Capital Planning and Supervisory Stress Testing, 50094-50101 [2017-23212]

Agencies

• National Credit Union Administration

[Federal Register Volume 82, Number 208 (Monday, October 30, 2017)]
[Proposed Rules]
[Pages 50094-50101]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-23212]


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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.

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Federal Register / Vol. 82, No. 208 / Monday, October 30, 2017 / 
Proposed Rules

[[Page 50094]]



NATIONAL CREDIT UNION ADMINISTRATION

12 CFR Part 702

RIN 3133-AE80


Capital Planning and Supervisory Stress Testing

AGENCY: National Credit Union Administration (NCUA).

ACTION: Proposed rule.

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SUMMARY: The NCUA Board (``Board'') proposes to amend its regulations 
regarding capital planning and stress testing for federally insured 
credit unions with $10 billion or more in assets (covered credit 
unions). The proposal would reduce regulatory burden by removing some 
of the capital planning and stress testing requirements currently 
applicable to certain covered credit unions. The proposal would also 
make the NCUA's capital planning and stress testing requirements more 
efficient for covered credit unions and the NCUA by, among other 
things, authorizing credit unions to conduct their own stress tests in 
accordance with the NCUA's requirements and allowing those credit 
unions to incorporate the stress test results into their capital plan 
submissions.

DATES: Comments must be received on or before December 29, 2017.

ADDRESSES: You may submit comments by any of the following methods, but 
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/regulation-supervision/Pages/rules/proposed.aspx. Follow the instructions for 
submitting comments.
     Email: Address to [email protected]. Include ``[Your 
name]--Comments on Proposed Rule--Capital Planning and Supervisory 
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: Technical information: Dale Klein, 
Senior Financial Analyst--CPST, Office of National Examinations and 
Supervision, at the above address or telephone (703) 518-6629; or legal 
information: John H. Brolin, Senior Staff Attorney, Office of General 
Counsel, at the above address or telephone (703) 518-6540.

SUPPLEMENTARY INFORMATION: 

I. Background

    In April 2014, the Board issued a final rule requiring capital 
planning and stress testing for FICUs with assets of $10 billion or 
more (covered credit unions).\1\ The NCUA recognizes that covered 
credit unions present a systemic risk to the National Credit Union 
Share Insurance Fund (NCUSIF) thereby necessitating that they be 
subject to more stringent prudential standards than apply to other 
federally insured credit unions. This approach is consistent with that 
taken by the Board of Governors of the Federal Reserve System, the 
Federal Deposit Insurance Corporation, and the Office of the 
Comptroller of the Currency (the other banking agencies). Capital 
planning requires covered credit unions to assess their financial 
condition and risks over the planning horizon under both expected and 
more adverse conditions. Annual supervisory stress testing has allowed 
the NCUA to obtain an independent test of these credit unions under 
stress scenarios. By setting a regulatory minimum stress test capital 
ratio, the April 2014 final rule requires a covered credit union to 
take corrective action before it becomes undercapitalized to an extent 
that it may cause a risk of loss to the NCUSIF.
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    \1\ 12 CFR part 702, subpart E; 79 FR 24311 (Apr. 30, 2014).
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    In July 2015, the Board amended the NCUA's capital planning and 
stress testing regulation to align its annual planning and testing 
schedule with the timelines being adopted by the other banking 
agencies. Among the reasons for this schedule change was that the 
NCUA's stress test scenarios are based on the supervisory stress test 
scenarios developed by the other banking agencies for their regulated 
institutions. The other banking agencies changed their schedule for 
publishing scenarios, which precipitated the modification of the NCUA's 
supervisory stress testing schedule.
    Based on the other banking agencies' experiences implementing the 
annual Dodd-Frank Act stress tests (DFAST), the NCUA tiered its own 
capital planning expectations for covered credit unions during the 
first three years of its program. By ``tiered,'' we mean that the NCUA 
aligned its capital planning and analysis expectations based on the 
size, complexity, and financial condition of each covered credit union. 
As the Board expected, credit union capital planning practices have 
evolved over the three-year period since 2014. Covered credit unions, 
consistent with their size, complexity, financial condition, have 
operated under the NCUA's tiered supervisory expectations. The Board 
believes that taking a graduated supervisory approach to capital 
planning has been beneficial for credit unions, and is consistent with 
the NCUA's overall supervisory objectives.
    When the NCUA's current capital planning and stress testing rule 
was adopted in April 2014, the Board believed it was important for the 
agency to initially conduct all stress tests to ensure the NCUA had an 
independent assessment of risk for covered credit unions.\2\ Current 
Sec.  702.506(c) provides, however, that after the NCUA has completed 
three consecutive supervisory stress tests of a covered credit union, 
the covered credit union may, with the NCUA's approval, conduct the 
tests described in subpart E of part 702. The preamble to the April 
2014 final rule also states that the April 2014 final rule was not the 
end of the process on stress testing, but just the beginning.\3\ 
Accordingly, after three productive and informative years of practical 
experience implementing the current capital planning and stress testing 
regulations, the Board now believes it is appropriate for the NCUA to 
revisit those regulations.
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    \2\ 79 FR 24311, 24312 (Apr. 30, 2014).
    \3\ Id.

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[[Page 50095]]

II. Summary of the Proposed Rule

    The Board is proposing to amend the NCUA's capital planning and 
stress testing regulations. The proposed changes reflect the NCUA's 
experiences in implementing the current rule's requirements, while also 
taking into consideration the systemic risk that covered credit unions 
pose to the NCUSIF. As explained in more detail below, these proposed 
changes are intended to reduce regulatory burdens by removing some of 
the more onerous capital planning and stress testing requirements 
currently applicable to covered credit unions.
    The proposed changes to the NCUA's capital planning requirements 
would more closely align the agency's regulatory requirements with its 
current supervisory expectations for covered credit unions. Under the 
proposal, covered credit unions would be subject to new tiered 
regulatory requirements that would further ensure their capital plans 
are tailored to reflect their size, complexity, and financial 
condition. For a tier I credit union, which is a covered credit union 
that has completed fewer than three capital planning cycles and has 
less than $20 billion in total assets, review of its capital plan would 
be incorporated into the NCUA's supervisory oversight of that covered 
credit union. For a tier II credit union, which is a covered credit 
union that has completed three or more capital planning cycles and has 
less than $20 billion in total assets, or is otherwise designated as a 
tier II credit union by the NCUA, review of its capital plan also would 
be incorporated into its supervisory oversight from the NCUA. For a 
tier III credit union, which is a covered credit union that has $20 
billion or more in total assets, or is otherwise designated as a tier 
III credit union by the NCUA, review of its capital plan would continue 
to be subject to the current requirement that the NCUA formally approve 
or reject it.
    Stress testing requirements under the proposal also would be 
tiered. Tier I credit unions would not be subject to any stress testing 
requirements. Once a tier I credit union satisfies the criteria for 
becoming a tier II credit union, which generally would be three years 
after it reaches total assets of $10 billion or more, that covered 
credit union would be required to conduct stress testing. Unlike their 
larger counterparts in tier III, however, tier II credit unions would 
not be subject to a 5% minimum stress test capital threshold. Further, 
under the proposal, the NCUA would no longer conduct the annual 
supervisory stress tests on applicable covered credit unions. Rather, 
the covered credit unions themselves would conduct the stress tests. 
Since stress testing standards were first adopted in 2014, the NCUA has 
conducted annual supervisory stress tests on all covered credit unions.
    While the Board recognizes that all covered credit unions are of 
systemic importance to the NCUSIF, the Board it is appropriate to 
differentiate the capital planning requirements applicable to such 
institutions based on their individual characteristics. Specifically, 
size, complexity, and financial condition are significant determinants 
regarding each covered credit union's risk to the NCUSIF, as well as to 
each covered credit union's ability to support sound capital planning 
and supervisory stress testing expectations. The application of the 
NCUA's capital planning and stress testing requirements defined by 
size, complexity, and financial condition would provide certain covered 
credit unions with a more reasonable period of time over which they can 
develop the policies and processes necessary to develop sound capital 
plans and analyses. However, the Board seeks comments on whether these 
characteristics are the appropriate factors, or whether other 
considerations should also be taken into account in assessing risk for 
purposes of differentiating capital planning and stress testing 
requirements.
    As noted above, all covered credit unions pose a degree of systemic 
risk to the NCUSIF and the credit union industry. This proposal, 
however, seeks to balance the higher risk that the larger, more complex 
covered credit unions may pose to the NCUSIF, with the time and 
resources these institutions need to prepare themselves to meet the 
NCUA's capital planning and supervisory stress testing expectations. 
The Board also seeks to tailor the NCUA's capital planning and stress 
testing requirements in such a manner as to reduce the regulatory 
burden imposed on those smaller covered credit unions which pose less 
risk to the NCUSIF.

Proposed Tiers of Covered Credit Unions

    The proposal identifies three tiers of covered credit unions and 
would impose varying levels of regulatory requirements based on those 
tiers. In brief, the tier comprised of the smallest covered credit 
unions would have the least regulatory requirements, with a concomitant 
increase in requirements for each tier as the size and complexity of 
those covered credit unions increases. The three tiers are as follows:
     A tier I credit union would be a covered credit union that 
has completed fewer than three capital planning cycles and has less 
than $20 billion in total assets;
     A tier II credit union would be a covered credit union 
that has completed three or more capital planning cycles and has less 
than $20 billion in total assets, or is otherwise designated as a tier 
II credit union by the NCUA; and
     A tier III credit union would be a covered credit union 
that has $20 billion or more in total assets, or is otherwise 
designated as a tier III credit union by the NCUA.
    Under the proposal, the level of the NCUA's capital planning 
requirements for tier I and tier II credit unions would generally 
decrease from the current regulatory requirements, but would generally 
remain the same for tier III credit unions. This proposed approach 
would reduce regulatory burdens on tier I and tier II credit unions 
while allowing them to focus on establishing sound capital planning and 
capital adequacy assessment processes. The tier III credit unions, on 
the other hand, which may pose the greatest systemic risk to the NCUSIF 
and which are most capable of complying with the current requirements, 
would remain subject to most of the current requirements. The Board 
seeks specific comments on whether this approach is appropriate and 
whether it sufficiently balances regulatory relief for covered credit 
unions with the NCUA's objective of managing risk to the NCUSIF.
    Under the proposal, the NCUA's capital planning and stress testing 
rule would distinguish between a tier II and a tier III credit union at 
the threshold level of $20 billion in total assets. Setting the 
threshold level at $20 billion would mean that a covered credit union 
would generally not be subject to the regulation's most rigorous 
requirements until it had doubled in size from the time it was first 
classified as a covered credit union. Setting the threshold at this 
level should help ensure that covered credit unions have adequate time 
to plan and prepare for compliance. The Board specifically requests 
comment, however, on whether the threshold level should be set higher, 
at $25 billion in total assets, to provide covered credit unions with 
even more time to plan and prepare for compliance. In addition, the 
Board requests comment on whether setting the threshold at this higher 
level would be reasonable and why.

[[Page 50096]]

Proposed Revisions to the NCUA's Capital Planning Requirements

    This proposal would retain the current requirement that all covered 
credit unions submit capital plans to the NCUA no later than May 31st 
of each year. Tier 1 and tier II credit unions, however, would no 
longer be required to have their capital plans formally approved by the 
NCUA. Capital plan reviews for tier I and tier II credit unions would 
be conducted as part of the NCUA's supervision of the credit union, 
with any deficiencies addressed as part of the supervisory process. 
This approach would provide the NCUA greater latitude when reviewing 
capital plan submissions. This proposed change is also intended to 
provide the NCUA with additional flexibility to use the supervisory 
process to address plan deficiencies, especially for credit unions 
newly covered by the NCUA's capital planning requirements. The Board 
believes that any increased risk to the NCUSIF that may occur as a 
result of providing regulatory relief can be addressed through the 
supervisory process.
    This proposal would retain the current requirement for the NCUA to 
formally approve or reject a tier III credit union's capital plan. 
Because the failure of a tier III credit union poses the most 
significant risk to the NCUSIF, the Board believes it is prudent to 
retain the current, more formal requirements for tier III credit 
unions.
    The NCUA's formal rejection of a capital plan would be subject to 
the Supervisory Review Committee process. The Board specifically 
requests comment on this aspect of the proposal.

Proposed Revisions to the NCUA's Supervisory Stress Testing 
Requirements

    Credit Union-Conducted Stress Tests. Under the current rule, the 
NCUA is required to conduct supervisory stress tests for all covered 
credit unions. When the Board approved the current regulation in 2014, 
it believed the agency should initially conduct all stress tests to 
ensure the NCUA had an independent assessment of risk for covered 
credit unions. The preamble to the final rule acknowledged, however, 
that it might be appropriate in the future for certain covered credit 
unions to conduct their own supervisory stress tests, and the Board 
adopted a provision in the final rule to allow for that. In particular, 
current Sec.  702.506(c) provides that after the NCUA has completed 
three consecutive supervisory stress tests of a covered credit union, 
the covered credit union may, with the NCUA's approval, conduct the 
tests described in subpart E of part 702 on its own. Having now 
completed three annual stress testing cycles, the Board believes that 
changing the NCUA's regulations to have covered credit unions conduct 
their own supervisory stress tests, without needing to obtain approval 
from the NCUA, is appropriate. Accordingly, under the proposal, the 
requirement that the NCUA conduct supervisory stress tests would be 
eliminated.
    The Board believes that credit unions are better informed of risk 
when they perform their own capital analyses. Having covered credit 
unions conduct their own supervisory stress tests also eliminates any 
unintentional, negative consequences that could result from the NCUA 
conducting those tests, namely concerns that a covered credit union 
might abdicate its responsibility to perform rigorous capital analyses 
to the NCUA. As a safeguard, however, the proposal would retain the 
provision in the current rule that reserves the NCUA's right to conduct 
the stress tests on any covered credit union at any time, and to 
request qualitative and quantitative information from the covered 
credit unions that pertains to supervisory stress testing.
    Incremental Approach. Running a supervisory stress test requires 
internal controls that enable the credit union to effectively challenge 
all material aspects of its capital planning and analysis. For a 
covered credit union to develop the ability to obtain, cleanse, and 
manage internal and external data, and perform adequate capital 
analyses, it must possess a level of experience and operational scale 
that is unlikely to be in place or quickly developed by a credit union 
when it first reaches the $10 billion threshold. Accordingly, the Board 
is proposing to adopt an incremental regulatory approach to supervisory 
stress testing that would gradually increase regulatory requirements on 
a covered credit union over time without making the requirements too 
burdensome too soon.

                                          Table 1--Incremental Approach
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         Tier                 Description                     Stress test                 Capital plan review
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I....................  First three years........  Not required.......................  Incorporated as part of
                                                                                        the NCUA's supervisory
                                                                                        oversight.
II...................  3 years or more, but less  Credit unions run stress tests       Incorporated as part of
                        than $20 billion in        using the NCUA stress-test           the NCUA's supervisory
                        total assets.              scenarios and NCUA guidance, but     oversight.
                                                   are not subject to the 5% minimum
                                                   stress-test ratio.
III..................  $20 billion or more in     Credit unions run stress tests       The NCUA accepts or
                        total assets.              using the NCUA stress-test           rejects credit union
                                                   scenarios and NCUA guidance, and     capital plans--
                                                   are subject to the 5% minimum        qualitative and
                                                   stress-test ratio.                   quantitative assessment.
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    Tier I. Under the proposal, a tier I credit union would not be 
subject to any supervisory stress testing requirements, nor would it be 
required to incorporate the NCUA's stress test scenarios within its 
capital plan. This proposed approach would allow a tier I credit union 
time after it reaches the $10 billion threshold level to obtain the 
policies and processes necessary to develop sound capital plans and 
analyses prior to incorporating supervisory stress testing. Once the 
tier I credit union satisfies the tier II criteria, which generally 
would be three years after reaching the $10 billion threshold, it would 
then be required to comply with all tier II requirements described 
below.
    Tier II. This proposal would require a tier II credit union to 
incorporate the NCUA's annual stress test scenarios into its capital 
plan submissions. The Board does not believe this particular 
requirement imposes additional regulatory burden on a tier II credit 
union because, as the NCUA has observed over the last three years of 
implementing the stress testing regulations, covered credit unions 
already incorporate the NCUA's supervisory stress testing scenarios 
into their capital plans even though they are not required to do so 
under the current rule.
    Tier III. The proposal would require a tier III credit union to 
incorporate the NCUA's stress test scenarios into its capital plan. 
Because a tier III credit union poses the greatest level of

[[Page 50097]]

systemic risk to the NCUSIF, it must also submit a plan to build 
capital or mitigate the risk if the credit union shows that its stress 
test capital ratio would fall below the 5% minimum stress test capital 
threshold. This is consistent with the supervisory stress testing 
requirements in current Sec.  702.506(c).
    The proposal would apply the tier III threshold of $20 billion as 
of the March 31 measurement date of each year, and the threshold would 
be effective at the beginning of the next capital planning cycle. The 
capital planning cycle would begin on June 1 of that year and run 
through the capital plan submission date of May 31 of the following 
year.
    Web site Instructions. If the Board adopts a final rule on this 
matter, the NCUA will publish on its Web site instructions for tier II 
and tier III credit unions on how to administer their own supervisory 
stress tests. The Board believes that a covered credit union's ability 
to maintain independence and flexibility is essential to the overall 
success of the NCUA's supervisory stress testing program. Accordingly, 
under the proposal, tier II and tier III credit unions would be 
required to conduct their own stress tests in accordance with the 
instructions provided by the NCUA. The standards for conducting the 
tests would differ for tier II and tier III credit unions and would be 
commensurate with their level of systemic risk to the NCUSIF.
    Conforming and Clarifying Amendments. Finally, the proposal would 
also make a number of minor conforming and clarifying amendments to the 
current rule. These conforming and clarifying amendments would include 
removing, changing, and adding certain definitions, and making other 
small amendments to various provisions in subpart E to part 702.
    The proposed changes outlined above are discussed in more detail in 
the Section-by-Section Analysis below.

III. Legal Authority

    The NCUA is issuing this proposal pursuant to its authority under 
the Federal Credit Union Act (FCUA).\4\ Section 120(a) of the FCUA 
authorizes the Board to ``prescribe rules and regulations for the 
administration of'' the FCUA.\5\ Section 204 of the FCUA authorizes the 
Board, through its examiners, ``to examine any [federally] insured 
credit union . . . to determine the condition of any such credit union 
for insurance purposes.'' \6\ Section 206(e) of the FCUA authorizes the 
Board to take certain actions against a federally insured credit union, 
if, in the opinion of the Board, the credit union ``is engaging or has 
engaged, or the Board has reasonable cause to believe that the credit 
union or any institution affiliated party is about to engage, in any 
unsafe or unsound practice in conducting the business of such credit 
union.'' \7\
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    \4\ 12 U.S.C. 1751 et seq.
    \5\ 12 U.S.C. 1766(a).
    \6\ 12 U.S.C. 1784(a).
    \7\ 12 U.S.C. 1786(e).
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IV. Section-by-Section Analysis

    This proposed rule would retain most of the current language in 
subpart E of part 702. In particular, current Sec. Sec.  702.501, and 
702.503 would remain unchanged under this proposal. The proposed 
changes to Sec. Sec.  702. 502, 702.504, 702.505, and 702.506 are 
described and explained in more detail below.

Section 702.502 Definitions

    The proposal would retain most of the definitions from current 
Sec.  702.502, without change, with the following exceptions.

Adverse Scenario

    The proposal would remove the definition of ``adverse scenario'' 
from Sec.  702.502 and replace this term throughout subpart E with 
terms more commonly used within the financial services industry. This 
change is intended to reduce confusion for covered credit unions. No 
substantive changes to the requirements of subpart E are intended by 
this change.

Capital Planning Cycle

    The proposal would add a definition for the new term ``capital 
planning cycle'' to Sec.  702.502. The proposal would provide that 
``capital planning cycle'' means a complete round of capital planning 
over a one year period. The definition would provide further that the 
capital planning cycle begins on June 1st of a given year and ends on 
May 31st of the following year when the capital plan submission is due. 
This change is intended to reduce confusion for covered credit unions 
regarding when they would be subject to certain stress testing and 
other requirements, which are discussed in more detail below.

Covered Credit Union

    The proposal would make conforming amendments to the current 
definition of ``covered credit union'' in Sec.  702.502. In particular, 
the proposed definition would remove the words ``capital planning and 
stress testing'' from the second sentence in the definition and add in 
their place the word ``applicable.'' The proposed definition would 
provide that ``covered credit union'' means a federally insured credit 
union whose assets are $10 billion or more. The definition would 
provide further that a credit union that crosses that asset threshold 
as of March 31st of a given calendar year is subject to the applicable 
requirements of subpart E in the capital planning cycle that begins on 
June 1st of that calendar year. As explained in more detail below, this 
change would help clarify that a covered credit union is only subject 
to the applicable requirements of subpart E.

Scenarios

    The proposal would make conforming amendments to the current 
definition of ``scenarios'' in Sec.  702.502. In particular, the 
proposal would remove the words ``adverse, and severely adverse'' from 
the current definition and add in their place the words ``scenarios, 
and stress.'' The revised definition would provide that ``scenarios'' 
are those sets of conditions that affect the U.S. economy or the 
financial condition of a covered credit union that serve as the basis 
for stress testing, including, but not limited to, NCUA-established 
baseline scenarios, and stress scenarios.

Severely Adverse Scenario

    The proposal would delete the definition of ``severely adverse 
scenario'' from Sec.  702.502 and replace this term throughout subpart 
E with terms more commonly used within the financial services industry. 
This change is intended to reduce confusion for covered credit unions. 
No substantive changes to the requirements of subpart E are intended by 
this change.

Stress Scenario

    The proposal would add the definition ``stress scenario'' to Sec.  
702.502. The definition would provide that ``stress scenario'' means a 
scenario that is more adverse than that associated with the baseline 
scenario.

Tier I Credit Union

    The proposal would add the definition of ``tier I credit union'' to 
Sec.  702.502. The definition would provide that ``tier I credit 
union'' means a covered credit union that has completed fewer than 
three capital planning cycles and has less than $20 billion in total 
assets. Generally, a covered credit union would be categorized as a 
tier I credit union for the first three years after its total assets 
reached $10 billion or more. After three years, a tier I credit union

[[Page 50098]]

would become a tier II credit union with the corresponding 
requirements.
    The definition of a tier I credit union would provide regulatory 
relief for qualifying covered credit unions. The Board believes it is 
appropriate to adjust the expectations for credit unions that newly 
meet the criteria for covered credit unions. As noted earlier, the NCUA 
has conducted the review and assessment of covered credit union capital 
planning activities in a phased manner since inception of the final 
rule in 2014. The proposed creation of the tier I distinction would 
allow the NCUA to better align regulatory expectations based on the 
size, complexity, and financial condition of each covered credit union.

Tier II Credit Union

    The proposal would add the definition of ``tier II credit union'' 
to Sec.  702.502. The definition would provide that ``tier II credit 
union'' means a covered credit union that has completed three or more 
capital planning cycles and has less than $20 billion in total assets, 
or is otherwise designated as a tier II credit union by NCUA. The tier 
II credit union definition would recognize the iterative nature of the 
NCUA's capital planning and stress testing processes, and acknowledge 
that covered credit unions get better at developing and implementing 
their capital plans over time and through repetition. The Board 
believes these proposed changes would provide regulatory relief for 
tier II credit unions.

Tier III Credit Union

    The proposal would add the definition of ``tier III credit union'' 
to Sec.  702.502. The definition would provide that ``tier III credit 
union'' means a covered credit union that has $20 billion or more in 
total assets, or is otherwise designated as a tier III credit union by 
NCUA. The proposal identifies credit unions with total assets of $20 
billion or more as posing the highest degree of risk to the NCUSIF. 
While the Board considers qualitative and quantitative capital plan 
supervision and credit union-run stress test review to be appropriate 
for covered credit unions with less than $20 billion in total assets, 
it does not for larger covered credit unions. For covered credit unions 
with total assets of $20 billion or more, the Board believes it is 
prudent, given the size of the NCUSIF and the potential loss associated 
with the failure of a credit union that large, to establish formal 
triggers requiring the NCUA and credit union actions to further 
mitigate NCUSIF risk exposure.
    Unless otherwise delegated to the NCUA's staff, the Board would 
retain the authority to designate a covered credit union as a tier II 
credit union or tier III credit union, respectively. The Board invites 
comment on what criteria would be appropriate to apply when considering 
such a designation.

Section 702.504 Capital Planning

(a) Annual Capital Planning
(a)(1)
    The proposal would retain most of current Sec.  702.504 without 
change, with the following exceptions. Proposed Sec.  702.504(a)(1) 
would no longer include the last sentence in current Sec.  
702.504(a)(1), which provides that the NCUA will assess whether the 
capital planning and analysis process is sufficiently robust in 
determining whether to accept a credit union's capital plan. Given the 
other changes in this proposal, this sentence would no longer be 
necessary. Proposed Sec.  702.504(a)(1) would provide that a covered 
credit union must develop and maintain a capital plan. It also would 
provide that a covered credit union must submit this plan and its 
capital policy to the NCUA by May 31 each year, or such later date as 
directed by the NCUA. It also would provide that the plan must be based 
on the covered credit union's financial data as of December 31 of the 
preceding calendar year, or such other date as directed by the NCUA.
(b) Mandatory Elements
(b)(4)
    The proposal would delete current Sec.  702.504(b)(4) from the 
regulation. Current Sec.  702.504(b)(4) provides that if a credit union 
conducts its own stress test under Sec.  702.506(c), its capital plan 
must include a discussion of how the credit union will maintain a 
stress test capital ratio of 5 percent or more under baseline, adverse, 
and severely adverse conditions in each quarter of the 9-quarter 
horizon. This sentence would no longer be necessary in this section 
because it would be fully addressed in proposed Sec.  702.506(f).

Section 702.505 NCUA Action on Capital Plans

(a) Timing
    The proposal would amend current Sec.  702.505(a) by dividing 
paragraph (a) into two subparts. Proposed Sec.  702.505(a)(1) would 
provide that the NCUA will address any deficiencies in the capital 
plans submitted by tier I and tier II credit unions through the 
supervisory process. The intent of this change is to provide regulatory 
relief to tier I and tier II credit unions by removing the regulatory 
review and regulatory ``accept or reject'' assessment of their capital 
plans. It also provides the NCUA with additional flexibility in 
addressing plan deficiencies.
    Proposed Sec.  702.505(a)(2) would continue to require that the 
NCUA accept or reject tier III credit unions' capital plans. The Board 
is not proposing to remove this requirement for Tier III credit unions 
at this time for the reasons discussed above. Accordingly, proposed 
Sec.  702.505(a)(2) would provide that the NCUA will notify tier III 
credit unions of the acceptance or rejection of their capital plans by 
August 31 of the year in which their plan is submitted.
    The proposal also would make additional conforming changes 
throughout Sec.  702.505 to clarify that only tier III credit unions 
would be required to operate under a capital plan formally accepted by 
the NCUA. No substantive changes, other than those discussed above, are 
intended.

Section 702.506 Annual Supervisory Stress Testing

    Much of the substance of current Sec.  702.506 would remain 
unchanged under the proposal. Each of the proposed substantive 
amendments are discussed in detail below. The proposal also would make 
a number of non-substantive conforming amendments to address certain 
changes in terminology.
(a) General Requirements
    The proposal would amend current Sec.  702.506(a) by adding a new 
clarifying sentence to the beginning of proposed paragraph (a). The new 
sentence would provide that only tier II and tier III credit unions are 
required to conduct supervisory stress tests. The Board believes that 
exempting tier I credit unions from supervisory stress testing provides 
prudent regulatory relief and enables tier I credit union time to 
develop their own capital adequacy assessments. The Board considers the 
supervisory stress testing exemption for tier I credit unions, which 
generally would be three years, after which the tier I credit union 
becomes a tier II credit union, to be sufficient time to develop 
internal capabilities to perform credit union-run supervisory stress 
tests.
NCUA-Run Tests
    The proposal would delete current Sec.  702.506(b), which, because 
of the other changes being proposed to part 702, would be overridden. 
The NCUA already reserves, in proposed

[[Page 50099]]

Sec.  702.506(b)(3), the right to conduct stress tests on covered 
credit unions if it deems such action necessary.
(b) Credit Union-Run Supervisory Stress Tests
    The proposal would make significant revisions to current Sec.  
702.506(c) to require tier II and tier III credit unions to conduct 
their own stress tests instead of first having to get approval from the 
NCUA. Proposal Sec.  702.506(b) would be split into three new 
subparagraphs, each of which is described in more detail below.
(b)(1) General
    Proposed Sec.  702.506(b)(1) would provide that all supervisory 
stress tests must be conducted according to the NCUA's instructions. 
The Board is proposing to add this requirement to ensure that 
supervisory stress tests performed by tier II and tier III credit 
unions are conducted in a manner that promotes consistency and 
comparability. Credit union-run stress tests must adhere to these 
principles in order for the NCUA to assess inherent risk in the 
portfolios of covered credit unions and establish supervisory 
benchmarks. The NCUA will publish credit union-run supervisory stress 
test instructions each year on its Web site. The instructions will 
contain general directives, and where appropriate, differentiate 
between tier II and tier III requirements.
(b)(2) Tier III Credit Unions
    Proposed Sec.  702.506(b)(2) would provide that when conducting its 
stress test, a tier III credit union must apply the minimum stress test 
capital ratio to all time periods in the planning horizon. The Board 
believes this requirement of the current remains pertinent, but only 
for tier III credit unions.
(b)(3) NCUA Tests
    Proposed Sec.  702.506(b)(3) would retain the last two sentences in 
current Sec.  702.506(c), without change. Proposed Sec.  702.506(b)(3) 
would provide that the NCUA reserves the right to conduct the tests 
described in this section on any covered credit union at any time. 
Proposed paragraph (b)(3) would provide further that where both the 
NCUA and a covered credit union have conducted the tests, the results 
of the NCUA's tests will determine whether the covered credit union has 
met the requirements of part 702. No substantive changes are being 
proposed with regard to these two sentences.
(f) Supervisory Actions
    The proposal would retain much of the language in current Sec.  
702.506(g), but would insert some additional language. The section 
would also be broken into three subsections, each of which is discussed 
in more detail below.
(f)(1)
    Proposed Sec.  702.506(f)(1) would provide that if a credit union-
run stress test shows a tier III credit union does not have the ability 
to maintain a stress test capital ratio of 5 percent or more under 
expected and stressed conditions in each quarter of the planning 
horizon, the credit union must incorporate into its capital plan a 
stress test capital enhancement plan showing how it will meet that 
target.
(f)(2)
    This section of the proposal would retain the language from the 
first sentence in current Sec.  702.506(g) and limit the application of 
paragraph (f)(2) to tier III credit unions. Proposed paragraph (f)(2) 
would provide that if an NCUA-run stress test shows that a tier III 
credit union does not have the ability to maintain a stress test 
capital ratio of 5 percent or more under expected and stressed 
conditions in each quarter of the planning horizon, the credit union 
must provide the NCUA, by November 30 of the calendar year in which the 
NCUA conducted the tests, a stress test capital enhancement plan 
showing how it will meet that target. As explained above, the NCUSIF 
risk exposure to a tier I and tier II credit union is sufficiently 
mitigated through qualitative and quantitative supervision of the 
credit union's capital planning and capital adequacy analysis. 
Accordingly, the proposed rule offers regulatory relief as tier 1 and 
tier II credit unions would no longer be subject to the minimum stress 
test capital ratio.
(f)(3)
    This section of the proposal would retain the language in the last 
sentence in current Sec.  702.506(g) and move it to proposed Sec.  
702.506(f)(3). The proposal also would limit the application of this 
section to only tier III credit unions. Proposed Sec.  702.506(f)(3) 
would provide that a tier III credit union operating without an NCUA-
approved stress test capital enhancement plan required under this 
section may be subject to supervisory action. A tier III credit union 
operating without an accepted capital plan or an approved stress test 
capital enhancement plan will be considered poorly managed and/or 
operating with insufficient capital to support the credit union's risk 
profile. The Board believes it is prudent to subject a tier III credit 
union to heightened regulatory scrutiny under such circumstances.

IV. Regulatory Procedures

1. Regulatory Flexibility Act

    The Regulatory Flexibility Act requires the 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 
$100 million in assets).\8\ The proposed rule and its requirements will 
apply to only the largest credit unions, those with $10 billion or more 
in total assets. Accordingly, the Board certifies that it will not have 
a significant economic impact on a substantial number of small 
entities.
---------------------------------------------------------------------------

    \8\ 5 U.S.C. 603(a); 12 U.S.C. 1787(c)(1).
---------------------------------------------------------------------------

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 on regulated 
entities or modifies an existing burden (44 U.S.C. 3507(d)). For 
purposes of the PRA, a paperwork burden may take the form of a 
reporting, recordkeeping, or a third-party disclosure requirement, 
referred to as information collections.
    The NCUA is seeking comments on proposed revisions to the 
information collection requirements contained in Subpart E of part 702, 
which has been submitted to the Office of Management and Budget (OMB) 
for review and approval OMB control number 3133-0199. The information 
collection requirements are found in Sec.  702.504, that requires FICUs 
with assets of at least $10 billion (covered credit unions) to develop, 
maintain, and submit capital plans annually to NCUA. Proposed change 
amend Sec.  702.506 to require tier 2 and 3 credit unions to conduct 
stress tests in a manner prescribed by NCUA. This reporting requirement 
will have an effect on five credit unions by increasing the information 
collection burden by an estimated 100 hours for each.
    Estimated number of respondents: 7.
    Estimated number of responses per respondent: 1.
    Estimated total annual responses: 7.
    Estimated burden per response: 393 hours.
    Total annual burden: 2,750 hours.
    Comments are invited on: (1) Whether the proposed collection of 
information is necessary for the proper performance of the functions of 
the agency, including

[[Page 50100]]

whether the information will have practical utility; (2) the accuracy 
of the agency's estimate of the burden of the proposed collection of 
information, including the validity of the methodology and assumptions 
used; (3) ways to enhance the quality, utility and clarity of the 
information to be collected; and (4) ways to minimize the burden of the 
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.
    Comments on the proposed information collection requirements may be 
sent to the 1. Office of Information and Regulatory Affairs, Office of 
Management and Budget, Attention: Desk Officer for NCUA, New Executive 
Office Building, Room 10235, Washington, DC 20503, or email at 
[email protected] and 2. NCUA PRA Clearance Officer, 1775 
Duke Street, Alexandria, VA 22314, Suite 5067, or email at 
[email protected].

3. Executive Order 13132

    Executive Order 13132 encourages independent regulatory agencies to 
consider the impact of their actions on state and local interests. The 
NCUA, an independent regulatory agency as defined in 44 U.S.C. 3502(5), 
voluntarily complies with the executive order to adhere to fundamental 
federalism principles. The proposed rule 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. The Board 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

    The Board 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 702

    Credit unions, Reporting and record keeping requirements.

    By the National Credit Union Administration Board, on October 
19, 2017.
Gerard Poliquin,
Secretary of the Board.

    For the reasons discussed above, the National Credit Union 
Administration proposes to amend 12 CFR part 702 as follows:

PART 702--CAPITAL ADEQUACY

0
1. Revise the authority citation for part 702 to read as follows:

    Authority:  12 U.S.C. 1766(a), 1784(a), 1786(e), 1790d.

Subpart E--Capital Planning and Stress Testing

0
2. Amend Sec.  702.502 as follows:
0
a. Remove the definition of ``adverse scenario'';
0
b. Add the definition of ``capital planning cycle'';
0
c. Remove from the definition of ``covered credit union'' the words 
``capital planning and stress testing'' and add in their place the word 
``applicable'';
0
d. Remove from the definition of ``scenarios'' the words ``adverse and 
severely adverse'' and add in their place the words ``scenarios and 
stress'';
0
e. Remove the definition of ``severely adverse scenario'';
0
f. Add the definition of ``stress scenario''; and
0
g. Add the definitions of ``tier I credit union'', ``tier II credit 
union'', and ``tier III credit union''.
    The additions and revisions read as follows:


Sec.  702.502   Definitions.

* * * * *
    Capital planning cycle means a complete round of capital planning 
over a one year period. The capital planning cycle begins on June 1 of 
a calendar year and ends on May 31, the capital plan submission date, 
of the following calendar year.
* * * * *
    Stress scenario means a scenario that is more adverse than that 
associated with the baseline scenario.
* * * * *
    Tier I credit union means a covered credit union that has completed 
fewer than three capital planning cycles and has less than $20 billion 
in total assets.
    Tier II credit union means a covered credit union that has 
completed three or more capital planning cycles and has less than $20 
billion in total assets, or is otherwise designated as a tier II credit 
union by NCUA.
    Tier III credit union means a covered credit union that has $20 
billion or more in total assets, or is otherwise designated as a tier 
III credit union by NCUA.


Sec.  702.504   [Amended]

0
3. Amend Sec.  702.504 as follows:
0
a. Remove the last sentence in paragraph (a)(1);
0
b. Remove paragraph (b)(4); and
0
c. Redesignate paragraphs (b)(5) and (6) as paragraphs (b)(4) and (5), 
respectively.
0
4. Amend Sec.  702.505 as follows:
0
a. Revise paragraph (a);
0
b. In paragraph (d) introductory text, add the words ``tier III'' 
before the words ``credit union's capital plan,''; and
0
c. In paragraph (e), remove the word ``covered'' and add in its place 
the words ``tier III''.
    The revision reads as follows:


Sec.  702.505   NCUA action on capital gains.

    (a) Timing--(1) Tier I & tier II credit unions. NCUA will address 
any deficiencies in the capital plans submitted by tier I and tier II 
credit unions through the supervisory process.
    (2) Tier III credit unions. NCUA will notify tier III credit unions 
of the acceptance or rejection of their capital plans by August 31 of 
the year in which their plan is submitted.
* * * * *
0
5. Section 702.506 is revised to read as follows:


Sec.  702.506   Annual supervisory stress testing.

    (a) General requirements. Only tier II and tier III credit unions 
are required to conduct supervisory stress tests. The supervisory 
stress tests consist of a baseline scenario, and stress scenarios, 
which NCUA will provide by February 28 of each year. The tests will be 
based on the credit union's financial data as of December 31 of the 
preceding calendar year, or such other date as directed by NCUA. The 
tests will take into account all relevant exposures and activities of 
the credit union to evaluate its ability to absorb losses in specified 
scenarios over a planning horizon. The minimum stress test capital 
ratio is 5 percent.
    (b) Credit union-run supervisory stress tests--(1) General. All 
supervisory stress tests must be conducted according to NCUA's 
instructions.
    (2) Tier III Credit Unions. When conducting its stress test, a tier 
III credit union must apply the minimum stress test capital ratio to 
all time periods in the planning horizon.
    (3) NCUA tests. NCUA reserves the right to conduct the tests 
described in this section on any covered credit union at any time. 
Where both NCUA and a

[[Page 50101]]

covered credit union have conducted the tests, the results of NCUA's 
tests will determine whether the covered credit union has met the 
requirements of this subpart.
    (c) Potential impact on capital. In conducting stress tests under 
this subpart, NCUA or the credit union will estimate the following for 
each scenario during each quarter of the planning horizon:
    (1) Losses, pre-provision net revenues, loan and lease loss 
provisions, and net income; and
    (2) The potential impact on the stress test capital ratio, 
incorporating the effects of any capital action over the planning 
horizon and maintenance of an allowance for loan losses appropriate for 
credit exposures throughout the horizon. NCUA or the credit union will 
conduct the stress tests without assuming any risk mitigation actions 
on the part of the credit union, except those existing and identified 
as part of the credit union's balance sheet, or off-balance sheet 
positions, such as derivative positions, on the date of the stress 
test.
    (d) Information collection. Upon request, the credit union must 
provide NCUA with any relevant qualitative or quantitative information 
requested by NCUA pertinent to the stress tests under this subpart.
    (e) Stress test results. A credit union required to conduct stress 
tests under this section must incorporate the results of its tests in 
its capital plan.
    (f) Supervisory actions. (1) If a credit union-run stress test 
shows a tier III credit union does not have the ability to maintain a 
stress test capital ratio of 5 percent or more under expected and 
stressed conditions in each quarter of the planning horizon, the credit 
union must incorporate, into its capital plan, a stress test capital 
enhancement plan that shows how it will meet that target.
    (2) If an NCUA-run stress test shows that a tier III credit union 
does not have the ability to maintain a stress test capital ratio of 5 
percent or more under expected and stressed conditions in each quarter 
of the planning horizon, the credit union must provide NCUA, by 
November 30 of the calendar year in which NCUA conducted the tests, a 
stress test capital enhancement plan showing how it will meet that 
target.
    (3) A tier III credit union operating without an NCUA approved 
stress test capital enhancement plan required under this section may be 
subject to supervisory actions.
    (g) Consultation on proposed action. Before taking any action under 
this section against a federally insured, state-chartered credit union, 
NCUA will consult and work cooperatively with the appropriate State 
official.

[FR Doc. 2017-23212 Filed 10-27-17; 8:45 am]
 BILLING CODE 7535-01-P