83 FR 17901 - Capital Planning and Supervisory Stress Testing

NATIONAL CREDIT UNION ADMINISTRATION

Federal Register Volume 83, Issue 80 (April 25, 2018)

Page Range		17901-17910
FR Document		2018-08558

The NCUA Board (Board) is issuing this final rule to amend its regulations regarding capital planning and stress testing for federally insured credit unions with $10 billion or more in assets (covered credit unions). The final rule reduces regulatory burden by removing some of the capital planning and stress testing requirements currently applicable to certain covered credit unions. The final rule also makes the NCUA's requirements more efficient by, among other things, authorizing covered credit unions to conduct their own stress tests in accordance with the NCUA's requirements and permitting covered credit unions to incorporate the stress test results into their capital plans.

Federal Register, Volume 83 Issue 80 (Wednesday, April 25, 2018)

[Federal Register Volume 83, Number 80 (Wednesday, April 25, 2018)]
[Rules and Regulations]
[Pages 17901-17910]
From the Federal Register Online [www.thefederalregister.org]
[FR Doc No: 2018-08558]

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Rules and Regulations
Federal Register
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This section of the FEDERAL REGISTER contains regulatory documents
having general applicability and legal effect, most of which are keyed
to and codified in the Code of Federal Regulations, which is published
under 50 titles pursuant to 44 U.S.C. 1510.

The Code of Federal Regulations is sold by the Superintendent of Documents.

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Federal Register / Vol. 83, No. 80 / Wednesday, April 25, 2018 /
Rules and Regulations

[[Page 17901]]

NATIONAL CREDIT UNION ADMINISTRATION

12 CFR Part 702

RIN 3133-AE80

Capital Planning and Supervisory Stress Testing

AGENCY: National Credit Union Administration (NCUA).

ACTION: Final rule.

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SUMMARY: The NCUA Board (Board) is issuing this final rule to amend its
regulations regarding capital planning and stress testing for federally
insured credit unions with $10 billion or more in assets (covered
credit unions). The final rule reduces regulatory burden by removing
some of the capital planning and stress testing requirements currently
applicable to certain covered credit unions. The final rule also makes
the NCUA's requirements more efficient by, among other things,
authorizing covered credit unions to conduct their own stress tests in
accordance with the NCUA's requirements and permitting covered credit
unions to incorporate the stress test results into their capital plans.

DATES: This final rule is effective June 1, 2018.

FOR FURTHER INFORMATION CONTACT: Technical information: Dale Klein,
Senior Financial Analyst--CPST, Office of National Examinations and
Supervision, at the above address or telephone (703) 518-6629; or legal
information: John H. Brolin, Senior Staff Attorney; or Rachel Ackmann,
Staff Attorney, Office of General Counsel, at the above address or
telephone (703) 518-6540.

SUPPLEMENTARY INFORMATION:

I. Background

At its October 19, 2017 meeting, the Board proposed amending its
regulations regarding capital planning and stress testing for covered
credit unions.\1\ As noted, the proposal was designed to reduce
regulatory burden and to make the NCUA's capital planning and stress
testing requirements more efficient. The NCUA is now issuing the
proposed rule as final with certain revisions and clarifications based
on comments received on the proposed rule.
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\1\ 82 FR 50094 (Oct. 30, 2017).
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The NCUA is issuing this final rule pursuant to its authority under
the Federal Credit Union Act (FCUA).\2\ Section 120(a) of the FCUA
authorizes the Board to ``prescribe rules and regulations for the
administration of'' the FCUA.\3\ Section 204 of the FCUA authorizes the
Board, through its examiners, ``to examine any [federally] insured
credit union . . . to determine the condition of any such credit union
for insurance purposes.'' \4\ Section 206(e) of the FCUA authorizes the
Board to take certain actions against a federally insured credit union,
if, in the opinion of the Board, the credit union ``is engaging or has
engaged, or the Board has reasonable cause to believe that the credit
union or any institution affiliated party is about to engage, in any
unsafe or unsound practice in conducting the business of such credit
union.'' \5\
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\2\ 12 U.S.C. 1751 et seq.
\3\ 12 U.S.C. 1766(a).
\4\ 12 U.S.C. 1784(a).
\5\ 12 U.S.C. 1786(e).
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II. Summary of Comments

The NCUA received a total of 17 comment letters from federally
insured credit unions, credit union leagues, and credit union trade
organizations. All of the commenters generally supported giving covered
credit unions regulatory relief from the current capital planning and
stress testing requirements. All also recommended, however, that the
NCUA provide even more regulatory relief. The comments are discussed in
more detail below.

A. Capital Planning and Stress Testing Tiers

Under the proposal, covered credit unions would be subject to
tiered regulatory requirements that would further ensure their capital
plans and stress testing requirements are tailored to reflect their
size, complexity, and financial condition. The proposal would divide
covered credit unions into three tiers, with each tier subject to
different regulatory requirements. The proposal defined: (1) A tier I
credit union as a covered credit union that has completed fewer than
three capital planning cycles and has less than $20 billion in total
assets; (2) a tier II credit union as a covered credit union that has
completed three or more capital planning cycles and has less than $20
billion in total assets, or is otherwise designated as a tier II credit
union by the NCUA; and (3) a tier III credit union as a covered credit
union that has $20 billion or more in total assets, or is otherwise
designated as a tier III credit union by the NCUA. Nearly all of the
commenters recommended changing the threshold levels for tier I, II,
and III covered credit unions by increasing the size threshold levels
for each tier. Several commenters suggested incorporating prudential
factors into the threshold levels.
A majority of commenters encouraged the NCUA to increase the asset
thresholds to be more consistent with the thresholds for banks. To
achieve parity with banks, commenters generally recommended two
different approaches to establishing size thresholds. A number of
commenters recommended that the NCUA take the size thresholds
established for banks and reduce that threshold to reflect the
proportionately smaller size of the National Credit Union Share
Insurance Fund (NCUSIF). The commenters explained that the NCUSIF is
approximately one-seventh the size of the Deposit Insurance Fund (DIF),
therefore, the appropriate threshold for credit unions would be about
$36.5 billion (one-seventh of the proposed $250 billion threshold for
banks).\6\ Such comments are based on the premise that the DIF and
NCUSIF are equivalent, but the DIF and NCUSIF are not structured
similarly. For example, the NCUSIF has an equity deposit base which can
lead to an undesirable pro-cyclical impact for all credit unions if a
large loss were to occur. In addition, the NCUSIF has an

[[Page 17902]]

operating equity ratio of 1.39 percent, whereas the DIF has a target
reserve ratio of 2.0 percent. Therefore, the NCUA does not consider the
size of the DIF as an appropriate benchmark for determining the asset
thresholds for covered credit unions to conduct stress tests and
capital planning exercises. The second approach suggested by commenters
to ensure parity between banks and covered credit unions was to emulate
the asset thresholds adopted by the banking agencies. The size
threshold, however, for most banks is currently set at $10 billion.
Additionally, as discussed above, the NCUA does not consider the risks
that banks pose to the DIF as analogous to the risks that covered
credit unions pose to the NCUSIF, and therefore, does not believe that
at this time the size thresholds for banks are appropriate for covered
credit unions.
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\6\ The $250 billion cited by commenters is only a proposal and
is not currently the size threshold for annual stress tests in the
banking industry. Currently, the Dodd-Frank Wall-Street Reform and
Consumer Protection Act requires that banks with total consolidated
assets of more than $10 billion conduct annual stress tests. 12
U.S.C. 5365(i)(2). The Federal Reserve's annual Comprehensive
Capital Analysis and Review applies to top-tier bank holding
companies with average total consolidated assets of $50 billion or
more and certain intermediate holding companies of foreign banking
organizations.
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While commenters consistently recommended increasing the size
threshold levels, there were mixed opinions on the appropriate size
thresholds that the NCUA should establish for each tier. Commenters
that suggested using $36.5 billion or $50 billion as the appropriate
size threshold may have differed on whether that threshold was
appropriate for a tier I, II, or III covered credit union. For example,
in the case of tier I covered credit unions, recommended size
thresholds varied from $10 billion to $50 billion.
As compared to the proposed rule, the Board in the final rule has
partially revised the thresholds for tier I and II covered credit
unions. In the final rule, a tier I credit union is a covered credit
union that has less than $15 billion in total assets and a tier II
credit union is a covered credit union that has $15 billion or more in
total assets, but less than $20 billion in total assets (or is
otherwise designated as a tier II credit union by the NCUA). Therefore,
in the final rule, a covered credit union that remains under $15
billion will not conduct annual stress tests, even if it has been
subject to capital planning requirements for over three years. For such
covered credit unions, the final rule provides additional regulatory
relief from supervisory stress testing. However, a tier I credit union
that crosses the $15 billion threshold in less than three years after
becoming a covered credit union, will have to conduct stress tests
earlier under the final rule than as proposed. The NCUA has determined
to remove the three year phase-in period in favor of a strict asset-
size threshold because the NCUA believes that size is one of the
primary indicators of systemic risk to the NCUSIF. Specifically, the
NCUA believes that a $15 billion threshold balances the goal of
providing regulatory relief with the additional risk that larger, more
systemically significant credit unions pose to the NCUSIF. Therefore,
the NCUA believes that at $15 billion in total assets a covered credit
union represents sufficient risk to the NCUSIF that supervisory stress
tests are warranted. The designation for a tier III credit union
remains the same as proposed and includes a covered credit union that
has $20 billion or more in total assets (or is otherwise designated as
a tier III credit union by the NCUA).
Several commenters recommended that the NCUA define the tier I, II,
and III thresholds to include factors other than a credit union's size
and number of completed capital planning cycles. A common theme among
such commenters was that the NCUA should explicitly consider a covered
credit union's financial health and risk profile in defining the
thresholds. These commenters urged the NCUA to provide additional
regulatory relief and flexibility to covered credit unions that pose
less risk to the NCUSIF. Factors mentioned by commenters that the NCUA
could consider in granting additional regulatory relief include prompt
corrective action capital levels, CAMEL ratings (specifically
composite, capital, and management ratings), levels of interest rate
risk, earnings, rates of growth, and concentration risk.
Capital plan review and supervisory stress testing, however, are
forward-looking assessments of a covered credit union's financial
condition. In contrast, capital ratings, earnings, rates of growth, and
concentration risk are important supervisory tools that are based on a
covered credit union's current financial condition. Additionally,
capital planning and supervisory stress testing contribute to a covered
credit union's CAMEL ratings and overall risk assessments. Therefore,
the NCUA believes that including CAMEL ratings as criteria for
supervisory thresholds would create inappropriate circularity and has
not incorporated prudential conditions into the thresholds for capital
planning and stress testing requirements.
Several commenters recommended that the NCUA incorporate an
additional grace period between the time when a covered credit union
becomes a tier I credit union and when it becomes a tier II credit
union. Commenters stated that such additional time would allow tier I
covered credit unions to focus on building strong capital planning and
capital adequacy assessment processes before having to incorporate
supervisory stress testing programs. The NCUA agrees with commenters
that it is important for tier I covered credit unions to focus on
building strong capital planning and capital adequacy assessment
processes before incorporating supervisory stress testing programs.
Therefore, as discussed above, in the final rule, a tier I credit union
will not be automatically subject to stress testing requirements after
a three-year phase in period. Instead, a tier I credit union will only
be subject to stress testing requirements after its total assets exceed
$15 billion. The NCUA believes that the $15 billion threshold provides
credit unions additional control over their timeline for beginning
supervisory stress testing. In recent years, covered credit unions have
grown an average of 10 percent per year. At this rate of growth, a
covered credit union would have about four years to focus on their
capital planning processes before becoming a tier II credit union and
incorporating supervisory stress testing programs. The NCUA believes
that modifying the thresholds by removing the three year phase-in
period in favor of a strict asset-size threshold provides additional
regulatory relief and that credit unions that grow in a safe and sound
manner will have sufficient time to build upon their capital planning
procedures before implementing stress testing requirements. The NCUA
notes that a credit union with an exceptional rate of growth such that
it must begin supervisory stress testing requirements less than three
years after becoming a tier I credit union may raise supervisory
concerns.
A few commenters recommended removing the proposed language
allowing the NCUA the discretion to designate a credit union as a tier
II or tier III credit union. Alternatively, the commenters suggested
setting clear criteria, along with examples, to delineate the
situations when this could happen. The NCUA recognizes that size alone
does not provide a complete view of risk at a credit union. Each credit
union is unique and matters of complexity and financial condition are
nuanced. To maintain flexibility, to avoid creating a ``one size fits
all'' rule, and to incorporate the unique attributes of individual
credit unions, the Board is retaining in the final rule the ability to
elevate a credit union's tier designations. Thus, in the final rule,
asset size establishes the baseline for determining the credit union's
tier designation, but a credit union's financial condition, complexity,
and other environmental matters may be considered by the Board to
elevate its

[[Page 17903]]

tier designation. In addition, the NCUA does not believe that codifying
a strict set of conditions to delineate when this discretion is to be
exercised is prudent given the highly fact specific nature of the
determination.

B. Capital Planning Requirements

Under the proposed rule, a covered credit union would continue to
annually develop and submit to the NCUA a capital plan. For tier I and
II covered credit unions, however, review of their capital plans would
be incorporated into their supervisory oversight. For tier III covered
credit unions, review of their capital plans would continue to be
subject to the current requirement that the NCUA formally approve or
reject them. A few commenters specifically expressed support for the
proposed changes to the capital planning requirements. Several other
commenters, however, recommended specific changes to further reduce the
burden of capital planning requirements.
Specifically, several commenters stated that the NCUA should reduce
the frequency of capital planning requirements. For example, a
commenter recommended that the NCUA eliminate the requirement that
covered credit unions provide annual capital plans. Instead, the
commenter recommended that the NCUA use the supervisory process to
evaluate capital. Other commenters suggested that for certain covered
credit unions, capital plans should only be required every two to three
years. The NCUA believes that capital adequacy considerations and
capital actions should be regular and ongoing activities at covered
credit unions and viewed alongside the credit union's strategic and
financial plans. Annual revisions and more frequent reviews of capital
plans are appropriate so that the credit union has a current view of
threats to capital and can take timely mitigating action. The NCUA does
not consider annual capital plan preparation, even with incorporated
supervisory stress tests, to be an excessive burden, and therefore, the
final rule continues to require annual development of capital plans for
all covered credit unions.
Additionally, a few commenters recommended tailoring capital
planning requirements to complement the stress testing changes by
providing tiered expectations for capital planning requirements. The
NCUA notes that it will review tier I and tier II credit union capital
plans through the supervisory process and those plans are not subject
to formal approval by the NCUA. Commenters also had different opinions
on whether the NCUA should formally approve or reject any covered
credit union's capital plan. For example, a commenter recommended that
the NCUA review all capital plans through the supervisory process,
while another commenter supported the proposal to retain the
requirement that the NCUA approve or reject a tier III credit union's
capital plan. The final rule's tiered approach enables the NCUA to
tailor capital plan expectations to the individual credit union,
reserving the highest expectations and most critical assessment for the
tier III credit unions. For tier III credit unions, which pose the most
systemic risk to the NCUSIF, it is prudent to establish formal triggers
requiring action to mitigate NCUSIF risk exposure. Therefore, in the
final rule, capital plans for tier III credit unions will continue to
be subject to formal approval requirements.

C. Stress Testing Requirements

Under the proposal, the NCUA would no longer conduct the annual
supervisory stress tests on applicable covered credit unions. Rather,
the covered credit unions themselves would conduct the stress tests
according to the NCUA's instructions, which ensures that the stress
tests performed by credit unions are conducted in a consistent and
comparable manner. Covered credit unions also would be subject to
tiered stress testing requirements. Tier I credit unions would no
longer be subject to stress testing requirements, and tier II and III
credit unions would conduct annual stress tests. Additionally, unlike
their larger counterparts in tier III, tier II credit unions would not
be subject to a 5 percent minimum stress test capital threshold.
Commenters had mixed opinions on whether the proposed changes to stress
testing requirements provided meaningful regulatory relief. Commenters
also had varied opinions on whether the NCUA or covered credit unions
should conduct the required stress tests. Several commenters
specifically stated their support for allowing covered credit unions to
conduct their own stress tests. Other commenters, however, stated that
such a change would increase operational burden and expense for credit
unions. Another commenter recommended retaining the current opt-in
approach to conducting stress tests. The NCUA believes that credit
unions are better informed of risk when they perform their own capital
adequacy assessments. Having covered credit unions conduct their own
supervisory stress tests further informs their capital analysis. Also,
it eliminates any negative consequences that could result from the NCUA
conducting the tests, namely that a covered credit union might abdicate
its responsibility to perform rigorous capital analyses to the NCUA.
Furthermore, the NCUA views the production and reporting of supervisory
stress test results as incidental given the expectation that credit
unions have sound capital adequacy assessment processes. Therefore, the
NCUA is not changing the proposed requirement to have tier II and III
covered credit unions conduct their own supervisory stress tests.
Many commenters encouraged the NCUA to consider providing more
substantial regulatory relief, including reducing or eliminating stress
testing requirements. Several commenters recommended eliminating the
stress testing requirements altogether. Others suggested reducing the
frequency of testing or waiving certain requirements based on the
credit union's risk profile. The primary objective of stress testing is
for the NCUA and the covered credit union to have an understanding of
the credit union's ability to absorb the impact of significant economic
stresses and to determine with a high degree of confidence when a
covered credit union does not have sufficient capital to protect the
NCUSIF from losses. Annual supervisory stress testing is an important
prudential tool that provides the NCUA an aggregate view of the covered
credit union's financial condition and capital resiliency. Therefore,
in the final rule, tier II and III credit unions will continue to be
required to conduct annual stress tests.
Commenters also had specific recommendations for the stress testing
process. For example, a few commenters objected to the proposed
timeline for conducting stress tests and completing capital plans. The
commenters believed that the May 31st submission date provides
insufficient time to complete the stress tests and incorporate results
into the capital planning process. Instead, commenters suggested
submission dates of July 31st or August 31st. As recently as 2015, the
NCUA considered the timing of capital planning and stress test
elements. In July 2015, the NCUA adopted a revised capital planning and
stress testing schedule, which included consideration of the potential
for credit union run stress testing.\7\ In that final rule, the NCUA
amended the capital planning and stress testing rule to establish a due
date of May 31st for covered credit unions to submit their capital
plans. This change provided covered credit unions with five months from
the as-of

[[Page 17904]]

date (and three months from the scenario release date) to prepare their
capital plans, as commenters requested. The NCUA continues to believe
that the release date of supervisory stress test scenarios and the due
date for credit union capital plans provide ample time for a credit
union to produce and report credible stress test results. Therefore,
the final rule retains the May 31st submission date for annual stress
tests. A number of commenters also encouraged the NCUA to provide
stress testing instructions earlier in the capital planning process.
The NCUA agrees with the commenters. The NCUA intends to post
instructions on its website that will generally remain the same each
year. If any modifications are necessary to the instructions due to a
particular year's scenarios, such modifications will be released at the
same time as the scenarios.
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\7\ 80 FR 48010 (Aug. 11, 2015).
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A minority of commenters discussed the scenarios required for
stress testing. For example, a commenter recommended that tier II
covered credit unions be exempt from the baseline and adverse stress
test scenarios. The NCUA believes that each scenario is necessary for
the NCUA and a credit union to have a complete understanding of the
credit union's risks and that each scenario serves a distinct purpose
in the stress test exercise. Specifically, the baseline scenario,
conducted under the NCUA's instructions, serves as a benchmark to
evaluate results under the stress scenarios. The stress scenarios are
used to stress different aspects of a credit union's positions under
unfavorable conditions and may be designed to focus on different risk
characteristics of a credit union's portfolio. The spectrum of
scenarios is necessary to have a complete understanding of a credit
union's capital position in different economic conditions. Therefore,
the NCUA believes that all stress tests should include all scenarios.
Furthermore, consistent testing parameters ensure that credit union
results are comparable to each other. Another commenter recommended
that the NCUA continue utilizing the Federal Reserve Board's stress
test assumption scenarios rather than designing its own unique tests.
The commenter believed that standardization across the financial
services industry is preferable. The NCUA agrees with this commenter.
Consistent with past practice, the NCUA intends to publish scenarios
that are consistent with the scenarios published by the banking
agencies. However, the NCUA reserves the right to modify scenarios or
produce unique scenarios to ensure risk at covered credit unions is
sufficiently captured in the exercise.

D. Data Submission

Covered credit unions are currently required to submit data to the
NCUA as part of the stress testing process, and the proposal did not
include any changes to these requirements. Several commenters,
nevertheless, encouraged the NCUA to eliminate or substantially reduce
the data submissions. Commenters, however, generally did not offer
specific data items that they considered unnecessary or burdensome.
Data collection is part of the NCUA's strategic initiative to enhance
supervision and is used to inform qualitative and quantitative
assessments and ratings of covered credit unions. The data currently
collected for the NCUA to conduct supervisory stress tests will
continue to be used by the agency to assess a covered credit union's
capital adequacy through review of its capital plan and supervisory
stress tests results. Also, the collected data can drive supervisory
efficiencies that reduce regulatory burden for covered credit unions.
For example, the data may lead to more targeted supervisory work
resulting in less time on-site at covered credit unions. Therefore, the
final rule retains the current data collection requirements.

E. Other Comments

A few commenters recommended amending the definition of ``covered
credit union'' so that a credit union with total assets over $10
billion does not becomes a ``covered credit union'' until its most
recent four-quarter average of consolidated total assets exceeds $10
billion. Based on our experience implementing the capital planning and
stress testing rules, the NCUA has not found that many credit unions
decrease under $10 billion after becoming covered credit unions.
Therefore, the NCUA does not believe the added complexity required by
determining a four-quarter average is warranted and is not making any
such changes to the final rule.
A few commenters also stated that given the enterprise-wide nature
of the capital planning and supervisory stress testing regime, the NCUA
should consider whether certain generally applicable requirements that
must be met for a credit union to be eligible for insurance coverage
are unnecessarily redundant when applied to covered credit unions. The
commenters specifically noted liquidity and risk-based capital
standards. Capital planning and stress testing are distinctive
supervisory tools that the NCUA uses in the supervision of risk at
covered credit unions. They complement, but do not replace, other
regulatory and supervisory tools used by the agency.

III. Final Rule

After carefully considering the public comments, the NCUA has made
several changes to the final rule. The final rule reflects the NCUA's
experiences in implementing the current rule's requirements, while also
considering the systemic risk that covered credit unions pose to the
NCUSIF. As explained in more detail below, the final rule is intended
to reduce regulatory burden by removing some of the more onerous
capital planning and stress testing requirements currently applicable
to covered credit unions. The changes to the NCUA's capital planning
and stress testing requirements will more closely align the agency's
regulatory requirements with its current supervisory expectations for
covered credit unions.
In the final rule, covered credit unions are subject to new tiered
regulatory requirements that further ensure their capital plans and
stress testing requirements are tailored to reflect their size,
complexity, and financial condition. For example, under the final rule,
tier I and II covered credit unions will continue to develop annual
capital plans, but the capital plans will no longer be formally
submitted to the NCUA by May 31st each year. In contrast, tier III
covered credit unions will continue to submit capital plans to the NCUA
by May 31st that must be formally accepted or rejected by the NCUA.
Additionally, stress testing requirements under the final rule are also
tiered. Under the final rule, tier I credit unions are not subject to
any stress testing requirements. In contrast, tier II and III covered
credit unions are required to conduct stress testing, although tier II
covered credit unions are not subject to a 5 percent minimum stress
test capital threshold. Further, under the final rule, the NCUA will no
longer be required to conduct the annual supervisory stress tests on
applicable covered credit unions. Rather, the covered credit unions
will conduct the stress tests.
While the NCUA recognizes that all covered credit unions are of
systemic importance to the NCUSIF, the NCUA believes it is appropriate
to differentiate the capital planning and stress testing requirements
applicable to such institutions based on their individual
characteristics. Specifically, size is deemed to be the most
significant

[[Page 17905]]

determinant regarding each covered credit union's systemic risk to the
NCUSIF. The Board's ability to recategorize a covered credit union into
a higher tier, however, recognizes that the complexity and financial
condition of the credit union are other important considerations for
determining whether a credit union should be subject to additional
capital planning and stress testing requirements. The final rule seeks
to balance the higher risk that covered credit unions may pose to the
NCUSIF, with the time and resources these institutions need to prepare
themselves to meet capital planning and supervisory stress testing
expectations. The NCUA also has sought to tailor the capital planning
and stress testing requirements in such a manner as to reduce the
regulatory burden imposed on those smaller covered credit unions that
pose less risk to the NCUSIF. The final rule is discussed in greater
detail below.

Tiers of Covered Credit Unions

The final rule retains the proposed use of tiers to differentiate
the capital planning and stress testing requirements applicable to
covered credit unions. The final rule identifies three tiers of covered
credit unions and imposes varying levels of regulatory requirements
based on those tiers. In brief, the tier comprised of the smallest
covered credit unions is subject to the least regulatory requirements,
with a concomitant increase in requirements for each tier as the size
and complexity of those covered credit unions increases. In response to
commenters, the final rule has partially revised the thresholds for
tier I, II, and III covered credit unions as compared to the proposed
rule. Under the final rule, the three tiers are as follows:
A tier I credit union is a covered credit union that has
less than $15 billion in total assets;
A tier II credit union is a covered credit union that has
$15 billion or more in total assets, but less than $20 billion in total
assets, or is otherwise designated as a tier II credit union by the
NCUA; and
A tier III credit union is a covered credit union that has
$20 billion or more in total assets, or is otherwise designated as a
tier III credit union by the NCUA.

Amendments to the Capital Planning Requirements

In the final rule, the level of the capital planning requirements
for tier I and II credit unions generally decreases from the current
regulatory requirements, but generally remains the same for tier III
credit unions. This approach reduces regulatory burdens on tier I and
II credit unions while allowing them to focus on establishing sound
capital planning and capital adequacy assessment processes. Tier III
credit unions, on the other hand, which pose the greatest systemic risk
to the NCUSIF and which are most capable of complying with the current
requirements, remain subject to most of the current requirements.
In the final rule, tier I and II covered credit unions are required
to develop and maintain an annual capital plan, but they are no longer
required to formally submit their capital plans to the NCUA for
approval by May 31st of each year. The removal of the requirement for
tier I and II credit unions to formally submit capital plans to the
NCUA is a change from the proposed rule. The NCUA believes this
provides smaller covered credit unions with additional flexibility to
incorporate their annual capital plan into their planning processes,
such as development of their strategic plans.
Additionally, under the final rule, tier I and II credit unions are
no longer required to have their capital plans formally approved by the
NCUA. Instead, capital plan reviews for tier I and II credit unions
will be conducted as part of the NCUA's supervisory process. This
approach provides the NCUA greater latitude when reviewing capital plan
submissions and provides the NCUA with additional flexibility to use
the supervisory process to address plan deficiencies, especially for
credit unions newly covered by the capital planning requirements. The
NCUA believes that any increased risk to the NCUSIF that may occur as a
result of providing regulatory relief can be addressed through the
supervisory process.
For tier III credit unions, the final rule retains the current
requirement that all such credit unions submit capital plans to the
NCUA no later than May 31st of each year. In addition, for tier III
credit unions, the NCUA will formally approve or reject its capital
plan. Because the failure of a tier III credit union poses the most
significant risk to the NCUSIF, the NCUA believes it is prudent to
retain the current, more formal requirements for those credit unions.
The NCUA's formal rejection of a capital plan is subject to the
Supervisory Review Committee process.

Table 1--Capital Plan Requirements
----------------------------------------------------------------------------------------------------------------
Financials ``as Submission and due
Tier Description Required of'' date date NCUA review
----------------------------------------------------------------------------------------------------------------
I............. A credit union Yes............. Based on financial Capital plan is Review of the
with $10 billion data within two not submitted to capital plan is
or more in total quarters of plan the NCUA, but is part of the
assets, but less completion. required to be NCUA's
than $15 billion done annually. supervisory
in total assets. oversight.
II............ A credit union Yes............. Based on financial Capital plan is Review of the
with $15 billion data within two not submitted to capital plan is
or more in total quarters of plan the NCUA, but is part of the
assets, but less completion. required to be NCUA's
than $20 billion done annually. supervisory
in total assets. oversight.
III........... A credit union Yes............. December 31st of Capital plans are The NCUA accepts
with $20 billion the previous submitted to the or rejects credit
or more in total calendar year. NCUA by May 31st union capital
assets. each year. plans--qualitativ
e and
quantitative
assessment.
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NCUA's Supervisory Stress Testing Requirements

Credit Union-Conducted Stress Tests. Under the current rule, the
NCUA is required to conduct supervisory stress tests for all covered
credit unions. When the NCUA approved the current regulation in 2014,
it believed that the NCUA should initially conduct all stress tests to
ensure that the NCUA had an independent assessment of risk for covered
credit unions. The preamble to the 2014 final rule acknowledged,
however, that it might be appropriate in the future for certain covered
credit unions to conduct their own supervisory stress tests, and the
NCUA adopted a provision in the 2014 final

[[Page 17906]]

rule to allow for that.\8\ In particular, current Sec. 702.506(c)
provides that after the NCUA has completed three consecutive
supervisory stress tests of a covered credit union, the covered credit
union may, with the NCUA's approval, conduct the tests described in
subpart E of part 702 on its own. Having now completed three annual
stress testing cycles, the NCUA believes that changing its regulation
to have covered credit unions conduct their own supervisory stress
tests, without needing to obtain approval from the NCUA, is
appropriate. Accordingly, in this final rule, the requirement that the
NCUA conduct supervisory stress tests is eliminated. Additionally, the
NCUA retains the provision in the current rule that reserves the NCUA's
right to conduct the stress tests on any covered credit union at any
time, and to request qualitative and quantitative information from the
covered credit unions that pertains to supervisory stress testing.
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\8\ 79 FR 24311 (Apr. 30, 2014).
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Incremental Approach. Running a supervisory stress test requires
internal controls that enable the credit union to effectively challenge
all material aspects of its capital planning and analysis. For a
covered credit union to develop the ability to obtain, cleanse, and
manage internal and external data, and perform adequate capital
analyses, it must possess a level of experience and operational scale
that is unlikely to be in place or quickly developed by a credit union
when it first reaches the $10 billion threshold. Accordingly, the NCUA
is adopting an incremental regulatory approach to supervisory stress
testing that gradually increases regulatory requirements on a covered
credit union as it increases in asset size without making the
requirements too burdensome too soon.

Table 2--Stress Test Incremental Approach
----------------------------------------------------------------------------------------------------------------
Minimum stress- Financials ``as
Tier Description Required test ratio of'' date Due date
----------------------------------------------------------------------------------------------------------------
I................ A credit union with No.............. N/A............. N/A............... N/A.
$10 billion or
more in total
assets, but less
than $15 billion
in total assets.
II............... A credit union with Yes............. N/A............. December 31st..... May 31st.
$15 billion or
more in total
assets, but less
than $20 billion
in total assets.
III.............. A credit union with Yes............. 5%.............. December 31st..... May 31st.
$20 billion or
more in total
assets.
----------------------------------------------------------------------------------------------------------------

Tier I. In the final rule, a tier I credit union is not subject to
any supervisory stress testing requirements, nor is it required to
incorporate the NCUA's stress test scenarios in its capital plan. This
approach allows a tier I credit union time after it reaches the $10
billion threshold to obtain the policies and processes necessary to
develop sound capital plans and analyses prior to incorporating
supervisory stress testing. Once a covered credit union has $15 billion
in total assets, it is required to meet all tier II requirements
described below.
Tier II. In the final rule, a tier II credit union is subject to
supervisory stress testing requirements. In addition, a tier II credit
union must incorporate the NCUA's annual stress test scenarios into its
capital plan, even though the capital plan is not required to be
submitted to the NCUA on May 31st. The NCUA does not believe this
particular requirement imposes additional regulatory burden on a tier
II credit union because, as the NCUA has observed over the last three
years of implementing the stress testing regulations, covered credit
unions already incorporate the NCUA's supervisory stress test scenarios
into their capital plans even though they are not required to do so
under the current rule.
Tier III. In the final rule, a tier III credit union is subject to
supervisory stress testing requirements and must meet a minimum stress-
test ratio of 5 percent. The final rule also requires a tier III credit
union to incorporate the NCUA's stress test scenarios into its capital
plan submission. Because a tier III credit union poses the greatest
level of systemic risk to the NCUSIF, it must also submit a plan to
build capital or mitigate the risk if the credit union shows that its
stress test capital ratio would fall below the 5 percent minimum stress
test capital threshold. This is consistent with the supervisory stress
testing requirements in current Sec. 702.506(g).
The final rule applies the asset thresholds as of the March 31st
measurement date of each year.\9\ If a credit union crosses any of the
tier I, II, or III asset thresholds by March 31st, then the credit
union's new classification is effective at the beginning of the next
year. Therefore, if a credit union has over $10 billion in total assets
as of March 31, 2018, it must complete a capital plan in calendar year
2019. And, if a covered credit union has $15 billion in assets on March
31, 2018, it must also conduct a stress test in calendar year 2019.
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\9\ See the definition of ``covered credit union.'' 12 CFR
702.502.
---------------------------------------------------------------------------

Website Instructions. The NCUA will publish on its website
instructions for tier II and III credit unions on how to administer
their own supervisory stress tests. The NCUA believes that a covered
credit union's ability to maintain independence and flexibility is
essential to the overall success of the NCUA's supervisory stress
testing program. Accordingly, tier II and III credit unions are
required to conduct their own stress tests in accordance with the
instructions provided by the NCUA.
Conforming and Clarifying Amendments. The final rule also makes
some minor conforming and clarifying amendments to the current rule.
These conforming and clarifying amendments include removing, changing,
and adding certain definitions.
The changes outlined above are discussed in more detail in the
Section-by-Section Analysis below.

IV. Section-by-Section Analysis

Section 702.502 Definitions

The final rule retains most of the definitions included in the
proposed rule except that the proposed definition of capital planning
cycle has been removed. The definition was necessary to distinguish
between tier I and II credit unions in the proposed rule, but is not
necessary in the final rule as the number of capital planning cycles
completed is no longer a distinguishing factor between the tier I and
II threshold classifications. The final rule also retains most of the
definitions from current Sec. 702.502, without change, with the
following exceptions.

[[Page 17907]]

Adverse Scenario

The final rule removes the definition of ``adverse scenario'' from
Sec. 702.502 and replaces this term throughout subpart E with terms
more commonly used in the financial services industry. This change is
intended to reduce confusion for covered credit unions. No substantive
changes to the requirements of subpart E are intended by this change
and covered credit unions will continue to be subject to the baseline
and one or more stressed scenarios.

Covered Credit Union

The final rule makes conforming amendments to the current
definition of ``covered credit union'' in Sec. 702.502. The amended
definition provides that ``covered credit union'' means a federally
insured credit union whose assets are $10 billion or more. The
definition provides further that a credit union that crosses that asset
threshold as of March 31st of a given calendar year is subject to the
applicable requirements of subpart E in the following calendar year.

Scenarios

The revised definition provides that ``scenarios'' are those sets
of conditions that affect the U.S. economy or the financial condition
of a covered credit union that serve as the basis for stress testing,
including, but not limited to, NCUA-established baseline scenarios, and
stress scenarios. It is the NCUA's intention to continue to base the
NCUA-established scenarios on the scenarios developed by the Federal
Reserve Board. As currently is the practice, the NCUA may modify such
scenarios to ensure they are appropriate for domestic banking
operations.

Severely Adverse Scenario

The final rule deletes the definition of ``severely adverse
scenario'' from Sec. 702.502 and replaces this term throughout subpart
E with terms more commonly used in the financial services industry.
This change is intended to reduce confusion for covered credit unions.
No substantive changes to the requirements of subpart E are intended by
this change and covered credit unions will continue to be subject to
the baseline and one or more stressed scenarios.

Stress Scenario

The final rule adds the definition ``stress scenario'' to Sec.
702.502. The definition provides that ``stress scenario'' means a
scenario that is more adverse than that associated with the baseline
scenario.

Tier I Credit Union

The final rule adds the definition of ``tier I credit union'' to
Sec. 702.502. The definition provides that ``tier I credit union''
means a covered credit union that has less than $15 billion in total
assets. The definition of a tier I credit union provides regulatory
relief for qualifying covered credit unions. This definition allows the
NCUA to better align regulatory expectations based on the size,
complexity, and financial condition of each covered credit union.

Tier II Credit Union

The final rule adds the definition of ``tier II credit union'' to
Sec. 702.502. The definition provides that ``tier II credit union''
means a covered credit union that has $15 billion or more in total
assets but less than $20 billion in total assets, or is otherwise
designated as a tier II credit union by NCUA. This definition
recognizes the iterative nature of the NCUA's capital planning and
stress testing processes, and acknowledges that covered credit unions
get better at developing and implementing their capital plans over time
and through repetition. The NCUA believes these changes provide
regulatory relief for tier II credit unions.

Tier III Credit Union

The final rule adds the definition of ``tier III credit union'' to
Sec. 702.502. The definition provides that ``tier III credit union''
means a covered credit union that has $20 billion or more in total
assets, or is otherwise designated as a tier III credit union by NCUA.
The final rule identifies credit unions with total assets of $20
billion or more as posing the highest degree of risk to the NCUSIF.
While the NCUA considers qualitative and quantitative capital plan
supervision and credit union-run stress test review to be appropriate
for covered credit unions with less than $20 billion in total assets,
it does not for larger covered credit unions. For covered credit unions
with total assets of $20 billion or more, the NCUA believes it is
prudent, given the size of the NCUSIF and the potential loss associated
with the failure of a credit union that large, to establish formal
triggers requiring the NCUA and credit union actions to further
mitigate NCUSIF risk exposure.
The Board retains the authority to designate a covered credit union
as a tier II credit union or tier III credit union.

Section 702.504 Capital Planning

The final rule retains most of current Sec. 702.504 without
change, with the following exceptions.
(a) Annual Capital Planning
(a)(1)
Section 702.504(a)(1) continues to provide that all covered credit
unions must develop and maintain a capital plan. Under the final rule,
however, only tier III credit unions are required to submit their
capital plan and capital policy to the NCUA. Therefore, the final rule
amends Sec. 702.504(a)(1) to state that a tier I and II credit union
must complete a capital plan by December 31st each year, but are not
required to submit a plan to the NCUA. Additionally, the final rule has
been amended to state that the capital plan must be based on financial
data from either of the two preceding calendar quarters. For example,
if a tier I or II credit union's board approves its capital plan in the
fourth quarter, the plan financial data must be as of either September
30th or June 30th. Section 702.504(a)(1) is also amended to explicitly
state that a tier III credit union must submit its plan and capital
policy to the NCUA by May 31st each year, or such later date as
directed by the NCUA. The final rule also continues to provide that for
tier III covered credit unions, the plan must be based on the covered
credit union's financial data as of December 31st of the preceding
calendar year, or such other date as directed by the NCUA. Finally,
Sec. 702.504(a)(1) will no longer include the last sentence in current
Sec. 702.504(a)(1), which provides that the NCUA will assess whether
the capital planning and analysis process is sufficiently robust in
determining whether to accept a credit union's capital plan. Given the
other changes in this final rule, this sentence is no longer necessary.
(a)(2)
The current rule states that a covered credit union's board of
directors (or a designated committee of the board) must at least
annually, and prior to the submission of the capital plan, review and
approve the credit union's capital plan. The final rule clarifies that
this requirement applies to all covered credit unions, even if the
credit union is not required to submit the plan to the NCUA.
(b) Mandatory Elements
(b)(4)
The final rule deletes current Sec. 702.504(b)(4) from the
regulation. Current Sec. 702.504(b)(4) provides that if a credit union
conducts its own stress test under Sec. 702.506(c), its capital plan
must include a discussion of how the credit union will maintain a
stress test capital ratio of 5 percent or more under

[[Page 17908]]

baseline, adverse, and severely adverse conditions in each quarter of
the 9-quarter horizon. This sentence is no longer necessary because it
is fully addressed in Sec. 702.506(f).

Section 702.505 NCUA Action on Capital Plans

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

Section 702.506 Annual Supervisory Stress Testing

Much of the substance of current Sec. 702.506 remains unchanged in
the final rule. Each of the substantive amendments are discussed in
detail below. The final rule also makes some non-substantive conforming
amendments to address certain changes in terminology.
(a) General Requirements
The final rule amends current Sec. 702.506(a) by adding a new
clarifying sentence to the beginning of paragraph (a). The new sentence
provides that only tier II and tier III credit unions are required to
conduct supervisory stress tests. The NCUA believes that exempting tier
I credit unions from supervisory stress testing provides prudent
regulatory relief and enables tier I credit unions time to develop
their own capital adequacy assessments. The NCUA considers the
supervisory stress testing exemption for tier I credit unions, which
allow credit unions to grow from $10 billion in total assets to $15
billion in total assets, to be sufficient time to develop internal
capabilities to perform credit union-run supervisory stress tests.

NCUA-Run Tests

The final rule deletes current Sec. 702.506(b) regarding NCUA
conducted stress tests, which, because of the other changes being
implemented to part 702, is overridden. The NCUA reserves, in amended
Sec. 702.506(b)(3), the right to conduct stress tests on covered
credit unions if it deems such action necessary.
(b) Credit Union-Run Supervisory Stress Tests
The final rule makes significant revisions to current Sec.
702.506(c) (which has been renumbered to Sec. 702.506(b) in the final
rule) to require tier II and tier III credit unions to conduct their
own stress tests instead of first having to get approval from the NCUA.
In the final rule, renumbered Sec. 702.506(b) is split into three new
subparagraphs, each of which is described in more detail below.
(b)(1) General
Section 702.506(b)(1) of the final rule provides that all
supervisory stress tests must be conducted according to the NCUA's
instructions. The NCUA is adding this requirement to ensure that
supervisory stress tests performed by tier II and tier III credit
unions are conducted in a manner that promotes consistency and
comparability. Credit union-run stress tests must adhere to these
principles in order for the NCUA to assess inherent risk in the
portfolios of covered credit unions and establish supervisory
benchmarks. The NCUA will publish credit union-run supervisory stress
test instructions on its website.
(b)(2) Tier III Credit Unions
Section 702.506(b)(2) of the final rule provides that when
conducting its stress test, a tier III credit union must apply the
minimum stress test capital ratio to all time periods in the planning
horizon. The NCUA believes that only tier III credit unions should be
subject to a minimum stress test capital requirement. Therefore, tier
II credit unions do not have to apply a minimum stress test capital
ratio to each time period in the planning horizon.
(b)(3) NCUA Tests
Section 702.506(b)(3) of the final rule retains the last two
sentences in current Sec. 702.506(c), without change. Section
702.506(b)(3) of the final rule provides that the NCUA reserves the
right to conduct the stress tests described in this section on any
covered credit union at any time. Paragraph (b)(3) provides further
that where both the NCUA and a covered credit union have conducted the
tests, the results of the NCUA's tests will determine whether the
covered credit union has met the requirements of part 702. The final
rule includes no substantive changes to these two sentences as compared
to the current rule.
(e) Stress Test Results
The final rule states that all stress test results are due to the
NCUA by May 31st each year. The May 31st stress testing due date
applies to both tier II and III credit unions, even though tier II
covered credit unions are not required to submit a capital plan on May
31st.
(f) Supervisory Actions
The final rule retains much of the language in current Sec.
702.506(g), but inserts some additional language. The section also is
broken into three subsections, each of which is discussed in more
detail below.
(f)(1)
Section 702.506(f)(1) of the final rule provides that if a credit
union-run stress test shows a tier III credit union does not have the
ability to maintain a stress test capital ratio of 5 percent or more
under expected and stressed conditions in each quarter of the planning
horizon, the credit union must incorporate into its capital plan a
stress test capital enhancement plan showing how it will meet that
target.
(f)(2)
Section 702.506(f)(2) provides that if an NCUA-run stress test
shows that a tier III credit union does not have the ability to
maintain a stress test capital ratio of 5 percent or more under
expected and stressed conditions in each quarter of the planning
horizon, the credit union must provide the NCUA, by November 30 of the
calendar year in which the NCUA conducted the tests, a stress test
capital enhancement plan showing how it will meet that target. As
explained above, the NCUSIF risk exposure to a tier I and tier II
credit union is sufficiently mitigated through qualitative and
quantitative supervision of the credit union's capital planning and
capital adequacy analysis. Accordingly, the final rule offers

[[Page 17909]]

regulatory relief as tier I and tier II credit unions are no longer
subject to the minimum stress test capital ratio.
(f)(3)
Section 702.506(f)(3) of the final rule provides that a tier III
credit union operating without an NCUA-approved stress test capital
enhancement plan required under this section may be subject to
supervisory action. A tier III credit union operating without an
accepted capital plan or an approved stress test capital enhancement
plan will be considered poorly managed and/or operating with
insufficient capital to support the credit union's risk profile. The
NCUA believes it is prudent to subject a tier III credit union to
heightened regulatory scrutiny under such circumstances.

V. Stress Testing and Capital Plan Requirements for 2018

The final rule is effective June 1, 2018, after the May 31, 2018
submission date for capital plans. Therefore, the current rule remains
effective for covered credit unions' 2018 capital plans and all covered
credit unions must complete their capital plans by May 31, 2018. Tier I
and II credit unions, however, do not need to submit their capital
plans to the NCUA by May 31, 2018, and the NCUA will review their
capital plans through the supervisory process. With respect to stress
testing, the NCUA will conduct stress tests in calendar year 2018 for
supervisory purposes.

VI. Regulatory Procedures

1. Regulatory Flexibility Act

The Regulatory Flexibility Act requires the NCUA to prepare an
analysis of any significant economic impact any regulation may have on
a substantial number of small entities (primarily those under $100
million in assets).\10\ The final rule and its requirements apply to
only the largest credit unions, those with $10 billion or more in total
assets. Accordingly, the Board certifies that it will not have a
significant economic impact on a substantial number of small entities.
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\10\ 5 U.S.C. 603(a); 12 U.S.C. 1787(c)(1).
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2. Paperwork Reduction Act

The Paperwork Reduction Act of 1995 (PRA) (44 U.S.C. 3501 et seq.)
requires that the Office of Management and Budget (OMB) approve all
collections of information by a Federal agency from the public before
they can be implemented. Respondents are not required to respond to any
collection of information unless it displays a current, valid OMB
control number.
In accordance with the PRA, the information collection requirements
included in this final rule has been submitted to OMB for approval
under control number 3133-0199, and includes the following program
changes:
Section 702.504 requires FICUs with assets of at least $10 billion
(covered credit unions) to develop and maintain capital plans; but only
tier III to submit NCUA. The removal of the requirement for tier I and
II credit unions to formally submit capital plans to NCUA is a change
from the proposed rule and reflects a reduction of 30 burden hours
annually. Also, an increase of 240 burden hours is due to an adjustment
in the number of respondents from 3 to 4 falling under the
recordkeeping requirements of Sec. 702.504.
Section 702.506 requires tier II and III credit unions to conduct
their own supervisory stress tests in a manner prescribed by NCUA,
which had previously been conducted by NCUA. It is estimated this new
information collection requirement impacts five credit unions for a
total increase of 500 burden hours.
Estimated number of respondents: FICUs with assets of at least $10
billion.
Frequency: Annually.
Total Annual Burden Hours Requested: 2,960 under OMB control number
3133-0199; a total increase of 710 burden hours.

3. Executive Order 13132

Executive Order 13132 encourages independent regulatory agencies to
consider the impact of their actions on state and local interests. The
NCUA, an independent regulatory agency as defined in 44 U.S.C. 3502(5),
voluntarily complies with the executive order to adhere to fundamental
federalism principles. The final rule does not have substantial direct
effects on the states, on the relationship between the national
government and the states, or on the distribution of power and
responsibilities among the various levels of government. The Board has,
therefore, determined that this final rule does not constitute a policy
that has federalism implications for purposes of the executive order.

4. Assessment of Federal Regulations and Policies on Families

The Board has determined that this final 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).

5. Small Business Regulatory Enforcement Fairness Act

The Small Business Regulatory Enforcement Fairness Act of 1996
(SBREFA) provides generally for congressional review of agency rules. A
reporting requirement is triggered in instances where NCUA issues a
final rule as defined by Section 551 of the Administrative Procedure
Act. NCUA does not believe this final rule is a ``major rule'' within
the meaning of the relevant sections of SBREFA. NCUA has submitted the
rule to the Office of Management and Budget for its determination in
that regard.

List of Subjects in 12 CFR Part 702

Credit unions, Reporting and recordkeeping requirements.

By the National Credit Union Administration Board, on April 19,
2018.
Gerard Poliquin,
Secretary of the Board.

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

PART 702--CAPITAL ADEQUACY

0
1. Revise the authority citation for part 704 to read as follows:

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

Subpart E--Capital Planning and Stress Testing

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

Sec. 702.502 Definitions.

* * * * *
Stress scenario means a scenario that is more adverse than that
associated with the baseline scenario.
* * * * *
Tier I credit union means a covered credit union that has less than
$15 billion in total assets.
Tier II credit union means a covered credit union that has $15
billion or more

[[Page 17910]]

in total assets but less than $20 billion in total assets, or is
otherwise designated as a tier II credit union by NCUA.
Tier III credit union means a covered credit union that has $20
billion or more in total assets, or is otherwise designated as a tier
III credit union by NCUA.

0
3. Amend Sec. 702.504 as follows:
0
a. Revise paragraph (a)(1).
0
b. In paragraph (a)(2) introductory text, add the words ``for tier III
credit unions,'' before the words ``prior to the submission of the
capital plan''.
0
c. Remove paragraph (b)(4).
0
d. Redesignate paragraphs (b)(5) and (b)(6) as paragraphs (b)(4) and
(b)(5).
The revision reads as follows:

Sec. 702.504 Capital planning.

(a) * * * (1) A covered credit union must develop and maintain a
capital plan. Tier I and tier II credit unions must complete this plan
and their capital policy by December 31 each year, but are not required
to submit this plan to the NCUA. For tier I and tier II credit unions,
the plan must be based on the credit union's financial data from either
of the two calendar quarters preceding the quarter in which the plan is
approved by the credit union's board of directors (or a designated
committee of the board). A tier III credit union must submit this plan
and its capital policy to NCUA by May 31 each year, or such later date
as directed by NCUA. For tier III credit unions, the plan must be based
on the credit union's financial data as of December 31 of the preceding
calendar year, or such other date as directed by NCUA.
* * * * *

0
4. Amend Sec. 702.505 as follows:
0
a. Revise paragraph (a).
0
b. Add to the introductory text of paragraph (d) the words ``tier III''
before the words ``credit union's capital plan''.
0
c. In paragraph (e), remove the word ``covered'' and add in its place
the words ``tier III''.
The revision reads as follows:

Sec. 702.505 NCUA action on capital plans.

(a) Timing. (1) Tier I & tier II credit unions. NCUA will address
any deficiencies in the capital plans submitted by tier I and tier II
credit unions through the supervisory process.
(2) Tier III credit unions. NCUA will notify tier III credit unions
of the acceptance or rejection of their capital plans by August 31 of
the year in which their plan is submitted.
* * * * *

0
5. Section 702.506 is revised to read as follows:

Sec. 702.506 Annual supervisory stress testing.

(a) General requirements. Only tier II and tier III credit unions
are required to conduct supervisory stress tests. The supervisory
stress tests consist of a baseline scenario, and stress scenarios,
which NCUA will provide by February 28 of each year. The tests will be
based on the credit union's financial data as of December 31 of the
preceding calendar year, or such other date as directed by NCUA. The
tests will take into account all relevant exposures and activities of
the credit union to evaluate its ability to absorb losses in specified
scenarios over a planning horizon.
(b) Credit union-run supervisory stress tests--(1) General. All
supervisory stress tests must be conducted according to NCUA's
instructions.
(2) Tier III credit unions. When conducting its stress test, a tier
III credit union must apply the minimum stress test capital ratio to
all time periods in the planning horizon. The minimum stress test
capital ratio is 5 percent.
(3) NCUA tests. NCUA reserves the right to conduct the tests
described in this section on any covered credit union at any time.
Where both NCUA and a covered credit union have conducted the tests,
the results of NCUA's tests will determine whether the covered credit
union has met the requirements of this subpart.
(c) Potential impact on capital. In conducting stress tests under
this subpart, the credit union, or the NCUA if it elects to conduct the
stress test under paragraph (b)(3) of this section, will estimate the
following for each scenario during each quarter of the planning
horizon:
(1) Losses, pre-provision net revenues, loan and lease loss
provisions, and net income; and
(2) The potential impact on the stress test capital ratio,
incorporating the effects of any capital action over the planning
horizon and maintenance of an allowance for loan losses appropriate for
credit exposures throughout the horizon. The credit union, or the NCUA
if it elects to conduct the stress test under paragraph (b)(3) of this
section, will conduct the stress tests without assuming any risk
mitigation actions on the part of the credit union, except those
existing and identified as part of the credit union's balance sheet, or
off-balance sheet positions, such as derivative positions, on the date
of the stress test.
(d) Information collection. Upon request, the credit union must
provide NCUA with any relevant qualitative or quantitative information
requested by NCUA pertinent to the stress tests under this subpart.
(e) Stress test results. A credit union required to conduct stress
tests under this section must incorporate the results of its tests in
its capital plan. A credit union required to conduct stress tests must
submit its stress test results to NCUA by May 31 of each year.
(f) Supervisory actions. (1) If a credit union-run stress test
shows a tier III credit union does not have the ability to maintain a
stress test capital ratio of 5 percent or more under expected and
stressed conditions in each quarter of the planning horizon, the credit
union must incorporate, into its capital plan, a stress test capital
enhancement plan that shows how it will meet that target.
(2) If an NCUA-run stress test shows that a tier III credit union
does not have the ability to maintain a stress test capital ratio of 5
percent or more under expected and stressed conditions in each quarter
of the planning horizon, the credit union must provide NCUA, by
November 30 of the calendar year in which NCUA conducted the tests, a
stress test capital enhancement plan showing how it will meet that
target.
(3) A tier III credit union operating without an NCUA approved
stress test capital enhancement plan required under this section may be
subject to supervisory actions.
(g) Consultation on proposed action. Before taking any action under
this section against a federally insured, state-chartered credit union,
NCUA will consult and work cooperatively with the appropriate State
official.

[FR Doc. 2018-08558 Filed 4-24-18; 8:45 am]
BILLING CODE 7535-01-P

17904 Federal Register / Vol. 83, No. 80 / Wednesday, April 25, 2018 / Rules and Regulations

date (and three months from the to ensure risk at covered credit unions distinctive supervisory tools that the
scenario release date) to prepare their is sufficiently captured in the exercise. NCUA uses in the supervision of risk at
capital plans, as commenters requested. covered credit unions. They
D. Data Submission
The NCUA continues to believe that the complement, but do not replace, other
release date of supervisory stress test Covered credit unions are currently regulatory and supervisory tools used by
scenarios and the due date for credit required to submit data to the NCUA as the agency.
union capital plans provide ample time part of the stress testing process, and the
proposal did not include any changes to III. Final Rule
for a credit union to produce and report
credible stress test results. Therefore, these requirements. Several After carefully considering the public
commenters, nevertheless, encouraged comments, the NCUA has made several
the final rule retains the May 31st
the NCUA to eliminate or substantially changes to the final rule. The final rule
submission date for annual stress tests.
reduce the data submissions. reflects the NCUA’s experiences in
A number of commenters also
Commenters, however, generally did not implementing the current rule’s
encouraged the NCUA to provide stress offer specific data items that they requirements, while also considering
testing instructions earlier in the capital considered unnecessary or burdensome. the systemic risk that covered credit
planning process. The NCUA agrees Data collection is part of the NCUA’s unions pose to the NCUSIF. As
with the commenters. The NCUA strategic initiative to enhance explained in more detail below, the
intends to post instructions on its supervision and is used to inform final rule is intended to reduce
website that will generally remain the qualitative and quantitative assessments regulatory burden by removing some of
same each year. If any modifications are and ratings of covered credit unions. the more onerous capital planning and
necessary to the instructions due to a The data currently collected for the stress testing requirements currently
particular year’s scenarios, such NCUA to conduct supervisory stress applicable to covered credit unions. The
modifications will be released at the tests will continue to be used by the changes to the NCUA’s capital planning
same time as the scenarios. agency to assess a covered credit and stress testing requirements will
A minority of commenters discussed union’s capital adequacy through more closely align the agency’s
the scenarios required for stress testing. review of its capital plan and regulatory requirements with its current
For example, a commenter supervisory stress tests results. Also, the supervisory expectations for covered
recommended that tier II covered credit collected data can drive supervisory credit unions.
unions be exempt from the baseline and efficiencies that reduce regulatory In the final rule, covered credit
adverse stress test scenarios. The NCUA burden for covered credit unions. For unions are subject to new tiered
believes that each scenario is necessary example, the data may lead to more regulatory requirements that further
for the NCUA and a credit union to have targeted supervisory work resulting in ensure their capital plans and stress
a complete understanding of the credit less time on-site at covered credit testing requirements are tailored to
union’s risks and that each scenario unions. Therefore, the final rule retains reflect their size, complexity, and
the current data collection financial condition. For example, under
serves a distinct purpose in the stress
requirements. the final rule, tier I and II covered credit
test exercise. Specifically, the baseline
unions will continue to develop annual
scenario, conducted under the NCUA’s E. Other Comments capital plans, but the capital plans will
instructions, serves as a benchmark to A few commenters recommended no longer be formally submitted to the
evaluate results under the stress amending the definition of ‘‘covered NCUA by May 31st each year. In
scenarios. The stress scenarios are used credit union’’ so that a credit union with contrast, tier III covered credit unions
to stress different aspects of a credit total assets over $10 billion does not will continue to submit capital plans to
union’s positions under unfavorable becomes a ‘‘covered credit union’’ until the NCUA by May 31st that must be
conditions and may be designed to its most recent four-quarter average of formally accepted or rejected by the
focus on different risk characteristics of consolidated total assets exceeds $10 NCUA. Additionally, stress testing
a credit union’s portfolio. The spectrum billion. Based on our experience requirements under the final rule are
of scenarios is necessary to have a implementing the capital planning and also tiered. Under the final rule, tier I
complete understanding of a credit stress testing rules, the NCUA has not credit unions are not subject to any
union’s capital position in different found that many credit unions decrease stress testing requirements. In contrast,
economic conditions. Therefore, the under $10 billion after becoming tier II and III covered credit unions are
NCUA believes that all stress tests covered credit unions. Therefore, the required to conduct stress testing,
should include all scenarios. NCUA does not believe the added although tier II covered credit unions
Furthermore, consistent testing complexity required by determining a are not subject to a 5 percent minimum
parameters ensure that credit union four-quarter average is warranted and is stress test capital threshold. Further,
results are comparable to each other. not making any such changes to the under the final rule, the NCUA will no
Another commenter recommended that final rule. longer be required to conduct the
the NCUA continue utilizing the Federal A few commenters also stated that annual supervisory stress tests on
Reserve Board’s stress test assumption given the enterprise-wide nature of the applicable covered credit unions.
scenarios rather than designing its own capital planning and supervisory stress Rather, the covered credit unions will
unique tests. The commenter believed testing regime, the NCUA should conduct the stress tests.
that standardization across the financial consider whether certain generally While the NCUA recognizes that all
services industry is preferable. The applicable requirements that must be covered credit unions are of systemic
sradovich on DSK3GMQ082PROD with RULES

NCUA agrees with this commenter. met for a credit union to be eligible for importance to the NCUSIF, the NCUA
Consistent with past practice, the NCUA insurance coverage are unnecessarily believes it is appropriate to differentiate
intends to publish scenarios that are redundant when applied to covered the capital planning and stress testing
consistent with the scenarios published credit unions. The commenters requirements applicable to such
by the banking agencies. However, the specifically noted liquidity and risk- institutions based on their individual
NCUA reserves the right to modify based capital standards. Capital characteristics. Specifically, size is
scenarios or produce unique scenarios planning and stress testing are deemed to be the most significant

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Document Created: 2018-11-02 08:17:20
Document Modified: 2018-11-02 08:17:20

Category		Regulatory Information
Collection		Federal Register
sudoc Class		AE 2.7: GS 4.107: AE 2.106:
Publisher		Office of the Federal Register, National Archives and Records Administration
Section		Rules and Regulations
Action		Final rule.
Dates		This final rule is effective June 1, 2018.
Contact		Technical information: Dale Klein, Senior Financial Analyst--CPST, Office of National Examinations and
FR Citation		83 FR 17901
RIN Number		3133-AE80
CFR Associated		Credit Unions and Reporting and Recordkeeping Requirements