Corporate Credit Unions, 30774-30776 [2017-13642]
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30774
Proposed Rules
Federal Register
Vol. 82, No. 126
Monday, July 3, 2017
This section of the FEDERAL REGISTER
contains notices to the public of the proposed
issuance of rules and regulations. The
purpose of these notices is to give interested
persons an opportunity to participate in the
rule making prior to the adoption of the final
rules.
NATIONAL CREDIT UNION
ADMINISTRATION
12 CFR Part 704
RIN 3133–AE75
Corporate Credit Unions
National Credit Union
Administration (NCUA).
ACTION: Proposed rule.
AGENCY:
The NCUA Board (Board)
proposes to amend its regulations
governing corporate credit unions
(corporates) and the scope of their
activities. Specifically, the proposed
amendments revise provisions on
retained earnings and Tier 1 capital.
DATES: Comments must be received on
or before September 1, 2017.
ADDRESSES: You may submit comments
by any of the following methods, but
please send comments by one method
only:
• Federal eRulemaking Portal: http://
www.regulations.gov. Follow the
instructions for submitting comments.
• NCUA Web site: http://
www.ncua.gov/RegulationsOpinions
Laws/proposed_regs/
proposed_regs.html. Follow the
instructions for submitting comments.
• Email: Address to regcomments@
ncua.gov. Include ‘‘[Your name]—
Comments on Proposed Rule—
Corporate Credit Unions’’ 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:
Yvonne Applonie, Director of
Supervision, Office of National
Examinations and Supervision, at the
above address or telephone (703) 518–
6595; or Marvin Shaw, Staff Attorney,
Office of General Counsel, at the above
address or telephone (703) 518–6553.
sradovich on DSK3GMQ082PROD with PROPOSALS
SUMMARY:
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SUPPLEMENTARY INFORMATION:
I. Background
The financial crisis of 2007–2009 took
a heavy toll on the corporate credit
union system. The crisis, largely
mortgage related, greatly affected the
investment portfolios of many
corporates causing widespread liquidity
problems, instability in the system, and
failures. During this time period, NCUA
took extraordinary short and mid-term
measures to stabilize the corporate
system. Among other things, it: (1) Made
capital injections; (2) approved the
Temporary Corporate Credit Union
Share Guarantee Program, which
guaranteed uninsured shares at
participating corporates; (3) engaged the
services of an independent, highly
qualified third party to conduct a
comprehensive analysis of expected
non-recoverable credit losses for
distressed securities held by corporates;
(4) conserved five corporates; 1 and (5)
created the NCUA Guaranteed Note
Program.2
To provide longer term structural
enhancements to the corporate system,
the Board comprehensively revised part
704, the regulations governing
corporates and their activities, in 2010.3
The 2010 rule’s primary purpose was to
establish a regulatory framework that
provides a foundation for a healthy
corporate system that: (1) Delivers
important services to the corporates’
natural person credit union members,
such as payment systems and liquidity;
and (2) builds and attracts sufficient
capital.4 The 2010 rule also helped to
prevent the recurrence of the kind of
financial losses that led to the failure of
the referenced five corporates and
weakened the financial condition of
several others.
The 2010 rule curtailed several of the
practices that led to the referenced
corporate failures. Specifically, it
established investment concentration
1 The five were U.S. Central, Western Corporate,
Members United Corporate, Southwest Corporate,
and Constitution Corporate.
2 As part of the corporate system resolution,
NCUA created the NCUA Guaranteed Note Program
to provide long-term funding for distressed
investment securities (Legacy Assets) from the five
failed corporate credit unions. Legacy Assets
consisted of over 2,000 investment securities,
secured by approximately 1.6 million residential
mortgages, as well as commercial mortgages and
other securitized assets.
3 12 CFR part 704; 75 FR 64786 (Oct. 20, 2010).
4 75 FR 64787, 64787 (Oct. 20, 2010).
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Frm 00001
Fmt 4702
Sfmt 4702
limits, limited asset maturities, and
prohibited investments in subordinated
and private label mortgage-backed
securities. Most relevant to this
proposal, the 2010 rule also
implemented a prompt corrective action
(PCA) regime stipulating capital
adequacy for corporates. Largely based
on the Basel I requirements, the capital
requirements of the 2010 rule
emphasized the importance of
corporates holding tangible and durable
capital.
It has been nearly seven years since
the Board issued the 2010 rule. In that
time, NCUA’s efforts have had the
intended effect of stabilizing the
corporate system and improving the
corporates’ ability to function and
provide needed services to natural
person credit unions. Additionally, the
overall economy has improved greatly,
thereby improving the economic
landscape in which corporates operate.
Further, the large concentration of
troubled assets within the corporate
system has been reduced through
portfolio repositioning or NCUA
intervention. The corporate system has
significantly contracted and
consolidated, with assets declining from
approximately $81.7 billion prior to the
2010 rule to approximately $24.9 billion
today. In that same time period, the
number of corporates has declined from
26 to 11. Given all of these positive
developments, the Board believes
conditions are such that it is now safe
and appropriate to revisit the capital
standards of the 2010 rule. As discussed
in more detail below, the proposed
amendments to the corporate rule
primarily affect the calculation of
capital after corporates consolidate and
set a retained earnings ratio target in
meeting PCA standards.
II. Proposed Amendments
Corporate Consolidations and Capital
In 2015, the Board made further
refinements to part 704. Specifically, the
Board amended the definition of ‘‘Tier
1 capital’’ to include as a component of
that term, the retained earnings acquired
through a merger. Given that retained
earnings acquired through a merger are
currently not recorded on the
continuing corporate’s financial
statements, the amount must be
recorded outside of the financial
statements. This approach does not
follow Generally Accepted Accounting
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Federal Register / Vol. 82, No. 126 / Monday, July 3, 2017 / Proposed Rules
sradovich on DSK3GMQ082PROD with PROPOSALS
Principles (GAAP), thus inhibiting
transparency of capital adequacy. The
Board believes a corporate will be more
transparent presenting its capital
adequacy by adopting conventions more
closely aligned with its published
financial statements. Accordingly, with
respect to the definition of ‘‘retained
earnings,’’ the Board proposes to
incorporate ‘‘GAAP equity acquired in a
merger’’ as a component of retained
earnings. This amendment to the
definition of ‘‘retained earnings’’ will, in
turn, affect the definition of ‘‘Tier 1
capital,’’ which includes retained
earnings as one of the components of
Tier 1 capital.
More specifically, the current
definition of ‘‘retained earnings’’
includes undivided earnings, regular
reserve, reserve for contingencies,
supplemental reserves, reserve for
losses, and other appropriations from
undivided earnings as designated by
management or NCUA. Including
‘‘GAAP equity acquired in a merger’’ to
that list gives recognition to standard
accounting conventions for purposes of
consolidating records between merged
entities. As a practical matter, the Board
has treated equity acquired in a merger
as retained earnings, but did so in the
context of defining contributed capital’s
ability to cover losses. The Board
believes that expressly including such
equity acquired in a merger as retained
earnings and referencing GAAP will
clarify that this capital is available to
cover losses, enhance transparency, and
reduce ambiguity.
Further, the Board proposes to delete
the phrase ‘‘the retained earnings of any
acquired credit union, or an integrated
set of activities and assets, calculated at
the point of acquisition, if the
acquisition is a mutual combination’’
from the current definition of ‘‘Tier 1
capital.’’ This provision becomes
redundant as a result of the expanded
definition of retained earnings which
will include GAAP equity acquired in a
merger.
Retained Earnings Ratio
In addition to the Board’s proposed
amendments to the definitions of
‘‘retained earnings’’ and ‘‘Tier 1 capital’’
as discussed above, the Board also
proposes to add a definition of ‘‘retained
earnings ratio’’ to part 704.
The 2010 rule’s PCA provisions
require corporates to meet a leverage
ratio.5 The leverage ratio primarily
5 The leverage ratio is currently defined as Tier
1 Capital divided by moving daily average net
assets. The leverage ratio and capital definitions
were revised as part of the 2010 rule, which
contained a series of phased in definitions over a
three-year period. Beginning October 21, 2011 and
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16:50 Jun 30, 2017
Jkt 241001
consists of retained earnings and
perpetual contributed capital (PCC).6
Capital included in the leverage ratio
incorporated the provisions of Tier 1
capital as defined by the bank regulatory
agencies, with a notable exception. The
Board recognizes that while corporates
had been permitted to secure
contributed capital from any source,
history has shown that nearly all
contributed capital has been invested by
federally insured natural person credit
unions. As such, depletions of corporate
capital can lead to corresponding
investment impairments and capital
erosion at the natural person credit
unions. This can lead to greater
exposure of loss to the National Credit
Union Share Insurance Fund. The 2010
rule encouraged corporates to build
sufficient retained earnings to absorb
losses without causing a corresponding
loss to another party, such as a natural
person credit union that purchased
contributed capital from that corporate
(i.e., perpetual and non-perpetual
capital as defined in the rule).
The incentive to build retained
earnings was created by limiting the
amount of contributed capital permitted
to be included in calculating the
corporate’s leverage ratio.7 The
limitation on PCC was phased-in over a
period of ten years recognizing the
erosion of corporate capital during the
financial crisis and reasonable
expectations for future corporate
profitability.8 Until October 2016, all
PCC was included in the leverage ratio.
Effective October 2016, part 704
requires corporates to deduct the
amount of PCC exceeding retained
before October 21, 2013, the leverage ratio was
defined as the ratio of total capital to moving daily
average net assets. This ratio was called the
‘‘interim’’ leverage ratio. After October 21, 2013, the
leverage ratio was redefined as the ratio of adjusted
core capital to moving daily average net assets. This
was called the permanent leverage ratio. In May 6,
2015 the NCUA Board approved changes to the
regulation that sought to simplify and clarify the
capital definitions in the regulations now that the
major phase-in dates had passed. The definitions of
core capital and adjusted core capital were
combined into one definition called Tier 1 capital.
The leverage ratio and other related capital ratio
definitions were similarly amended to reflect the
change to Tier 1 Capital.
6 Perpetual Contributed Capital means accounts
or other interests of a corporate credit union that
are perpetual, non-cumulative dividend accounts;
are available to cover losses that exceed retained
earnings, are not insured by the National Credit
Union Share Insurance Fund or other share or
deposit insurers; and cannot be pledged against
borrowings. In the event the corporate is liquidated,
any claims made by the holders of the perpetual
contributed capital will be subordinate to all other
claims (including National Credit Union Share
Insurance Fund claims).
7 12 CFR 704.2
8 As financial intermediaries, the net margins for
corporates have been low with a historical average
net return on assets ratio of approximately 23 bps.
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Sfmt 4702
30775
earnings by 200 basis points. Effective
October 2020, corporates must deduct
the amount of PCC exceeding retained
earnings.
The 2010 revisions to part 704 have
resulted in the intended effect.
Specifically, all corporates have
accumulated sufficient retained
earnings to meet or exceed the adequate
capitalization threshold under PCA
through the October 2016 phase-in
adjustment.
While the result has been positive, the
Board recognizes that the language in
the current rule is indirect and may
disadvantage corporates working with
third parties. The limitation on PCC for
regulatory capital purposes does not
recognize the full value of PCC that
stands to absorb losses and protect
counterparties. Further, the construct to
reduce the inclusion of PCC as capital
provides for inconsistent treatment
compared to capital regulations
governing other types of financial
institutions, such as banks, and could
promote confusion. Accordingly, the
Board proposes to remove the
requirement effective October 2020 to
limit PCC counted as Tier 1 capital to
the amount of retained earnings.
Further, the Board proposes to permit a
corporate to include in its Tier 1 capital
all PCC that is sourced from an entity
not covered by federal share insurance.
However, recognizing that retained
earnings is critical to the health of the
corporate system and the share
insurance fund, the Board proposes to
add a provision to part 704 requiring all
corporates to achieve an eventual
retained earnings ratio of 250 basis
points. To that end, the Board proposes
to add a definition of ‘‘retained earnings
ratio’’ to mean ‘‘the corporate credit
union’s retained earnings divided by its
moving daily average net assets.’’ Upon
attaining this benchmark, a corporate
would be permitted to include all PCC,
regardless of source, in its Tier 1 capital.
The PCA thresholds will remain at their
current limits. Until such time as a
corporate achieves a 250 basis points
retained earnings ratio, it must deduct
the amount of PCC exceeding retained
earnings by 200 basis points as an
inducement to build retained earnings.
The Board believes this proposal will
promote clarity as to the minimum
amount of retained earnings to be held
by a corporate to account for potential
losses. In setting this minimum
standard, the Board balances it with the
risk mitigating provisions of current part
704 including investment concentration
limits, NEV volatility limits, asset
maturity limits, and investment
prohibitions. As such, the Board is not
contemplating amending other
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30776
Federal Register / Vol. 82, No. 126 / Monday, July 3, 2017 / Proposed Rules
corporate risk taking authorities in part
704.
Appendix B to Part 704—Expanded
Authorities and Requirements
Appendix B to part 704 enumerates
the expanded authorities available to
corporates and the procedures that a
corporate must follow to be granted
such authorities. The Part I expanded
investment authority allows a corporate
to take on additional risk in certain
investment products. As part of this
authority, a corporate’s NEV ratios may
decline to specified amounts when
meeting certain leverage ratios.
The Board proposes to add a
‘‘retained earnings ratio’’ requirement to
the Part I expanded investment
authorities. The Board believes that by
doing so the retained earnings ratio
requirement will limit the risk of the
expanded investment portfolios.
Specifically, the Board proposes to
employ an indexed retained earnings
requirement, which will correlate with
the actual level of risk taking.
III. Regulatory Procedures
1. Regulatory Flexibility Act
The Regulatory Flexibility Act
requires NCUA to prepare an analysis of
any significant economic impact a
regulation may have on a substantial
number of small entities (primarily
those under $100 million in assets).9
This proposed rule only affects
corporates, all of which have more than
$100 million in assets. Accordingly,
NCUA certifies the rule will not have a
significant economic impact on a
substantial number of small credit
unions.
sradovich on DSK3GMQ082PROD with PROPOSALS
2. Paperwork Reduction Act
The Paperwork Reduction Act of 1995
(PRA) applies to rulemakings in which
an agency by rule creates a new
paperwork burden or increases an
existing burden.10 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
rule does not contain information
collection requirements that require
approval by OMB under the Paperwork
Reduction Act (44 U.S.C. 3501).
3. 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
95
U.S.C. 603(a).
U.S.C. 3507(d); 5 CFR part 1320.
10 44
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17:54 Jun 30, 2017
Jkt 241001
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.
4. 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 § 654
of the Treasury and General
Government Appropriations Act, 1999,
Public Law 105–277, 112 Stat. 2681
(1998).
List of Subjects in 12 CFR Part 704
Credit unions, Corporate credit
unions, Reporting and recordkeeping
requirements.
By the National Credit Union
Administration Board on June 23, 2017.
Gerard Poliquin,
Secretary of the Board.
For the reasons discussed above, the
National Credit Union Administration
Board proposes to amend 12 CFR part
704 as follows:
PART 704—CORPORATE CREDIT
UNIONS
1. The authority citation for Part 704
continues to read as follows:
■
Authority: 12 U.S.C. 1766(a), 1781, 1789.
2. Amend § 704.2 by:
a. Revising the definition of ‘‘Retained
earnings’’;
■ b. Adding a definition of ‘‘Retained
Earnings Ratio’’; and
■ c. Revising the definition of ‘‘Tier 1
capital’’ to read as follows:
■
■
§ 704.2
Definitions
*
*
*
*
*
Retained earnings means undivided
earnings, regular reserve, reserve for
contingencies, supplemental reserves,
reserve for losses, GAAP equity
acquired in a merger, and other
appropriations from undivided earnings
as designated by management or NCUA.
Retained earnings ratio means the
corporate credit union’s retained
earnings divided by its moving daily
average net assets.
*
*
*
*
*
Tier 1 capital means the sum of items
(1) through (2) of this definition from
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Frm 00003
Fmt 4702
Sfmt 4702
which items (3) through (6) are
deducted:
(1) Retained earnings;
(2) Perpetual contributed capital;
(3) Deduct the amount of the
corporate credit union’s intangible
assets that exceed one half percent of its
moving daily average net assets
(however, NCUA may direct the
corporate credit union to add back some
of these assets on NCUA’s own
initiative, or NCUA’s approval of
petition from the applicable state
regulator or application from the
corporate credit union);
(4) Deduct investments, both equity
and debt, in unconsolidated CUSOs;
(5) Deduct an amount equal to any
PCC or NCA that the corporate credit
union maintains at another corporate
credit union;
(6) Deduct any amount of PCC
received from federally insured credit
unions that causes PCC minus retained
earnings, all divided by moving daily
average net assets, to exceed two
percent when a corporate credit union’s
retained earnings ratio is less than two
and a half percent.
*
*
*
*
*
■ 3. Amend by revising paragraphs
(b)(2) and (b)(3) of Part I of Appendix B
to Part 704 to read as follows:
Appendix B to Part 704—Expanded
Authorities and Requirements
*
*
*
*
*
(b)(1) * * *
(2) 28 percent if the corporate credit union
has a seven percent minimum leverage ratio
and a two and a half percent retained
earnings ratio, and is specifically approved
by NCUA; or
(3) 35 percent if the corporate credit union
has an eight percent minimum leverage ratio
and a three percent retained earnings ratio
and is specifically approved by NCUA.
*
*
*
*
*
[FR Doc. 2017–13642 Filed 6–30–17; 8:45 am]
BILLING CODE 7535–01–P
FEDERAL HOUSING FINANCE BOARD
12 CFR Parts 930 and 932
FEDERAL HOUSING FINANCE
AGENCY
12 CFR Part 1277
RIN 2590–AA70
Federal Home Loan Bank Capital
Requirements
Federal Housing Finance
Board; Federal Housing Finance
Agency.
ACTION: Proposed rule.
AGENCY:
E:\FR\FM\03JYP1.SGM
03JYP1
Agencies
[Federal Register Volume 82, Number 126 (Monday, July 3, 2017)]
[Proposed Rules]
[Pages 30774-30776]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-13642]
========================================================================
Proposed Rules
Federal Register
________________________________________________________________________
This section of the FEDERAL REGISTER contains notices to the public of
the proposed issuance of rules and regulations. The purpose of these
notices is to give interested persons an opportunity to participate in
the rule making prior to the adoption of the final rules.
========================================================================
Federal Register / Vol. 82, No. 126 / Monday, July 3, 2017 / Proposed
Rules
[[Page 30774]]
NATIONAL CREDIT UNION ADMINISTRATION
12 CFR Part 704
RIN 3133-AE75
Corporate Credit Unions
AGENCY: National Credit Union Administration (NCUA).
ACTION: Proposed rule.
-----------------------------------------------------------------------
SUMMARY: The NCUA Board (Board) proposes to amend its regulations
governing corporate credit unions (corporates) and the scope of their
activities. Specifically, the proposed amendments revise provisions on
retained earnings and Tier 1 capital.
DATES: Comments must be received on or before September 1, 2017.
ADDRESSES: You may submit comments by any of the following methods, but
please send comments by one method only:
Federal eRulemaking Portal: http://www.regulations.gov.
Follow the instructions for submitting comments.
NCUA Web site: http://www.ncua.gov/RegulationsOpinions
Laws/proposed_regs/proposed_regs.html. Follow the instructions for
submitting comments.
Email: Address to regcomments@ncua.gov. Include ``[Your
name]--Comments on Proposed Rule--Corporate Credit Unions'' 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: Yvonne Applonie, Director of
Supervision, Office of National Examinations and Supervision, at the
above address or telephone (703) 518-6595; or Marvin Shaw, Staff
Attorney, Office of General Counsel, at the above address or telephone
(703) 518-6553.
SUPPLEMENTARY INFORMATION:
I. Background
The financial crisis of 2007-2009 took a heavy toll on the
corporate credit union system. The crisis, largely mortgage related,
greatly affected the investment portfolios of many corporates causing
widespread liquidity problems, instability in the system, and failures.
During this time period, NCUA took extraordinary short and mid-term
measures to stabilize the corporate system. Among other things, it: (1)
Made capital injections; (2) approved the Temporary Corporate Credit
Union Share Guarantee Program, which guaranteed uninsured shares at
participating corporates; (3) engaged the services of an independent,
highly qualified third party to conduct a comprehensive analysis of
expected non-recoverable credit losses for distressed securities held
by corporates; (4) conserved five corporates; \1\ and (5) created the
NCUA Guaranteed Note Program.\2\
---------------------------------------------------------------------------
\1\ The five were U.S. Central, Western Corporate, Members
United Corporate, Southwest Corporate, and Constitution Corporate.
\2\ As part of the corporate system resolution, NCUA created the
NCUA Guaranteed Note Program to provide long-term funding for
distressed investment securities (Legacy Assets) from the five
failed corporate credit unions. Legacy Assets consisted of over
2,000 investment securities, secured by approximately 1.6 million
residential mortgages, as well as commercial mortgages and other
securitized assets.
---------------------------------------------------------------------------
To provide longer term structural enhancements to the corporate
system, the Board comprehensively revised part 704, the regulations
governing corporates and their activities, in 2010.\3\ The 2010 rule's
primary purpose was to establish a regulatory framework that provides a
foundation for a healthy corporate system that: (1) Delivers important
services to the corporates' natural person credit union members, such
as payment systems and liquidity; and (2) builds and attracts
sufficient capital.\4\ The 2010 rule also helped to prevent the
recurrence of the kind of financial losses that led to the failure of
the referenced five corporates and weakened the financial condition of
several others.
---------------------------------------------------------------------------
\3\ 12 CFR part 704; 75 FR 64786 (Oct. 20, 2010).
\4\ 75 FR 64787, 64787 (Oct. 20, 2010).
---------------------------------------------------------------------------
The 2010 rule curtailed several of the practices that led to the
referenced corporate failures. Specifically, it established investment
concentration limits, limited asset maturities, and prohibited
investments in subordinated and private label mortgage-backed
securities. Most relevant to this proposal, the 2010 rule also
implemented a prompt corrective action (PCA) regime stipulating capital
adequacy for corporates. Largely based on the Basel I requirements, the
capital requirements of the 2010 rule emphasized the importance of
corporates holding tangible and durable capital.
It has been nearly seven years since the Board issued the 2010
rule. In that time, NCUA's efforts have had the intended effect of
stabilizing the corporate system and improving the corporates' ability
to function and provide needed services to natural person credit
unions. Additionally, the overall economy has improved greatly, thereby
improving the economic landscape in which corporates operate. Further,
the large concentration of troubled assets within the corporate system
has been reduced through portfolio repositioning or NCUA intervention.
The corporate system has significantly contracted and consolidated,
with assets declining from approximately $81.7 billion prior to the
2010 rule to approximately $24.9 billion today. In that same time
period, the number of corporates has declined from 26 to 11. Given all
of these positive developments, the Board believes conditions are such
that it is now safe and appropriate to revisit the capital standards of
the 2010 rule. As discussed in more detail below, the proposed
amendments to the corporate rule primarily affect the calculation of
capital after corporates consolidate and set a retained earnings ratio
target in meeting PCA standards.
II. Proposed Amendments
Corporate Consolidations and Capital
In 2015, the Board made further refinements to part 704.
Specifically, the Board amended the definition of ``Tier 1 capital'' to
include as a component of that term, the retained earnings acquired
through a merger. Given that retained earnings acquired through a
merger are currently not recorded on the continuing corporate's
financial statements, the amount must be recorded outside of the
financial statements. This approach does not follow Generally Accepted
Accounting
[[Page 30775]]
Principles (GAAP), thus inhibiting transparency of capital adequacy.
The Board believes a corporate will be more transparent presenting its
capital adequacy by adopting conventions more closely aligned with its
published financial statements. Accordingly, with respect to the
definition of ``retained earnings,'' the Board proposes to incorporate
``GAAP equity acquired in a merger'' as a component of retained
earnings. This amendment to the definition of ``retained earnings''
will, in turn, affect the definition of ``Tier 1 capital,'' which
includes retained earnings as one of the components of Tier 1 capital.
More specifically, the current definition of ``retained earnings''
includes undivided earnings, regular reserve, reserve for
contingencies, supplemental reserves, reserve for losses, and other
appropriations from undivided earnings as designated by management or
NCUA. Including ``GAAP equity acquired in a merger'' to that list gives
recognition to standard accounting conventions for purposes of
consolidating records between merged entities. As a practical matter,
the Board has treated equity acquired in a merger as retained earnings,
but did so in the context of defining contributed capital's ability to
cover losses. The Board believes that expressly including such equity
acquired in a merger as retained earnings and referencing GAAP will
clarify that this capital is available to cover losses, enhance
transparency, and reduce ambiguity.
Further, the Board proposes to delete the phrase ``the retained
earnings of any acquired credit union, or an integrated set of
activities and assets, calculated at the point of acquisition, if the
acquisition is a mutual combination'' from the current definition of
``Tier 1 capital.'' This provision becomes redundant as a result of the
expanded definition of retained earnings which will include GAAP equity
acquired in a merger.
Retained Earnings Ratio
In addition to the Board's proposed amendments to the definitions
of ``retained earnings'' and ``Tier 1 capital'' as discussed above, the
Board also proposes to add a definition of ``retained earnings ratio''
to part 704.
The 2010 rule's PCA provisions require corporates to meet a
leverage ratio.\5\ The leverage ratio primarily consists of retained
earnings and perpetual contributed capital (PCC).\6\ Capital included
in the leverage ratio incorporated the provisions of Tier 1 capital as
defined by the bank regulatory agencies, with a notable exception. The
Board recognizes that while corporates had been permitted to secure
contributed capital from any source, history has shown that nearly all
contributed capital has been invested by federally insured natural
person credit unions. As such, depletions of corporate capital can lead
to corresponding investment impairments and capital erosion at the
natural person credit unions. This can lead to greater exposure of loss
to the National Credit Union Share Insurance Fund. The 2010 rule
encouraged corporates to build sufficient retained earnings to absorb
losses without causing a corresponding loss to another party, such as a
natural person credit union that purchased contributed capital from
that corporate (i.e., perpetual and non-perpetual capital as defined in
the rule).
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\5\ The leverage ratio is currently defined as Tier 1 Capital
divided by moving daily average net assets. The leverage ratio and
capital definitions were revised as part of the 2010 rule, which
contained a series of phased in definitions over a three-year
period. Beginning October 21, 2011 and before October 21, 2013, the
leverage ratio was defined as the ratio of total capital to moving
daily average net assets. This ratio was called the ``interim''
leverage ratio. After October 21, 2013, the leverage ratio was
redefined as the ratio of adjusted core capital to moving daily
average net assets. This was called the permanent leverage ratio. In
May 6, 2015 the NCUA Board approved changes to the regulation that
sought to simplify and clarify the capital definitions in the
regulations now that the major phase-in dates had passed. The
definitions of core capital and adjusted core capital were combined
into one definition called Tier 1 capital. The leverage ratio and
other related capital ratio definitions were similarly amended to
reflect the change to Tier 1 Capital.
\6\ Perpetual Contributed Capital means accounts or other
interests of a corporate credit union that are perpetual, non-
cumulative dividend accounts; are available to cover losses that
exceed retained earnings, are not insured by the National Credit
Union Share Insurance Fund or other share or deposit insurers; and
cannot be pledged against borrowings. In the event the corporate is
liquidated, any claims made by the holders of the perpetual
contributed capital will be subordinate to all other claims
(including National Credit Union Share Insurance Fund claims).
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The incentive to build retained earnings was created by limiting
the amount of contributed capital permitted to be included in
calculating the corporate's leverage ratio.\7\ The limitation on PCC
was phased-in over a period of ten years recognizing the erosion of
corporate capital during the financial crisis and reasonable
expectations for future corporate profitability.\8\ Until October 2016,
all PCC was included in the leverage ratio. Effective October 2016,
part 704 requires corporates to deduct the amount of PCC exceeding
retained earnings by 200 basis points. Effective October 2020,
corporates must deduct the amount of PCC exceeding retained earnings.
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\7\ 12 CFR 704.2
\8\ As financial intermediaries, the net margins for corporates
have been low with a historical average net return on assets ratio
of approximately 23 bps.
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The 2010 revisions to part 704 have resulted in the intended
effect. Specifically, all corporates have accumulated sufficient
retained earnings to meet or exceed the adequate capitalization
threshold under PCA through the October 2016 phase-in adjustment.
While the result has been positive, the Board recognizes that the
language in the current rule is indirect and may disadvantage
corporates working with third parties. The limitation on PCC for
regulatory capital purposes does not recognize the full value of PCC
that stands to absorb losses and protect counterparties. Further, the
construct to reduce the inclusion of PCC as capital provides for
inconsistent treatment compared to capital regulations governing other
types of financial institutions, such as banks, and could promote
confusion. Accordingly, the Board proposes to remove the requirement
effective October 2020 to limit PCC counted as Tier 1 capital to the
amount of retained earnings. Further, the Board proposes to permit a
corporate to include in its Tier 1 capital all PCC that is sourced from
an entity not covered by federal share insurance.
However, recognizing that retained earnings is critical to the
health of the corporate system and the share insurance fund, the Board
proposes to add a provision to part 704 requiring all corporates to
achieve an eventual retained earnings ratio of 250 basis points. To
that end, the Board proposes to add a definition of ``retained earnings
ratio'' to mean ``the corporate credit union's retained earnings
divided by its moving daily average net assets.'' Upon attaining this
benchmark, a corporate would be permitted to include all PCC,
regardless of source, in its Tier 1 capital. The PCA thresholds will
remain at their current limits. Until such time as a corporate achieves
a 250 basis points retained earnings ratio, it must deduct the amount
of PCC exceeding retained earnings by 200 basis points as an inducement
to build retained earnings.
The Board believes this proposal will promote clarity as to the
minimum amount of retained earnings to be held by a corporate to
account for potential losses. In setting this minimum standard, the
Board balances it with the risk mitigating provisions of current part
704 including investment concentration limits, NEV volatility limits,
asset maturity limits, and investment prohibitions. As such, the Board
is not contemplating amending other
[[Page 30776]]
corporate risk taking authorities in part 704.
Appendix B to Part 704--Expanded Authorities and Requirements
Appendix B to part 704 enumerates the expanded authorities
available to corporates and the procedures that a corporate must follow
to be granted such authorities. The Part I expanded investment
authority allows a corporate to take on additional risk in certain
investment products. As part of this authority, a corporate's NEV
ratios may decline to specified amounts when meeting certain leverage
ratios.
The Board proposes to add a ``retained earnings ratio'' requirement
to the Part I expanded investment authorities. The Board believes that
by doing so the retained earnings ratio requirement will limit the risk
of the expanded investment portfolios. Specifically, the Board proposes
to employ an indexed retained earnings requirement, which will
correlate with the actual level of risk taking.
III. Regulatory Procedures
1. Regulatory Flexibility Act
The Regulatory Flexibility Act requires NCUA to prepare an analysis
of any significant economic impact a regulation may have on a
substantial number of small entities (primarily those under $100
million in assets).\9\ This proposed rule only affects corporates, all
of which have more than $100 million in assets. Accordingly, NCUA
certifies the rule will not have a significant economic impact on a
substantial number of small credit unions.
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\9\ 5 U.S.C. 603(a).
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2. Paperwork Reduction Act
The Paperwork Reduction Act of 1995 (PRA) applies to rulemakings in
which an agency by rule creates a new paperwork burden or increases an
existing burden.\10\ 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 rule does not
contain information collection requirements that require approval by
OMB under the Paperwork Reduction Act (44 U.S.C. 3501).
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\10\ 44 U.S.C. 3507(d); 5 CFR part 1320.
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3. 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.
4. 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, Public Law 105-277, 112 Stat. 2681
(1998).
List of Subjects in 12 CFR Part 704
Credit unions, Corporate credit unions, Reporting and recordkeeping
requirements.
By the National Credit Union Administration Board on June 23,
2017.
Gerard Poliquin,
Secretary of the Board.
For the reasons discussed above, the National Credit Union
Administration Board proposes to amend 12 CFR part 704 as follows:
PART 704--CORPORATE CREDIT UNIONS
0
1. The authority citation for Part 704 continues to read as follows:
Authority: 12 U.S.C. 1766(a), 1781, 1789.
0
2. Amend Sec. 704.2 by:
0
a. Revising the definition of ``Retained earnings'';
0
b. Adding a definition of ``Retained Earnings Ratio''; and
0
c. Revising the definition of ``Tier 1 capital'' to read as follows:
Sec. 704.2 Definitions
* * * * *
Retained earnings means undivided earnings, regular reserve,
reserve for contingencies, supplemental reserves, reserve for losses,
GAAP equity acquired in a merger, and other appropriations from
undivided earnings as designated by management or NCUA.
Retained earnings ratio means the corporate credit union's retained
earnings divided by its moving daily average net assets.
* * * * *
Tier 1 capital means the sum of items (1) through (2) of this
definition from which items (3) through (6) are deducted:
(1) Retained earnings;
(2) Perpetual contributed capital;
(3) Deduct the amount of the corporate credit union's intangible
assets that exceed one half percent of its moving daily average net
assets (however, NCUA may direct the corporate credit union to add back
some of these assets on NCUA's own initiative, or NCUA's approval of
petition from the applicable state regulator or application from the
corporate credit union);
(4) Deduct investments, both equity and debt, in unconsolidated
CUSOs;
(5) Deduct an amount equal to any PCC or NCA that the corporate
credit union maintains at another corporate credit union;
(6) Deduct any amount of PCC received from federally insured credit
unions that causes PCC minus retained earnings, all divided by moving
daily average net assets, to exceed two percent when a corporate credit
union's retained earnings ratio is less than two and a half percent.
* * * * *
0
3. Amend by revising paragraphs (b)(2) and (b)(3) of Part I of Appendix
B to Part 704 to read as follows:
Appendix B to Part 704--Expanded Authorities and Requirements
* * * * *
(b)(1) * * *
(2) 28 percent if the corporate credit union has a seven percent
minimum leverage ratio and a two and a half percent retained
earnings ratio, and is specifically approved by NCUA; or
(3) 35 percent if the corporate credit union has an eight
percent minimum leverage ratio and a three percent retained earnings
ratio and is specifically approved by NCUA.
* * * * *
[FR Doc. 2017-13642 Filed 6-30-17; 8:45 am]
BILLING CODE 7535-01-P