Risk-Based Capital-Supplemental Rule, 38997-39004 [2018-16888]
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H. Unreviewed Safety Questions
1. The USQ process is an important tool to
evaluate whether changes affect the safety
basis. A contractor must use the USQ process
to ensure that the safety basis for a DOE
nuclear facility is not undermined by
changes in the facility, the work performed,
the associated hazards, or other factors that
support the adequacy of the safety basis.
2. The USQ process permits a contractor to
make physical and procedural changes to a
nuclear facility and to conduct tests and
experiments without prior approval,
provided these changes do not cause a USQ.
The USQ process provides a contractor with
the flexibility needed to conduct day-to-day
operations by requiring only those changes
and tests with a potential to impact the safety
basis (and therefore the safety of the nuclear
facility) be approved by DOE. This allows
DOE to focus its review on those changes
significant to safety. The USQ process helps
keep the safety basis current by ensuring
appropriate review of and response to
situations that might adversely affect the
safety basis.
3. DOE Guide 424.1–1B Chg 2,
Implementation Guide for Use in Addressing
Unreviewed Safety Question Requirements,
or successor document provides DOE’s
expectations for a USQ process. The
contractor must obtain DOE approval of its
procedure used to implement the USQ
process. The contractor is allowed to make
editorial and format changes to its USQ
procedure while maintaining DOE approval.
I. Functions and Responsibilities
1. The DOE Management Official for a DOE
nuclear facility (that is, the Assistant
Secretary, the Assistant Administrator, or the
Office Director who is primarily responsible
for the management of the facility) has
primary responsibility within DOE for
ensuring that the safety basis for the facility
is adequate and complies with the safety
basis requirements of Part 830. The DOE
Management Official is responsible for
ensuring the timely and proper (1) review of
all safety basis documents submitted to DOE
and (2) preparation of a safety evaluation
report concerning the safety basis for a
facility.
2. DOE will maintain a public list on the
internet that provides the status of the safety
basis for each Hazard Category 1, 2, or 3 DOE
nuclear facility and, to the extent practicable,
provides information on how to obtain a
copy of the safety basis and related
documents for a facility.
[FR Doc. 2018–16863 Filed 8–7–18; 8:45 am]
BILLING CODE 6450–01–P
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NATIONAL CREDIT UNION
ADMINISTRATION
12 CFR Part 702
RIN 3133–AE90
Risk-Based Capital—Supplemental
Rule
National Credit Union
Administration (NCUA).
AGENCY:
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ACTION:
Proposed rule.
The NCUA Board (Board) is
seeking comment on a proposed rule
that would amend the NCUA’s
previously revised regulations regarding
prompt corrective action (PCA). The
proposal would delay the effective date
of the NCUA’s October 29, 2015 final
rule regarding risk-based capital (2015
Final Rule) for one year, moving the
effective date from January 1, 2019 to
January 1, 2020. During the extended
delay period, the NCUA’s current PCA
requirements would remain in effect.
The proposal would also amend the
definition of a ‘‘complex’’ credit union
adopted in the 2015 Final Rule for riskbased capital purposes by increasing the
threshold level for coverage from $100
million to $500 million. These proposed
changes would provide covered credit
unions and the NCUA with additional
time to prepare for the rule’s
implementation, and would exempt an
additional 1,026 credit unions from the
rule without subjecting the National
Credit Union Share Insurance Fund
(NCUSIF) to undue risk.
DATES: Comments must be received by
September 7, 2018.
ADDRESSES: You may submit written
comments, identified by RIN 3133–
AE90, by any of the following methods
(Please send comments by one method
only):
• Federal eRulemaking Portal: https://
www.regulations.gov. Follow the
instructions for submitting comments.
• NCUA website: https://
www.ncua.gov/Legal/Regs/Pages/
PropRegs.aspx. Follow the instructions
for submitting comments.
• Email: Address to regcomments@
ncua.gov. Include ‘‘[Your name]—
Comments on Proposed Rule: RiskBased Capital—Supplemental Proposal’’
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.
You can view all public comments on
the NCUA’s website at https://
www.ncua.gov/Legal/Regs/Pages/
PropRegs.aspx as submitted, except for
those we cannot post for technical
reasons. The NCUA will not edit or
remove any identifying or contact
information from the public comments
submitted. You may inspect paper
copies of comments in the NCUA’s law
library at 1775 Duke Street, Alexandria,
Virginia 22314, by appointment
SUMMARY:
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38997
weekdays between 9 a.m. and 3 p.m. To
make an appointment, call (703) 518–
6546, or send an email to OGCMail@
ncua.gov.
FOR FURTHER INFORMATION CONTACT:
Policy and Analysis: Julie Cayse,
Director, Division of Risk Management,
Office of Examination and Insurance, at
(703) 518–6360; Kathryn Metzker, Loss/
Risk Analyst, Division of Risk
Management, Office of Examination and
Insurance, at (703) 548–2456; Julie
Decker, Loss/Risk Analyst, Division of
Risk Management, Office of
Examination and Insurance, at (703)
518–3684; Aaron Langley, Risk
Management Officer, Division of
Analytics and Surveillance, Office of
Examination and Insurance, at (703)
518–6387; Legal: John Brolin, Staff
Attorney, Office of General Counsel, at
(703) 518–6540; or by mail at National
Credit Union Administration, 1775
Duke Street, Alexandria, VA 22314.
SUPPLEMENTARY INFORMATION:
I. Introduction
The NCUA’s primary mission is to
ensure the safety and soundness of
federally insured credit unions. The
agency performs this function by
examining and supervising all federal
credit unions, participating in the
examination and supervision of
federally insured, state-chartered credit
unions in coordination with state
regulators, and insuring members’
accounts at federally insured credit
unions.1 In its role as administrator of
the NCUSIF, the NCUA insures and
regulates approximately 5,573 federally
insured credit unions, holding total
assets exceeding $1.4 trillion and
representing approximately 111 million
members.2
At its October 2015 meeting, the
Board issued the 2015 Final Rule to
amend Part 702 of the NCUA’s PCA
regulations to require that credit unions
taking certain risks hold capital
commensurate with those risks.3 The
risk-based capital provisions of the 2015
Final Rule apply only to federally
insured, natural-person credit unions
with quarter-end total assets exceeding
$100 million. The overarching intent of
the 2015 Final Rule is to reduce the
likelihood that a relatively small
number of high-risk outlier credit
unions would exhaust their capital and
cause large losses to the NCUSIF. Under
1 As of December 31, 2017, within the nine states
that allow privately insured credit unions,
approximately 116 state-chartered credit unions are
privately insured and are not subject to the NCUA’s
regulation and oversight.
2 Based on December 31, 2017 Call Report Data.
3 80 FR 66625 (Oct. 29, 2015).
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the Federal Credit Union Act (FCUA),
federally insured credit unions are
collectively responsible for replenishing
losses to the NCUSIF.4
The 2015 Final Rule restructures the
NCUA’s PCA regulations and makes
various revisions, including amending
the agency’s current risk-based net
worth requirement by replacing the risk
based net worth ratio with a new riskbased capital ratio for federally insured,
natural-person credit unions (credit
unions). The risk-based capital
requirements set forth in the 2015 Final
Rule are more consistent with the
NCUA’s risk-based capital ratio measure
for corporate credit unions and, as the
law requires, are more comparable to
the regulatory risk-based capital
measures used by the Federal Deposit
Insurance Corporation (FDIC), Board of
Governors of the Federal Reserve
System, and Office of the Comptroller of
Currency (Other Banking Agencies). The
2015 Final Rule also eliminates several
provisions in the NCUA’s current PCA
regulations, including provisions related
to the regular reserve account, riskmitigation credits, and alternative risk
weights.
The 2015 Final Rule is currently set
to become effective on January 1, 2019.
The NCUA delayed the effective date
until January 1, 2019 to provide credit
unions and the NCUA sufficient time to
make the necessary adjustments, such as
systems, processes, and procedures; to
reduce the burden on affected credit
unions.
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II. Legal Authority
In 1998, Congress enacted the Credit
Union Membership Access Act
(CUMAA).5 Section 301 of CUMAA
added section 216 to the FCUA,6 which
required the Board to adopt by
regulation a system of PCA to restore the
net worth of credit unions that become
inadequately capitalized.7 Section
4 See 12 U.S.C. 1782(c)(2)(A) (The FCUA requires
that each federally insured credit unions to pay a
federal share insurance premium equal to a
percentage of the credit union’s insured shares to
ensure that the NCUSIF has sufficient reserves to
pay potential share insurance claims by credit
union members, and to provide assistance in
connection with the liquidation or threatened
liquidation of federally insured credit unions in
troubled condition.).
5 Public Law 105–219, 112 Stat. 913 (1998).
6 12 U.S.C. 1790d.
7 The risk-based net worth requirement for credit
unions meeting the definition of ‘‘complex’’ was
first applied on the basis of data in the Call Report
reflecting activity in the first quarter of 2001. 65 FR
44950 (July 20, 2000). The NCUA’s risk-based net
worth requirement has been largely unchanged
since its implementation, with the following
limited exceptions: revisions were made to the rule
in 2003 to amend the risk-based net worth
requirement for MBLs, 68 FR 56537 (Oct. 1, 2003);
revisions were made to the rule in 2008 to
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216(b)(1)(A) requires the Board to adopt
by regulation a system of PCA for
federally insured credit unions
‘‘consistent with’’ section 216 of the
FCUA and ‘‘comparable to’’ section 38
of the Federal Deposit Insurance Act
(FDI Act).8 Section 216(b)(1)(B) requires
that the Board, in designing the PCA
system, also take into account the
‘‘cooperative character of credit unions’’
(i.e., credit unions are not-for-profit
cooperatives that do not issue capital
stock, must rely on retained earnings to
build net worth, and have boards of
directors that consist primarily of
volunteers).9 The Board initially
implemented the required system of
PCA in 2000,10 primarily in Part 702 of
the NCUA’s Regulations, and most
recently made substantial updates to the
regulation in October 2015.11
The purpose of section 216 of the
FCUA is to ‘‘resolve the problems of
[federally] insured credit unions at the
least possible long-term loss to the
[NCUSIF].’’ 12 To carry out that purpose,
Congress set forth a basic structure for
PCA in section 216 that consists of three
principal components: (1) A framework
combining mandatory actions
prescribed by statute with discretionary
actions developed by the NCUA; (2) an
alternative system of PCA to be
developed by the NCUA for credit
unions defined as ‘‘new;’’ and (3) a riskbased net worth requirement to apply to
credit unions the NCUA defines as
‘‘complex.’’
Among other things, section 216(c) of
the FCUA requires the NCUA to use a
credit union’s net worth ratio to
determine its classification among five
‘‘net worth categories’’ set forth in the
FCUA.13 Section 216(o) generally
defines a credit union’s ‘‘net worth’’ as
its retained earnings balance,14 and a
credit union’s ‘‘net worth ratio,’’ as the
ratio of its net worth to its total assets.15
As a credit union’s net worth ratio
declines, so does its classification
incorporate a change in the statutory definition of
‘‘net worth,’’ 73 FR 72688 (Dec. 1, 2008); revisions
were made to the rule in 2011 to expand the
definition of ‘‘low-risk assets’’ to include debt
instruments on which the payment of principal and
interest is unconditionally guaranteed by NCUA, 76
FR 16234 (Mar. 23, 2011); and revisions were made
in 2013 to exclude credit unions with total assets
of $50 million or less from the definition of
‘‘complex’’ credit union, 78 FR 4033 (Jan. 18, 2013).
8 12 U.S.C. 1790d(b)(1)(A); see also 12 U.S.C.
1831o (Section 38 of the FDI Act setting forth the
PCA requirements for banks).
9 12 U.S.C. 1790d(b)(1)(B).
10 12 CFR part 702; see also 65 FR 8584 (Feb. 18,
2000) and 65 FR 44950 (July 20, 2000).
11 80 FR 66625 (Oct. 29, 2015).
12 12 U.S.C. 1790d(a)(1).
13 12 U.S.C. 1790d(c).
14 12 U.S.C. 1790d(o)(2).
15 12 U.S.C. 1790d(o)(3).
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among the five net worth categories,
thus subjecting it to an expanding range
of mandatory and discretionary
supervisory actions.16
Section 216(d)(1) of the FCUA
requires that the NCUA’s system of PCA
include, in addition to the statutorily
defined net worth ratio requirement
applicable to federally insured naturalperson credit unions, ‘‘a risk-based net
worth 17 requirement for insured credit
unions that are complex, as defined by
the Board. . . .’’ 18 The FCUA directs
the NCUA to base its definition of
‘‘complex’’ credit unions ‘‘on the
portfolios of assets and liabilities of
credit unions.’’ 19 It also requires the
NCUA to design a risk-based net worth
requirement to apply to such ‘‘complex’’
credit unions.20
III. Proposed Rule
Under § 702.103 of the NCUA’s 2015
Final Rule, a credit union is defined as
‘‘complex’’ and the NCUA’s risk-based
capital ratio measure is applicable only
if the credit union’s quarter-end total
assets exceed $100 million, as reflected
in its most recent Call Report.
Consistent with the spirit and intent of
Executive Order 13777, the NCUA
further analyzed the impact of the
NCUA’s risk-based capital requirements
and the portfolios of assets and
liabilities of credit unions to identify
potential ways to reduce regulatory
burden on credit unions.21
Based on the NCUA’s analysis, which
is discussed in more detail below, the
Board believes that $500 million in total
assets would be a more appropriate
threshold level for defining a complex
credit union, and therefore subjecting it
to the risk-based capital requirement.
Increasing the threshold level to $500
million in assets would reduce
16 12
U.S.C. 1790d(c)–(g); 12 CFR 702.204(a)–(b).
purposes of this rulemaking, the term ‘‘riskbased net worth requirement’’ is used in reference
to the statutory requirement for the Board to design
a capital standard that accounts for variations in the
risk profile of complex credit unions. The term
‘‘risk-based capital ratio’’ is used to refer to the
specific standards established in the 2015 Final
Rule to function as criteria for the statutory riskbased net worth requirement. The term ‘‘risk-based
capital ratio’’ is also used by the Other Banking
Agencies and the international banking community
when referring to the types of risk-based
requirements that are addressed in the 2015 Final
Rule. This change in terminology throughout the
proposal would have no substantive effect on the
requirements of the FCUA, and is intended only to
reduce confusion for the reader.
18 12 U.S.C. 1790d(d)(1).
19 12 U.S.C. 1790d(d).
20 Id.
21 The Board has always intended to periodically
review the threshold of a complex credit union, as
noted in the preamble to the 2015 proposed Risk
Based Capital Rule. 80 FR 4339, 4378 (January 27,
2015).
17 For
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regulatory burden on credit unions by
more closely tailoring the applicability
of the NCUA’s risk-based capital
requirement to cover only those credit
unions that, if they failed, individually
could present an undue risk of loss to
the NCUSIF. This amendment would
exempt an additional 1,026 credit
unions—a total of 90 percent 22 of all
credit unions—from the 2015 Final
Rule’s risk-based capital requirements.
However, approximately 85 percent of
the complex assets and liabilities and 76
percent of the total assets in the credit
union system would still be subject to
the risk-based capital requirement.23
Accordingly, consistent with
requirements of section 216(d)(1) of the
FCUA, proposed § 702.103 would
provide that, for purposes of § 702.102,
a credit union is defined as ‘‘complex,’’
and a risk-based capital ratio
requirement is applicable, only if the
credit union’s quarter-end total assets
exceed $500 million, as reflected in its
most recent Call Report.
Under the 2015 Final Rule, the NCUA
determined that credit unions exceeding
the $100 million asset-size threshold
had portfolios of assets and liabilities
that were complex based on the
products and services in which such
credit unions engaged. As explained
further below, the $100 million assetsize threshold was developed as a proxy
measure based on a detailed analysis
performed by the NCUA. The threshold
set forth a clear demarcation line, above
which the NCUA determined all credit
unions engaged in complex activities,
and where almost all such credit unions
(99 percent) were involved in multiple
complex activities.24 The NCUA
continues to believe that using a single
asset-size threshold is appropriate, as it
is clear, logical, and easy to administer.
Moreover, using a single asset-size
threshold provides regulatory relief for
smaller institutions, and eliminates the
potential unintended consequences of
having a checklist of activities that
would determine complexity on an
institution-by-institution basis.
The $100 million asset threshold
adopted in the 2015 Final Rule for
determining whether a credit union is
complex was based on a complexity
index (original complexity index or
OCI). The OCI counted the number of
22 Based on December 31, 2017 Call Report data.
For comparison, if the threshold were to remain at
$100 million about 72 percent of all credit unions
would be exempt.
23 For comparison, if the threshold were to remain
at $100 million about 98 percent of the complex
assets and liabilities and 93 percent of the total
assets in the credit union system would be subject
to the risk based capital requirement.
24 80 FR 66625, 66663 (Oct. 29, 2015).
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complex products and services provided
by credit unions based on the following
indicators:
• Member Business Loans
• Participation Loans
• Interest-Only Loans
• Indirect Loans
• Real Estate Loans
• Non-Federally Guaranteed Student
Loans
• Investments with Maturities of
Greater than Five Years (where the
investments are greater than one
percent of total assets)
• Non-Agency Mortgage-Backed
Securities
• Non-Mortgage Related Securities With
Embedded Options
• Collateralized Mortgage Obligations/
Real Estate Mortgage Investment
Conduits
• Commercial Mortgage-Related
Securities
• Borrowings (Draws Against Lines of
Credit, Borrowing Repurchase
Transactions, Other Notes, Promissory
Notes, and Interest Payable)
• Repurchase Transactions
• Derivatives
• Internet Banking
As discussed in more detail in the
2015 Final Rule, these products and
services were determined by the NCUA
to be good indicators of complexity.25
To define ‘‘complex’’ credit unions for
the 2015 Final Rule, the NCUA used the
original complexity index to analyze
June 30, 2014 and March 31, 2015 Call
Report data. Based on the OCI, for credit
unions with more than $100 million in
assets, 100 percent engaged in offering
at least one complex activity; 99 percent
engaged in two or more complex
activities; and 87 percent engaged in
four or more complex activities.
Accordingly, the Board determined it
was appropriate to set the asset size
threshold for ‘‘complex’’ credit unions
at $100 million in total assets,
subjecting credit unions with more than
$100 million in assets to the NCUA’s
risk-based capital requirements.
As discussed in more detail below,
the OCI did not take into account the
25 80 FR 66625, 66663 (Oct. 29, 2015). The 2015
Final Rule states ‘‘For the purpose of defining a
complex credit union, assets include tangible and
intangible items that are economic resources
(products and services) that are expected to produce
economic benefit (income), and liabilities are
obligations (expenses) the credit union has to
outside parties. The Board recognizes there are
products and services—which under GAAP are
reflected as the credit unions’ portfolio of assets and
liabilities—in which credit unions are engaged that
are inherently complex based on the nature of their
risk and the expertise and operational demands
necessary to manage and administer such activities
effectively. Thus, credit unions offering such
products and services have complex portfolios of
assets and liabilities for purposes of NCUA’s riskbased net worth requirement.’’
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volume of the complex activity engaged
in by such credit unions.
Following a careful review of the 2015
Final Rule by the NCUA’s regulatory
reform task force,26 the Board is now
proposing to revise the original
complexity index (revised complexity
index or RCI), and to apply a new
complexity ratio (complexity ratio or
CR) for analyzing the portfolios of assets
and liabilities of credit unions to
determine which are ‘‘complex.’’ The
RCI would amend 6 of the indicators in
the original complexity index so the
index will more accurately reflect
‘‘complexity’’ in credit unions and take
into account certain regulatory changes
that were made after the 2015 Final Rule
was approved. The revised complexity
index would be the same as the original
complexity index, with the following
six changes:
• Replace the indicator for ‘‘member
business loans’’ with an indicator for
‘‘commercial loans’’ to reflect changes to
the NCUA’s member business lending
rule,27 and current Call Report data
collection requirements.
• Replace the indicator for
‘‘participation loans’’ (which included
participation loans sold and
participation loans held) with an
indicator for ‘‘participation loans sold’’
to restrict the indicator to the most
complex component of participation
loans.
• Replace the indicator for ‘‘interestonly loans’’ to exclude first-lien
mortgages. The remaining interest only
loans include complex payment
options. For example, only requiring
monthly payments of interest during
draw periods.
• Remove the indicator for ‘‘internet
banking’’ because it has become a
typical mechanism for members to
transact business with most credit
unions, with 78 percent of credit unions
engaging in some type of internet
banking. Also, it is not an asset or
liability—therefore there is no suitable
way to translate the volume into a
financial measure for purposes of
defining complex.
• Remove the indicator for
‘‘investments with maturities greater
than five years (where the investments
are greater than one percent of total
assets)’’ because the indicator is
adequately captured in the other index
components.
• Replace the indicator for ‘‘real
estate loans (where the loans are greater
than five percent of assets and/or sold
mortgages)’’ with an indicator for ‘‘sold
26 See
82 FR 39702, 39706 (Aug. 22, 2017).
12 CFR 723.2; and 81 FR 13529, 13538
(March 14, 2016).
27 See
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mortgages’’ to account for the most
complex component of real estate loans.
The NCUA believes the revised
complexity index would provide a more
accurate methodology, based on the
assets and liabilities of credit unions, for
identifying when credit unions engage
in complex activities and defining credit
unions as ‘‘complex.’’ Table 1 shows
that, among credit unions with $500
million or more in total assets, 100
percent engage in at least one complex
activity, and 96 percent engage in three
or more complex activities.
TABLE 1—REVISED COMPLEXITY INDEX BY ASSET CATEGORY, 2017Q4 CALL REPORT DATA
Number of
credit
unions
Asset category
<$100M ............................
$100M–$250M .................
$250M–$500M .................
$500M–$750M .................
$750M–$1B ......................
$1B+ .................................
Average
index
value
4,016
692
334
149
95
287
Median
index
value
0.8
3.7
4.9
5.7
6.1
7.0
In addition to the revised complexity
index, the NCUA is also proposing to
use a ratio of complex assets and
liabilities to total assets (complexity
ratio or CR) to evaluate the extent to
which credit unions are involved in
complex activities. The CR, when used
in conjunction with the revised
complexity index, takes into account the
volume of the complex activity engaged
in by complex credit unions and
provides a more accurate measure of
credit union complexity.28 The
Index >=1
(%)
0.0
4.0
5.0
6.0
7.0
7.0
Index >=2
(%)
41
98
99
100
100
100
numerator of the CR would be the dollar
value sum of the complex assets and the
liabilities held by a credit union, where
complex assets and liabilities are
determined using the same complexity
indicators as used in the RCI. The
denominator of the CR would be the
total assets of the credit union.
As shown in Table 2 below, credit
unions with greater than $500 million in
total assets hold complex assets and
liabilities as a larger share of their total
assets than smaller credit unions. The
Index >=3
(%)
21
89
96
98
100
98
Index >=5
(%)
10
73
88
96
97
96
Index >=6
(%)
2
32
57
73
79
88
1
16
40
53
64
77
complexity ratio increases from 23
percent among credit unions with less
than $500 million in assets to 40 percent
among credit unions with more than
$500 million in assets. Of the $497
billion in complex assets and liabilities
in the credit union system, $423 billion
(85 percent)—the majority of complex
assets and liabilities in the credit union
system—are held among credit unions
with more than $500 million in assets.29
TABLE 2—COMPLEXITY RATIO BY ASSET CATEGORIES, 2017Q4 CALL REPORT DATA
Number of
credit unions
Asset category
<$500M ....................................................
>$500M ....................................................
5,042
531
Table 3 below shows the share of
credit unions in each asset category
above various complex ratio thresholds.
Larger credit unions are much more
likely to have a significant share of their
Complex
assets and
liabilities
Total assests
74,600
422,553
Complex ratio
(%)
Share of
complex A & L
in the credit
union system
(%)
Cumulative
share of
complex A & L
in the credit
union system
(%)
23
40
15
85
15
100
330,545
1,048,289
balance sheet in complex assets and
liabilities. Nearly all credit unions (95
percent) with more than $500 million in
assets have complex assets and
liabilities greater than 10 percent of
their total assets, and 66 percent have
complex assets and liabilities greater
than 30 percent of their total assets.
TABLE 3—COMPLEXITY RATIO ABOVE VARIOUS THRESHOLDS BY ASSET CATEGORIES, 2017Q4
Complex ratio
>10%
Asset category
Complex ratio
>20%
Complex ratio
>30%
29
95
18
84
11
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<$500M ........................................................................................................................................
>$500M ........................................................................................................................................
28 See 80 FR 66625, 66661 (Oct. 29, 2015) (As
pointed out by at least one commenter, credit
unions should not be considered complex unless
complex activities are undertaken in significant
volumes. The commenter provided the following
example: A credit union that lends a member
$60,000 to purchase new equipment for his bakery
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is engaged in member business lending, but that
credit union should not be designated as complex
by virtue of that single loan—assuming it is not a
significant share of the credit union’s assets.).
29 Credit unions with assets between $250 million
and $500 million hold a higher share of their
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portfolio in complex assets (32 percent) than the
entire group of credit unions below $500 million in
assets (23 percent), but it remains below the share
of complex assets in credit unions above $500
million in assets (40 percent).
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In general, two-thirds of credit unions
with more than $500 million in total
assets have complex assets and
liabilities ratios above 30 percent. Only
11 percent of credit unions with less
than $500 million have complexity
ratios above 30 percent.30
Using both the revised complexity
index and the complexity ratio to
determine the appropriate threshold for
defining complex credit unions would
exclude approximately 90 percent of
credit unions from the risk-based capital
requirement, while still covering
approximately 76 percent of the assets
held by federally insured credit
unions.31 Moreover, the revised
definition of a complex credit union
would not represent undue risk to the
NCUSIF, nor significantly decrease the
level of complex assets and liabilities
covered by the risk-based capital
requirement. Even though the percent of
total assets covered by the rule would
fall from 93 percent 32 to 76 percent
when compared to the $100 million
threshold adopted in the 2015 Final
Rule,33 85 percent of complex assets and
liabilities would still be covered.
In addition, if the historical trends in
changes to the composition of the credit
union community continue, the share of
total assets covered by the rule will rise
in the future, potentially reaching 90
percent of total assets within the next 10
years. Also, the higher asset threshold
39001
still captures those credit unions that, if
they failed, individually could present
an undue risk of loss to the NCUSIF. In
addition, if the historical trends in
changes to the composition of the credit
union community continue and
historical probability of failure and loss
given failure rates (excluding fraud
related failures) for credit unions with
total assets between $100 and $500
million and those with total assets over
$500 million remain the same, total
losses to the NCUSIF over the next 10
years would likely be significantly
larger for credit unions with more than
$500 million in assets than for those
with assets between $100 million and
$500 million.
TABLE 4—CREDIT UNIONS BOUND BY RISK-BASED CAPITAL, 2017Q4 CALL REPORT DATA
Number of
complex credit
unions bound by
risk-based capital
Asset category
Capital required
over the net
worth ratio
(million)
Total assets
(billion)
Assets $100M–$500M ...............................................................................................
Assets >$500M ..........................................................................................................
284
221
$165
635
$69
370
Total ....................................................................................................................
505
800
439
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Under the 2015 Final Rule, an
estimated 505 credit unions would face
higher required capital levels as a result
of risk-based capital requirements.
These 505 credit unions have total
assets of $439 billion and the 2015 Final
Rule would raise their required capital
levels by approximately $800 million
above what is required by the net worth
ratio.34 Under this proposal, the 284
credit unions with assets between $100
and $500 million would no longer have
higher required capital levels as a result
of risk-based capital requirements.
However, as reflected in Table 4, this
proposal would maintain most of the
credit union assets subject to higher
capital requirements, and incremental
capital required by risk-based capital,
under the 2015 Final Rule.
Exempting credit unions with assets
between $100 million and $500 million
represents approximately 16 percent of
the total assets of credit unions with
required capital levels above what is
required by the net worth ratio, and
about 21 percent of the incremental
capital the system is required to hold
under the 2015 Final Rule. However,
this proposal still encompasses
approximately 84 percent of the total
assets of credit unions with required
capital levels above what is required by
the net worth ratio, and almost 80
percent of the incremental capital the
system is required to hold under the
2015 Final Rule.
Under the 2015 Final Rule, a net of 20
credit unions with total assets of $11.5
billion would have a lower PCA
classification with a capital shortfall of
$84 million.35 Under this proposal, 6
credit unions (net) with total assets of
$8.8 billion would have a lower PCA
classification and a capital deficiency of
$71 million. Therefore, this proposal
encompasses approximately 80 percent
of the downgraded credit union assets
and approximately 85 percent of the
capital shortfall for these institutions.
The Board also notes the NCUSIF is
much stronger today than it was in 2015
when the agency passed the 2015 Final
Rule. The equity ratio of the NCUSIF
was 1.29 percent in 2015. In 2018, the
NCUSIF equity ratio will be 1.39
percent even after an equity distribution
of $736 million is paid to credit unions.
The total funds held in the NCUSIF will
be approximately $16 billion after the
equity distribution this year, about $3.5
billion more than the $12.4 billion held
in the fund in 2015.
The NCUA will continue to address
any deficiencies in the capital levels of
credit unions with $500 million or less
in assets through the examination
process.36 Sound capital levels are vital
to the long-term health of all credit
unions. Credit unions need to hold
capital commensurate with their risk.
Balancing proper capital accumulation
with product offering and pricing
strategies helps ensure credit unions are
able to provide affordable member
services over time. Credit unions are
already expected to incorporate into
their business models and strategic
plans provisions for maintaining
prudent levels of capital.
30 Credit unions with assets between $250 million
and $500 million are more likely to have a CR
greater than 10 percent (88 percent) than the entire
group of credit unions below $500 million in assets
(29 percent), but it remains below the share of
complex assets in credit unions above $500 million
in assets (95 percent). Further, the difference
widens significantly for CRs above 10 percent. Less
than half (47 percent) of credit unions with assets
between $250 million and $500 million have a CR
greater than 30 percent, whereas over two-thirds of
credit unions with more than $500 million in assets
have a CR greater than 30 percent.
31 Based on December 31, 2017 Call Report data.
32 Based on December 31, 2017 Call Report data,
93 percent of credit union assets would be covered
based on the $100 million threshold established by
the 2015 Final Rule.
33 Based on December 31, 2017 Call Report data.
34 Based on December 31, 2017 Call Report data.
It is important to note that almost all of these credit
unions already hold enough capital to meet either
the risk-based capital requirements or the networth-based capital requirements.
35 Based on December 31, 2017 Call Report Data.
36 See, e.g., § 702.102(b) (Authorizes the NCUA
Board to reclassify a well-capitalized credit union
as adequately capitalized and may require an
adequately capitalized or undercapitalized credit
union to comply with certain mandatory or
discretionary supervisory actions as if it were
classified in the next lower capital category.).
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Also, the Board wants to clarify for
commenters that the standard under the
Regulatory Flexibility Act for how the
NCUA defines a ‘‘small credit union’’ 37
is different from the standard under the
FCUA for how the agency defines
‘‘complex credit union’’ for purposes of
the risk-based net worth requirement.38
While both definitions currently use an
asset threshold of greater than $100
million in total assets, the thresholds
were arrived at using different
methodologies. The methodologies
necessarily vary to address the different
applicable statutory provisions.39 This
proposal addresses and amends only the
NCUA’s definition of ‘‘complex’’ credit
unions as that term is defined under the
2015 Final Rule. It does not address or
propose to amend the NCUA’s current
definition of ‘‘small credit unions’’ for
purposes of the Regulatory Flexibility
Act.40
V. Effective Date of the 2015 Final Rule
The Board initially established the
effective date of the 2015 Final Rule as
January 1, 2019 to provide credit unions
and the NCUA with an extended period
to make necessary adjustments to
systems, processes, and procedures, and
to reduce the burden on affected credit
unions in meeting the new
requirements. Based on feedback from
the credit union community and agency
staff, and that the agency is proposing
to change the definition of complex
credit union, the Board believes it is
necessary and beneficial to delay the
effective date of the 2015 Final Rule as
amended by this proposal by one year.
Extending the effective date would
provide covered credit unions
additional time to adjust systems,
processes, and procedures; and would
help smooth the transition for complex
credit unions affected by the
requirements of the 2015 Final Rule.
Until the 2015 Final Rule’s effective
date, the NCUA’s current PCA
regulation will remain in effect. The
NCUA will continue to enforce the
capital standards currently in place and
address any supervisory concerns
through existing regulatory and
supervisory mechanisms. The Board
believes that, given the facts above,
extending the implementation period of
the 2015 Final Rule for an additional
year would be reasonable and would not
pose undue risk to the NCUSIF.
Accordingly, the Board proposes to
change the effective date for the 2015
Final Rule, and any changes to that rule
finalized as part of this rulemaking,
from January 1, 2019 to January 1, 2020.
VI. Impact of the Proposed Regulation
The proposed rule will lower the
overall impact of the 2015 Final Rule by
reducing the number of credit unions
subject to the risk-based capital
requirements of the rule. By increasing
the threshold for defining a complex
credit union from more than $100
million to more than $500 million in
assets, an additional 1,026 credit unions
would be exempt from the 2015 Final
Rule’s risk-based capital requirements.
This represents significant burden relief
for these relatively small credit unions,
as half of them have assets of $190
million or less. The proposed new
definition of complex credit union
would exempt a total of 90 percent
(5,042) of all credit unions as of
December 31, 2017.41 For comparison, if
the threshold were to remain at $100
million only about 72 percent of all
credit unions would be exempt.
While under this proposal 9 out of 10
credit unions would be exempt, these
institutions only hold 24 percent of total
assets in the credit union system and 15
percent of complex assets and
liabilities.42 Thus, approximately 85
percent of the complex assets and
liabilities and 76 percent of the total
assets in the credit union system would
still be subject to the risk based capital
requirement.43
The credit unions that would be
defined as complex under this proposal
have estimated aggregate and average
risk-based capital ratios of 16.8 and 17.2
percent, respectively. The aggregate
risk-weighted assets to total assets ratio
is 63 percent for complex credit unions
under this proposal.44 Table 5 shows the
distribution of estimated risk-based
capital ratios for all complex credit
unions based on this proposed rule.
TABLE 5—DISTRIBUTION OF ESTIMATED RISK BASED CAPITAL RATIOS FOR COMPLEX CREDIT UNIONS
RBC Ratio
<10%
10–13%
13–16%
16–20%
20–30%
30–50%
>50%
Number of CUs ............
7
110
153
144
101
14
2
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As shown in Table 5 above, most
complex credit unions will have a riskbased capital ratio well in excess of the
10 percent level required to be well
capitalized. Under this proposal, six
complex credit unions with total assets
of $8.8 billion would have a lower
capital classification, with a capital
shortfall of approximately $71
million.45 Overall, 98.7 percent of all
complex credit unions are well
capitalized under this proposed rule.
37 NCUA Interpretative Ruling and Policy
Statement 15–1, available at https://www.ncua.gov/
regulation-supervision/Pages/rules/interpretiverulings-policy-statements.aspx.
38 80 FR 66625, 66663–66664 (October 29, 2015).
39 Compare 80 FR 66663–66664, with 80 FR
57512, 57514-57516 (Sept. 24, 2015).
40 5 U.S.C. 601 et seq.
41 This proposal would limit risk-based capital
requirements to only credit unions with assets of
more than $500 million compared to the Other
Banking Agencies’ risk-based capital standards that
apply to banks of all sizes. As of December 31,
2017, there were 1,450 and 4,294 FDIC-insured
banks with assets of $100 million and $500 million
or less, respectively.
42 Credit unions with assets between $100 million
and $500 million make up 17 percent of assets in
the credit union system, and only hold 13 percent
of complex assets and liabilities.
43 For comparison, if the threshold were to remain
at $100 million about 98 percent of the complex
assets and liabilities and 93 percent of the total
assets in the credit union system would still be
subject to the risk-based capital requirement.
44 By way of comparison, the bank aggregate total
risk-weighted assets to total assets ratio is 72.4
percent as of December 31, 2017. Further, complex
credit unions maintain a median risk-based capital
ratio of 15.8 percent compared to a bank median
risk-based capital ratio of 15.9 percent. Bank
comparisons exclude banks with less than $50
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Table 6 below provides a comparison of
the margins complex credit unions
currently hold in excess of both the net
worth ratio requirement and the riskbased capital requirement.
Credit unions often hold some margin
above regulatory capital requirements.
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million in total assets and more than $60 billion in
total assets to arrive at a more comparable asset
profile to credit unions.
45 Of the 531 impacted credit unions, only 7, or
1.3 percent, would have less than the 10 percent
risk-based capital requirement to be well
capitalized. Of these, one has a net worth ratio less
than 7 percent and is therefore not a new
downgrade in capital classification, but already
categorized as less than well capitalized. If the asset
threshold for the definition of complex credit union
remained at $100 million, a net of 20 credit unions
with total assets of $11.5 billion would have a lower
capital classification, with a capital shortfall of
approximately $84 million.
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TABLE 6—DISTRIBUTION OF NET WORTH RATIO AND RISK-BASED CAPITAL RATIO FOR COMPLEX CREDIT UNIONS UNDER
THIS PROPOSAL
Less than
well
capitalized
Number of CUs
Net Worth Ratio ...............................................
RBC Ratio ........................................................
Net Worth Ratio ...............................................
RBC Ratio ........................................................
Both measures indicate the large
majority of complex credit unions hold
margins well above the levels required
to be well-capitalized.
Well
capitalized to
well + 2%
<7%
<10%
2
7
Well
capitalized
+2% to + 3.5%
7%–9%
10%–12%
90
54
Well
capitalized
+3.5% to + 5%
9%–10.5%
12%–13.5%
166
82
The NCUA also analyzed complex
credit unions to determine whether the
net worth or risk-based capital
requirement would require a credit
union to hold more dollars of capital.
Greater than
well capitalized
+ 5%
10.5%–12%
13.5%–15%
141
88
>12%
>15%
132
300
Table 7 below summarizes the
distribution of credit unions by the ratio
of risk-weighted assets to total assets for
credit unions bound by each capital
requirement.
TABLE 7—DISTRIBUTION OF RISK-WEIGHTED ASSETS TO TOTAL ASSETS RATIOS FOR COMPLEX CREDIT UNIONS BY
GOVERNING CAPITAL REQUIREMENT
Total
number
Number Bound by Net Worth Ratio ..................
Number Bound by Risk Based Capital .............
310
221
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Forty-two percent of complex credit
unions (221 complex credit unions with
$370.3 billion in total assets) are
estimated to have a higher minimum
capital requirement in terms of dollars
under the risk-based capital ratio than
the net worth ratio.46 These 221
complex credit unions have a notably
higher risk profile than the other 310
complex credit unions. The ratio of
average risk weighted assets to total
assets for the 221 complex credit unions
is 72 percent, compared with 59 percent
for the remaining 310 complex credit
unions. Therefore, relative to what
qualifies as capital for risk-based capital
purposes, these institutions must hold
more net worth in dollars to achieve a
well-capitalized designation over what
the net worth ratio requires.
In addition, despite holding a greater
share of risk-weighted assets, the riskbased capital-bound group of 221
complex credit unions also has, on
average, a net worth ratio that is 100
basis point below the net worth ratio of
the other 310 complex credit unions.47
Table 7 highlights the distribution of
46 The required dollar amount for risk based
capital is calculated as [(risk-weighted assets times
10 percent) ¥ allowance for loan losses ¥ equity
acquired in merger + total adjusted retained
earnings acquired through business combinations +
NCUA share insurance capitalization deposit +
goodwill + identifiable intangible assets] ¥ (total
assets × 7 percent). Complex credit unions in Table
7 are categorized by whichever calculation results
in a higher dollar volume.
47 The average net worth ratio is 10.3 percent for
the 212 complex credit unions bound by risk-based
capital while the average net worth ratio for the 310
complex credit unions bound by the net worth ratio
is 11.4 percent.
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Average
(%)
Risk weighted assets/total assets
<50%
58.9
71.9
50–60%
49
0
101
3
credit unions by risk weighted assets to
total assets depending on whether the
risk-based capital requirement
necessitates more capital than the net
worth ratio. The risk-based capitalbound group of 221 complex credit
unions would have to retain more net
worth in dollars than what is currently
required due to the net worth ratio to
satisfy the well-capitalized threshold.
However, over 97 percent (215) of these
institutions already hold more than
enough capital to meet the risk-based
capital requirement.
VI. Request for Comment
The Board is requesting comment on
all aspects of the changes proposed in
this proposed rule. In particular, the
agency requests comments on:
1. Whether the definition of a
complex credit union, as defined under
§ 701.103 of the 2015 Final Rule, should
be amended to increase the threshold
level for coverage from more than $100
million in total assets to more than $500
million in total assets?
2. Whether the implementation date
for the 2015 Final Rule should be
amended to extend the effective date of
the rule until January 1, 2020?
VII. Regulatory Procedures
Regulatory Flexibility Act
The Regulatory Flexibility Act (RFA)
generally requires that, in connection
with a notice of proposed rulemaking,
an agency prepare and make available
for public comment an initial regulatory
flexibility analysis that describes the
impact of a proposed rule on small
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60–70%
70–80%
147
81
80–90%
10
128
>90%
2
6
1
3
entities. A regulatory flexibility analysis
is not required, however, if the agency
certifies that the rule will not have a
significant economic impact on a
substantial number of small entities
(defined for purposes of the RFA to
include credit unions with assets less
than $100 million) 48 and publishes its
certification and a short, explanatory
statement in the Federal Register
together with the rule.
The proposed amendments to the
2015 Final Rule and part 702 would
only affect complex credit unions,
which are those with greater than $100
million in assets under the 2015 Final
Rule and would be amended to cover
only those with greater than $500
million in assets under this proposal. As
a result, credit unions with $100 million
or less in total assets would not be
affected by this proposal. Accordingly,
the NCUA certifies that this proposal
will not have a significant economic
impact on a substantial number of small
credit unions.
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.49 For
purposes of the PRA, a paperwork
burden may take the form of a reporting,
disclosure, or recordkeeping
requirement, each referred to as an
48 See
49 44
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80 FR 57512 (Sept. 24, 2015).
U.S.C. 3507(d).
08AUP1
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Federal Register / Vol. 83, No. 153 / Wednesday, August 8, 2018 / Proposed Rules
information collection. The NCUA may
not conduct or sponsor, and the
respondent is not required to respond
to, an information collection unless it
displays a currently valid Office of
Management and Budget (OMB) control
number.
The proposed changes to part 702
would increase the asset size of credit
unions identified as complex from
greater than $100 million to greater than
$500 million. This change would reduce
the number of credit unions who must
comply with recordkeeping
requirements prescribed by § 702.101(b).
Therefore, the burden cleared under
OMB number 3133–0191 will be revised
to reflect the reduction in the number of
respondents.50
Title of Information Collection:
Prompt Corrective Action—Risk-Based
Capital.
OMB Control Number: 3133–0191.
Affected Public: Private Sector: Notfor-profit institutions—Complex Credit
Unions.
Estimated Number of Respondents:
531.
Estimated Number of Responses per
Respondent: 1.
Estimated Hours per Response: 40.
Estimated Total Annual Burden
Hours: 21,240.
By exempting credit unions with
assets between $100 million and $500
million, the NCUA estimates that the
burden under this proposed rule would
be 41,040 fewer hours.
The Board invites comment on (a)
whether the collections of information
are necessary for the proper
performance of the agency’s function,
including practical utility; (b) the
accuracy of estimates of the burden of
the information collections, including
the validity of the methodology and
assumptions used; (c) ways to enhance
the quality, utility, and clarity of the
information being collected, and (d)
ways to minimize the burden of the
information collection on respondents,
including through the use of automated
collection techniques or other forms of
information technology.
All comments are a matter of public
record. Comments regarding the
information collection requirements of
this rule should be sent to (1) Dawn
Wolfgang, NCUA PRA Clearance
Officer, National Credit Union
Administration, 1775 Duke Street, Suite
5080, Alexandria, Virginia 22314, or Fax
No. 703–519–8572, or Email at
PRAcomments@ncua.gov and the (2)
Office of Information and Regulatory
50 Proposed revisions to OMB control number
3133–0191 have been submitted to OMB for
approval in accordance with 5 CFR 1320.11.
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Affairs, Office of Management and
Budget, Attention: Desk Officer for
NCUA, New Executive Office Building,
Room 10235, Washington, DC 20503, or
email at
OIRA_Submission,@OMB.EOP.gov.
Submission of comments. The NCUA
considers comments by the public on
this proposed collection of information
in:
• Evaluating whether the proposed
collection of information is necessary
for the proper performance of the
functions of the NCUA, including
whether the information will have a
practical use;
• Evaluating the accuracy of the
NCUA’s estimate of the burden of the
proposed collection of information,
including the validity of the
methodology and assumptions used;
• Enhancing the quality, usefulness,
and clarity of the information to be
collected; and
• Minimizing the burden of collection
of information on those who are to
respond, including through the use of
appropriate automated, electronic,
mechanical, or other technological
collection techniques or other forms of
information technology; e.g., permitting
electronic submission of responses.
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 principles of the
executive order to adhere to
fundamental federalism principles. This
proposed rule reduces the number of
federally insured natural-person credit
unions, including federally insured,
state-chartered natural-person credit
unions that would be subject to the 2015
Final Rule. It may have, to some degree,
a direct effect on the states, on the
relationship between the national
government and the states, or on the
distribution of power and
responsibilities among the various
levels of government. It does not,
however, rise to the level of material
impact for purposed of Executive Order
13132.
Assessment of Federal Regulations and
Policies on Families
The NCUA has determined that this
proposed rule will not affect family
well-being within the meaning of
section 654 of the Treasury and General
Government Appropriations Act, 1999,
Public Law 105–277, 112 Stat. 2681
(1998).
Frm 00023
Fmt 4702
Sfmt 4702
Credit unions, Reporting and
recordkeeping requirements.
By the National Credit Union
Administration Board on August 2, 2018.
Gerard Poliquin,
Secretary of the Board.
For the reasons discussed above, the
Board proposes to further amend 12
CFR part 702, as amended in a final rule
at 80 FR 66625 (Oct. 29, 2015), effective
January 1, 2019, as follows:
PART 702—CAPITAL ADEQUACY
1. The authority citation for part 702
continues to read as follows:
■
Authority: 12 U.S.C. 1766(a), 1790d.
§ 702.103
[Amended]
2. Amend § 702.103 by removing the
words ‘‘one hundred million dollars
($100,000,000)’’ and add in their place
‘‘five hundred million dollars
($500,000,000).’’
■
[FR Doc. 2018–16888 Filed 8–7–18; 8:45 am]
BILLING CODE 7535–01–P
DEPARTMENT OF TRANSPORTATION
Federal Aviation Administration
Executive Order 13132
PO 00000
List of Subjects in 12 CFR Part 702
14 CFR Part 39
[Docket No. FAA–2018–0722; Product
Identifier 2017–SW–104–AD
RIN 2120–AA64
Airworthiness Directives; Bell
Helicopter Textron Canada Limited
Helicopters
Federal Aviation
Administration (FAA), Department of
Transportation (DOT).
ACTION: Notice of proposed rulemaking
(NPRM).
AGENCY:
We propose to supersede
airworthiness directive (AD) 2015–22–
02 for Bell Helicopter Textron Canada
Limited (Bell) Model 429 helicopters.
AD 2015–22–02 requires inspecting the
tail rotor (TR) pitch link assemblies.
This proposed AD would retain the
inspections of AD 2015–22–02 and
would require replacing certain pitch
link bearings. Since we issued AD
2015–22–02, Bell has introduced a new
design bearing. The actions of this
proposed AD are intended to prevent an
unsafe condition on these products.
DATES: We must receive comments on
this proposed AD by October 9, 2018.
ADDRESSES: You may send comments by
any of the following methods:
SUMMARY:
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]]>Agencies
[Federal Register Volume 83, Number 153 (Wednesday, August 8, 2018)]
[Proposed Rules]
[Pages 38997-39004]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-16888]
=======================================================================
-----------------------------------------------------------------------
NATIONAL CREDIT UNION ADMINISTRATION
12 CFR Part 702
RIN 3133-AE90
Risk-Based Capital--Supplemental Rule
AGENCY: National Credit Union Administration (NCUA).
ACTION: Proposed rule.
-----------------------------------------------------------------------
SUMMARY: The NCUA Board (Board) is seeking comment on a proposed rule
that would amend the NCUA's previously revised regulations regarding
prompt corrective action (PCA). The proposal would delay the effective
date of the NCUA's October 29, 2015 final rule regarding risk-based
capital (2015 Final Rule) for one year, moving the effective date from
January 1, 2019 to January 1, 2020. During the extended delay period,
the NCUA's current PCA requirements would remain in effect. The
proposal would also amend the definition of a ``complex'' credit union
adopted in the 2015 Final Rule for risk-based capital purposes by
increasing the threshold level for coverage from $100 million to $500
million. These proposed changes would provide covered credit unions and
the NCUA with additional time to prepare for the rule's implementation,
and would exempt an additional 1,026 credit unions from the rule
without subjecting the National Credit Union Share Insurance Fund
(NCUSIF) to undue risk.
DATES: Comments must be received by September 7, 2018.
ADDRESSES: You may submit written comments, identified by RIN 3133-
AE90, by any of the following methods (Please send comments by one
method only):
Federal eRulemaking Portal: https://www.regulations.gov.
Follow the instructions for submitting comments.
NCUA website: https://www.ncua.gov/Legal/Regs/Pages/PropRegs.aspx. Follow the instructions for submitting comments.
Email: Address to [email protected]. Include ``[Your
name]--Comments on Proposed Rule: Risk-Based Capital--Supplemental
Proposal'' 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.
You can view all public comments on the NCUA's website at https://www.ncua.gov/Legal/Regs/Pages/PropRegs.aspx as submitted, except for
those we cannot post for technical reasons. The NCUA will not edit or
remove any identifying or contact information from the public comments
submitted. You may inspect paper copies of comments in the NCUA's law
library at 1775 Duke Street, Alexandria, Virginia 22314, by appointment
weekdays between 9 a.m. and 3 p.m. To make an appointment, call (703)
518-6546, or send an email to [email protected].
FOR FURTHER INFORMATION CONTACT: Policy and Analysis: Julie Cayse,
Director, Division of Risk Management, Office of Examination and
Insurance, at (703) 518-6360; Kathryn Metzker, Loss/Risk Analyst,
Division of Risk Management, Office of Examination and Insurance, at
(703) 548-2456; Julie Decker, Loss/Risk Analyst, Division of Risk
Management, Office of Examination and Insurance, at (703) 518-3684;
Aaron Langley, Risk Management Officer, Division of Analytics and
Surveillance, Office of Examination and Insurance, at (703) 518-6387;
Legal: John Brolin, Staff Attorney, Office of General Counsel, at (703)
518-6540; or by mail at National Credit Union Administration, 1775 Duke
Street, Alexandria, VA 22314.
SUPPLEMENTARY INFORMATION:
I. Introduction
The NCUA's primary mission is to ensure the safety and soundness of
federally insured credit unions. The agency performs this function by
examining and supervising all federal credit unions, participating in
the examination and supervision of federally insured, state-chartered
credit unions in coordination with state regulators, and insuring
members' accounts at federally insured credit unions.\1\ In its role as
administrator of the NCUSIF, the NCUA insures and regulates
approximately 5,573 federally insured credit unions, holding total
assets exceeding $1.4 trillion and representing approximately 111
million members.\2\
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\1\ As of December 31, 2017, within the nine states that allow
privately insured credit unions, approximately 116 state-chartered
credit unions are privately insured and are not subject to the
NCUA's regulation and oversight.
\2\ Based on December 31, 2017 Call Report Data.
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At its October 2015 meeting, the Board issued the 2015 Final Rule
to amend Part 702 of the NCUA's PCA regulations to require that credit
unions taking certain risks hold capital commensurate with those
risks.\3\ The risk-based capital provisions of the 2015 Final Rule
apply only to federally insured, natural-person credit unions with
quarter-end total assets exceeding $100 million. The overarching intent
of the 2015 Final Rule is to reduce the likelihood that a relatively
small number of high-risk outlier credit unions would exhaust their
capital and cause large losses to the NCUSIF. Under
[[Page 38998]]
the Federal Credit Union Act (FCUA), federally insured credit unions
are collectively responsible for replenishing losses to the NCUSIF.\4\
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\3\ 80 FR 66625 (Oct. 29, 2015).
\4\ See 12 U.S.C. 1782(c)(2)(A) (The FCUA requires that each
federally insured credit unions to pay a federal share insurance
premium equal to a percentage of the credit union's insured shares
to ensure that the NCUSIF has sufficient reserves to pay potential
share insurance claims by credit union members, and to provide
assistance in connection with the liquidation or threatened
liquidation of federally insured credit unions in troubled
condition.).
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The 2015 Final Rule restructures the NCUA's PCA regulations and
makes various revisions, including amending the agency's current risk-
based net worth requirement by replacing the risk based net worth ratio
with a new risk-based capital ratio for federally insured, natural-
person credit unions (credit unions). The risk-based capital
requirements set forth in the 2015 Final Rule are more consistent with
the NCUA's risk-based capital ratio measure for corporate credit unions
and, as the law requires, are more comparable to the regulatory risk-
based capital measures used by the Federal Deposit Insurance
Corporation (FDIC), Board of Governors of the Federal Reserve System,
and Office of the Comptroller of Currency (Other Banking Agencies). The
2015 Final Rule also eliminates several provisions in the NCUA's
current PCA regulations, including provisions related to the regular
reserve account, risk-mitigation credits, and alternative risk weights.
The 2015 Final Rule is currently set to become effective on January
1, 2019. The NCUA delayed the effective date until January 1, 2019 to
provide credit unions and the NCUA sufficient time to make the
necessary adjustments, such as systems, processes, and procedures; to
reduce the burden on affected credit unions.
II. Legal Authority
In 1998, Congress enacted the Credit Union Membership Access Act
(CUMAA).\5\ Section 301 of CUMAA added section 216 to the FCUA,\6\
which required the Board to adopt by regulation a system of PCA to
restore the net worth of credit unions that become inadequately
capitalized.\7\ Section 216(b)(1)(A) requires the Board to adopt by
regulation a system of PCA for federally insured credit unions
``consistent with'' section 216 of the FCUA and ``comparable to''
section 38 of the Federal Deposit Insurance Act (FDI Act).\8\ Section
216(b)(1)(B) requires that the Board, in designing the PCA system, also
take into account the ``cooperative character of credit unions'' (i.e.,
credit unions are not-for-profit cooperatives that do not issue capital
stock, must rely on retained earnings to build net worth, and have
boards of directors that consist primarily of volunteers).\9\ The Board
initially implemented the required system of PCA in 2000,\10\ primarily
in Part 702 of the NCUA's Regulations, and most recently made
substantial updates to the regulation in October 2015.\11\
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\5\ Public Law 105-219, 112 Stat. 913 (1998).
\6\ 12 U.S.C. 1790d.
\7\ The risk-based net worth requirement for credit unions
meeting the definition of ``complex'' was first applied on the basis
of data in the Call Report reflecting activity in the first quarter
of 2001. 65 FR 44950 (July 20, 2000). The NCUA's risk-based net
worth requirement has been largely unchanged since its
implementation, with the following limited exceptions: revisions
were made to the rule in 2003 to amend the risk-based net worth
requirement for MBLs, 68 FR 56537 (Oct. 1, 2003); revisions were
made to the rule in 2008 to incorporate a change in the statutory
definition of ``net worth,'' 73 FR 72688 (Dec. 1, 2008); revisions
were made to the rule in 2011 to expand the definition of ``low-risk
assets'' to include debt instruments on which the payment of
principal and interest is unconditionally guaranteed by NCUA, 76 FR
16234 (Mar. 23, 2011); and revisions were made in 2013 to exclude
credit unions with total assets of $50 million or less from the
definition of ``complex'' credit union, 78 FR 4033 (Jan. 18, 2013).
\8\ 12 U.S.C. 1790d(b)(1)(A); see also 12 U.S.C. 1831o (Section
38 of the FDI Act setting forth the PCA requirements for banks).
\9\ 12 U.S.C. 1790d(b)(1)(B).
\10\ 12 CFR part 702; see also 65 FR 8584 (Feb. 18, 2000) and 65
FR 44950 (July 20, 2000).
\11\ 80 FR 66625 (Oct. 29, 2015).
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The purpose of section 216 of the FCUA is to ``resolve the problems
of [federally] insured credit unions at the least possible long-term
loss to the [NCUSIF].'' \12\ To carry out that purpose, Congress set
forth a basic structure for PCA in section 216 that consists of three
principal components: (1) A framework combining mandatory actions
prescribed by statute with discretionary actions developed by the NCUA;
(2) an alternative system of PCA to be developed by the NCUA for credit
unions defined as ``new;'' and (3) a risk-based net worth requirement
to apply to credit unions the NCUA defines as ``complex.''
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\12\ 12 U.S.C. 1790d(a)(1).
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Among other things, section 216(c) of the FCUA requires the NCUA to
use a credit union's net worth ratio to determine its classification
among five ``net worth categories'' set forth in the FCUA.\13\ Section
216(o) generally defines a credit union's ``net worth'' as its retained
earnings balance,\14\ and a credit union's ``net worth ratio,'' as the
ratio of its net worth to its total assets.\15\ As a credit union's net
worth ratio declines, so does its classification among the five net
worth categories, thus subjecting it to an expanding range of mandatory
and discretionary supervisory actions.\16\
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\13\ 12 U.S.C. 1790d(c).
\14\ 12 U.S.C. 1790d(o)(2).
\15\ 12 U.S.C. 1790d(o)(3).
\16\ 12 U.S.C. 1790d(c)-(g); 12 CFR 702.204(a)-(b).
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Section 216(d)(1) of the FCUA requires that the NCUA's system of
PCA include, in addition to the statutorily defined net worth ratio
requirement applicable to federally insured natural-person credit
unions, ``a risk-based net worth \17\ requirement for insured credit
unions that are complex, as defined by the Board. . . .'' \18\ The FCUA
directs the NCUA to base its definition of ``complex'' credit unions
``on the portfolios of assets and liabilities of credit unions.'' \19\
It also requires the NCUA to design a risk-based net worth requirement
to apply to such ``complex'' credit unions.\20\
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\17\ For purposes of this rulemaking, the term ``risk-based net
worth requirement'' is used in reference to the statutory
requirement for the Board to design a capital standard that accounts
for variations in the risk profile of complex credit unions. The
term ``risk-based capital ratio'' is used to refer to the specific
standards established in the 2015 Final Rule to function as criteria
for the statutory risk-based net worth requirement. The term ``risk-
based capital ratio'' is also used by the Other Banking Agencies and
the international banking community when referring to the types of
risk-based requirements that are addressed in the 2015 Final Rule.
This change in terminology throughout the proposal would have no
substantive effect on the requirements of the FCUA, and is intended
only to reduce confusion for the reader.
\18\ 12 U.S.C. 1790d(d)(1).
\19\ 12 U.S.C. 1790d(d).
\20\ Id.
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III. Proposed Rule
Under Sec. 702.103 of the NCUA's 2015 Final Rule, a credit union
is defined as ``complex'' and the NCUA's risk-based capital ratio
measure is applicable only if the credit union's quarter-end total
assets exceed $100 million, as reflected in its most recent Call
Report. Consistent with the spirit and intent of Executive Order 13777,
the NCUA further analyzed the impact of the NCUA's risk-based capital
requirements and the portfolios of assets and liabilities of credit
unions to identify potential ways to reduce regulatory burden on credit
unions.\21\
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\21\ The Board has always intended to periodically review the
threshold of a complex credit union, as noted in the preamble to the
2015 proposed Risk Based Capital Rule. 80 FR 4339, 4378 (January 27,
2015).
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Based on the NCUA's analysis, which is discussed in more detail
below, the Board believes that $500 million in total assets would be a
more appropriate threshold level for defining a complex credit union,
and therefore subjecting it to the risk-based capital requirement.
Increasing the threshold level to $500 million in assets would reduce
[[Page 38999]]
regulatory burden on credit unions by more closely tailoring the
applicability of the NCUA's risk-based capital requirement to cover
only those credit unions that, if they failed, individually could
present an undue risk of loss to the NCUSIF. This amendment would
exempt an additional 1,026 credit unions--a total of 90 percent \22\ of
all credit unions--from the 2015 Final Rule's risk-based capital
requirements. However, approximately 85 percent of the complex assets
and liabilities and 76 percent of the total assets in the credit union
system would still be subject to the risk-based capital
requirement.\23\ Accordingly, consistent with requirements of section
216(d)(1) of the FCUA, proposed Sec. 702.103 would provide that, for
purposes of Sec. 702.102, a credit union is defined as ``complex,''
and a risk-based capital ratio requirement is applicable, only if the
credit union's quarter-end total assets exceed $500 million, as
reflected in its most recent Call Report.
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\22\ Based on December 31, 2017 Call Report data. For
comparison, if the threshold were to remain at $100 million about 72
percent of all credit unions would be exempt.
\23\ For comparison, if the threshold were to remain at $100
million about 98 percent of the complex assets and liabilities and
93 percent of the total assets in the credit union system would be
subject to the risk based capital requirement.
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Under the 2015 Final Rule, the NCUA determined that credit unions
exceeding the $100 million asset-size threshold had portfolios of
assets and liabilities that were complex based on the products and
services in which such credit unions engaged. As explained further
below, the $100 million asset-size threshold was developed as a proxy
measure based on a detailed analysis performed by the NCUA. The
threshold set forth a clear demarcation line, above which the NCUA
determined all credit unions engaged in complex activities, and where
almost all such credit unions (99 percent) were involved in multiple
complex activities.\24\ The NCUA continues to believe that using a
single asset-size threshold is appropriate, as it is clear, logical,
and easy to administer. Moreover, using a single asset-size threshold
provides regulatory relief for smaller institutions, and eliminates the
potential unintended consequences of having a checklist of activities
that would determine complexity on an institution-by-institution basis.
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\24\ 80 FR 66625, 66663 (Oct. 29, 2015).
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The $100 million asset threshold adopted in the 2015 Final Rule for
determining whether a credit union is complex was based on a complexity
index (original complexity index or OCI). The OCI counted the number of
complex products and services provided by credit unions based on the
following indicators:
Member Business Loans
Participation Loans
Interest-Only Loans
Indirect Loans
Real Estate Loans
Non-Federally Guaranteed Student Loans
Investments with Maturities of Greater than Five Years (where
the investments are greater than one percent of total assets)
Non-Agency Mortgage-Backed Securities
Non-Mortgage Related Securities With Embedded Options
Collateralized Mortgage Obligations/Real Estate Mortgage
Investment Conduits
Commercial Mortgage-Related Securities
Borrowings (Draws Against Lines of Credit, Borrowing
Repurchase Transactions, Other Notes, Promissory Notes, and Interest
Payable)
Repurchase Transactions
Derivatives
Internet Banking
As discussed in more detail in the 2015 Final Rule, these products
and services were determined by the NCUA to be good indicators of
complexity.\25\
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\25\ 80 FR 66625, 66663 (Oct. 29, 2015). The 2015 Final Rule
states ``For the purpose of defining a complex credit union, assets
include tangible and intangible items that are economic resources
(products and services) that are expected to produce economic
benefit (income), and liabilities are obligations (expenses) the
credit union has to outside parties. The Board recognizes there are
products and services--which under GAAP are reflected as the credit
unions' portfolio of assets and liabilities--in which credit unions
are engaged that are inherently complex based on the nature of their
risk and the expertise and operational demands necessary to manage
and administer such activities effectively. Thus, credit unions
offering such products and services have complex portfolios of
assets and liabilities for purposes of NCUA's risk-based net worth
requirement.''
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To define ``complex'' credit unions for the 2015 Final Rule, the
NCUA used the original complexity index to analyze June 30, 2014 and
March 31, 2015 Call Report data. Based on the OCI, for credit unions
with more than $100 million in assets, 100 percent engaged in offering
at least one complex activity; 99 percent engaged in two or more
complex activities; and 87 percent engaged in four or more complex
activities. Accordingly, the Board determined it was appropriate to set
the asset size threshold for ``complex'' credit unions at $100 million
in total assets, subjecting credit unions with more than $100 million
in assets to the NCUA's risk-based capital requirements.
As discussed in more detail below, the OCI did not take into
account the volume of the complex activity engaged in by such credit
unions.
Following a careful review of the 2015 Final Rule by the NCUA's
regulatory reform task force,\26\ the Board is now proposing to revise
the original complexity index (revised complexity index or RCI), and to
apply a new complexity ratio (complexity ratio or CR) for analyzing the
portfolios of assets and liabilities of credit unions to determine
which are ``complex.'' The RCI would amend 6 of the indicators in the
original complexity index so the index will more accurately reflect
``complexity'' in credit unions and take into account certain
regulatory changes that were made after the 2015 Final Rule was
approved. The revised complexity index would be the same as the
original complexity index, with the following six changes:
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\26\ See 82 FR 39702, 39706 (Aug. 22, 2017).
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Replace the indicator for ``member business loans'' with
an indicator for ``commercial loans'' to reflect changes to the NCUA's
member business lending rule,\27\ and current Call Report data
collection requirements.
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\27\ See 12 CFR 723.2; and 81 FR 13529, 13538 (March 14, 2016).
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Replace the indicator for ``participation loans'' (which
included participation loans sold and participation loans held) with an
indicator for ``participation loans sold'' to restrict the indicator to
the most complex component of participation loans.
Replace the indicator for ``interest-only loans'' to
exclude first-lien mortgages. The remaining interest only loans include
complex payment options. For example, only requiring monthly payments
of interest during draw periods.
Remove the indicator for ``internet banking'' because it
has become a typical mechanism for members to transact business with
most credit unions, with 78 percent of credit unions engaging in some
type of internet banking. Also, it is not an asset or liability--
therefore there is no suitable way to translate the volume into a
financial measure for purposes of defining complex.
Remove the indicator for ``investments with maturities
greater than five years (where the investments are greater than one
percent of total assets)'' because the indicator is adequately captured
in the other index components.
Replace the indicator for ``real estate loans (where the
loans are greater than five percent of assets and/or sold mortgages)''
with an indicator for ``sold
[[Page 39000]]
mortgages'' to account for the most complex component of real estate
loans.
The NCUA believes the revised complexity index would provide a more
accurate methodology, based on the assets and liabilities of credit
unions, for identifying when credit unions engage in complex activities
and defining credit unions as ``complex.'' Table 1 shows that, among
credit unions with $500 million or more in total assets, 100 percent
engage in at least one complex activity, and 96 percent engage in three
or more complex activities.
Table 1--Revised Complexity Index by Asset Category, 2017Q4 Call Report Data
--------------------------------------------------------------------------------------------------------------------------------------------------------
Number of
Asset category credit Average Median Index >=1 Index >=2 Index >=3 Index >=5 Index >=6
unions index value index value (%) (%) (%) (%) (%)
--------------------------------------------------------------------------------------------------------------------------------------------------------
<$100M.......................................... 4,016 0.8 0.0 41 21 10 2 1
$100M-$250M..................................... 692 3.7 4.0 98 89 73 32 16
$250M-$500M..................................... 334 4.9 5.0 99 96 88 57 40
$500M-$750M..................................... 149 5.7 6.0 100 98 96 73 53
$750M-$1B....................................... 95 6.1 7.0 100 100 97 79 64
$1B+............................................ 287 7.0 7.0 100 98 96 88 77
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In addition to the revised complexity index, the NCUA is also
proposing to use a ratio of complex assets and liabilities to total
assets (complexity ratio or CR) to evaluate the extent to which credit
unions are involved in complex activities. The CR, when used in
conjunction with the revised complexity index, takes into account the
volume of the complex activity engaged in by complex credit unions and
provides a more accurate measure of credit union complexity.\28\ The
numerator of the CR would be the dollar value sum of the complex assets
and the liabilities held by a credit union, where complex assets and
liabilities are determined using the same complexity indicators as used
in the RCI. The denominator of the CR would be the total assets of the
credit union.
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\28\ See 80 FR 66625, 66661 (Oct. 29, 2015) (As pointed out by
at least one commenter, credit unions should not be considered
complex unless complex activities are undertaken in significant
volumes. The commenter provided the following example: A credit
union that lends a member $60,000 to purchase new equipment for his
bakery is engaged in member business lending, but that credit union
should not be designated as complex by virtue of that single loan--
assuming it is not a significant share of the credit union's
assets.).
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As shown in Table 2 below, credit unions with greater than $500
million in total assets hold complex assets and liabilities as a larger
share of their total assets than smaller credit unions. The complexity
ratio increases from 23 percent among credit unions with less than $500
million in assets to 40 percent among credit unions with more than $500
million in assets. Of the $497 billion in complex assets and
liabilities in the credit union system, $423 billion (85 percent)--the
majority of complex assets and liabilities in the credit union system--
are held among credit unions with more than $500 million in assets.\29\
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\29\ Credit unions with assets between $250 million and $500
million hold a higher share of their portfolio in complex assets (32
percent) than the entire group of credit unions below $500 million
in assets (23 percent), but it remains below the share of complex
assets in credit unions above $500 million in assets (40 percent).
Table 2--Complexity Ratio by Asset Categories, 2017Q4 Call Report Data
--------------------------------------------------------------------------------------------------------------------------------------------------------
Cumulative
Share of share of
Number of Complex assets Complex ratio complex A & L complex A & L
Asset category credit unions and Total assests (%) in the credit in the credit
liabilities union system union system
(%) (%)
--------------------------------------------------------------------------------------------------------------------------------------------------------
<$500M.................................................. 5,042 74,600 330,545 23 15 15
>$500M.................................................. 531 422,553 1,048,289 40 85 100
--------------------------------------------------------------------------------------------------------------------------------------------------------
Table 3 below shows the share of credit unions in each asset
category above various complex ratio thresholds. Larger credit unions
are much more likely to have a significant share of their balance sheet
in complex assets and liabilities. Nearly all credit unions (95
percent) with more than $500 million in assets have complex assets and
liabilities greater than 10 percent of their total assets, and 66
percent have complex assets and liabilities greater than 30 percent of
their total assets.
Table 3--Complexity Ratio Above Various Thresholds by Asset Categories, 2017Q4
----------------------------------------------------------------------------------------------------------------
Complex ratio Complex ratio Complex ratio
Asset category >10% >20% >30%
----------------------------------------------------------------------------------------------------------------
<$500M.......................................................... 29 18 11
>$500M.......................................................... 95 84 66
----------------------------------------------------------------------------------------------------------------
[[Page 39001]]
In general, two-thirds of credit unions with more than $500 million
in total assets have complex assets and liabilities ratios above 30
percent. Only 11 percent of credit unions with less than $500 million
have complexity ratios above 30 percent.\30\
Using both the revised complexity index and the complexity ratio to
determine the appropriate threshold for defining complex credit unions
would exclude approximately 90 percent of credit unions from the risk-
based capital requirement, while still covering approximately 76
percent of the assets held by federally insured credit unions.\31\
Moreover, the revised definition of a complex credit union would not
represent undue risk to the NCUSIF, nor significantly decrease the
level of complex assets and liabilities covered by the risk-based
capital requirement. Even though the percent of total assets covered by
the rule would fall from 93 percent \32\ to 76 percent when compared to
the $100 million threshold adopted in the 2015 Final Rule,\33\ 85
percent of complex assets and liabilities would still be covered.
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\30\ Credit unions with assets between $250 million and $500
million are more likely to have a CR greater than 10 percent (88
percent) than the entire group of credit unions below $500 million
in assets (29 percent), but it remains below the share of complex
assets in credit unions above $500 million in assets (95 percent).
Further, the difference widens significantly for CRs above 10
percent. Less than half (47 percent) of credit unions with assets
between $250 million and $500 million have a CR greater than 30
percent, whereas over two-thirds of credit unions with more than
$500 million in assets have a CR greater than 30 percent.
\31\ Based on December 31, 2017 Call Report data.
\32\ Based on December 31, 2017 Call Report data, 93 percent of
credit union assets would be covered based on the $100 million
threshold established by the 2015 Final Rule.
\33\ Based on December 31, 2017 Call Report data.
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In addition, if the historical trends in changes to the composition
of the credit union community continue, the share of total assets
covered by the rule will rise in the future, potentially reaching 90
percent of total assets within the next 10 years. Also, the higher
asset threshold still captures those credit unions that, if they
failed, individually could present an undue risk of loss to the NCUSIF.
In addition, if the historical trends in changes to the composition of
the credit union community continue and historical probability of
failure and loss given failure rates (excluding fraud related failures)
for credit unions with total assets between $100 and $500 million and
those with total assets over $500 million remain the same, total losses
to the NCUSIF over the next 10 years would likely be significantly
larger for credit unions with more than $500 million in assets than for
those with assets between $100 million and $500 million.
Table 4--Credit Unions Bound by Risk-Based Capital, 2017Q4 Call Report Data
----------------------------------------------------------------------------------------------------------------
Number of complex Capital required
credit unions over the net Total assets
Asset category bound by risk- worth ratio (billion)
based capital (million)
----------------------------------------------------------------------------------------------------------------
Assets $100M-$500M..................................... 284 $165 $69
Assets >$500M.......................................... 221 635 370
--------------------------------------------------------
Total.............................................. 505 800 439
----------------------------------------------------------------------------------------------------------------
Under the 2015 Final Rule, an estimated 505 credit unions would
face higher required capital levels as a result of risk-based capital
requirements. These 505 credit unions have total assets of $439 billion
and the 2015 Final Rule would raise their required capital levels by
approximately $800 million above what is required by the net worth
ratio.\34\ Under this proposal, the 284 credit unions with assets
between $100 and $500 million would no longer have higher required
capital levels as a result of risk-based capital requirements. However,
as reflected in Table 4, this proposal would maintain most of the
credit union assets subject to higher capital requirements, and
incremental capital required by risk-based capital, under the 2015
Final Rule.
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\34\ Based on December 31, 2017 Call Report data. It is
important to note that almost all of these credit unions already
hold enough capital to meet either the risk-based capital
requirements or the net-worth-based capital requirements.
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Exempting credit unions with assets between $100 million and $500
million represents approximately 16 percent of the total assets of
credit unions with required capital levels above what is required by
the net worth ratio, and about 21 percent of the incremental capital
the system is required to hold under the 2015 Final Rule. However, this
proposal still encompasses approximately 84 percent of the total assets
of credit unions with required capital levels above what is required by
the net worth ratio, and almost 80 percent of the incremental capital
the system is required to hold under the 2015 Final Rule.
Under the 2015 Final Rule, a net of 20 credit unions with total
assets of $11.5 billion would have a lower PCA classification with a
capital shortfall of $84 million.\35\ Under this proposal, 6 credit
unions (net) with total assets of $8.8 billion would have a lower PCA
classification and a capital deficiency of $71 million. Therefore, this
proposal encompasses approximately 80 percent of the downgraded credit
union assets and approximately 85 percent of the capital shortfall for
these institutions.
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\35\ Based on December 31, 2017 Call Report Data.
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The Board also notes the NCUSIF is much stronger today than it was
in 2015 when the agency passed the 2015 Final Rule. The equity ratio of
the NCUSIF was 1.29 percent in 2015. In 2018, the NCUSIF equity ratio
will be 1.39 percent even after an equity distribution of $736 million
is paid to credit unions. The total funds held in the NCUSIF will be
approximately $16 billion after the equity distribution this year,
about $3.5 billion more than the $12.4 billion held in the fund in
2015.
The NCUA will continue to address any deficiencies in the capital
levels of credit unions with $500 million or less in assets through the
examination process.\36\ Sound capital levels are vital to the long-
term health of all credit unions. Credit unions need to hold capital
commensurate with their risk. Balancing proper capital accumulation
with product offering and pricing strategies helps ensure credit unions
are able to provide affordable member services over time. Credit unions
are already expected to incorporate into their business models and
strategic plans provisions for maintaining prudent levels of capital.
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\36\ See, e.g., Sec. 702.102(b) (Authorizes the NCUA Board to
reclassify a well-capitalized credit union as adequately capitalized
and may require an adequately capitalized or undercapitalized credit
union to comply with certain mandatory or discretionary supervisory
actions as if it were classified in the next lower capital
category.).
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[[Page 39002]]
Also, the Board wants to clarify for commenters that the standard
under the Regulatory Flexibility Act for how the NCUA defines a ``small
credit union'' \37\ is different from the standard under the FCUA for
how the agency defines ``complex credit union'' for purposes of the
risk-based net worth requirement.\38\ While both definitions currently
use an asset threshold of greater than $100 million in total assets,
the thresholds were arrived at using different methodologies. The
methodologies necessarily vary to address the different applicable
statutory provisions.\39\ This proposal addresses and amends only the
NCUA's definition of ``complex'' credit unions as that term is defined
under the 2015 Final Rule. It does not address or propose to amend the
NCUA's current definition of ``small credit unions'' for purposes of
the Regulatory Flexibility Act.\40\
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\37\ NCUA Interpretative Ruling and Policy Statement 15-1,
available at https://www.ncua.gov/regulation-supervision/Pages/rules/interpretive-rulings-policy-statements.aspx.
\38\ 80 FR 66625, 66663-66664 (October 29, 2015).
\39\ Compare 80 FR 66663-66664, with 80 FR 57512, 57514-57516
(Sept. 24, 2015).
\40\ 5 U.S.C. 601 et seq.
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V. Effective Date of the 2015 Final Rule
The Board initially established the effective date of the 2015
Final Rule as January 1, 2019 to provide credit unions and the NCUA
with an extended period to make necessary adjustments to systems,
processes, and procedures, and to reduce the burden on affected credit
unions in meeting the new requirements. Based on feedback from the
credit union community and agency staff, and that the agency is
proposing to change the definition of complex credit union, the Board
believes it is necessary and beneficial to delay the effective date of
the 2015 Final Rule as amended by this proposal by one year. Extending
the effective date would provide covered credit unions additional time
to adjust systems, processes, and procedures; and would help smooth the
transition for complex credit unions affected by the requirements of
the 2015 Final Rule.
Until the 2015 Final Rule's effective date, the NCUA's current PCA
regulation will remain in effect. The NCUA will continue to enforce the
capital standards currently in place and address any supervisory
concerns through existing regulatory and supervisory mechanisms. The
Board believes that, given the facts above, extending the
implementation period of the 2015 Final Rule for an additional year
would be reasonable and would not pose undue risk to the NCUSIF.
Accordingly, the Board proposes to change the effective date for the
2015 Final Rule, and any changes to that rule finalized as part of this
rulemaking, from January 1, 2019 to January 1, 2020.
VI. Impact of the Proposed Regulation
The proposed rule will lower the overall impact of the 2015 Final
Rule by reducing the number of credit unions subject to the risk-based
capital requirements of the rule. By increasing the threshold for
defining a complex credit union from more than $100 million to more
than $500 million in assets, an additional 1,026 credit unions would be
exempt from the 2015 Final Rule's risk-based capital requirements. This
represents significant burden relief for these relatively small credit
unions, as half of them have assets of $190 million or less. The
proposed new definition of complex credit union would exempt a total of
90 percent (5,042) of all credit unions as of December 31, 2017.\41\
For comparison, if the threshold were to remain at $100 million only
about 72 percent of all credit unions would be exempt.
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\41\ This proposal would limit risk-based capital requirements
to only credit unions with assets of more than $500 million compared
to the Other Banking Agencies' risk-based capital standards that
apply to banks of all sizes. As of December 31, 2017, there were
1,450 and 4,294 FDIC-insured banks with assets of $100 million and
$500 million or less, respectively.
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While under this proposal 9 out of 10 credit unions would be
exempt, these institutions only hold 24 percent of total assets in the
credit union system and 15 percent of complex assets and
liabilities.\42\ Thus, approximately 85 percent of the complex assets
and liabilities and 76 percent of the total assets in the credit union
system would still be subject to the risk based capital
requirement.\43\
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\42\ Credit unions with assets between $100 million and $500
million make up 17 percent of assets in the credit union system, and
only hold 13 percent of complex assets and liabilities.
\43\ For comparison, if the threshold were to remain at $100
million about 98 percent of the complex assets and liabilities and
93 percent of the total assets in the credit union system would
still be subject to the risk-based capital requirement.
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The credit unions that would be defined as complex under this
proposal have estimated aggregate and average risk-based capital ratios
of 16.8 and 17.2 percent, respectively. The aggregate risk-weighted
assets to total assets ratio is 63 percent for complex credit unions
under this proposal.\44\ Table 5 shows the distribution of estimated
risk-based capital ratios for all complex credit unions based on this
proposed rule.
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\44\ By way of comparison, the bank aggregate total risk-
weighted assets to total assets ratio is 72.4 percent as of December
31, 2017. Further, complex credit unions maintain a median risk-
based capital ratio of 15.8 percent compared to a bank median risk-
based capital ratio of 15.9 percent. Bank comparisons exclude banks
with less than $50 million in total assets and more than $60 billion
in total assets to arrive at a more comparable asset profile to
credit unions.
Table 5--Distribution of Estimated Risk Based Capital Ratios for Complex Credit Unions
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RBC Ratio <10% 10-13% 13-16% 16-20% 20-30% 30-50% >50%
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Number of CUs.................... 7 110 153 144 101 14 2
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As shown in Table 5 above, most complex credit unions will have a
risk-based capital ratio well in excess of the 10 percent level
required to be well capitalized. Under this proposal, six complex
credit unions with total assets of $8.8 billion would have a lower
capital classification, with a capital shortfall of approximately $71
million.\45\ Overall, 98.7 percent of all complex credit unions are
well capitalized under this proposed rule.
Credit unions often hold some margin above regulatory capital
requirements. Table 6 below provides a comparison of the margins
complex credit unions currently hold in excess of both the net worth
ratio requirement and the risk-based capital requirement.
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\45\ Of the 531 impacted credit unions, only 7, or 1.3 percent,
would have less than the 10 percent risk-based capital requirement
to be well capitalized. Of these, one has a net worth ratio less
than 7 percent and is therefore not a new downgrade in capital
classification, but already categorized as less than well
capitalized. If the asset threshold for the definition of complex
credit union remained at $100 million, a net of 20 credit unions
with total assets of $11.5 billion would have a lower capital
classification, with a capital shortfall of approximately $84
million.
[[Page 39003]]
Table 6--Distribution of Net Worth Ratio and Risk-Based Capital Ratio for Complex Credit Unions Under This Proposal
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Greater than
Number of CUs Less than well Well capitalized Well capitalized Well capitalized well capitalized
capitalized to well + 2% +2% to + 3.5% +3.5% to + 5% + 5%
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Net Worth Ratio............................................... <7% 7%-9% 9%-10.5% 10.5%-12% >12%
RBC Ratio..................................................... <10% 10%-12% 12%-13.5% 13.5%-15% >15%
Net Worth Ratio............................................... 2 90 166 141 132
RBC Ratio..................................................... 7 54 82 88 300
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Both measures indicate the large majority of complex credit unions
hold margins well above the levels required to be well-capitalized.
The NCUA also analyzed complex credit unions to determine whether
the net worth or risk-based capital requirement would require a credit
union to hold more dollars of capital. Table 7 below summarizes the
distribution of credit unions by the ratio of risk-weighted assets to
total assets for credit unions bound by each capital requirement.
Table 7--Distribution of Risk-Weighted Assets to Total Assets Ratios for Complex Credit Unions by Governing Capital Requirement
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Risk weighted assets/total assets
Total Average (%) -----------------------------------------------------------------------------
number <50% 50-60% 60-70% 70-80% 80-90% >90%
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Number Bound by Net Worth Ratio................. 310 58.9 49 101 147 10 2 1
Number Bound by Risk Based Capital.............. 221 71.9 0 3 81 128 6 3
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Forty-two percent of complex credit unions (221 complex credit
unions with $370.3 billion in total assets) are estimated to have a
higher minimum capital requirement in terms of dollars under the risk-
based capital ratio than the net worth ratio.\46\ These 221 complex
credit unions have a notably higher risk profile than the other 310
complex credit unions. The ratio of average risk weighted assets to
total assets for the 221 complex credit unions is 72 percent, compared
with 59 percent for the remaining 310 complex credit unions. Therefore,
relative to what qualifies as capital for risk-based capital purposes,
these institutions must hold more net worth in dollars to achieve a
well-capitalized designation over what the net worth ratio requires.
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\46\ The required dollar amount for risk based capital is
calculated as [(risk-weighted assets times 10 percent) - allowance
for loan losses - equity acquired in merger + total adjusted
retained earnings acquired through business combinations + NCUA
share insurance capitalization deposit + goodwill + identifiable
intangible assets] - (total assets x 7 percent). Complex credit
unions in Table 7 are categorized by whichever calculation results
in a higher dollar volume.
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In addition, despite holding a greater share of risk-weighted
assets, the risk-based capital-bound group of 221 complex credit unions
also has, on average, a net worth ratio that is 100 basis point below
the net worth ratio of the other 310 complex credit unions.\47\ Table 7
highlights the distribution of credit unions by risk weighted assets to
total assets depending on whether the risk-based capital requirement
necessitates more capital than the net worth ratio. The risk-based
capital-bound group of 221 complex credit unions would have to retain
more net worth in dollars than what is currently required due to the
net worth ratio to satisfy the well-capitalized threshold. However,
over 97 percent (215) of these institutions already hold more than
enough capital to meet the risk-based capital requirement.
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\47\ The average net worth ratio is 10.3 percent for the 212
complex credit unions bound by risk-based capital while the average
net worth ratio for the 310 complex credit unions bound by the net
worth ratio is 11.4 percent.
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VI. Request for Comment
The Board is requesting comment on all aspects of the changes
proposed in this proposed rule. In particular, the agency requests
comments on:
1. Whether the definition of a complex credit union, as defined
under Sec. 701.103 of the 2015 Final Rule, should be amended to
increase the threshold level for coverage from more than $100 million
in total assets to more than $500 million in total assets?
2. Whether the implementation date for the 2015 Final Rule should
be amended to extend the effective date of the rule until January 1,
2020?
VII. Regulatory Procedures
Regulatory Flexibility Act
The Regulatory Flexibility Act (RFA) generally requires that, in
connection with a notice of proposed rulemaking, an agency prepare and
make available for public comment an initial regulatory flexibility
analysis that describes the impact of a proposed rule on small
entities. A regulatory flexibility analysis is not required, however,
if the agency certifies that the rule will not have a significant
economic impact on a substantial number of small entities (defined for
purposes of the RFA to include credit unions with assets less than $100
million) \48\ and publishes its certification and a short, explanatory
statement in the Federal Register together with the rule.
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\48\ See 80 FR 57512 (Sept. 24, 2015).
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The proposed amendments to the 2015 Final Rule and part 702 would
only affect complex credit unions, which are those with greater than
$100 million in assets under the 2015 Final Rule and would be amended
to cover only those with greater than $500 million in assets under this
proposal. As a result, credit unions with $100 million or less in total
assets would not be affected by this proposal. Accordingly, the NCUA
certifies that this proposal will not have a significant economic
impact on a substantial number of small credit unions.
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.\49\ For purposes of the PRA, a
paperwork burden may take the form of a reporting, disclosure, or
recordkeeping requirement, each referred to as an
[[Page 39004]]
information collection. The NCUA may not conduct or sponsor, and the
respondent is not required to respond to, an information collection
unless it displays a currently valid Office of Management and Budget
(OMB) control number.
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\49\ 44 U.S.C. 3507(d).
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The proposed changes to part 702 would increase the asset size of
credit unions identified as complex from greater than $100 million to
greater than $500 million. This change would reduce the number of
credit unions who must comply with recordkeeping requirements
prescribed by Sec. 702.101(b). Therefore, the burden cleared under OMB
number 3133-0191 will be revised to reflect the reduction in the number
of respondents.\50\
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\50\ Proposed revisions to OMB control number 3133-0191 have
been submitted to OMB for approval in accordance with 5 CFR 1320.11.
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Title of Information Collection: Prompt Corrective Action--Risk-
Based Capital.
OMB Control Number: 3133-0191.
Affected Public: Private Sector: Not-for-profit institutions--
Complex Credit Unions.
Estimated Number of Respondents: 531.
Estimated Number of Responses per Respondent: 1.
Estimated Hours per Response: 40.
Estimated Total Annual Burden Hours: 21,240.
By exempting credit unions with assets between $100 million and
$500 million, the NCUA estimates that the burden under this proposed
rule would be 41,040 fewer hours.
The Board invites comment on (a) whether the collections of
information are necessary for the proper performance of the agency's
function, including practical utility; (b) the accuracy of estimates of
the burden of the information collections, including the validity of
the methodology and assumptions used; (c) ways to enhance the quality,
utility, and clarity of the information being collected, and (d) ways
to minimize the burden of the information collection on respondents,
including through the use of automated collection techniques or other
forms of information technology.
All comments are a matter of public record. Comments regarding the
information collection requirements of this rule should be sent to (1)
Dawn Wolfgang, NCUA PRA Clearance Officer, National Credit Union
Administration, 1775 Duke Street, Suite 5080, Alexandria, Virginia
22314, or Fax No. 703-519-8572, or Email at [email protected] and
the (2) 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
OIRA_Submission,@OMB.EOP.gov.
Submission of comments. The NCUA considers comments by the public
on this proposed collection of information in:
Evaluating whether the proposed collection of information
is necessary for the proper performance of the functions of the NCUA,
including whether the information will have a practical use;
Evaluating the accuracy of the NCUA's estimate of the
burden of the proposed collection of information, including the
validity of the methodology and assumptions used;
Enhancing the quality, usefulness, and clarity of the
information to be collected; and
Minimizing the burden of collection of information on
those who are to respond, including through the use of appropriate
automated, electronic, mechanical, or other technological collection
techniques or other forms of information technology; e.g., permitting
electronic submission of responses.
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 principles of the executive order to
adhere to fundamental federalism principles. This proposed rule reduces
the number of federally insured natural-person credit unions, including
federally insured, state-chartered natural-person credit unions that
would be subject to the 2015 Final Rule. It may have, to some degree, a
direct effect on the states, on the relationship between the national
government and the states, or on the distribution of power and
responsibilities among the various levels of government. It does not,
however, rise to the level of material impact for purposed of Executive
Order 13132.
Assessment of Federal Regulations and Policies on Families
The NCUA has determined that this proposed rule will not affect
family well-being within the meaning of section 654 of the Treasury and
General Government Appropriations Act, 1999, Public Law 105-277, 112
Stat. 2681 (1998).
List of Subjects in 12 CFR Part 702
Credit unions, Reporting and recordkeeping requirements.
By the National Credit Union Administration Board on August 2,
2018.
Gerard Poliquin,
Secretary of the Board.
For the reasons discussed above, the Board proposes to further
amend 12 CFR part 702, as amended in a final rule at 80 FR 66625 (Oct.
29, 2015), effective January 1, 2019, as follows:
PART 702--CAPITAL ADEQUACY
0
1. The authority citation for part 702 continues to read as follows:
Authority: 12 U.S.C. 1766(a), 1790d.
Sec. 702.103 [Amended]
0
2. Amend Sec. 702.103 by removing the words ``one hundred million
dollars ($100,000,000)'' and add in their place ``five hundred million
dollars ($500,000,000).''
[FR Doc. 2018-16888 Filed 8-7-18; 8:45 am]
BILLING CODE 7535-01-P
