Capital Planning and Stress Testing, 65583-65588 [2013-25713]

Agencies

• National Credit Union Administration

[Federal Register Volume 78, Number 212 (Friday, November 1, 2013)]
[Proposed Rules]
[Pages 65583-65588]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-25713]



[[Page 65583]]

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NATIONAL CREDIT UNION ADMINISTRATION

12 CFR Part 702

RIN 3133-AE27


Capital Planning and Stress Testing

AGENCY: National Credit Union Administration (NCUA).

ACTION: Proposed rule with request for comment.

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SUMMARY: NCUA proposes to conduct annual stress tests of federally 
insured credit unions (FICUs) with assets of $10 billion or more. NCUA 
further proposes to require those credit unions to develop and maintain 
capital plans.

DATES: Comments must be received on or before December 31, 2013.

ADDRESSES: You may submit comments by any of the following methods 
(Please send comments by one method only):
     Federal eRulemaking Portal: https://www.regulations.gov. 
Follow the instructions for submitting comments.
     NCUA Web site: https://www.ncua.gov/RegulationsOpinionsLaws/proposed_regs/proposed_regs.html. Follow the 
instructions for submitting comments.
     Email: Address to regcomments@ncua.gov. Include ``[Your 
name]-- Comments on Proposed Rule--Capital Planning and Stress 
Testing'' in the email subject line.
     Fax: (703) 518-6319. Use the subject line described above 
for email.
     Mail: Address to Gerard Poliquin, Secretary of the Board, 
National Credit Union Administration, 1775 Duke Street, Alexandria, 
Virginia 22314-3428.
     Hand Delivery/Courier: Same as mail address.

FOR FURTHER INFORMATION CONTACT: Jeremy Taylor, Senior Capital Markets 
Specialist, Office of National Examinations and Supervision, at the 
above address or telephone (703) 518-6640; Dale Klein, Senior Capital 
Markets Specialist, Office of Examination and Insurance, at the above 
address or telephone (703) 518-6360; or Lisa Henderson, Staff Attorney, 
Office of General Counsel, at the above address or telephone (703) 518-
6540.

SUPPLEMENTARY INFORMATION: 

Table of Contents

I. Background
II. Proposed Rule
    A. Credit union capital planning and analysis.
    B. Applicability.
    C. Governance of capital planning and analysis.
    D. NCUA action on capital plans.
    E. Annual supervisory stress testing.
    F. Public disclosure.
    G. Process Overview.
III. Regulatory Procedures

I. Background

    The NCUA Board (Board) has determined, to protect the National 
Credit Union Share Insurance Fund (NCUSIF) and the credit union system, 
that the largest FICUs should have systems and processes to monitor and 
maintain their capital adequacy. This notice of proposed rulemaking 
(NPRM) requires FICUs with assets of $10 billion or more (covered 
credit unions) to submit capital plans annually to NCUA. The Board has 
also determined that stress testing of these larger FICUs would provide 
useful information for both NCUA and the FICUs. This NPRM describes the 
stress testing NCUA will conduct of covered credit unions.
    The Board of Governors of the Federal Reserve System (Federal 
Reserve) requires large bank holding companies to submit capital plans 
to the Federal Reserve.\1\ The requirement supports the Federal 
Reserve's expectation that large bank holding companies have robust 
systems and processes that incorporate forward-looking projections of 
revenue and losses to monitor and maintain their internal capital 
adequacy.\2\ The Federal Reserve, the Federal Deposit Insurance 
Corporation (FDIC), and the Office of the Comptroller of the Currency 
(OCC) have issued regulations, pursuant to the Dodd-Frank Wall Street 
Reform and Consumer Protection Act (the Dodd-Frank Act), requiring 
their supervised institutions to conduct annual stress tests.\3\
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    \1\ 76 FR 74631 (Dec. 1, 2011).
    \2\ Id.
    \3\ See 77 FR 61238 (Oct. 9, 2012); 77 FR 62378 (Oct. 12, 2012); 
77 FR 62396 (Oct. 12, 2012); 77 FR 62417 (Oct. 15, 2012).
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II. Proposed Rule

A. Credit Union Capital Planning and Analysis

    The proposed rule requires covered credit unions to develop and 
maintain a capital plan and submit this plan to NCUA by March 31 of 
each year. NCUA took into account the risk to the NCUSIF of the largest 
FICUs as it considered the need for capital plans at these 
institutions. The size of these institutions relative to the NCUSIF 
makes capital planning essential. As of June 2013, NCUSIF equity was 
$11.2 billion, and the assets of the largest FICUs that would be 
covered by this rule totaled $108.5 billion--nearly 10 times the size 
of the NCUSIF. The net worth of these FICUs was $10.8 billion as a 
cushion against the risks of these assets. At the same time, NCUA must 
maintain the NCUSIF against the risks of all FICUs, large and small. As 
of June 2013, the aggregate assets of all FICUs in the system was $1.06 
trillion, with a net worth of $111.0 billion. The concentration of the 
NCUSIF's exposure to risks at the largest FICUs is therefore clear, as 
is the associated need for safe and sound capital planning at these 
FICUs to ensure the adequacy of their net worth. Losses by FICUs with 
assets of $10 billion or more would likely require replenishment of the 
NCUSIF by all FICUs through assessments. NCUA is protecting the NCUSIF 
and the interests of all FICU members by making this proposed rule 
applicable to the largest FICUs.
    Under the proposed rule, mandatory elements of the covered credit 
unions' capital plans start with an assessment of each credit union's 
sources and levels of capital over the planning horizon, taking into 
consideration its financial condition, size, risk profile, scope of 
operations, and existing capital. The credit union must assume both 
expected and adverse conditions. The credit union must also discuss in 
its capital plan how it will maintain ready access to funding to meet 
its obligations and continue to serve as an intermediary for its 
members. The capital plan must also take into account any expected 
changes to the credit union's business plan that will materially affect 
the capital adequacy or liquidity of the credit union.
    The proposed rule requires a covered credit union to perform 
specific capital analyses. At a minimum, covered credit unions must 
conduct a sensitivity analysis to evaluate the effect on capital of 
changes in variables, parameters, and inputs used by the credit union 
in its capital plans. Credit unions must also test the impact of 
interest rate shocks of at least  300 basis points on the 
net economic value of the credit union, using final maturities of non-
maturity shares not exceeding two years. Covered credit unions must 
also analyze the impact of credit risk to capital under unfavorable 
conditions, both separately and in combination with unfavorable 
interest rate scenarios.

B. Applicability

    The proposed rule would apply to all FICUs that report $10 billion 
or more in assets on their March 31 Call Report. For example, if a FICU 
reports $10 billion or more in assets on March 31, 2014, it would be 
required to evaluate its capital under unfavorable conditions and 
submit a capital plan by March 31,

[[Page 65584]]

2015. The specific details of the required capital plan and 
accompanying capital analysis are discussed below.

C. Governance of Capital Planning and Analysis

    To emphasize the importance of credit union board oversight of the 
capital planning and analysis process, the proposed rule provides that 
a covered credit union's board of directors is expected to understand 
and approve processes that are consistent with the financial condition, 
size, complexity, risk profile, scope of operations, and level of 
regulatory capital of the credit union.
    Senior management with responsibility for accomplishing these 
critical objectives must take into account all of the complexities of 
the credit union's risk exposures and operations. The capital planning 
process should reflect the risk management of the credit union, and 
senior management responsible for establishing and maintaining the 
capital planning functions should report directly to the board of 
directors.
    The capital analysis policy approved by the covered credit union's 
board should be established and reviewed in conjunction with the credit 
union's capital plan. NCUA will consider these together in assessing 
the safety and soundness of a credit union.

D. NCUA Action on Capital Plans

    Under the proposed rule, NCUA will notify a covered credit union of 
the agency's acceptance or rejection of the capital plan by June 30 of 
the year it is submitted. NCUA may reject the plan if there are 
material unresolved supervisory issues associated with the planning 
process. NCUA may also reject the plan if the assumptions, 
methodologies, or analysis underlying the plan are not reasonable or 
appropriate or if the data used lacks integrity or is not sufficiently 
detailed. In the event NCUA objects to the credit union's capital plan, 
the credit union must update and re-submit a plan within 30 days of 
receiving notice of the objection. The plan must address deficiencies 
identified by NCUA and remediation for any unresolved supervisory 
issues which have been identified as contributing to the rejection of 
the plan.
    Any covered credit union operating without an NCUA-approved capital 
plan after September 30 of the year in which the plan was submitted 
will be subject to supervisory actions on the part of NCUA. Before 
taking any action on the capital plan of a federally insured, state-
chartered credit union, NCUA will consult with the applicable state 
supervisory authority.

E. Annual Supervisory Stress Testing

    NCUA will conduct independent stress tests on all covered credit 
unions based on September 30 financial data. These stress tests are for 
the agency to independently conduct forward-looking assessments of risk 
vulnerabilities and stress test capital positions in the credit unions. 
NCUA will provide a description of the baseline, adverse, and severely 
adverse scenarios underlying the test by December 1 of the same year. 
The scenarios will be based on those developed by the Federal Reserve, 
the FDIC, and the OCC for their regulated institutions, although there 
may be variations based on credit union-specific factors. If NCUA's 
stress test shows that a covered credit union does not have the ability 
to maintain a stress test capital ratio of at least 5 percent on a pro-
forma basis under expected and stressed conditions throughout the 9-
quarter stress test period, NCUA will require the credit union to take 
steps to enhance capital and/or may take other supervisory action 
against the credit union.
    In arriving at a minimum stress test capital ratio of 5 percent, 
NCUA considered minimum net worth ratio requirements under the Prompt 
Corrective Action regulation.\4\ NCUA considers a credit union to be 
significantly undercapitalized when its net worth ratio is between 2 
percent and 3.99 percent, and critically undercapitalized when its 
ratio is less than 2 percent. A minimum stress test capital ratio 
requirement is intended to provide prospective information of credit 
union capital adequacy. NCUA believes that a minimum ratio of 5 percent 
allows for a credit union to take corrective measures before it becomes 
significantly or critically undercapitalized. Under these latter two 
classifications, the credit union's operating environment would be 
influenced by mandatory, discretionary and other supervisory actions, 
enhanced public scrutiny, and member concern over the safety of its 
deposits leading to abnormal withdrawals. These pressures may limit the 
credit union's ability to restore confidence and its financial 
soundness in a timely manner, thus jeopardizing future viability.
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    \4\ 12 CFR part 702.
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    In establishing a 5 percent ratio, NCUA also considered the minimum 
leverage ratio for banks, which is now 4 percent.\5\ While the banking 
agencies' leverage ratio is not identical to NCUA's proposed stress 
test capital ratio, it is the most comparable of the banking capital 
ratios. NCUA is setting the minimum stress test capital ratio higher 
than the leverage ratio in recognition of the fact that credit unions 
cannot raise capital in the form of stockholder equity. Most credit 
unions can replenish depleted capital only through the retention of 
earnings, which may be especially difficult in times of stress. Credit 
unions must, therefore, anticipate any need to retain additional 
earnings. The stress test process, combined with the 5 percent minimum 
ratio, prepares them to do this.
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    \5\ See 78 FR 62018 (Oct. 11, 2013).
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    The net worth ratio contains components that do not constitute core 
capital on which a credit union may rely to offset losses. The proposed 
regulation excludes the following components from the definition of 
stress test capital ratio:
     assistance through Section 208 of the Federal Credit Union 
Act,
     subordinated debt for low-income credit unions, and
     the credit union's NCUSIF deposit.
There are several reasons for these exclusions. Stress tests are 
intended to show the impact of events on a credit union's own capital, 
and therefore will not include assistance provided by NCUA. The largest 
credit unions are unlikely to be designated as low-income. Only low-
income credit unions are authorized by statute to count subordinated 
debt as capital. In any event, NCUA believes the largest credit unions 
should be supported by their own capital under stressed conditions. The 
NCUSIF deposit is carried by credit unions as an asset rather than 
being expensed. It therefore elevates credit union net worth ratios 
compared to banks without representing capital on which a credit union 
may draw to absorb losses from stresses as they occur.
    As noted above, if NCUA's stress test indicates a covered credit 
union cannot maintain a minimum stress test capital ratio of 5 percent 
under expected and stressed conditions throughout the 9-quarter stress 
test period, NCUA will require the credit union to include actions and 
timeframes for enhancement of stress test capital. These actions may be 
to accumulate capital, to reduce risks to capital or a combination of 
the two. If a covered credit union's stress test capital ratio 
indicates serious safety and soundness concerns, NCUA will take 
supervisory actions at its discretion. Before taking any action on the 
stress test of a federally insured, state-chartered credit union, NCUA 
will consult with the applicable state supervisory authority.

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    The Board notes that the Federal Reserve, OCC, and FDIC require 
their covered institutions to conduct their own stress testing based on 
agency-provided baseline, adverse, and severely adverse scenarios. The 
Board seeks comment on whether NCUA should similarly require covered 
credit unions to conduct their own stress testing.

F. Public Disclosure

    The Board also notes that the Federal Reserve, OCC, and FDIC 
require their covered institutions to publicly disclose the results of 
their stress tests. The Board recognizes that public disclosure helps 
to provide valuable information to market participants, enhances 
transparency, and facilitates market discipline. However, the Board 
also understands that stress test results can be misinterpreted and 
lead to inaccurate conclusions about the health of an institution. The 
Board seeks comment on the benefits and costs associated with credit 
union-specific disclosures, specific concerns about the possible 
release of a credit union's proprietary information, and alternatives 
to credit union-specific disclosures that could still provide useful 
information to the membership or the public.

G. Process Overview.

    Table 1 describes the capital planning and NCUA stress testing 
process under this proposed rule, including the anticipated general 
timelines for each step.

  Table 1--Process Overview of Capital Planning and Annual Stress Test
                  Requirements Under This Proposed Rule
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             Timeframe                              Steps
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September 30......................  ``As of'' date for covered credit
                                     union's capital plan and NCUA's
                                     stress test data.
by December 1.....................  NCUA releases scenarios on which it
                                     will conduct independent stress
                                     tests.
by March 31.......................  Covered credit union submits capital
                                     plan to NCUA.
by May 31.........................  NCUA provides stress test results to
                                     covered credit union.
by June 30........................  NCUA approves or rejects capital
                                     plan.
by September 30...................  Covered credit union must have an
                                     NCUA-approved capital plan.
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    The Board emphasizes that credit union capital planning and NCUA's 
stress testing have different timelines. While covered credit unions 
may choose to perform their own stress tests, NCUA will rely on the 
independent stress testing described in this proposed rule to measure a 
covered credit union's stress test capital ratio. However, if a covered 
credit union fails the NCUA stress test and must provide a stress test 
capital enhancement plan under Sec.  702.506(e), the credit union must 
incorporate this enhancement plan into the Sec.  702.503 capital plan 
submitted the following year.

III. Regulatory Procedures

a. Regulatory Flexibility Act

    The Regulatory Flexibility Act requires NCUA to prepare an analysis 
of any significant economic impact any proposed regulation may have on 
a substantial number of small entities (primarily those under $50 
million in assets).\6\ Because the proposed rule only applies to credit 
unions with $10 billion or more in assets, it will not have any 
economic impact on small credit unions.
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    \6\ 5 U.S.C. 603(a).
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b. Paperwork Reduction Act

    The Paperwork Reduction Act of 1995 (PRA) applies to rulemakings in 
which an agency by rule creates a new paperwork burden on regulated 
entities or increases an existing burden.\7\ For purposes of the PRA, a 
paperwork burden may take the form of a reporting or recordkeeping 
requirement, both referred to as information collections. The proposed 
changes to part 702 impose new information collection requirements. As 
required by the PRA, NCUA is submitting a copy of this proposal to OMB 
for its review and approval. Persons interested in submitting comments 
with respect to the information collection aspects of the proposed rule 
should submit them to OMB at the address noted below.
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    \7\ 44 U.S.C. 3507(d); 5 CFR part 1320.
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 1. Estimated PRA Burden
    The information collection requirements are found in sections 
702.503, 702.504, 702.505, and 702.506 of the proposed rule.
    Section 702.503(a) requires a covered credit union to develop and 
maintain a capital plan and to submit the plan to NCUA by March 31 of a 
given year. Section 702.506(a) further requires a covered credit 
union's board of directors or a designated committee to review and 
approve the covered credit union's capital plan prior to its submission 
to NCUA.
    Section 702.503(b) provides the list of mandatory elements to be 
included in the capital plan.
    Section 702.504 provides that the senior management of a covered 
credit union must establish and maintain a system of controls, 
oversight, and documentation designed to ensure that the capital 
planning and analysis processes satisfy the requirements in this part.
    Section 702.505(d) provides that within 30 calendar days of receipt 
of a notice of rejection by NCUA of a covered credit union's capital 
plan, under section 702.505(c), the covered credit union must update 
and re-submit its capital plan to NCUA.
    Section 702.506(c) requires a covered credit union to provide any 
relevant qualitative or quantitative information requested by NCUA to 
conduct the supervisory stress test.
Summary of Burden
    As of June 30, 2013, there were four FICUs with assets of $10 
billion or more.

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                                                     Number of        Annual          Hourly
                                                    respondents      frequency       estimate       Total hours
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Initial Paperwork Burden:
    Initial Report..............................               4               1             500           2,000
Ongoing Paperwork Burden:
    Annual Report...............................               4               1             250           1,000
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[[Page 65586]]

 2. Submission of comments
    NCUA considers comments by the public on this proposed collection 
of information in:
     Evaluating whether the proposed collection of information 
is necessary for the proper performance of the functions of NCUA, 
including whether the information will have a practical use;
     Evaluating the accuracy of NCUA's estimate of the burden 
of the proposed collection of information, including the validity of 
the methodology and assumptions used;
     Enhancing the quality, usefulness, and clarity of the 
information to be collected; and
     Minimizing the burden of collection of information on 
those who are to respond, including through the use of appropriate 
automated, electronic, mechanical, or other technological collection 
techniques or other forms of information technology; e.g., permitting 
electronic submission of responses.
    The PRA requires OMB to make a decision concerning the collection 
of information contained in the proposed regulation between 30 and 60 
days after publication of this document in the Federal Register. 
Therefore, a comment to OMB is best assured of having its full effect 
if OMB receives it within 30 days of publication. This does not affect 
the deadline for the public to comment to NCUA on the substantive 
aspects of the proposed regulation.
    Comments on the proposed information collection requirements should 
be sent to: Office of Information and Regulatory Affairs, OMB, New 
Executive Office Building, Washington, DC 20503; Attention: NCUA Desk 
Officer, with a copy to Gerard Poliquin, Secretary of the Board, 
National Credit Union Administration, 1775 Duke Street, Alexandria, 
Virginia 22314-3428.

c. Executive Order 13132

    Executive Order 13132 encourages independent regulatory agencies to 
consider the impact of their actions on state and local interests. 
NCUA, an independent regulatory agency as defined in 44 U.S.C. 3502(5), 
voluntarily complies with the executive order to adhere to fundamental 
federalism principles. The proposed rule does not have substantial 
direct effects 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. NCUA has, 
therefore, determined that this proposal does not constitute a policy 
that has federalism implications for purposes of the executive order.

d. Assessment of Federal Regulations and Policies on Families

    NCUA has determined that this proposed rule will not affect family 
well-being within the meaning of Sec.  654 of the Treasury and General 
Government Appropriations Act, 1999, Pub. L. 105-277, 112 Stat. 2681 
(1998).

List of Subjects in 12 CFR Part 702

    Credit unions, Reporting and recordkeeping requirements.

    By the National Credit Union Administration Board, on October 24, 
2013.

Gerard Poliquin,
Secretary of the Board.

    For the reasons discussed above, the National Credit Union 
Administration proposes to amend part 702 as follows:

PART 702--CAPITAL ADEQUACY

0
1. The authority citation for part 702 continues to read as follows:

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

0
2. The heading for part 702 is revised to read as set forth above.
0
3. Add subpart E to read as follows:

Subpart E--Capital Planning and Stress Testing
Sec.
702.501 Authority, purpose, and reservation of authority.
702.502 Definitions.
702.503 Credit union capital planning.
702.504 Governance of capital planning and analysis.
702.505 NCUA action on capital plans
702.506 Annual supervisory stress testing.

Subpart E--Capital Planning and Stress Testing


Sec.  702.501  Authority, purpose, and reservation of authority.

    (a) Authority. This subpart is issued by the National Credit Union 
Administration (NCUA).
    (b) Purpose. This subpart requires covered credit unions to develop 
and maintain capital plans and describes NCUA stress testing and 
actions on credit union capital plans.
    (c) Reservation of authority. Notwithstanding any other provisions 
of this subpart, NCUA may modify some or all of the requirements of 
this subpart. Any exercise of authority under this section by NCUA will 
be in writing and will consider the financial condition, size, 
complexity, risk profile, scope of operations, and level of regulatory 
capital of the covered credit union, in addition to any other relevant 
factors. Nothing in this subpart limits the authority of NCUA under any 
other provision of law or regulation to take supervisory or enforcement 
action, including action to address unsafe and unsound practices or 
conditions, or violations of law or regulation.


Sec.  702.502  Definitions.

    For purposes of this subpart--
    Adverse scenario means a scenario that is more adverse than that 
associated with the baseline scenario.
    Baseline scenario means a scenario that reflects the consensus 
views of the economic and financial outlook.
    Capital plan means a written presentation of a covered credit 
union's capital planning strategies and capital adequacy process that 
includes the mandatory elements set forth in this subpart.
    Capital policy means a covered credit union's written assessment of 
the principles and guidelines used for capital planning, including 
analyzing capital, establishing capital levels, describing the 
strategies for addressing potential capital shortfalls, and describing 
the internal governance procedures around capital policy principles and 
guidelines.
    Covered credit union means a federally insured credit union whose 
assets were $10 billion or more on March 31 of the current calendar 
year.
    Planning horizon means the period of at least three years over 
which the relevant projections extend.
    Pre-provision net revenue means the sum of net interest income and 
non-interest income, less expenses, before adjusting for loss 
provisions.
    Provision for loan and lease losses means the provision for loan 
and lease losses as reported by the covered credit union on its Call 
Report.
    Scenarios are those sets of conditions that affect the U.S. economy 
or the financial condition of a covered credit union that NCUA annually 
uses to conduct stress tests, including, but not limited to, baseline, 
adverse, and severely adverse scenarios.
    Severely adverse scenario means a scenario that overall is more 
severe than that associated with the adverse scenario.
    Stress test means the process to assess the potential impact of 
expected and stressed economic conditions on the consolidated earnings, 
losses, and capital of a covered credit union over the planning 
horizon, taking into account the current state of the covered credit 
union and the covered credit union's risks, exposures, strategies, and 
activities.
    Stress test capital means net worth (less assistance provided under 
Section

[[Page 65587]]

208 of the Federal Credit Union Act, subordinated debt included in net 
worth, and NCUSIF deposit) under stress test scenarios.
    Stress test capital ratio means a covered credit union's stress 
test capital divided by its total consolidated assets less NCUSIF 
deposit.


Sec.  702.503  Credit union capital planning.

    (a) General requirements--Annual capital planning. (1) A covered 
credit union must develop and maintain a capital plan.
    (2) A covered credit union must submit its complete capital plan to 
NCUA each year by March 31, or such later date as directed by NCUA. The 
plan must be based on the credit union's financial data as of September 
30 of the previous calendar year.
    (3) The covered credit union's board of directors or a designated 
committee thereof must at least annually and prior to submission of the 
capital plan under paragraph (a)(2) of this section:
    (i) Review the credit union's process for assessing capital 
adequacy;
    (ii) Ensure that any deficiencies in the credit union's process for 
assessing capital adequacy are appropriately remedied; and
    (iii) Approve the credit union's capital plan and capital planning 
policy.
    (b) Mandatory elements of capital plan. A capital plan must contain 
at least the following elements:
    (1) A quarterly assessment of the expected sources and levels of 
capital over the planning horizon that reflects the covered credit 
union's financial state, size, complexity, risk profile, scope of 
operations, and existing level of capital, assuming both expected and 
unfavorable conditions, including:
    (i) Estimates of projected revenues, losses, reserves, and pro 
forma capital levels, over each quarter of the planning horizon under 
expected conditions and under a range of unfavorable conditions, 
appropriate to its financial state, size, complexity, risk profile, and 
scope of operations; and
    (ii) A detailed description of the credit union's process for 
assessing capital adequacy.
    (2) A discussion of how the covered credit union will, under 
expected and unfavorable conditions, maintain capital commensurate with 
its risks.
    (3) A discussion of how the covered credit union will, under 
expected and unfavorable conditions, maintain ready access to funding, 
meeting its obligations to all creditors and other counterparties and 
continuing to serve as an intermediary for its members.
    (4) The covered credit union's capital policy.
    (5) A discussion of any expected changes to the covered credit 
union's business plan that are likely to have a material impact on the 
credit union's capital adequacy and liquidity.
    (c) Mandatory credit union capital analysis. As a fundamental part 
of its capital planning process, a covered credit union must, at a 
minimum, conduct the capital analyses set forth in paragraphs (c)(1) 
through (3) of this section.
    (1) A covered credit union must conduct a sensitivity analysis to 
evaluate the effect on its capital of changes in variables, parameters, 
and inputs used by the credit union in preparing its capital plan.
    (2) A covered credit union must perform an analysis of the net 
economic value of the credit union using interest rate risk shocks of 
at least +/- 300 basis points. This analysis must assume all non-
maturity shares have final maturities not exceeding two years.
    (3) A covered credit union must analyze the impact of credit risk 
to capital under unfavorable economic conditions, both separately and 
in combination with the impact of unfavorable interest rate scenarios.


Sec.  702.504  Governance of capital planning and analysis.

    (a) General requirements. The extent and sophistication of a 
covered credit union's governance over its capital planning and 
analysis process must align with the extent and sophistication of that 
process. The process must be consistent with the financial condition, 
size, complexity, risk profile, scope of operations, and level of 
regulatory capital of the covered credit union. Governance over a 
covered credit union's capital planning and analysis process must rest 
with the credit union's board of directors. Senior management must 
establish a comprehensive, integrated, and effective process that fits 
into the broader risk management of the credit union. Accordingly, 
senior management responsible for capital planning and analysis must 
report directly to the credit union's board of directors or a 
designated committee of the board. NCUA will assess whether the capital 
planning and analysis process is sufficiently robust in determining 
whether to accept a credit union's capital plan.
    (b) Capital analysis policy. The board of directors must review and 
approve a capital analysis policy, along with procedures to implement 
it, at least annually in conjunction with the covered credit union's 
capital plan. The capital analysis policy must:
    (1) State the governance over the capital analysis process, 
including all the activities that contribute to the analysis;
    (2) Articulate consistent and sufficiently rigorous capital 
analysis practices across the entire credit union;
    (3) Specify capital analysis roles and responsibilities, including 
controls over external resources used for any part of capital analysis 
(such as vendors and data providers);
    (4) Describe the frequency with which capital analyses will be 
conducted;
    (5) State how capital analysis results are used, and by whom, and 
outline instances in which remedial actions must be taken; and
    (6) Require review, at least annually, and update the capital 
analysis process as necessary to ensure that it remains current with 
changes in market conditions, credit union products and strategies, 
credit union exposures and activities, the credit union's established 
risk appetite, and industry practices.


Sec.  702.505  NCUA action on capital plans.

    (a) Timing. NCUA will notify the covered credit union of the 
acceptance or rejection of its capital plan by June 30 of the calendar 
year in which the capital plan was submitted.
    (b) Grounds for rejection of capital plan. NCUA may reject a 
capital plan if it determines that:
    (1) The covered credit union has material unresolved supervisory 
issues associated with its capital planning process;
    (2) The assumptions and analysis underlying the covered credit 
union's capital plan, or the covered credit union's methodologies for 
reviewing the robustness of its capital adequacy, are not reasonable or 
appropriate;
    (3) Data utilized for analysis is insufficiently detailed to 
capture the risks of the covered credit union, or the data lacks 
integrity; or
    (4) The covered credit union's capital planning process constitutes 
an unsafe or unsound practice, or would violate any law, regulation, 
NCUA order, directive, or any condition imposed by, or written 
agreement with, NCUA. In determining whether a capital plan would 
constitute an unsafe or unsound practice, NCUA considers whether the 
covered credit union is and would remain in sound financial condition 
after giving effect to the capital plan.
    (c) Notification in writing. NCUA will notify the credit union in 
writing of the reasons for a decision to reject a capital plan.
    (d) Re-submission of a capital plan. If NCUA rejects a credit 
union's capital plan, the credit union must update and

[[Page 65588]]

re-submit its capital plan to NCUA within 30 calendar days. The 
resubmitted capital plan must at a minimum address:
    (1) NCUA-noted deficiencies in the credit union's original capital 
plan; and
    (2) Remediation plans for unresolved supervisory issues 
contributing to the rejection of the credit union's original capital 
plan.
    (e) Supervisory actions. Any covered credit union operating without 
an NCUA-approved capital plan after September 30 of the year in which 
the plan was submitted will be subject to supervisory actions on the 
part of NCUA.
    (f) Federally insured, state-chartered credit unions. Before taking 
any action under this section on the capital plan of a federally 
insured, state-chartered credit union, NCUA will consult with the 
applicable state supervisory authority.


Sec.  702.506  Annual supervisory stress testing.

    (a) NCUA tests. NCUA will conduct an annual stress test of each 
covered credit union using baseline, adverse, and severely adverse 
scenarios. NCUA will provide a description of those scenarios by 
December 1 of a calendar year and will conduct the stress test using 
the credit union's financial data as of September 30 of that year. NCUA 
stress test analysis will take into account all relevant exposures and 
activities of a credit union to evaluate its ability to absorb losses 
in specified scenarios over a 9-quarter horizon. The minimum target 
stress test capital ratio for covered credit unions is 5 percent.
    (b) Potential impact on capital. In conducting a stress test under 
this subpart, during each quarter of the stress test horizon, NCUA will 
estimate the following for each scenario for each covered credit union:
    (1) Pre-provision net revenues, loan and lease loss provisions, and 
net income; and
    (2) The potential impact on the stress test capital ratio, 
incorporating the effects of any capital action over the stress test 
horizon and maintenance of an allowance for loan losses appropriate for 
credit exposures throughout the horizon. NCUA will conduct the stress 
test without assuming any risk mitigation actions on the part of the 
covered credit union, except those existing and identified as part of 
the covered credit union's balance sheet, or off-balance sheet 
positions, such as assets sales or derivatives positions, on the date 
of the stress test.
    (c) Information collection. Upon request, the covered credit union 
must provide NCUA with any relevant qualitative or quantitative 
information requested by NCUA to conduct the stress test under this 
section.
    (d) Stress test results. NCUA will provide each covered credit 
union with the results of the stress test by May 31 of the year 
following the September 30 ``as of'' testing date.
    (e) Supervisory actions. If NCUA stress tests show that covered 
credit union does not have the ability to maintain a stress test 
capital ratio of 5 percent or more on a pro forma basis under expected 
and stressed conditions throughout the 9-quarter horizon, the credit 
union must provide NCUA, within 60 days of receipt of the stress test 
results, a stress test capital enhancement plan showing how it will 
meet that target. Failure to do so will subject a covered credit union 
to supervisory actions on the part of NCUA.
    (f) Federally insured, state-chartered credit unions. Before taking 
any action under this section against a federally insured, state-
chartered credit union, NCUA will consult with the applicable state 
supervisory authority.
[FR Doc. 2013-25713 Filed 10-31-13; 8:45 am]
BILLING CODE 7535-01-P