Proposed Rule2021-15965
Capital Adequacy: The Complex Credit Union Leverage Ratio; Risk-Based Capital
Primary source
Metadata and text below are from the Federal Register, a public-domain U.S. government work. Always verify the official published version before relying on it for any legal matter.
Published
August 16, 2021
Issuing agencies
National Credit Union Administration
Abstract
The NCUA is seeking comment on a proposed rule that would provide a simplified measure of capital adequacy for federally insured, natural-person credit unions (credit unions) classified as complex (those with total assets greater than $500 million). Under the proposed rule, a complex credit union that maintains a minimum net worth ratio, and that meets other qualifying criteria, will be eligible to opt into the complex credit union leverage ratio (CCULR) framework. The minimum net worth ratio would initially be established at 9 percent on January 1, 2022, and be gradually increased to 10 percent by January 1, 2024. A complex credit union that opts into the CCULR framework would not be required to calculate a risk-based capital ratio under the Board's October 29, 2015, risk-based capital final rule, as amended on October 18, 2018. A qualifying complex credit union that opts into the CCULR framework and that maintains the minimum net worth ratio would be considered well capitalized. The proposed rule would also make several amendments to update the NCUA's October 29, 2015, risk-based capital final rule, including addressing asset securitizations issued by credit unions, clarifying the treatment of off-balance sheet exposures, deducting certain mortgage servicing assets from a complex credit union's risk-based capital numerator, updating several derivative- related definitions, and clarifying the definition of a consumer loan.
Full Text
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[Federal Register Volume 86, Number 155 (Monday, August 16, 2021)]
[Proposed Rules]
[Pages 45824-45854]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2021-15965]
[[Page 45823]]
Vol. 86
Monday,
No. 155
August 16, 2021
Part II
National Credit Union Administration
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12 CFR Parts 702 and 703
Capital Adequacy: The Complex Credit Union Leverage Ratio; Risk-Based
Capital; Proposed Rule
Federal Register / Vol. 86, No. 155 / Monday, August 16, 2021 /
Proposed Rules
[[Page 45824]]
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NATIONAL CREDIT UNION ADMINISTRATION
12 CFR Parts 702 and 703
[NCUA-2021-0072]
RIN 3133-AF12
Capital Adequacy: The Complex Credit Union Leverage Ratio; Risk-
Based Capital
AGENCY: National Credit Union Administration (NCUA).
ACTION: Proposed rule.
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SUMMARY: The NCUA is seeking comment on a proposed rule that would
provide a simplified measure of capital adequacy for federally insured,
natural-person credit unions (credit unions) classified as complex
(those with total assets greater than $500 million). Under the proposed
rule, a complex credit union that maintains a minimum net worth ratio,
and that meets other qualifying criteria, will be eligible to opt into
the complex credit union leverage ratio (CCULR) framework. The minimum
net worth ratio would initially be established at 9 percent on January
1, 2022, and be gradually increased to 10 percent by January 1, 2024. A
complex credit union that opts into the CCULR framework would not be
required to calculate a risk-based capital ratio under the Board's
October 29, 2015, risk-based capital final rule, as amended on October
18, 2018. A qualifying complex credit union that opts into the CCULR
framework and that maintains the minimum net worth ratio would be
considered well capitalized. The proposed rule would also make several
amendments to update the NCUA's October 29, 2015, risk-based capital
final rule, including addressing asset securitizations issued by credit
unions, clarifying the treatment of off-balance sheet exposures,
deducting certain mortgage servicing assets from a complex credit
union's risk-based capital numerator, updating several derivative-
related definitions, and clarifying the definition of a consumer loan.
DATES: Comments must be received on or before October 15, 2021.
ADDRESSES: You may submit comments using one of the following methods
(please do not send the same comments via two or more methods):
<bullet> Federal eRulemaking Portal: <a href="http://www.regulations.gov">http://www.regulations.gov</a>.
The docket number for this proposed rule is NCUA-2021-0072. Follow the
instructions for submitting comments.
<bullet> Fax: (703) 518-6319. Include ``[Your name] Comments on
``Capital Adequacy: The Complex Credit Union Leverage Ratio, Amendments
to Risk-Based Capital, and other Technical Amendments'' in the
transmittal.
<bullet> Mail: Address to Melane Conyers-Ausbrooks, Secretary of
the Board, National Credit Union Administration, 1775 Duke Street,
Alexandria, Virginia 22314-3428.
<bullet> Hand Delivery/Courier: Same as mail address.
Public Inspection: All public comments are available on the Federal
eRulemaking Portal at: <a href="http://www.regulations.gov">http://www.regulations.gov</a> as submitted, except
where technical limitations make posting the comments on the portal
impossible. Public comments will not be edited to remove any
identifying or contact information. Due to social distancing measures
in effect, the usual opportunity to inspect paper copies of comments in
the NCUA's law library is not currently available. After social
distancing measures are relaxed, visitors may make an appointment to
review paper copies by calling (703) 518-6540 or emailing
<a href="/cdn-cgi/l/email-protection#8ac5cdc9c7ebe3e6cae4e9ffeba4ede5fc"><span class="__cf_email__" data-cfemail="da959d9997bbb3b69ab4b9afbbf4bdb5ac">[email protected]</span></a>.
FOR FURTHER INFORMATION CONTACT:
Policy and Accounting: Thomas Fay, Director, Division of Capital
Markets, Office of Examination and Insurance, at (703) 518-1179;
Legal: Rachel Ackmann, at (703) 623-9363 or Ariel Pereira, at (703)
548-2778; or by mail at National Credit Union Administration, 1775 Duke
Street, Alexandria, Virginia 22314.
SUPPLEMENTARY INFORMATION:
Table of Contents
I. Background
A. The NCUA's Risk-Based Capital Requirements
B. The Other Banking Agencies' Risk-Based Capital and CBLR
Framework
C. The NCUA's Advance Notice of Proposed Rulemaking
II. Legal Authority
III. Proposed Rule
A. Overview of the CCULR Framework
B. Qualifying Complex Credit Unions
C. The CCULR Ratio
D. Calibration of the CCULR
E. Opting Into the CCULR Framework
F. Voluntarily Opting Out of the CCULR Framework
G. Compliance With the Proposed Criteria to Be a Qualifying
Complex Credit Union
H. Treatment of a Qualifying Complex Credit Union That Falls
Below the CCULR Requirement
I. Transition Provision
J. Reservation of Authority
K. Effect of the CCULR on Other Regulations
L. Illustrative Reporting Forms To Support the CCULR
M. Amendments to the 2015 Final Rule
N. Technical Amendments
O. Illustrative Reporting Forms for Risk-Based Capital
IV. Regulatory Procedures
A. Regulatory Flexibility Act
B. Paperwork Reduction Act
C. Executive Order 13132 on Federalism
D. Assessment of Federal Regulations and Policies on Families
I. Background
A. The NCUA'S Risk-Based Capital Requirements
The NCUA's mission is to ensure the safety and soundness of
federally insured credit unions (FICUs), in addition to carrying out
other statutory responsibilities. The NCUA performs this function by
examining and supervising federally chartered credit unions (FCUs),
participating in the examination and supervision of federally insured,
state-chartered credit unions (FISCUs) in coordination with state
regulators, and insuring members' accounts at all FICUs up to the
limits prescribed by statute.
Capital adequacy standards are an important prudential tool to
ensure the safety and soundness of individual credit unions and the
credit union system as a whole. Capital serves as a buffer for credit
unions to prevent institutional failure and dramatic deleveraging
during times of stress. During a financial crisis, a buffer can mean
the difference between the survival or failure of a financial
institution. Higher levels of capital insulate credit unions from the
effects of unexpected adverse developments in their financial
condition, 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.
Following the 2007-2009 recession, the NCUA substantially
reevaluated its capital adequacy standards, which are codified in 12
CFR part 702 (part 702). On October 29, 2015, as amended on October 18,
2018, the Board published a final rule restructuring its capital
adequacy regulations (2015 Final Rule).\1\ The effective date of the
2015 Final Rule was originally January 1, 2019. The overarching intent
of the 2015 Final Rule was to reduce the likelihood that a relatively
small number of high-risk credit unions would exhaust their capital and
cause large losses to the National Credit Union Share Insurance Fund
(NCUSIF). Under the Federal Credit Union Act (FCUA), FICUs are
collectively responsible for replenishing losses to and capitalizing
the NCUSIF.\2\
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\1\ 80 FR 66626 (Oct. 29, 2015). See also, 83 FR 55467 (Oct. 18,
2018).
\2\ See 12 U.S.C. 1782(c). At the times the Board prescribes,
subject to statutory parameters, the FCUA requires each insured
credit union to pay an insurance premium equal to a percentage of
the credit union's insured shares. The FCUA also requires each
insured credit union to pay and maintain a deposit with the NCUSIF
equaling one percent of the credit union's insured shares. The
NCUSIF's reserves are available to pay potential share insurance
claims, to provide assistance in connection with the liquidation or
threatened liquidation of credit unions, and for administrative and
other expenses the Board incurs in carrying out the purposes of the
share insurance subchapter of the FCUA. See 12 U.S.C. 1783(a).
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[[Page 45825]]
The 2015 Final Rule restructured the NCUA's current capital
adequacy regulations and made various revisions, including amending the
agency's risk-based net worth requirement by replacing a credit union's
risk-based net worth ratio with a risk-based capital ratio. The risk-
based capital requirements in the 2015 Final Rule are more consistent
with the NCUA's risk-based capital ratio measure for corporate credit
unions, are more comparable to the risk-based capital measures
implemented by the Federal Deposit Insurance Corporation (FDIC), Board
of Governors of the Federal Reserve System (Federal Reserve Board), and
Office of the Comptroller of Currency (OCC) (collectively, the other
banking agencies) in 2013, and consistent with the FCUA.\3\
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\3\ The Federal Reserve Board and OCC issued a joint final rule
on October 11, 2013 (78 FR 62018), and the FDIC issued a
substantially identical interim final rule on September 10, 2013 (78
FR 55340). On April 14, 2014 (79 FR 20754), the FDIC adopted the
interim final rule as a final rule with no substantive changes.
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The risk-based capital provisions of the 2015 Final Rule apply only
to credit unions that are complex, which the rule defined as those with
total assets over $100 million.\4\ On November 6, 2018, the Board
published a supplemental final rule that raised the threshold level for
a complex credit union to $500 million (2018 Supplemental Rule).\5\
Therefore, only credit unions with over $500 million in assets are now
subject to the risk-based capital requirements of the 2015 Final Rule.
The 2018 Supplemental Rule also delayed the effective date of the 2015
Final Rule for one year (from January 1, 2019, to January 1, 2020).
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\4\ See, supra note 1.
\5\ 83 FR 55467 (Nov. 6, 2018).
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The effective date was delayed a second time through a final rule
published on December 17, 2019 (2019 Supplemental Rule).\6\ The 2015
Final Rule is now scheduled to become effective on January 1, 2022. The
delay has provided credit unions and the NCUA with additional time to
implement the 2015 Final Rule. Further, as explained in the 2019
Supplemental Rule, the delay provided the Board additional time to
holistically and comprehensively evaluate the NCUA's capital standards
for credit unions.\7\ Among a few items that the Board made reference
to, the rule highlighted a community bank leverage ratio (CBLR)
analogue and the treatment of asset securitizations issued by credit
unions as items for possible consideration by the Board during the
delay.\8\
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\6\ 84 FR 68781 (Dec. 17, 2019).
\7\ Id. at 68782.
\8\ Id.
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B. The Other Banking Agencies' Risk-Based Capital and CBLR Framework
As discussed previously, the other banking agencies adopted a
revised risk-based capital rule in 2013, which was designed to
strengthen their capital requirements and improve risk sensitivity.
These rules, along with subsequent amendments, were intended to address
weaknesses that became apparent during the financial crisis of 2007-08
(the other banking agencies' 2013 capital rule).\9\ The other banking
agencies' 2013 capital rule provides two methodologies for determining
risk-weighted assets: (i) A standardized approach; and (ii) a more
complex, models-based approach, which includes both the internal
ratings-based approach for measuring credit risk exposure and the
advanced measurement approach for measuring operational risk
exposure.\10\ The standardized approach applied to all banking
organizations, whereas the internal ratings-based approach applied only
to certain large or internationally active banking organizations.
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\9\ See, 84 FR 35234, 35235 (July 22, 2019). The other banking
agencies' 2013 capital rule also reflected agreements reached by the
Basel Committee on Banking Supervision (BCBS) in ``Basel III: A
Global Regulatory Framework for More Resilient Banks and Banking
Systems'' (Basel III), including subsequent changes to the BCBS's
capital standards and recent BCBS consultative papers. Their rule
also included changes consistent with the Dodd-Frank Wall Street
Reform and Consumer Protection Act (the Dodd-Frank Act).
\10\ 12 CFR part 3, subparts D & E (OCC); 12 CFR part 217,
subparts D & E (Federal Reserve Board); 12 CFR part 324, subparts D
& E (FDIC).
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In 2018, section 201 of the Economic Growth, Regulatory Relief, and
Consumer Protection Act (EGRRCPA), directed the other banking agencies
to propose a simplified, alternative measure of capital adequacy for
certain federally insured banks.\11\ On November 13, 2019, the other
banking agencies issued a final rule implementing this statutory
directive (CBLR Final Rule).\12\
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\11\ Public Law 115-174 (May 24, 2018). Section 201 is codified
at 12 U.S.C. 5371 note.
\12\ 84 FR 61776 (Nov. 13, 2019).
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Under the CBLR Final Rule, the CBLR framework is optional for
depository institutions and depository institution holding companies
that meet the following criteria:
(1) A leverage ratio (equal to tier 1 capital divided by average
total consolidated assets) of greater than nine percent; \13\
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\13\ Under section 4012 of the Coronavirus Aid, Relief, and
Economic Security Act (CARES Act), Public Law 116-136, 134 Stat. 281
(Mar. 27, 2020), the CBLR was temporarily set to eight percent. See,
85 FR 22924 (Apr. 23, 2020). Under the statute, the temporary CBLR
of eight percent ended on December 31, 2020. The CBLR transitions
back to nine percent during calendar year 2021. See, 85 FR 22930
(Apr. 23, 2020).
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(2) Total consolidated assets of less than $10 billion; \14\
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\14\ See, 85 FR 77345 (Dec. 2, 2020), providing temporary relief
from December 2, 2020, through December 31, 2021, for purposes of
determining the asset size of an institution.
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(3) Total off-balance sheet exposures of 25 percent or less of its
total consolidated assets;
(4) Trading assets plus trading liabilities of five percent or less
of its total consolidated assets; and
(5) Not an advanced approaches banking organization (advanced
approaches banking organizations are generally those with at least $250
billion in total consolidated assets or at least $10 billion in total
on-balance sheet foreign exposure, and depository institution
subsidiaries of those firms).
The CBLR Final Rule refers to the depository institutions and
depository institution holding companies that meet these criteria as
``qualifying community banking organizations.'' Qualifying community
banking organizations that opt into the CBLR framework are considered
to be in compliance with the other banking agencies' generally
applicable risk-based and leverage capital requirements. Further, these
qualifying banking organizations will be considered to have met the
well-capitalized ratio requirements for purposes of section 38 of the
Federal Deposit Insurance Act (FDI Act), which applies prompt
corrective action to federally insured depository institutions.\15\
Qualifying community banking organizations may opt into or out of the
CBLR framework at any time.
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\15\ 12 U.S.C. 1831o.
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The CBLR Final Rule includes a two-quarter grace period during
which a qualifying community banking organization that temporarily
fails to meet any of the qualifying criteria, including the greater
than nine percent leverage ratio requirement, generally will still be
deemed well-capitalized so long as the qualifying community banking
organization maintains a leverage ratio greater than eight percent. At
the end of the grace period, the banking organization must meet all
[[Page 45826]]
qualifying criteria to remain in the CBLR framework or otherwise must
comply with and report under the generally applicable risk-based and
leverage capital requirements. Similarly, a banking organization that
fails to maintain a leverage ratio greater than eight percent will not
be permitted to use the grace period and must comply with the generally
applicable capital requirements and file the appropriate regulatory
reports.
In March 2020, the CBLR was temporarily set to eight percent by
statute.\16\ Accordingly, effective the second quarter of 2020, the
CBLR requirement was eight percent or greater.\17\ At the start of
2021, the CBLR requirement was increased to 8.5 percent or greater and
the minimum requirement during the grace period is 7.5 percent.\18\
Beginning on January 1, 2022, the CBLR requirement will return to nine
percent and the minimum requirement during the grace period will return
to eight percent.
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\16\ Public Law 116-136.
\17\ See, 85 FR 22924 (Apr. 23, 2020).
\18\ See, 85 FR 22930 (Apr. 23, 2020).
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C. The NCUA'S Advance Notice of Proposed Rulemaking
At its January 14, 2021, meeting the Board issued an advance notice
of proposed rulemaking (ANPR) to solicit comments on two approaches to
simplify the 2015 Final Rule.\19\ The risk-based leverage ratio (RBLR)
is the first alternative to the 2015 Final Rule included in the ANPR,
which would replace the 2015 Final Rule with a new capital framework.
The RBLR would use relevant risk-attribute thresholds to determine
which complex credit unions would be required to hold additional
capital buffers above the statutory leverage ratio. The second
alternative contemplated in the ANPR is to retain the 2015 Final Rule
but enable eligible complex credit unions to opt-in to the CCULR
framework.
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\19\ 86 FR 13498 (Mar. 9, 2021).
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The ANPR provided for a 60-day comment period that closed on May
10, 2021. The Board received 19 comments. Almost all commenters
supported the stated goal of simplifying the 2015 Final Rule. In
general, commenters favored the NCUA developing a CCULR complement to
risk-based capital rather than adopting a RBLR system of capital
adequacy.
Several commenters were opposed to the RBLR framework because it
would likely call for higher capital requirements for credit unions
holding certain assets compared to the current RBC requirements.
Several commenters also stated that introducing a RBLR regime at this
point would increase regulatory burden and negate the substantial work
complex credit unions have undertaken to achieve compliance with the
2015 Final Rule. Commenters also generally stated that the RBLR would
increase transaction costs for complex credit unions as they would be
required to invest additional resources to redevelop the processes that
have been put in place in anticipation of the RBC requirements. A few
commenters also stated that a RBLR framework could result in a capital
cliff. These commenters were concerned that a small change in assets
could move a credit union to a new buffer, thereby causing a large
increase in minimum capital requirements.
Almost all commenters that favored the CCULR framework noted that
it is a more flexible framework than the RBLR because complex credit
unions have the option of calculating the more complex risk-based
capital measure for a more precise and generally lower overall capital
requirement. A few commenters noted that a benefit of the CCULR
framework, as compared to a RBLR framework, is its similarity to the
capital framework of the other banking agencies.
After reviewing the comments received in response to the ANPR, the
Board decided to issue this proposed rule to provide a simple measure
of capital adequacy for complex credit unions that would serve as a
complement to the 2015 Final Rule.
II. Legal Authority
This proposed rule would primarily provide a simple measure of
capital adequacy for credit unions classified as complex based on the
principles of the CBLR framework. The CCULR would relieve complex
credit unions that satisfy specified qualifying criteria from having to
calculate the risk-based capital ratio. In exchange, the credit union
would be required to maintain a higher net worth ratio than is
otherwise required for the well-capitalized classification for risk-
based capital purposes. This is a similar trade-off to the decision
qualifying community banks make under the CBLR. After the initial phase
in period, a qualifying complex credit union that has a net worth ratio
of 10 percent or greater will be eligible to opt into the CCULR
framework.
A qualifying complex credit union that opts into the CCULR
framework and maintains the minimum net worth ratio (both during and
after the threshold transition) will be considered well capitalized
under the 2015 Final Rule.\20\ The proposed rule would also make
several amendments to update the NCUA's 2015 Final Rule, including
addressing asset securitizations issued by credit unions, clarifying
the treatment of off-balance sheet exposures, deducting certain
mortgage servicing assets from a complex credit union's risk-based
capital numerator, updating certain derivative-related definitions and
clarifying the definition of a consumer loan.
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\20\ 12 CFR 702.102(a)(1) (effective Jan. 1, 2022).
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The Board is issuing this proposed rule pursuant to its authority
under the FCUA. Under the FCUA, the NCUA is the chartering and
supervisory authority for FCUs and the federal supervisory authority
for FICUs.\21\ The FCUA grants the NCUA a broad mandate to issue
regulations governing both FCUs and all FICUs. Section 120 of the FCUA
is a general grant of regulatory authority and authorizes the Board to
prescribe rules and regulations for the administration of the FCUA.\22\
Section 207 of the FCUA is a specific grant of authority over share
insurance coverage, conservatorships, and liquidations.\23\ Section 209
of the FCUA is a plenary grant of regulatory authority to the Board to
issue rules and regulations necessary or appropriate to carry out its
role as share insurer for all FICUs.\24\ Accordingly, the FCUA grants
the Board broad rulemaking authority to ensure that the credit union
industry and the NCUSIF remain safe and sound.
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\21\ 12 U.S.C. 1752-1775.
\22\ 12 U.S.C. 1766(a).
\23\ 12 U.S.C. 1787(b)(1).
\24\ 12 U.S.C. 1789(a)(11).
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The FCUA also includes an express grant of authority for the Board
to develop capital adequacy standards for credit unions. In 1998,
Congress enacted the Credit Union Membership Access Act (CUMAA).\25\
Section 301 of CUMAA added section 216 to the FCUA,\26\ which required
the Board to adopt by regulation a system of prompt corrective action
(PCA) to restore the net worth of credit unions that become
inadequately capitalized.\27\ Section
[[Page 45827]]
216(b)(1)(A) requires the Board to adopt by regulation a system of PCA
for credit unions consistent with section 216 of the FCUA and
comparable to section 38 of the FDI Act.\28\ Section 216(b)(1)(B)
requires that the Board, in designing the PCA system, also take into
account the ``cooperative character of credit unions'' (that is, 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).\29\ The Board
initially implemented the required system of PCA in 2000,\30\ primarily
in part 702, and, as discussed previously, most recently made
substantial updates to the regulation in the 2015 Final Rule.
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\25\ Public Law 105-219, 112 Stat. 913 (1998).
\26\ 12 U.S.C. 1790d.
\27\ The risk-based net worth requirement for credit unions
meeting the definition of complex was first applied on the basis of
data in the Call Report reflecting activity in the first quarter of
2001. 65 FR 44950 (July 20, 2000). The NCUA's risk-based net worth
requirement has been largely unchanged since its implementation,
with the following limited exceptions: Revisions were made to the
rule in 2003 to amend the risk-based net worth requirement for
member business loans, 68 FR 56537 (Oct. 1, 2003); revisions were
made to the rule in 2008 to incorporate a change in the statutory
definition of ``net worth,'' 73 FR 72688 (Dec. 1, 2008); revisions
were made to the rule in 2011 to expand the definition of ``low-risk
assets'' to include debt instruments on which the payment of
principal and interest is unconditionally guaranteed by NCUA, 76 FR
16234 (Mar. 23, 2011); 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); and revisions
were made in 2020 to reflect loans issued under the Paycheck
Protection Program, 85 FR 23212 (Apr. 27, 2020).
\28\ 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 insured
banks). In discussing the statutory requirement for comparability,
the 2019 Supplemental Rule stated that ``the FCU Act requires the
Board to adopt a PCA framework comparable to the PCA framework in
the FDI Act. The FCU Act, however, does not require the Board to
adopt a system of risk-based capital identical to the risk-based
capital framework for federally insured banking organizations.''
\29\ 12 U.S.C. 1790d(b)(1)(B).
\30\ 12 CFR part 702; see also 65 FR 8584 (Feb. 18, 2000) and 65
FR 44950 (July 20, 2000).
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Among other things, section 216(c) of the FCUA requires the NCUA to
use a credit union's net worth ratio to determine its classification
among five net worth categories set forth in the FCUA.\31\ Section
216(o) generally defines a credit union's net worth as its retained
earnings balance as determined under generally accepted accounting
principles (GAAP),\32\ and a credit union's net worth ratio, as the
ratio of its net worth to its total assets.\33\ 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.\34\
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\31\ 12 U.S.C. 1790d(c).
\32\ 12 U.S.C. 1790d(o)(2).
\33\ 12 U.S.C. 1790d(o)(3).
\34\ 12 U.S.C. 1790d(c)-(g); 12 CFR 702.204(a)-(b).
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Section 216(d)(1) of the FCUA requires that the NCUA's system of
PCA include, in addition to the statutorily defined net worth ratio
requirement, ``a risk-based net worth \35\ requirement for credit
unions that are complex, as defined by the Board.'' \36\ The FCUA
directs the NCUA to base its definition of complex credit unions ``on
the portfolios of assets and liabilities of credit unions.'' \37\ If a
credit union is not classified as complex, as defined by the NCUA, it
is not subject to a risk-based net worth requirement. In addition to
granting the NCUA broad authority to determine which credit unions are
complex, and therefore subject to a risk-based net worth requirement,
the FCUA also grants the NCUA broad authority to design a risk-based
net worth requirement to apply to such complex credit unions.\38\
Specifically, unlike the terms net worth and net worth ratio, the term
risk-based net worth is not defined in the FCUA. Accordingly, section
216 grants the Board the authority to design risk-based net worth
requirements, so long as the regulations are comparable to those
applicable to other federally insured depository institutions and
consistent with the requirements of the FCUA.
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\35\ 12 U.S.C. 1790d(d)(2). For purposes of this rulemaking, the
term risk-based net worth requirement is used in reference to the
statutory requirement for the Board to design a 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. The term
risk-based capital ratio is used to refer to the specific standards
established in the 2015 Final Rule to function as criteria for the
statutory risk-based net worth requirement. The term risk-based
capital ratio is also used by the other banking agencies and the
international banking community when referring to the types of risk-
based requirements that are addressed in the 2015 Final Rule. This
change in terminology throughout the proposed rule would have no
substantive effect on the requirements of the FCUA, and is intended
only to reduce confusion for the reader.
\36\ 12 U.S.C. 1790d(d)(1).
\37\ 12 U.S.C. 1790d(d).
\38\ Id.
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The proposed CCULR framework is comparable to section 38 of the FDI
Act, as implemented by CBLR Final Rule.\39\ As discussed previously,
section 201 of the EGRRCPA amended part of the other banking agencies'
capital adequacy framework to direct the other banking agencies to
propose a simplified, alternative measure of capital adequacy for
certain federally insured banks.\40\ The other banking agencies
implemented this requirement, including amendments to their PCA
regulations under section 38 of the FDI Act, in the CBLR Final Rule.
The Board also notes that the proposed amendments to the NCUA's 2015
Final Rule would make the rule more comparable to the other banking
agencies' 2013 capital rules.
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\39\ 12 CFR part 3 (OCC), 12 CFR part 217 (Federal Reserve
Board), and 12 CFR part 324 (FDIC).
\40\ 12 U.S.C. 5371.
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In addition to satisfying the comparability requirement in section
216, the proposed CCULR framework also meets the requirements in
section 216 for the NCUA's risk-based net worth framework. Section 216
has two express provisions that authorize an NCUA analogue to the
CBLR--the definition of complex credit unions and the mandate for the
Board to design a risk-based net worth requirement. In designing its
CCULR framework, the Board considered both its legal authority to
exclude credit unions from risk-based net worth requirements under the
definition of complex, and its authority to design a system of risk-
based net worth that includes a higher net worth ratio in place of
calculating a ratio based on risk-adjusted assets.\41\
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\41\ The Board also briefly considered an additional independent
legal basis for the proposed CCULR framework. As discussed in the
section III.D. Calibration of the CCULR, the proposed CCULR
framework would result in complex credit unions generally holding
more capital than under the 2015 Final Rule. Because of the higher
capital requirements under the proposed CCULR framework, the Board
also considered whether the proposal could be considered an
alternative method to demonstrate compliance with the 2015 Final
Rule, instead of an alternative measure of risk-based net worth.
This approach would be within the Board's general discretion to
determine the means and manner by which it measures compliance with
its regulations, including the risk-based net worth requirement.
However, in light of the express statutory authority to define
complex and design a risk-based net worth framework, the Board
believes this alternative basis, while valid, is not necessary to
support the proposed rule.
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The Board considered its express authority under section 216 to
define which credit unions are complex, and thus exclude noncomplex
credit unions from the risk-based net worth requirement.\42\ The
express delegation grants the Board significant discretion to determine
which credit unions are considered complex. Under this legal basis, the
Board would continue to limit the definition of complex to only those
credit unions with quarter-end total assets that exceed $500 million
dollars. In using asset size as a proxy for complexity, the Board
complied with the statutory directive that the definition of complex be
based on the portfolios of assets and liabilities of credit unions.
Specifically, the Board relied on a complexity index that counted the
number of complex
[[Page 45828]]
products and services provided by credit unions.\43\ The complexity
index demonstrated that credit unions with greater than $500 million in
total assets held complex assets and liabilities as larger share of
their total assets than smaller credit unions.\44\
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\42\ When Congress expressly authorizes or directs an agency to
define a statutory term, it grants the agency broad discretion.
Under these circumstances, an agency is permitted to interpret a
term so long as its interpretation is not manifestly contrary to the
statute. The interpretation need not conform to the ordinary meaning
of the term. See Am. Bankers Ass'n v. Nat'l Credit Union Admin., 934
F.3d 649, 663 (D.C. Cir. 2019) (``An express delegation of
definitional power ``necessarily suggests that Congress did not
intend the [terms] to be applied in [their] plain meaning sense,''
Women Involved in Farm Econ. v. U.S. Dep't of Agric., 876 F.2d 994,
1000 (D.C. Cir. 1989), that they are not ``self-defining,'' id., and
that the agency ``enjoy[s] broad discretion'' in how to define them,
Lindeen v. SEC, 825 F.3d 646, 653 (D.C. Cir. 2016)).
\43\ Supra note 5 at 55470.
\44\ Id.
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The Board, however, could also propose a definition of complex
that, rather than looking at the assets and liabilities of credit
unions in the aggregate, looks at the individual portfolios of credit
unions with total assets greater than $500 million. This approach is
also consistent with the statutory provision that the complex
definition should be based on the portfolios of assets and liabilities
of credit unions. The Board would use the same qualifying criteria as
in the proposed rule, as measures of complexity. If a credit union
would otherwise meet the proposed definition of a qualifying credit
union, it would be considered not complex, and therefore not subject to
risk-based capital, as implemented by the 2015 Final Rule. This
alternative approach would create a functionally equivalent requirement
to the one set forth in this proposed rule, with the only difference
being the technical details of the implementing regulatory text in part
702.
The Board also considered its express authority and mandate to
design the CCULR on the basis that the CCULR constitutes a risk-based
net worth requirement, as required for complex credit unions in section
216(d). As discussed previously, the FCUA does not define the term
risk-based net worth requirement and only sets forth general guidelines
for the design of the risk-based net worth requirement mandated under
section 216(d)(1). 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.'' Under section 216(c)(1)(B) of the FCUA, the net
worth ratio required for a credit union to be adequately capitalized is
six percent.
The plain language of section 216(d)(2) supports the NCUA's
interpretation that Congress intended for the NCUA to design the risk-
based net worth requirement to take into account any material risks
beyond those already addressed through the statutory six percent net
worth ratio required for a credit union to be adequately capitalized.
In other words, the language in paragraph 216(d)(2) simply identifies
the types of risks that the NCUA's risk-based net worth requirement
must address, that is, those risks not already addressed by the
statutory six percent net worth requirement. Notably, the FCUA does not
require that the risk-based net worth requirement include risk-adjusted
assets as part of its calculation.\45\ Instead, the Board interprets
``risk-based'' to require an accounting for risks in some manner--that
is, the measure must be based on a consideration of risks--but not any
particular manner of doing so.\46\ Therefore, provided the Board
determines that the proposed CCULR considers all material risks against
which the six percent net worth ratio does not provide protection, then
the Board has satisfied the statutory requirements for a risk-based net
worth ratio.\47\
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\45\ Case law research revealed no decisions discussing the
meaning of ``risk-based'' under the FCUA or other statutes that
impose risk-based capital requirements on financial institutions.
\46\ By contrast, in 2010, Congress specifically elaborated on
the risk-based measures applicable to banks by providing that the
generally applicable risk-based capital requirements for those
institutions must include risk-weighted assets in the denominator of
the ratio. Public Law 111-203, codified at 12 U.S.C. 5371. Congress
did not elect to amend the FCUA to add a similar elaboration on the
risk-based net worth requirement applicable to complex credit
unions, which is consistent with the Board's interpretation that the
term risk-based by itself does not necessarily entail risk-weighted
assets. This reading is consistent with judicial interpretations of
the closely related phrase ``based on,'' which the Supreme Court has
held to indicate a causal or but-for causation relationship between
the phrase ``based on'' and the term it modifies. Babb v. Wilkie,
140 S.Ct. 1168, 2020 WL 1668281, at *4 (Apr. 6. 2020). Similarly, a
``risk-based'' requirement can be understood as a requirement that
bears a causal relationship to the relevant risks but does not
require a specific form for the calculation of this requirement.
\47\ In a similar manner, the Board initially explored a non-
risk-adjusted approach in the advance notice of proposed rulemaking
that the Board issued following CUMAA's enactment in 1998, in which
it requested comments on addressing this provision through increased
net worth requirements as well as through risk-adjusted measures. 63
FR 57938 (Oct. 29, 1998). This approach is also consistent with the
Senate report accompanying CUMAA, which stated: ``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. Thus the NCUA should, for example,
consider whether the six 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.'' S. Rep. No. 105-193 at 14 (May 21, 1998) (emphasis
added). The report indicates that Congress did not intend to
prescribe the manner in which the Board accounts for any relevant
risks that the six percent net worth ratio does not adequately
address.
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The Board believes that both approaches to designing the CCULR
framework are supported by the FCUA. The Board, however, has chosen to
draft the proposed rule under its authority to design a risk-based net
worth requirement. The Board believes that considering the CCULR as an
alternative way to calculate a risk-based net worth requirement is more
straightforward, consistent with the structure of section 216, and
simpler for complex credit unions to implement.
III. Proposed Rule
A. Overview of the CCULR Framework
This proposed rule would provide a simplified measure of capital
adequacy for credit unions classified as complex (credit unions with
total assets greater than $500 million). Under the proposed rule, a
qualifying complex credit union that meets the minimum CCULR, which is
equal to its net worth ratio, would be eligible to opt into the CCULR
framework and would be considered well capitalized. The proposed CCULR
framework is based on the principles of the CBLR framework. It would
relieve complex credit unions that meet specified qualifying criteria
and have opted into the CCULR framework from having to calculate a
risk-based capital ratio, as implemented by the 2015 Final Rule. In
exchange, the qualifying complex credit union would be required to
maintain a higher net worth ratio than is otherwise required for the
well-capitalized classification. This is a similar trade-off to the one
qualifying community banking organizations are able to make under the
CBLR. The CCULR would further the goal of the FCUA's PCA requirements
by ensuring that complex credit unions continue to hold sufficient
capital, while minimizing the burden associated with complying with the
NCUA's risk-based capital requirement.
As noted previously, the 2015 Final Rule is scheduled to take
effect on January 1, 2022. Accordingly, the regulatory amendments
contained in this proposed rule, if finalized, would not take effect
until January 1, 2022, and qualifying complex credit unions would not
be able to opt into the proposed CCULR framework prior to this
effective date.
B. Qualifying Complex Credit Unions
Under the proposal, a qualifying complex credit union would be
defined as a complex credit union under Sec. 702.103 that meets the
following criteria (qualifying criteria), each as described further
below:
[[Page 45829]]
(1) Has a CCULR (net worth) of 10 percent or greater, subject to an
initial transition period; \48\
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\48\ For an additional discussion on why the Board set the ratio
to 10 percent, see Section D. Calibration of the CCULR. For
additional information on the transition period, see Section I.
Transition Provision.
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(2) Has total off-balance sheet exposures of 25 percent or less of
its total assets;
(3) Has the sum of total trading assets and total trading
liabilities of five percent or less of its total assets; and
(4) Has the sum of total goodwill, including goodwill that meets
the definition of excluded goodwill, and total other intangible assets,
including intangible assets that meet the definition of excluded other
intangible assets, of two percent or less of its total assets.
The Board believes that complex credit unions that do not meet any
one of the qualifying criteria should remain subject to risk-based
capital to ensure that such credit unions hold capital commensurate
with the risk profile of their activities. The Board would continue to
evaluate the qualifying criteria over time to ensure that they continue
to be appropriate.
Question 1: The Board invites comment on the qualifying criteria.
What are the advantages and disadvantages of each qualifying criterion?
What is the burden associated with determining whether a complex credit
union meets the proposed qualifying criteria? What other criteria, if
any, should the Board consider in the proposed definition? What are
commenters' views on the tradeoffs between simplicity and having
additional qualifying criteria? In specifying any alternative
qualifying criteria regarding a credit union's risk profile, please
provide information on how alternative qualifying criteria should be
considered in conjunction with the calibration of the CCULR level and
why the Board should consider such alternative criteria. For example,
if the Board were to consider a CCULR of less than 10 percent to be
well capitalized, should additional qualifying criteria be
incorporated? The Board may consider qualifying criteria related to
mortgage servicing assets, investments in credit union service
organizations (CUSOs), or investments in corporate credit unions if a
permanent CCULR of less than 10 percent is considered.
1. CCULR of 10 Percent or Greater
After the transition period, the proposed rule would require a
complex credit union to have a CCULR of at least 10 percent to be
classified as a qualifying complex credit union. An otherwise
qualifying complex credit union could not opt into the CCULR framework
unless its CCULR was at least 10 percent.
Transition Provision
Under the proposed rule, there is a transition provision to phase
in the 10 percent CCULR over two years to give complex credit unions
time to adjust and adapt to the new requirements. The transition
provision provides for full effectiveness of the 10 percent CCULR on
January 1, 2024. From January 1, 2022, to December 31, 2022, a complex
credit union may opt into the CCULR framework if it has a CCULR of nine
percent or greater. Therefore, a qualifying complex credit union that
opts into the CCULR framework and that maintains a CCULR of nine
percent would be considered well capitalized. Beginning January 1,
2023, a complex credit union that has opted into the CCULR framework
must have a CCULR of 9.5 percent or greater to meet the eligibility
criteria and be considered well-capitalized. After January 1, 2024, a
complex credit union would need to maintain a CCULR of 10 percent to be
considered well-capitalized. Accordingly, the proposed rule provides a
complex credit union two years to meet a CCULR of 10 percent or
greater. See, Section I. Transition Provision for additional
information.
2. Off-Balance Sheet Exposures
Under the proposal, a qualifying complex credit union would be
required to have total off-balance sheet exposures of 25 percent or
less of its total assets, as of the end of the most recent calendar
quarter. The Board is including these qualifying criteria in the CCULR
framework because the CCULR includes only on-balance sheet assets in
its denominator and thus would not require a qualifying complex credit
union to hold capital against its off-balance sheet exposures. This
qualifying criterion is intended to reduce the likelihood that a
qualifying complex credit union with significant off-balance sheet
exposures would be required to hold less capital under the CCULR
framework than under the risk-based capital ratio.\49\
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\49\ The proposed amendments to Sec. 702.104, Risk-based
capital ratio, include credit conversion factors and risk-weights
for off-balance sheet exposures.
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The other banking agencies' CBLR framework also excludes banking
organizations with significant off-balance sheet exposures. The CBLR
Final Rule excludes banking organizations that have more than 25
percent of total consolidated assets in off-balance sheet exposures.
The other banking agencies' definition of off-balance sheet exposures,
however, has several differences from the current definition of off-
balance sheet exposures in the 2015 Final Rule. Therefore, to make the
CCULR framework more comparable to the CBLR and to improve on the
effectiveness of the 2015 Final Rule, the proposed rule would amend the
NCUA's definition of off-balance sheet exposures. The proposed
amendments to the definition of off-balance sheet exposure would apply
to both the proposed CCULR framework and the risk-based capital
framework.\50\
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\50\ The proposed rule would also include risk weights for each
new exposure in the definition of off-balance sheet exposure. See,
Section M. Amendments to the 2015 Final Rule.
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Under the proposed CCULR framework, off-balance sheet exposures
would mean:
(1) For unfunded commitments, excluding unconditionally cancellable
commitments, the remaining unfunded portion of the contractual
agreement.
(2) For loans transferred with limited recourse, or other seller-
provided credit enhancements, and that qualify for true sale
accounting, the maximum contractual amount the credit union is exposed
to according to the agreement, net of any related valuation allowance.
(3) For loans transferred under the Federal Home Loan Bank (FHLB)
mortgage partnership finance program, the outstanding loan balance as
of the reporting date, net of any related valuation allowance.
(4) For financial standby letters of credit, the total potential
exposure of the credit union under the contractual agreement.
(5) For forward agreements that are not derivative contracts, the
future contractual obligation amount.
(6) For sold credit protection through guarantees and credit
derivatives, the total potential exposure of the credit union under the
contractual agreement.
(7) For off-balance sheet securitization exposures, the notional
amount of the off-balance sheet credit exposure (including any credit
enhancements, representations, or warranties that obligate a credit
union to protect another party from losses arising from the credit risk
of the underlying exposures) that arises from a securitization.
(8) For securities borrowing or lending transactions, the amount of
all securities borrowed or lent against
[[Page 45830]]
collateral or on an uncollateralized basis.\51\
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\51\ New exposure categories may require changes to the Call
Report. For example, unconditionally cancellable commitments, off-
balance sheet securitization exposures, forward agreements, sold
credit protection through guarantees and credit derivatives, and
securities borrowing and lending transactions may require additional
Call Report fields.
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Each element of the off-balance sheet definition is discussed in
more detail below.
Unfunded Commitments
The current definition of off-balance sheet exposures in the 2015
Final Rule includes all unfunded commitments. The proposed definition,
however, would not include commitments that are unconditionally
cancellable. Under the proposed rule, an unconditionally cancellable
commitment would mean a commitment that a credit union may, at any
time, with or without cause, refuse to extend credit under (to the
extent permitted under applicable law). The Board notes that for an
exposure to be treated as unconditionally cancellable, the contractual
agreement must explicitly state that the credit union can
unconditionally refuse to extend credit under the commitment. A
provision stating the credit union can cancel the commitment for good
cause would be insufficient.
Loans Transferred With Limited Recourse
The current definition of off-balance sheet exposures in the 2015
Final Rule includes all other loans transferred with limited recourse
or other seller-provided credit enhancements and that qualify for true
sales accounting. The proposed rule would make no substantive changes
to this prong of the off-balance sheet exposure definition. The
exposure amount for loans transferred with limited recourse is the
maximum contractual amount the credit union is exposed to according to
the agreement, net of any related valuation allowance.
Loans Transferred Under the Federal Home Loan Bank (FHLB) Mortgage
Partnership Finance Program Loans
The current definition of off-balance sheet exposures in the 2015
Final Rule includes loans transferred under the FHLB mortgage
partnership finance program. The proposed rule would clarify the
language of this item in the off-balance sheet exposure definition but
would make no other substantive change. The exposure amount for loans
that meet the definition of mortgage partnership finance program and
are transferred under the FHLB mortgage partnership finance program is
the outstanding loan balance as of the reporting date, net of any
related valuation allowance.
Financial Standby Letters of Credit
The proposed rule would include financial standby letters of credit
in the definition of off-balance sheet exposures. These exposures are
not explicitly included in the current definition of off-balance sheet
exposure in the 2015 Final Rule; however, they are included as off-
balance sheet items. Under the proposed rule, the exposure amount for
financial standby letters of credit would be the total potential
exposure of the credit union under the contractual agreement.
Forward Agreements
The proposed definition of off-balance exposures would also include
forward agreements that are not derivative contracts. Forward
agreements are not explicitly included in the current definition of
off-balance sheet exposure in the 2015 Final Rule; however, forward
agreements are included as off-balance sheet items. A forward agreement
would mean a legally binding contractual obligation to purchase assets
with certain drawdown at a specified future date, not including
commitments to make residential mortgage loans or forward foreign
exchange contracts. The exposure amount of a forward agreement that is
not a derivative contract would be the future contractual obligation
amount.
Similar to the other banking agencies, the Board is also clarifying
that typical mortgage lending activities such as forward loan delivery
commitments between credit unions and investors are typically
derivative contracts, and therefore, would be excluded from the off-
balance sheet exposure definition.\52\ The Board also notes that put
and call options on mortgage-backed securities are also typically
derivatives and would be excluded from the definition of off-balance
sheet exposure. A contractual obligation for the future purchase of a
``to be announced'' (that is, when-issued) mortgage securities contract
that does not meet the definition of a derivative contract, however,
would be captured by the off-balance sheet exposure definition as it
would be considered a forward agreement. In contrast, a contractual
obligation for the future sale (rather than purchase) of a ``to be
announced'' mortgage securities contract that does not meet the
definition of a derivative contract would not be captured in the off-
balance sheet qualifying criterion, as it would not be considered a
forward agreement.
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\52\ Derivative contract means a financial contract whose value
is derived from the values of one or more underlying assets,
reference rates, or indices of asset values or reference rates.
Derivative contracts include interest rate derivative contracts,
exchange rate derivative contracts, equity derivative contracts,
commodity derivative contracts, and credit derivative contracts.
Derivative contracts also include unsettled securities, commodities,
and foreign exchange transactions with a contractual settlement or
delivery lag that is longer than the lesser of the market standard
for the particular instrument or five business days. 12 CFR 702.2
(effective Jan. 1, 2022).
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Sold Credit Protection Through Guarantees and Credit Derivatives
The proposed definition of off-balance sheet exposure would also
include sold credit protection through guarantees \53\ and credit
derivatives. These exposures are not explicitly included in the
definition of off-balance sheet exposure in the 2015 Final Rule;
however, guarantees are included as off-balance sheet items. Credit
derivatives are included in the other banking agencies' CBLR framework
as part of the off-balance sheet threshold. Under the proposed
definition, the exposure amount for sold credit protection through
guarantees and credit derivatives would be the total potential exposure
of the credit union under the contractual agreement. A credit
derivative would mean a financial contract executed under standard
industry credit derivative documentation that allows one party (the
protection purchaser) to transfer the credit risk of one or more
exposures (reference exposure[s]) to another party (the protection
provider) for a certain period of time. At this time, FCUs are not
permitted to have credit derivatives and the Board is unaware of any
state-chartered credit unions engaging in credit derivatives. The Board
is including this provision for consistency with the other banking
agencies and to ensure that the proposed rule is flexible should credit
unions hold credit derivatives in the future.
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\53\ A guarantee means a financial guarantee, letter of credit,
insurance, or similar financial instrument that allows one party to
transfer the credit risk of one or more specific exposures to
another party. 12 CFR 702.2 (effective Jan. 1, 2022).
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Off-Balance Sheet Securitizations
Additionally, compared to the current definition of off-balance
sheet exposure, the proposed definition would include off-balance sheet
securitizations, including any credit enhancements, representations, or
warranties that obligate a credit union to protect another party from
losses arising from the credit risk of the underlying
[[Page 45831]]
exposures.\54\ Off-balance sheet securitizations are not included in
the current definition of off-balance sheet exposure or off-balance
sheet items, but are included in the other banking agencies' CBLR
framework as part of the off-balance sheet threshold. An off-balance
sheet securitization exposure could arise in a number of circumstances.
For example, if an originating credit union provides liquidity or
credit support for an issued securitization, the credit union may
report an off-balance sheet securitization exposure. The exposure
amount of an off-balance sheet securitization exposure would be the
notional amount of the exposure.
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\54\ The other banking agencies define the term ``credit
enhancements, representations, or warranties.'' The Board believes
the definition used by the other banking agencies introduces
additional complexity and therefore is not adopting it at this time
and, instead, will rely on the plain meaning of these terms.
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Securities Borrowing or Lending Transactions
Finally, the proposed rule would explicitly include securities
borrowing or lending transactions. Securities borrowing or lending
transactions are not included in the current definition of off-balance
sheet exposure or off-balance sheet items, but are included in the
other banking agencies' CBLR framework as part of the off-balance sheet
qualifying criterion. These types of transactions are permissible for
FCUs under part 703 of NCUA regulations and may be permissible for
FISCUs as well.\55\ For these transactions, the exposure amount would
be the amount of all securities borrowed or lent against collateral or
on an uncollateralized basis.
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\55\ 12 CFR 703.13. 12 CFR 703.2 defines securities lending as
lending a security to a counterparty, either directly or through an
agent, and accepting collateral in return.
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Collectively, the above eight elements comprise the proposed
definition of off-balance sheet exposures that would apply to both the
proposed CCULR framework and the risk-based capital framework under the
2015 Final Rule. Section M. Amendments to the 2015 Final Rule, which
addresses two additional off-balance sheet exposures, that are not part
of the off-balance exposure definition because they are not included as
an off-balance sheet exposure in either the CCULR or the other banking
agencies' CBLR off-balance sheet thresholds. However, they are
considered in the other banking agencies' 2013 capital rule and are
proposed amendments to the NCUA's 2015 risk-based capital rule. By
applying the proposed changes to both frameworks, the Board would
establish consistency between the 2015 Final Rule and the proposed
CCULR framework. Without these conforming amendments to the definition
of off-balance sheet exposures, a credit union might be required to
hold less capital under the CCULR framework than under the risk-based
capital framework of the 2015 Final Rule.
The Board proposes a 25 percent threshold for off-balance sheet
exposures, as this threshold is similar to the CBLR framework and it
would provide enough flexibility for complex credit unions to engage in
normal lending practices. The Board does not believe that traditional
banking activities, such as extending loan commitments to members,
should necessarily preclude a complex credit union from qualifying to
use the CCULR framework. The 25 percent threshold will also ensure that
complex credit unions engaging in substantial off-balance sheet
activity will also have the commensurate regulatory capital
requirement. Therefore, the Board proposes a 25 percent threshold for
off-balance sheet exposures, consistent with the CBLR Final Rule.
Question 2: The Board invites comment on the proposed off-balance
sheet exposures qualifying criterion. What aspects of the off-balance
sheet exposures qualifying criterion, including the related definition,
requires further clarity? What other alternatives should the Board
consider for purposes of defining the proposed qualifying criterion?
What impact would the proposed qualifying criterion have on a complex
credit union's business strategies and lending decisions? Is a 25
percent threshold appropriate? If commenters believe an alternative
threshold is more appropriate, please provide data.
3. Trading Assets and Liabilities
Under the proposal, a qualifying complex credit union would be
required to have the sum of its total trading assets and total trading
liabilities be five percent or less of its total assets, each measured
as of the end of the most recent calendar quarter.\56\ The proposed
rule would include new definitions for the terms trading assets and
trading liabilities. Trading assets would be defined as securities or
other assets acquired, not including loans originated by the credit
union, for the purpose of selling in the near term or otherwise with
the intent to resell to profit from short-term price movements. Trading
assets would not include shares of a registered investment company or a
collective investment fund used for liquidity purposes. Trading assets,
however, would include derivatives recorded as assets on a credit
union's balance sheet that are used for trading purposes. The Board
notes that FCUs do not currently have the authority under part 703 to
enter into derivative transactions for trading.
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\56\ Currently, the Call Report does not include a reporting
requirement for trading assets and trading liabilities. As discussed
in Section III. L. Illustrative Reporting Forms to Support the
CCULR, if the proposed rule is finalized, the NCUA would update the
Call Report before January 1, 2022. The revised Call Report would
include reporting requirements for trading assets and trading
liabilities.
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The Board is proposing to define trading assets similarly to the
other banking agencies' definition with the exception of including
securities or investments acquired through underwriting or dealing, or
securities acquired as an accommodation to a customer. The Board does
not believe these are activities that credit unions currently engage in
and, additionally, they would still likely be captured in the
definition of trading assets. The Board notes that any loan originated
by a credit union would not be considered a trading asset. However,
under the proposed definition, loans purchased with the intent to sell
in the short-term would be considered trading assets.
Trading liabilities would be defined as the total liability for
short positions of securities or other liabilities held for trading
purposes. A short position is established when an investor sells an
investment that the investor does not own. The following is an example
of a short position that would not be included within the definition of
trading liability because it is used to manage interest rate risk. In
managing interest rate risk, an investor might sell a 10-year Treasury
Note to decrease the price volatility of the investor's bond/loan
portfolio. The value of the 10-year Treasury Note, which is a liability
for the investor, would change in the same direction as the bond/loan
portfolio, reducing interest rate risk if the price change of assets
minus liabilities is less than it would have been without shorting the
10-year Treasury Note. If a credit union engaged in such a transaction,
it would not be included in the trading liabilities definition. The
Board also notes that FCUs do not currently have the authority to short
securities.\57\ Additionally, trading liabilities would include
derivatives recorded as liabilities on a credit union's balance sheet
that are used for trading purposes. The Board notes that FCUs do not
currently have the
[[Page 45832]]
authority to enter into derivative transactions for trading.
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\57\ 12 CFR 703.15.
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These qualifying criteria would be calculated in accordance with
the reporting instructions in the Call Report and the complex
qualifying credit union would divide the sum of its total trading
assets and total trading liabilities by its total assets.
The other banking agencies limited a qualifying community banking
organization to having total trading assets and trading liabilities of
five percent or less of its total consolidated assets. In the CBLR
Final Rule, the other banking agencies discussed the potential elevated
levels of risk and complexity that can be associated with certain
trading activities and, therefore, required banking organizations with
significant trading assets and liabilities to be subject to risk-based
capital requirements. The other banking agencies noted that elevated
levels of trading activity can produce a heightened level of earnings
volatility, which has implications for capital adequacy. The other
banking agencies also expressed concerns about making the CBLR
framework available to banking organizations with material market risk
exposure. For similar reasons, the Board believes it is important to
have a qualifying criterion based on the sum of total trading assets
and trading liabilities.
Based on the Board's analysis of currently available Call Report
data and permissible activities for FCUs, the Board believes the vast
majority of complex credit unions do not have material amounts of
trading assets and trading liabilities.\58\ The Board has included a
trading activity criterion, despite the general lack of credit union
trading activity, because the Board recognizes the potential elevated
levels of risk and complexity that can be associated with certain
trading activities even if is not applicable to most complex credit
unions. In addition, the Board recognizes that the level of credit
union trading activity could increase in the future.
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\58\ Even though it is permissible for FCUs to trade securities,
Call Report data shows FCUs do not hold substantial trading assets.
See, 12 CFR 703.13(f). Depending on state law, FISCUs also may be
permitted to hold trading assets, however, again, the Board's
analysis shows that FISCUs do not hold material amounts of trading
assets. As of December 2020, the largest concentration in trading
debt securities at a complex credit union was 2.3 percent of assets.
Furthermore, only four complex credit unions had over one percent of
assets in trading debt securities.
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Question 3: The Board invites comment on the proposed trading
activity criterion. What other alternative measures of trading activity
should the Board consider for purposes of defining a qualifying complex
credit union and why?
4. Goodwill and Other Intangible Assets
Under the proposal, a qualifying complex credit union would be
required to have the sum of total goodwill and other intangible assets
of two percent or less of its total assets. Qualifying complex credit
unions would be required to include excluded goodwill and excluded
other intangible assets in this calculation.\59\ Goodwill is defined as
an intangible asset, maintained in accordance with GAAP, representing
the future economic benefits arising from other assets acquired in a
business combination (for example, a merger) that are not individually
identified and separately recognized. Other intangible assets mean
intangible assets, other than servicing assets and goodwill, maintained
in accordance with GAAP. Other intangible assets do not include
excluded other intangible assets. These are the same definitions as in
the 2015 Final Rule. However, as discussed previously, for purposes of
the CCULR, complex credit unions would be required to include in the
proposed threshold excluded goodwill and excluded other intangible
assets, even though excluded goodwill and excluded other intangible
assets are not included in the goodwill deduction under the 2015 Final
Rule. The 2015 Final Rule established an implementation period for
deducting goodwill and other intangible assets acquired by certain
supervisory mergers prior to the publication of the 2015 Final Rule.
This approach ensured credit unions were not treated punitively for
goodwill and other intangible assets acquired before the publication of
the 2015 Final Rule. However, the CCULR framework is voluntary and the
same fairness concerns are not present. Therefore, the Board has chosen
to include the full amount of goodwill and other intangible assets for
this criterion.
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\59\ 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. 12 CFR
702.2 (effective Jan. 1, 2022).
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The Board is proposing a qualifying criterion related to goodwill
and other intangible assets because 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. Due to the uncertainty of recognizing value from
goodwill and other intangible assets, the other banking agencies
require insured banks to deduct goodwill and intangible assets from
tier 1 capital.\60\ The Board believes it is prudent to assess the
credit union's balance of goodwill and other intangible assets to
ensure comparability with the banking industry. Without this proposed
criterion, a qualifying credit union could use the CCULR despite
substantial goodwill and intangible assets, which would be inconsistent
with the principles of the CBLR framework. The Board also notes that
under the 2015 Final Rule, goodwill and other intangible assets are
deducted from both the risk-based capital ratio numerator and
denominator.
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\60\ See e.g., 12 CFR 324.22.
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As stated previously, the proposed rule includes a two percent
threshold on goodwill and other intangibles assets. The Board believes
that complex credit unions with two percent or less of their assets in
goodwill and other intangibles assets would not hold less capital under
the CCULR framework than under the risk-based capital ratio. In
addition, a two percent threshold only would exclude a small portion of
otherwise qualifying complex credit unions, an estimated four credit
unions as of December 31, 2020, from the CCULR framework. Therefore,
the Board believes a two percent threshold balances regulatory relief
for most qualifying complex credit unions, while still recognizing the
uncertainty and volatility of goodwill and other intangible assets. The
Board believes that complex credit unions with substantial goodwill and
other intangible assets should calculate their capital adequacy using
the risk-based capital ratio, as their portfolios may require higher
capital levels.
Question 4: The Board invites comment on the proposed qualifying
criterion for the sum of total goodwill and other intangible assets.
What are commenters' views on the inclusion of such a qualifying
criterion? Should qualifying complex credit unions be required to
include excluded goodwill and excluded other intangible assets that
would have been excluded under the 2015 Final Rule?
Question 5: As discussed previously, under the 2015 Final Rule,
goodwill and other intangible assets are deducted from both the risk-
based capital ratio numerator and denominator in order to
[[Page 45833]]
achieve a risk-based capital ratio numerator reflecting equity
available to cover losses in the event of liquidation. 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 the 2015 Final Rule could directly
reduce a credit union's risk-based capital ratio. Accordingly, under
the 2015 Final Rule, the Board also permitted credit unions to exclude
certain goodwill and other intangible assets from the deduction in the
risk-based capital ratio numerator. In particular, the 2015 Final Rule
excluded from the definition of goodwill, which must be deducted from
the risk-based capital ratio numerator, certain goodwill or other
intangible assets acquired by a credit union in a supervisory merger or
consolidation.
Under the 2015 Final Rule, excluded goodwill is defined 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 December 28, 2015. This term and definition
expire on January 1, 2029. Excluded other intangible assets is defined
as 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.
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. Both definitions apply to
supervisory mergers or combinations that occurred before December 28,
2015. The date, December 28, 2015, was 60 days after the 2015 Final
Rule was published in the Federal Register, which provided sufficient
notice to complex credit unions contemplating supervisory mergers at
the time the 2015 Final Rule was issued. The Board understands,
however, that there is some confusion as to whether the dates were
amended after the subsequent delays to the 2015 Final Rule in the 2018
Supplemental Rule and the 2019 Supplemental Rule. The Board notes that
as currently written, the delays to the effective date of the 2015
Final Rule do not amend the December 28, 2015, date for excluded
goodwill and other intangible assets. Any supervisory mergers that
included goodwill and other intangible assets after December 28, 2015,
are required deductions once the 2015 Final Rule becomes effective on
January 1, 2022. The Board, however, is open to considering an
amendment to the 2015 Final Rule. Should the Board amend the December
28, 2015, date to alleviate any potential confusion in the date caused
by the delayed effective date of the 2015 Final Rule? The Board also
notes that the CCULR framework, as proposed, would not require a
deduction, so any potential amendment would only be relevant for
complex credit unions that are not qualifying complex credit unions or
that have not opted to calculate their risk-based capital measure under
the CCULR framework. What are the advantages and disadvantages of
deducting goodwill from regulatory capital under the 2015 Final Rule?
As goodwill is not a tangible asset, how would not deducting goodwill
from regulatory capital adequately protect the NCUSIF in the event of a
failure and liquidation?
Question 6: Please comment on whether the Board should consider
qualifying criteria for other categories of exposures that are subject
to heightened risk weights under the 2015 Final Rule. Should the Board
combine several categories of higher risk-weighted exposures to ensure
a complex credit union's aggregate exposure is under a certain
threshold?
5. Other CBLR Eligibility Criteria
Total Assets of Less Than $10 Billion
Under the other banking agencies' CBLR framework, only depository
institutions or depository institution holding companies with total
consolidated assets of less than $10 billion are eligible to use the
CBLR. The $10 billion limitation was included in the EGRRCPA.\61\ The
other banking agencies also stated that a risk-based capital ratio is
more appropriate for larger banking organizations because such banking
organizations may present risks that are not appropriately captured by
the CBLR framework.\62\ Commenters to the ANPR that addressed the scope
of eligible institutions generally favored not using the CBLR threshold
of $10 billion. One commenter stated that because credit unions are
generally subject to more stringent portfolio shaping regulations than
banks, a $10 billion cap was not appropriate. One commenter stated that
the NCUA could set a higher threshold of $15 billion or $20 billion to
harmonize the CCULR with the more granular stress testing tiers. Other
non-credit union commenters favored a $10 billion limit on eligibility
to opt into the CCULR framework.
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\61\ Supra note 11.
\62\ Supra note 12.
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The Board is not proposing to include this qualifying criterion in
the proposed rule. The Board believes that the CCULR framework would
appropriately capture the risk for all complex credit unions regardless
of asset size. The FCUA limits the types of assets a Federal credit
union can hold compared to banking organizations. Consequently, larger
banking organizations may be more likely to include assets that cannot
be adequately risk weighted with a leverage ratio than a complex credit
union. Therefore, the Board believes permitting all complex credit
unions regardless of asset size to opt into the CCULR framework is
prudent and does not present a risk to the NCUSIF. Permitting credit
unions with total assets over $10 billion would only include 18
additional credit unions, with total assets of over $438 billion, or 27
percent of all complex credit union assets as of March 31, 2021. In
addition, these credit unions are highly capitalized and have an
average net worth ratio of just under 10 percent. Twelve of the
eighteen credit unions have net worth ratios over nine percent. The
remaining six credit unions with total assets over $10 billion as of
March 2021 have an average net worth ratio of 8.32 percent.
The Board notes that $10 billion is the threshold for credit unions
to begin capital planning under part 702. In addition, complex credit
unions with $20 billion or more in total assets are subject to stress
testing requirements.\63\ These requirements are independent of the
complex credit union's CCULR selection. Therefore, a complex credit
union that meets the applicable thresholds for capital planning and
stress testing requirements will be subject to such requirements
regardless of its CCULR opt in election.
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\63\ 12 CFR 702.502.
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Question 7: Should the Board consider limiting eligibility to the
CCULR framework to only complex credit unions with less than $10
billion in total assets? The Board seeks comments on a potential $10
billion asset limitation and whether it is appropriate for the CCULR
framework.
Question 8: In contrast to the other banking agencies' CBLR statute
and regulation, the Board is not proposing to include a qualifying
criterion for mortgage servicing assets (MSAs). As
[[Page 45834]]
discussed subsequently in this preamble, the Board is proposing changes
to the risk-weighting of MSAs under the 2015 Final Rule consistent with
the other banking agencies' risk-based capital regulations. Currently,
MSA balances are insignificant enough relative to total assets that the
Board believes a qualifying criterion would be unnecessary and would
not have much, or any, effect. However, as discussed in the section on
risk-based capital, revisions to the other banking agencies' capital
rules on this subject and potential increases in future activity
warrant at least some adjustment to the risk-based capital treatment of
MSAs. But the Board does not currently find that even that potential
increase, which is not certain and would depend on a separate, pending
rulemaking, would warrant including MSAs as a qualifying criterion for
the CCULR framework. The Board invites comment on this issue. What are
commenters' views on the exclusion of such a qualifying criterion?
C. The CCULR Ratio
Under the proposal, the CCULR would be the net worth ratio, which
is defined under the 2015 Final Rule as the ratio of the credit union's
net worth to its total assets rounded to two decimal places.\64\
Therefore, any amendments to the definition of the net worth ratio
would also be applicable to the calculation of CCULR. For example, the
Board finalized changes to the net worth ratio to provide that, for
purposes of the prompt corrective action regulations, credit unions may
phase-in the day-one impact of transitioning to the Current Expected
Credit Loss (CECL) methodology over a three-year period.\65\ This
change would be part of a credit union's net worth ratio, and
therefore, its CCULR. The 2015 Final Rule, as amended, defines net
worth as:
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\64\ 12 CFR 702.2 (effective Jan. 1, 2022).
\65\ 86 FR 34924 (July. 1, 2021).
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(1) The retained earnings balance of the credit union at quarter-
end as determined under GAAP, subject to paragraph (3) of this
definition.
(2) With respect to a low-income designated credit union, the
outstanding principal amount of Subordinated Debt treated as Regulatory
Capital in accordance with Sec. 702.407, and the outstanding principal
amount of Grandfathered Secondary Capital treated as Regulatory Capital
in accordance with Sec. 702.414, in each case that is:
(i) Uninsured; and
(ii) Subordinate to all other claims against the credit union,
including claims of creditors, shareholders, and the NCUSIF.
(3) For a credit union that acquires another credit union in a
mutual combination, net worth also includes the retained earnings of
the acquired credit union, or of an integrated set of activities and
assets, less any bargain purchase gain recognized in either case to the
extent the difference between the two is greater than zero. The
acquired retained earnings must be determined at the point of
acquisition under GAAP. A mutual combination, including a supervisory
combination, is a transaction in which a credit union acquires another
credit union or acquires an integrated set of activities and assets
that is capable of being conducted and managed as a credit union.
(4) The term ``net worth'' also includes loans to and accounts in
an insured credit union, established pursuant to section 208 of the Act
[12 U.S.C. 1788], provided such loans and accounts:
(i) Have a remaining maturity of more than 5 years;
(ii) Are subordinate to all other claims including those of
shareholders, creditors, and the NCUSIF;
(iii) Are not pledged as security on a loan to, or other obligation
of, any party;
(iv) Are not insured by the NCUSIF;
(v) Have non-cumulative dividends;
(vi) Are transferable; and
(vii) Are available to cover operating losses realized by the
insured credit union that exceed its available retained earnings.
The proposed denominator of the CCULR would be a complex credit
union's total assets, consistent with the net worth ratio. Total
assets, as defined under the 2015 Final Rule, means:
(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.\66\
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\66\ 12 CFR 702.2 (effective Jan. 1, 2022).
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The Board is proposing to use the net worth ratio for the CCULR for
its simplicity. Complex credit unions are required to calculate their
net worth ratio regardless of whether they opt into the CCULR
framework. Therefore, complex credit unions would not be required to
calculate a unique ratio for purposes of opting into the CCULR
framework. Additionally, complex credit unions are already familiar
with the net worth ratio, which would reduce compliance costs compared
to a unique ratio designed for the CCULR. The Board intends for the
CCULR to be a simple alternative to the risk-based capital ratio and is
concerned that the burden imposed by a unique CCULR would exceed its
possible utility as a capital reporting measure.
The Board notes that the other banking agencies originally proposed
a new ratio for purposes of the CBLR, but declined to adopt the
definition due to the complexities that would be created by adopting a
new measure of capital.\67\ Instead, the other banking agencies based
the CBLR on the existing tier 1 capital definition, which is also the
basis of the other banking agencies' leverage ratio.\68\ Similarly, the
Board is proposing to use the established and well understood net worth
ratio rather than proposing a new definition of capital for purposes of
the CCULR.
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\67\ Supra note 12, at 61783.
\68\ See, 12 CFR 324.10(b)(4).
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The Board considered using the risk-based capital ratio numerator
from the 2015 Final Rule.\69\ The Board believes that the numerator to
the 2015 Final Rule is a more conservative measure of capital compared
to the net worth ratio because it includes several deductions,
including deductions for the NCUSIF capitalization deposit, goodwill,
other intangible assets, and identified losses not reflected in the
risk-based capital ratio numerator. The 2015 Final Rule, however, is
not yet effective, and complex credit unions are not familiar with
calculating and implementing the definition of capital.\70\ Therefore,
the Board believes it is preferable to base the CCULR on the net worth
ratio.
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\69\ 12 CFR 702.104(b) (effective Jan. 1, 2022).
\70\ As proposed, both the 2015 Final Rule and this CCULR
framework would be effective January 1, 2022.
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Several commenters to the ANPR requested that all complex credit
unions be permitted to use Subordinated Debt under any proposed CCULR
framework. Under the proposed rule, however, the CCULR is defined as
net worth; therefore, Subordinated Debt would not eligible for
inclusion as capital under the CCULR framework unless the complex
credit union is also a low-income designated credit union. As
[[Page 45835]]
raised in Question 9, the Board could consider alternative definitions
of capital, for example, the risk-based capital numerator, such that
Subordinated Debt is included as capital for purposes of the CCULR
framework. However, the Board notes that the risk-based capital
numerator also includes deductions that are not included in the
definition of net worth.
Question 9: What are the advantages and disadvantages of using the
net worth ratio as the measure of capital adequacy under the CCULR?
Should the Board consider alternative measures for the CCULR? Instead
of the existing net worth definition, the proposed rule could use the
risk-based capital ratio numerator from the 2015 Final Rule. The Board
could also consider drafting a new numerator for purposes of the CCULR.
For example, the Board could use net worth as the basic framework for
the CCULR numerator, but then make additional deductions.
D. Calibration of the CCULR
Under the proposal, a qualifying complex credit union may opt into
the CCULR framework if it meets the minimum CCULR at the time of opting
into the CCULR framework. A qualifying complex credit union opting into
the CCULR framework that maintains the minimum ratio or higher would be
considered well capitalized.
Commenters to the ANPR, recommended a wide range for the minimum
amount of capital necessary for the CCULR framework. Some commenters
stated the CCULR should be no greater than eight percent. One commenter
supported eight percent by referring to a 2020 Federal Deposit
Insurance Corporation (FDIC) survey. The commenter stated that the
FDIC's 2020 study of the CBLR found that under the nine percent
leverage ratio, only three percent of banks would see their capital
buffers shrink by taking the CBLR option. The commenter stated that for
credit unions, a comparable measure of capital relief would be
accomplished with a leverage ratio set between eight and 8.5 percent.
Other commenters, including a banking trade organization, said nine
percent should be the minimum (the CBLR is set at nine percent). One
commenter recommended 11 percent, which is 400 basis points above the
well capitalized leverage ratio (the CBLR is set 400 basis points above
the other banking agencies' well-capitalized leverage ratio). A
commenter also recommended a reduced calibration due to accelerated
asset growth in the last year.
In proposing 10 percent as the fully phased-in well-capitalized
ratio requirement for qualifying complex credit unions, the Board
considered several factors. The proposed calibration of the CCULR, in
conjunction with the qualifying criteria, seeks to strike a balance
among several objectives, including maintaining strong capital levels
in the credit union system, ensuring safety and soundness, and
providing appropriate regulatory burden relief to as many credit unions
as possible. The CCULR framework is designed to generally require
credit unions to hold more capital than would be required for a credit
union under the 2015 Final Rule. The Board also considered aggregate
levels of capital among complex credit unions. The CCULR framework
would not result in a reduction of the minimum amount of capital held
by complex credit unions and would likely result in an overall increase
in minimum amount of required capital held by complex credit unions.
Additional data on capital levels under the proposed rule are discussed
below.
The Board also considered comparability to the other banking
agencies' CBLR framework, which established a CBLR of nine percent
(that is, if an insured bank has a CBLR of nine percent it is
considered well capitalized). As discussed previously, the EGRRCPA
mandates a higher capital requirement to qualify for the CBLR framework
than the five percent leverage ratio required for well-capitalized
status under the other banking agencies' capital regulations.\71\
Specifically, the EGRRCPA requires that the CBLR be not less than eight
percent and not more than 10 percent for qualifying community
banks.\72\ This statutory requirement calibrates the CBLR to maintain
the overall amount of capital currently held by qualifying community
banking organizations.\73\ The NCUA is not subject to the statutory
requirement of not less than eight percent and not more than 10
percent; however, the Board considers the congressional directive as an
important reference point in considering a comparable CCULR framework.
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\71\ 12 CFR 6.4 (OCC), 12 CFR 208.43 (Federal Reserve Board),
and 12 CFR 324.403 (FDIC).
\72\ Supra note 11.
\73\ Supra note 12, at 61778.
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The 8 to 10 percent range established by Congress for the CBLR is
300 to 500 basis points higher than the five percent leverage ratio
required for well-capitalized status under the other banking agencies'
PCA framework. Insured banks and credit unions, however, have different
minimum requirements under their PCA frameworks. Insured banks must
maintain a leverage ratio of five percent to be considered well
capitalized, whereas insured credit unions are statutorily required to
have a seven percent net worth ratio to be considered well capitalized.
Therefore, a similar 300 to 500 basis points range would equate to a
CCULR of 10 to 12 percent for credit unions.
The Board notes that one of the underlying reasons for the higher
statutory net worth requirement may no longer be as relevant given
changes in the credit union industry since CUMAA was enacted over 20
years ago. When CUMAA was enacted in 1998, Congress determined that a
higher net worth ratio was appropriate because credit unions cannot
quickly issue capital stock to raise their net worth as soon as a
financial need arises.\74\ Instead, credit unions must rely on retained
earnings to build net worth, which necessarily takes time. In addition,
according to the 2001 Treasury Report, issued pursuant to CUMAA on the
NCUA's compliance with the statute, Congress established a capital
level two percentage points higher because one percent of a credit
union's capital is dedicated to the NCUSIF and another one percent of a
typical credit union's capital is dedicated to its corporate credit
union.\75\ In 1998, most credit unions had at least .5 percent of their
assets in corporate credit unions.\76\ That is no longer true. Today, a
significant amount of complex credit unions have less than 0.25 percent
of their capital invested in corporate credit unions.\77\ Furthermore,
the aggregate total capital complex credit unions have dedicated to
corporate credit unions, through nonperpetual capital and perpetual
contributed capital, is just under 0.04 percent of complex credit union
assets. Due to the reduction of concentration in corporate credit union
capital, the Board
[[Page 45836]]
initially considered a potential ratio for the CCULR of 9 to 11
percent.
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\74\ The Department of the Treasury, Comparing Credit Unions
With Other Depository Institutions, p. 11 (Jan. 2001) (2001 Treasury
Report).
\75\ Id.
\76\ Note, 6,874 of 10,972 credit unions had more than 0.5
percent of assets in Membership Capital Share Deposit and Paid-In
Capital of Corporate Credit Unions as of December 1998. The Board
also notes that an FCU is permitted to invest up to two percent of
its assets in the perpetual and nonperpetual capital in one
corporate credit union. An FCU's aggregate amount of contributed
capital in all corporate credit unions is limited to four percent of
assets. Therefore, it is possible that in the future credit union
investments in corporate credit unions exceeds the current
investment amounts. See 12 CFR 703.14(b).
\77\ 616 of 649 complex credit unions have less than 0.25
percent of assets in nonperpetual capital and perpetual contributed
capital as of December 2020.
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When considering the appropriate calibration for the proposed
CCULR, the Board intended to strike a balance between strong capital
levels and providing appropriate regulatory burden relief. To that end,
the Board analyzed the potential impact in terms of safety and
soundness and burden reduction for potential CCULRs of 9 and 10
percent.
<bullet> The Board estimates that as, of December 31, 2020, the
majority of complex credit unions would constitute qualifying complex
credit unions and would meet a proposed CCULR well capitalized standard
of nine percent. Based on reported data, approximately 73 percent of
complex credit unions would qualify to use the CCULR framework and be
well capitalized under a nine percent calibration. Of the 649 complex
credit unions, 472 have net worth greater than nine percent as of
December 31, 2020, and would be well capitalized under a nine percent
CCULR standard. Of those 472 credit unions, it is estimated that two
credit unions would not meet the proposed qualifying criteria, and thus
would not be eligible to opt into the CCULR. The total minimum capital
required for these 470 credit unions under the 2015 Final Rule to be
well capitalized is estimated at $82 billion. Under the proposed CCULR,
if all estimated 470 credit unions opted into the CCULR and held the
minimum nine percent to be well capitalized, the total minimum net
worth required would be estimated at $104.6 billion, an increased
capital requirement of $22 billion.
<bullet> Based on reported data as of December 31, 2020,
approximately 48 percent of complex credit unions would qualify to use
the CCULR framework and be well capitalized under a 10 percent
calibration. Of the 649 complex credit unions, 313 have net worth
greater than 10 percent as of December 31, 2020, and would be well
capitalized under a 10 percent CCULR standard. Of those 313 credit
unions, it is estimated that one credit union would not meet the
proposed qualifying criteria, and thus would not be eligible to opt
into the CCULR framework. The total minimum capital required for those
312 credit unions under the 2015 Final Rule to be well capitalized is
estimated at $57.5 billion. Under the proposed CCULR, if all estimated
312 credit unions opted into the CCULR and held the minimum 10 percent
net worth required to be well capitalized, the total minimum net worth
required would be estimated at $81.7 billion, and increased capital
requirement of $24 billion.
A nine percent CCULR would allow more credit unions to opt into the
CCULR framework but could incentivize some qualifying complex credit
unions to hold less regulatory capital than they do today. In contrast,
a 10 percent well-capitalized standard would ensure strong capital
levels and more certainty that qualifying complex credit unions are
holding greater levels of capital than under the 2015 Final Rule. The
Board has proposed a 10 percent well-capitalized threshold for the
CCULR framework. A 10 percent well-capitalized standard for the CCULR
would be 300 basis points above the well-capitalized threshold for the
net worth ratio, and 400 basis points above a six percent well-
capitalized standard for the net worth ratio when considering credit
unions decreased holdings in corporate credit unions. In addition, a 10
percent well-capitalized threshold for the CCULR would be 100 basis
points higher than the nine percent threshold established by the other
banking agencies for the CBLR. As discussed previously, the total
minimum capital required to be well capitalized under the 2015 Final
Rule is $57.5 billion for credit unions that also meet the CCULR
qualifying criteria and would be well capitalized under a 10 percent
calibration for the CCULR. If all those credit unions meeting the
qualifying criteria opted into the CCULR and held the minimum 10
percent net worth required to be well capitalized, the total minimum
net worth required would be estimated at $81.6 billion. This figure is
approximately $24.2 billion in excess of the risk-based capital
requirement under the 2015 Final Rule. The Board believes that the
proposed 10 percent CCULR requirement strikes the right balance between
maintaining strong capital levels and providing a simpler option to
comply with risk-based capital requirements.
Question 10: The Board invites comment on the proposed CCULR
calibration. What are the advantages and disadvantages to the Board
considering a CCULR of 8, 9 or 10 percent? Should the Board consider
further modifications to its methodology in calibrating the CCULR? What
other factors should the Board consider in calibrating the CCULR and
why? The Board requests that commenters include a discussion of how the
proposed CCULR level should be affected by potential changes to other
aspects of the proposed framework, such as the definition of CCULR and
the definition of a qualifying complex credit union.
Question 11: One factor in the Board's calibration of the CCULR is
the recent trend in credit unions investing in fewer corporate credit
union capital instruments. The Board is soliciting comment on whether
the trend is likely to continue or whether it is likely that the trend
is temporary and in response to the 2007-2009 recession.
E. Opting Into the CCULR Framework
Under the proposal, a qualifying complex credit union with a CCULR
of 10 percent or greater, subject to the transition provisions, may opt
into the CCULR framework at the end of each calendar quarter. Similar
to the other banking agencies' CBLR framework, a qualifying complex
credit union may only opt into the CCULR framework if it would be well
capitalized. Requiring credit unions to be at least be well capitalized
when they opt into the framework would ensure that complex credit
unions that do not meet the minimum CCULR are reporting capital under
the 2015 Final Rule, which is a more risk-sensitive measure of capital
adequacy. A qualifying complex credit union choosing to opt into the
CCULR would indicate its decision by completing a CCULR reporting
schedule in its Call Report.
Question 12: The Board invites comment on the proposed procedure a
qualifying complex credit union would use to opt into the CCULR
framework. What are commenters' views on the frequency with which a
qualifying complex credit union may opt into the CCULR framework? What
other alternatives should the Board consider for purposes of qualifying
complex credit unions' opt in elections to use and report the CCULR and
why?
F. Voluntarily Opting Out of the CCULR Framework
Under the proposal, after a qualifying complex credit union has
adopted the CCULR framework, it may voluntarily opt out of the
framework by providing written notice to the appropriate Regional
Director or the Director of the Office of National Examinations and
Supervision (ONES). The notice must be provided at least 30 days before
the end of the calendar quarter that the credit union will begin
reporting its risk-based capital ratio.
The notice must include several items:
<bullet> A statement of intent explaining why the qualifying
complex credit union is opting out of the CCULR framework.
<bullet> A copy of board meeting minutes showing that the credit
union's board of directors was notified of the opt out election.
[[Page 45837]]
<bullet> The calendar quarter that the qualifying complex credit
union will begin calculating its risk-based capital ratio. The earliest
a complex credit union may begin calculating its risk-based capital
ratio is the calendar quarter that the credit union submits its
notification.
<bullet> A completed Call Report schedule as if the complex credit
union had calculated its risk-based capital ratio the prior quarter.
For example, if a credit union seeks to begin using a risk-based
capital ratio in the second quarter, it would have to provide notice to
the appropriate Regional Director or the Director of the ONES by June
1st and would have to include a Call Report with data as of March 31st.
Under the other banking agencies' CBLR framework, qualifying
complex credit unions that have opted into the CBLR may opt out of the
framework at any time. In addition, commenters to the ANPR generally
favored allowing credit unions to liberally opt into and out of the
CCULR framework. The Board believes, however, that qualifying complex
credit unions should not opt out of the CCULR framework at any time
because, in contrast to qualifying community banking organizations,
qualifying complex credit unions are not currently calculating risk-
based capital under the 2015 Final Rule.
The Board notes that qualifying community banking organizations had
been complying with their revised risk-based capital requirements for
several years when the CBLR was implemented.\78\ Banking organizations
had systems and processes in place to implement risk-based capital,
staff had acquired experience calculating their capital ratios under
risk-based capital, and qualifying complex banking organizations had
been examined for compliance with risk-based capital standards. In
contrast, complex credit unions will be subject to the risk-based
capital ratio requirement established in the 2015 Final Rule for the
first time when they are eligible to opt into the CCULR framework. It
is likely that a qualifying complex credit union opting out of the
CCULR framework would not have any experience calculating a risk-based
capital ratio under the 2015 Final Rule.
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\78\ Supra note 3.
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The Board does not believe it is prudent to allow qualifying
complex credit unions opting out of the CCULR framework the same
flexibility as provided to qualifying community banking organizations
under the CBLR. Instead, the Board believes a qualifying complex credit
union opting out of the CCULR framework should notify the NCUA of its
intentions to begin calculating a risk-based capital ratio. Following
notification to the NCUA, the NCUA may, through the supervisory
process, monitor whether the credit union has acquired the necessary
systems and processes to be capable of calculating and reporting its
risk-based capital ratio accurately.
Question 13: The Board invites comment on the proposed procedure a
complex credit union would use to opt out of the CCULR framework. What
are commenters' views on the frequency with which qualifying complex
credit unions may opt out of the CCULR framework? Do qualifying complex
credit unions anticipate frequent switching between the CCULR framework
and the risk-based capital requirements, and if so, why? What are the
operational or other challenges associated with switching between
frameworks?
G. Compliance With the Proposed Criteria To Be a Qualifying Complex
Credit Union
Under the proposal, after a qualifying complex credit union has
adopted the CCULR framework and then no longer meets the proposed
qualifying criteria, it would be required, within a limited grace
period of two calendar quarters, either to once again meet the
qualifying criteria or comply with the risk-based capital ratio
requirements. The grace period would begin at the end of the calendar
quarter in which the credit union ceases to satisfy the criteria to be
a qualifying complex credit union and would end after two consecutive
calendar quarters. For example, if the complex credit union exceeded
one of the qualifying criteria after December 31st (and still does not
meet the criteria as of the end of that quarter), the grace period for
such a credit union would begin at the quarter ending March 31st and
would end at the quarter ending September 30th. The complex credit
union could continue to use the CCULR framework as of June 30th, but
would need to fully comply with the risk-based capital ratio (including
the associated reporting requirements) as of September 30th, unless at
that time the qualifying complex credit once again met the qualifying
criteria of the CCULR framework. The Board believes that this limited
grace period is appropriate to mitigate potential volatility in capital
and associated regulatory reporting requirements based on temporary
changes in a credit union's risk profile from quarter to quarter, while
capturing more permanent changes in risk profile.
During the grace period, the credit union continues to be treated
as a qualifying complex credit union and must continue calculating and
reporting its CCULR, unless it has opted out of using the CCULR
framework. Additionally, during the grace period, the qualifying
complex credit union continues to be considered to have met the capital
ratio requirements for the well-capitalized capital category. However,
if the qualifying complex credit union has a CCULR of less than seven
percent, it would not be considered well capitalized. Instead, its
capital classification would be determined by its net worth ratio. For
additional discussion on the treatment of a qualifying complex credit
union when its CCULR falls below 10 percent, see Section H--Treatment
of a Qualifying Complex Credit Union That Falls Below the CCULR
Requirement.
The two-quarter grace period is similar to the other banking
agencies' CBLR framework. However, unlike the CBLR framework, under the
proposed rule, a qualifying complex credit union that is likely to not
meet the requirements to be a qualifying complex credit union by the
end of the grace period must submit written notification to the
appropriate Regional Director or the Director of the ONES. The
notification must be submitted at least 30 days before the end of the
grace period and state that the credit union may cease to meet the
requirements to be a qualifying complex credit union. The Board
believes it is necessary to receive notice in case the complex credit
union begins calculating a risk-based capital ratio. As discussed
previously, qualifying complex credit unions initially opting into the
CCULR would not likely have calculated a risk-based capital ratio under
the 2015 Final Rule. Therefore, the notice would provide the NCUA the
option, through the supervisory process, to monitor whether the
appropriate systems and processes are being developed to calculate a
risk-based capital ratio.
The Board acknowledges that a credit union may believe it is
reasonably likely to meet the qualifying criteria, and not submit a
notice, and then be subject to risk-based capital requirements at the
end of the quarter for failure to comply with qualifying criteria. The
Board is providing credit unions flexibility with notice requirements
as a form of burden reduction. It would be unnecessary for every credit
union to file notice during the grace period, as some credit unions
will be certain of their compliance with the qualifying criteria. For
such credit unions, completing the required notification would be an
unnecessary
[[Page 45838]]
burden. The Board believes that it would be rare for a credit union to
not provide the notice when required. The notice would be submitted
only 30 days before the end of the grace period and a credit union that
is being prudently managed should be able to accurately predict whether
it would be likely to meet the qualifying criteria. The Board believes
that if a credit union does not provide the required notice, it raises
supervisory concerns and the credit union may be subject to a lower
management rating as a result.
The notification would be similar to the notification required for
credit unions voluntarily opting out of the CCULR framework. First, the
notification must provide the reason for the potential
disqualification. The notification would also be required to include a
copy of the board meeting minutes showing that the credit union's board
of directors was notified that the credit union might cease to meet the
qualifying complex credit union requirements. Finally, the notification
also would be required to include a Call Report schedule completed as
if the credit union calculated its risk-based capital ratio the
previous calendar quarter.
Under the CBLR Final Rule, a qualifying community banking
organization that ceases to meet the qualifying criteria as a result of
a business combination is not provided a grace period. The proposed
rule would include a similar limitation. Therefore, under the proposed
rule a qualifying complex credit union that has opted into the CCULR
framework and that ceases to meet the qualifying criteria as a result
of a business combination would receive no grace period and would be
required to revert to a risk-based capital framework immediately. The
Board believes this approach is appropriate, as complex credit unions
should consider the regulatory capital implications of a planned
business combination and be prepared to comply with the applicable
requirements. Therefore, a qualifying complex credit union that would
not meet the qualifying criteria as a result of a business combination
must fully comply with the 2015 Final Rule for the regulatory reporting
period during which the transaction is completed.
Question 14: The Board invites comment on the proposed treatment
for a complex credit union that no longer meets the definition of a
qualifying complex credit union after opting into the CCULR framework.
Specifically, what are the advantages and disadvantages of the proposed
grace period? What other alternatives should the Board consider with
respect to a complex credit union that no longer meets the definition
of a qualifying complex credit union and why? Should the Board consider
requiring complex credit unions that no longer meet the qualifying
criteria to begin to immediately calculate their assets according to
the risk-based capital ratio? Is notification that a credit union will
not meet the qualifying criteria necessary? Should the Board consider a
grace period for previously qualified credit unions that have opted
into the CCULR framework if after a business combination the credit
union no longer qualified as of the next reporting period? Should the
Board consider alternative notification requirements or consider not
requiring any notification at all?
H. Treatment of a Qualifying Complex Credit Union That Falls Below the
CCULR Requirement
As discussed previously, under the proposal, a qualifying complex
credit union that has opted into the CCULR framework and has a CCULR of
10 percent or greater, subject to the transition provisions, would be
considered well capitalized. A qualifying complex credit union's CCULR
may deteriorate due to a decline in its level of retained earnings,
growth in its total assets, or a combination of both. In such a case, a
credit union may choose to stop using the CCULR framework and instead
become subject to the risk-based capital ratio. However, the Board
recognizes that some qualifying complex credit unions may find it
unduly burdensome to begin complying with the more complex risk-based
capital ratio reporting requirements at the same time that the credit
union is experiencing a decline in its CCULR.
Under the proposed rule, a minimum CCULR (10 percent after the
transition period) is one of the qualifying criteria. Therefore, if a
qualifying complex credit union has a CCULR that falls below the
minimum requirement, it would receive the same grace period of two
calendar quarters, as applicable when a credit union ceases to meet the
other qualifying criteria. After the two-quarter grace period, the
qualifying complex credit union would either have to once again meet
the minimum CCULR ratio or comply with the risk-based capital ratio
requirements. During the grace period, the credit union would be deemed
to have met the well-capitalized capital ratio requirements for PCA
purposes, provided that its net worth ratio remains seven percent or
greater.
If a credit union's net worth ratio falls below seven percent, it
will not be considered to have met the capital ratio requirements for
the well-capitalized capital category and its capital classification is
determined by its net worth ratio. A credit union that becomes less
than well capitalized during the two-quarter grace period would not be
required to begin calculating its capital under the 2015 Final Rule
immediately. Instead, the credit union would still be eligible for the
full two-quarter grace period; however, it would be subject to any
applicable PCA requirements for its capital category.
Under the other banking agencies' CBLR framework, an electing
banking organization with a leverage ratio of eight percent or less is
not eligible for the grace period and must comply with the generally
applicable rule, that is, for the quarter in which the banking
organization reports a leverage ratio of eight percent or less. An
electing banking organization experiencing or anticipating such an
event would be expected to notify its primary federal supervisory
agency, which would respond as appropriate to the circumstances of the
banking organization.\79\ The Board believes that it would be unduly
burdensome to require complex credit unions to immediately begin
calculating their capital under the 2015 Final Rule.
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\79\ Supra note 12.
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As discussed previously, credit unions have not previously been
subject to the 2015 Final Rule. The Board believes it is reasonable to
provide complex credit unions the full two-quarter grace period
regardless of their CCULR as the 2015 Final Rule would be a new system
of capital adequacy and would require an adjustment for the complex
credit union. The Board does not believe permitting two quarters to
comply with the qualifying criteria or to begin calculating capital
under the 2015 Final Rule presents unreasonable risk to the NCUSIF.
Question 15: What are the advantages and disadvantages of
permitting a two-quarter grace period? Should the Board consider
including the CCULR in the PCA framework similar to the other banking
agencies' CBLR proposed rule? To what extent does the calibration of
the CCULR relate to the Board's choice between including the CCULR into
the PCA framework versus relying on a grace period when a credit
union's CCULR falls below 10 percent?
I. Transition Provision
In light of strains in economic conditions related to the COVID-19
[[Page 45839]]
pandemic and stress in U.S. financial markets, the NCUA has taken a
number of actions intended to: (i) Restore market functioning and
support the flow of credit to households, businesses, and Communities;
and (ii) increase flexibility and tailor regulations.
Among those actions, the NCUA has communicated a number of rules
and supervisory guidance designed to mitigate the economic consequences
of the COVID-19 pandemic, facilitate the safe and effective operations
of credit unions, and protect credit union members.\80\ Credit unions
have played an instrumental role in the nation's financial response to
the COVID-19 pandemic, and many have experienced significant balance
sheet growth because of the COVID-19 pandemic and the policy response
to the event.
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\80\ See, e.g., 86 FR 15397 (Mar. 23, 2021).
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The unprecedented and significant balance sheet growth is largely a
result of individual member response to actions taken by monetary and
fiscal authorities. At the start of the COVID-19 pandemic, consumer
spending decreased as individual states or major metropolitan areas
ordered millions of Americans to stay home. Additionally, market
volatility pushed savers with money in financial markets to safer
assets, including insured shares. Fiscal stimulus applied additional
upward pressure on credit union total assets.
The Board is aware that the unprecedented balance sheet growth has
resulted in declining net worth ratios for most complex credit unions.
To help mitigate the impact of this unprecedented balance sheet growth,
the Board is proposing a two-year transition provision to delay the
introduction of a 10 percent CCULR. This two-year phase would permit
complex credit unions time to increase their net worth ratios.
Under the proposed rule, from January 1, 2022, to December 31,
2022, a complex credit union may opt into the CCULR framework if it has
a net worth ratio of nine percent or greater. Therefore, a qualifying
complex credit union that opts into the CCULR framework and that
maintains a nine percent CCULR would be considered well capitalized.
Beginning January 1, 2023, a complex credit union that has opted into
the CCULR framework must have a CCULR of 9.5 percent or greater to meet
the eligibility criteria. Finally, beginning January 1, 2024, a complex
credit union must have a CCULR of 10 percent or greater to be eligible
to determine their capital adequacy under the CCULR framework. Once an
eligible credit union opts into the CCULR framework it would be
eligible to use the two-quarter grace period, as discussed in section
G. Compliance With the Proposed Criteria To Be a Qualifying Complex
Credit Union. Therefore, if a credit union has a CCULR of nine percent
when it opts into the CCULR framework on March 31, 2022, but does not
have a CCULR of 9.5 percent on March 31, 2023, the credit union would
have until September 30th to either have a CCULR of 9.5 percent or
determine their capital adequacy under the risk-based capital
framework.
As discussed previously, the temporary changes to the CBLR
framework implemented through the CARES Act expired December 31,
2021.\81\ Therefore, the temporary reduction in the CBLR to eight
percent (and 8.5 percent in calendar year 2021) will not be in effect
when the 2015 Final Rule becomes effective. The Board, however,
believes that due to credit unions' unique structure and dependence on
retained earnings to accumulate capital, additional time to accumulate
capital will be beneficial to complex credit unions. The Board believes
that the CCULR framework is beneficial to complex credit unions due to
the reduced compliance costs for managing and documenting risk-based
capital standards, and to the NCUSIF as complex credit unions that opt
into the CCULR framework will be required to hold higher capital levels
under the CCULR framework than the risk-based capital framework. The
Board does not want complex credit unions that would have otherwise
been eligible to opt into a CCULR framework calibrated at 10 percent to
be temporarily ineligible due to unexpected asset growth following the
COVID-19 pandemic. The Board believes two years is sufficient time for
complex credit unions that want to opt into the CCULR framework to
build the necessary capital.
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\81\ Coronavirus Aid, Relief, and Economic Security Act, Public
Law 116-136, 134 Stat. 281.
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Question 16: What are the advantages and disadvantages of the
transition provision starting at nine percent and permitting a
transition period to a CCULR of 10 percent? Should the Board consider a
transition period longer or shorter than two years? If suggesting a
longer transition period, such as four years, discuss the merits of a
longer phase-in and why the additional time over two years would be
needed. Please provide specific data.
J. Reservation of Authority
In general, a complex credit union that meets the eligibility
criteria may opt into the CCULR framework. However, there may be
limited instances in which the CCULR framework would be inappropriate
and not require sufficient capital to adequately protect the NCUSIF. To
address such situations, the proposed rule includes a reservation of
authority. Under the reservation of authority, the Board can require a
complex credit union that has opted into the CCULR framework to use the
risk-based capital framework to calculate its capital adequacy if the
Board determines that the complex credit union's capital requirements
are not commensurate with its credit or other risks. When making any
such determination, the Board would consider all relevant factors
affecting the complex credit union's safety and soundness.
The Board expects to apply the reservation of authority only in
limited circumstances. Under the reservation of authority, credit
unions would be entitled to a two-quarter grace period before being
required to comply with the risk-based capital framework. The other
banking agencies also have reserved the authority to disallow the use
of the CBLR framework by a depository institution or depository
institution holding company, based on the risk profile of the banking
organization.
Question 17: The Board invites general comment on the reservation
of authority in the proposed rule. Should the Board consider a
reservation of authority that applies to the risk-based capital rule?
Should the Board consider a general waiver provision or consider
including a statement that assets can be provided a more conservative
risk weight than provided in the proposed rule? Should the Board
consider adopting notice and response procedures to be used in
determining whether the reservation of authority should be used?
K. Effect of the CCULR on Other Regulations
1. Member Business Loan Cap
Section 107A of the FCUA generally limits the aggregate amount of
member business loans (MBLs) that an insured credit union may make,
subject to exceptions for some categories of loans, such as loans
granted by a corporate credit union to another credit union.\82\ In
addition, the FCUA exempts certain credit unions from compliance with
the aggregate MBL limit. Specifically, an insured credit union
chartered for the purpose of making MBLs, or that has a history of
making MBLs to its members,
[[Page 45840]]
as determined by the Board, is not subject to the aggregate MBL
limit.\83\ Also, an insured credit union that serves predominantly low-
income members, as defined by the Board, or is a community development
financial institution, as defined in 12 U.S.C. 4702, is also not
subject to the aggregate MBL limit.\84\
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\82\ 12 U.S.C. 1757a(c)(1)(B).
\83\ 12 U.S.C. 1757a(b)(1).
\84\ 12 U.S.C. 1575a(b)(2).
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An insured credit union that is subject to the aggregate MBL limit
may not make an MBL that would result in the total amount of
outstanding MBLs at the credit union being more than the lesser of 1.75
times the actual net worth of the credit union or 1.75 times the
minimum net worth required for a credit union to be well capitalized
under section 216(c)(1)(A) of the FCUA.\85\ Section 107A defines net
worth for purposes of that section, providing that it includes the
retained earnings balance, as determined under GAAP. Net worth under
this section also includes, for credit unions that serve predominantly
low-income members (which the Board defines as low-income designated
credit unions), secondary capital accounts that are uninsured and
subordinate to all other claims against the credit union, including the
claims of creditors, shareholders, and the NCUSIF.\86\
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\85\ 12 U.S.C. 1757a(a).
\86\ This definition does not expressly cover two elements that
were added to the definition of net worth in section 216(o)(2) for
PCA purposes in a 2011 enactment: (1) Amounts that were previously
retained earnings of any other credit union with which the insured
credit union has combined; and (2) assistance that the Board has
provided under Section 208. Public Law 111-382, 124 Stat. 4135 (Jan.
4, 2011). In the 2016 MBL final rule, the Board included these
elements in net worth for purposes of the MBL limitation by defining
net worth in the MBL regulation through a cross-reference to the
current part 702 definition of net worth, which includes all the
elements in section 216(o)(2). The 2015 Final Rule amended the
definition of net worth in part 702 effective January 1, 2022, but
did not add or remove any of the components of net worth in the
current regulation.
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For credit unions that are not complex and therefore are not
subject to a risk-based net worth requirement under section 216(d) of
the FCUA, MBLs are limited to 1.75 times the net worth required for the
credit union to meet the seven percent net worth ratio under section
216(c)(1)(A)(i) (assuming the credit union's actual net worth is
greater than the minimum required to be well capitalized). To determine
its maximum allowable outstanding balance of MBLs, a credit union
multiplies 1.75 by seven percent of its total assets.
Until 2016, the Board calculated the MBL limitation in the same
manner for complex credit unions that are subject to a risk-based net
worth requirement under section 216(d) without considering any greater
amount of net worth that a complex credit union might need to hold to
be well capitalized under a risk-based net worth requirement.\87\
However, in the 2015 proposed rule on MBLs, the Board proposed to amend
the MBL regulation to incorporate section 107A more faithfully and
noted that complex credit unions could have a different limitation
caused by the need to hold more net worth under a risk-based
requirement.\88\ The preamble to the 2016 final rule on MBLs and
commercial loans analyzed this issue in response to comments on the
rule and explained that under the 2015 Final Rule on risk-based
capital, the MBL limitation would be calculated in the following
manner. The preamble to the 2016 final rule stated that where actual
net worth is greater than the minimum to be well capitalized, the limit
on MBLs is 1.75 times the greater of the following calculations: (i)
The minimum amount of capital (in dollars) required by the net worth
ratio, which is seven percent times total assets; and (ii) the minimum
amount of capital (in dollars) required by the risk based capital
ratio, which is 10 percent times total risk-weighted assets. Then, the
credit union must solve for the minimum amount of net worth needed
after accounting for other forms of qualifying capital allowed under
the 2015 Final Rule.\89\
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\87\ Prior to amendments that the Board adopted in the 2016, the
MBL regulation limited MBLs to 12.25 percent of an insured credit
union's total assets--1.75 times the seven percent net worth ratio.
\88\ 80 FR 37898, 37909 (July 1, 2015).
\89\ 81 FR 13530, 13548 (Mar. 14, 2016).
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Therefore, a complex credit union subject to a risk-based capital
requirement under the 2015 Final Rule would have to calculate the
minimum amount of net worth required by both its net worth ratio and
risk-based capital requirement. First, the net worth ratio requires a
complex credit union to hold net worth (in dollars) equal to seven
percent of its total assets. Second, for purposes of computing the MBL
cap,\90\ the risk-based capital ratio requires a complex credit union
to hold net worth (in dollars) equal to 10 percent of the credit
union's risk-weighted assets, as calculated under Sec. 702.104. The
complex credit union would then compare the two net worth amounts as
calculated in the preceding discussion. The credit union would take the
larger of the two net worth amounts, which is the minimum amount of net
worth necessary to be well capitalized under either the net worth ratio
or the risk-based capital ratio, and compare that to actual net worth.
The lesser of these two net worth amounts is used to compute the
complex credit union's MBL cap, which would be 1.75 times the lesser of
these two net worth amounts. While the 2015 Final Rule is not yet
effective, the agency currently implements this approach for the small
number of complex credit unions that are required to hold more net
worth under the current risk-based net worth requirement than the net
worth ratio.
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\90\ The Board notes that the amount of capital a complex credit
union needs to be well capitalized under the 2015 Final Rule for PCA
purposes is a different calculation than the amount of net worth
required to be well capitalized for purposes of the MBL cap. The
reason is the 2015 Final Rule permits complex credit unions to
include several forms of capital for purposes of determining its PCA
status that do not meet the statutory definition of net worth. The
MBL cap, however, is limited by statute to net worth.
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The Board continues to find that this approach reflects the correct
reading of sections 107A and 216 and re-affirms this interpretation
over any prior interpretation that disregarded the risk-based net worth
requirement for this purpose.\91\ For complex credit unions, the amount
to be well capitalized under section 216(c)(1)(A) is seven percent of
total assets (the net worth ratio) or the amount required by the risk-
based net worth requirement (which could be either the risk-based
capital ratio under the 2015 Final Rule or the proposed CCULR
framework). A complex credit union must satisfy both of these
requirements to be well capitalized under section 216(c)(1)(A), which
means that, in section 107A's terms, the minimum net worth required to
be well capitalized is the higher of the amount required by the net
worth ratio or the risk-based net worth requirement. The Board finds
this is a clear, plain language reading of both provisions. Section
107A(a) points to section 216(c)(1)(A) to determine the minimum net
worth required, and in turn, section 216(c)(1)(A) includes both the
seven percent net worth ratio and the net worth required by any
applicable risk-based net worth requirement, for complex credit unions.
Reading section 107A(a) to exclude the net worth required for complex
credit unions under section 216(c)(1)(A)(ii) would ignore a key
component of the plain language of section 216(c)(1)(A) and
inappropriately treat it as surplusage.
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\91\ Therefore, the current language in part 723 remains valid,
and the Board is not proposing any changes to part 723 at this time.
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The Board also finds that even if sections 107A and 216(c)(1)(A)
were considered ambiguous or unclear, it would interpret them in the
same way. For instance, the Board observes two key textual indicators
that Congress did
[[Page 45841]]
not intend to limit this calculation to the seven percent net worth
ratio. First, section 107A was enacted in the same legislation as
section 216. Thus, Congress was aware that section 216(c)(1)(A) set a
seven percent net worth ratio to be well capitalized. Yet in section
107A(a), rather than specifying that the MBL limitation is determined
by the amount of net worth required to achieve a seven percent net
worth ratio, Congress provided more broadly that the limitation is
determined by reference to the minimum net worth required under section
216(c)(1)(A). Second, Congress could have limited this calculation to
the seven percent net worth ratio by providing that the MBL limitation
is determined by reference only to the minimum net worth required under
section 216(c)(1)(A)(i), which would have excluded the risk-based net
worth requirement. Instead, section 107A points to section
216(c)(1)(A), which encompasses both applicable net worth requirements
for complex credit unions.
The Board acknowledges that the Senate Report associated with the
legislation that enacted sections 107A and 216 refers to the MBL
limitation as being based on the seven percent net worth ratio in a
parenthetical statement. A statement by an individual Senator also
refers to the limitation as being determined by the seven percent net
worth ratio.\92\ But this discussion in the Senate Report is brief and
does not touch upon the risk-based net worth requirement or explain how
the Senate believed the MBL limitation should work for complex credit
unions, which are subject to additional net worth requirements. In any
event, this general discussion does not expressly contradict the
language and structure of sections 107A and 216, which the Board finds
to be better indicators of the meaning and purpose of these provisions.
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\92\ S. Rep. No. 105-193 (May 21, 1998), at 5, 10, 29.
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Applying this approach to the proposed CCULR framework, the Board
proposes that for qualifying complex credit unions opting into the
CCULR framework, such credit unions may calculate a different
limitation on MBLs from what they do currently under the seven percent
net worth ratio. This is because, as discussed previously in the Legal
Authority section, the CCULR is considered a risk-based net worth
requirement, and thus falls under section 216(c)(1)(A)(ii) as a measure
of the minimum net worth required to be well capitalized. Accordingly,
under the proposed rule, a qualifying complex credit union that opts
into the CCULR would determine its MBL limitation by reference to the
amount of net worth required to be well capitalized under the CCULR.
Complex credit unions that do not qualify or do not opt into the CCULR
would determine their MBL limitation by reference to the 10 percent
risk-based capital ratio, as described in the 2016 MBL final rule,
quoted previously. In either scenario, if a complex credit union has
actual net worth below those measures, its actual net worth would
determine its MBL limitation.
2. Capital Adequacy
Under the 2015 Final Rule, a complex credit union 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.\93\ While a qualifying complex credit
union opting into the CCULR framework, is required to have a
comprehensive written strategy for maintaining an appropriate level of
capital, such strategy may be straightforward and minimally state how
the credit union intends to comply with the CCULR framework, including
minimum capital requirements and qualifying criteria. In contrast,
complex credit unions that do not opt into the CCULR framework will be
required to have a more detailed written strategy. The NCUA intends to
review the written strategies during the supervisory process.
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\93\ 12 CFR 702.101(b)(2) (effective Jan. 1, 2022).
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L. Illustrative Reporting Forms To Support the CCULR
The NCUA intends to separately seek comment on the proposed changes
to the Call Report for complex, qualifying credit unions that elect to
use the CCULR framework. Chart 1, provided below, is an example of what
the CCULR election form may look like in the Call report. Details
supporting lines 2 through 6 can be found in section B of this proposed
rule.
[[Page 45842]]
[GRAPHIC] [TIFF OMITTED] TP16AU21.000
This form provides an indication of the potential reporting format
and potential reporting burden relative to the regulatory requirements
associated with electing to use the CCULR framework.
Similarly, in support of the off-balance sheet exposures qualifying
criteria, Chart 2 provides an example of what an off-balance sheet
exposures Call Report form may look like. Details supporting this
schedule are in section B and M of this proposed rule.
[GRAPHIC] [TIFF OMITTED] TP16AU21.001
[[Page 45843]]
This form provides an indication of the potential reporting format
and reporting burden relative to the regulatory requirements associated
with the proposed off-balance sheet exposures for the CCULR framework
and the risk-based capital framework under the 2015 Final Rule.
M. Amendments to the 2015 Final Rule
The Board stated its intent to holistically and comprehensively
reevaluate the NCUA's capital standards for credit unions in the 2019
Final Rule. A principal component of this review is the proposed CCULR
framework. The Board also stated it would consider whether to make more
substantive revisions to the 2015 Final Rule.\94\ The Board has
completed this analysis and is proposing several changes to the 2015
Final Rule. Each change is discussed below.
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\94\ 84 FR 68781, 68783 (Dec. 17, 2019).
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1. Off-Balance Sheet Exposure Risk Weights
The 2015 Final Rule states that the risk-weighted amounts for all
off-balance sheet items \95\ are determined by multiplying the off-
balance sheet exposure amount \96\ by the appropriate credit conversion
factor and the assigned risk weight. However, the definition of off-
balance sheet items is not aligned with the definition of off-balance
sheet exposure. Under the 2015 Final Rule, only commitments, loans
transferred with limited recourse, and loans transferred under the FHLB
mortgage partnership finance program are provided explicit exposure
amounts. The rule is silent on the appropriate treatment for the
remaining items included in the definition of off-balance sheet items
(contingent items, guarantees, certain repo-style transactions,
financial standby letters of credit, and forward agreements). In
addition, the 2015 Final Rule does not include a credit conversion
factor or risk weight for the off-balance sheet items that are not
provided a specific exposure amount in the definition of off-balance
sheet exposure.
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\95\ Off-balance sheet items are defined as items such as
commitments, contingent items, guarantees, certain repo-style
transactions, financial standby letters of credit, and forward
agreements that are not included on the statement of financial
condition, but are normally reported in the financial statement
footnotes. 12 CFR 702.2 (effective Jan. 1, 2022).
\96\ 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. 12 CFR 702.2 (effective Jan. 1, 2022).
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The proposed rule would make several changes to clarify the
treatment of off-balance sheet items. First, as discussed previously,
the proposed rule would amend the definition of off-balance sheet
exposures. This definition is used as one of the CCULR eligibility
criteria and is proposed to be amended to more closely align with the
other banking agencies' CBLR framework. As a consequence of amending
the definition of off-balance sheet exposure for the CCULR framework,
the proposed off-balance sheet exposure definition would also more
closely align with the existing definition of off-balance sheet
items.\97\ Therefore, under the proposed rule, several items currently
defined as an off-balance sheet item, but not included in the current
definition of off-balance sheet exposure, would be provided an exposure
amount. This change reduces ambiguity in the 2015 Final Rule. In
addition, in the proposed rule, each item included in the definition of
off-balance sheet exposure would be provided an explicit credit
conversion factor and risk weight for purposes of the risk-based
capital rule. Each proposed change to the risk-based capital rule is
discussed in detail below.
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\97\ The only item included in the current definition of off-
balance sheet item that would not be provided an explicit exposure
amount would be contingent items. However, as discussed below, the
Board is proposing to amend the definition of off-balance sheet item
and would no longer include contingent items.
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The proposed rule would state that unconditionally cancellable
commitments have a zero percent credit conversion factor. Therefore,
any unconditionally cancellable commitment would be excluded from a
credit union's risk-based capital calculation. Under the 2015 Final
Rule, these exposures would receive a minimum of a 10 percent credit
conversion factor and could receive up to a 50 percent credit
conversion factor. The Board believes that many of credit unions'
commitments would qualify as unconditionally cancellable and that
credit unions are currently subject to a more conservative treatment
for unfunded commitments than banking organizations. Therefore, the
Board believes providing a zero percent conversion factor will not only
make the 2015 Final Rule more comparable to the other banking agencies'
2013 capital rule but will also provide a significant burden reduction
for credit unions calculating their capital adequacy under the 2015
Final Rule.
The proposed rule would provide that financial standby letters of
credit are given a 100 percent credit conversion factor. The 2015 Final
Rule does not provide a credit conversion factor for financial standby
letters of credit. Including an explicit 100 percent conversion factor
would provide parity between the other banking agencies and the NCUA.
The risk weight would be 100 percent.
For forward agreements that are not derivative contracts, the
proposed rule would provide for a 100 percent credit conversion factor.
The 2015 Final Rule does not provide a credit conversion factor for
forward agreements that are not derivative contracts. Including an
explicit 100 percent conversion factor would provide parity between the
other banking agencies and the NCUA. The risk weight would be 100
percent.
For sold credit protection through guarantees and credit
derivatives, the proposed rule would provide for a 100 percent credit
conversion factor. The 2015 Final Rule does not provide a credit
conversion factor for sold credit protection through guarantees or
credit derivatives. The proposed rule would provide different risk
weights for guarantees and credit derivatives. Guarantees would receive
a 100 percent risk weight. For credit derivatives, the risk weight
would be determined through the applicable provisions of FDIC's capital
rules. A credit union offering credit protection through a credit
derivative would risk weight the exposure according to 12 CFR 324.34
(for derivatives that are not cleared) or 324.35 (for derivatives that
are cleared exposures).
The Board understands the proposed treatment of credit derivatives
is complex and compliance with these requirements increases the
regulatory burden for credit unions that offer credit protection
through credit derivatives. However, credit derivatives are complex
instruments. Furthermore, credit derivatives are not a permissible
activity for FCUs and the Board believes that state-chartered credit
unions should only offer credit derivatives if the credit union has the
appropriate resources and capabilities to manage the complexity
associated with them. The Board believes any credit union that has
offered credit protection through credit derivatives should also be
capable of complying with the complexity in the FDIC's capital rules.
Therefore, the Board believes it is appropriate to reference the other
banking agencies' 2013 capital rules when determining the
[[Page 45844]]
appropriate risk weights for credit derivatives.
For off-balance sheet securitization exposures, the credit
conversion factor would be 100 percent. The 2015 Final Rule does not
currently provide a credit conversion factor for the off-balance sheet
portion of securitization exposures. The risk weight would be
determined as if the exposure is an on-balance sheet securitization
exposure. Under the 2015 Final Rule, the risk weight for securitization
exposures is dependent upon whether the exposure is a subordinated or
non-subordinated tranche. Non-subordinated tranches can receive a 100
percent risk weight (credit unions also have the option to use the
gross up approach).\98\ In contrast, a subordinated tranche would
receive a 1,250 percent risk weight (credit unions also have the option
to use the gross-up approach).\99\
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\98\ 12 CFR 702.104(c)(2)(v)(B)(8) (effective Jan. 1, 2022).
\99\ 12 CFR 702.104(c)(2)(x) (effective Jan. 1, 2022).
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For securities borrowing or lending transactions, the proposed
credit conversion factor would be 100 percent. The 2015 Final Rule does
not provide a credit conversion factor for securities borrowing or
lending transactions. Including an explicit 100 percent credit
conversion factor would provide parity between the other banking
agencies and the NCUA. Unlike the other banking agencies' rules, the
proposed rule would include a risk weight of 100 percent for these
transactions. The Board is aware this may be a more conservative risk
weight than for securities borrowing and lending transactions under the
other banking agencies' 2013 capital rule.
The Board is proposing a 100 percent risk weight for simplicity.
However, a credit union may recognize the credit risk mitigation
benefits of financial collateral by risk weighting the collateralized
portion of the exposure under the applicable provisions of 12 CFR
324.35 or 324.37. Any collateral recognized would have to meet the
definition of financial collateral under the other banking agencies
2013 capital rules.\100\ The Board solicits comments on whether
referencing the other banking agencies' risk mitigation provisions
introduces undue complexity. The Board understands that some credit
unions engaged in securities lending and borrowing transactions would
benefit from a lower risk weight, as provided by the other banking
agencies' rules; however, the Board believes most credit unions do not
engage in a substantial amount of securities lending and borrowing
activities and therefore would benefit from a simple, although
conservative, 100 percent risk weight.
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\100\ See 12 CFR 324.2. Financial collateral means collateral:
(1) In the form of: (i) Cash on deposit with the FDIC-supervised
institution (including cash held for the FDIC-supervised institution
by a third-party custodian or trustee); (ii) Gold bullion; (iii)
Long-term debt securities that are not resecuritization exposures
and that are investment grade; (iv) Short-term debt instruments that
are not resecuritization exposures and that are investment grade;
(v) Equity securities that are publicly traded; (vi) Convertible
bonds that are publicly traded; or (vii) Money market fund shares
and other mutual fund shares if a price for the shares is publicly
quoted daily; and (2) In which the FDIC-supervised institution has a
perfected, first-priority security interest or, outside of the
United States, the legal equivalent thereof (with the exception of
cash on deposit; and notwithstanding the prior security interest of
any custodial agent or any priority security interest granted to a
CCP in connection with collateral posted to that CCP).
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The proposed rule would also include a specific credit conversion
factor and risk weight for the off-balance sheet exposure amount of
repurchase transactions.\101\ Under the proposed rule, the off-balance
sheet exposure amount for a repurchase transaction would equal all of
the positions the credit union has sold or bought subject to repurchase
or resale, which equals the sum of the current fair values of all such
positions. The off-balance sheet exposure amounts of repurchase
transactions are not provided a credit conversion factor under the 2015
Final Rule. The proposed rule would provide a 100 percent risk weight
for the off-balance sheet exposure amounts of repurchase transactions.
A credit union may recognize the credit risk mitigation benefits of
financial collateral, as defined by 12 CFR 324.2, by risk weighting the
collateralized portion of the exposure under the applicable provisions
of 12 CFR 324.35 or 324.37.
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\101\ Repurchase transactions would mean either a transaction in
which a credit union agrees to sell a security to a counterparty and
to repurchase the same or an identical security from that
counterparty at a specified future date and at a specified price or
a transaction in which an investor agrees to purchase a security
from a counterparty and to resell the same or an identical security
to that counterparty at a specified future date and at a specified
price.
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The Board notes that repurchase transactions are not included in
the definition of off-balance sheet exposure. This exclusion of
repurchase transactions from the definition of off-balance sheet
exposure is because the other banking agencies did not include
repurchase transactions in their related measure of CBLR and the
definition of off-balance sheet exposure is used for purposes of the
CCULR eligibility criteria.\102\
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\102\ 12 CFR 324.12(a)(2)(iii).
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Even though, for purposes of the CCULR framework, repurchase
transactions are excluded from the off-balance sheet criterion, the
Board believes that the off-balance sheet portion of repurchase
transactions should be risk-weighted under the risk-based capital
ratio. First, repurchase transactions are included in the current
definition of off-balance sheet items. Second, the other banking
agencies risk-weight the off-balance sheet portion of repurchase
transactions in their risk-based capital framework.\103\
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\103\ 12 CFR 324.33(b)(4)(ii).
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The Board, however, does not believe that repurchase transactions
are a material exposure for credit unions. As of December 31, 2020,
there are only 31 complex credit unions with repurchase transactions on
their balance sheets. Therefore, the proposed rule would include the
off-balance sheet portion of repurchase transactions for purposes of
risk-based capital, even though such transactions are not included as
part of the off-balance sheet eligibility criteria under the CCULR
framework.\104\
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\104\ The proposed rule would also revise the definition of off-
balance sheet items. The proposed definition of off-balance sheet
items would include off-balance sheet exposures and the off-balance
sheet exposure amount of repurchase transactions. This change is
necessary to ensure repurchase transactions are not included as part
of the off-balance sheet criteria for eligibility in the CCULR
framework.
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Finally, the proposed rule would include a ``catchall'' category.
Under the proposed rule, all other off-balance sheet exposures not
explicitly provided a credit conversion factor or risk weight that meet
the definition of a commitment would be given a credit conversion
factor of 100 percent and a risk weight of 100 percent. The Board
believes a catchall category is necessary given that the definition of
commitment is broad. Commitments include 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.\105\ To ensure all off-balance sheet exposures
that met the definition of commitment are provided a credit conversion
factor and risk weight, the proposed rule would include a new catchall
category for such exposures.
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\105\ 12 CFR 702.2 (effective Jan. 1, 2022).
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2. Asset Securitizations Issued by Complex Credit Unions
The 2019 Supplemental Rule included asset securitizations as one of
the reasons the Board sought a holistic reevaluation of the 2015 Final
Rule. The Board has further considered asset securitizations issued by
credit unions and has decided to propose to amend the 2015 Final Rule
to explicitly address credit union issued securitizations.
[[Page 45845]]
The proposed rule would require credit unions that issue
securitizations to use the other banking agencies' 2013 capital rules
when determining whether assets transferred in connection with a
securitization are excluded from risk-based capital. The Board has
reviewed these standards and finds they would be appropriate as applied
to credit union securitizations, with the minor differences noted
below. Specifically, under the proposed rule, a credit union must
follow the requirements of the applicable provisions of 12 CFR 324.41
when it transfers exposures in connection with a securitization. A
credit union may only exclude the transferred exposures from the
calculation of its risk-weighted assets if each condition in 12 CFR
324.41 is satisfied. The conditions for traditional securitizations in
12 CFR 324.41 are as follows (adapted for credit unions):
(1) The exposures are not reported on the credit union's
consolidated balance sheet under GAAP;
(2) The credit union has transferred to one or more third parties
credit risk associated with the underlying exposures;
(3) Any clean-up calls relating to the securitization are eligible
clean-up calls (a defined term under the other banking agencies' 2013
capital rules); \106\ and
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\106\ Under the other banking agencies' 2013 capital rules,
eligible clean-up call means a clean-up call that: (1) Is
exercisable solely at the discretion of the originating institution
or servicer; (2) is not structured to avoid allocating losses to
securitization exposures held by investors or otherwise structured
to provide credit enhancement to the securitization; and (3)(i) for
a traditional securitization, is only exercisable when 10 percent or
less of the principal amount of the underlying exposures or
securitization exposures (determined as of the inception of the
securitization) is outstanding; or (ii) for a synthetic
securitization, is only exercisable when 10 percent or less of the
principal amount of the reference portfolio of underlying exposures
(determined as of the inception of the securitization) is
outstanding.
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(4) The securitization does not:
(i) Include one or more underlying exposures in which the borrower
is permitted to vary the drawn amount within an agreed limit under a
line of credit; and
(ii) Contain an early amortization provision.
A credit union that meets the conditions, but retains any credit
risk for the transferred exposures, must hold risk-based capital
against the credit risk it retains in connection with the
securitization.
The other banking agencies' 2013 rule includes conditions for both
traditional securitizations and synthetic securitizations.\107\ The
Board believes almost all securitizations issued by credit unions would
be traditional securitizations and subject to the conditions in 12 CFR
324.41(a). The Board does not believe that credit unions are likely to
engage in synthetic securitizations, however, if a credit union issues
a synthetic securitization, it would be subject to the conditions in 12
CFR 324.41(b).
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\107\ Under the other banking agencies' 2013 capital rule, a
synthetic securitization means a transaction in which: (1) All or a
portion of the credit risk of one or more underlying exposures is
retained or transferred to one or more third parties through the use
of one or more credit derivatives or guarantees (other than a
guarantee that transfers only the credit risk of an individual
retail exposure); (2) The credit risk associated with the underlying
exposures has been separated into at least two tranches reflecting
different levels of seniority; (3) Performance of the securitization
exposures depends upon the performance of the underlying exposures;
and (4) All or substantially all of the underlying exposures are
financial exposures (such as loans, commitments, credit derivatives,
guarantees, receivables, asset-backed securities, mortgage-backed
securities, other debt securities, or equity securities). See, 12
CFR 324.2.
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The Board also notes that 12 CFR 324.41(c) includes explicit due
diligence requirements for banking organizations' investments in
securitizations. The Board is not proposing to adopt these requirements
at this time. The proposed rule only references 12 CFR 324.41 to
incorporate the factors a credit union must consider when excluding
assets transferred in connection with a securitization from risk-
weighted assets. The Board intends to use its supervisory authority to
monitor securitizations for safety and soundness purposes and is not
currently proposing to adopt any new regulatory requirements for such
transactions.
The other banking agencies' 2013 capital rule has an explicit
treatment for any gain-on-sale in connection with a securitization
exposure and any credit-enhancing interest only strips (CEIOs) retained
by a banking organization that do not qualify as a gain-on-sale. Any
gain-on-sale in connection with a securitization exposure is deducted
from a banking organization's common equity tier 1 capital.\108\ CEIOs
that do not qualify as a gain-on-sale are given a 1,250 percent risk
weight.\109\ The other banking agencies provided punitive treatments
for these exposures because of historical supervisory concerns with the
subjectivity involved in valuations of gains-on-sale and CEIOs.
Furthermore, although the treatments for gains-on-sale and CEIOs can
increase an originating banking organization's risk-based capital
requirement following a securitization, the other banking agencies
believe that such anomalies are rare where a securitization transfers
significant credit risk to third parties.
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\108\ See, 12 CFR 324.22(a)(4) and 12 CFR 324.42(a)(1).
\109\ See, 12 CFR 324.42(a)(1).
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The 2015 Final Rule does not include specific treatments for gain-
on-sales or CEIOs because, as discussed previously, in 2015 credit
unions had not issued any securitizations. Under the 2015 Final Rule,
however, most CEIOs would still receive a 1,250 percent risk weight
because they constitute a subordinated tranche. However, the 2015 Final
Rule permits a credit union to use the gross-up approach as an
alternative. The Board believes that credit union-issued
securitizations should be given a similar capital treatment under the
2015 Final Rule as under the other banking agencies' risk-based capital
rule.
Therefore, the proposed rule would include a specific risk weight
for certain exposures associated with securitization activities. While
the Board believes the capital treatment for credit union-issued
securitizations should be similar to bank-issued securitizations, for
simplicity, the proposed rule is slightly different than the other
banking agencies' 2013 risk-based capital rule. Under the proposed
rule, the gain-on-sale amount from a securitization transaction,
generally the CEIO, will be included the numerator in calculating a
credit union's net worth. This is a different approach than the other
banking agencies' rule, which excludes gains-on-sale in calculating a
bank's common equity tier 1 capital. Instead, the Board has chosen to
address the risks associated with a gain-on-sale amount by requiring
that a 1,250 percent risk weighting be applied to retained non-security
beneficial interests. The Board believes the proposed approach is
simpler and that it provides a more conservative risk weight overall
than the other banking agencies' approach. The Board believes this
approach is warranted given the limited securitizations issued by
credit unions at this time.
Under the proposed rule, a non-security beneficial interest is
defined as the residual equity interest in the special purpose entity
that represents a right to receive possible future payments after
specified payment amounts are made to third-party investors in the
securitized receivables. Therefore, under the proposed rule, if a
credit union has a non-security beneficial interest, such as a CEIO or
cash collateral account, it cannot be risk-weighted with the gross-up
approach and, instead, would be given a 1,250 risk weight. The Board
believes this treatment is similar to the treatment provided by the
other banking agencies in their 2013 risk-based capital rule.
[[Page 45846]]
The Board notes that subordinate tranches, either retained by the
securitization sponsor or offered to investors as securities, that are
also senior in payment priority to the non-security beneficial
interest, are allowed to be risk weighted using the gross-up approach.
Question 18: What are the advantages and disadvantages of relying
on the other banking agencies' risk-based capital rule for determining
whether a credit union has transferred the credit risk associated with
a securitization? Should credit union-issued securitizations be subject
to the same capital treatment as bank-issued securitizations? Should
there be an option for complex credit unions to use the gross-up
approach for risk weighting non-security beneficial interest of a
securitization? If so, please provide examples where the gross-up
approach would sufficiently capture the risks of a non-security
beneficial interest of a securitization.
3. Mortgage Servicing Assets
The Board is proposing to amend Sec. 702.104(b), risk-based
capital numerator, to deduct mortgage servicing assets that exceed 25
percent of the sum of the capital elements in Sec. 702.104(b)(1), less
deductions required under Sec. 702.104(b)(2)(i) through (iv) of this
section. Under the 2015 Final Rule, MSAs are 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.\110\
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\110\ 12 CFR 702.2 (effective Jan. 1, 2022).
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To determine if a complex credit union would be subject to the MSA
deduction from the risk-based capital numerator in this proposal, the
complex credit union would first need to calculate the risk-based
capital numerator before the MSA deduction. This calculation is in the
current rule and requires that the complex credit union add all the
capital elements of the risk-based capital numerator and subtract all
risk-based capital numerator deductions, not including the MSA
deduction. The complex credit union would then determine if its MSA
exposure exceeds 25 percent of the previous calculation. If its MSAs do
not exceed 25 percent, then the previous calculation is the risk-based
capital numerator. If its MSAs exceed 25 percent, the complex credit
union will need to deduct the amount of MSAs that exceed 25 percent of
the previous calculation. All MSA exposures that are not deducted from
the risk-based capital numerator are risk weighted at 250 percent.
The current rule does not include a deduction to the risk-based
capital numerator for MSAs. The Board chose not to include a deduction
for MSA exposures because, when the 2015 Final Rule was issued, the
other banking agencies' risk-based capital rule included a complex
deduction for MSAs that included other items that were not comparable
to the credit union structure. In 2015, the other banking agencies made
numerator adjustment based on the collective exposure to MSAs, deferred
tax assets arising from temporary differences that could not be
realized through net operating loss carrybacks, and significant
investments in capital of nonconsolidated financial institutions in the
form of common stock. As the other banking agencies' 2015 approach was
not comparable to the credit union capital structure and added
significant complexity to their rule, the Board did not include a
similar deduction to the 2015 Final Rule.
The Board is now proposing a deduction to the risk-based capital
numerator for MSAs that exceed 25 percent of the risk-based capital
numerator for two primary reasons. First, this change will make the
NCUA's risk-based capital calculation more consistent with the other
banking agencies' revised risk-based capital rules as the other banking
agencies simplified their MSA calculation post-issuance of the 2015
Final Rule.\111\ Under the other banking agencies' revised risk-based
capital rule, banking organizations deduct MSAs that exceed 25 percent
of the banking organization's common equity tier 1 capital.\112\ The
Board believes the simplification of the other banking agencies'
approach easily allows the NCUA to be consistent with the other banking
agencies' risk-based capital rule. Also, the Board believes it would be
important to implement prudential conditions around MSAs if the Board
adopts the recent proposed rule to amend parts 703 and 721 to allow
FCUs to purchase mortgage servicing rights \113\ from other FICUs.\114\
If adopted, this rule could increase MSA holdings for complex credit
unions. But even if the Board does not adopt the proposed rule on
mortgage servicing rights, the other considerations in this section
support the proposed amendment to the 2015 Final Rule.
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\111\ 84 FR 35234 (July 22, 2019).
\112\ 12 CFR 324.22(d).
\113\ The terms mortgage servicing rights and MSAs are used
interchangeably.
\114\ 85 FR 86867 (Dec. 31, 2020).
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The Board believes that by including a deduction to the risk-based
capital numerator for MSAs in risk-based capital, complex credit unions
will be encouraged to avoid excessive exposures in MSAs relative the
other risks on their balance sheets. As mentioned in the preamble of
the 2015 Final Rule, the Board believes the risks of MSAs contribute to
a high level of uncertainty regarding the ability of credit unions to
realize value from these assets. Therefore, the Board believes it is
appropriate to add the proposed risk-based numerator deduction to
address the potential of complex credit unions purchasing MSAs from
other FICUs.
The Board does not believe the proposed treatment would have an
immediate effect on complex credit unions. As of December 31, 2020, the
largest concentration in MSAs held by complex credit unions was just
under 15 percent of the credit union's net worth. While net worth and
the risk-based capital numerator are different calculations, the Board
believes the two calculations are similar enough to state, with a high
degree of certainty, there are no complex credit unions that would be
required to deduct MSAs from the risk-based capital numerator were
risk-based capital currently in effect.
Finally, the Board is aware that complex credit unions may believe
that deducting exposures of MSAs over 25 percent of their risk-based
capital numerator is punitive. However, the Board notes that both the
Board and other banking agencies have stated that MSAs have a
relatively high level of uncertainty regarding the ability to both
value and realize value from these assets.\115\ The Board also believes
including the proposed MSA deduction from the risk-based capital
numerator is prudential for potential balance sheets complex credit
union may have in the future.
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\115\ Report to Congress on the Effect of Capital Rules on
Mortgage Servicing Assets, Report to the Congress on the Effect of
Capital Rules on Mortgage Servicing Assets, June 2016, available at
<a href="https://www.federalreserve.gov/publications/other-reports/files/effect-capital-rules-mortgage-servicing-assets-201606.pdf">https://www.federalreserve.gov/publications/other-reports/files/effect-capital-rules-mortgage-servicing-assets-201606.pdf</a>.
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Question 19: What are the advantages and disadvantages of deducting
MSAs from the risk-based capital numerator? Should the Board consider a
higher or lower deduction threshold? Why or why not?
4. Supranational Organizations and Multilateral Development Banks
The Board is proposing to amend the risk-based capital rule to
assign a risk
[[Page 45847]]
weighting of zero percent to an obligation of the Bank for
International Settlements, the European Central Bank, the European
Commission, the International Monetary Fund, the European Stability
Mechanism, the European Financial Stability Facility, and multilateral
development banks (MDBs). The 2015 Final Rule did not specifically
discuss MDBs, which would have a risk weight of 100 percent under the
catchall category for all other assets not specifically assigned a risk
weight.\116\ Assigning a risk-weight of zero percent is consistent with
the other banking agencies' risk-based capital rule and the Board
believes the zero percent risk weight is appropriate due to the
generally high-credit quality of the issuers. This proposed change to
the risk-based capital risk weighting was also requested in a comment
letter in the ANPR. As part of this change, the Board would add a
definition listing MDBs and criteria for non-listed multilateral
lending institutions or regional development banks to be included in
the MDB category. The MDBs listed in the definition are:
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\116\ 12 CFR 702.104(c)(2)(v)(C) (effective Jan. 1, 2022).
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<bullet> International Bank for Reconstruction and Development;
<bullet> Multilateral Investment Guarantee Agency;
<bullet> International Finance Corporation;
<bullet> Inter-American Development Bank;
<bullet> Asian Development Bank;
<bullet> African Development Bank;
<bullet> European Bank for Reconstruction and Development;
<bullet> European Investment Bank;
<bullet> European Investment Fund;
<bullet> Nordic Investment Bank;
<bullet> Caribbean Development Bank;
<bullet> Islamic Development Bank; and
<bullet> Council of Europe Development Bank.
<bullet> Multilateral lending institution or regional development
bank in which the U.S. government is a shareholder or contributing
member are also included in the definition of MDBs.
Furthermore, the Board notes that MDBs are not permissible
investments for FCUs under the general investment authorities. However,
FCUs may invest in MDBs under Sec. 701.19 and under Sec. 721.3(b),
subject to some conditions.
Question 20: Are there any supranational entities that should be
included in the zero percent risk weight category? Specifically, the
Board is requesting whether this proposed change sufficiently aligns
NCUA's risk-weightings with the other banking agencies' risk weights
for supranational organizations and MDBs.
5. Paycheck Protection Program Loans
As discussed previously in connection with the other banking
agencies' CBLR regulation, the CARES Act was enacted in 2020 to provide
aid to the U.S. economy during the COVID-19 pandemic.\117\ The CARES
Act authorized the Small Business Administration (SBA) to create a loan
guarantee program, the Paycheck Protection Program (PPP), to help
certain affected businesses meet payroll needs and utilities (including
employee salaries, sick leave, other paid leave, and health insurance
expenses) as a result of the COVID-19 pandemic. Provided credit union
lenders comply with the applicable lender obligations set forth in the
SBA's interim final rule, the SBA fully guaranteed loans issued under
the PPP. Most FICUs were eligible to make PPP loans to members. Under
the CARES Act, PPP loans must receive a zero percent risk weighting
under the NCUA's risk-based capital requirements.\118\ The NCUA issued
a 2020 interim final rule to explicitly state that PPP loans under the
risk-based net worth requirement receive a zero percent risk-
weight.\119\ The 2020 interim final rule stated that the NCUA's risk-
based capital regulations would be amended in the future. The Board is
now proposing to update the 2015 Final Rule to reflect that PPP loans
receive a zero percent risk weight.
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\117\ Public Law 116-136 (Mar. 27, 2020).
\118\ Public Law 116-136, 134 Stat. 281 (Mar. 27, 2020).
\119\ 85 FR 23212 (Apr. 27, 2020).
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6. Updates to Derivative-Related Definitions
The Board recently amended its rule on derivatives to modernize the
rule and make it more principles-based, while retaining key safety and
soundness components.\120\ The rulemaking amended several defined
terms. A few of those defined terms are also included in the 2015 Final
Rule. For consistency, the proposed rule would update those definitions
that are also included in the 2015 Final Rule. First, under the
proposed rule, the term derivative would be defined as ``a financial
contract that derives its value from the value and performance of some
other underlying financial instrument or variable, such as an index or
interest rate.'' \121\ Second the proposed rule would make minor
changes to the definitions of a derivative clearing organization and
swap dealer by including a more general reference to the Commodity
Futures Trading Commission (CFTC)'s regulations (for both definitions,
the 2015 Final Rule references the definitions used by the CFTC).\122\
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\120\ 85 FR 23212 (Apr. 27, 2020).
\121\ The 2015 Final Rule defines a 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. 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.'' 12 CFR 702.2 (effective Jan. 1, 2022).
\122\ The 2015 Final Rule states a derivative clearing
organization is ``as defined by the Commodity Futures Trading
Commission in 17 CFR 1.3(d).'' The proposed rule would state that a
derivative clearing organization ``as defined by the Commodity
Futures Trading Commission (CFTC) in 17 CFR 1.3.'' Essentially the
proposed rule would remove the ``(d)''. Similarly, the more specific
reference in the 2015 Final Rule would be updated with the more
general reference included in the recent derivative rule.
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7. Definitions of Consumer Loan and Current
The Board is proposing to amend the definitions for Consumer Loan
and Current in Sec. 702.2. The Board is proposing these changes as a
clarification to the 2015 Final Rule. The 2015 Final Rule does not
include leases in the definition in Consumer Loan, despite the fact
that the 2014 Risk-Based Capital NPR stated ``[c]onsumer 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.'' \123\ The Board is
providing this proposed change for clarity. Without this proposed
change the treatment of consumer leases is unclear and, therefore, may
be risk weighted in the catchall category of 100 percent. The change
makes clear that consumer leases receive a 75 percent risk weight. Due
to the proposed change in the definition of a consumer loan, the
definition of current will also be amended for consistency and would
include the term leases.
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\123\ 79 FR 11184, 11198 (Feb. 27, 2014).
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N. Technical Amendments
The proposed rule would also include two technical amendments to 12
CFR part 703. Both amendments would make minor corrections related to
the 2015 Final Rule.
O. Illustrative Reporting Forms for Risk-Based Capital
In January 2018, the Board issued a Request for Comment (RFI)
seeking comments on all proposed changes to the Call Report form 5300,
the Profile
[[Page 45848]]
form 4501A, and the accompanying instructions. The proposed forms and
instructions are available on the NCUA's Call Report Modernization web
page.\124\ The proposed Call Report form included six risk-based
capital schedules (FC-T-1 through FC-T-6) designed to collect
information consistent with the 2015 Final Risk-based Capital Rule. The
Board also provided other risk-based capital tools detailed on the
Risk-based Capital Rule Resources Page on the NCUA's website.\125\
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\124\ <a href="https://www.ncua.gov/regulation-supervision/examination-modernization-initiatives/call-report-modernization">https://www.ncua.gov/regulation-supervision/examination-modernization-initiatives/call-report-modernization</a>.
\125\ <a href="https://www.ncua.gov/regulation-supervision/regulatory-compliance-resources/risk-based-capital-rule-resources">https://www.ncua.gov/regulation-supervision/regulatory-compliance-resources/risk-based-capital-rule-resources</a>.
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The Board is illustrating as part of this proposal the draft forms
that may be used as the risk-based capital Call Report schedules. Any
new Call Report forms to support risk-based capital will be accompanied
with detailed instructions. The NCUA intends to separately seek comment
on the proposed changes to the Call Report for complex credit unions
that use the risk-based capital framework. The examples below
illustrate what the risk-based capital form for the numerator and
denominator may look like. The illustration consists of three sections:
Part I--Numerator, Part II--Denominator for on-balance sheet assets,
and Part III--Denominator for off-balance sheet exposures and
derivatives.
The illustration of the capital elements for the risk-based capital
numerator are consistent with the 2015 Final rule in Sec.
702.104(b)(1) with the addition of the proposed MSA deduction as
proposed in the Amendments to the 2015 Final Rule, section M.
[GRAPHIC] [TIFF OMITTED] TP16AU21.002
The illustration for Part II--Denominator form for on-balance sheet
assets may auto-populate the totals from other schedules in the Call
Report (see table below for ``Totals from Schedules'' column with
greyed out boxes). The Board will also provide a detailed instruction
guide consistent with the 2015 Final Rule Sec. 702.104(c)(2) for risk
weighting the on-balance sheet assets into their respective risk weight
categories. An empty box underneath each risk-weight category indicates
a possible asset amount for each line item in accordance with the 2015
Final Rule.
[[Page 45849]]
[GRAPHIC] [TIFF OMITTED] TP16AU21.003
The Board is proposing to improve the clarity and completeness of
off-balance sheet and derivative exposures with the Part III--
Denominator form example below. Similar to Part II, a detailed
instruction guide consistent with the 2015 Final Rule Sec. 702.104(4)
and Sec. 702.105 will supplement the schedule for risk weighting the
off-balance sheet and derivative exposures into their respective risk
weight categories. Both the Credit Conversion Factor (CCF) and the
Credit Equivalent Amount (CEA) assist in calculating the amount to be
risk weighted.
[GRAPHIC] [TIFF OMITTED] TP16AU21.004
[[Page 45850]]
IV. Regulatory Procedures
A. Regulatory Flexibility Act
The Regulatory Flexibility Act \126\ requires the NCUA to prepare
an analysis to describe any significant economic impact a regulation
may have on a substantial number of small entities (primarily those
under $100 million in assets).\127\ This proposed rule would affect
only credit unions with over $500 million in assets, which are subject
to the 2015 Final Rule and the 2018 Supplemental Rule when they go into
effect in January 2022. As a result, credit unions with $100 million or
less in total assets would not be affected by this proposed rule.
Accordingly, the NCUA certifies that this proposed rule would not have
a significant economic impact on substantial number of small credit
unions.
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\126\ 5 U.S.C. 601 et seq.
\127\ 5 U.S.C. 603(a).
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B. Paperwork Reduction Act
The Paperwork Reduction Act of 1995 (PRA) applies to rulemakings in
which an agency by rule creates a new paperwork burden on regulated
entities or amends an existing burden. For purposes of the PRA, a
paperwork burden may take the form of a reporting, disclosure or
recordkeeping requirement, each referred to as an information
collection. The proposed changes to part 702 may revise existing
information collection requirements to the Call Report. Should changes
be made to the Call Report, they will be addressed in a separate
Federal Register notice. The revisions to the Call Report will be
submitted for approval by the Office of Information and Regulatory
Affairs at the Office of Management and Budget prior to their effective
date.
C. Executive Order 13132 on Federalism
Executive Order 13132 encourages independent regulatory agencies to
consider the impact of their actions on state and local interests.\128\
The NCUA, an independent regulatory agency, as defined in 44 U.S.C.
3502(5), voluntarily complies with the executive order to adhere to
fundamental federalism principles. The proposed rule will apply to all
federally insured natural-person credit unions, including federally
insured, state-chartered 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, however, NCUA has
consulted with representatives of state regulators regarding the impact
of the proposed rule.
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\128\ 64 FR 43255 (Aug. 4, 1999).
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D. Assessment of Federal Regulations and Policies on Families
The NCUA has determined that this proposed rule would 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 702
Credit unions, Reporting and recordkeeping requirements.
12 CFR Part 703
Credit unions, Investments, Reporting and recordkeeping
requirements.
By the National Credit Union Administration Board on July 22,
2021.
Melane Conyers-Ausbrooks,
Secretary of the Board.
For the reasons stated in the preamble, the NCUA proposes to amend
12 CFR parts 702 and 703, as follows:
PART 702--CAPITAL ADEQUACY
0
1. The authority for part 702 continues to read as follows:
Authority: 12 U.S.C. 1766(a), 1790d.
0
2. In Sec. 702.2, revise the definitions of ``Consumer Loan'',
``Current'', ``Derivative contract'', ``Derivatives Clearing
Organization'', ``Off-balance sheet exposure'', ``Off-balance sheet
items'', and ``Swap dealer'' and add definitions of ``CCULR'', ``Credit
derivative'', ``Forward agreement'', ``Multilateral development bank'',
``Non-security beneficial interest'' ``Repurchase transaction,''
``Trading assets'', ``Trading liabilities'', and ``Unconditionally
cancelable'', in alphabetical order, to read as follows:
Sec. 702.2 Definitions.
* * * * *
CCULR means the complex credit union leverage ratio. It is
calculated in the same manner as the net worth ratio under Sec. 702.2.
* * * * *
Consumer loan means a loan or lease for household, family, or other
personal expenditures, including any loans or leases 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 or lease. 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.
* * * * *
Credit derivative means a financial contract executed under
standard industry credit derivative documentation that allows one party
(the protection purchaser) to transfer the credit risk of one or more
exposures (reference exposure(s)) to another party (the protection
provider) for a certain period of time.
* * * * *
Current means, with respect to any loan or lease, that the loan or
lease is less than 90 days past due, not placed on non-accrual status,
and not restructured.
* * * * *
Derivative contract means a financial contract that derives its
value from the value and performance of some other underlying financial
instrument or variable, such as an index or interest rate.
Derivatives Clearing Organization has the meaning as defined by the
Commodity Futures Trading Commission (CFTC) in 17 CFR 1.3.
* * * * *
Forward agreement means a legally binding contractual obligation to
purchase assets with certain drawdown at a specified future date, not
including commitments to make residential mortgage loans or forward
foreign exchange contracts.
* * * * *
Multilateral development bank (MDB) means the International Bank
for Reconstruct
[…truncated; see source link]Indexed from Federal Register on August 16, 2021.
This is legal information, not legal advice. Laws vary by jurisdiction and change frequently. Always verify current law with official sources and consult a licensed attorney in your jurisdiction for advice on your specific situation.