12 CFR Part 702, Subpart E (1-1-21 ED)

§ 702.501

12 CFR Ch. VII (1–1–21 Edition)

Subpart E—Capital Planning and
Stress Testing
SOURCE: 79 FR 24315, Apr. 30, 2014, unless
otherwise noted.
EFFECTIVE DATE NOTE: At 80 FR 66722, Oct.
29, 2015, subpart E to part 702 was redesignated as subpart C, effective Jan. 1, 2019. At
83 FR 55467, Nov. 6, 2018, the effective date
was delayed until Jan. 1, 2020. At 84 FR 68781,
Dec. 17, 2019, the effective date was further
delayed until Jan. 1, 2022.

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§ 702.501 Authority, purpose, and reservation of authority.
(a) Authority. This subpart is issued
by the National Credit Union Administration (NCUA).
(b) Purpose. This subpart requires
covered credit unions to develop and
maintain capital plans and describes
stress testing requirements and actions
on covered credit union capital plans.
(c) Reservation of authority. Notwithstanding any other provisions of this
subpart, NCUA may modify some or all
of the requirements of this subpart.
Any exercise of authority under this
section by NCUA will be in writing and
will consider the financial condition,
size, complexity, risk profile, scope of
operations, and level of capital of the
covered credit union, in addition to
any other relevant factors. Nothing in
this subpart limits the authority of
NCUA under any other provision of law
or regulation to take supervisory or
enforcement action, including action
to address unsafe and unsound practices or conditions, or violations of law
or regulation.
§ 702.502 Definitions.
For purposes of this subpart—
Baseline scenario means a scenario
that reflects the consensus views of the
economic and financial outlook.
Capital plan means a written presentation of a covered credit union’s capital planning strategies and capital
adequacy process that includes the
mandatory elements set forth in this
subpart.
Capital planning process means development of a capital policy and formulation of a capital plan that conforms
to this part.
Covered credit union means a federally
insured credit union whose assets are

$10 billion or more. A credit union that
crosses the asset threshold as of March
31 of a given calendar year is subject to
the applicable requirements of this
subpart in the following calendar year.
Planning horizon means the period of
3 years over which capital planning
projections extend.
Pre-provision net revenue means the
sum of net interest income and non-interest income, less expenses, before adjusting for loss provisions.
Provision for loan and lease losses
means the provision for loan and lease
losses as reported by the covered credit
union on its Call Report.
Reverse stress test means a test that
defines severely unfavorable outcomes
and then identifies events or scenarios
that lead to these outcomes. Examples
of severely unfavorable outcomes are
breaching regulatory capital, failing to
meet obligations, or being unable to
continue independent operations.
Scenarios are those sets of conditions
that affect the U.S. economy or the financial condition of a covered credit
union that serve as the basis for stress
testing, including, but not limited to,
NCUA-established baseline, scenarios
and stress scenarios.
Sensitivity testing means testing the
relationship between specific variables,
parameters, and inputs and their impacts on analytical results.
Stress scenario means a scenario that
is more adverse than that associated
with the baseline scenario.
Stress test means the process to assess
the potential impact of expected and
stressed economic conditions on the
consolidated earnings, losses, and capital of a covered credit union over the
planning horizon, taking into account
the current state of the covered credit
union and the covered credit union’s
risks, exposures, strategies, and activities.
Stress test capital means net worth
(less assistance provided under Section
208 of the Federal Credit Union Act,
subordinated debt included in net
worth, and NCUSIF deposit) under
stress test scenarios.
Stress test capital ratio means a covered credit union’s stress test capital
divided by its total consolidated assets
less NCUSIF deposit.

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National Credit Union Administration

§ 702.504

Tier I credit union means a covered
credit union that has less than $15 billion in total assets.
Tier II credit union means a covered
credit union that has $15 billion or
more in total assets but less than $20
billion in total assets, or is otherwise
designated as a tier II credit union by
NCUA.
Tier III credit union means a covered
credit union that has $20 billion or
more in total assets, or is otherwise
designated as a tier III credit union by
NCUA.
[79 FR 24315, Apr. 30, 2014, as amended at 80
FR 48012, Aug. 11, 2015; 83 FR 17909, Apr. 25,
2018]

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§ 702.503

Capital policy.

(a) General requirements. The extent
and sophistication of a covered credit
union’s governance over its capital
planning and analysis process must
align with the extent and sophistication of that process. The process must
be consistent with the financial condition, size, complexity, risk profile,
scope of operations, and level of capital
of the covered credit union. The ultimate responsibility for governance
over a covered credit union’s capital
planning and analysis process rests
with the credit union’s board of directors. Senior management must establish a comprehensive, integrated, and
effective process that fits into the
broader risk management of the credit
union. Senior management responsible
for capital planning and analysis must
provide regular reports on capital planning and analysis to the credit union’s
board of directors (or a designated
committee of the board).
(b) Mandatory elements. A covered
credit union’s board of directors (or a
designated committee of the board)
must review and approve a capital policy, along with procedures to implement it. The capital policy must:
(1) State goals and limits for capital
levels and risk exposure.
(2) Establish requirements for reviewing and reporting capital levels and
breaches of capital limits, with contingency
plans
for
remedying
any
breaches.
(3) State the governance over the
capital analysis process, including all

the activities that contribute to the
analysis;
(4) Specify capital analysis roles and
responsibilities,
including
controls
over external resources used for any
part of capital analysis (such as vendors and data providers);
(5) Specify the internal controls that
govern capital planning, including review by internal audit, control of
changes in capital planning procedures,
and required documentation;
(6) Describe the frequency with which
capital analyses will be conducted;
(7) State how capital analysis results
are used and by whom; and
(8) Be reviewed at least annually and
updated as necessary to ensure that it
remains current with changes in market conditions, credit union products
and strategies, credit union risk exposures and activities, the credit union’s
established risk appetite, and industry
practices.
§ 702.504 Capital planning.
(a) Annual capital planning. (1) A covered credit union must develop and
maintain a capital plan. Tier I and tier
II credit unions must complete this
plan and their capital policy by December 31 each year, but are not required
to submit this plan to the NCUA. For
tier I and tier II credit unions, the plan
must be based on the credit union’s financial data from either of the two calendar quarters preceding the quarter in
which the plan is approved by the credit union’s board of directors (or a designated committee of the board). A tier
III credit union must submit this plan
and its capital policy to NCUA by May
31 each year, or such later date as directed by NCUA. For tier III credit
unions, the plan must be based on the
credit union’s financial data as of December 31 of the preceding calendar
year, or such other date as directed by
NCUA.
(2) A covered credit union’s board of
directors (or a designated committee of
the board) must at least annually, and
for tier III credit unions, prior to the
submission of the capital plan under
paragraph (a)(1) of this section:
(i) Review the credit union’s process
for assessing capital adequacy;
(ii) Ensure that any deficiencies in
the credit union’s process for assessing

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§ 702.505

12 CFR Ch. VII (1–1–21 Edition)

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

separately and in combination with
each other.
[79 FR 24315, Apr. 30, 2014, as amended at 80
FR 48012, Aug. 11, 2015; 81 FR 7198, Feb. 11,
2016; 83 FR 17910, Apr. 25, 2018]
EDITORIAL NOTE: At 84 FR 1606, Feb. 5, 2019,
§ 702.504 was amended in paragraph (b)(4) by
revising the citation ‘‘§ 702.306(c)’’ to read
‘‘§ 702.506(c)’’; however, that citation did not
exist in the section and the amendment
could not be incorporated due to inaccurate
amendatory instruction.
EFFECTIVE DATE NOTE: At 80 FR 66722, Oct.
29, 2015, § 702.504 was amended in paragraph
(b)(4) by removing the citation ‘‘§ 702.506(c)’’
and adding in its place ‘‘§ 702.306(c)’’, effective Jan. 1, 2019. At 83 FR 55467, Nov. 6, 2018,
the effective date was delayed until Jan. 1,
2020. At 84 FR 68781, Dec. 17, 2019, the effective date was further delayed until Jan. 1,
2022. At 85 FR 62210, Oct. 2, 2020, the regulatory instruction 11. at 85 FR 66722, Oct. 29,
2015 was removed, effective Jan. 1, 2022.

§ 702.505 NCUA
plans.

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(a) Timing—(1) Tier I & tier II credit
unions. NCUA will address any deficiencies in the capital plans submitted
by tier I and tier II credit unions
through the supervisory process.
(2) Tier III credit unions. NCUA will
notify tier III credit unions of the acceptance or rejection of their capital
plans by August 31 of the year in which
their plan is submitted.
(b) Grounds for rejection of capital
plan. NCUA may reject a capital plan if
it determines that:
(1) The covered credit union has material unresolved supervisory issues associated with its capital planning process;
(2) The capital analysis underlying
the covered credit union’s capital plan,
or the covered credit union’s methodologies for reviewing the robustness
of its capital adequacy, are not reasonable or appropriate;
(3) Data utilized for the capital analysis is insufficiently detailed to capture the risks of the covered credit
union, or the data lacks integrity;
(4) The plan does not meet all of the
requirements of § 702.504;
(5) Unacceptable weakness in the capital plan or policy, the capital planning
analysis, or any critical system or
process supporting capital analysis;

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National Credit Union Administration

§ 702.506

(6) The covered credit union’s capital
planning process constitutes an unsafe
or unsound practice, or would violate
any law, regulation, NCUA order, directive, or any condition imposed by,
or written agreement with, NCUA. In
determining whether a capital plan
would constitute an unsafe or unsound
practice, NCUA considers whether the
covered credit union is and would remain in sound financial condition after
giving effect to the capital plan.
(c) Notification in writing. NCUA will
notify the credit union in writing of
the reasons for a decision to reject a
capital plan.
(d) Resubmission of a capital plan. If
NCUA rejects a tier III credit union’s
capital plan, the credit union must update and resubmit an acceptable capital plan to NCUA by November 30 of
the year in which the credit union submitted its plan. The resubmitted capital plan must, at a minimum, address:
(1) NCUA-noted deficiencies in the
credit union’s original capital plan or
policy; and
(2) Remediation plans for unresolved
supervisory issues contributing to the
rejection of the credit union’s original
capital plan.
(e) Supervisory actions. Any tier III
credit union operating without a capital plan accepted by NCUA may be
subject to supervisory actions on the
part of NCUA.
(f) Consultation on proposed action. Before taking any action under this section on the capital plan of a federally
insured, state-chartered credit union,
NCUA will consult and work cooperatively with the appropriate State official.

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[79 FR 24315, Apr. 30, 2014, as amended at 80
FR 48012, Aug. 11, 2015; 83 FR 17910, Apr. 25,
2018]
EFFECTIVE DATE NOTE: At 80 FR 66722, Oct.
29, 2015, § 702.505 was amended in paragraph
(b)(4) by removing the citation ‘‘§ 702.504’’
and adding in its place ‘‘§ 702.304’’, effective
Jan. 1, 2019. At 83 FR 55467, Nov. 6, 2018, the
effective date was delayed until Jan. 1, 2020.
At 84 FR 68781, Dec. 17, 2019, the effective
date was further delayed until Jan. 1, 2022.
At 85 FR 62210, Oct. 2, 2020, the instruction
was corrected to amend newly redesignated
§ 702.305, effective Jan. 1, 2022.

§ 702.506 Annual supervisory stress
testing.
(a) General requirements. Only tier II
and tier III credit unions are required
to conduct supervisory stress tests.
The supervisory stress tests consist of
a baseline scenario, and stress scenarios, which NCUA will provide by
February 28 of each year. The tests will
be based on the credit union’s financial
data as of December 31 of the preceding
calendar year, or such other date as directed by NCUA. The tests will take
into account all relevant exposures and
activities of the credit union to evaluate its ability to absorb losses in specified scenarios over a planning horizon.
(b) Credit union-run supervisory stress
tests—(1) General. All supervisory stress
tests must be conducted according to
NCUA’s instructions.
(2) Tier III credit unions. When conducting its stress test, a tier III credit
union must apply the minimum stress
test capital ratio to all time periods in
the planning horizon. The minimum
stress test capital ratio is 5 percent.
(3) NCUA tests. NCUA reserves the
right to conduct the tests described in
this section on any covered credit
union at any time. Where both NCUA
and a covered credit union have conducted the tests, the results of NCUA’s
tests will determine whether the covered credit union has met the requirements of this subpart.
(c) Potential impact on capital. In conducting stress tests under this subpart,
the credit union, or the NCUA if it
elects to conduct the stress test under
paragraph (b)(3) of this section, will estimate the following for each scenario
during each quarter of the planning horizon:
(1) Losses, pre-provision net revenues, loan and lease loss provisions,
and net income; and
(2) The potential impact on the stress
test capital ratio, incorporating the effects of any capital action over the
planning horizon and maintenance of
an allowance for loan losses appropriate for credit exposures throughout
the horizon. The credit union, or the
NCUA if it elects to conduct the stress
test under paragraph (b)(3) of this section, will conduct the stress tests without assuming any risk mitigation actions on the part of the credit union,

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Pt. 702, App. A

12 CFR Ch. VII (1–1–21 Edition)

except those existing and identified as
part of the credit union’s balance
sheet, or off-balance sheet positions,
such as derivative positions, on the
date of the stress test.
(d) Information collection. Upon request, the credit union must provide
NCUA with any relevant qualitative or
quantitative information requested by
NCUA pertinent to the stress tests
under this subpart.
(e) Stress test results. A credit union
required to conduct stress tests under
this section must incorporate the results of its tests in its capital plan. A
credit union required to conduct stress
tests must submit its stress test results to NCUA by May 31 of each year.
(f) Supervisory actions. (1) If a credit
union-run stress test shows a tier III
credit union does not have the ability
to maintain a stress test capital ratio
of 5 percent or more under expected
and stressed conditions in each quarter
of the planning horizon, the credit
union must incorporate, into its capital plan, a stress test capital enhancement plan that shows how it will meet
that target.
(2) If an NCUA-run stress test shows
that a tier III credit union does not
have the ability to maintain a stress
test capital ratio of 5 percent or more
under expected and stressed conditions
in each quarter of the planning horizon, the credit union must provide
NCUA, by November 30 of the calendar
year in which NCUA conducted the
tests, a stress test capital enhancement plan showing how it will meet
that target.
(3) A tier III credit union operating
without an NCUA approved stress test
capital enhancement plan required
under this section may be subject to
supervisory actions.
(g) Consultation on proposed action.
Before taking any action under this
section against a federally insured,
state-chartered credit union, NCUA
will consult and work cooperatively
with the appropriate State official.
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[83 FR 17910, Apr. 25, 2018]

APPENDIX A TO PART 702—GROSS-UP
APPROACH, AND LOOK-THROUGH APPROACHES
AT 80 FR 66722, OCT. 29, 2015.
AMENDMENT WAS DELAYED UNTIL
JAN. 1, 2020, AT 83 FR 55467, NOV. 6,

2018.
DELAYED UNTIL JAN. 1,
FR 68781, DEC. 17, 2019.

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;
(iii) Exposure amount, which is the amortized cost for investments classified as heldto-maturity and available-for-sale, and the
fair value for trading securities; and
(iv) Risk weight, which is the weighted-average 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

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