Rule2021-27644
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
December 23, 2021
Effective
January 1, 2022
Issuing agencies
National Credit Union Administration
Abstract
This final rule provides 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 final rule, a complex credit union that maintains a minimum net worth ratio, and that meets other qualifying criteria, is eligible to opt into the complex credit union leverage ratio (CCULR) framework if they have a minimum net worth ratio of nine percent. A complex credit union that opts into the CCULR framework need not calculate a risk-based capital ratio under the NCUA 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 maintains the minimum net worth ratio is considered well capitalized. The final rule also makes 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, revising the treatment of goodwill, and amending other asset risk weights.
Full Text
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[Federal Register Volume 86, Number 244 (Thursday, December 23, 2021)]
[Rules and Regulations]
[Pages 72784-72806]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2021-27644]
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NATIONAL CREDIT UNION ADMINISTRATION
12 CFR Parts 702 and 703
RIN 3133-AF12
Capital Adequacy: The Complex Credit Union Leverage Ratio; Risk-
Based Capital
AGENCY: National Credit Union Administration (NCUA).
ACTION: Final rule.
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SUMMARY: This final rule provides 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 final rule, a complex credit union that
maintains a minimum net worth ratio, and that meets other qualifying
criteria, is eligible to opt into the complex credit union leverage
ratio (CCULR) framework if they have a minimum net worth ratio of nine
percent. A complex credit union that opts into the CCULR framework need
not calculate a risk-based capital ratio under the NCUA 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 maintains the minimum net worth ratio is considered well
capitalized. The final rule also makes 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, revising the treatment of goodwill, and amending
other asset risk weights.
DATES: The final rule is effective January 1, 2022.
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) 548-2601
or Ariel
[[Page 72785]]
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
IV. Final 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 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. Amendments to the 2015 Final Rule
M. Technical Amendments
N. Other Comments Beyond the Scope of the Proposed Rule
V. 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
E. Small Business Regulatory Enforcement Fairness Act
F. Administrative Procedure Act
I. Background
A. The NCUA'S Risk-Based Capital Requirements
The NCUA ensures the safety and soundness of federally insured
credit unions (FICUs) by examining and supervising federally chartered
credit unions (FCUs); participating in the examination and supervision
of federally insured, state-chartered credit unions in coordination
with state regulators; and insuring members' accounts at all FICUs up
to the statutorily prescribed limits.
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. Capital levels commensurate with risk 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 provide 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. On October 29, 2015, as amended on October 18, 2018, the
NCUA Board (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 capitalizing and replenishing losses to
the NCUSIF.\2\ 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, consistent with the FCUA, and 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.\3\
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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). The FCUA requires each insured credit
union to pay an insurance premium equal to a percentage of the
credit union's insured shares when the Board, subject to statutory
parameters, assesses a premium. 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 funds
are available to pay share insurance claims, to aid 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).
\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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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).\4\ 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\ 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).\5\ 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 enabled the Board to holistically and
comprehensively evaluate the NCUA's capital standards for credit
unions.\6\ Among the items highlighted by the Board for possible
consideration during the delay were adoption of a community bank
leverage ratio (CBLR) analogue, the treatment of asset securitizations
issued by credit unions, finalization of the Subordinated Debt rule and
implementation of the current expected credit loss (CECL) standard.\7\
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\5\ 84 FR 68781 (Dec. 17, 2019).
\6\ Id. at 68782.
\7\ Id.
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B. The Other Banking Agencies' Risk-Based Capital and CBLR Framework
As discussed in the proposed rule, the other banking agencies
adopted in 2013 a revised risk-based capital rule, which was designed
to strengthen their capital requirements and improve risk sensitivity.
In 2018, section 201 of the Economic Growth, Regulatory Relief, and
Consumer Protection Act directed the other banking agencies to propose
a simplified, alternative measure of capital adequacy for certain
federally insured banks.\8\ On November 13, 2019, the other banking
agencies issued a final rule implementing this statutory directive
(CBLR Final Rule).\9\
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\8\ Public Law 115-174 (May 24, 2018). Section 201 is codified
at 12 U.S.C. 5371 note.
\9\ 84 FR 61776 (Nov. 13, 2019).
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Under the CBLR Final Rule, the CBLR framework is an option for
depository institutions and depository institution holding companies
that meet the following criteria:
[[Page 72786]]
(1) A CBLR greater than nine percent; \10\
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\10\ 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 on January 1, 2022. See, 85 FR 22930 (Apr. 23,
2020).
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(2) Total consolidated assets of less than $10 billion; \11\
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\11\ 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).
In March 2020, the CBLR was temporarily set to eight percent by
statute.\12\ Accordingly, effective the second quarter of 2020, the
CBLR requirement was eight percent or greater.\13\ In early 2021, the
CBLR requirement was increased to 8.5 percent or greater. During the
grace period, the minimum requirement is 7.5 percent.\14\ Effective
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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\12\ Public Law 116-136.
\13\ See, 85 FR 22924 (Apr. 23, 2020).
\14\ See, 85 FR 22930 (Apr. 23, 2020). The grace period is the
two-calendar quarter period a depository institution or depository
institution holding company has to satisfy the requirements to be a
qualifying institution or to calculate a risk-based capital ratio.
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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 and solicited comments on two approaches to
simplify the 2015 Final Rule.\15\ 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.
Almost all commenters who favored the CCULR framework noted that its
flexibility is attributable to the option complex credit unions have in
calculating the more complex risk-based capital measure, which produces
a more precise, and generally lower, overall capital requirement. A few
commenters also stated that a benefit of the CCULR framework is its
similarity to the capital framework of the other banking agencies.
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\15\ See, 86 FR 13498 (March 9, 2021).
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II. Legal Authority
This final rule provides a simple measure of capital adequacy for
credit unions classified as complex based on the principles of the CBLR
framework. The CCULR relieves complex credit unions that meet specified
qualifying criteria from having to calculate the risk-based capital
ratio.\16\ In exchange, the credit union is required to maintain a
higher net worth ratio than is otherwise required for the well-
capitalized classification. This trade-off is akin to the decision
qualifying community banks make under the CBLR. A qualifying complex
credit union that has a net worth ratio of nine percent or greater is
eligible to opt into the CCULR framework.
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\16\ See Section IV.B. Qualifying Credit Unions for more
information on the qualifying criteria.
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The Board received no comments on its legal authority to issue the
final rule and thus affirms its conclusions and interpretations in the
proposed rule. The Board is issuing this final rule pursuant to its
authority under the FCUA. 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.\17\ Section 207 of the FCUA is a specific grant of authority over
share insurance coverage, conservatorships, and liquidations.\18\
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.\19\ 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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\17\ 12 U.S.C. 1766(a).
\18\ 12 U.S.C. 1787(b)(1).
\19\ 12 U.S.C. 1789(a)(11).
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The FCUA also expressly grants authority for the Board to develop
capital adequacy standards for credit unions. In 1998, Congress enacted
the Credit Union Membership Access Act (CUMAA).\20\ Section 301 of
CUMAA added section 216 to the FCUA,\21\ which required the Board to
adopt by regulation a system of prompt corrective action (PCA) to
resolve the problems of insured credit unions when the net worth of
credit unions declines below certain levels.\22\ Section 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 Federal Deposit Insurance Act (FDI Act).\23\ Section
216(b)(1)(B) requires that the Board, in designing the PCA system, also
consider the ``cooperative character of credit unions''.\24\ The Board
initially implemented the required system of PCA in 2000,\25\ primarily
in part 702. As discussed previously, the Board most recently made
substantial updates to the regulation in the 2015 Final Rule.
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\20\ Public Law 105-219, 112 Stat. 913 (1998).
\21\ 12 U.S.C. 1790d.
\22\ The risk-based net worth requirement for credit unions
meeting the definition of complex was first applied based on 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).
\23\ 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 FCUA requires the Board
to adopt a PCA framework comparable to the PCA framework in the FDI
Act. The FCUA, 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.''
\24\ 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. 12 U.S.C. 1790d(b)(1)(B).
\25\ 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.\26\ Section
216(o) generally defines a credit union's net worth as its retained
earnings balance as determined under generally accepted accounting
principles (GAAP); \27\ and a credit union's net worth ratio as the
ratio of its net worth to its total assets.\28\ As a credit union's net
worth ratio declines, so does
[[Page 72787]]
its classification among the five net worth categories, thus subjecting
it to an expanding range of mandatory and discretionary supervisory
actions.\29\
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\26\ 12 U.S.C. 1790d(c).
\27\ 12 U.S.C. 1790d(o)(2).
\28\ 12 U.S.C. 1790d(o)(3).
\29\ 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 the NCUA's system of PCA
include, besides the statutorily defined net worth ratio requirement,
``a risk-based net worth \30\ requirement for credit unions that are
complex, as defined by the Board.'' \31\ The FCUA directs the NCUA to
base its definition of complex credit unions ``on the portfolios of
assets and liabilities of credit unions.'' \32\ 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. Besides granting the NCUA broad
authority to determine which credit unions are complex, and thus
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.\33\ Specifically, unlike the terms
``net worth'' and ``net worth ratio,'' the term ``risk-based net
worth'' is undefined 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 FCUA
requirements.
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\30\ 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 final rule would have no
substantive effect on the requirements of the FCUA and is intended
only to reduce confusion for the reader.
\31\ 12 U.S.C. 1790d(d)(1).
\32\ 12 U.S.C. 1790d(d).
\33\ Id.
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The CCULR framework is comparable to section 38 of the FDI Act, as
implemented by CBLR Final Rule.\34\ As discussed previously, section
201 of the Economic Growth, Regulatory Relief, and Consumer Protection
Act 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.\35\ 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.
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\34\ 12 CFR part 3 (OCC), 12 CFR part 217 (Federal Reserve
Board), and 12 CFR part 324 (FDIC).
\35\ 12 U.S.C. 5371.
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Besides satisfying the comparability requirement in section 216,
the CCULR framework also meets the requirements in section 216 of the
FCUA 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.\36\
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\36\ The Board also briefly considered an additional independent
legal basis for the CCULR framework. As discussed in the section
III.D. Calibration of the CCULR, the CCULR framework results in
complex credit unions generally holding more capital than under the
2015 Final Rule. Because of the higher capital requirements under
the CCULR framework, the Board also considered whether the framework
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. Considering the express statutory authority to define
complex and design a risk-based net worth framework, however, the
Board believes this alternative basis, while valid, is unnecessary
to support the final 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.\37\ 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 products and services provided by credit unions.\38\
The complexity index demonstrated that credit unions with greater than
$500 million in total assets held more complex assets and liabilities
as a larger share of their total assets than smaller credit unions.\39\
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\37\ 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)).
\38\ Supra note 4 at 55470.
\39\ Id.
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The Board, however, could also have drafted a definition of complex
that looks at the individual portfolios of credit unions with total
assets greater than $500 million rather than examining the assets and
liabilities of credit unions in the aggregate. 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 have used the same qualifying criteria as in
the final rule as measures of complexity. If a credit union would
otherwise meet the definition of a qualifying credit union, it would be
considered not complex. Thus, it would not be subject to risk-based
capital, as implemented by the 2015 Final Rule. This alternative
approach would have created a functionally equivalent requirement to
the one set forth in this final 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 noted previously, the FCUA does not define the term ``risk-
based net worth requirement'' and sets forth only 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.
[[Page 72788]]
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 factor 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 section 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 the risk-
based net worth requirement include risk-adjusted assets as part of its
calculation.\40\ 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.\41\ Thus, if the Board determines that the CCULR
considers all material risks not addressed by the six percent net worth
ratio, then the Board has satisfied the statutory requirements for a
risk-based net worth ratio.\42\
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\40\ 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.
\41\ 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.
\42\ Similarly, 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 how 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 either the complex-based approach or the
risk-based approach to designing the CCULR framework are supported by
the FCUA. The Board, however, chose to draft the final 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
The Board issued the proposed rule to provide a simplified measure
of capital adequacy for complex credit unions at its July 22, 2021,
meeting.\43\ The proposed rule provided for a 60-day comment period
that ended on October 15, 2021. The Board received 21 comments from
credit unions, both state and federal; credit union leagues and trade
associations; a banking trade organization; individuals; and an
association of state credit union supervisors. Many of the commenters
supported the goal of providing a simplified, alternative measure of
capital adequacy for certain highly capitalized complex credit unions.
Most commenters, however, expressed some concerns about specific
aspects of the proposal. The final rule and a discussion of the Board's
responses to the comments are discussed in the following sections.
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\43\ 86 FR 45825 (Aug. 16, 2021).
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IV. Final Rule
A. Overview of the CCULR Framework
The final rule provides a simplified measure of capital adequacy
for credit unions classified as complex (credit unions with total
assets greater than $500 million). Under the final rule, a qualifying
complex credit union that meets the minimum CCULR, which is equal to
its net worth ratio, is eligible to opt into the CCULR framework and is
considered well capitalized. The CCULR framework is based on the
principles of the CBLR framework. As discussed previously in this
preamble, it relieves 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 is
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 can
make under the CBLR.
Most commenters generally supported the CCULR framework. Several
commenters noted that credit unions could choose to comply with the
current risk-based capital rule or the CCULR. One commenter stated
that, with the CCULR framework, the Board can maximize synergy with the
risk-based capital rule, maintain flexibility, and achieve greater
consistency with sound public policy and the FCUA. In contrast, another
commenter opposed the optionality in the CCULR framework and stated
that allowing credit unions to opt-in to the CCULR framework creates
two populations of credit unions based on nothing but the compliance of
internal actors of the credit unions. The Board believes that
implementing a CCULR framework furthers the goal of the FCUA's PCA
requirements by ensuring complex credit unions continue to hold
sufficient capital, while minimizing the burden associated with
complying with the NCUA's risk-based capital requirement. In response
to comments, however, the final rule makes several material changes to
the CCULR framework. These changes include: (1) Calibrating the CCULR
at nine percent instead of 10 and forgoing any transition period; (2)
removing the written notification requirement for exiting the CCULR
framework after opting in; (3) permitting a grace period for credit
unions that no longer meet the qualifying criteria due to a supervisory
merger; and (4) amending the treatment of goodwill in both the CCULR
framework and risk-based capital framework. The Board has not amended
the effective date in response to the comments; the final rule, along
with the 2015 Final Rule, is effective on January 1, 2022. Several
commenters stated that this date should be delayed because the
effective date of risk-based capital is in less than three months after
the comment period closed for the proposed rule. Other commenters
discussed the need to comment on Call Report changes. Commenters also
stated that the NCUA should factor in the effective date of CECL, which
will have a significant impact on net worth and the current economic
conditions related to COVID-19.
Commenters recommended different alternative effective dates for
the CCULR framework. Several commenters
[[Page 72789]]
recommended January 1, 2023. Other commenters recommended six months
after publication of the final rule in the Federal Register.
In contrast, one banking trade organization recommended that the
Board first subject credit unions to the risk-based capital standards
before implementing an opt-in to the CCULR framework. This argument
appeared to be based primarily or solely on the fact that banks
complied with risk-based capital before Congress enacted and the other
banking agencies implemented the CBLR. The Board found no new evidence
or information that would warrant it refraining from adopting the CCULR
framework now. As discussed in the proposed rule and this final rule
preamble, a complex credit union which opts into the CCULR framework
will generally increase the overall capital requirement. The Board
continues to find that implementing the CCULR framework alongside the
2015 Final Rule will balance flexibility and choice for complex credit
unions with safety and soundness and overall capital adequacy.
The Board is not delaying the implementation of either the CCULR
framework or the 2015 Final Rule. The Board did not propose to delay
the 2015 Final Rule and does not believe that credit unions need
additional time to comply with either framework.\44\ The Board
acknowledges that January 1, 2022, is less than the standard effective
date of 30 days following the publication of this final rule. There
are, however, several factors that persuade the Board that credit
unions will not be disadvantaged. First, credit unions are not required
to comply with the CCULR framework as it is an optional framework to
the 2015 Final Rule. Also, credit unions do not have to select their
framework until the end of the first quarter in 2022, which is a few
months after the publication of the final rule in the Federal Register.
The final rule does not include any new calculations for complex credit
unions and relies on the net worth ratio, an existing capital measure
that credit unions report each quarter. Finally, the Board is not
persuaded that credit unions are unprepared to choose between the CCULR
framework and the risk-based capital framework due to Call Report
amendments. The proposed rule included sample Call Report
illustrations. While the Board did not seek specific comments in the
proposed rule on the Call Report changes, credit unions knew of the
potential changes and no comments were received expressing general
confusion. The agency also published a Notice and Request for Comment
on the proposed Call Report changes on September 27, 2021.\45\ Thus,
the Board believes a January 1, 2022 effective date for the CCULR
framework is reasonable and not disadvantageous to credit unions.
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\44\ Because the Board did not propose any change to the 2015
Final Rule's effective date, a change in this final rule would not
be within the scope of the proposed rule.
\45\ 86 FR 53351 (Sept. 27, 2021).
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B. Qualifying Complex Credit Unions
Under the final rule, a qualifying complex credit union is defined
as a complex credit union under 12 CFR 702.103 that meets the following
criteria (qualifying criteria), each as described further as follows:
(1) Has a CCULR (net worth ratio) of 9 percent or greater; \46\
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\46\ For an additional discussion on why the Board set the ratio
to nine percent, see Section D. Calibration of the CCULR.
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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 5 percent or less of its total assets; and
(4) Has the sum of total goodwill and total other intangible
assets of 2 percent or less of its total assets.
The Board believes 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 will continue to evaluate
the qualifying criteria over time to ensure it continues to be
appropriate.
1. CCULR of Nine Percent or Greater
The final rule requires a complex credit union to have a CCULR of
at least nine percent to be classified as a qualifying complex credit
union. Given this change from 10 percent in the proposal, the Board is
not adopting the proposed transition provision, which would have set
the CCULR at 9 percent initially, then increased it to 10 percent by
January 1, 2024. For a discussion of the relevant comments, see Section
D. Calibration.
2. Off-Balance Sheet Exposures
The Board did not receive substantial comment on the proposed off-
balance sheet exposure criterion. One commenter requested further
guidance on this criterion. Another credit union said this criterion is
better addressed through the examination process. The proposed rule
provided substantial detail on the eight off-balance sheet exposures.
The Board also disagrees that this criterion is better addressed
through the supervisory process; rather, the Board believes the off-
balance sheet criterion is essential in determining the appropriateness
of the CCULR framework for a specific credit union. If a complex credit
union has substantial off-balance sheet exposures, the Board believes
the more precise risk-based capital framework is necessary to determine
its capital adequacy.
Under the final rule, a qualifying complex credit union is 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. Thus, it does 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.\47\
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\47\ The 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 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. Thus, to make the CCULR
framework more comparable to the CBLR and to improve on the
effectiveness of the 2015 Final Rule, the final rule amends the NCUA's
definition of off-balance sheet exposures. The amendments to the
definition of off-balance sheet exposure apply to both the CCULR
framework and the risk-based capital framework.\48\
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\48\ The final rule also includes risk weights for each new
exposure in the definition of off-balance sheet exposure. See,
Section L. Amendments to the 2015 Final Rule.
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Under the CCULR framework, off-balance sheet exposures 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
[[Page 72790]]
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 collateral or on an
uncollateralized basis.
Each element of the off-balance sheet definition is discussed in
detail in the proposed rule.
3. Trading Assets and Liabilities
Commenters raised no objections to the proposed criterion related
to trading assets and labilities. Thus, the Board is finalizing this
provision as proposed. Under the final rule, a qualifying complex
credit union is 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. This criterion, including related definitions, is discussed in
detail in the proposed rule.
4. Goodwill and Other Intangible Assets
Under the proposal, a qualifying complex credit union was required
to have the sum of total goodwill and other intangible assets of two
percent or less of its total assets. As proposed, qualifying complex
credit unions were required to include excluded goodwill and excluded
other intangible assets in this calculation.\49\ Five commenters
objected to the inclusion of a criterion related to goodwill and
intangible assets. One commenter stated that previous accounting
changes resulted in increased amounts of goodwill related to
supervisory mergers. This commenter stated that credit unions that
support the NCUA and the NCUSIF by assisting in supervisory mergers
should not be penalized by subsequent restrictions on the holding of
supervisory goodwill.\50\ Several commenters requested that supervisory
goodwill and elective goodwill should be treated differently. Another
commenter stated that only impaired goodwill should be deducted.
Another commenter preferred that the goodwill criterion be removed but
stated that, at the very least, the Board should not include excluded
goodwill and excluded other intangible assets. Finally, one commenter
stated that goodwill is not an eligibility criterion for the CBLR. The
Board notes that goodwill is deducted from insured banks' numerator for
purposes of the CBLR. Other commenters generally supported the
inclusion of goodwill as a criterion.
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\49\ 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. 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, 2015.12 CFR 702.2 (effective Jan. 1, 2022).
\50\ Supervisory goodwill is goodwill originating from a
supervisory merger or combination, as defined in the 2015 Final
Rule.
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In response to the comments received, the Board has revised the
treatment of goodwill in the final rule. The final rule will not
include excluded goodwill and excluded other intangible assets as part
of the calculation for the two percent eligibility requirement. As a
result of these changes, a complex credit union need not include
excluded goodwill or excluded other intangible assets for purposes of
calculating the two percent goodwill qualifying criterion under the
CCULR framework. Related to this change, the 2015 Final Rule has been
amended to permanently grandfather excluded goodwill and excluded other
intangible assets. Thus, under the 2015 Final Rule, a complex credit
union will not deduct excluded goodwill or excluded other intangible
assets from its risk-based capital numerator after the sunset date of
January 1, 2029. For additional information on this change, see Section
L. Amendments to the 2015 Final Rule.
The Board made these changes in response to commenters' concerns
about equity related to subsequent changes to the treatment of
supervisory goodwill. Certain commenters expressed concern about
unforeseen capital implications related to goodwill acquired as part of
a supervisory merger or combination before December 28, 2015. In this
case, the Board agrees that credit unions that assisted in previous
supervisory mergers and combinations should not be unduly penalized by
subsequent restrictions on excluded goodwill. Thus, the Board will not
require credit unions to include such exposures when calculating the
two percent threshold under the CCULR framework.
The Board, however, still believes a qualifying criterion related
to goodwill and other intangible assets should be included in the final
rule. The Board also recognizes that 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 one capital.\51\ 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 criterion, a qualifying credit union
could violate the principles of the CBLR framework by using the CCULR
despite substantial goodwill and intangible assets. 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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\51\ See e.g., 12 CFR 324.22.
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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, as of June 30, 2021, it is estimated that
the two percent threshold would not exclude any complex credit unions
from the CCULR framework. Thus, the Board believes a two percent
threshold balances regulatory relief for most qualifying complex credit
unions with 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.
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 Board did not include this qualifying criterion in the proposed
rule. Several commenters supported this position. Commenters reiterated
the
[[Page 72791]]
Board's justification in the proposed rule. For example, commenters
noted that credit unions' stringent portfolio-shaping rules mitigate
many of the risks associated with larger institutions in the banking
sector. Also, credit unions with $10 billion or more in assets are
generally required to conduct capital planning, and credit unions with
$15 billion or more in assets are generally required to conduct stress
testing.\52\
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\52\ 12 CFR part 702, subpart E.
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One commenter objected to the inclusion of all qualifying credit
unions by noting that Congress limited the asset size threshold for a
qualifying community bank to less than $10 billion in assets. The
commenter presented no new information or considerations beyond those
the Board addressed in the proposed rule. The Board disagrees and, for
the reasons discussed in the proposed rule preamble, continues to
believe the CCULR is an appropriate capital framework for all complex
credit unions as the FCUA limits the types of assets an FCU can hold
compared to banking organizations. The Board also finds that the
legislative cap on eligibility for the CBLR does not require the Board
to impose the same cap on the CCULR framework, which is tailored to the
requirements of the FCUA and the risks associated with complex credit
unions. Thus, the Board is finalizing this provision as proposed.
Other Qualifying Criteria
In the proposed rule, the Board asked whether the final rule should
include other qualifying criteria. Several commenters stated they did
not support expanding the qualifying criteria to include certain
categories discussed in the proposed rule, including ``heightened
risk'' asset categories, investments in CUSOs, or concentrations of
mortgage servicing assets (MSAs). Several commenters stated that the
other banking agencies do not have similar qualifying criteria.
One banking trade organization stated that the CCULR framework
should only be made available to those credit unions that do not
originate or hold a significant amount of member business loans.
The Board is not adding any additional qualifying criteria with a
CCULR of nine percent. The Board believes that a CCULR of nine percent
is appropriate because most complex credit unions would be required to
hold more capital under the CCULR framework than under the risk-based
capital framework. This would be true even if a complex credit union's
portfolio included greater than average amount of assets with higher
risk weights under the 2015 Final Rule, such as concentrations in
junior-lien mortgages and commercial loans, investments in CUSOs, or
concentrations of MSAs. The Board considered adding qualifying criteria
to account for adopting the CCULR at 9 percent instead of 10 percent
but does not believe it is necessary now as credit unions do not hold
less capital under the CCULR framework than the risk-based capital
framework.
The Board may consider future qualifying criteria as it gains
experience in supervising complex credit unions under the CCULR
framework or if the risk-profile of credit union assets change. For
example, if the credit union industry begins to hold larger
concentrations of high-risk assets, including junior lien mortgages,
commercial loans, MSAs, corporate credit unions investments, or CUSO
investments, then the Board may reconsider whether additional
qualifying criteria are necessary. If an individual credit union holds
significant concentrations of these assets, then the Board may exercise
its reservation of authority to require the credit union to calculate
its capital adequacy under the risk-based capital framework.\53\
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\53\ See, Section J. Reservation of Authority.
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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 (for
example 9.32 percent).\54\
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\54\ 12 CFR 702.2 (effective Jan. 1, 2022).
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The Board proposed 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.
Thus, complex credit unions are not required to calculate a unique
ratio for purposes of opting into the CCULR framework. Also, complex
credit unions are already familiar with the net worth ratio, which
reduces compliance costs compared to a unique ratio designed for the
CCULR framework.
Several commenters supported using the net worth ratio for the
CCULR for the reasons stated in the proposed rule. But three commenters
recommended that the Board create a new measure of capital for the
CCULR framework. Specifically, commenters recommended the inclusion of
subordinated debt for credit unions that are not low-income designated
credit unions. Alternatively, commenters also recommended the inclusion
of other types of capital shares akin to the perpetual contributed
capital shares issued by corporate credit unions. An association of
credit union supervisors stated that subordinated debt should be
included because during times of economic dislocation, even healthy
institutions may not be able to accelerate their capital replenishment.
This commenter further stated that allowing for additional sources of
capital such as subordinated debt strengthens the credit union system
and protects the NCUSIF. One commenter stated that goodwill should be
deducted from net worth for purposes of CCULR.
The Board considered an alternative measure of capital in the
proposed rule that included subordinated debt parallel to the risk-
based capital ratio numerator from the 2015 Final Rule.\55\ The Board
has not adopted a new measure of capital in the final rule. First, the
Board believes that the numerator to the 2015 Final Rule is a more
conservative measure of capital compared to the numerator in the net
worth ratio. Second, as the proposed rule preamble stated, a new
measure of capital would likely include several deductions, including
deductions for the NCUSIF capitalization deposit, goodwill, other
intangible assets, and identified losses and would be more complicated
to calculate than the net worth ratio.
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\55\ 12 CFR 702.104(b) (effective Jan. 1, 2022).
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Regarding commenters' characterization of subordinated debt as a
useful tool to build capital when a credit union is experiencing a
capital hardship, the Board acknowledges the benefits of issuing
subordinated debt, but also notes that subordinated debt can be an
expensive form of capital, both in the terms of the cost of issuing it
and in terms of necessary rate of return to investors. Also, it may not
be readily available during times of stress.
D. Calibration of the CCULR
The proposed rule would have allowed a qualifying complex credit
union to opt into the CCULR framework if it met the minimum CCULR at
the time of opting into the CCULR framework. The proposed rule
initially set the CCULR at 9 percent and transitioned to 10 percent
over two years. Almost all commenters objected to calibrating the CCULR
ratio at 10 percent, and instead recommended a 9 percent measure in
conformance with the ratio used for the CBLR. Other commenters were
concerned that fewer credit unions could take advantage of the CCULR
framework if it is set at 10
[[Page 72792]]
percent. Some commenters stated that a nine percent CCULR would provide
greater regulatory relief. Several commenters generally discussed that
higher capital may restrict credit union growth and mean less resources
to invest in products and services that benefit the member-owners. One
commenter stated that a 10 percent calibration could restrict credit
unions' ability to expand access to the underserved and underbanked.
One commenter discussed that accelerated asset growth as a result of
COVID-19 should favor a lower CCULR. Another commenter recommended that
the Board set CCULR at less than nine percent and recommended a ratio
closer to eight percent.
In contrast, one credit union commenter supported a CCULR of 10
percent. One banking trade organization generally supported sufficient
capital requirements.
The Board understands the commenters' concerns about a 10 percent
CCULR, due in part to the recent downward pressure on credit union net
worth ratios from the rapid growth in assets during 2020 and 2021. The
Board also understands that a higher capital requirement may restrict
credit union ability to invest in member products and services. As the
proposed rule explained, the Board initially considered setting the
CCULR between 9 and 11 percent and presented analysis on the potential
impact in terms of safety and soundness and burden reduction for
potential CCULRs at 9 and 10 percent.
In recognition of this fact, and in response to the comments
received, the Board has adopted a CCULR of nine percent and is forgoing
the transition provision. The Board finds that this calibration of the
CCULR will provide appropriate regulatory burden relief and serve as
further incentive for complex credit unions to opt into the CCULR with
the benefit of maintaining strong capital levels in the credit union
system and ensuring safety and soundness.
Guided by the goals stated in the proposed rule's calibration
discussion--maintaining strong capital levels in the credit union
system, ensuring safety and soundness, and providing appropriate
regulatory relief to as many credit unions as possible--the Board
considered several factors in adopting a CCULR of nine percent.
First, the Board considered aggregate levels of capital among
complex credit unions. The CCULR framework does not result in a
reduction of the minimum required amount of capital held by complex
credit unions and results in an overall increase in the minimum amount
of required capital held by complex credit unions. Based on reported
data as of June 30, 2021, approximately 70 percent of complex credit
unions qualify to use the CCULR framework and would be well capitalized
under a 9 percent calibration. This was a significant decrease in the
number of eligible credit unions at 9 percent when compared to pre-
pandemic net worth ratios, when approximately 90 percent would have
been eligible. Of the total 680 complex credit unions as of June 30,
2021, 473 have a net worth ratio greater than nine percent and would be
well capitalized under a nine percent CCULR standard. Of those 473
credit unions, the Board estimates that all of them meet the qualifying
criteria, and are thus eligible to opt into the CCULR framework. Under
the CCULR, if all 473 credit unions opted into the CCULR and held the
minimum nine percent net worth ratio required to be well capitalized,
the total minimum net worth required is estimated at $111.8 billion, an
increased capital requirement of $24.3 billion over the minimum
required under the 2015 Final Rule. The Board is not aware of any
qualifying complex credit unions that would reduce their capital
requirement with a CCULR of nine percent as compared to the 2015 Final
Rule.
The Board also considered the extent of the burden relief provided
by the CCULR framework. The Board believes a CCULR of 9 percent is
preferable to a CCULR of 10 percent as it permits an additional 173
complex credit unions (473 eligible at 9 percent versus 300 at 10
percent) to opt-into the CCULR framework, which supports the Board's
goal of reducing regulatory burden for as many complex credit unions as
possible.
Next, the Board considered that the 8 to 10 percent range
established by Congress for the CBLR is 300 to 500 basis points higher
than the 5 percent leverage ratio required for well-capitalized status
under the other banking agencies' PCA framework.\56\ As detailed in the
proposed rule preamble, the Board reviewed the basis for the 7 percent
net worth ratio for insured credit unions and considered a range
between 9 and 11 percent for the CCULR. The Board's analysis
established that setting the CCULR 300 basis points higher than the
seven percent net worth ratio while the other banking agencies have set
the CBLR 400 basis points higher than the comparable leverage
requirements for insured banks would be appropriate because of changes
in credit union investments in corporate credit unions since Congress
established the seven percent net worth ratio in 1998. But the proposed
rule did not conclude that a 9 percent CCULR would be inappropriate and
specifically analyzed the merits of 9 and 10 percent in the calibration
discussion.
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\56\ 12 CFR 6.4 (OCC), 12 CFR 208.43 (Federal Reserve Board),
and 12 CFR 324.403 (FDIC).
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Upon reconsideration, the Board is adopting a nine percent CCULR
based on its effect on capital levels and burden reduction, rather than
calibrating CCULR based on the analysis of the seven percent net worth
ratio and relative difference between the CBLR and the leverage ratio
for insured banks. The Board acknowledges, however, that setting CCULR
at nine percent is only 200 basis points above the statutory well-
capitalized threshold for the net worth ratio absent consideration of
the reduced corporate credit union investments. The Board also
recognizes it is less than the 400 basis point differential established
by the other banking agencies in setting the CBLR when compared to the
leverage ratio. The Board, however, believes a CCULR of nine percent is
prudent and does not present undue safety and soundness risk. A primary
reason that other banking agencies chose a CBLR of nine percent was to
ensure qualifying community banks generally maintain their current
level of capital. As discussed previously, a CCULR of nine percent
increases the total minimum net worth required to $111.8 billion, an
increased capital requirement of $24.3 billion over the minimum
required under the 2015 Final Rule. The Board also notes that the
analysis in the proposed rule comparing bank and credit union net worth
and leverage ratios was not a decisive factor but one of several
factors forming the overall proposal, which included a nine percent
CCULR in the range of consideration.
Also, as a separate point that confirms the Board's approach and
conclusion, the other banking agencies also designed the CBLR framework
to reduce the likelihood that a banking organization would not hold
less capital under the CBLR framework than under the risk-based capital
framework. The Board estimates that no qualifying complex credit union
would reduce its capital requirement with a CCULR of nine percent as
compared to the 2015 Final Rule. Thus, the Board does not believe a
reduced CCULR of nine percent will result in the potential for
regulatory arbitrage between the two frameworks.
Finally, as noted in the proposed rule preamble, the Board
specifically considered comparability to the other
[[Page 72793]]
banking agencies' CBLR framework when designing the CCULR framework.
The other banking agencies established a CBLR of nine percent--that is,
if an insured bank has a CBLR of nine percent and meets other
requirements, it is considered well capitalized. Adopting the CCULR at
nine percent will make the two frameworks generally consistent in the
actual level of capital required.
In sum, the Board believes a CCULR of nine percent is prudent and
does not present undue safety and soundness risk. This calibration is
also within the range of consideration from the proposed rule and meets
the goal of reducing regulatory burden when appropriate. Also, a CCULR
of nine percent is comparable to the calibration of the CBLR. Thus,
based on a reconsideration of the perspective on the calibration level
relative to the CBLR and credit union net worth requirements, and a
further analysis of net worth levels at 9 and 10 percent net worth
ratios, the Board finds that adopting a 9 percent CCULR provides
adequate protection for the NCUSIF. The Board intends to continue to
monitor the impact of CCULR and RBC on credit unions and the NCUSIF
going forward.
E. Opting Into the CCULR Framework
Most commenters supported a credit union's ability to opt into
CCULR at the end of each calendar quarter. A few credit unions also
requested that they be permitted to freely switch between the risk-
based capital framework and CCULR framework and the NCUA not to limit
how frequently a credit union opts into the CCULR framework. The Board
has made no changes to the opt-in procedures. Under the final rule, a
qualifying complex credit union with a CCULR of nine percent or greater
may opt into the CCULR framework at the end of each calendar quarter. 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.
F. Voluntarily Opting Out of the CCULR Framework
Under the proposal, after a qualifying complex credit union opted
into 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.
Most commenters on the opt-out procedures stated that prior notice
to NCUA should not be required and qualifying credit unions should be
able to perform the required analysis and switch between the two
options with the same ease as banking organizations. One commenter
stated it is reasonable to expect that any complex credit union would
not choose to opt-out of the CCULR framework without first performing a
preliminary risk-based ratio calculation. The commenter wrote that if
there is any possibility a credit union would skip performing such
calculation, that possibility is not a justification for subjecting all
complex credit unions to a notification requirement. Another commenter
stated if the Board is concerned that qualifying complex credit unions
are not prepared to implement risk-based capital, an alternative may be
for the agency to only require advance notice in the first year of
CCULR's implementation.
The Board has removed the written notice requirement for opting out
of the CCULR framework. Under the other banking agencies' CBLR
framework, qualifying banks that have opted into the CBLR may opt out
of the framework at any time. The Board agrees with commenters and has
aligned the final rule with the CBLR. The Board has reconsidered its
position for several reasons. First, the Board believes that switching
between CCULR and risk-based capital would be an infrequent activity
and, potentially, of little benefit to the credit union. For any credit
union that raises potential concerns, the NCUA can review its capital
adequacy, including its choice of capital framework, through the normal
supervisory process. And, the notice requirement in the proposed rule
only provided the NCUA 61 days prior notice as compared to the
timeframe notice would be provided through the Call Report under the
final rule. The Board does not believe this 61-day period justifies
subjecting all credit unions to the proposed notification. There is
also no general requirement for credit unions to submit a Call Report
schedule with risk-based capital before the first reporting period of
March 2022, or whenever a credit union becomes complex and must
calculate risk-based capital. The Board believes if it can manage the
transition of newly complex credit unions to the risk-based capital
framework without notification, notification is unnecessary for credit
unions switching from the CCULR framework.
The Board also notes that, although a credit union may choose to
use the CCULR framework, a credit union that frequently switched
between CCULR and risk-based capital may raise supervisory concerns.
G. Compliance With the Criteria To Be a Qualifying Complex Credit Union
Under the proposed CCULR framework, complex credit unions have a
two-calendar quarter grace period if they no longer meet one of the
qualifying criteria to either begin calculating a risk-based capital
ratio or to meet all the CCULR eligibility criteria. Commenters who
discussed the grace period generally supported it and did not support
creating a separate prompt corrective action framework for CCULR. One
commenter objected to the required notice if the credit union is not
likely to remain eligible for the CCULR framework. One commenter
suggested a three-year grace period for a credit union that fails to
comply with an eligibility requirement due to a merger, rather than
immediately subjecting the credit union to the risk-based capital
requirements. As discussed in the following paragraphs, the Board has
made two changes to the proposed grace period in response to
commenters.
Under the final rule, after a qualifying complex credit union has
adopted the CCULR framework and then no longer meets the qualifying
criteria, it is 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 begins
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 ends
after two consecutive calendar quarters. For example, if the complex
credit union ceases to satisfy 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 this 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 and 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 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 the risk profile.
During the grace period, the credit union continues to be treated
as a qualifying complex credit union and
[[Page 72794]]
must continue calculating and reporting its CCULR, unless it has opted
out of using the CCULR framework. Also, the qualifying complex credit
union continues to be considered to have met the capital ratio
requirements for the well-capitalized capital category during the grace
period. If the qualifying complex credit union has a CCULR of less than
seven percent, however, it is not considered to be well capitalized.
Instead, its capital classification is determined by its net worth
ratio. For additional discussion on the treatment of a qualifying
complex credit union when its CCULR falls below nine percent, see
Section H--Treatment of a Qualifying Complex Credit Union That Falls
Below the CCULR Requirement.
The two-quarter grace period is akin to the other banking agencies'
CBLR framework. The proposed rule differed from the CBLR framework
because a qualifying complex credit union that may fail to meet the
requirements to be a qualifying complex credit union by the end of the
grace period was required to submit written notification to the
appropriate Regional Director or the Director of Office of National
Examinations and Supervision. Consistent with the reasons discussed for
credit unions voluntarily opting out of the CCULR framework, the Board
has decided to remove the notification requirements in the final rule.
The Board no longer believes notification is necessary and will monitor
compliance and a credit union's adoption of risk-based capital through
the supervisory process.
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 included a similar limitation. One commenter suggested a three-
year grace period for a credit union that fails to comply with an
eligibility requirement due to a merger, rather than immediately
subjecting the credit union to the risk-based capital requirements. In
general, the Board believes credit unions that no longer meet the CCULR
eligibility requirements due to a merger do not need a grace period, as
complex credit unions should consider the regulatory capital
implications of a planned business combination and be prepared to
comply with the applicable requirements.
The Board, however, believes that supervisory mergers should be an
exception to this general policy. As defined in the 2015 Final Rule, a
supervisory merger or combination is a transaction that involved the
following:
(1) An assisted merger or purchase and assumption where funds
from the NCUSIF were provided to the continuing credit union;
(2) A merger or purchase and assumption classified by the NCUA
as an ``emergency merger'' where the acquired credit union is either
insolvent or ``in danger of insolvency'' as defined under appendix B
to part 701; or
(3) A merger or purchase and assumption that included the NCUA's
or the appropriate state official's identification and selection of
the continuing credit union.\57\
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\57\ 12 CFR 702.2 (effective Jan. 1, 2022).
The Board believes it is reasonable to provide a limited grace
period for this select group of mergers because continuing credit
unions in supervisory mergers may not have the benefit of time to plan
for the capital implications of a merger. As a result, continuing
credit unions may need additional time to meet the CCULR eligibility
criteria following a supervisory merger. The Board believes a limited,
two-quarter grace period is reasonable.
H. Treatment of a Qualifying Complex Credit Union That Falls Below the
CCULR Requirement
A qualifying complex credit union that has opted into the CCULR
framework and has a CCULR of nine percent or greater is 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 this case, a credit union may
choose to stop using the CCULR framework and instead become subject to
the risk-based capital requirement. The Board recognizes, however, that
some qualifying complex credit unions may find it unduly burdensome to
begin complying with the more complex risk-based capital requirements
while the credit union is experiencing a decline in its CCULR.
Under the proposed rule, a minimum CCULR is one of the qualifying
criteria. Thus, 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. The Board received no
comments on this provision and is finalizing it as proposed.
Thus, under the final rule a credit union is permitted a two-
quarter grace period when its CCULR falls below the minimum
requirement. After the two-quarter grace period, the qualifying complex
credit union must either once again meet the minimum CCULR ratio or
comply with the risk-based capital requirements. During the grace
period, the credit union is deemed to have met the well-capitalized
capital ratio requirements for PCA purposes, provided its net worth
ratio remains at seven percent or greater.
If a credit union's net worth ratio falls below seven percent, it
is not 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.
I. Transition Provision
The Board proposed a two-year transition provision to delay the
introduction of a 10 percent CCULR. All commenters who discussed the
transition period favored a longer transition, and most recommended
four years. Commenters generally discussed uncertainty due to COVID-19,
upcoming CECL implementation, and the need for additional time to build
capital. A few commenters who recommended a nine percent CCULR also
recommended setting CCULR at eight percent during the transition
period. One commenter recommended the agency commit to future
retargeting of a fully phased in CCULR once additional data is
collected during the transition period.
Because the Board is finalizing the CCULR at 9 percent instead of
10, it is not adopting the transition provision. As proposed, the
transition provision would have applied if the permanent CCULR were 10
percent. Thus, the change in the CCULR in the final rule makes the
transition provision unnecessary and of no effect.
The Board is not adopting a transition provision with an initial
CCULR of eight percent, as several commenters suggested, for two
reasons. First, the Board does not believe there is sufficient logical
outgrowth from the proposal to adopt a CCULR of eight percent.
Separately from the transition provision, the proposed rule posed a
question on calibrating the CCULR at eight percent but did not
otherwise discuss it or provide a basis to support this level of
capital being sufficient to protect the NCUSIF. Second, the Board does
not believe a CCULR of eight percent is necessary to ensure most
complex credit unions are eligible to opt into the CCULR framework. As
previously mentioned, an estimated 70 percent of complex credit unions
will be eligible to opt into the CCULR framework on January 1, 2022.
J. Reservation of Authority
The proposed rule included a reservation of authority for the Board
to require a credit union to use the risk-
[[Page 72795]]
based capital framework in specific cases. As detailed in this section,
the final rule adopts this provision as proposed. Most commenters who
discussed the reservation of authority did not object to it. A few
noted it was analogous to the reservation of authority for the other
banking agencies under the CBLR. Several commenters recommended the
Board provide greater detail on how this process will work, who at NCUA
makes the decision, and what information would be provided to the
credit union. Three commenters also requested an appeal process. Two
commenters objected to the reservation of authority. One commenter
characterized the provision as providing NCUA with ``subjective
judgment'' to establish minimum capital levels which should be left out
of any minimum capital threshold. The final rule adopts the reservation
of authority as proposed. Additional information is discussed in the
following paragraphs in response to commenters.
In general, a complex credit union that meets the eligibility
criteria may opt into the CCULR framework. There may be limited
instances, however, whereby the CCULR framework would be inappropriate
and not require sufficient capital to adequately protect the NCUSIF. To
address such situations, the final rule includes a reservation of
authority that can be exercised by the Board. 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 deciding, the Board would consider all
relevant factors affecting the complex credit union's safety and
soundness. Also, the Board expects to provide a credit union
potentially subject to use of the reservation of authority with an
opportunity to present evidence on why the CCULR framework is
appropriate for that institution.
The Board expects to apply the reservation of authority only in
limited circumstances. Under the reservation of authority, credit
unions are entitled to a two-quarter grace period before being required
to comply with the risk-based capital framework. No appeal process is
being provided, however, because under this final rule, the Board would
exercise the reservation of authority.
K. Effect of the CCULR on Other Regulations
1. Member Business Loan Cap
The Board did not receive any comments on the proposed member
business loans (MBL) analysis and thus, affirms its conclusions and
interpretations in the proposed rule. Section 107A of the FCUA
generally limits the aggregate amount of 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.\58\ In addition, the FCUA exempts certain credit unions from
complying with the aggregate MBL limit. Specifically, an insured credit
union chartered to make MBLs, or has a history of making MBLs to its
members, as determined by the Board, is not subject to the aggregate
MBL limit.\59\ 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.\60\
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\58\ 12 U.S.C. 1757a(c)(1)(B).
\59\ 12 U.S.C. 1757a(b)(1).
\60\ 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.\61\ Section 107A defines net
worth for purposes of that section, providing that it includes the
retained earnings balance, as determined under GAAP. Under this
section, for credit unions that serve predominantly low-income members,
net worth also includes 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.\62\
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\61\ 12 U.S.C. 1757a(a).
\62\ 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 thus 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.\63\ 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 the risk-based requirement.\64\ 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. When 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 7
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.\65\
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\63\ Before 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.
\64\ 80 FR 37898, 37909 (July 1, 2015).
\65\ 81 FR 13530, 13548 (Mar. 14, 2016).
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Thus, 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
[[Page 72796]]
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,\66\ 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 12 CFR 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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\66\ 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 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.\67\ 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 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 for complex
credit unions, 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. 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) contrary to principles of statutory
interpretation.
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\67\ Thus, the current language in part 723 remains valid, and
the Board is not currently adopting any changes to part 723.
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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 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), Congress chose not to specify that
the MBL limitation is determined by the amount of net worth required to
achieve a seven percent net worth ratio. Instead, 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 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.\68\ 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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\68\ S. Rep. No. 105-193 (May 21, 1998), at 5, 10, 29.
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Applying this approach to the CCULR framework, qualifying complex
credit unions opting into the CCULR framework would calculate a
different limitation on MBLs from their current calculation 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 final rule, a qualifying complex credit union
that opts into the CCULR determines 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 framework determine their MBL limitation by reference to the 10
percent risk-based capital ratio, as described in the 2016 MBL final
rule. 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.\69\ 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, this 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. One commenter
expressed concern about the subjective nature of this provision, and
whether the agency has the statutory authority to adopt the provision
if it would require individual credit unions to hold capital above
those required by the rule or the FCUA. The Board disagrees. As
discussed in the 2015 Final Rule, the NCUA has a long-established
policy that FICUs should hold capital commensurate with the level and
nature of the risks to which they are exposed. In some cases, this may
entail holding capital above
[[Page 72797]]
the minimum requirements, depending on the nature of the credit union's
activities and risk profile. The FCUA grants NCUA broad authority to
take action to ensure the safety and soundness of credit unions and the
NCUSIF and to carry out the powers granted to the Board. Requiring
credit unions to maintain capital adequacy is part of ensuring safety
and soundness and is not a new concept. This provision is focused on
the credit union's own process and strategy for assessing and
maintaining its overall capital adequacy in relation to its risk
profile and does not affect credit unions' PCA capital category. The
provision is only intended to support the assessment of capital
adequacy in the supervisory process, for example when assigning CAMELS
and risk ratings.\70\
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\69\ 12 CFR 702.101(b)(2) (effective Jan. 1, 2022).
\70\ 86 FR 59282 (Oct. 27, 2021). The final rule updating the
CAMEL system to CAMELS becomes effective April 1, 2022.
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L. 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 CCULR
framework. The Board also stated it would consider whether to make more
substantive revisions to the 2015 Final Rule.\71\ The Board has
completed this analysis and is including several changes to the 2015
Final Rule. Each change is discussed in the following sections. The
proposed changes are generally adopted as final without change.
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\71\ 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 \72\ are determined by multiplying the off-
balance sheet exposure amount \73\ by the appropriate credit conversion
factor and the assigned risk weight. But 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,
for example 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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\72\ 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).
\73\ 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; and (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 final rule makes several changes to clarify the treatment of
off-balance sheet items. First, as discussed previously, the final rule
amends the definition of off-balance sheet exposures. This definition
is used as one of the CCULR eligibility criteria and is 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 off-balance sheet exposure definition also
more closely aligns with the existing definition of off-balance sheet
items.\74\ Thus, several items currently defined as an off-balance
sheet item, but not included in the current definition of off-balance
sheet exposure, are now provided an exposure amount. This change
reduces ambiguity in the 2015 Final Rule. Further, each item included
in the definition of off-balance sheet exposure in the final rule is
provided an explicit credit conversion factor and risk weight for
purposes of the risk-based capital rule. The Board did not receive any
comments on the proposed off-balance sheet risk weights and is adopting
them as final without change. Each change to the risk-based capital
rule is discussed in detail in the following paragraphs.
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\74\ The only item included in the current definition of off-
balance sheet item that is not provided an explicit exposure amount
is contingent items. As discussed subsequently in this preamble,
however, the Board is amending the definition of off-balance sheet
item and no longer includes contingent items.
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The final rule states that unconditionally cancellable commitments
have a zero percent credit conversion factor. Thus, any unconditionally
cancellable commitment is excluded from a credit union's risk-based
capital calculation. Under the 2015 Final Rule, these exposures 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 qualify as unconditionally cancellable
and that credit unions are currently subject to a more conservative
treatment for unfunded commitments than banking organizations. Thus,
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 2015 Final Rule does not provide a credit conversion factor for
financial standby letters of credit. Including an explicit 100 percent
conversion factor provides parity between the other banking agencies
and the NCUA. The final rule provides 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
forward agreements that are not derivative contracts. Including an
explicit 100 percent conversion factor provides parity between the
other banking agencies and the NCUA. For forward agreements that are
not derivative contracts, the final rule provides 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
final rule provides different risk weights for guarantees and credit
derivatives. Guarantees would receive a 100 percent risk weight. For
credit derivatives, the risk weight is determined through the
applicable provisions of the FDIC's capital rules. A credit union
offering credit protection through a credit derivative risk weights the
exposure according to 12 CFR 324.34 (for derivatives that are not
cleared) or 12 CFR 324.35 (for derivatives that are cleared exposures).
For sold credit protection through guarantees and credit derivatives,
the final rule provides for a 100 percent credit conversion factor.
The Board understands the 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. But credit derivatives are complex instruments. And,
credit derivatives are not a permissible activity for FCUs, and the
Board believes that state-chartered credit unions should only offer
credit
[[Page 72798]]
derivatives if the credit union has the appropriate resources and
capabilities to manage the associated complexity. 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. Thus, the Board believes it is appropriate to
reference the other banking agencies' 2013 capital rules when
determining the appropriate risk weights for credit derivatives.\75\
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\75\ The Board is adopting these references for consistency and
believes they are appropriate, but the Board will review these
references in the future if the FDIC makes changes and will consider
any adjustments as necessary.
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For off-balance sheet securitization exposures, the credit
conversion factor is 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 is 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 again have the option to use the
gross up approach).\76\ In contrast, a subordinated tranche receives a
1,250 percent risk weight. Credit unions also have the option to use
the gross-up approach.\77\
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\76\ 12 CFR 702.104(c)(2)(v)(B)(8) (effective Jan. 1, 2022).
\77\ 12 CFR 702.104(c)(2)(x) (effective Jan. 1, 2022).
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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 provides parity between the other
banking agencies and the NCUA. Unlike the other banking agencies'
rules, the final rule includes 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. For securities borrowing or
lending transactions, the credit conversion factor is 100 percent.
The final rule includes a 100 percent risk weight for simplicity. A
credit union, however, 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 must meet the definition of
financial collateral under the other banking agencies 2013 capital
rules.\78\
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\78\ 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 final rule also includes a specific credit conversion factor
and risk weight for the off-balance sheet exposure amount of repurchase
transactions.\79\ Under the final rule, the off-balance sheet exposure
amount for a repurchase transaction equals 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
final rule provides 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.\80\
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\79\ Repurchase transactions means 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.
\80\ The Board is adopting references to the FDIC's regulations
for consistency and believes that these references are appropriate,
but the Board will review these references in the future if the FDIC
makes changes and will consider any adjustments as necessary.
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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.\81\
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\81\ 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.\82\
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\82\ 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 June 30, 2021, there
are 26 complex credit unions with repurchase transactions on their
balance sheets. Thus, the final rule includes 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.\83\
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\83\ The final rule also revises the definition of off-balance
sheet items. The definition of off-balance sheet items includes 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 final rule includes a ``catchall'' category. Under the
final rule, all other off-balance sheet exposures not explicitly
provided a credit conversion factor or risk weight that meet the
definition of a commitment are 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.\84\ To
ensure all off-balance sheet exposures that met the definition of
commitment are provided a credit conversion factor and risk weight, the
final rule includes a new catchall category for such exposures.
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\84\ 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
[[Page 72799]]
securitizations issued by credit unions and has decided to amend the
2015 Final Rule to explicitly address credit union issued
securitizations.
The proposed rule required 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 reviewed these standards
and found they would be appropriate as applied to credit union
securitizations, with the minor differences noted below. Specifically,
under the final 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); \85\ and
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\85\ 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.\86\ 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 is subject to the conditions in 12 CFR
324.41(b).
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\86\ 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 currently adopting these
requirements. The final 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 adopting 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.\87\ CEIOs
that do not qualify as a gain-on-sale are given a 1,250 percent risk
weight.\88\ 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. And
though 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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\87\ See, 12 CFR 324.22(a)(4) and 12 CFR 324.42(a)(1).
\88\ 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, but 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.
Thus, the final rule includes 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 akin to bank-issued securitizations, the final rule is
slightly different than the other banking agencies' 2013 risk-based
capital rule for simplicity. Under the final rule, the gain-on-sale
amount from a securitization transaction, generally the CEIO, will be
included in 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.
One commenter specifically supported the securitization framework,
which generally references the capital rule of the other banking
agencies. Another commenter questioned why the Board did not adopt the
entirety of the other banking agencies' framework and recommended
granting complex credit unions the option to use the gross-up approach
for risk weighting non-security beneficial interest of a
securitization. The commenter stated that this would ensure that credit
unions have at least the same flexibility as non-advanced approaches
banks. The other banking agencies do not permit the use of the gross-up
approach for a securitization gain-on-sale, and require the full
deduction of the gain-on-sale from the tier 1 capital numerator.\89\
Further, the Board believes its approach is simpler and provides a more
conservative overall risk weight. The Board believes this approach is
warranted given the limited
[[Page 72800]]
securitizations issued by credit unions at this time.
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\89\ 12 CFR 324.22(a)(4).
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Under the final 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. Thus, under the final 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 akin to the treatment provided by the other banking
agencies in their 2013 risk-based capital rule.
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, can be risk-weighted using the gross-up approach.
The Board also notes that although the final rule is currently
adopting the FDIC's approach to securitization through a cross
reference, as with other FDIC provisions referenced elsewhere in this
final rule, the Board will review the FDIC's treatment of
securitizations in the future if it makes changes and will consider any
adjustments as necessary.
3. Mortgage Servicing Assets
The Board proposed to amend 12 CFR 702.104(b), risk-based capital
numerator, to deduct mortgage servicing assets that exceed 25 percent
of the sum of the capital elements in 12 CFR 702.104(b)(1), less
deductions required under 12 CFR 702.104(b)(2)(i) through (iv) of this
section. A few commenters did not support the proposed deduction of
MSAs. One commenter noted that CCULR lacks a comparable restriction and
the risk-based capital rule is primarily designed for credit risk and
not operational or market risk.
The Board is not making changes in response to the commenters.
The Board is including 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.\90\ 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.\91\ The
Board believes the simplification of the other banking agencies'
approach allows the NCUA to be consistent with the other banking
agencies' risk-based capital rule. Also, the Board believes it is
important to implement prudential conditions around MSAs as the Board
is considering a final rule to amend parts 703 and 721 to allow FCUs to
purchase mortgage servicing rights \92\ from other FICUs.\93\ This rule
may potentially increase MSA holdings for complex credit unions.
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\90\ 84 FR 35234 (July 22, 2019).
\91\ 12 CFR 324.22(d).
\92\ The terms mortgage servicing rights and MSAs are used
interchangeably.
\93\ 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 to the
other risks on their balance sheets. As mentioned in the preamble of
the 2015 Final Rule, the risks of MSAs contribute to a high level of
uncertainty regarding the ability of credit unions to realize value
from these assets. Thus, the Board believes it is appropriate to add
the risk-based numerator deduction to address the potential of complex
credit unions purchasing MSAs from other FICUs.
The treatment would not have an immediate effect on complex credit
unions. As of June 30, 2021, the largest concentration in MSAs held by
complex credit unions was just under 12 percent of the credit union's
net worth. While net worth and the risk-based capital numerator are
different calculations, the two calculations are similar enough to
state, with a high degree of certainty, there are no complex credit
unions as of June 30, 2021, that would be required to deduct MSAs from
the risk-based capital numerator.
Finally, the Board is aware that some commenters believe deducting
exposures of MSAs over 25 percent of their risk-based capital numerator
is punitive. The Board notes 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.\94\ The Board also believes including the MSA deduction from
the risk-based capital numerator is prudent for potential balance
sheets complex credit union may have in the future.
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\94\ 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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To determine if a complex credit union would be subject to the MSA
deduction from the risk-based capital numerator, the complex credit
union first needs to calculate the risk-based capital numerator before
the MSA deduction. This calculation is in the 2015 Final Rule and
requires 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, 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 from the previous
calculation. All MSA exposures that are not deducted from the risk-
based capital numerator are risk-weighted in the risk-based capital
denominator at 250 percent.
4. Supranational Organizations and Multilateral Development Banks
The Board proposed amending the risk-based capital rule to assign a
risk 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.\95\ 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. A few commenters
specifically supported the zero percent risk weight for supranational
entities, and none opposed it. The Board is finalizing this provision
without change. The Board notes that MDBs are not permissible
investments for FCUs under the general investment authorities but may
be permissible for federally insured, state-chartered credit unions
under state investment authorities. But FCUs may invest in MDBs under
12 CFR 701.19
[[Page 72801]]
and 721.3(b), subject to some conditions.
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\95\ 12 CFR 702.104(c)(2)(v)(C) (effective Jan. 1, 2022).
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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 COVID-19.\96\ 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 as a result of
COVID-19, including employee salaries, sick leave, other paid leave,
and health insurance expenses. 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.\97\
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\96\ Public Law 116-136 (Mar. 27, 2020).
\97\ Public Law 116-136, 134 Stat. 281 (Mar. 27, 2020)
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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.\98\ The 2020 interim final rule stated the NCUA's
risk-based capital regulations would be amended in the future. The
Board proposed to update the 2015 Final Rule to reflect that PPP loans
receive a zero percent risk weight. No comments were received on this
proposed change and the Board is now finalizing it as proposed.
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\98\ 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.\99\ The rulemaking amended several defined terms
that are also included in the 2015 Final Rule. For consistency, the
proposed rule updated those definitions that are also included in the
2015 Final Rule. The Board received no comments on these changes and is
now finalizing it without additional change. First, under the final
rule, the term derivative is 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.'' \100\ Second, the rule makes 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.\101\ The Board is
adopting references to the CFTC regulations for consistency and
believes these definitions appropriately define the terms, but the
Board will review these references in the future if the CFTC makes
changes and will adjust as necessary.
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\99\ 86 FR 28241 (May 26, 2021).
\100\ 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).
\101\ 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 final rule defines a derivative
clearing organization ``as defined by the Commodity Futures Trading
Commission (CFTC) in 17 CFR 1.3.'' Essentially the final rule
removes the ``(d)''. Similarly, the more specific reference in the
2015 Final Rule is 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 proposed to amend the definitions for Consumer Loan and
Current in 12 CFR 702.2. The Board received no comments on this
proposed change and is now finalizing it without change. The Board is
amending these definitions to clarify the 2015 Final Rule. The 2015
Final Rule does not include leases in the definition of Consumer Loan,
although the 2014 Risk-Based Capital notice of proposed rulemaking
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.'' \102\ Without this change the treatment of consumer leases
is unclear and, thus, 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 amendment in the definition of a
consumer loan, the definition of current is also amended for
consistency and includes the term leases.
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\102\ 79 FR 11184, 11198 (Feb. 27, 2014).
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8. Treatment of Goodwill in the 2015 Final Rule
The 2015 Final Rule requires complex credit unions to deduct
goodwill \103\ from the risk-based capital numerator. The proposed rule
did not include any changes to the deduction of goodwill under the 2015
Final Rule. The proposed rule, however, asked about the advantages and
disadvantages of deducting goodwill from regulatory capital under the
2015 Final Rule. The proposed rule also asked commenters whether not
deducting goodwill from regulatory capital would adequately protect the
NCUSIF in the event of a failure and liquidation given that goodwill is
not a tangible asset. Several commenters urged the agency to permit
credit unions to include goodwill in the risk-based capital numerator.
One commenter stated that deducting supervisory goodwill restricts
growth and decreases the likelihood that a healthy, well-capitalized
credit union will assist with a supervisory merger of an under-
capitalized credit union. Another commenter said the deduction
penalizes credit unions that have just gone through a merger.
---------------------------------------------------------------------------
\103\ Note that under the 2015 Final Rule, the term goodwill
does not include excluded goodwill. See, 12 CFR 702.2 (effective
Jan. 1, 2022).
---------------------------------------------------------------------------
Under the 2015 Final Rule, the Board permitted credit unions to
exclude certain goodwill and other intangible assets from the deduction
in the numerator that occurred on or before December 28, 2015. The
proposed rule asked whether this date should be updated considering the
subsequent delays to the risk-based capital rule. A few commenters
encouraged the agency to alleviate any potential confusion by amending
this date. Several commenters suggested grandfathering all goodwill
prior the effective date of the CCULR framework or the risk-based
capital framework. Another commenter recommended establishing a formal
approval process for grandfathered goodwill with required criteria such
as annual goodwill impairment testing. Another commenter stated that
the relief provided by the original 13-year period, in which
grandfathered goodwill is not deducted, has been diminished due to the
delayed effective date for the risk-based capital rule.
As discussed previously, in response to comments about the proposed
treatment of goodwill, the Board has made two changes in the final
rule. The first change modifies the CCULR qualifying criteria by not
including excluded goodwill and excluded other intangible assets as
part of the calculation of the two percent qualifying
[[Page 72802]]
criteria. This change aligns the treatment of goodwill in CCULR with
the treatment in risk-based capital. For additional discussion on this
change, see Section B. Qualifying Complex Credit Unions.
The final rule also amends the treatment of goodwill under the 2015
Final Rule. Specifically, the final rule removes the 2029 sunset date
for excluded goodwill and excluded other intangible assets. Under the
final rule, credit unions will not be required to deduct excluded
goodwill from the risk-based capital numerator, even after January 1,
2029. Credit unions would not be required to deduct 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. The
Board believes credit unions that previously supported the NCUSIF by
assisting in supervisory mergers should not be penalized for these
decisions. Specifically, the Board is amending the 2015 Final Rule in
response to commenters' concerns relating to the deduction of excluded
goodwill from the risk-based capital numerator after the completion of
supervisory mergers. The Board does not believe the subsequent change
in capital treatment will unduly penalize credit unions.
M. Technical Amendments
The final rule includes several technical amendments to part 702,
including some discussed in the proposed rule and others that the Board
has identified in finalizing this rule. First, the definition of total
assets in 12 CFR 702.2 is amended to carry forward the PPP-related
change made in the 2020 interim final rule. Specifically, under the
final rule, the definition of total assets would be amended to
explicitly state that PPP loans pledged to the Federal Reserve Board's
PPP Lending Facility to support PPP lending are excluded from the
definition of total assets.\104\ This 2020 interim final rule made this
change to the definition of total assets in the currently effective
version of 12 CFR 702.2, but did not make the change to the definition
of total assets as implemented by the 2015 Final Rule. This technical
correction will ensure the definition carries past 2021 as intended.
The definition will also include an amended citation. The 2015 Final
Rule stated that, for each quarter, a credit union must elect one of
the measures of total assets to apply except for 12 CFR 702.103 through
702.106 (risk-based capital requirement). The exception should be for
12 CFR 702.103 through 702.105. This change has been made in the final
rule.
---------------------------------------------------------------------------
\104\ Specifically, the 2020 interim final rule updated the
currently effective Sec. 702.2 and the definition of total assets,
however, the interim final rule did not update the definition of
total assets that will be effective January 1, 2022.
---------------------------------------------------------------------------
The second technical amendment adjusts the definition of the net
worth ratio from the 2015 Final Rule. The change clarifies that the net
worth ratio is rounded to two decimal places, but the rounding occurs
only after the ratio is expressed as percentage.
The final rule also includes two technical amendments to 12 CFR
part 703 that were included in the proposed rule. Both amendments make
minor corrections related to the 2015 Final Rule. The Board received no
comment on the proposed amendments and is finalizing them without
change.
N. Other Comments Beyond the Scope of the Proposed Rule
Several commenters offered recommendations that went beyond the
scope of the proposed changes to the 2015 Final Rule. For example,
several commenters recommended the Board consider rescinding or
delaying the 2015 Final Rule. The Board continues to believe the
current risk-based net worth standards have weaknesses and revised
standards with enhanced risk sensitivity are appropriate for complex
credit unions. The Board is not currently rescinding the 2015 Final
Rule. Delaying the 2015 Final Rule is also outside the scope of the
proposed rule, which did not discuss amending the effective date of the
2015 Final Rule. Also, the Board continues to believe that a delay to
the effective date of the 2015 Final Rule is unnecessary, as discussed
previously.
Another commenter recommended the Board consider refinements to the
subordinated debt framework contemporaneously with changes to the risk-
based capital rule. Neither the subordinated debt final rule nor the
2015 Final Rule are yet effective. The Board will separately monitor
implementation of the subordinated rule and consider any appropriate
changes in the future.
Other commenters urged the Board to eliminate the higher risk-
weighting for concentrations of first-lien mortgages, junior-lien
mortgages, MSAs, and commercial loans. One commenter stated these
concentration limits are not generally comparable to the risk-based
capital rules of the other banking agencies or the Basel Framework. One
commenter requested investments in CUSOs be risk-weighted at no more
than 100 percent. Another commenter stated MSAs should not be subject
to a higher risk weight under the risk-based capital rule, which is
currently 250 percent. The commenter recommended 150 percent. The Board
believes these recommendations are beyond the scope of the proposed
rule. As discussed previously, amendments to risk-weights can be
considered anytime in the future by the Board, or during the Board's
regular process to review regulations every three years.
V. Regulatory Procedures
A. Regulatory Flexibility Act
The Regulatory Flexibility Act \105\ requires the NCUA to prepare
an analysis describing any significant economic impact a regulation may
have on a substantial number of small entities (primarily those under
$100 million in assets).\106\ This final rule affects 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 under $100 million in
total assets would not be affected by this final rule. Accordingly, the
NCUA certifies this final rule does not have a significant economic
impact on substantial number of small credit unions.
---------------------------------------------------------------------------
\105\ 5 U.S.C. 601 et seq.
\106\ 5 U.S.C. 603(a).
---------------------------------------------------------------------------
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 final rule will revise existing information collection
requirements to the Call Report (Office of Management and Budget
control number 3133-0004). These revisions will be addressed in a
separate Federal Register notice and will be submitted for approval by
the Office of Information and Regulatory Affairs at the Office of
Management and Budget.
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.\107\
The NCUA, an independent regulatory agency, as defined in 44 U.S.C.
3502(5), voluntarily complies with the executive order to
[[Page 72803]]
adhere to fundamental federalism principles. The final rule applies to
all federally insured natural-person credit unions, including federally
insured, state-chartered natural-person credit unions. Accordingly, the
Final Rule 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 executing the statutory mandate to adopt a
system of PCA to apply to all federally insured, natural-person credit
unions. The NCUA has consulted with representatives of state regulators
regarding the impact of the final rule during the rulemaking process.
---------------------------------------------------------------------------
\107\ 64 FR 43255 (Aug. 4, 1999).
---------------------------------------------------------------------------
D. Assessment of Federal Regulations and Policies on Families
The NCUA has determined that this 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).
E. Small Business Regulatory Enforcement Fairness Act
The Small Business Regulatory Enforcement Fairness Act of 1996
(SBREFA) generally provides for congressional review of agency
rules.\108\ A reporting requirement is triggered in instances where the
NCUA issues a final rule as defined in the Administrative Procedure
Act.\109\ Besides being subject to congressional oversight, an agency
rule may also be subject to a delayed effective date if it is a ``major
rule.'' As required by SBREFA, the NCUA will submit this final rule to
the Office of Management and Budget for it to determine if it is a
``major rule'' for purposes of SBREFA. The NCUA also will file
appropriate reports with Congress and the Government Accountability
Office so this rule may be reviewed.
---------------------------------------------------------------------------
\108\ 5 U.S.C. 551.
\109\ Id.
---------------------------------------------------------------------------
F. Administrative Procedure Act
The Administrative Procedure Act typically requires a 30-day
delayed effective date, except for (1) substantive rules which grant or
recognize an exemption or relieve a restriction; (2) interpretative
rules and statements of policy; or (3) as otherwise provided by the
agency for good cause.\110\ Because qualifying complex credit unions
that opt into the CCULR framework under the final rule are exempt from
compliance with the 2015 Final Rule, the final rule is exempt from the
Administrative Procedure Act's delayed effective date requirement.
---------------------------------------------------------------------------
\110\ 5 U.S.C. 553(d).
---------------------------------------------------------------------------
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 December
16, 2021.
Melane Conyers-Ausbrooks,
Secretary of the Board.
For the reasons stated in the preamble, the NCUA amends 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. Amend Sec. 702.2 by:
0
a. Adding in alphabetical order the definitions of ``CCULR'';
0
b. Revising the definition of ``Consumer Loan'',
0
c. Adding in alphabetical order the definition of ``Credit
derivative'';
0
d. Revising the definitions of ``Current'', ``Derivative contract'',
``Derivatives Clearing Organization'', ``Excluded goodwill'',
``Excluded other intangible assets'';
0
e. Adding in alphabetical order the definitions of ``Forward
agreement'', ``Multilateral development bank'';
0
f. Revising the definition of ``Net worth ratio'';
0
g. Adding in alphabetical order the definition of ``Non-security
beneficial interest'';
0
h. Revising the definition of ``Off-balance sheet exposure'', ``Off-
balance sheet items'';
0
i. Adding in alphabetical order the definition of ``Repurchase
transaction,''
0
j. Revising the definitions of ``Swap dealer'', and ``Total assets'';
and
0
k. Adding in alphabetical order the definitions ``Trading assets'',
``Trading liabilities'', and ``Unconditionally cancelable''.
The revisions and additions 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.
* * * * *
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.
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.
* * * * *
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
[[Page 72804]]
Reconstruction and Development, the Multilateral Investment Guarantee
Agency, the International Finance Corporation, the Inter-American
Development Bank, the Asian Development Bank, the African Development
Bank, the European Bank for Reconstruction and Development, the
European Investment Bank, the European Investment Fund, the Nordic
Investment Bank, the Caribbean Development Bank, the Islamic
Development Bank, the Council of Europe Development Bank, and any other
multilateral lending institution or regional development bank in which
the U.S. government is a shareholder or contributing member.
* * * * *
Net worth ratio means the ratio of the net worth of the credit
union to the total assets of the credit union, expressed as a
percentage rounded to two decimal places.
* * * * *
Non-security beneficial interest is defined as the residual equity
interest in the Special Purpose Entity (SPE) that represents a right to
receive possible future payments after specified payment amounts are
made to third-party investors in the securitized receivables. For
purposes of this definition, a SPE means a trust, bankruptcy remote
entity or other special purpose entity which is wholly owned, directly
or indirectly, by the credit union and which is formed for the purpose
of, and engages in no material business other than, acting as an issuer
or a depositor in a securitization.
* * * * *
Off-balance sheet exposure means:
(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 sales
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 collateral or on an
uncollateralized basis.
Off-balance sheet items means off-balance sheet exposures and the
off-balance sheet exposure amount of repurchase transactions.
* * * * *
Repurchase transactions means 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. The off-balance sheet
exposure amount for a repurchase transaction equals 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.
* * * * *
Swap Dealer has the meaning as defined by the CFTC in 17 CFR 1.3.
* * * * *
Total assets means a credit union's total assets as measured by
either:
(1)(i) 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;
(ii) 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;
(iii) Average daily balance. The credit union's total assets
measured by the average daily balance over the applicable calendar
quarter; or
(iv) 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.
(2) For each quarter, a credit union must elect one of the measures
of total assets listed in paragraph (1) of this definition to apply for
all purposes under this part except Sec. Sec. 702.103 through 702.105
(risk-based capital requirement).
(3) Notwithstanding paragraph (1) of this definition, a credit
union may exclude loans pledged as collateral for a non-recourse loan
that is provided as part of the Paycheck Protection Program Lending
Facility, announced by the Federal Reserve Board on April 7, 2020, from
the calculation of total assets for the purpose of calculating its net
worth ratio. For the purpose of this provision, a credit union's
liability under the Facility must be reduced by the principal amount of
the loans pledged as collateral for funds advanced under the Facility.
* * * * *
Trading assets means 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 in
order 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 liabilities means the total liability for short positions
of securities or other liabilities held for trading purposes.
* * * * *
Unconditionally cancelable means with respect to a commitment, that
a credit union may, at any time, with or without cause, refuse to
extend credit under the commitment (to the extent permitted under
applicable law).
* * * * *
0
3. In Sec. 702.101, revise paragraph (a)(2) to read as follows:
Sec. 702.101 Capital measures, capital adequacy, effective date of
classification, and notice to NCUA.
(a) * * *
(2) If determined to be applicable under Sec. 702.103, either the
risk-based capital ratio under Sec. 702.104(a) through (c) or the
CCULR framework under Sec. 702.104(d).
* * * * *
0
4. In Sec. 702.102, revise paragraphs (a)(1)(i) and (ii), and Table 1
to read as follows:
Sec. 702.102 Capital classification.
(a) * * *
(1) * * *
(i)(A) Net worth ratio. The credit union has a net worth ratio of
7.0 percent or greater; and
(B) Risk-based capital ratio. The credit union, if complex, has a
risk-
[[Page 72805]]
based capital ratio of 10 percent or greater; or
(ii) Complex credit union leverage ratio. (A) The complex credit
union is a qualifying complex credit union that has opted into the
CCULR framework under Sec. 702.104(d) and it has a CCULR of 9.0
percent or greater; or
(B) The complex credit union is a qualifying complex credit union
that has opted into the CCULR framework under Sec. 702.104(d), is in
the grace period, as defined in Sec. 702.104(d)(7), and has a CCULR of
7.0 percent or greater.
* * * * *
Table 1 to Sec. 702.102--Capital Categories
--------------------------------------------------------------------------------------------------------------------------------------------------------
Risk-based capital
Capital classification Net worth ratio ratio, if CCULR, if And subject to following
applicable applicable condition(s) . . .
--------------------------------------------------------------------------------------------------------------------------------------------------------
Well Capitalized................. 7% or greater....... And.......... 10% or greater..... Or.......... 9% or greater *.... ........................
Adequately Capitalized........... 6% or greater....... And.......... 8% or greater...... Or.......... N/A................ And does not meet the
criteria to be
classified as well
capitalized.
Undercapitalized................. 4% to 5.99%......... Or........... Less than 8%....... Or.......... N/A................ ........................
Significantly Undercapitalized... 2% to 3.99%......... N/A................ N/A................ Or if ``undercapitalized
at <5% net worth and
(a) fails to timely
submit, (b) fails to
materially implement,
or (c) receives notice
of the rejection of a
net worth restoration
plan.
Critically Undercapitalized...... Less than 2%........ N/A................ N/A................ ........................
--------------------------------------------------------------------------------------------------------------------------------------------------------
\*\ A qualifying complex credit union opting into the CCULR framework should refer to 12 CFR 702.104(d)(7) if its CCULR falls below 9.0 percent.
* * * * *
0
5. Revise Sec. 702.103 to read as follows:
Sec. 702.103 Applicability of risk-based capital measures.
For purposes of Sec. 702.102, a credit union is defined as
``complex'' and a risk-based capital measure is applicable only if the
credit union's quarter-end total assets exceed five hundred million
dollars ($500,000,000), as reflected in its most recent Call Report. A
complex credit union may calculate its risk-based capital measure
either by using the risk-based capital ratio under Sec. 702.104(a)
through (c), or, for a qualifying complex credit union opting into the
CCULR framework, by using the CCULR framework under Sec. 702.104(d).
0
6. In Sec. 702.104:
0
a. Revise the introductory text;
0
b. Remove the word ``and'' at the end of paragraph (b)(2)(iii);
0
c. Remove the period at the end of paragraph (b)(2)(iv) and add in its
place ``; and;
0
d. Add paragraph (b)(2)(v);
0
e. Add paragraphs (c)(2)(i)(B)(3) and (c)(2)(i)(D);
0
f. Revise paragraphs (c)(2)(vii) and (x);
0
g. Revise paragraph (c)(4) introductory text;
0
h. Redesignate paragraphs (c)(4)(iii)(A) through (E) as (c)(4)(iii)(B)
through (F) and add new paragraph (c)(4)(iii)(A);
0
i. Add paragraphs (c)(4)(iv) through (x); and
0
j. Add paragraphs (c)(6), (d), and (e).
The revisions and additions read as follows:
Sec. 702.104 Risk-based capital ratio.
A complex credit union must calculate its risk-based capital
measure in accordance with this section. A complex credit union may
calculate its risk-based capital measure either by using the risk-based
capital ratio under paragraphs (a) through (c) of this section, or, for
a qualifying complex credit union opting into the CCULR framework, by
using the CCULR framework under paragraph (d) of this section.
* * * * *
(b) * * *
(2) * * *
(v) Mortgage servicing assets that exceed 25 percent of the sum of
the capital elements in paragraph (b)(1) of this section, less
deductions required under paragraphs (b)(2)(i) thorough (iv) of this
section.
(c) * * *
(2) * * *
(i) * * *
(B) * * *
(3) 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, or an MDB.
* * * * *
(D) Covered loans issued under the Small Business Administration's
Paycheck Protection Program, 15 U.S.C. 636(a)(36).
* * * * *
(vii) Category 7--250 percent risk weight. A credit union must
assign a 250 percent risk weight to the carrying value of mortgage
servicing assets not deducted from the risk-based capital numerator
pursuant to Sec. 702.104(b).
* * * * *
(x) Category 10--1,250 percent risk weight. A credit union must
assign a 1,250 percent risk weight to the exposure amount of any
subordinated tranche of any investment, with the option to use the
gross-up approach in paragraph (c)(3)(iii)(A) of this section. However,
a credit union may not use the gross-up approach for non-security
beneficial interests.
* * * * *
(4) Risk weights for off-balance sheet items. The risk weighted
amounts for all off-balance sheet items are determined by multiplying
the off-balance sheet exposure amount by the appropriate CCF and the
assigned risk weight as follows:
* * * * *
(iii) * * *
(A) For a commitment that is unconditionally cancelable, a 0
percent CCF.
* * * * *
(iv) For financial standby letter of credits, a 100 percent CCF and
a 100 percent risk weight.
(v) For forward agreements that are not derivative contracts, a 100
percent CCF and a 100 percent risk weight.
(vi) For sold credit protection through guarantees and credit
derivatives, a 100 percent CCF and a 100 percent risk weight for
guarantees; for credit derivatives the risk weight is determined by the
applicable provisions of 12 CFR 324.34 or 324.35.
(vii) For off-balance sheet securitization exposures, a 100 percent
CCF, and the risk weight is determined
[[Page 72806]]
as if the exposure is an on-balance sheet securitization exposure.
(viii) For securities borrowing or lending transactions, a 100
percent CCF and a 100 percent risk weight. A credit union may recognize
the credit risk mitigation benefits of financial collateral, as defined
under 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.
(ix) For the off-balance sheet portion of repurchase transactions,
a 100 percent CCF and a 100 percent risk weight. 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.
(x) For all other off-balance sheet exposures not explicitly
provided a CCF or risk weight in this paragraph (c) that meet the
definition of a commitment, a 100 percent CCF and a 100 percent risk
weight.
* * * * *
(6) Asset Securitizations Issued by Complex Credit Unions. 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. A credit union that meets
these 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.
(d) Complex Credit Union Leverage Ratio (CCULR) Framework. (1)
General. A qualifying complex credit union that has opted into the
CCULR framework under paragraph (d)(5) of this section is considered to
have met the capital ratio requirements for the well capitalized
capital category under Sec. 702.102(a)(1) if it has a CCULR of 9.0
percent or greater.
(2) Qualifying Complex Credit Union. For purposes of this part, a
qualifying complex credit union means a complex credit union under
Sec. 702.103 that satisfies all of the following criteria:
(i) Has a CCULR of 9.0 percent or greater;
(ii) Has total off-balance sheet exposures of 25 percent or less of
its total assets;
(iii) Has the sum of total trading assets and total trading
liabilities of 5 percent or less of its total assets; and
(iv) Has the sum of total goodwill and total other intangible
assets of 2 percent or less of its total assets.
(3) Calculation of Qualifying Criteria. Each of the qualifying
criteria in paragraph (d)(2) of this section is calculated based on
data reported in the Call Report as of the end of the most recent
calendar quarter.
(4) Calculation of the CCULR. A qualifying complex credit union
opting into the CCULR framework under this paragraph (d) calculates its
CCULR in the same manner as its net worth ratio under Sec. 702.2.
(5) Opting into the CCULR Framework. (i) A qualifying complex
credit union may opt into the CCULR framework by completing the
applicable reporting requirements of its Call Report.
(ii) A qualifying complex credit union can opt into the CCULR
framework at the end of each calendar quarter.
(6) Opting Out of the CCULR Framework. (i) A qualifying complex
credit union may voluntarily opt out of the framework at the end of
each calendar quarter.
(7) Treatment when ceasing to meet the qualifying complex credit
union requirements. (i) If a qualifying complex credit union that has
opted into the CCULR framework ceases to meet the qualifying criteria
in paragraph (d)(2) of this section, the credit union has two calendar
quarters (grace period) either to satisfy the requirements to be a
qualifying complex credit union or to calculate its risk-based capital
ratio under paragraphs (a) through (c) of this section.
(ii) The grace period begins at the end of the calendar quarter in
which the credit union no longer satisfies the criteria to be a
qualifying complex credit union. The grace period ends on the last day
of the second consecutive calendar quarter following the beginning of
the grace period.
(iii) During the grace period, the credit union continues to be
treated as a qualifying complex credit union for the purpose of this
part and must continue calculating and reporting its CCULR, unless the
qualifying complex credit union has opted out of using the CCULR
framework under paragraph (d)(6) of this section. The qualifying
complex credit union also continues to be considered to have met the
capital ratio requirements for the well capitalized capital category
under Sec. 702.102(a)(1). However, if the qualifying complex credit
union has a CCULR of less than seven percent, it will not be considered
to have met the capital ratio requirements for the well capitalized
capital category under Sec. 702.102(a)(1) and its capital
classification is determined by its net worth ratio.
(v) A qualifying complex credit union that ceases to meet the
qualifying criteria in paragraph (d)(2) of this section as a result of
a merger or acquisition that is not a supervisory merger or combination
has no grace period and must comply with the risk-based capital ratio
under paragraphs (a) through (c) of this section in the quarter it
ceases to be a qualifying complex credit union.
(e) Reservation of Authority. The NCUA may require a complex credit
union that otherwise would meet the definition of a qualifying complex
credit union to comply with the risk-based capital ratio under
paragraphs (a) through (c) of this section if the NCUA determines that
the complex credit union's capital requirements under paragraph (d) of
this section are not commensurate with its risks. Any credit union
required to comply with the risk-based capital ratio under this
paragraph (e), would be permitted a minimum of a two-quarter grace
period before being subject to risk-based capital requirements.
Sec. 702.111 [Amended]
0
7. In Sec. 702.111, amend paragraph (c)(1)(i) by removing ``risk-based
capital ratio'' and adding in its place ``risk-based capital measure''.
PART 703--INVESTMENT AND DEPOSIT ACTIVITIES
0
8. The authority citation for part 703 continues to read as follows:
Authority: 12 U.S.C. 1757(7), 1757(8), 1757(15).
Sec. 703.2 [Amended]
0
9. In Sec. 703.2, amend the definition of ``Net worth'' by removing
``Sec. 702.2(f)'' and adding in its place ``Sec. 702.2''.
Sec. 703.13 [Amended]
0
11. In Sec. 703.13, amend paragraph (d)(3)(iii) by
0
a. Removing the phrase ``net worth classification'' and adding in its
place the phrase ``capital classifications''; and
0
b. Removing the phrase ``or, if subject to a risk-based net worth
(RBNW) requirement under part 702 of this chapter, has remained ``well
capitalized'' for the six (6) immediately preceding quarters after
applying the applicable RBNW requirement''.
[FR Doc. 2021-27644 Filed 12-22-21; 8:45 am]
BILLING CODE 7535-01-P
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</html>Indexed from Federal Register on December 23, 2021.
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