
that the Board continue to apply
standard risk weights to benefit plan
investments. The commenter contended
that a 457(b) executive plan is unfunded and does not vest until the
employee retires or terminates
employment, and the assets underlying
such plans generally must remain the
property of the credit union until vested
and are subject to the claims of general
creditors. The commenter speculated
further that, if the credit union is put
into conservatorship, the investments
never transfer to the employee. So, the
commenter maintained, it is appropriate
for the Board to risk weight such
investments as part of the overall
balance. The commenter expressed
concern that it could be very difficult
for NCUA to determine with certainty
whether, and to what extent, the credit
union held a risk of loss in connection
with the investments because employee
benefit plans can be tailored to fit the
needs of each individual credit union
and executive.
One commenter claimed risk
weighting all publicly traded equities at
300 percent would be punitive and
unjustified by real-world experience
with a long list of blue-chip, dividendpaying, financially secure stocks
regularly included in credit union client
§ 701.19 portfolios. The commenter
suggested that, as with corporate debt,
some tools must be offered to allow a

VerDate Sep<11>2014

22:13 Oct 28, 2015

Jkt 238001

credit union to obtain relief from the
extremely high risk assessment for
specific equity issues which are more
secure than consumer loans in default,
to which the proposal assigns a 150
percent risk weight. The commenter
suggested further that relevant factors
which could support a lowering of the
risk weighting for specific equity
investments include the issuer’s debt
rating, market capitalization and
financial condition, history of dividend
payments, and absence of financial
defaults. The commenter speculated
that imposing a blanket 300 percent risk
weight on all public equity would create
two negative, counterproductive
incentives: First, it would discourage
any public equity investments, driving
down expected overall portfolio return
and requiring investment of a larger
amount of credit union funds to achieve
a needed annual return tied to projected
future benefit costs. Second, for those
credit unions which do nevertheless
include an equity component in their
§ 701.19 portfolios, there would be
pressure to overcome the high reserve
ratio by investing in higher-return,
higher-risk equities, instead of more
stable dividend-paying stocks. The
commenter also maintained that the 300
percent risk weight assigned to prefunded, non-part 703 compliant mutual
funds, while subject to reduction under
various look-through methods, was
unjustifiably high in comparison to the
other weights assigned to performing
and even non-performing loans.
Publicly traded equity investments.
One commenter recommended that all
publicly traded equity investments be
treated as either available for sale or
trading. The commenter suggested that
these two methods of accounting require
the investment to be recorded at market
value, which should be easily
determined since they are publicly
traded. Thus, the commenter argued, the
300 percent risk weight assigned under
the Second Proposal would be
excessive, especially given the amount
of class B Visa shares held by a
significant number of credit unions, and
with the employee benefit funding
allowed by § 701.19 of NCUA’s
regulations.
Non-agency ABS structured securities.
One commenter suggested that collateral
utilized to secure investments included
in the non-agency ABS structured
securities category could include
automobile loans. Because the Second
Proposal requires a risk weighting of 75
percent for all current secured consumer
loans—and since the risk profile of the
underlying collateral does not differ
between secured automobile loans and
non-agency ABS structured securities

PO 00000

Frm 00050

Fmt 4701

Sfmt 4700

backed by secured auto loans—the
commenter recommended the risk
weightings for both instruments be set at
75 percent.
Subordinate tranche of any
investment. At least one commenter
complained that the Second Proposal
would assign a risk weighting of 1,250
percent, or require the use of the grossup approach to determine the overall
weighting of this category of investment.
The commenter argued that the 1,250
percent risk weighting was punitive in
nature and could not be justified from
a safety and soundness standpoint
because it may appear to represent more
than 100 percent of the monies at risk
in any one investment.
At least one commenter also objected
that, by not including the ‘‘simplified
supervisory formula approach’’ 139 in
the Second Proposal, the Board
deprived credit unions of a
measurement tool that is allowed by the
Other Banking Agencies and the Basel
Committee on Banking Supervision. The
commenter argued that this could
represent a competitive disadvantage to
credit unions who are evaluating certain
investments for inclusion in their
strategies. Given the significance of the
weighting and the exclusion of the
evaluation method, the commenter
recommended the 1,250 percent
weighting should be eliminated and the
Simplified Supervisory Formula
Approach be utilized to determine the
weighting of investment categories.
One commenter suggested that the
Board assign the subordinate tranche of
any investments the same risk weight
that applies to commercial loans.
Corporate debt. Several commenters
maintained that applying high risk
weights to investments in the corporate
system would penalize credit unions
that invest within the industry.
Commenters also suggested that the risk
weights assigned to corporate paid-in
capital should recognize how the
stricter regulatory standards for
corporate credit unions adopted in 2010
not only mitigate risks to natural-person
credit unions, but also protect the
NCUSIF from potential losses.
Accordingly, some commenters
recommended that a lower risk weight
of 125 percent be assigned to corporate
paid-in capital under the final rule.
One commenter suggested that it
would be more reasonable to generally
structure risk weights for corporate debt
into tiers similar to that of municipal
bonds because the proposed structure
would make it costly to diversify and
gain yield because the risk weights
assigned would negate the added yield
139 See,

E:\FR\FM\29OCR2.SGM

e.g., 12 CFR 324.43.

29OCR2

Federal Register / Vol. 80, No. 209 / Thursday, October 29, 2015 / Rules and Regulations

mstockstill on DSK4VPTVN1PROD with RULES2

of these bonds. The commenter insisted
that, in order to preserve a credit
union’s ability to diversify and avoid
concentration risk in agency or
government bonds, more reasonable risk
weights should be assigned to different
forms of corporate debt. The commenter
suggested one alternative option for
structuring risk weights for corporate
debt would be to create a four-tiered risk
classification that would include
investment grade and non-investment
grade bonds. The commenter noted that
the current definition is silent on
whether bonds can be non-investment
grade. The commenter suggested further
that the investment grades could be
broken down into high, medium and
low investment grade plus noninvestment grade for four tiers.
According to the commenter, the high
grade would be equivalent to an AAA
rating, the medium grade would be
equivalent to an A rating, the low grade
would be equivalent to a BBB rating,
and the non-investment grade would be
non-investment grade. The commenter
recommended these ratings be part of
the credit union’s internal ratings
system for bonds, which would allow
for lower risk weights for high-grade
bonds at 50 percent, medium-grade
bonds at 75 percent, and low-grade
bonds at 100 percent.
Discussion
The Board disagrees with commenters
who suggested that the proposal would
unfairly penalize credit unions by using
investment risk weights to compensate
for IRR. The Board intentionally
removed the weighted average life
calculation from the assignment of risk
weights to remove the IRR components
from the Second Proposal. As stated
above, the risk weights assigned to
investments were based on credit risk,
consistent with the risk weights
assigned to investments by the Other
Banking Agencies.
The Board disagrees with the
commenters who claimed the proposed
risk weights assigned to investments
were mute on the weights for deposits
in banks and credit unions. The Second
Proposal assigned a risk weight of zero
percent to insured balances from FDICinsured depositories or federally
insured credit unions. Uninsured
balances, and all balances due from
privately insured credit unions, were
risk-weighted at 20 percent. Deposits in
a bank that are guaranteed by a state
received the same 20 percent risk
weight as an investment in a PSE.
The Board disagrees with the
commenters who suggested that a 300
percent risk weight for non-part 703
compliant investment funds would be

VerDate Sep<11>2014

22:13 Oct 28, 2015

Jkt 238001

punitive compared to the 100 percent
risk weight for part 703 compliant
investment funds. The Board chose to
create standard risk weights for
investment funds to allow credit unions
a simple alternative to calculating the
risk weights for such assets using the
look-through approaches. Part 703
compliant investment funds were
assigned a 100 percent risk weight
under the Second Proposal unless they
qualified for a lower risk weight because
they were limited to holding lower riskweighted assets. The Board determined
that part 703 compliant investment
funds should qualify for a maximum
100 percent risk weight under
§ 702.104(c)(2) because the underlying
investments permitted under part 703 of
NCUA’s regulations were almost
exclusively assigned a risk weight of
100 percent or less under the proposal.
Non-part 703 investment funds, on the
other hand, are potentially more risky,
so assigning them a risk weight
equivalent to the risk weight assigned to
publicly traded equity investments is
appropriate. Under the Second
Proposal, credit unions were also given
the option to calculate the risk weight
for any investment fund using one of the
look-through approaches, which allow a
credit union to risk weight such a fund
based on its underlying assets.
The Board disagrees with commenters
who claimed the proposed risk weights
were too general because they lumped
together assets with widely varying risk,
and those who suggested including
additional risk-weight measures, such as
taking into account the specific loan-tovalue ratio or FICO scores of the
underlying assets. As with loans, the
risk weights assigned to investments
were generally determined based on the
underlying collateral or type of loan,
and the relative credit risk. The Board
chose not to apply separate risk weights
to investments based on additional riskweighting tools due to the complexity
involved and the backward-looking
nature of an analysis based on past
performance. Adding risk-weighting
factors within investment type
categories would have been inconsistent
with the approach taken by the Other
Banking Agencies.
The Board also disagrees with
commenters who suggested that credit
unions should be able use lower risk
weights if they are able to demonstrate
that an investment should qualify for a
lower-risk weight. Alternative and
individualized risk weight mechanisms
would be difficult and costly to
implement consistently, and would be
inconsistent with the Other Banking
Agencies’ regulations.

PO 00000

Frm 00051

Fmt 4701

Sfmt 4700

66675

Several commenters recommended
that the Board apply a 100 percent risk
weight to non-significant equity
exposures, which would be similar to
the approach taken by the Other
Banking Agencies. As discussed in more
detail below in the part of the preamble
associated with § 702.104(c)(3)(i), the
Board generally agrees with commenters
on this point and has amended this final
rule to assign a 100 percent risk weight
to non-significant equity exposures.
This change is consistent with the
Board’s objective of assigning risk
weights to assets that are similar to the
Other Banking Agencies’ regulations
where the level of risk exposure does
not create safety and soundness
concerns.
The Board disagrees with commenters
who suggested that lower risk weights
should be applied to certain types of
investments, such as corporate bonds
and publicly traded equities, which are
generally not available to federal credit
unions, simply because they were
purchased for employee benefit plans.
In particular, several commenters
argued that the 300 percent risk weight
assigned to publicly traded equity
investments should be much lower so
that credit unions are not limited in
their investments for employee benefits.
The proposed risk weights were
intended to be applied based on risk,
not on use. And, consistent with
commenters’ suggestions on the Original
Proposal, the Board assigned risk
weights in a manner similar to the Other
Banking Agencies’ regulations unless
the FCUA or a unique circumstance
warranted a different risk weight be
adopted. The 300 percent risk weight for
non-part 703 compliant investment
funds is appropriate when they are used
to fund employee benefits because there
are few limits on the investments in
these types of funds. A credit union
may, however, use one of the lookthrough approaches if the underlying
assets have a risk weight of less than
300 percent. Accordingly, for these
types of assets, the proposed risk weight
reasonably reflects the risks associated
with the types of assets available to fund
employee benefit plans.
The Board disagrees with the
commenter who suggested that a 300
percent risk-weight was excessive for
publicly traded equity investments
because they are treated as available for
sale or trading and recorded at market
value. The value at which an equity is
recorded does not reflect the risk of loss
and does not preclude an equity from
losing a substantial amount of its value
in the future. The lack of a maturity
date, loss position, and unknown

E:\FR\FM\29OCR2.SGM

29OCR2

66676

Federal Register / Vol. 80, No. 209 / Thursday, October 29, 2015 / Rules and Regulations

dividends make an equity riskier than
many other types of assets.
The Board generally agrees with the
commenter who suggested that a senior
asset-backed security should have the
same risk weight as a similar loan. Such
an approach is consistent with the Other
Banking Agencies’ regulations and
focuses on the risk of the underlying
collateral. By applying the gross-up
approach to a non-subordinated tranche
of an investment, a credit union can risk
weight a non-subordinated tranche of an
investment with the same risk weight as
if they had owned the loans directly.
Accordingly, this final rule adds nonsubordinated tranches of any
investments to the 100 risk-weight
category and gives credit unions the
option to use the gross-up approach.
The Board disagrees with commenters
who suggested that the proposed 1,250
percent risk weight was punitive for
subordinated tranches of investments.
Under the proposal, credit unions were
given the option to use the gross-up
approach to lower the risk weight of a
subordinated tranche of an investment if
it did not contain an excessively large
amount of leverage. The 1,250 percent
risk weight is a reasonable risk weight
for subordinated tranches if the credit
union is unable, or unwilling to use the
gross-up approach. The risk weight is
appropriate given the leveraged risk in
subordinated tranches, and is consistent
with the Other Banking Agencies’
regulations.140 As noted in the Second
Proposal, the simplified supervisory
formula approach for subordinated
tranches permitted under the Other
Banking Agencies’ capital regulations
was not included in the Second
Proposal because of its complexity and
limited applicability.
The Board also disagrees with
commenters who suggested that
subordinated tranches of investments
should receive the same risk weight as
commercial loans. Applying

subordinated tranches of investments
the same risk weights as commercial
loans would likely fail to account for
highly leveraged transactions, and
would be inconsistent with the Other
Banking Agencies’ regulations. The
Board also notes that, using the gross-up
approach, low-risk subordinated
tranches of certain investments could
receive risk weights equal to or less than
the risk weights assigned to commercial
loans.
The Board disagrees with commenters
who suggested that assigning high risk
weights to investments in the corporate
credit union system would penalize
credit unions that invest within the
industry. The proposed risk weights
assigned to nonperpetual capital and
perpetual contributed capital at
corporate credit unions are 100 percent
and 150 percent, respectively. The
proposed risk weights were not
intended to be a penalty or disincentive
for holding any particular assets. Rather,
the intent was to assign appropriate risk
weights that adequately account for the
risk associated with each particular
asset. The risk weights for corporate
capital investments did take into
consideration the stricter regulations
commenters cited when seeking lower
risk weights. And as a result, this final
rule assigns reasonable risk weights to
corporate-capital investments given the
stricter regulatory requirements
applicable to corporate credit unions as
compared to the higher risk weights
associated with non-publicly traded
equity investments under the Other
Banking Agencies’ regulations.
The Board disagrees with the
commenter who suggested that the final
rule should assign different risk-weight
tiers in corporate debt, similar to
municipal bonds. Under the Second
Proposal, the risk weight assigned to a
corporate debt was consistent with the
risk weight assigned to an industrial
development bond, which is a type of

municipal bond. An industrial
development bond is 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. Typically the ultimate
obligation of repayment of the industrial
development bond is on a corporation.
The 100 percent risk weight for
corporate bonds is consistent with the
risk weights assigned to industrial
development bonds, a tier within
municipal bonds, where the ultimate
obligation of repayment is a corporate
entity. The proposed risk weight for
corporate debt is generally consistent
with the Other Banking Agencies’
regulations. The Board decided not to
apply tiers within investment types due
to the complexity and the inability to
apply a standard and objective
approach.
Consistent with the Dodd-Frank Wall
Street Reform and Consumer Protection
Act of 2010, which required agencies to
remove all references to credit ratings,
this final rule does not use credit ratings
to determine risk weights for part
702.141
Commercial Loans
The Second Proposal assigned risk
weights to commercial loans in a
manner generally consistent with the
Other Banking Agencies’ capital
regulations and the objectives of the
Basel Committee on Banking
Supervision.142 The proposal set a
single concentration threshold at 50
percent of total assets. Commercial
loans that were less than the 50 percent
threshold were assigned a 100 percent
risk weight, and commercial loans over
the threshold were assigned a 150
percent risk weight. Commercial loans
that were not current were assigned a
150 percent risk weight.

Commercial loan concentration
(percent of total assets)
15%

mstockstill on DSK4VPTVN1PROD with RULES2

Effective Capital Rate: 143
Current Rule .................................................................
This Proposal ................................................................

140 NCUA estimates a de minimis number of
investments would be subject to the 1,250 risk
weight.
141 Public Law 111–203, Title IX, Subtitle C,
section 939A, 124 Stat. 1376, 1887 (July 21, 2010).
142 This is comparable with the other Federal
Banking Regulatory Agencies’ capital rules. See e.g.,
12 CFR 324.32 (Assigns a 100 percent risk-weight
for commercial real estate (CRE) and includes a 150

VerDate Sep<11>2014

22:13 Oct 28, 2015

Jkt 238001

20%
6.0
10.0

50%
6.5
10.0

percent risk-weight for loans defined as high
volatility commercial real estate (HVCRE)); 78 FR
55339 (Sept. 10, 2013); and 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

PO 00000

Frm 00052

Fmt 4701

Sfmt 4700

75%
10.4
10.0

100%
11.6
11.7

12.2
12.5

commercial real estate do not, in principle, justify
other than a 100 percent risk weight of the loans
secured.’’) available at http://www.bis.org/publ/
bcbs128.htm.
143 The effective capital rate represents the
blended percentage of capital necessary for a given
level of commercial loan concentration. The
calculation uses 10 percent as the level of riskbased capital to be well capitalized.

E:\FR\FM\29OCR2.SGM

29OCR2

Federal Register / Vol. 80, No. 209 / Thursday, October 29, 2015 / Rules and Regulations
Public Comments on the Second
Proposal
A substantial number of commenters
recommended that the risk weights for
commercial loans be adjusted
downward to levels no more than those
in place for banks. Those commenters
claimed credit unions do not have
higher levels of risk associated with
holding commercial loans than banks
do. Commenters acknowledged that
lower risk weights for higher
concentrations of commercial loans
would imply lower risk weights for
lower concentrations of these loans
compared to bank risk weights, but they
insisted this disparity would be
appropriate given lower loss rates at
credit unions. One commenter
recommended assigning a lower risk
weight, of perhaps 50–75 percent, to
secured commercial loans. The
commenter explained that in locations
where there is a market for certain types
of commercial vehicles, a lower risk
weight makes more sense. Another
commenter recommended the following
risk weights for commercial loans be
assigned as an alternative: Credit card
and other unsecured loans that are less
than 50 percent of assets should be
assigned a 100 percent risk weight, and
such loans that are over 50 percent of
assets should be assigned a 150 percent
risk weight; new vehicle loans that are
less than 50 percent of assets should be
assigned a 50 percent risk weight, and
such loans that are greater than 50
percent of assets should be assigned a
75 percent risk weight; used vehicle
loans that are less than 50 percent of

assets should be assigned a 75 percent
risk weight, and such loans that are
greater than 50 percent of assets should
be assigned a 112 percent risk weight;
first-lien residential real estate loans
and lines of credit that are less than 50
percent of assets should be assigned a
75 percent risk weight, and such loans
that are greater than 50 percent of assets
should be assigned a 112 percent risk
weight; all other real estate loans and
lines of credit that are less than 50
percent of assets should be assigned a
100 percent risk weight, and such loans
that are greater than 50 percent of assets
should be assigned a 150 percent risk
weight.
At least one commenter speculated
that the vast majority of credit union
member business loans have real estate
as collateral, while commercial bank
loans are typically collateralized with
receivables, etc. The commenter noted
that under the banking agencies’ rules,
commercial loans made by banks are
assigned a 100 percent risk weight. The
commenter argued, however, that
NCUA’s risk weight for member
business loans should be lowered from
100 percent to 75 percent to account for
the fact that credit union member
business loans are safer than
commercial loans made by banks.
Some commenters complained that
the proposal did not account for the
different types of commercial loans
made by credit unions. Commenters
also speculated that credit unions
chartered for the purpose of making
MBLs would be unfairly penalized
under the proposal.

66677

Discussion
The Board disagrees that
concentration thresholds for commercial
loans should vary based on the business
purpose or underlying collateral. The
Agency did not pursue the alternative
commercial risk weights suggested by
commenters because such alternatives
would be extremely difficult to
implement consistently across all credit
unions. 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 regulations. All
commercial asset classes experience
performance fluctuations with
variations in business cycles. Some
sectors that had historically experienced
minimal losses are now pre-disposed to
heightened credit risk. Both NCUA and
FDIC have recently addressed these
types of exposures in respective Letters
to Credit Unions and Financial
Institution Letters.144
Contemporary variances between
bank and credit union losses on
commercial loans are not substantial
enough to warrant assigning lower risk
weights to commercial loans held by
credit unions. As stated in the Second
Proposal, and as further clarified below
using data to match the asset breakouts
within the FDIC Quarterly Banking
Profile, credit unions’ commercial loan
loss experience is comparable to
community banks after adjusting for
asset size. The recent loss experience for
credit unions and banks is very similar.

3 YEAR AVERAGE LOSS HISTORY
[2012, 2013, 2014]

Commercial & Industrial 145 ...................................................................................
Member Business Loans 146 ..................................................................................

mstockstill on DSK4VPTVN1PROD with RULES2

Further, credit unions’ long-term
historical MBL losses are somewhat
understated because 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 long-

144 NCUA, Taxi Medallion Lending, Letter to
Credit Unions 14–CU–06 (April 2014); FDIC,
Prudent Management of Agricultural Credits
Through Economic Cycles, Financial Institution
Letter FIL–39–2014 (July 16, 2014).
145 See Yearend FDIC Quarterly Banking Profiles
11 (2012, 2013, & 2014).

VerDate Sep<11>2014

22:13 Oct 28, 2015

Jkt 238001

Credit unions
>$100M in assets

Banks
$100M to $10B
in assets

Banks
$1B to $10B
in assets

..................................
0.52

0.61

0.42

term historical credit union MBL loss
data.147
Residential Real Estate Loans
The Second Proposal assigned risk
weights to residential real estate loans
that are generally consistent with those
assigned by the Other Banking
146 See NCUA Financial Performance Report
using year end data for credit unions with assets
greater than $100 million.
147 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

PO 00000

Frm 00053

Fmt 4701

Sfmt 4700

Agencies.148 The proposal set the firstand junior-lien residential real estate
loan concentration thresholds at 35
percent and 20 percent of total assets
respectively. Current first-lien
residential real estate loans that were
less than 35 percent of assets were
assigned a 50 percent risk weight, and
NCUSIF over $100 million. See Department of the
Treasury, Credit Union Member Business Lending
(Washington, DC January 2001).
148 See, e.g., 12 CFR 324.32(g).

E:\FR\FM\29OCR2.SGM

29OCR2

66678

Federal Register / Vol. 80, No. 209 / Thursday, October 29, 2015 / Rules and Regulations

those equal to or greater than 35 percent
of assets were assigned a 75 percent risk
weight. Current junior-lien residential

real estate loans that were less than 20
percent of assets were assigned a 100
percent risk weight, and those equal to

or greater than 20 percent of assets were
assigned a 150 percent risk weight.

PROPOSED RESIDENTIAL REAL ESTATE LOAN CONCENTRATION THRESHOLDS AND RISK WEIGHTS

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

50%

75%

100%

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

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

Current <20% of Assets ...

In addition, under the Second
Proposal, first- and junior-lien
residential real estate loans that are not
current were assigned 100 percent and
150 percent risk weights, respectively.
Public Comments on the Second
Proposal
A majority of the commenters who
mentioned these loans recommended
that the concentration risk component
be removed entirely from the risk
weights for first- and junior-lien
residential real estate loans. One
commenter expressed concern that the
high risk weights assigned to certain
first-lien residential real estate loans
and certain junior-lien residential real
estate loans could negatively impact
mortgage lending in the communities
served by credit unions. The commenter
argued that the proposal did not appear
to address the underlying attributes of
the mortgages nor the degree in which
they may be match funded, which could
thereby restrict lending and curtail
profitability and capital growth at well
managed, risk-averse credit unions.
Accordingly, the commenter
recommended that the Board reconsider
and revise the risk weights for mortgage
loans held on balance sheet to be more
consistent with the requirements of the
Other Federal Banking Agencies.
Similarly, a substantial number of credit
union commenters suggested that the
risk weights for mortgage loans be
adjusted downward to levels no more
than those in place for banks because
they claimed credit unions do not have
higher levels of risk associated with
holding these assets. Another
commenter argued that the risk weights
assigned to real estate loans were
arbitrary because: (1) The vast majority
of MBLs are collateralized with real

estate at a loan-to-value ratio of 75
percent or less; (2) the vast majority of
home equity loans are first mortgages
with a loan-to-value ratio of 80 percent
or less; and (3) some increased risk is
associated with junior lien mortgages,
but it is not extensive or widespread.
Yet another commenter suggested that
the final rule assign risk weights to
these assets by including a study of loss
history and the market where a credit
union operates.
Several commenters recommended
further that consideration be given to
incorporating loan-to-value ratios, credit
scores, salability of the loan to
secondary mortgage market participants,
and the size of loans in the proposed
risk weighting. One commenter
suggested that both junior- and first-lien
residential real estate loans amortize
over time, lessening their credit risk
profile, and in the case of junior liens,
over time they can become first liens, at
which point the risk weightings become
too conservative. The commenter
maintained that this reduction in risk
was not accounted for under the Second
Proposal.
One commenter suggested that the
Board consider lower risk weightings for
loans with private mortgage insurance
or government guarantees.
One commenter suggested that one-tofour-family non-owner occupied realestate-backed loans should be treated as
a separate category and not count
toward the premium of 75 percent risk
weight when real estate loans comprise
over 35 percent of assets. From a
concentration risk standpoint,
commercial loans are already limited by
a statutory cap under the FCUA at 12.25
percent for the majority of credit unions.
Some commenters argued that the
proposal would exacerbate the burden

150%
Current ≥20% of Assets.

and costs credit unions are already
facing under the Dodd-Frank Act
regulations by requiring higher levels of
capital for those credit unions that hold
first-lien residential real estate loans in
excess of 35 percent of total assets.
Those commenters speculated that the
increased capital cost based upon
concentration risk will put credit unions
at a competitive disadvantage to other
financial institutions that do not have
higher risk weightings for holding
higher concentrations of loans.
Similarly, some commenters argued
that the proposal would exacerbate the
burden and costs credit unions are
already facing under the Dodd-Frank
Act regulations by requiring higher
levels of capital for those credit unions
that hold junior-lien residential real
estate loans in excess of 20 percent of
total assets. Those commenters
maintained that the increased capital
cost based upon concentration risk puts
credit unions at a competitive
disadvantage to other financial
institutions that do not have higher risk
weightings for holding higher
concentrations of loans.
Discussion
The Board has considered the
comments received, but, as stated in the
proposal, the contemporary variances
between bank and credit union losses
on real estate loans are not substantial
enough to warrant assigning lower risk
weights. As stated in the Second
Proposal and as further clarified below
using data to match the asset breakouts
within the FDIC Quarterly Banking
Profile, credit unions’ real estate loss
experience is comparable to community
banks after adjusting for asset size.

3 YEAR AVERAGE LOSS HISTORY 149
mstockstill on DSK4VPTVN1PROD with RULES2

[2012, 2013, 2014]
Credit unions
>$100M in assets
All real estate loans ...............................................................................................
149 See yearend FDIC Quarterly Banking Profiles
for 2012, 2013, and 2014, page 11 and NCUA

VerDate Sep<11>2014

22:13 Oct 28, 2015

Jkt 238001

0.33

Financial Performance Report (FPR) using year end

PO 00000

Frm 00054

Fmt 4701

Sfmt 4700

Banks
$100M to $10B
in assets
0.36

Banks
$1B to $10B
in assets
0.38

data for credit unions with assets greater than $100
million.

E:\FR\FM\29OCR2.SGM

29OCR2

Federal Register / Vol. 80, No. 209 / Thursday, October 29, 2015 / Rules and Regulations

66679

3 YEAR AVERAGE LOSS HISTORY 149—Continued
[2012, 2013, 2014]
Credit unions
>$100M in assets
Other 1–4 family residential loans .........................................................................
First mortgage loans ..............................................................................................
Home equity loans .................................................................................................
Other real estate loans ..........................................................................................

Higher capital requirements for
concentrations of real estate loans exist
in the current rule, and 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.
NCUA currently reviews credit
concentrations during examinations as
commenters recommended. As
discussed in the summary section,
however, 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.150
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 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.151 In addition, in 2012, GAO
recommended that NCUA address the
credit concentration risk concerns
raised by the NCUA OIG.152 The 2012
GAO report notes credit concentration
risk contributed to 27 of 85 credit union

mstockstill on DSK4VPTVN1PROD with RULES2

150 See

12 U.S.C. 1790d(d)(2).
151 See NCUA, Material Loss Review of Cal State
9 Credit Union, OIG–10–03 (April 14, 2010); NCUA,
Material Loss Review OF Beehive Credit Union,
OIG–11–07 (July 7, 2011); and NCUA, Material Loss
Review OF Ensign Federal Credit Union, OIG–10–
15 (September 23, 2010), available at http://
www.ncua.gov/about/Leadership/CO/OIG/Pages/
MaterialLossReviews.aspx.
152 See U.S. Govt. Accountability Office, Earlier
Actions are Needed to Better Address Troubled
Credit Unions, GAO–12–247 (2012), available at
http://www.gao.gov/products/GAO-12-247.

VerDate Sep<11>2014

22:13 Oct 28, 2015

Jkt 238001

..................................
0.24
..................................
0.63

failures that occurred between January
1, 2008, and June 30, 2011. The report
also indicated that the Board should
revise NCUA’s PCA regulation so that
the minimum net worth levels required
under the rule emphasize credit
concentration risk. So eliminating the
concentration dimension for risk
weights entirely would be inconsistent
with the concerns raised by GAO and
the MLRs conducted by NCUA’s OIG.
The proposed risk weights would not
slow residential real estate loan
origination, stifle homeownership, or
limit credit unions’ ability to assist lowincome members because the revised
risk weights provide credit unions with
continued flexibility to assist members
in a sustainable manner while
maintaining sufficient minimum capital.
The Board agrees with commenters
that credit scores, loan underwriting,
portfolio seasoning, and portfolio
performance are appropriate measures
to evaluate a specific credit union’s
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
an 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
unwieldy for NCUA to enforce
minimum capital requirements.153
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
153 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.’’).

PO 00000

Frm 00055

Fmt 4701

Sfmt 4700

Banks
$100M to $10B
in assets

Banks
$1B to $10B
in assets

0.30

0.37

0.52

0.51

and supervision process. This method of
review is consistent with the Basel
three-pillar framework: Minimum
capital requirements, supervisory
review, and market discipline.154 Credit
unions should use criteria from their
own internal risk models and loan
underwriting in developing their
internal risk management systems.
The Board likewise 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. There is no
historical data across institutions upon
which to base varying risk weights
according to LTVs and other
underwriting criteria (such as credit
scores). Examiners take LTVs into
consideration during the examination
process. 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.
Junior-lien residential real estate
loans continue to warrant a higher risk
weight based on loss history. Call
Report data indicate credit unions over
$100 million in asset size reported
nearly three times the rate of loan losses
(0.63 percent) on other real estate
loans 155 when compared to first
mortgage real estate loans (0.24 percent)
during the past three years. The final
base risk weight for junior-lien
residential real estate loans is
comparable to the risk weight assigned
by the Other Banking Agencies.156
154 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.’’).
155 Junior-lien real estate loans are currently
reported on the Call Report as part of ‘‘other real
estate loans.’’
156 See, e.g., 12 CFR 324.32(g)(2).

E:\FR\FM\29OCR2.SGM

29OCR2

66680

Federal Register / Vol. 80, No. 209 / Thursday, October 29, 2015 / Rules and Regulations

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.157 Under the Second Proposal,
a current secured consumer loan
received a risk weight of 75 percent, and
a current unsecured consumer loan was
assigned a 100 percent risk weight.

mstockstill on DSK4VPTVN1PROD with RULES2

Public Comments on the Second
Proposal
One commenter claimed the risk
weightings assigned to secured and
unsecured consumer loans at credit
unions would be more restrictive than
the comparable risk weightings
applicable to community banks. To
remain competitive, the commenter
recommended that the proposed risk
weights should be changed to be more
in line with Basel III instead of being
more restrictive. Other commenters
argued that based on the historical
performance of credit unions in
managing consumer loan risk, the Board
should assign a 50 percent risk weight
to secured consumer loans and a 75
percent risk weight to unsecured
consumer loans. These commenters
speculated that if the risk weights
proposed for consumer loans were
adopted, some credit unions would
have to reduce the services they are
currently able to provide to members.
Discussion
The Board disagrees with the
commenter who claimed the proposed
risk weight assigned to consumer loans
that are current is more restrictive than
the corresponding risk weight assigned
to such loans for community banks. The
risk weight for secured consumer loans
in the Second Proposal and in this final
rule is 75 percent, which is less than the
100 percent risk weight assigned to such
loans held at community banks under
the Other Banking Agencies’
regulations. The risk weight for
unsecured consumer loans that are
current is identical to the corresponding
risk weight for such loans held at
community banks.
Comparisons of historical losses on
consumer loans between credit unions
and banks is difficult due to differences
in Call Report data, but generally the
difference in historical performance
measured by loss history is not
significant. Accordingly, the Board has
decided to maintain the consumer loan
157 Per Call Report data for years ending
December 31, 2012, 2013, and 2014, consumer
loans were greater than 40 percent of loans in credit
unions with total assets greater than $100 million.

VerDate Sep<11>2014

22:13 Oct 28, 2015

Jkt 238001

risk weights contained in the Second
Proposal.
Non-Current Consumer Loans
The risk-based net worth measure in
NCUA’s current PCA regulation does
not assign a higher risk weight to noncurrent consumer loans. Increasing
levels of non-current loans, however,
are an indicator of increased risk. To
reflect the impaired credit quality of
past-due loans, the Second Proposal
required credit unions to assign a 150
percent risk weight to loans (other than
real estate loans) that are 90 days or
more past due, in nonaccrual status, or
restructured.
Public Comments on the Second
Proposal
One commenter suggested that
consumer loans that are not current (90
days past due), could be assigned a 100
percent risk weight, instead of a 150
percent risk weight, given the
historically low default rate of these
loan types, strong underwriting and
possible further protection by
underlying collateral. At least one
commenter maintained that with ALLL
calculations already in place to account
for higher charge offs, the proposed risk
weight for non-current loans would be
unnecessarily high and would
ultimately hurt credit union members.
Other commenters speculated that the
proposed risk weights would force
credit unions to pull back lending to
low-income communities for fear of
carrying delinquent (non-current) loans
at elevated risk weightings.
Discussion
The proposed risk weight of 150
percent is warranted because noncurrent consumer loans have a higher
probability of default when compared to
current consumer loans. Non-current
consumer loans are more likely to
default because repayment is already
impaired, making them one step closer
to default compared to current
consumer loans. As stated in the Second
Proposal, the Board assigned a higher
risk weight on past-due exposures to
ensure sufficient regulatory capital for
the increased probability of unexpected
losses on these exposures, which results
in a risk-based capital measure that is
more responsive to changes in the credit
performance of the loan portfolio. The
higher risk weight will capture the risk
associated with the impaired credit
quality of these exposures. Moreover,
the 150 percent risk weight is consistent
with the risk weights used under Basel
III and the Other Banking Agencies.158
158 See,

PO 00000

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

Frm 00056

Fmt 4701

Sfmt 4700

The Board disagrees with commenters
who speculated that the proposed risk
weights would limit credit unions’
ability to assist low-income members.
The removal of the ALLL cap will
reduce the impact of non-current loans
to the risk-based capital ratio.
Accordingly, this final rule retains the
150 percent risk weight for consumer
loans that are not current.
Loans to CUSOs, and CUSO Investments
Under the Second Proposal,
investments in CUSOs were assigned a
risk weight of 150 percent and loans to
CUSOs were assigned a risk weight of
100 percent.
Public Comments on the Second
Proposal
Commenters generally maintained
that the proposed risk weight for
investments in CUSOs was too high. A
majority of the commenters who
mentioned it suggested that the risk
weight for CUSO investments was too
high and should be the same as for
CUSO loans, or less. A substantial
number of commenters argued that
given the unique position of CUSOs as
cooperative cost-saving structures in the
credit union system, the Board should
use its statutorily granted discretion to
draw distinctions between CUSOs and
private equity investments held by
banks. Commenters maintained that not
only must CUSOs provide NCUA with
open access to their books and records,
but CUSOs will be required to register
directly with NCUA and, if complex,
report audited financial statements and
customer information.159 Commenters
reasoned that this heightened
supervisory oversight compared to
general investment exposures,
combined with the limits on credit
union investment powers, makes a 100
percent risk weight more appropriate.
The commenters suggested further that,
given the limits on credit union
investment powers, the vast majority of
credit unions with unconsolidated
equity investments in CUSOs would fall
within the ‘‘non-significant’’ exception
under the banking regulations for
investments aggregating less than 10
percent of total assets, and would
receive a 100 percent risk weight.
Therefore, the commenters reasoned,
adjusting the CUSO investment
weighting to 100 percent would better
reflect the role of CUSOs in the credit
union industry while still aligning in
practice with treatment of similar
exposures in banks.
Other commenters stated that they
supported the proposed treatment of
159 12

E:\FR\FM\29OCR2.SGM

CFR part 712; and 12 CFR 741.222.

29OCR2

mstockstill on DSK4VPTVN1PROD with RULES2

Federal Register / Vol. 80, No. 209 / Thursday, October 29, 2015 / Rules and Regulations
consolidated CUSO investments and
loans in which no separate risk
weighting would apply. One commenter
suggested that, if GAAP is followed for
the valuation of CUSOs, the proper
valuation of the asset should allow for
the lowering of the risk weight from the
proposed 150 percent risk weight.
Several commenters contended that the
150 percent risk weight assigned to
unconsolidated CUSO investments,
which applies to the accumulated and
undistributed earnings of these CUSOs
under GAAP, is inappropriate because it
would require credit unions to set aside
additional capital, beyond what they
initially invested, to cover retained
earnings to support future growth of
these CUSOs. These commenters
recommended that the Board reduce the
risk weight to 100 percent, or, if not
lowered, to risk weight only the initial
investment by the credit union and not
the appreciation of that investment over
time.
One commenter argued that the risk
weight assigned to unconsolidated
investments in CUSOs would be
counter-productive. The commenter
claimed that the Board presented only
anecdotal and unsubstantiated
references to what it considers
‘‘substantial CUSO losses’’ over the last
decade as justification for CUSO
regulations and assigning a 150 percent
risk weight to CUSO investments. The
commenter contended that no detailed
statistics have been provided to justify
these losses as substantial, and the
commenter would challenge any such
claim because they were not able to
substantiate any losses of a significant
nature through credit union investment
in CUSOs over the past 10 years. The
commenter recommended the Board
investigate the industry benefits of
CUSOs and the relatively immaterial
level of CUSO investment impact on the
NCUSIF before finalizing the current
proposed risk weights for CUSO
investments.
Other commenters suggested that
assigning a 150 percent risk weight to
multi-credit union owned CUSOs,
which are important collaborative tools
for credit unions, is not reflective of the
actual systemic risk CUSOs pose. The
commenters explained that, overall,
based on 2014 data, federally insured
credit unions in total have less than 22
basis points of their assets invested in
CUSOs, including fully consolidated
CUSO investments. Therefore, the
commenters asserted, CUSO
investments are not a systemic risk to
the NCUSIF.
One commenter pointed out that the
proposal stated that the risks associated
with CUSOs are similar to the risks

VerDate Sep<11>2014

22:13 Oct 28, 2015

Jkt 238001

associated with third-party vendors.
However, the commenter could not find
any references in the proposal that
would account for the risks posed by
non-CUSO third-party vendors. The
commenter claimed that only CUSOs
were singled out for their supposed risk,
and argued that was not adequate
justification for the risk weight assigned
to CUSO investments.
Some commenters argued that the
proposal cited FDIC’s capital regulation
in saying that risk weights should be set
based on the risk of loss and not the size
of exposure. Those commenters
suggested, however, that FDIC agrees
that non-significant investment
exposures in unconsolidated equity of a
privately held company should be risk
weighted at 100 percent. The
commenters recommended the Board
look deeper into the FDIC definition of
‘‘non-significant’’ and how it translates
to unconsolidated CUSO investments.
In the commenters’ opinion, the
statutory and regulatory structure of
CUSO investments make such
investments non-significant using the
FDIC definition, and thereby should be
assigned only a 100 percent risk weight.
One commenter suggested that
investments in CUSOs should carry a
100 percent risk weighting based on the
following risk-mitigating factors: (1)
GAAP requires credit unions to evaluate
the asset for potential impairment; (2)
the majority of CUSOs are limited
liability corporations (LLCs) and the
credit union would be protected under
the LLC structure; and (3) the stated
purpose of NCUA’s CUSO rule is to
reduce risk exposure to credit unions.
Another commenter suggested that
investments in and loans to CUSOs
should be equally risk weighted. The
commenter recommended assigning a
75 percent risk weight due to the
expertise that is brought to the business
strategy within the relevant business
model that they are operating within
and to encourage the use of the
cooperative business model. Other
commenters suggested that CUSOs
should be risk weighted based on type:
Operational CUSOs should receive a 50
percent risk weight, fee-generating
CUSOs should receive a zero percent
risk weight, and start-up CUSOs should
receive a 100 percent risk weight.
Several commenters suggested that
instead of assuming that all CUSOs are
inherently risky, the proposal should be
primarily concerned with the riskiness
of the services provided by a CUSO and
how dependent a credit union is on
CUSO investments. One commenter
suggested that in order to minimize the
impacts of the proposal, CUSOs would
be required to give excess earnings back

PO 00000

Frm 00057

Fmt 4701

Sfmt 4700

66681

to the credit unions to reduce their
CUSO exposure. This would result in
reduced services for the credit union.
Discussion
The Board has carefully considered
the comments received. As discussed in
more detail below in the part of this
preamble associated with
§ 702.104(c)(3)(i), under this final rule a
credit union’s investments in CUSOs
will receive a 100 percent risk weight if
the credit union has non-significant
equity exposures.160
The Board relied 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 100
percent risk weight if its equity
exposures are non-significant or a 150
percent risk weight if its equity
exposures are significant, 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 to
many credit unions. However, an equity
investment in a CUSO is an unsecured,
at-risk equity investment in a first loss
position, which is analogous to an
investment in a non-publicly 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.
The position can grow in proportion to
assets over time. In setting capital
standards (such as Basel and FDIC), the
risk of loss—not the size of the
160 A credit union has ‘‘non-significant equity
exposures’’ if the aggregate amount of its equity
exposures does not exceed 10 percent of the sum
of the credit union’s capital elements of the riskbased capital ratio numerator.

E:\FR\FM\29OCR2.SGM

29OCR2

66682

Federal Register / Vol. 80, No. 209 / Thursday, October 29, 2015 / Rules and Regulations

mstockstill on DSK4VPTVN1PROD with RULES2

exposure—is central to determining the
risk weight. 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.161
The Second Proposal noted that the
risk weight should be higher than 100
percent given that an equity investment
in a CUSO is in a first loss position, is
an unsecured equity investment in a
non-publicly traded entity, the
significant history of losses to the
NCUSIF related to CUSOs, and the fact
NCUA lacks vendor authority. 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. It may
be possible, however, to make more
meaningful risk distinctions in the
future between the risk various types of
CUSOs pose once NCUA’s CUSO
registry is in place and sufficient trend
information has been collected.
Under the Second 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.162 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. Under the Other Banking
Agencies’ regulations, an equity
investment in a CUSO would be treated
the same as an equity investment in a
non-publicly traded entity (with 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 nonsignificant.
The Board recognizes the complexity
of FDIC’s approach and believes that a
161 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.
162 See, e.g., 12 CFR 324.52.

VerDate Sep<11>2014

22:13 Oct 28, 2015

Jkt 238001

simplified lower-risk-weight approach
is appropriate when the entire amount
of equity exposures within the credit
union are not significant.
Accordingly, this final rule retains the
proposed 100 percent risk weight
assigned to loans to CUSOs, and retains
the 150 percent risk weight assigned to
investments in CUSOs if the equity
exposure is significant. As discussed in
more detail below, however, this final
rule reduces the risk weight assigned to
investments in CUSOs to 100 percent
for complex credit unions with nonsignificant equity exposures.
Mortgage Servicing Assets (MSAs)
The Second Proposal would have
assigned a 250 percent risk weight to
MSAs to address the complexity and
volatility of these assets.
Public Comments on the Second
Proposal
A significant number of commenters
maintained that the 250 percent riskweight assigned to MSAs would reduce
the ability of credit unions to grant
mortgage loans, engage in loan
participations, and retain servicing of
their member loans, and that it would
likely also prevent credit unions from
using mortgage servicing rights as a
hedge against future rate changes.
Accordingly, they argued the proposed
risk weighting for MSAs, which would
be the same as for banks, would be too
high and should be significantly lower.
One commenter suggested that, because
much of the risk associated with
holding MSAs relates to the volatility of
their market value with changes in
interest rates, credit unions that book
MSAs at, or close to, their current
market value are at a greater risk of loss
in a falling interest rate scenario. One
commenter suggested further that those
institutions that book MSAs more
conservatively have a built-in book-tomarket value cushion to absorb normal
downward fluctuations in market value
and are in a better position to recapture
their investment over a shorter period of
time. The commenter stated that in a
rising-rate environment, the value of
MSAs and the corresponding cushion
grow and the risk declines.
Consequently, the commenter
contended, a flat 250 percent in all
circumstances would be punitive for
those credit unions that conservatively
book MSAs, particularly in a lowinterest-rate or low-refinance
environment. The commenter
maintained that it is important to note
that the operational risks associated
with MSAs are not avoided by holding
originated mortgage loans in portfolio,
yet the risk weights of portfolio

PO 00000

Frm 00058

Fmt 4701

Sfmt 4700

mortgage loans varies from 50 percent to
75 percent, despite the fact that such
assets are burdened with a multitude of
other risks not inherent in MSAs.
One commenter observed that for
sound asset, liability, and liquidity
management purposes, some credit
unions sell nearly all of their mortgage
loan production into the secondary
market and retain a sizable portion of
the servicing rights for member service
and risk mitigation purposes, the latter
in terms of the stability of earnings from
the aggregate of mortgage-related
activities over time. The commenter
maintained that these credit unions’
MSA-portfolio market values are
evaluated independently each quarter,
with the market value consistently
representing more than the stated book
values, representing sizable off-balance
sheet assets. The commenter
recommended that the risk weight for
MSAs be based on a reasonable formula
related to the ratio of book value to
market value and in any case not exceed
a 75 percent risk weight.
Several commenters argued that
MSAs are salable and, consistent with
GAAP, they are evaluated for potential
impairment. Accordingly, they argued
MSAs should be assigned a risk weight
of 100 percent. One commenter
suggested that the risk weight for MSAs
should be no more than 150 percent.
Another commenter suggested that
MSAs should be assigned the same risk
weight that is assigned to mortgage
loans held in portfolio and that are
under 35 percent of assets. At least one
commenter recommended that, if a 250
percent risk weight is adopted for
MSAs, a lower risk weight of 100
percent should be assigned to MSAs on
loans sold without recourse, but that are
serviced by the credit union.
Other commenters suggested that if a
credit union is following GAAP, it must
record mortgage servicing as an asset
that then requires a valuation be done
every year, and if as an asset it does not
meet the actual valuation reflected it
must be written down to the audited
value.
One commenter argued that weighting
MSAs at 250 percent would penalize
those credit unions who lowered their
interest rate risk on their balance sheet
by selling their longer-term, fixed-rate
real estate loans. Another commenter
suggested that the 250 percent risk
weight would pressure credit unions to
sell the servicing rights on mortgages
they originate, effectively forcing credit
unions to end a significant member
relationship many credit unions have
with their members, in order to manage
interest rate risk.

E:\FR\FM\29OCR2.SGM

29OCR2

Federal Register / Vol. 80, No. 209 / Thursday, October 29, 2015 / Rules and Regulations

mstockstill on DSK4VPTVN1PROD with RULES2

One commenter claimed that MSAs
only have two significant risks
associated with them: (1) Prepayment
penalties, and (2) operational/
reputational risk. Both risks, the
commenter suggested, are relatively
easily mitigated because prepayment
risk can be mitigated by maintaining a
viable origination pipeline, and
operational/reputational risk can be
mitigated by maintaining a good system
of internal controls. Moreover, the
commenter argued MSAs provide a
significant, reliable source of fee
revenue for many credit unions, which
is generated from fees that are paid by
investors, not by members.
Discussion
The 250 percent risk weight factors in
the relatively greater risks inherent in
MSAs, and maintains comparability
with the risk weight assigned to these
assets by the Other Banking
Agencies.163 As noted in the preamble
to the Second Proposal, MSAs typically
lose value when interest rates fall and
borrowers refinance or prepay their
mortgage loans, leading to earnings
volatility and erosion of capital. 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 agrees with
commenters that MSAs may provide
some hedge against falling rates under
certain circumstances, 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, the commenters’
argument is no longer directly
applicable.
NCUA does not agree with
commenters who speculated that the
proposed 250 percent risk weight
assigned to this relatively small asset
class would significantly dis-incentivize
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 stringent) risk weights for MSAs
for some time and continue to sell loans
and retain MSAs.
163 See,

e.g., 12 CFR 324.32(l)(4)(i).

VerDate Sep<11>2014

22:13 Oct 28, 2015

Jkt 238001

The January 1, 2019 effective date for
this final rule provides credit unions
more than three years to adjust to these
new requirements and provides credit
unions with a phase-in period
comparable to that given to banks
following a similar change to the Other
Banking Agencies’ capital
regulations.164
Other On-Balance Sheet Assets
The Second Proposal assigned
specific risk weights to additional asset
classes, which are discussed in more
detail below. Under the proposal, all
assets listed on the statement of
financial condition not specifically
assigned a risk weight under proposed
§ 702.104 were assigned a 100 percent
risk weight.165
Public Comments on the Second
Proposal
The Board received several comments
regarding the proposed risk weights for
other on-balance sheet assets.
Some commenters opposed the
Second Proposal’s risk weighting of 20
percent for share-secured loan balances
and member business (commercial)
loans secured by compensating
balances. By contrast, the commenters
observed the comparable risk weight for
community banks is zero percent if the
cash is on deposit in the bank, which is
appropriate given there is no risk. Thus,
the commenters recommended that loan
balances secured by shares or
compensating balances on deposit at the
originating credit union be reduced to a
zero percent weighting, and loan
balances secured by compensating
balances on deposit at another financial
institution be weighted at the proposed
20 percent.
One commenter agreed that the
Board’s efforts to align the risk-based
capital regulation more closely with the
Other Banking Agencies’ regulations
were appropriate. The commenter
suggested that, absent a compelling
rationale for different treatment between
the two systems, regulators should
strive to maintain equal treatment for
equal risks in all depository institutions.
The commenter also recommended that
principal-only STRIPS be risk-weighted
based on the underlying guarantor or
collateral.
Some commenters suggested that
imposing risk-based capital limitations
on charitable donation accounts would
contravene the appeal for credit unions
164 See,

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

PO 00000

Frm 00059

Fmt 4701

Sfmt 4700

66683

to put money into these investments to
fund charitable activities. Those
commenters recommended that the
Board amend the final rule to do one of
the following: (1) Exempt CDAs from
the risk-based capital regulation because
the Board effectively balanced safety
and soundness with effectuating credit
unions’ charitable intent when it passed
the CDA regulation; (2) Assign a 100
percent risk weight to any equity or
corporate bond exposure in a CDA
investment; (3) Apply a 100 percent risk
weight to non-significant equity
exposures because banks are permitted
to apply a 100 percent risk weight to
certain equity exposures deemed nonsignificant. Those commenters
suggested that such treatment would
support broader participation by credit
unions with community development
investments and enhance the goodwill
and reputation of the credit union
industry as it builds an investment
resource to support charitable
contributions.
One commenter maintained that the
Second Proposal would require a credit
union to reduce its capital (in the
numerator) by the amount of the
underfunded portion of the pension
plan, but was silent on how to reflect an
overfunded pension asset. The
commenter recommended that NCUA
provide specific guidance on the
treatment of an overfunded pension
asset. Specifically, the commenter
recommended the Board eliminate the
inconsistent treatment by removing the
overfunded pension asset from both the
numerator and the denominator.
A state supervisory authority
commenter requested clarification on
the risk weighting treatment of credit
union deposits in the Bank of North
Dakota. The commenter noted that the
Bank is state-owned, and its deposits are
neither federally nor privately insured,
but are backed by a guarantee from the
State of North Dakota. The commenter
acknowledged it is a unique institution,
and thus was unsure which risk
weighting would apply to the deposits.
The commenter suggested the deposits
are low risk due to the guarantee by the
state, and recommended it be afforded
a 20 percent or lower weighting.
At least one commenter recommend
that the Board define auto and credit
card servicing assets and assign them
risk weights consistent with the risk
weighting assigned to mortgage
servicing assets.
One commenter contended that the
‘‘full look-through’’ approach described
under the Second Proposal failed to
apply risk weights to mutual fund
investments in a consistent manner to
the holding of the same securities by

E:\FR\FM\29OCR2.SGM

29OCR2

mstockstill on DSK4VPTVN1PROD with RULES2

66684

Federal Register / Vol. 80, No. 209 / Thursday, October 29, 2015 / Rules and Regulations

credit unions directly. The commenter
explained that, for example, a credit
union that holds ‘‘U.S. Treasuries and
Government Securities’’ would assign a
risk weight of zero percent to such
holdings. By contrast, an investment
fund, with similar U.S. Treasuries and
Government Securities, would have a
risk weight of 20 percent assigned to
this asset. The commenter suggested
this disparity in the treatment of the
same asset when held by two different
entities unnecessarily discriminates
against a credit union’s investments in
mutual funds by penalizing the credit
union for making the same investment
indirectly that they could otherwise
make directly. The commenter
suggested further that the added layer of
risk that the Second Proposal assumed
will be present for indirect investments
is not a factor with mutual funds,
because they provide daily redemption
at net asset value and generally provide
sold share proceeds to the investor on
the next business day. The commenter
recommended that the Board revise the
rule so that mutual fund risk weights are
consistent with the risk weights on the
underlying instruments. The commenter
also recommended that the Board adopt
a full look-through approach that is
attuned to the distinctions between
underlying assets that would allow lowrisk mutual funds to carry risk ratios
ranging between zero percent and 20
percent based upon the actual risk ratio
of their holdings.
One commenter suggested that the
proposal was silent on how to risk
weight loans held for sale, and
recommended the Board assign a risk
weight of 25 percent to loans held for
sale.
At least one commenter suggested
that, under the Second Proposal, current
non-federally insured student loans
would be assigned a 100 percent risk
weight, despite other potential sources
of insurance. The commenter asked
whether there should be a distinction, at
least for insured private student loans,
and whether insured private student
loans should be assigned a 50 percent
risk weight and uninsured private
student loans at 100 percent. The
commenter suggested that, at some
credit unions, private student loans are
not only insured by an independent
insurance company, but reinsured with
three separate carriers. In such a
situation, the commenter suggested that
a 100 percent risk weighting seemed
excessive.
Discussion
The Board generally agrees with the
commenter who suggested that
principal-only mortgage-backed-security

VerDate Sep<11>2014

22:13 Oct 28, 2015

Jkt 238001

STRIPS should be risk weighted based
on the underlying collateral, which
would more closely align NCUA’s
regulations with the Other Banking
Agencies’ rules. Principal-only
mortgage-backed-security STRIPS are
purchased at a discount to par, and par
is paid to the investor over the life of the
bond. As with other mortgage-backed
securities, the timing of the repayment
of par is the primary risk when credit
risk is not considered. Absent credit
risk, the investor receives par. This is
not the case with interest-only
mortgage-backed-security STRIPS,
where an investor can receive less than
the amount paid even without a credit
event. Accordingly, this final rule
assigns non-subordinated principal-only
mortgage-backed-security STRIPS a risk
weight based on the underlying
collateral.
The Board also agrees with
commenters who suggested the risk
weight for certain accounts used for
charitable purposes should be aligned
with the 100 percent risk weight
assigned to community development
investments under the Other Banking
Agencies’ regulations. Charitable
donation accounts are limited to 5
percent of net worth, which limits the
risks of such accounts to the Share
Insurance Fund. In addition, charitable
donation accounts are required to be
transparent segregated accounts, which
enables NCUA to ensure that such
accounts comply with applicable laws
through supervision. As explained
above and in more detail below, this
final rule would permit credit unions to
assign a 100 percent risk weight to
CDAs.
The Board disagrees with the
commenter who recommended
removing overfunded pension assets
from both the numerator and
denominator. Under the Second
Proposal, overfunded pension assets
were not included in the risk-based
capital ratio numerator or denominator,
primarily because they are not disclosed
on the financial statement as an asset, so
there is no need to remove them from
the calculation. Overfunded pension
assets were excluded completely from
the proposed risk-based capital
calculation, and their inclusion in the
final rule would add only needless
complexity and could create volatility
in the risk-based capital ratio.
The Board disagrees with the
commenter who suggested that any
investment fund holding assets that are
assigned a zero percent risk weight
should receive a zero percent risk
weight. As discussed in the Second
Proposal, assets assigned a zero percent
risk weight that are held in an

PO 00000

Frm 00060

Fmt 4701

Sfmt 4700

investment fund are considered indirect
obligations. The risk weight assigned to
an investment fund that holds zero
percent risk-weighted assets is 20
percent even though the underlying
investments consist of zero riskweighted assets due to the investment’s
structure as an investment fund. This is
consistent with the Other Banking
Agencies’ regulations.
The Board agrees with the commenter
who suggested that the final rule should
clarify the timing of holding reports
used for the full look-through approach.
As explained in more detail below, new
appendix A to part 702 now clarifies
which holding report should be used for
the full look-through approach.
The Board has decided to reduce the
risk weight in the final rule for sharesecured loans, where the shares
securing the loan are on deposit at the
credit union, to zero percent since the
risk of loss is more a function of
operational risk than credit risk. The
Board maintained the 20 percent risk
weight for share-secured loans where
the collateral deposit is at another
depository institution due to the added
credit risk of the depository institution.
The resulting risk weights for sharesecured loans are more consistent with
the Other Banking Agencies’ related risk
weights.
Loan servicing assets associated with
credit card loans or auto loans are
different than loan servicing assets
associated with mortgages because of
the much shorter duration of the
associated cash flows. Since shorterterm assets are individually assigned a
risk weight, they default to the 100
percent risk weight assigned to all other
assets, which is a reasonable risk weight
based on the general credit quality
associated with the underlying
consumer loans. The 100 percent risk
weight is appropriate for this class of
assets because 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
is 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

E:\FR\FM\29OCR2.SGM

29OCR2

Federal Register / Vol. 80, No. 209 / Thursday, October 29, 2015 / Rules and Regulations

mstockstill on DSK4VPTVN1PROD with RULES2

the Other Banking Agencies’ capital
regulations.166
This final rule 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. 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.
Accordingly, consistent with the Second
Proposal, this final rule assigns loans
held for sale a risk weight based on the
loan’s type.
Non-federally guaranteed student
loans are appropriately classified under
current consumer loans due to the
higher risks (default risk and extension
risk) associated with this product.
104(c)(2)(i) Category 1—Zero Percent
Risk Weight
Proposed § 702.104(c)(2)(i) provided
that a credit union must assign a zero
percent risk weight to the following onbalance 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.
For the reasons explained above, the
Board decided to remove the proposed
language excluding directly and
unconditionally guaranteed principalonly mortgage-backed-security STRIPS
that were an obligation of the U.S.
Government, its central bank, or a U.S.
Government agency. The final rule also
adds the word ‘‘security’’ after the word
‘‘mortgage-backed’’ for clarity and
consistently.
In addition, the Board decided to
lower the risk weight for share-secured
loans, where the shares securing the
loan are on deposit with the credit
166 See,

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

VerDate Sep<11>2014

22:13 Oct 28, 2015

Jkt 238001

union, to zero percent. Assigning a zero
percent risk weight to share-secured
loans under such circumstances is
consistent with the risk weight assigned
to such loans under the Other Banking
Agencies.
Accordingly, § 702.104(c)(2)(i) of this
final rule provides that a credit union
must assign a zero percent risk weight
to the following on-balance sheet assets:
• The balance of
Æ Cash, currency and coin, including
vault, automatic teller machine, and
teller cash.
Æ Share-secured loans, where the
shares securing the loan are on deposit
with the credit union.
• 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 interest-only mortgagebacked-security STRIPS.
Æ Federal Reserve Bank stock and
Central Liquidity Facility stock.
• Insured balances due from FDICinsured depositories or federally
insured credit unions.
104(c)(2)(ii) Category 2—20 Percent Risk
Weight
Proposed § 702.104(c)(2)(ii) provided
that a credit union must assign a 20
percent risk weight to the following onbalance 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.167
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.
167 This would include the NCUA Guaranteed
Notes (NGNs), which are an obligation of the NCUA
and are backed by the full faith and credit of the
United States.

PO 00000

Frm 00061

Fmt 4701

Sfmt 4700

66685

• The portions of outstanding loans
with a government guarantee.
• The portions of commercial loans
secured with contractual compensating
balances.
For the reasons explained above, the
Board has decided to remove the
proposed language excluding
conditionally guaranteed principal-only
mortgage-backed-security STRIPS that
were an obligation of the U.S.
Government, its central bank, or a U.S.
Government agency. In addition, the
Board decided to add the word
‘‘security’’ after the word ‘‘mortgagebacked’’ for clarity and consistently.
The Board also decided to revise the
language regarding investment funds to
clarify that the 20 percent risk weight
includes only investment funds with
portfolios permitted to hold only
investments that are authorized under
12 CFR 703.14(c).
Accordingly, § 702.104(c)(2)(ii) of this
final rule provides 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
interest-only mortgage-backed-security
STRIPS.
Æ A non-subordinated obligation of a
GSE other than an equity exposure or
preferred stock, excluding interest only
GSE mortgage-backed-security STRIPS.
Æ Securities issued by PSEs that
represent general obligation securities.
Æ Part 703 compliant investment
funds that are restricted to holding only
investments that qualify for a zero or 20
percent risk weight under § 702.104.
Æ Federal Home Loan Bank stock.
• The balances due from Federal
Home Loan Banks.
• The balance of share-secured loans,
where the shares securing the loan are
on deposit with another depository
institution.
• The portions of outstanding loans
with a government guarantee.
• The portions of commercial loans
secured with contractual compensating
balances.
104(c)(2)(iii) Category 3—50 Percent
Risk Weight
Proposed § 702.104(c)(2)(iii) provided
that a credit union must assign a 50
percent risk weight to the following onbalance sheet assets:
• The outstanding balance (net of
government guarantees), including loans

E:\FR\FM\29OCR2.SGM

29OCR2

66686

Federal Register / Vol. 80, No. 209 / Thursday, October 29, 2015 / Rules and Regulations

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.
For the reasons explained above, the
Board has decided to remove the
proposed language excluding
conditionally guaranteed principal-only
mortgage-backed-security STRIPS that
were non-subordinated, non-U.S.
Government agency or non-GSE
guaranteed residential mortgage-backed
securities. In addition, the Board
decided to add the word ‘‘mortgagebacked-security’’ before the word
‘‘STRIPS’’ for clarity and consistently.
Accordingly, § 702.104(c)(2)(iii) of
this final rule provides 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
securities, excluding interest-only
mortgage-backed-security STRIPS.

mstockstill on DSK4VPTVN1PROD with RULES2

104(c)(2)(iv) Category 4—75 Percent
Risk Weight
Proposed § 702.104(c)(2)(iv) provided
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.
For the reasons explained above, the
Board has decided to retain this
proposed section in the final rule
without change.
104(c)(2)(v) Category 5—100 Percent
Risk Weight
Proposed § 702.104(c)(2)(v) provided
that a credit union must assign a 100
percent risk weight to the following onbalance sheet assets:
• The outstanding balance (net of
government guarantees), including loans
held for sale, of:

VerDate Sep<11>2014

22:13 Oct 28, 2015

Jkt 238001

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 principalonly 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.
For the reasons explained above, the
Board has decided to remove the
proposed language including principalonly mortgage-backed-security STRIPS
in the 100 percent risk-weight category.
The Board has also decided to include
the exposure amount of nonsubordinated tranches of any
investments in the 100 percent riskweight category. Credit unions also are
given the option to use the gross-up
approach as an alternative to the 100
percent risk-weight.
Accordingly, § 702.104(c)(2)(v) of this
final rule provides that a credit union
must assign a 100 percent risk weight to
the following on-balance sheet assets:
• 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 Interest-only mortgage-backedsecurity STRIPS.
Æ Part 703 compliant investment
funds, with the option to use the lookthrough approaches in
§ 702.104(c)(3)(iii)(B) of this section.

PO 00000

Frm 00062

Fmt 4701

Sfmt 4700

Æ Corporate debentures and
commercial paper.
Æ Nonperpetual capital at corporate
credit unions.168
Æ General account permanent
insurance.
Æ GSE equity exposure or preferred
stock.
Æ Non-subordinated tranches of any
investment, with the option to use the
gross-up approach in paragraph
(c)(3)(iii)(A) of this section.
• All other assets listed on the
statement of financial condition not
specifically assigned a different risk
weight under this subpart.
As discussed in more detail below,
however, this final rule reduces the risk
weight assigned to CUSO investments,
corporate perpetual capital, and other
equity investments to 100 percent for
complex credit unions with nonsignificant equity exposures.169
104(c)(2)(vi) Category 6—150 Percent
Risk Weight
Proposed § 702.104(c)(2)(vi) provided
that a credit union must assign a 150
percent risk weight to the following onbalance 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.170
Æ Equity investments in CUSOs.171
As discussed in more detail below,
however, this final rule reduces the risk
weight assigned to CUSO investments,
and corporate perpetual capital, to 100
percent for complex credit unions with
168 Subject to non-significant equity exposure
risk-weight under § 702.104(c)(3)(i).
169 A credit union has ‘‘non-significant equity
exposures’’ if the aggregate amount of its equity
exposures does not exceed 10 percent of the sum
of the credit union’s capital elements of the riskbased capital ratio numerator.
170 Subject to the lower 100 percent nonsignificant equity exposure risk-weight under
§ 702.104(c)(3)(i).
171 Subject to the lower 100 percent nonsignificant equity exposure risk-weight under
§ 702.104(c)(3)(i).

E:\FR\FM\29OCR2.SGM

29OCR2

Federal Register / Vol. 80, No. 209 / Thursday, October 29, 2015 / Rules and Regulations
non-significant equity exposures.172 For
the reasons explained above, the Board
has decided to retain this proposed
section in the final rule without change.
104(c)(2)(vii) Category 7—250 Percent
Risk Weight
Proposed § 702.104(c)(2)(vii) provided
that a credit union must assign a 250
percent risk weight to the carrying value
of mortgage servicing assets (MSAs)
held on-balance sheet.
For the reasons explained above, the
Board has decided to retain this
proposed section in the final rule
without change.
104(c)(2)(viii) Category 8—300 Percent
Risk Weight
Proposed § 702.104(c)(2)(viii)
provided 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).
For the reasons explained above, the
Board has decided to retain this
proposed section in the final rule with
only minor conforming changes.
Accordingly, § 702.104(c)(2)(viii) of
this final rule provides that a credit
union must assign a 300 percent risk
weight to the exposure amount of the
following on-balance sheet assets:
• Publicly traded equity investments,
other than a CUSO investment.173
• Investment funds that do not meet
the requirements under 12 CFR
703.14(c), with the option to use the
look-through approaches in
§ 702.104(c)(3)(iii)(B).
• Separate account insurance, with
the option to use the look-through
approaches in § 702.104(c)(3)(iii)(B).

mstockstill on DSK4VPTVN1PROD with RULES2

104(c)(2)(ix) Category 9—400 Percent
Risk Weight
Proposed § 702.104(c)(2)(ix) provided
that a credit union must assign a 400
percent risk weight to the exposure
amount of non-publicly traded equity
investments that are held on-balance
172 A

credit union has ‘‘non-significant equity
exposures’’ if the aggregate amount of its equity
exposures does not exceed 10 percent of the sum
of the credit union’s capital elements of the riskbased capital ratio numerator.
173 Subject to the lower 100 percent nonsignificant equity exposure risk-weight under
§ 702.104(c)(3)(i).

VerDate Sep<11>2014

22:13 Oct 28, 2015

Jkt 238001

sheet, other than equity investments in
CUSOs.
For the reasons discussed above, the
Board has decided to retain this
proposed section in the final rule
without change.174
104(c)(2)(x) Category 10—1,250 Percent
Risk Weight
Proposed § 702.104(c)(2)(x) provided
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).175
For the reasons discussed above and
in additional detail below, the Board
has decided to retain this proposed
section in the final rule with only minor
conforming changes to the cross
citations.
104(c)(3) Alternative Risk Weights for
Certain On-Balance Sheet Assets
Proposed § 702.104(c)(3) provided
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. These alternative
approaches provide a credit union with
the ability to risk weight certain assets
based on the underlying exposure of the
subordinated tranche or investment
fund without exposing the NCUSIF to
additional risk.
Other than the comments already
discussed above, the Board received few
comments on this section of the
proposal and has decided to retain the
proposed gross-up approach and lookthrough approaches in this final rule
with only minor changes, which are
discussed in more detail below. In
addition, this final rule restructures
proposed § 702.104(c)(3).
As explained in more detail below,
this final rule restructures the
provisions in § 702.104(c)(3) to
renumber the gross-up and look-through
approaches and add in alternative riskweighting methodologies for nonsignificant equity exposures and certain
types of charitable donation accounts.
These changes are in response to public
comments received on the Second
Proposal and, as explained below,
174 Subject to lower 100 percent non-significant
equity exposure risk-weight under
§ 702.104(c)(3)(i).
175 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
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.

PO 00000

Frm 00063

Fmt 4701

Sfmt 4700

66687

would only lower the risk weights
assigned to certain on-balance sheet
assets under certain circumstances.
104(c)(3)(i) Non-Significant Equity
Exposures
Under the Other Banking Agencies’
capital regulations, banks are permitted
to assign a 100 percent risk weight to
equity exposures when the aggregate
amount of the exposures does not
exceed 10 percent of the bank’s total
capital. The Board did not include a
similar approach in the Second Proposal
because it would have added significant
complexity to the rule. As previously
discussed, however, a significant
number of commenters requested that
NCUA’s risk-based capital requirement
include an alternative risk-weighting
methodology, similar to that provided
under the Other Banking Agencies’
capital regulations, for non-significant
equity exposures at credit unions.
Applying a 100 percent risk weight to
an equity exposure, provided the
exposure does not exceed 10 percent of
the sum of the credit union’s capital
elements of the risk-based capital ratio
numerator, will provide relief to certain
credit unions holding limited amounts
of higher-risk equity assets on their
books. Such an approach is generally
consistent with the Other Banking
Agencies’ regulations and will not
increase risk weights for any equity
exposures held by credit unions.
Accordingly, this final rule adds the
following provisions assigning
alternative risk weights to nonsignificant equity exposures.
104(c)(3)(i)(A) General
Section 702.104(c)(3)(i)(A) of this
final rule provides that notwithstanding
the risk weights assigned in
§ 702.104(c)(2), a credit union must
assign a 100 percent risk weight to nonsignificant equity exposures.
104(c)(3)(i)(B) Determination of NonSignificant Equity Exposures
Section 702.104(c)(3)(i)(B) of this final
rule provides that a credit union has
non-significant equity exposures if the
aggregate amount of its equity exposures
does not exceed 10 percent of the sum
of the credit union’s capital elements of
the risk-based capital ratio numerator
(as defined under paragraph
§ 702.104(b)(1)).
104(c)(3)(i)(C) Determination of the
Aggregate Amount of Equity Exposures
As discussed above,
§ 702.104(c)(3)(i)(C) of this final rule
provides that when determining the
aggregate amount of its equity
exposures, a credit union must include

E:\FR\FM\29OCR2.SGM

29OCR2

66688

Federal Register / Vol. 80, No. 209 / Thursday, October 29, 2015 / Rules and Regulations

the total amounts (as recorded on the
statement of financial condition in
accordance with GAAP) of the
following:
• Equity investments in CUSOs,
• Perpetual contributed capital at
corporate credit unions,
• Nonperpetual capital at corporate
credit unions, and
• Equity investments subject to a risk
weight in excess of 100 percent.
The Board determined that the assets
identified above encompass the extent
of funds invested in stock, equities, or
debts associated with an ownership
interest and are normally in a loss
position subordinate to unsecured
creditors. Non-perpetual capital at
corporate credit unions, despite
receiving a 100 percent risk-weight, is
included in the calculation of equity
exposure because its priority in
liquidation is subordinate to
shareholders and the NCUSIF. Limiting
the sum of these higher credit risk
accounts to 10 percent or less of the sum
of a credit union’s capital elements of
the risk-based capital ratio numerator
receiving a 100 percent risk weight
ensures that the related loss exposure
does not present a significant risk to the
credit union or the NCUSIF.
104(c)(3)(ii) Charitable Donation
Accounts
Under the Other Banking Agencies’
capital regulations, banks are permitted
to apply a 100 percent risk weight to
equity exposures that qualify as
community development investments.
The Board did not include a similar
approach in the Second Proposal
because credit unions do not hold
community development investments in
the same manner banks do. As
previously discussed, however, a
significant number of commenters
requested that NCUA’s risk-based
capital requirement include an
alternative risk-weighting methodology,
similar to that provided under the Other

Banking Agencies’ capital regulations,
for charitable donation accounts.
The Board believes charitable
donation accounts held at credit unions
are similar enough in purpose to
community development investments
held at banks to warrant a 100 percent
risk weight. Under this final rule, a
credit union can choose whether to
apply the 100 percent risk weight
because the account may be entitled to
a lower risk weight based on the
investments held in the account. As
explained in the definitions part of the
preamble, the 100 percent risk weight
would apply only to accounts that meet
the definition of a ‘‘charitable donation
account’’ and the criteria provided
therein. These limits are prudent and
provide credit unions the option of
applying the 100 percent risk weight, if
they choose.
Accordingly, this final rule revises
§ 702.104(c)(3)(ii) to provide that
notwithstanding the risk weights
assigned in § 702.104(c)(2), a credit
union may assign a 100 percent risk
weight to a charitable donation account.
104(c)(3)(iii) Alternative Approaches
As discussed above, this final rule
reorganizes § 702.104(c)(3) and moves
proposed §§ 702.104(c)(3)(i) and (ii)
under § 702.104(c)(3)(iii) with only nonsubstantive conforming changes. Instead
of citing to FDIC’s regulations, this final
rule incorporates the text explaining
how to apply the gross up approach 176
and the look through approaches 177 into
appendix A to part 702 of NCUA’s
regulations. As discussed below, to
incorporate the full text of §§ 324.43(e)
and 324.53 into NCUA’s regulations, the
Board made some minor conforming
changes to the language and numbering
used in the section. Other than the
changes discussed above, no substantive
changes are intended by these revisions.
Accordingly, § 702.104(c)(3)(iii) of
this final rule provides that,
notwithstanding the risk weights

assigned in paragraph (c)(2) of this
section, a credit union may determine
the risk weight of investment funds, and
non-subordinated or subordinated
tranches of any investment as provided
below.
104(c)(3)(iii)(A) Gross-Up Approach
Proposed § 702.104(c)(3)(i) provided
that a credit union may use the grossup approach under 12 CFR 324.43(e) to
determine the risk weight of the
carrying value of any subordinated
tranche of any investment. When
calculating the risk weight for a
subordinated tranche of any investment
using the proposed gross-up approach, a
credit union must have the following
information:
• The exposure amount of the
subordinated tranche;
• The current outstanding par value
of the credit union’s subordinated
tranche;
• The current outstanding par value
of the total amount of the entire tranche
where the credit union has exposure;
• The current outstanding par value
of the more senior positions in the
securitization that are supported by the
subordinate tranche the credit union
owns; 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: 178
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.
Calculation

A

B

mstockstill on DSK4VPTVN1PROD with RULES2

C
D
E
F

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.
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%.

176 12
177 12

CFR 324.43(e).
CFR 324.53.

VerDate Sep<11>2014

22:13 Oct 28, 2015

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

40%

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

$90,000,000

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

$36,000,000

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

$4,000,000
$40,000,000
50%

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

Jkt 238001

PO 00000

Frm 00064

Fmt 4701

Sfmt 4700

Result

E:\FR\FM\29OCR2.SGM

29OCR2

Federal Register / Vol. 80, No. 209 / Thursday, October 29, 2015 / Rules and Regulations
Calculation
G

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 million. Conversely,
under the 1,250 percent risk weight
approach, the credit union would be
required to risk weight the subordinated
tranche at $50 million (1,250 percent
times $4 million). This example shows
the benefit to credit unions of the
proposed inclusion of the gross-up
approach.
In the case of master trust 179 type
structures and structured products,180
credits unions should calculate the prorata share of the more senior positions
using the prospectus and current
servicing/reference pool reports.
The Board received few comments
objecting to allowing credit unions to
use the gross-up approach, and has
decided to retain the option of using the
gross-up approach in this final rule. The
final rule, however, incorporates the
text of § 324.43(e) into NCUA’s
regulations instead of simply citing to
FDIC’s regulations. As discussed above,
this final rule also would permit credit
unions to use the gross-up approach to

mstockstill on DSK4VPTVN1PROD with RULES2

179 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.
180 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.

VerDate Sep<11>2014

22:13 Oct 28, 2015

Jkt 238001

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

risk-weight a non-subordinated tranche
of any investment.
Accordingly, § 702.104(c)(3)(iii)(A) of
this final rule provides that a credit
union may use the gross-up approach
under appendix A of this part to
determine the risk weight of the
carrying value of non-subordinated or
subordinated tranches of any
investment.
104(c)(3)(iii)(B) Look-Through
Approaches
Proposed § 702.104(c)(3)(ii) provided
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. In particular,
for purposes of applying risk weights to
investment funds, the Board proposed
giving credit unions the option of using
the three look-through 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
included these alternative approaches to
make NCUA’s risk-based capital
requirement more comparable to the
Other Banking Agencies’ regulations
and to grant credit unions additional
flexibility.
The first of the three full look-through
approaches under 12 CFR 324.53

PO 00000

Frm 00065

Fmt 4701

Sfmt 4700

66689
Result
$20,000,000

required 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
required a credit union to use the
information provided in the investment
fund’s prospectus. The minimum risk
weight for any investment fund asset
was 20 percent, regardless of which
approach was used.
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.181
The following examples outline each
of the three proposed look-through
approaches:
Full look-through approach. The full
look-through approach allowed 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 were required to
use the most recently available holdings
reports when utilizing the full lookthrough approach.
181 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.

E:\FR\FM\29OCR2.SGM

29OCR2

66690

Federal Register / Vol. 80, No. 209 / Thursday, October 29, 2015 / Rules and Regulations

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

Risk weight
%

Credit union
exposure 182

Dollar risk weight

US Treasury Notes ......................................................
FNMA PACs ................................................................
PSE Revenue Bonds ..................................................
Subordinated MBS 184 .................................................

50
30
17.5
2.5

$5,000,000
3,000,000
1,750,000
250,000

20 183 ................................
20 .....................................
50 .....................................
1,250 ................................

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

Totals ....................................................................

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

10,000,000

56 185 ................................
(Weighted average Risk
weight).

5,600,000 (Amount of
Risk Assets)

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

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

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 follows:

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

Permissible investments
US 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

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 allowed credit
unions to risk weight their holdings in
an investment fund by applying the risk

100
50
20
20
30
10

Risk weight
186 20

20
20
50
50
187 1,250

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 lookthrough approach is as follows:

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

mstockstill on DSK4VPTVN1PROD with RULES2

Permissible investments

Risk weight
%

CU exposure

US 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
10

20 188 ................................
20 .....................................
20 .....................................
50 .....................................
50 .....................................
1,250 189 ...........................

$0
2,000,000
2,000,000
2,000,000
3,000,000
1,000,000

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

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

158 190 (weighted average
risk weight).

10,000,000

182 Fund holdings (percent of fund) multiplied by
the credit union investment.
183 Minimum 20 percent risk weight for assets in
an investment fund, even if the individual risk
weight is zero percent.
184 Use 1,250 percent risk weight or gross-up
calculation.
185 The weighted average risk weight was
calculated by dividing the amount of risk assets

VerDate Sep<11>2014

22:13 Oct 28, 2015

Jkt 238001

($5,600,000) by the credit union exposure
($10,000,000).
186 Minimum 20 percent risk weight for assets in
an investment fund, even if the individual risk
weight is zero percent.
187 Use 1,250 percent risk weight unless the
prospectus limits gross-up risk weight.

PO 00000

Frm 00066

Fmt 4701

Sfmt 4700

Dollar risk weight

400,000
400,000
1,000,000
1,500,000
12,500,000
15,800,000 (Amount of
Risk Assets)

188 Minimum 20 percent risk weight for assets in
an investment fund, even if the individual risk
weight is zero percent.
189 Use 1,250 percent risk weight unless the
prospectus limits gross-up risk weights.
190 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).

E:\FR\FM\29OCR2.SGM

29OCR2

Federal Register / Vol. 80, No. 209 / Thursday, October 29, 2015 / Rules and Regulations
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.
Public Comments on the Second
Proposal
The Board received a few comments
relating to the proposed use of the lookthrough approaches. Most of these
comments were addressed above. At
least one commenter, however,
suggested that the Board clarify that the
timing of the most recent available
holding reports are to be used by credit
unions applying the full look-through
approach.
Discussion
The Board received no comments
objecting to allowing credit unions to
use the look-through approaches, and
has decided to retain the option of using
the gross-up approach in this final rule.
The final rule incorporates the relevant
text of § 324.53 into NCUA’s regulations
instead of simply citing to FDIC’s
regulations and makes other minor
conforming edits. In response to the
comments received, the Board has also
added language in paragraph (b)(2)(ii) of
appendix A below to clarify which
holding reports should be used when
calculating a risk-weight using the fulllook-through approach. The
methodology for applying the lookthrough approaches is added to new
appendix A to part 702, which is
discussed in more detail below.
Accordingly, § 702.104(c)(3)(iii)(B)
provides that a credit union may use
one of the look-through approaches
under appendix A part 702 to determine
the risk weight of the exposure amount
of any investment funds, the holdings of
separate account insurance, or both.

mstockstill on DSK4VPTVN1PROD with RULES2

104(c)(4) Risk Weights for Off-BalanceSheet Activities
Under the Second Proposal,
§ 702.104(c)(4) provided that the riskweighted amounts for all off-balancesheet 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

VerDate Sep<11>2014

22:13 Oct 28, 2015

Jkt 238001

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:
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.
Public Comments on the Second
Proposal
The Board received several comments
regarding the proposed risk weights
assigned to off-balance-sheet items. At
least one commenter agreed with
requiring capital for most off-balancesheet activities. But the commenter
suggested that credit unions should not
be required to hold capital for offbalance-sheet exposures that are
unconditionally cancellable (without
cause), especially if the exposure is for
less than one year. The commenter
recommended that the Board adopt a
more bank-like off-balance-sheet riskbased capital regime for such exposures.
Another commenter stated that the
proposal identifies the use of a 10
percent credit conversion factor for all
noncommercial unused lines of credit,
but noted that community banks utilize
various credit conversion factors
ranging from zero percent to 50 percent
depending on whether the commitment
is unconditionally cancellable (zero
percent), conditionally cancellable
within one year (20 percent), or
conditionally cancellable beyond one
year (50 percent). The commenter
suggested that the design and inclusion
of cancellation language in lending
contracts is to mitigate the overall
potential risk associated with unfunded
amounts, and the type and extent of the
specific language helps outline the
extent and timeframe of the risk

PO 00000

Frm 00067

Fmt 4701

Sfmt 4700

66691

associated within each lending contract.
As such, the commenter recommended
that the credit conversion factors
utilized by the community banks be
adopted by NCUA to help ensure that
the inherent risk embedded within
specific cancellation language in
lending contracts be accurately
identified and risk weighted.
At least one commenter
recommended that the Board lower the
credit conversion factor for unfunded
consumer loans. Other commenters
recommended unfunded,
unconditionally cancellable
commitments should be risk weighted at
zero percent.
Some commenters noted that under
the proposal, the Board differentiates
between partial recourse loans executed
under the Federal Home Loan Banks’
Mortgage Partnership Finance (MPF)
Program and all other partial recourse
lending programs. Commenters
suggested that, although the MPF
program loans enjoy a lower 20 percent
credit conversion factor (CCF) compared
to the 100 percent CCF applied to other
partial recourse loans, credit unions that
hold a contractual exposure amount that
is less than 20 percent of the
outstanding loan balance will have to
hold more capital for MPF loans than
for other partial recourse arrangements.
For example, a $100,000 loan sold with
a 3 percent contractual exposure would
have an off-balance-sheet value of
$3,000 if it were a normal recourse loan
and $20,000 if it were an MPF loan.191
Since MPF loans include a fixed
contractual exposure amount, the
commenter suggested there does not
appear to be a strong justification for
differentiating this loan program from
other partial recourse loan
arrangements. Even though this adjusted
calculation may track historical losses
in the MPF program more closely,
commenters suggested that the Board
consider whether it is appropriate to
incorporate individualized risk weights
for specific counterparties.
One commenter suggested that the
proposed treatment of the MPF Program
does not address the complexity and
risks associated with the program, and
would prevent credit unions from
selling loans in the secondary market
that have no recourse at all and
therefore pose no risk to the credit
union. Under the Second Proposal, the
capital requirement (after a credit
191 The MPF program takes the outstanding loan
balance multiplied by a 20 percent CCF (100,000 *
.20 = 20,000), while other partial recourse loans
take the maximum contractual exposure multiplied
by a 100 percent CCF (3,000 * 1 = 3,000). Both loans
would be subject to a 50 percent risk-weight as a
first-lien residential real estate loan.

E:\FR\FM\29OCR2.SGM

29OCR2

66692

Federal Register / Vol. 80, No. 209 / Thursday, October 29, 2015 / Rules and Regulations

mstockstill on DSK4VPTVN1PROD with RULES2

conversion factor) is derived from the
total outstanding principal balance of all
loans sold under the MPF Program. The
commenter suggested it is important to
note that the MPF Program is actually
composed of several different types of
loan purchase programs, some of which
have a limited recourse component and
some that do not. The commenter
suggested further that each loan sold
under an MPF program that includes a
credit-risk sharing component
undergoes an FHLB calculation that
assigns a specific dollar amount for
credit enhancement to that loan. And
some loans with very low credit risk
may have no credit enhancement
assigned, while other loans with
characteristics of higher credit risk are
assigned a higher credit enhancement.
According to the commenter, the total of
these credit enhancement calculations,
which is tracked by the FHLB and
available online, is the maximum
amount of risk for which a credit union
is liable. The commenter suggested that
in some cases, the results of the
calculation for a particular loan may
determine whether that loan is sold
under the MPF Xtra Program (with no
credit enhancement) or under a different
MPF program that includes some form
of credit enhancement. The commenter
contended that, by lumping all MPF
loans into one calculation, the proposal
would significantly alter an institution’s
analysis of how to price and sell
individual loans without any benefit to
the institution or to NCUA in managing
risk. As an alternative, the commenter
suggested the credit conversion and risk
weight be applied to the total credit
enhancement under the MPF program
for which a credit union is liable,
instead of to the loan balances.
Discussion
The small credit conversion factor for
unused consumer lines of credit
provides for the potential swift shift in
credit risk that can occur when
consumers access the lines. The other
alternative credit conversion factors that
include a determination of the term of
the outstanding guarantee add
additional complexity to the assignment
of credit conversion factors and could
result in a less consistent application of
assigned risk weights even with
expanded supervisory guidance.
The definition of the (MPF) Program
will provide for assignments of proper
risk weights in transactions where credit
unions receive fees for managing the
credit risk of the loans. Under the MPF
Program, credit unions retain recourse
risk through a credit enhancement
obligation to the FHLB for credit losses
on certain loans. For loans sold to the

VerDate Sep<11>2014

22:13 Oct 28, 2015

Jkt 238001

FHLB that do not meet the definition of
MPF loans, the risk weight is based on
the maximum contractual amount of the
credit union’s exposure. In a loan sale
transaction that creates no contractual
exposure, the risk-weight would be zero.
Supervisory guidance and Call Report
instructions will be provided to ensure
proper treatment of loans transferred
under the FHLB programs and all other
loans transferred with limited recourse.
The proposed risk weights for offbalance-sheet activities will be retained,
as they are clear and generally
comparable to those assigned under the
Other Banking Agencies’ regulations.
104(c)(5) Derivatives
Proposed § 702.104(c)(5) would have
provided that a complex credit union
must assign a risk-weighted amount to
any derivative contracts as determined
under 12 CFR 702.105.
For the reasons discussed below, the
Board has decided to retain this
proposed section in the final rule
without change.
Current § 702.105 Weighted-Average
Life of Investments
As discussed above, proposed new
§ 702.105 would have replaced 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 have been removed
from part 702 altogether.
The Board received no comments
objecting to this change and has decided
to retain this change in the final rule.
Section 702.105

Derivatives Contract

Under the Second Proposal, § 702.105
assigned risk weights to derivatives in a
manner generally consistent with the
approach adopted by FDIC in its interim
final rule regarding regulatory
capital.192 The NCUA Board proposed
to focus only on interest-rate-related
derivatives in the rule and referred
credit unions to FDIC’s rules for all noninterest-rate-related derivatives. The
Board made this distinction because
federal credit unions are restricted to
interest-rate-related contracts under
NCUA’s final derivatives rule, which
was approved in January 2014.
Federally insured state-chartered credit
unions, however, may have broader
authorization to use non-interest-rate
contracts if approved by the respective
state supervisory authorities.
192 See

PO 00000

78 FR 55339 (Sept. 10, 2013).

Frm 00068

Fmt 4701

Sfmt 4700

Public Comments on the Second
Proposal
The Board received a few general
comments on proposed § 702.105. One
commenter recommended that the
Board, rather than just cross-citing to
FDIC’s regulations, incorporate the FDIC
risk weights for non-interest-rate
derivatives into NCUA regulations
verbatim. The commenter suggested that
although the vast majority of credit
unions will probably not engage in this
activity, its inclusion in NCUA’s
regulations would ease the regulatory
burden for credit unions and examiners
in finding and citing the appropriate
authority. The commenter cautioned,
however, that the Board should not
create its own risk-weight system for
non-interest-rate-related derivatives.
The commenter suggested that, given
the complex nature of derivatives,
modifying the established regulatory
framework could result in unintended
consequences for credit unions engaged
in that activity. In addition, state
regulators have experience supervising
derivative activity in state-chartered
banks within the FDIC framework,
which will help facilitate effective state
supervision for credit unions with
minimum confusion.
Another commenter complained that
the risk-weight calculations for
derivatives were too complicated. The
commenter suggested that derivatives,
per GAAP, are fair valued daily,
monthly, quarterly, and yearly, and
reflected as an asset or a liability, while
their impact runs through earnings or
equity. Accordingly, the commenter
recommended the Board apply a
simpler formula to assess risk-based
capital for derivatives, using a credit
conversion factor to the notional
amount and then applying a riskweighted factor. Another commenter
suggested that the Board simplify the
calculation for derivatives based on the
percentage of potential future exposure.
Discussion
The Board has considered the
comments suggesting the derivatives
calculations be simplified. But given the
number of variables to be considered for
risk weighting—which include the type
of derivative (interest rate or other), the
legal agreement governing the
transactions (qualified master netting
agreement), the type of collateral to be
used to satisfy margin movements, the
method the credit union will use for
collateral risk mitigation, and the
counterparty approach (dealer or
exchange)—it is impractical to simplify
the calculation any further given the
number of options that need to be

E:\FR\FM\29OCR2.SGM

29OCR2

Federal Register / Vol. 80, No. 209 / Thursday, October 29, 2015 / Rules and Regulations
considered. Therefore the Board has
maintained the proposed approach in
this final rule.
Consistent with NCUA’s recently
finalized derivatives rule,193 the Board
is now adopting 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.194 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 final rule focuses only on
interest-rate-related derivatives and
refers credit unions to FDIC’s rules for
all non-interest-rate-related derivatives.
The final rule makes this distinction
because federal credit unions are
restricted to interest-rate-related
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 supervisory authorities.
NCUA is not aware of any non-interestrate derivative contracts being used by
federally insured, state-chartered credit
unions (per Call Report data).

mstockstill on DSK4VPTVN1PROD with RULES2

OTC Derivatives Transaction Risk
Weight
Under the Second Proposal, a credit
union would have undertaken the
following process to determine the risk
weight for OTC derivative contracts. To
determine the risk-weighted asset
amount for a derivatives contract a
credit union must first determine its
exposure amount for the contract. The
credit union must then recognize the
credit mitigation of financial collateral,
if qualified, and 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 proposal required 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) potential future exposure, 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
193 See
194 See

78 FR 55339 (Sept. 10, 2013).
78 FR 55339 (Sept. 10, 2013).

VerDate Sep<11>2014

22:13 Oct 28, 2015

Jkt 238001

can be referenced in 12 CFR 324.34 of
the FDIC rule.

66693

by the Other Banking Agencies.195
Under the Second Proposal, a credit
union was required to calculate a trade
PROPOSED CONVERSION FACTOR MA- exposure amount, determine the risk
TRIX FOR INTEREST RATE DERIVA- mitigation of any financial collateral,
and multiply that amount by the
TIVES CONTRACTS
applicable risk weight. Such an
approach allowed credit unions to take
IRR
hedge
Remaining maturity
derivatives
into account the lower degree of risk
associated with cleared derivatives
One year or less ...................
0.00 transactions and the benefit of collateral
Greater than one year and
associated with these transactions. In
less than or equal to five
addition, the proposed approach also
years .................................
0.005
Greater than five years .........
0.015 accounted for the risk of loss associated
with collateral posted by a credit union.
The Board received no comments
For multiple interest rate derivatives
objecting
to this particular approach and
contracts subject to a qualifying master
netting agreement, a credit union would has decided to retain the proposed
process to determine the risk weight for
calculate the exposure amount by
cleared derivatives in this final rule
adding the net CCE and the adjusted
without change.
sum of the PFE amounts for all
derivatives contracts subject to that
Trade Exposure Amount
qualifying master netting agreement.
Under the Second Proposal, the trade
Under the proposal, the net CCE
exposure amount would have been
would have been the greater of zero and equal to the amount of the derivative,
the net sum of all positive and negative
calculated as if it were an OTC
fair values of the individual derivatives
transaction under subsection (b) of this
contracts subject to the qualifying
section, added to the fair value of the
master netting agreement. The adjusted
collateral posted by the credit union and
sum of the PFE amounts would have
held by a DCO, clearing member or
been calculated as described in
custodian. This calculation took into
proposed § 702.105(a)(2)(ii)(B).
account the exposure amount of the
Under the proposal, to recognize the
derivatives transaction and the exposure
netting benefit of multiple derivatives
associated with any collateral posted by
contracts, the contracts would have to
the credit union. This is the same
be subject to the same qualifying master approach employed by the Other
netting agreement. For example, a credit Banking Agencies.196
union with multiple derivatives
The Board received no comments
contracts with a single counterparty
objecting to this particular approach and
could net the counterparty exposure if
has decided to retain the proposed
the transactions fall under the same
process to determine the trade exposure
International Swaps and Derivatives
amount in this final rule without
Association, Inc. (ISDA) Master
change.
Agreement and Schedule.
Cleared Transaction Risk Weights
Under the proposal, if a derivatives
contract were collateralized by financial
Under the Second Proposal, after a
collateral, a credit union would first
credit union determines its trade
determine the exposure amount of the
exposure amount, it would have been
derivatives contract as described in
required to apply a risk weight that is
§§ 702.105(a)(i) or (a)(ii). Next, to
based on agreements preventing risk of
recognize the credit risk mitigation
loss of the collateral posted by the
benefits of the financial collateral, the
counterparty to the transaction. The
credit union would use the approach for proposal required credit unions to apply
collateralized transactions as described
a 2 percent risk weight if the collateral
in § 702.105(c) of the proposal, which is posted by a counterparty is subject to an
discussed in more detail below.
agreement that prevents any losses
The Board received no comments
caused by the default, insolvency,
objecting to this particular approach and liquidation, or receivership of the
has decided to retain the proposed
clearing member or any of its clients. To
process to determine the risk weight for qualify for this risk weight, a credit
OTC derivatives contracts in this final
union would have been required to
rule without change.
conduct a sufficient legal review and
determine that the agreement to prevent
Cleared Derivatives Risk Weight
risk of loss is legal, valid, binding, and
Proposed § 702.105 would have
enforceable. If a credit union did not
adopted an approach to assign risk
weights to derivatives that is generally
195 See 78 FR 55339 (Sept. 10, 2013).
196 See, e.g., 12 CFR 324.35.
consistent with the approach adopted

PO 00000

Frm 00069

Fmt 4701

Sfmt 4700

E:\FR\FM\29OCR2.SGM

29OCR2

66694

Federal Register / Vol. 80, No. 209 / Thursday, October 29, 2015 / Rules and Regulations

mstockstill on DSK4VPTVN1PROD with RULES2

meet either or both of these
requirements, the credit union would
have to apply a 4 percent risk weight to
the transaction.
The differing risk weights for cleared
transactions took 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. This is the same approach
employed by the Other Banking
Agencies.197
The Board received no comments
objecting to this particular approach and
has decided to retain the proposed
process to determine the risk weights for
cleared transactions in this final rule
without change.
Collateralized Transactions
Under the Second Proposal, the Board
proposed to permit a credit union to
recognize risk-mitigating 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
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

197 See,

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.
The Board received no comments
objecting to this particular approach
and, consistent with the proposal, has
decided to permit a credit union to
recognize risk-mitigating effects of
financial collateral in OTC transactions
in this final rule without change.
Risk Management Guidance for
Recognizing Collateral
Under the Second Proposal, before a
credit union could recognize collateral
for credit risk mitigation purposes, it
should: (1) 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,
such as securities. The Board proposed
including this concept in the rule so
that credit unions could accurately
recognize the risk mitigation benefit of
collateral. This is the same approach
taken by the Other Banking Agencies.
The Board received no comments
objecting to this particular approach and
has decided to retain the proposed
approach to risk management for
recognizing collateral in this final rule
without change.
The table below illustrates an
example of the calculations for RiskWeighted Asset Amounts for both OTC
and clearing derivatives agreements. For
this example, both the OTC and clearing
are considered to be 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.
Lines 8 through 16 are calculations based
on the approach and types of agreement,
collateral, fair values and notional amounts
of the credit union derivatives transactions.

e.g., 12 CFR 324.35.

VerDate Sep<11>2014

22:13 Oct 28, 2015

Jkt 238001

PO 00000

Frm 00070

Fmt 4701

Sfmt 4700

E:\FR\FM\29OCR2.SGM

29OCR2

Federal Register / Vol. 80, No. 209 / Thursday, October 29, 2015 / Rules and Regulations

Under the Second Proposal, the Board
included language that would require
federally insured, state-chartered credit
unions (FISCUs) to calculate risk
weights in accordance with FDIC’s rules
for derivatives transactions that are not
permissible under NCUA’s derivatives
rule. As noted above, one commenter
requested that NCUA incorporate all of
FDIC’s language into the final RBC rule.
FDIC’s rules for derivatives are very
detailed and lengthy. Incorporating
these rules into this final rule would
add unnecessary complexity. Further, as
the options available to FISCUs are
based on state laws, it would be a very
time-consuming and expensive process
to monitor FDIC’s rules to make future
conforming changes in NCUA’s riskbased capital regulations. For these
reasons, the Board is retaining the crossreference and is not incorporating the
text of FDIC’s derivatives regulations
into this final rule.

VerDate Sep<11>2014

22:13 Oct 28, 2015

Jkt 238001

Current Section 702.106 Standard
Calculation of Risk-Based Net Worth
Requirement
The Second Proposal 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 Second Proposal,
on the other hand, contained only a
single measurement for calculating a
credit union’s risk-based capital ratio.
Accordingly, current § 702.106 will no
longer be necessary.
The Board received no comments on
this particular revision and has decided
to eliminate current § 702.106 from this
final rule as proposed.
Current Section 702.107 Alternative
Component for Standard Calculation
The Second Proposal would eliminate
current § 702.107 regarding the use of
alternative risk weight measures. The
Board observed that the current
alternative risk weight measures add

PO 00000

Frm 00071

Fmt 4701

Sfmt 4700

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.
The Board received no comments on
this particular revision and has decided
to eliminate current § 702.107 from this
final rule as proposed.
Current Section 702.108
Mitigation Credit

Risk

The Second Proposal would eliminate
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

E:\FR\FM\29OCR2.SGM

29OCR2

ER29OC15.002

mstockstill on DSK4VPTVN1PROD with RULES2

Federally Insured, State-Chartered
Credit Unions’ Derivative Transactions

66695

66696

Federal Register / Vol. 80, No. 209 / Thursday, October 29, 2015 / Rules and Regulations

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 received no comments on
this particular revision and has decided
to eliminate current § 702.107 from this
final rule as proposed.
Section 702.106 Prompt Corrective
Action for Adequately Capitalized
Credit Unions
The Second Proposal renumbered
current § 702.201 as proposed § 702.106,
and would have made 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 also remove the requirement that
adequately capitalized credit unions
transfer the earnings retention amount
from undivided earnings to their regular
reserve account.
The Board received no comments on
this section and has decided to adopt
the proposed amendments in this final
rule without change.
Section 702.107 Prompt Corrective
Action for Undercapitalized Credit
Unions

One state agency commenter noted
that under the proposal, credit unions
classified as significantly
undercapitalized or worse would be
required to restrict member business
loans. The commenter acknowledged
that it may be prudent to limit member
business lending in some such cases,
but felt there could be instances in
which rational loan workout agreements
require additional loans be granted to
protect the cash flow or collateral
position on loans already granted. The
commenter suggested that forcing a
restriction without some element of
discretion on the part of the state
examiner or federal examiner and
corresponding state regulatory official
and NCUA regional office may have the
unintended consequence of artificially
creating a liquidity problem for a
borrower, and potentially jeopardizing
the collection of existing credits. The
commenter recommended that the
decision to limit any type of lending be
done on a case-by-case basis rather than
a sweeping decision to be applied to all
regardless of the circumstances.
Discussion

The Second Proposal renumbered
current § 702.202 as proposed § 702.107,
and made 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 also
remove the requirement that
undercapitalized credit unions transfer
the earnings retention amount from
undivided earnings to their regular
reserve account.
The Board received no comments on
this section and has decided to adopt
the proposed amendments in this final
rule without change.

mstockstill on DSK4VPTVN1PROD with RULES2

Public Comments on the Second
Proposal

The Board is bound by statute because
section 216(g)(2) of the FCUA provides
in relevant part:
[A]n insured credit union that is
undercapitalized may not make any increase
in the total amount of member business loans
(as defined in section 107A(c) of this title)
outstanding at that credit union at any one
time, until such time as the credit union
becomes adequately capitalized.

The statutory language does not
preclude a credit union from entering
into loan workout agreements provided
the total amount of member business
loans outstanding, including unused
commitments, does not increase.
Accordingly, the Board has retained the
language in proposed § 702.108 in this
final rule without change.

Section 702.108 Prompt Corrective
Action for Significantly
Undercapitalized Credit Unions

Section 702.109 Prompt Corrective
Action for Critically Undercapitalized
Credit Unions

The Second Proposal renumbered
current § 702.203 as proposed § 702.108,
and made 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 also
remove the requirement that
significantly undercapitalized credit
unions transfer the earnings retention
amount from undivided earnings to
their regular reserve account.

The Second Proposal renumbered
current § 702.204 as proposed § 702.109,
and made 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 also
remove the requirement that critically
undercapitalized credit unions transfer
the earnings retention amount from
undivided earnings to their regular
reserve account.

VerDate Sep<11>2014

22:13 Oct 28, 2015

Jkt 238001

PO 00000

Frm 00072

Fmt 4701

Sfmt 4700

The Board received no comments on
this section and has decided to adopt
the proposed amendments in this final
rule without change.
Section 702.110 Consultation With
State Official on Proposed Prompt
Corrective Action
The Second Proposal renumbered
current § 702.205 as proposed § 702.110,
and made only minor conforming
amendments to the text of the section.
Public Comments on the Second
Proposal
One state supervisory authority
commenter pointed out that, under the
proposal, authority to approve certain
actions (such as net worth restoration
plans, earnings retention waivers, etc.)
must come from the NCUA Board, after
consulting with the state regulator. The
commenter recommended, however,
that the authority to approve actions
may be better placed with NCUA
regional directors, after consulting with
the state regulator. The commenter
suggested that most states have a long
and well established working
relationship with regional offices, and
regional directors should be in a better
position to evaluate the reasonableness
of this type of request.
Discussion
The Board appreciates the
commenter’s suggestion, but declines to
make the recommended change at this
time. However, the Board may choose
delegate its authority to approve actions
under this section to regional directors
without having to change NCUA’s
regulations. Accordingly, the Board has
decided to retain proposed § 702.110 in
this final rule without change.
Section 702.111 Net Worth Restoration
Plans (NWRPs)
The Second Proposal renumbered
current § 702.206 as proposed § 702.111,
and made only minor conforming
amendments to the text of most of the
subsections, with a few exceptions
discussed in more detail below.
The Board reviewed the comments
received on this section, which are
discussed in more detail below, and has
decided to adopt proposed § 702.111 in
this final rule without change.
111(c) Contents of NWRP
Under the Second Proposal,
§ 702.111(c)(1)(i) provided 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 risk-based capital ratio, if
applicable, so that it becomes
adequately capitalized by the end of the

E:\FR\FM\29OCR2.SGM

29OCR2

Federal Register / Vol. 80, No. 209 / Thursday, October 29, 2015 / Rules and Regulations
term of the NWRP, and will remain so
for four consecutive calendar quarters.
The Board received no comments on
this section and has decided to adopt
the proposed amendments in this final
rule without change.
111(g)(4) Submission of Multiple
Unapproved NWRPs
Under the Second Proposal,
§ 702.111(g)(4) provided 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.198 The
proposed amendments were 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.

mstockstill on DSK4VPTVN1PROD with RULES2

Public Comments on the Second
Proposal
At least one commenter claimed that
a number of credit unions are not aware
of proposed new § 702.111(g)(4) because
NCUA led them to believe that the rule
only applied to complex credit unions.
The commenter suggested that NCUA
has significant latitude to approve or
deny net worth restoration plans, even
if a credit union submits a plan that
meets the stated requirements. The
commenter opposed including the new
provision in the final rule, and
recommended the Board include
safeguards to ensure that credit unions
acting in good faith are able to
successfully submit NWRPs. Another
commenter contended that the Board
presented no evidence that submitting
multiple net worth restoration plans
represents an unsafe and unsound
condition.
Discussion
The failure of a credit union to
prepare an adequate net worth
restoration plan places the credit union
in violation of the FCUA requiring
submission of an acceptable plan within
the time allowed. The submission and
rejection of multiple plans results in
delays in resolving the problem of
insured credit unions. Accordingly, to
further ensure compliance with the
FCUA, the Board has decided to adopt
proposed § 702.111(g)(4) in this final
rule without change.
The Board clarifies, however, that
non-complex credit unions will not be
198 12

U.S.C. 1786; and 1790d.

VerDate Sep<11>2014

22:13 Oct 28, 2015

Jkt 238001

expected to address risk-based capital in
net worth restoration plans.
111(j) Termination of NWRP
Under the Second Proposal,
§ 702.111(j) provided that, for purposes
of part 702, an NWRP terminates once
the credit union has been classified as
adequately capitalized or well
capitalized for four consecutive
quarters. The proposed paragraph also
provided, 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 was intended
to provide clarification for credit unions
on the timing of an NWRP’s
termination.
The Board received no comments on
this section and has decided to adopt
the proposed amendments in this final
rule without change.
Section 702.112 Reserves
The Second Proposal renumbered
current § 702.401 as proposed § 702.112.
Consistent with the text of current
§ 702.401(a), the proposal also would
require that each credit union 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.
The Board received no comments on
this section and has decided to adopt
the proposed amendments in this final
rule without change.
Regular Reserve Account
As mentioned above, the 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.
The Board received no comments on
the elimination of current § 702.401(b)
and has decided to adopt the proposed
revision in this final rule without
change.
Section 702.113 Full and Fair
Disclosure of Financial Condition
The Second Proposal renumbered
current § 702.402 as proposed § 702.113,
and made only minor conforming

PO 00000

Frm 00073

Fmt 4701

Sfmt 4700

66697

amendments to the text of the section
with the exception of the changes to
proposed § 702.113(d) that are discussed
in more detail below.
The Board received no comments on
this section and has decided to adopt
the proposed amendments in this final
rule without change.
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
current § 702.402(d)(4), 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 current § 702.402(d)(4), which
provides that adjustments to the
valuation ALLL will be recorded in the
expense account ‘‘Provision for Loan
and Lease Losses.’’ This change is
intended to clarify that the ALLL is to
be maintained in accordance with
GAAP, as discussed above.
The Board received no comments on
these proposed revisions and has
decided to adopt the proposed
amendments in this final rule without
change.
(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 italicized
words ‘‘and lease’’ and ‘‘timely and’’
would be added 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, these changes are intended 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.
The Board received no comments on
this section and has decided to adopt
the proposed amendments in this final
rule without change.
(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 change is intended to provide full

E:\FR\FM\29OCR2.SGM

29OCR2

66698

Federal Register / Vol. 80, No. 209 / Thursday, October 29, 2015 / Rules and Regulations

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.
The Board received no comments on
this section and has decided to adopt
the proposed amendments in this final
rule without change.
(d)(3)
Proposed § 702.113(d)(3) retained the
language in current § 702.401(d)(5) with
no changes.
The Board received no comments on
this section and has decided to adopt
the proposed amendments in this final
rule without change.
Section 702.114 Payment of Dividends
The Second Proposal renumbered
current § 702.402 as proposed § 702.114
and made amendments to the text of
paragraphs (a) and (b).
The Board received no comments on
this section and has decided to adopt
the proposed amendments in this final
rule without change.

mstockstill on DSK4VPTVN1PROD with RULES2

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 proposed
§ 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. Because of the
removal of the regular reserve account,
and to conform to GAAP, the proposal
would amend the language to 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.
The Board received no comments on
this section and has decided to adopt
the proposed amendments in this final
rule without change.
114(b) Payment of Dividends and
Interest Refunds
The Second Proposal would eliminate
the language in current § 702.403(b) and
replace it with a new provision.
Proposed new § 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

VerDate Sep<11>2014

22:13 Oct 28, 2015

Jkt 238001

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).
Proposed paragraph (b) would have
provided further that the request for
written approval must include the plan
for eliminating any negative retained
earnings balance.
The Board received no comments on
this section and has decided to adopt
the proposed amendments in this final
rule without change.
B. Subpart B—Alternative Prompt
Corrective Action for New Credit Unions
Consistent with the Second Proposal,
this final rule adds new subpart B,
which contains most of the capital
adequacy rules that apply to ‘‘new’’
credit unions. The current net worth
measures, net worth classification, and
text of the PCA requirements applicable
to new credit unions are renumbered.
They remain mostly unchanged from
the current 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 exceeded 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 an unsafe and unsound
condition.
(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
The Board received no comments on
this section. Accordingly, consistent
with the Second Proposal, this final rule
renumbers current § 702.301 as
§ 702.201. The final rule also clarifies
that a credit union may not regain a
designation of ‘‘new’’ after reporting
total assets in excess of $10 million.
Section 702.202 Net Worth Categories
for New Credit Unions
The Board received no comments on
this section. Accordingly, consistent
with the Second Proposal, this final rule
renumbers current § 702.302 as
§ 702.202, and makes only minor

PO 00000

Frm 00074

Fmt 4701

Sfmt 4700

technical edits and conforming
amendments to the text of the section.
Section 702.203 Prompt Corrective
Action for Adequately Capitalized New
Credit Unions
The Board received no comments on
this section. Accordingly, consistent
with the Second Proposal, this final rule
renumbers current § 702.303 as
§ 702.203, and makes 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), this final rule also removes
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
The Board received no comments on
this section. Accordingly, consistent
with the Second Proposal, this final rule
renumbers current § 702.304 as
§ 702.204, and makes 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), this final rule removes 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
The Board received no comments on
this section. Accordingly, consistent
with the Second Proposal, this final rule
renumbers current § 702.305 as
proposed § 702.205, and makes only
minor conforming amendments to the
text of the section.
Section 702.206 Revised Business
Plans (RBPs) for New Credit Unions
The Board received no comments on
this section. Accordingly, consistent
with the Second Proposal, this final rule
renumbers current § 702.306 as
§ 702.206, makes mostly minor
conforming amendments to the text of
the section, and adds new
§ 702.206(g)(3). Consistent with the
proposed elimination of the regular
reserve requirement in current
§ 702.401(b), this final rule also removes
the requirement that new credit unions
transfer the earnings retention amount
from undivided earnings to their regular
reserve account.

E:\FR\FM\29OCR2.SGM

29OCR2

Federal Register / Vol. 80, No. 209 / Thursday, October 29, 2015 / Rules and Regulations
206(g)(3) Submission of Multiple
Unapproved Revised Business Plans
The Board received no comments on
this section. Accordingly, consistent
with the Second Proposal,
§ 702.206(g)(3) of this final rule provides
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.199 As explained in the preamble
to the Second Proposal, 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. This
amendment is intended clarify that
submitting multiple RBPs that are
rejected by NCUA, or a 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.

mstockstill on DSK4VPTVN1PROD with RULES2

Section 702.207 Incentives for New
Credit Unions
The Board received no comments on
this section. Accordingly, consistent
with the Second Proposal, this final rule
renumbers current § 702.307 as
proposed § 702.207, and makes only
minor conforming amendments to the
text of the section.
Section 702.208 Reserves
The Board received no comments on
this section. Accordingly, consistent
with the Second Proposal, this final rule
adds new § 702.208 regarding reserves
for new credit unions. Also, consistent
with the text of the current reserve
requirement in § 702.401(a), this final
rule requires that each new credit union
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.
As explained under the part of the
preamble associated with § 702.112
above, this final rule eliminates 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 will be
eliminated upon the effective date of
this final rule. Upon the effective date
of this final rule, a federal credit union
should close out its regular reserve
199 12

U.S.C. 1786 and 1790d.

VerDate Sep<11>2014

22:13 Oct 28, 2015

Jkt 238001

balance into undivided earnings. A
federally insured state-chartered credit
union, however, may still maintain a
regular reserve account if required
under state law or by its state
supervisory authority.
Section 702.209 Full and Fair
Disclosure of Financial Condition
The Board received no comments on
this section. Accordingly, consistent
with the Second Proposal, this final rule
renumbers current § 702.402 as
§ 702.209 and makes 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
The Board received no comments on
this section. Accordingly, consistent
with the proposed elimination of the
regular reserve requirement,
§ 702.209(d) of this final rule removes
the language in current § 702.402(d)(4),
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 final rule removes current
§ 702.402(d)(3), which provides that
adjustments to the valuation ALLL will
be recorded in the expense account
‘‘Provision for Loan and Lease Losses.’’
As discussed in the part of the preamble
associated with § 702.113, the changes
to this section emphasize the need to
record the ALLL in accordance with
GAAP.
(d)(1)
The Board received no comments on
this section. Accordingly, consistent
with the Second Proposal, current
§ 702.401(d)(1) is renumbered as
§ 702.209(d)(1) and amended to provide
that charges for loan and lease losses
shall be made timely and in accordance
with GAAP. This final rule adds 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 is 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.

PO 00000

Frm 00075

Fmt 4701

Sfmt 4700

66699

(d)(2)
The Board received no comments on
this section. Accordingly, consistent
with the Second Proposal, current
§ 702.401(d)(2) is renumbered as
§ 702.209(d)(2) and is amended to
provide that the ALLL must be
maintained in accordance with GAAP.
This change is intended to provide full
and fair disclosure to credit union
members, 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)
The Board received no comments on
this section. Accordingly, consistent
with the Second Proposal, current
§ 702.401(d)(5) is renumbered as
§ 702.209(d)(3) and retains the language
with no changes.
Section 702.210 Payment of Dividends
The Board received no comments on
this section. Accordingly, consistent
with the Second Proposal, the language
in current § 702.403 is incorporated into
new § 702.210 of this final rule.
210(a) Restriction on Dividends
The Board received no comments on
this section. Accordingly, consistent
with the Second Proposal, § 702.210(a)
provides that, for new 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
The Board received no comments on
this section. Accordingly, consistent
with the Second Proposal, § 702.210
provides 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 B
of part 702 unless the appropriate
regional director and, if state-chartered,
the appropriate state official, has given
prior written approval (in an RBP or
otherwise). Paragraph (b) provides
further that the request for written
approval must include the plan for
eliminating any negative retained
earnings balance.
C. Appendix A to Part 702—Alternative
Risk Weights for Certain On-Balance
Sheet Assets
As discussed in the part of the
preamble that discusses § 702.104(c)(3)
of this final rule, the Board is adding
new appendix A to part 702 of NCUA’s
regulations. As previously stated, this
final rule allows credit unions to

E:\FR\FM\29OCR2.SGM

29OCR2

66700

Federal Register / Vol. 80, No. 209 / Thursday, October 29, 2015 / Rules and Regulations

determine the risk weight of certain
investment funds, and the risk weight of
a subordinated tranche of any
investment instead of using the risk
weights assigned in § 702.104(c)(2). This
final rule incorporates the relevant
portions of §§ 324.43(e) and 324.53 of
FDIC’s regulations, which were
incorporated only by reference in the
Second Proposal, into new appendix A
of part 702 of NCUA’s regulations. To
incorporate the text of FDIC’s
regulations into NCUA’s regulations, the
Board had to make some minor
conforming changes to the proposed
language incorporated into appendix A.
No substantive changes to the proposed
methodology for calculating the grossup and look-through approaches are
intended.
Accordingly, Appendix A to part 702
of this final rule provides that instead of
using the risk weights assigned in
§ 702.104(c)(2), a credit union may
determine the risk weight of certain
investment funds, and the risk weight of
non-subordinated or subordinated
tranches of any investment as provided
below.
(a) Gross Up-Approach

mstockstill on DSK4VPTVN1PROD with RULES2

(a)(1) Applicability
Paragraph (a)(1) of appendix A
provides that: Section
702.104(c)(3)(iii)(A) of part 702 provides
that, a credit union may use the grossup approach in this appendix to
determine the risk weight of the
carrying value of non-subordinated or
subordinated tranches of any
investment.
(a)(2) Calculation
Paragraph (a)(2) of appendix A
provides, to use the gross-up approach,
a credit union must calculate the
following four inputs:
• Pro rata share, which is the par
value of the credit union’s exposure as
a percent of the par value of the tranche
in which the securitization exposure
resides;
• Enhanced amount, which is the par
value of tranches that are more senior to
the tranche in which the credit union’s
securitization resides;
• Exposure amount, which is the
amortized cost for investments
classified as held-to-maturity and
available-for-sale, and the fair value for
trading securities; and
• Risk weight, which is the weightedaverage risk weight of underlying
exposures of the securitization as
calculated under this appendix.
(a)(3) Credit Equivalent Amount
Paragraph (a)(3) of appendix A
provides that the ‘‘credit equivalent

VerDate Sep<11>2014

22:13 Oct 28, 2015

Jkt 238001

amount’’ of a securitization exposure
under this part equals the sum of:
• The exposure amount of the credit
union’s exposure; and
• The pro rata share multiplied by the
enhanced amount, each calculated in
accordance with paragraph (a)(2) of
appendix A to part 702.
(a)(4) Risk-Weighted Assets
Paragraph (a)(4) of appendix A
provides, to calculate risk-weighted
assets for a securitization exposure
under the gross-up approach, a credit
union must apply the risk weight
required under paragraph (a)(2) of
appendix A to part 702 to the credit
equivalent amount calculated in
paragraph (a)(3) of appendix A to part
702.
(a)(5) Securitization Exposure Defined
Paragraph (a)(5) of appendix A
provides, for purposes of paragraph (a)
of appendix A to part 702,
‘‘securitization exposure’’ means:
• A credit exposure that arises from a
securitization; or
• An exposure that directly or
indirectly references a securitization
exposure described in first element of
this definition.
(a)(6) Securitization Defined
Paragraph (a)(6) of appendix A
provides, for purposes of paragraph (a)
of appendix A to part 702,
‘‘securitization’’ means a transaction in
which:
• The credit risk associated with the
underlying exposures has been
separated into at least two tranches
reflecting different levels of seniority;
• Performance of the securitization
exposures depends upon the
performance of the underlying
exposures; and
• All or substantially all of the
underlying exposures are financial
exposures (such as loans, receivables,
asset-backed securities, mortgagebacked securities, or other debt
securities).
(b) Look-Through Approaches
(b)(1) Applicability
Paragraph (b)(1) of appendix A
provides: Section 702.104(c)(3)(iii)(B)
provides that, a credit union may use
one of the look-through approaches in
appendix A to part 702 to determine the
risk weight of the exposure amount of
any investment fund, or the holding of
separate account insurance.
(b)(2) Full Look-Through Approach
(b)(2)(i) General
Paragraph (b)(2)(i) of appendix A
provides, a credit union that is able to

PO 00000

Frm 00076

Fmt 4701

Sfmt 4700

calculate a risk-weighted asset amount
for its proportional ownership share of
each exposure held by the investment
fund may set the risk-weighted asset
amount of the credit union’s exposure to
the fund equal to the product of:
• The aggregate risk-weighted asset
amounts of the exposures held by the
fund as if they were held directly by the
credit union; and
• The credit union’s proportional
ownership share of the fund.
(b)(2)(ii) Holding Report
Paragraph (b)(2)(ii) of appendix A
provides, to calculate the risk-weighted
amount under paragraph (b)(2)(i) of
appendix A, a credit union should:
• Use the most recently issued
investment fund holding report; and
• Use an investment fund holding
report that reflects holdings that are not
older than six months from the quarterend effective date (as defined in
§ 702.101(c)(1) of part 702).
(b)(3) Simple Modified Look-Through
Approach
Paragraph (b)(3) of appendix A
provides that under the simple modified
look-through approach, the riskweighted asset amount for a credit
union’s exposure to an investment fund
equals the exposure amount multiplied
by the highest risk weight that applies
to any exposure the fund is permitted to
hold under the prospectus, partnership
agreement, or similar agreement that
defines the fund’s permissible
investments (excluding derivative
contracts that are used for hedging
rather than speculative purposes and
that do not constitute a material portion
of the fund’s exposures).
(b)(4) Alternative Modified LookThrough Approach
Paragraph (b)(4) of appendix A
provides that under the alternative
modified look-through approach, a
credit union may assign the credit
union’s exposure amount to an
investment fund on a pro rata basis to
different risk weight categories under
subpart A of part 702 based on the
investment limits in the fund’s
prospectus, partnership agreement, or
similar contract that defines the fund’s
permissible investments. The paragraph
provides further that the risk-weighted
asset amount for the credit union’s
exposure to the investment fund equals
the sum of each portion of the exposure
amount assigned to an exposure type
multiplied by the applicable risk weight
under subpart A of this part. The
paragraph also notes that if the sum of
the investment limits for all exposure
types within the fund exceeds 100

E:\FR\FM\29OCR2.SGM

29OCR2

Federal Register / Vol. 80, No. 209 / Thursday, October 29, 2015 / Rules and Regulations
percent, the credit union must assume
that the fund invests to the maximum
extent permitted under its investment
limits in the exposure type with the
highest applicable risk weight under
subpart A of this part and continues to
make investments in order of the
exposure type with the next highest
applicable risk weight under subpart A
of this part until the maximum total
investment level is reached. The
paragraph also provides that if more
than one exposure type applies to an
exposure, the credit union must use the
highest applicable risk weight. Finally,
the paragraph provides that a credit
union may exclude derivative contracts
held by the fund that are used for
hedging rather than for speculative
purposes and do not constitute a
material portion of the fund’s exposures.
D. Other Conforming Changes to the
Regulations
The Board received only one
comment on this section. The
commenter expressed concern that the
references to the risk weightings for
member business loans under § 723.1(d)
and (e) were confusing and should be
eliminated because of the proposed
rule’s use of the term ‘‘commercial
loan,’’ instead of member business
loans, in assigning risk weights. The
Board generally agrees with the
commenter’s concerns and has revised
§ 723.1(d) and (e) to remove the words
referring to the risk-weighting standards
for member business loans.
Accordingly, consistent with the Second
Proposal, this final rule makes minor
conforming amendments to §§ 700.2,
701.21, 701.23, 701.34, 703.14, 713.6,
723.1, 723.7, 747.2001, 747.2002, and
747.2003.
V. Effective Date
How much time would credit unions
have to implement these new
requirements?

mstockstill on DSK4VPTVN1PROD with RULES2

In the preamble to the Second
Proposal, the Board proposed an
effective date of January 1, 2019 to
provide credit unions and NCUA a
lengthy implementation period 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.
Public Comments on the Second
Proposal
The Board received many comments
regarding the proposed effective date of
the final rule. Several commenters
suggested that given the significant
operational implications for both credit

VerDate Sep<11>2014

22:13 Oct 28, 2015

Jkt 238001

unions and the NCUA, a 2019 effective
date is appropriate. Those commenters
suggested the proposed effective date
would allow credit unions to adjust
their balance sheets and strategic plans
to achieve a well-capitalized standard
under the rule without disrupting
member products and services.
Commenters also noted that the
proposed effective date aligns with the
implementation timeframe of the Other
Banking Agencies and, thus, would
avoid creating a competitive
disadvantage across competing financial
services entities.
A substantial number of other
commenters, however, requested that
the effective date be delayed until 2021
to coincide with refunds the
commenters expect to receive from the
Corporate Stabilization Fund. The
commenters suggested the refunds will
be important to those credit unions that
will need to increase capital levels in
order to comply with the new
regulation.
Other commenters argued that the
proposed timeframe was insufficient
given the significance of the impact of
the proposed requirements and the
length of time it would take credit
unions to adjust their business
strategies, portfolios and capital to best
position themselves relative to the rule.
Commenters complained the task would
be burdensome for credit unions given
their limited options for raising capital
when compared to banks, which were
afforded seven years to fully implement
BASEL III. Accordingly, those
commenters recommended various
extended implementation periods
ranging from five years to seven years,
or phase-in periods over a similar
timeframe.
One commenter speculated that
extending the implementation until
2019 would create a dual standard for
credit unions near threshold levels. The
commenter asked: What measure should
be the plan for the coming 2–3 years?
The commenter acknowledged that for
some credit unions, the change will
result in better risk-based capital levels
than under the current rule. But the
commenter argued that fixing the
current capital levels under rules being
phased out could cause real harm to
memberships and credit union health.
Several commenters noted that the
Financial Accounting Standards Board
(FASB) plans to replace the current
credit impairment model with a current
expected credit loss model. Commenters
suggested further that any final rule
issued by FASB will require NCUA and
FASB harmonization with respect to
forecasting models utilized by credit
unions to reduce conflicts between

PO 00000

Frm 00077

Fmt 4701

Sfmt 4700

66701

examination guidance. Accordingly,
commenters recommended that the
NCUA Board delay implementation of
any final risk-based capital rule until
the final FASB rule has been fully
implemented by credit unions.
One commenter recommended that if
IRR, access to additional supplemental
forms of capital, and risk-based share
insurance premium changes are likely
in the near future, the Board should
delay finalization and implementation
of the proposed rule until a
comprehensive analysis can be
conducted to ensure an integrated,
aligned approach to risk-based capital.
The commenter contended that
addressing interest rate risk,
supplemental capital, risk-based share
insurance premiums and risk-based
capital in silos will not create the most
efficient and effective solution.
Discussion
The proposed January 1, 2019
effective date provides credit unions
with more than three years to ramp up
implementation, which should be more
than sufficient time to make the
necessary adjustments to systems and
operations before the effective date of
this final rule. In addition, as noted
above, the effective date generally
coincides with the full phase-in of
FDIC’s capital regulations. In response
to commenters who asked the Board to
phase in the implementation, the Board
found that phasing in the new capital
rules for credit unions would add
additional complexity with minimal
benefit.
Further, it would be inappropriate to
delay implementation due to potential
changes in accounting that may be
forthcoming, and the elimination of the
cap on the amount of the ALLL will
reduce the impact of the announced
change in maintaining the ALLL.
Accordingly, this final rule will
become effective on January 1, 2019.
VI. Impact of This Final Rule
This final rule will apply to credit
unions with $100 million or greater in
total assets. As of December 31, 2014,
there were 1,489 credit unions (23.7
percent of all credit unions) with assets
of $100 million or greater. As a result,
approximately 76 percent of all credit
unions will be exempt from the riskbased capital requirement.200 A net of
16 complex credit unions with total
assets of $9.8 billion would have a
200 The proposed risk-based capital requirements
applied 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.
There were 1,872 FDIC-insured banks with assets
less than $100 million as of December 2014.

E:\FR\FM\29OCR2.SGM

29OCR2

66702

Federal Register / Vol. 80, No. 209 / Thursday, October 29, 2015 / Rules and Regulations

lower capital classification as a result
this rule with a capital shortfall of
approximately $67 million.201
Approximately 98.5 percent of all
complex credit unions will remain well

capitalized.202 The aggregate and
average RBC ratios for complex credit
unions are 17.9 and 19.2 percent
respectively.203 As shown in the table
below most complex credit unions will

have a risk-based capital ratio well in
excess of the 10 percent needed to be
well capitalized.

DISTRIBUTION OF NET WORTH RATIO AND FINAL RISK-BASED CAPITAL RATIO
Number of CUs

Less than well
capitalized

Well capitalized to
well +2%

Well capitalized
+2% to +3.5%

Well capitalized
+3.5% to +5%

Greater than well
capitalized +5%

Net Worth Ratio
RBC Ratio

<7%
<10%

7%–9%
10%–12%

9%–10.5%
12%–13.5%

10.5%–12%
13.5%–15%

>12%
>15%

Net Worth Ratio ...................................
Final RBC Ratio ...................................

14
23

mstockstill on DSK4VPTVN1PROD with RULES2

Public Comments on the Second
Proposal
The Board received a substantial
number of comments regarding NCUA’s
estimates of the impacts of the Second
Proposal. Most commenters who
mentioned the impacts of the proposal
suggested the rule would have negative
impacts on the credit union industry.
Numerous commenters speculated that
the proposal would unjustifiably slow
credit union growth in the future, and
that the funds used to meet the newly
proposed requirements could otherwise
be used to make loans to consumers or
small businesses, or be used in other
productive ways. Commenters also
speculated that the requirements in the
proposal would restrict credit union
lending to consumers by forcing credit
unions to maintain capital on their
books rather than lending to their
members. At least one commenter
recommended that the Board more
thoughtfully consider the actual market
effect on the credit union industry and
produce more reasonably calibrated risk
weights based on the cooperative nature
of credit unions. The commenter
recommended that the Board also
reconsider the value of concentration
escalators and provide empirical data
that reflect what actual additional risk is
created based on concentration of
certain asset categories. Other
commenters claimed the higher capital
levels that would be required under the
proposal would reduce the amount of
support, both monetary and operational,
that larger credit unions have
historically provided to their smaller
counterparts, which would put
additional strain on the finances and
operations of many smaller credit
unions.
201 In the second proposal using data as of
December 31, 2013, NCUA estimated less than 20
credit unions would experience a decline in their
capital classification with a capital shortfall of
$53.6 million.

VerDate Sep<11>2014

22:13 Oct 28, 2015

Jkt 238001

297
107

449
140

334
194

395
1,025

One credit union trade association
commenter speculated that under the
proposal, the number of credit unions
downgraded would more than double
during a downturn in the business
cycle. Under the commenter’s analysis,
45 credit unions would have been
downgraded during the most 2007–2009
financial crisis if this proposal had been
in place in 2009. According to the
commenter, of those 45 credit unions,
41 would be well capitalized today. The
commenter suggested that to have
avoided a downgrade, those credit
unions would have had to increase their
capital by $145 million, or an average of
$3.2 million per credit union. The
commenter stated that almost all of the
credit unions that would have been
downgraded (95 percent) are well
capitalized or adequately capitalized
today. The commenter claimed this
empirically proves that the proposal is
unnecessary and unduly burdensome,
as it would further strain the credit
union system during a financial
downturn. The commenter estimated
that, in order to satisfy the proposal’s
well capitalized threshold, credit unions
would need to hold at least an
additional $729 million. The commenter
estimated further that, to satisfy the
proposal’s adequately capitalized
threshold, credit unions would need to
hold at least an additional $260 million.
Another commenter argued that the
Board’s cost estimates failed to include
the one-time costs that would be
incurred by the entire credit union
industry in system changes, additional
reports, potential additional segregation
and segmentation of the balance sheet,
etc. in order to fill out the new Call
Report forms. The commenter
speculated that such costs will far

outweigh the costs that the Board has
identified in the proposal.
Yet another commenter maintained
that, according to the proposal, most
complex credit unions are currently
well capitalized under both the net
worth ratio and the proposed risk-based
capital ratio. The commenter calculated
that as of September 30, 2014, complex
credit unions had an average net worth
ratio of 10.7 percent and a risk-based
capital ratio of 19.3 percent, both well
in excess of guidelines identifying well
capitalized status. The commenter
suggested that only 19 complex credit
unions would fall from well capitalized
status under the proposal. Thus, the
commenter concluded that the costs
associated with the proposal seemed
excessive given how extremely well
capitalized the credit union industry is
today under current guidelines.
One credit union commenter
suggested that for the risk-based capital
requirement to be effective, it would
have to be more complex. The
commenter explained that this would
mean requiring more information on the
Call Report and adding new categories
of loans in the final rule. Another credit
union commenter supported making the
risk-based capital framework as
complicated as it needs to be to more
accurately reflect the unique needs and
structure of the credit union industry.
Several commenters noted that in
March 2015, FASB announced
expectations to finalize the standard for
timely financial reporting of credit
losses in the third quarter of 2015.
Commenters recommended the Board
consider the possible effects of the
FASB proposal in relation to NCUA’s
risk-based capital regulations and
remove any duplicative regulatory
burdens that may be created.

202 Of the 1,489 impacted credit unions, only 23,
or 1.54 percent, would have less than the 10 percent
risk-based capital requirement to be well
capitalized. Of these, seven have net worth ratios
less than 7 percent and therefore are already
categorized as less than well capitalized.

203 In the second proposal, based on December
2013 Call Report data, NCUA estimated the
aggregate average risk-based capital ratio would be
18.2 percent with an average risk-based capital ratio
of 19.3 percent.

PO 00000

Frm 00078

Fmt 4701

Sfmt 4700

E:\FR\FM\29OCR2.SGM

29OCR2

Federal Register / Vol. 80, No. 209 / Thursday, October 29, 2015 / Rules and Regulations
A significant number of commenters
requested that the Board minimize the
burden on credit unions of expanding
the Call Report. Several commenters
suggested the Board consider an
approach where credit unions would
have the option of providing the
additional, detailed information
required under the proposal. One
commenter suggested such an approach
could be accomplished by including
additional optional data fields within
the Call Report, similar to the approach
used by FDIC. The commenter suggested
further that any changes required of a
credit union require the expenditure of
resources, and in a time when many
credit unions are struggling to comply
with existing rules from NCUA and
other regulators, the Board should
consider any alternatives that will
reduce the burden of this rule on credit
unions. Another commenter contended
that NCUA’s current estimate of the
public burden of collecting information
for the Call Report grossly understates
the actual amount of time required. The
commenter suggested that the variety of
data needed to generate a quarterly Call
Report takes employees from some
credit unions 66 hours (10 times
NCUA’s current 6.6 hour estimate). The
commenter recommended the Board
consider the time and resources
dedicated to producing the additional
Call Report data required by the

proposal and focus on minimizing that
burden and impact to credit unions. At
least one commenter recommended that
any Call Report updates required by this
rulemaking be made available to credit
unions at least six months before the
effective date of the final rule.
Discussion
The Board has considered the
comments received and recognizes that
unduly high minimum regulatory
capital requirements and unnecessary
burdens could lead to less-than-optimal
outcomes. Thus, as discussed
throughout this preamble and in the
Paperwork Reduction Act section to
follow, the Board has made appropriate
efforts to target the impacts and reduce
the burdens of this final rule. This final
rule only targets outlier credit unions
with insufficient capital relative to their
risk. The final rule meets Congress’
express purpose of prompt corrective
action ‘‘. . . to resolve the problems of
insured credit unions at the least
possible long-term cost to the Fund,’’ 204
by establishing a risk-based capital
requirement which will reduce the
likelihood that a credit union will
become undercapitalized and eventually
fail at a cost to the Fund.
The Board’s elimination of the 1.25
percent of risk-assets cap on the amount
of ALLL in the risk-based capital ratio
numerator will reduce the impact of the

66703

risk-based capital ratio during economic
downturns when credit unions are more
likely to be funding higher levels of loan
losses. Removal of the ALLL cap will
also mitigate concerns with FASB’s
proposed related changes to GAAP.205 A
reduction in capital ratios during
economic downturns is a normal result
for both the risk-based capital ratio and
the net worth ratio. The capital
adequacy requirement will enhance a
credit union’s ability to measure and
plan for economic downturns.
Sound capital levels are vital to the
long-term health of all financial
institutions. Credit unions are already
expected to incorporate into their
business models and strategic plans
provisions for maintaining prudent
levels of capital. This final rule ensures
minimum regulatory capital levels for
complex credit unions will be more
accurately correlated to risk. The final
rule achieves a reasonable balance
between requiring credit unions posing
an elevated risk to hold more capital,
while not overburdening lower-risk
credit unions.
As indicated in the table below,
according to the impact measure used in
the Second Proposal, 72 complex credit
unions would have had higher capital
requirements due to the risk-based
capital ratio requirement based on
December 31, 2014 data.206

DISTRIBUTION OF RISK-BASED LEVERAGE EQUIVALENT RATIO 207
RBC ratio—leverage
equivalent

<6%

6–7.5%

7.5–8.5%

8.5–9.5%

9.5–11%

>11%

Average

Number of CUs ............

816

601

57

11

4

0

5.90%

Using another more conservative
measure developed based on
suggestions received from commenters,
NCUA identified 308 credit unions, or
20 percent of all complex credit unions,
that are likely to have a higher
minimum capital requirement under the
risk-based capital ratio requirement
being adopted under this final rule.208
While up to 20 percent of credit unions
are likely to have the risk-based capital

204 12

U.S.C. 1790d(a)(1).
Financial Standards Accounting Board,
Proposed Accounting Standards Update, Financial
Instruments—Credit Losses, Subtopic 825–15 (Dec.
20, 2012).
206 The method used in the Second Proposal was
calculated by taking 10 percent of estimated risk
assets divided by total assets with results exceeding
7.5 percent indicating the risk-based capital
requirement is the higher minimum-capital
requirement.

mstockstill on DSK4VPTVN1PROD with RULES2

205 See

VerDate Sep<11>2014

22:13 Oct 28, 2015

Jkt 238001

ratio as the binding constraint, only 20
of those credit unions have an estimated
risk-based capital ratio below 10
percent.209
NCUA’s latest analysis concludes it is
reasonable for the risk-based capital
ratio requirement to be the primary
determiner of the capital requirement
for about 20 percent of complex credit
unions because these 308 credit unions
have an average risk-weighted assets to
total assets ratio of 72 percent—which is

significantly higher than the 59 percent
average ratio for all complex credit
unions.
As noted earlier, concentration risk is
a material risk addressed in this final
rule. Based on December 31, 2014 Call
Report data, if this final rule were
effective today, NCUA estimates that the
additional capital required for
concentration risk would have the
following impact:

207 This computation calculates the amount of
capital required by multiplying the estimated
proposed risk 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 riskbased capital provisions provide for a broader
definition of capital included in the risk-based
capital ratio 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.

208 Calculated based on a positive result to the
following formula: ((risk-weighted assets times 10
percent) ¥ allowance for loan losses ¥ equity
acquired in merger ¥ total adjusted retained
earnings acquired through business combinations +
NCUA share insurance capitalization deposit +
goodwill + identifiable intangible assets) ¥ (total
assets times 7 percent).
209 Also, given the new treatment of nonsignificant equity exposures, which could not be
estimated due to existing data limitations, this
impact may be further reduced.

PO 00000

Frm 00079

Fmt 4701

Sfmt 4700

E:\FR\FM\29OCR2.SGM

29OCR2

66704

Federal Register / Vol. 80, No. 209 / Thursday, October 29, 2015 / Rules and Regulations
Number of credit
unions with total
assets greater than
$100 million as of
12/31/2014

Concentration threshold

First-Lien Residential Real Estate (>35% of Total Assets) .................................................................
Junior-Lien Residential Real Estate (>20% of Total Assets) ..............................................................
Commercial Loans (using MBLs as a proxy) 210 (>50% of Total Assets) ..........................................

The Board considered the impact of
the individual data items necessary to
compute the risk-based capital ratio.
Many commenters’ requests for further
stratification of risk weights were
determined to create a data burden in
excess of the benefits. All revisions to
the Call Report will be subject to the
publication and opportunity for
comment process in accordance with
the requirements of the Paperwork
Reduction Act of 1994 to obtain a valid
control number from the U.S. Office of
Management and Budget (OMB).
Interested parties are invited to submit
written comments to each notice of
information collection that NCUA will
submit to OMB for review.
VII. Regulatory Procedures
Regulatory Flexibility Act
The Regulatory Flexibility Act (RFA)
generally requires that, in connection
with a final rulemaking, an agency
prepare and make available a final
regulatory flexibility analysis that
describes the impact of the final 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 211) and publishes its
certification and a short, explanatory
statement in the Federal Register
together with the rule.

mstockstill on DSK4VPTVN1PROD with RULES2

Public Comments on the Second
Proposal
A small credit union commenter
suggested that while credit unions with
less than $100 million in assets are not
subject to the requirements of this
proposal, there is great apprehension
among small credit unions that NCUA
examiners will require them to meet the
210 Using MBL data as the current Call Report
does not capture ‘‘commercial loan’’ data as defined
in this final rule.
211 On September 24, 2015, the Board published
Interpretative Ruling and Policy Statement 15–1,
which amends the definition of small credit unions
for purposes of the RFA to credit unions with assets
of less than $100 million. 80 FR 57512 (Sept. 24,
2015). This change, however, does not take effect
until November 23, 2015, which is after the date
this rule is scheduled to be voted on by the Board.

VerDate Sep<11>2014

22:13 Oct 28, 2015

Jkt 238001

basic requirements in the risk-based
capital rule.
Several commenters contended that
NCUA’s current estimate of the public
burden of collecting information for the
Call Report grossly understates the
actual amount of time required. At least
one commenter suggested that the
variety of data needed to generate a
quarterly Call Report takes employees
from some credit unions 66 hours (10
times NCUA’s estimate of 6.6 hours).
Discussion
The amendments this final rule makes
to part 702 primarily affect complex
credit unions, which are those with
$100 million or more in assets. The
revised risk-based capital requirement
and capital adequacy plan under this
final rule do not apply to small credit
unions.
NCUA recognizes that because many
commenters suggested NCUA collect
more granular data for credit union Call
Reports, small credit unions with assets
less than $50 million could be affected
if they are asked to assemble and report
additional data. NCUA, however, will
make every reasonable effort to redesign
the Call Report system so that all credit
unions with $100 million or less in
assets are not unnecessarily burdened
by the data requirements that apply to
complex credit unions. NCUA plans to
propose information collection changes
to reflect the new requirements of this
final rule in the future, and publish the
regulatory reporting requirements
separately—including the steps NCUA
has taken to minimize the impact of the
reporting burden on small credit
unions—for comment.
In addition, this final rule makes a
number of minor changes to current part
702 of NCUA’s regulations including:
• Part 702—Reorganizing and
renumbering part 702, including
sections of the part applicable to small
credit unions.
• Section 702.2—Making minor
amendments to certain definitions
applicable to all credit unions under
part 702.
• Section 702.111(g)(4) &
702.206(g)(3)—Making minor
clarifications regarding the submission
of multiple unapproved NWRPs or
RBPs.

PO 00000

Frm 00080

Fmt 4701

Sfmt 4700

Percentage of 1,489
credit unions with
total assets greater
than $100 million

135
57
12

9.1
3.8
0.8

• Sections 702.112 & 702.208—
Eliminating the regular reserve account
requirement for all credit unions.
• Sections 702.113(d) & 702.209(d)—
Making minor amendments to the
treatment of loan and lease losses.
• Section 702.114 & 702.210—Making
minor amendments to part 702
regarding the payments of dividends for
all credit unions.
• Section 702.201—Making minor
revisions to the definition of ‘‘new
credit union.’’
NCUA believes the one time burden
associated with the policy review and
revisions related to these amended
provisions will be one hour for small
credit unions. Accordingly, the effects
of this final rule on small credit unions
are minor.
Based on the above assessment, the
Board certifies that this final rule 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.212 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 changes
made to part 702 by this final rule will
impose new information collection
requirements.
NCUA determined that the proposed
changes to part 702 would have costs
associated with updating internal
policies, and updating data collection
and reporting systems for preparing Call
Reports. Based on December 2013 Call
Report data, NCUA in the Second
Proposal estimated that all 6,554 credit
unions would have to amend their
procedures and systems for preparing
Call Reports. NCUA proposed
addressing the costs and providing
notice of the particular changes that
would be made in other collections,
such as the NCUA Call Report and
Profile as part of its regular amendments
separate from this proposed rule.
212 44

E:\FR\FM\29OCR2.SGM

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

29OCR2

Federal Register / Vol. 80, No. 209 / Thursday, October 29, 2015 / Rules and Regulations

mstockstill on DSK4VPTVN1PROD with RULES2

NCUA also estimated that
approximately 21.5 percent, or 1,455
credit unions, would be defined as
‘‘complex’’ under the proposed rule and
would have additional data collection
requirements related to the new riskbased capital requirements.
NCUA’s Total Estimated One-Time
Costs of the Second Proposal:
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
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.
Public Comments on the Second
Proposal
A significant number of commenters
maintained that the proposal did not
incorporate the estimated burden for
establishing a comprehensive written
strategy for maintaining an appropriate
level of capital and other changes to a
complex credit union’s operations other
than data collection. Commenters
suggested the effects of the proposal
would be a greater burden for complex
credit unions upon the implementation
year and for ongoing years. Commenters
noted that NCUA’s final rule on Capital
Planning and Stress Testing estimated
750 hours of paperwork burden in the
initial year and 250 hours in subsequent
years, and suggested it was unclear how
the requirements of the Second Proposal
would differ from the final rule on
Capital Planning and Stress Testing in
terms of burden. Using the cost estimate
previously utilized by NCUA for the
final rule on Capital Planning and Stress
Testing, one commenter suggested a
more reasonable estimate for this
proposal would be $23,926 per credit
union or $34.8 million to the industry
for the initial year of the final RBC rule.
The commenter also suggested there
would be an ongoing annual cost of
$7,975 per credit union or $11.6 million
to the industry, which, over a five-year
period, would have a cumulative cost to
the industry of approximately $81.2
million.
In addition, several commenters
contended that NCUA’s current estimate
of the public burden of collecting
information for the Call Report grossly
understates the actual amount of time
required. At least one commenter
suggested that the variety of data needed
to generate a quarterly Call Report takes
employees from some credit unions 66
hours (10 times NCUA’s estimate 6.6
hours).

VerDate Sep<11>2014

22:13 Oct 28, 2015

Jkt 238001

Discussion
The final changes will result in some
costs for complex credit unions
associated with updating internal
policies, including a comprehensive
strategy for maintaining an appropriate
level of capital, the cost estimates for
which are discussed in more detail
below. Further, there will be marginal
costs associated with updating data
collection and reporting systems for the
NCUA Call Reports. The changes to the
Call Reporting requirements, however,
will be handled as part of NCUA’s
regular Call Report updates separately
from this proposed rule. The
information collection requirements for
the Call Report are approved by OMB
under Control No. 3133–004.
In response to commenters who
believe all complex credit unions will
need substantial time to establish and
maintain a comprehensive written
capital strategy, NCUA field staff report
that many well-managed complex credit
unions already have comprehensive
strategies for maintaining appropriate
levels of capital. Further, commenters
compared the burden of the Capital
Planning and Stress Testing hours;
however, for the vast majority of
complex credit unions, the written
capital strategy will not necessarily
approach the complexity and more
rigorous requirements associated with
stress testing.
NCUA has updated its PRA analysis
based on December 2014 Call Report
data. Again, NCUA will make every
effort to redesign the Call Report system
so that small credit unions are not
unnecessarily burdened by the data
requirements that apply to complex
credit unions.
The final rule contains minor changes
to §§ 702.2, 702.111(g)(4), 702.206(g)(3),
702.112, 702.208, 702.113(d),
702.209(d), 702.114, 702.210, and
702.201 for which all credit union’s
should be aware. The information
collection requirements contained in
702.111(g)(4) and 702.206(g)(3) are
generally related to information
collected under OMB Control No. 3133–
0154.
NCUA estimates that 1,489 credit
unions defined as ‘‘complex’’ will have
additional data collection requirements
related to the new risk-based capital
requirements. This slight increase from
1,455 credit unions in the Second
Proposal occurred as some credit unions
that had assets of less than $100 million
grew in size and now meet the
definition of ‘‘complex.’’
As a result, NCUA’s Total Estimated
One-Time Costs based on the December

PO 00000

Frm 00081

Fmt 4701

Sfmt 4700

66705

2014 Call Report data have changed
slightly:
One-time burden for policy review
and revision:
• 40 hours times 1,489 complex
credit unions. The total one-time cost
for complex credit unions totals 59,560
hours or $1,898,174, an average of
$1,275 per credit union.
• 1 hour times 4,784 non-complex
credit unions. The total one-time cost
for credit unions with $100 million or
less in assets totals 4,784 hours, for a
total estimated cost of $152,562.
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
final 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 final rule.
Assessment of Federal Regulations and
Policies on Families
NCUA has determined that this final
rule will not affect family well-being
within the meaning of section 654 of the
Treasury and General Government
Appropriations Act, 1999, Public Law
105–277, 112 Stat. 2681 (1998).
List of Subjects
12 CFR Part 700
Credit unions.
12 CFR Part 701
Credit, Credit unions, Insurance,
Reporting and recordkeeping
requirements.

E:\FR\FM\29OCR2.SGM

29OCR2

66706

Federal Register / Vol. 80, No. 209 / Thursday, October 29, 2015 / Rules and Regulations

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.
12 CFR Part 747
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 October 15, 2015.
Gerard Poliquin,
Secretary of the Board.

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
1. The authority citation for part 700
continues to read as follows:
Authority: 12 U.S.C. 1752, 1757(6), 1766.
[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
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’’.

mstockstill on DSK4VPTVN1PROD with RULES2

■

§ 701.23

[Amended]

5. Amend § 701.23(b)(2) 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)

■

VerDate Sep<11>2014

22:13 Oct 28, 2015

Jkt 238001

§ 701.34

[Amended]

6. 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’’.
■ c. 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)’’.
■
■

PART 702—CAPITAL ADEQUACY
7. The authority citation for part 702
continues to read as follows:

■

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

8. Revise §§ 702.101, 702.202, and
subparts A and B to read as follows:

■

Sec.
702.1 Authority, purpose, scope, and other
supervisory authority.
702.2 Definitions.

■

§ 700.2

requirement under part 702 of this
chapter, has remained ‘well capitalized’
for the six (6) immediately preceding
quarters after applying the applicable
RBNW requirement’’.

Subpart A—Prompt Corrective Action
702.101 Capital measures, capital adequacy,
effective date of classification, and notice
to NCUA.
702.102 Capital classification.
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 undercapialized 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 B—Alternative Prompt Corrective
Action for New Credit Unions
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

PO 00000

Frm 00082

Fmt 4701

Sfmt 4700

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 A—Prompt Corrective Action
§ 702.1 Authority, purpose, scope, and
other supervisory authority.

(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
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

E:\FR\FM\29OCR2.SGM

29OCR2

Federal Register / Vol. 80, No. 209 / Thursday, October 29, 2015 / Rules and Regulations
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.

mstockstill on DSK4VPTVN1PROD with RULES2

§ 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.
Appropriate state official means the
state commission, board or other
supervisory authority that chartered the
affected 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 the value of the
asset or liability 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.
Charitable donation account means
an account that satisfies all of the
conditions in § 721.3(b)(2)(i), (b)(2)(ii),
and (b)(2)(v) of this chapter.
Commercial loan means any loan, line
of credit, or letter of credit (including
any unfunded commitments) 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, purchase
or sell assets, enter into a borrowing

VerDate Sep<11>2014

22:13 Oct 28, 2015

Jkt 238001

agreement, or enter into a financial
transaction.
Consumer loan means a loan for
household, family, or other personal
expenditures, including any loans that,
at origination, are wholly or
substantially 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 one or more vehicles to be
part of a fleet of 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.
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

PO 00000

Frm 00083

Fmt 4701

Sfmt 4700

66707

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 or five business days.
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
enter into derivative transactions.
Excluded goodwill means the
outstanding balance, maintained in
accordance with GAAP, of any goodwill
originating from a supervisory merger or
combination that was completed on or
before December 28, 2015. This term
and definition expire on January 1,
2029.
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 on or before December
28, 2015. This term and definition
expire on January 1, 2029.
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.

E:\FR\FM\29OCR2.SGM

29OCR2

mstockstill on DSK4VPTVN1PROD with RULES2

66708

Federal Register / Vol. 80, No. 209 / Thursday, October 29, 2015 / Rules and Regulations

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,
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

VerDate Sep<11>2014

22:13 Oct 28, 2015

Jkt 238001

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.
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 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.
Loan to a CUSO means the
outstanding balance of any loan from a
credit union to a CUSO as recorded on

PO 00000

Frm 00084

Fmt 4701

Sfmt 4700

the statement of financial condition in
accordance with GAAP.
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
depository institution receives fees for
managing the credit risk of the loans.
The credit risk must be shared between
the depository institution 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

E:\FR\FM\29OCR2.SGM

29OCR2

mstockstill on DSK4VPTVN1PROD with RULES2

Federal Register / Vol. 80, No. 209 / Thursday, October 29, 2015 / Rules and Regulations
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.
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 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.
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.
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.

VerDate Sep<11>2014

22:13 Oct 28, 2015

Jkt 238001

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.
Part 703 compliant investment fund
means an investment fund that is
restricted to holding only investments
that are permissible under § 703.14(c) of
this chapter.
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
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

PO 00000

Frm 00085

Fmt 4701

Sfmt 4700

66709

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.
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

E:\FR\FM\29OCR2.SGM

29OCR2

mstockstill on DSK4VPTVN1PROD with RULES2

66710

Federal Register / Vol. 80, No. 209 / Thursday, October 29, 2015 / Rules and Regulations

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, 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
a junior claim on the underlying
collateral or assets to other investments
in the same issuance. An investment
that does not have a junior claim to
other investments in the same issuance
on the underlying collateral or assets is
non-subordinated. A Security that is
junior only to money market eligible
securities in the same issuance is also
non-subordinated.
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).

VerDate Sep<11>2014

22:13 Oct 28, 2015

Jkt 238001

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. U.S. Government agency
includes NCUA.

(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
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.

Subpart A—Prompt Corrective Action

§ 702.102

§ 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.
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).

PO 00000

Frm 00086

Fmt 4701

Sfmt 4700

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.

E:\FR\FM\29OCR2.SGM

29OCR2

Federal Register / Vol. 80, No. 209 / Thursday, October 29, 2015 / Rules and Regulations
(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

66711

(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.

mstockstill on DSK4VPTVN1PROD with RULES2

TABLE 1 TO § 702.102—CAPITAL CATEGORIES
A credit union’s capital
classification is . . .

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
§ 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.

VerDate Sep<11>2014

22:13 Oct 28, 2015

Jkt 238001

Risk-based capital ratio
also applicable if complex

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.

§ 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
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.
(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

PO 00000

Frm 00087

Fmt 4701

Sfmt 4700

(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:
(1) Cash, currency and coin, including
vault, automatic teller machine, and
teller cash.
(2) share-secured loans, where the
shares securing the loan are on deposit
with the credit union.

E:\FR\FM\29OCR2.SGM

29OCR2

mstockstill on DSK4VPTVN1PROD with RULES2

66712

Federal Register / Vol. 80, No. 209 / Thursday, October 29, 2015 / Rules and Regulations

(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 interest-only mortgagebacked-security STRIPS.
(2) Federal Reserve Bank stock and
Central Liquidity Facility stock.
(C) Insured balances due from FDICinsured depositories or federally
insured credit unions.
(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
interest-only mortgage-backed-security
STRIPS.
(2) A non-subordinated obligation of a
GSE other than an equity exposure or
preferred stock, excluding interest-only
GSE mortgage-backed-security STRIPS.
(3) Securities issued by PSEs that
represent general obligation securities.
(4) Part 703 compliant investment
funds that are restricted to holding only
investments that qualify for a zero or 20
percent risk-weight under this section.
(5) Federal Home Loan Bank stock.
(C) The balances due from Federal
Home Loan Banks.
(D) The balance of share-secured
loans, where the shares securing the
loan are on deposit with another
depository institution.
(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 interest-only
mortgage-backed security STRIPS.
(iv) Category 4—75 percent risk
weight. A credit union must assign a 75

VerDate Sep<11>2014

22:13 Oct 28, 2015

Jkt 238001

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:
(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) Interest-only mortgage-backed
security STRIPS.
(3) Part 703 compliant investment
funds, with the option to use the lookthrough approaches in paragraph
(c)(3)(iii)(B) 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.
(8) Non-subordinated tranches of any
investment, with the option to use the
gross-up approach in paragraph
(c)(3)(iii)(A) of this section.
(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:

PO 00000

Frm 00088

Fmt 4701

Sfmt 4700

(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
investments, other than a CUSO
investment.
(B) Investment funds that do not meet
the requirements under § 703.14(c) of
this chapter, with the option to use the
look-through approaches in paragraph
(c)(3)(iii)(B) of this section.
(C) Separate account insurance, with
the option to use the look-through
approaches in paragraph (c)(3)(iii)(B) 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)(iii)(A) of this section.
(3) Alternative risk weights for certain
on-balance sheet assets—(i) Nonsignificant equity exposures.— (A)
General. Notwithstanding the risk
weights assigned in paragraph (c)(2) of
this section, a credit union must assign
a 100 percent risk weight to nonsignificant equity exposures.
(B) Determination of non-significant
equity exposures. A credit union has
non-significant equity exposures if the
aggregate amount of its equity exposures
does not exceed 10 percent of the sum
of the credit union’s capital elements of
the risk-based capital ratio numerator
(as defined under paragraph (b)(1) of
this section).
(C) Determination of the aggregate
amount of equity exposures. When
determining the aggregate amount of its
equity exposures, a credit union must
include the total amounts (as recorded
on the statement of financial condition
in accordance with GAAP) of the
following:
(1) Equity investments in CUSOs,
(2) Perpetual contributed capital at
corporate credit unions,
(3) Nonperpetual capital at corporate
credit unions, and
(4) Equity investments subject to a
risk weight in excess of 100 percent.
(ii) Charitable donation accounts.
Notwithstanding the risk weights

E:\FR\FM\29OCR2.SGM

29OCR2

mstockstill on DSK4VPTVN1PROD with RULES2

Federal Register / Vol. 80, No. 209 / Thursday, October 29, 2015 / Rules and Regulations
assigned in paragraph (c)(2) of this
section, a credit union may assign a 100
percent risk weight to a charitable
donation account.
(iii) Alternative approaches.
Notwithstanding the risk weights
assigned in paragraph (c)(2) of this
section, a credit union may determine
the risk weight of investment funds, and
non-subordinated or subordinated
tranches of any investment as follows:
(A) Gross-up approach. A credit
union may use the gross-up approach
under appendix A of this part to
determine the risk weight of the
carrying value of non-subordinated or
subordinated tranches of any
investment.
(B) Look-through approaches. A credit
union may use one of the look-through
approaches under appendix A of this
part to determine the risk weight of the
exposure amount of any investment
funds, the holdings of separate account
insurance, or both.
(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:
(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

VerDate Sep<11>2014

22:13 Oct 28, 2015

Jkt 238001

amount to any derivative contracts as
determined under § 702.105.
§ 702.105

Derivative contracts.

(a) OTC interest rate derivative
contracts—(1) Exposure amount—(i)
Single OTC interest rate derivative
contract. Except as modified by
paragraph (a)(2) of this section, the
exposure amount for a single OTC
interest rate derivative contract that is
not subject to a qualifying master
netting agreement is equal to the sum of
the credit union’s current credit
exposure and potential future credit
exposure (PFE) on the OTC interest rate
derivative contract.
(A) Current credit exposure. The
current credit exposure for a single OTC
interest rate derivative contract is the
greater of the fair value of the OTC
interest rate derivative contract or zero.
(B) PFE. (1) The PFE for a single OTC
interest rate derivative contract,
including an OTC interest rate
derivative contract with a negative fair
value, is calculated by multiplying the
notional principal amount of the OTC
interest rate derivative contract by the
appropriate conversion factor in Table 1
of this section.
(2) 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 PFE.

TABLE 1 TO § 702.105—CONVERSION
FACTOR MATRIX FOR INTEREST
RATE DERIVATIVE CONTRACTS 2
Remaining maturity

Conversion
factor

One year or less .......................
Greater than one year and less
than or equal to five years ....
Greater than five years .............

0.00
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
the net current credit exposure and the
adjusted sum of the PFE amounts for all
OTC interest rate derivative contracts
subject to the qualifying master netting
agreement.
2 Non-interest rate derivative contracts are
addressed in paragraph (d) of this section.

PO 00000

Frm 00089

Fmt 4701

Sfmt 4700

66713

(A) Net current credit exposure. The
net current credit exposure is the greater
of the net sum of all positive and
negative fair value of the individual
OTC interest rate derivative contracts
subject to the qualifying master netting
agreement or zero.
(B) Adjusted sum of the PFE amounts
(Anet). The adjusted sum of the PFE
amounts is calculated as Anet = (0.4 ×
Agross) + (0.6 × NGR × Agross), where:
(1) Agross equals the gross PFE (that
is, the sum of the PFE amounts as
determined under paragraph (a)(1)(i)(B)
of this section for each individual
derivative contract subject to the
qualifying master netting agreement);
and
(2) Net-to-gross Ratio (NGR) equals
the ratio of the net current credit
exposure to the gross current credit
exposure. In calculating the NGR, the
gross current credit exposure equals the
sum of the positive current credit
exposures (as determined under
paragraph (a)(1)(i) of this section) of all
individual derivative contracts subject
to the qualifying master netting
agreement.
(2) Recognition of credit risk
mitigation of collateralized OTC
derivative contracts. A credit union may
recognize credit risk mitigation benefits
of financial collateral that secures an
OTC derivative contract or multiple
OTC derivative contracts subject to a
qualifying master netting agreement
(netting set) by following the
requirements of paragraph (c) of this
section.
(b) Cleared transactions for interest
rate derivatives. (1) General
requirements—A credit union must use
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

E:\FR\FM\29OCR2.SGM

29OCR2

mstockstill on DSK4VPTVN1PROD with RULES2

66714

Federal Register / Vol. 80, No. 209 / Thursday, October 29, 2015 / Rules and Regulations

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.
(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

VerDate Sep<11>2014

22:13 Oct 28, 2015

Jkt 238001

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
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 a
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

PO 00000

Frm 00090

Fmt 4701

Sfmt 4700

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 this section.

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

20 or 50

0.5

1.0

2.0
4.0

3.0
6.0

Zero
25.0

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

E:\FR\FM\29OCR2.SGM

29OCR2

Federal Register / Vol. 80, No. 209 / Thursday, October 29, 2015 / Rules and Regulations
§ 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
for decreasing its earnings retention as
provided under paragraph (b) of this
section.

mstockstill on DSK4VPTVN1PROD with RULES2

§ 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

VerDate Sep<11>2014

22:13 Oct 28, 2015

Jkt 238001

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
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

PO 00000

Frm 00091

Fmt 4701

Sfmt 4700

66715

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
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,

E:\FR\FM\29OCR2.SGM

29OCR2

66716

Federal Register / Vol. 80, No. 209 / Thursday, October 29, 2015 / Rules and Regulations

including meeting its prescribed steps to
increase its net worth ratio.

mstockstill on DSK4VPTVN1PROD with RULES2

§ 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;

VerDate Sep<11>2014

22:13 Oct 28, 2015

Jkt 238001

(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
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;

PO 00000

Frm 00092

Fmt 4701

Sfmt 4700

(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 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);

E:\FR\FM\29OCR2.SGM

29OCR2

mstockstill on DSK4VPTVN1PROD with RULES2

Federal Register / Vol. 80, No. 209 / Thursday, October 29, 2015 / Rules and Regulations
(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. 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

VerDate Sep<11>2014

22:13 Oct 28, 2015

Jkt 238001

liquidation pursuant to 12 U.S.C.
1787(a)(3)(A)(i).
(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

PO 00000

Frm 00093

Fmt 4701

Sfmt 4700

66717

improvement in net worth since the
date the net worth restoration plan was
approved;
(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).
§ 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

E:\FR\FM\29OCR2.SGM

29OCR2

66718

Federal Register / Vol. 80, No. 209 / Thursday, October 29, 2015 / Rules and Regulations

NCUA Board shall not place the credit
union into conservatorship or
liquidation unless it first considers the
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.

mstockstill on DSK4VPTVN1PROD with RULES2

§ 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

VerDate Sep<11>2014

22:13 Oct 28, 2015

Jkt 238001

Director within 30 calendar days of
receiving such notice, unless the NCUA
Board notifies the credit union in
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

PO 00000

Frm 00094

Fmt 4701

Sfmt 4700

union takes steps to become adequately
capitalized, the NCUA Board shall, in
evaluating an NWRP 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.
(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

E:\FR\FM\29OCR2.SGM

29OCR2

Federal Register / Vol. 80, No. 209 / Thursday, October 29, 2015 / Rules and Regulations
change in circumstance. Pending
approval of an amended NWRP, the
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.

mstockstill on DSK4VPTVN1PROD with RULES2

§ 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:

VerDate Sep<11>2014

22:13 Oct 28, 2015

Jkt 238001

(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.
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
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.

PO 00000

Frm 00095

Fmt 4701

Sfmt 4700

66719

§ 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%).

TABLE 1 TO § 702.202—CAPITAL
CATEGORIES FOR NEW CREDIT UNIONS
A new credit union’s capital
classification is

If it’s net worth
ratio is

Well Capitalized ..................
Adequately Capitalized .......
Moderately Capitalized .......
Marginally Capitalized ........
Minimally Capitalized ..........
Uncapitalized ......................

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

E:\FR\FM\29OCR2.SGM

29OCR2

66720

Federal Register / Vol. 80, No. 209 / Thursday, October 29, 2015 / Rules and Regulations

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.

mstockstill on DSK4VPTVN1PROD with RULES2

§ 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
(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 (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

VerDate Sep<11>2014

22:13 Oct 28, 2015

Jkt 238001

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).
(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

PO 00000

Frm 00096

Fmt 4701

Sfmt 4700

(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
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

E:\FR\FM\29OCR2.SGM

29OCR2

mstockstill on DSK4VPTVN1PROD with RULES2

Federal Register / Vol. 80, No. 209 / Thursday, October 29, 2015 / Rules and Regulations
as provided under paragraphs (a)(1) or
(a)(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.
(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

VerDate Sep<11>2014

22:13 Oct 28, 2015

Jkt 238001

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
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.

PO 00000

Frm 00097

Fmt 4701

Sfmt 4700

66721

(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.
§ 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
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.

E:\FR\FM\29OCR2.SGM

29OCR2

66722
§ 702.210

Federal Register / Vol. 80, No. 209 / Thursday, October 29, 2015 / Rules and Regulations
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.
Subparts C and D—[Removed]
■

9. Remove subparts C and D.

Subpart E—[Redesignated as Subpart
C]
10. Redesignate subpart E, consisting
of §§ 702.501–702.506, as subpart C,
consisting of §§ 702.301–702.306.

■

§ 702.504

[Amended]

11. Amend newly redesignated
§ 702.504(b)(4) by removing the citation
‘‘§ 702.506(c)’’ and adding in its place
‘‘§ 702.306(c)’’.

■

§ 702.505

[Amended]

12. Amend newly redesignated
§ 702.505(b)(4) by removing the citation
‘‘§ 702.504’’ and adding in its place
‘‘§ 702.304’’.
■ 13. Appendix A to part 702 is added
to read as follows:
■

mstockstill on DSK4VPTVN1PROD with RULES2

Appendix A to Part 702—Gross-Up
Approach, and Look-Through
Approaches
Instead of using the risk weights assigned
in § 702.104(c)(2) a credit union may
determine the risk weight of certain
investment funds, and the risk weight of a
non-subordinated or subordinated tranche of
any investment as follows:
(a) Gross-up approach—(1) Applicability.
Section 702.104(c)(3)(iii)(A) of this part
provides that, a credit union may use the
gross-up approach in this appendix to
determine the risk weight of the carrying
value of non-subordinated or subordinated
tranches of any investment.
(2) Calculation. To use the gross-up
approach, a credit union must calculate the
following four inputs:
(i) Pro rata share, which is the par value
of the credit union’s exposure as a percent of
the par value of the tranche in which the
securitization exposure resides;
(ii) Enhanced amount, which is the par
value of tranches that are more senior to the
tranche in which the credit union’s
securitization resides;

VerDate Sep<11>2014

22:13 Oct 28, 2015

Jkt 238001

(iii) Exposure amount, which is the
amortized cost for investments classified as
held-to-maturity and available-for-sale, and
the fair value for trading securities; and
(iv) Risk weight, which is the weightedaverage risk weight of underlying exposures
of the securitization as calculated under this
appendix.
(3) Credit equivalent amount. The ‘‘credit
equivalent amount’’ of a securitization
exposure under this part equals the sum of:
(i) The exposure amount of the credit
union’s exposure; and
(ii) The pro rata share multiplied by the
enhanced amount, each calculated in
accordance with paragraph (a)(2) of this
appendix.
(4) Risk-weighted assets. To calculate riskweighted assets for a securitization exposure
under the gross-up approach, a credit union
must apply the risk weight required under
paragraph (a)(2) of this appendix to the credit
equivalent amount calculated in paragraph
(a)(3) of this appendix.
(5) Securitization exposure defined. For
purposes of this this paragraph (a),
‘‘securitization exposure’’ means:
(i) A credit exposure that arises from a
securitization; or
(ii) An exposure that directly or indirectly
references a securitization exposure
described in paragraph (a)(5)(i) of this
appendix.
(6) Securitization defined. For purposes of
this paragraph (a), ‘‘securitization’’ means a
transaction in which:
(i) The credit risk associated with the
underlying exposures has been separated into
at least two tranches reflecting different
levels of seniority;
(ii) Performance of the securitization
exposures depends upon the performance of
the underlying exposures; and
(iii) All or substantially all of the
underlying exposures are financial exposures
(such as loans, receivables, asset-backed
securities, mortgage-backed securities, or
other debt securities).
(b) Look-through approaches.—(1)
Applicability. Section 702.104(c)(3)(iii)(B)
provides that, a credit union may use one of
the look-through approaches in this appendix
to determine the risk weight of the exposure
amount of any investment fund, or the
holding of separate account insurance.
(2) Full look-through approach. (i) General.
A credit union that is able to calculate a riskweighted asset amount for its proportional
ownership share of each exposure held by
the investment fund may set the riskweighted asset amount of the credit union’s
exposure to the fund equal to the product of:
(A) The aggregate risk-weighted asset
amounts of the exposures held by the fund
as if they were held directly by the credit
union; and
(B) The credit union’s proportional
ownership share of the fund.
(ii) Holding report. To calculate the riskweighted amount under paragraph (b)(2)(i) of
this appendix, a credit union should:
(A) Use the most recently issued
investment fund holding report; and
(B) Use an investment fund holding report
that reflects holding that are not older than
6-months from the quarter-end effective date
(as defined in § 702.101(c)(1).

PO 00000

Frm 00098

Fmt 4701

Sfmt 4700

(3) Simple modified look-through
approach. Under the simple modified lookthrough approach, the risk-weighted asset
amount for a credit union’s exposure to an
investment fund equals the exposure amount
multiplied by the highest risk weight that
applies to any exposure the fund is permitted
to hold under the prospectus, partnership
agreement, or similar agreement that defines
the fund’s permissible investments
(excluding derivative contracts that are used
for hedging rather than speculative purposes
and that do not constitute a material portion
of the fund’s exposures).
(4) Alternative modified look-through
approach. Under the alternative modified
look-through approach, a credit union may
assign the credit union’s exposure amount to
an investment fund on a pro rata basis to
different risk weight categories under subpart
A of this part based on the investment limits
in the fund’s prospectus, partnership
agreement, or similar contract that defines
the fund’s permissible investments. The riskweighted asset amount for the credit union’s
exposure to the investment fund equals the
sum of each portion of the exposure amount
assigned to an exposure type multiplied by
the applicable risk weight under subpart A of
this part. If the sum of the investment limits
for all exposure types within the fund
exceeds 100 percent, the credit union must
assume that the fund invests to the maximum
extent permitted under its investment limits
in the exposure type with the highest
applicable risk weight under subpart A of
this part and continues to make investments
in order of the exposure type with the next
highest applicable risk weight under subpart
A of this part until the maximum total
investment level is reached. If more than one
exposure type applies to an exposure, the
credit union must use the highest applicable
risk weight. A credit union may exclude
derivative contracts held by the fund that are
used for hedging rather than for speculative
purposes and do not constitute a material
portion of the fund’s exposures.

PART 703—INVESTMENT AND
DEPOSIT ACTIVITIES
14. 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]

15. 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
■
■

E:\FR\FM\29OCR2.SGM

29OCR2

Federal Register / Vol. 80, No. 209 / Thursday, October 29, 2015 / Rules and Regulations
(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
16. The authority citation for part 713
continues to read as follows:

■

17. 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,’’.
§ 713.6 What is the permissible
deductible?

(a)(1) * * *

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.

*

*

*

*

§ 723.7

*

18. The authority citation for part 723
continues to read as follows:

■

Authority: 12 U.S.C. 1756, 1757, 1757A,
1766, 1785, 1789.
§ 723.1

[Amended]

22:13 Oct 28, 2015

§ 747.2002

PART 747—ADMINSTRATIVE
ACTIONS, ADJUDICATIVE HEARINGS,
RULES OF PRACTICE AND
PROCEDURE, AND INVESTIGATIONS
21. The authority citation for part 747
continues to read as follows:

■

19. Amend § 723.1 as follows:
■ a. In paragraph (d) remove the words
‘‘and the risk weighting standards of
part 702 of this chapter’’; and
■ b. In paragraph (e) remove the words
‘‘and the risk weighting standards under
part 702 of this chapter’’.
■

VerDate Sep<11>2014

[Amended]

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

■

PART 723—MEMBER BUSINESS
LOANS

mstockstill on DSK4VPTVN1PROD with RULES2

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

66723

Jkt 238001

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.
§ 747.2001

[Amended]

23. Amend § 747.2002(a) 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)’’.

■

§ 747.2003

[Amended]

24. Amend § 747.2003(a) by removing
the citation ‘‘702.302(d)’’ and adding in
its place the citation ‘‘702.202(d)’’.

■

[FR Doc. 2015–26790 Filed 10–28–15; 8:45 am]

[Amended]

BILLING CODE 7535–01–P

22. Amend § 747.2001(a) by removing
the citation ‘‘702.302(d)’’ and adding in
its place the citation ‘‘702.202(d)’’.

■

PO 00000

Frm 00099

Fmt 4701

Sfmt 9990

E:\FR\FM\29OCR2.SGM

29OCR2