83 FR 55467 - Risk-Based Capital
NATIONAL CREDIT UNION ADMINISTRATION Federal Register Volume 83, Issue 215 (November 6, 2018)
Federal Register Volume 83, Issue 215 (November 6, 2018)
| Page Range | 55467-55478 | |
| FR Document | 2018-24171 |
[Federal Register Volume 83, Number 215 (Tuesday, November 6, 2018)] [Rules and Regulations] [Pages 55467-55478] From the Federal Register Online [www.thefederalregister.org] [FR Doc No: 2018-24171] ======================================================================= ----------------------------------------------------------------------- NATIONAL CREDIT UNION ADMINISTRATION 12 CFR Parts 700, 701, 702, 703, 713, 723, and 747 RIN 3133-AE90 Risk-Based Capital AGENCY: National Credit Union Administration (NCUA). ACTION: Final rule; supplemental. ----------------------------------------------------------------------- SUMMARY: The NCUA Board (Board) is amending the NCUA's previously revised regulations regarding prompt corrective action (PCA). The final rule delays 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 will remain in effect. The final rule also amends 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 changes provide covered credit unions and the NCUA with additional time to prepare for the rule's implementation, and exempt an additional 1,026 credit unions from the risk-based capital requirements of the 2015 Final Rule without subjecting the National Credit Union Share Insurance Fund (NCUSIF) to undue risk. DATES: The effective date of the final rule published on October 29, 2015 (80 FR 66625) is delayed until January 1, 2020. In addition, the amendments to Sec. 702.103 in this final rule are effective on January 1, 2020. 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, Risk Officer, Division of Risk Management, Office of Examination and Insurance, at (703) 548- 2456; Julie Decker, Risk Officer, Division of Risk Management, Office of Examination and Insurance, at (703) 518-3684; Aaron Langley, Risk Management Officer, Data Analysis Division, Office of Examination and Insurance, at (703) 518-6387; Legal: John Brolin, Senior 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 5,573 federally insured credit unions, holding total assets exceeding $1.4 trillion and serving approximately 111 million members.\2\ --------------------------------------------------------------------------- \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. --------------------------------------------------------------------------- At its October 2015 meeting, the Board issued the 2015 Final Rule to [[Page 55468]] amend Part 702 of the NCUA's current 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 the Federal Credit Union Act (FCUA), federally insured credit unions are collectively responsible for replenishing losses to the NCUSIF.\4\ --------------------------------------------------------------------------- \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.). --------------------------------------------------------------------------- The 2015 Final Rule restructures the NCUA's current PCA regulations and makes various revisions, including amending the agency's 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 Board originally set the effective date of the 2015 Final Rule for January 1, 2019 to provide credit unions and the NCUA with sufficient time to make the necessary adjustments--such as systems, processes, and procedures--and to reduce the burden on affected credit unions. On August 8, 2018, the Board published a proposed rule \5\ (the Proposal) to amend the NCUA's 2015 Final Rule by (1) delaying the effective date of the rule until January 1, 2020; and (2) increasing the threshold level for coverage for NCUA's risk-based capital requirements from $100 million to $500 million by amending the definition of a ``complex'' credit union. This final rule adopts all the provisions in the Proposal with only one minor change, which is discussed in detail below. --------------------------------------------------------------------------- \5\ 83 FR 38997 (Aug. 8, 2018). --------------------------------------------------------------------------- II. The Final Rule and Public Comments on the Proposed Rule The NCUA received 38 comment letters in response to its August 8, 2018 Proposal. These comment letters were received from credit union trade associations, Federal credit unions, state credit unions, state and regional credit union leagues, and other individuals. A. Delayed 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 the fact that the agency proposed changing the definition of a complex credit union, the Board proposed delaying the effective date of the 2015 Final Rule by one year, from January 1, 2019 to January 1, 2020. The Board believed extending the effective date was necessary and beneficial, and would provide covered credit unions with additional time to adjust systems, processes, and procedures affected by the requirements of the 2015 Final Rule. Under the Proposal, the NCUA's current PCA regulation would have remained in effect until the 2015 Final Rule's proposed new effective date, January 1, 2020. The NCUA would have continued to enforce the capital standards currently in place and addressed any supervisory concerns through existing regulatory and supervisory mechanisms during the extended implementation period. The Board believed 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. Public Comments on the Proposed Delay Fourteen commenters explicitly supported delaying the implementation of the 2015 Final Rule until January 1, 2020 to allow the NCUA additional time to provide early guidance on new reporting requirements, and to help mitigate any potential impact the 2015 Final Rule may have on the credit union industry. Twenty two of the commenters stated that they appreciated the delay, but believed the delay should be longer. Of those commenters, all suggested that the delay should be for at least two years, with a few suggesting that more than two years might be appropriate. A number of commenters remarked that a two-year delay would be consistent with the timeframe set forth in legislation currently before Congress, such as section 701 of H.R. 5841, and suggested that the two-year delay was necessary to provide credit unions and the agency sufficient time to implement necessary systems, processes, and procedures. Three commenters suggested the 2015 Final Rule should be delayed for two years or more to give credit unions adequate time to make the necessary adjustments to meet the 10 percent risk-based capital target. Two commenters suggested that, in light of the health of the credit union system, the NCUA can afford to provide even more time, on a reasonable basis, to facilitate the development of its own examiners, as well as provide additional time for covered credit unions to make any strategic and operational changes they need to prepare for risk-based capital implementation. Two commenters suggested the 2015 Final Rule should be delayed two years or more to give credit unions time to understand and coordinate compliance with the Financial Accounting Standards Board's final current expected credit loss (CECL) standard, and its relation to the requirements of the 2015 Final Rule. Two commenters recommend the proposed one year delay be expanded to include the grandfathering of the ``excluded goodwill'' and ``excluded other intangible assets'' provisions of the 2015 Final Rule, which are currently set to expire on January 1, 2029. In particular, the commenters suggested that the proposed delay of the 2015 Final Rule should also apply to the ten-year deferral period associated with supervisory mergers (example: The January 1, 2029 effective date should be adjusted to January 1, 2030). The commenters suggested this additional time would benefit credit unions that hold a significant amount of excluded goodwill or other intangible assets, as those terms are defined in the 2015 Final Rule. Eight commenters recommended delaying implementation of the risk- based capital rule until revisions to the NCUA's regulations regarding [[Page 55469]] alternative capital \6\ are finalized. Commenters stated a delay would give the NCUA time to finalize an alternative capital rule permitting credit unions additional ways to increase capital to meet the risk- based capital requirements. --------------------------------------------------------------------------- \6\ Commenters referred to secondary capital, supplemental capital, and alternative capital. --------------------------------------------------------------------------- Discussion of Delay in Implementation Several commenters recommended delaying implementation of the 2015 Final Rule to be consistent with legislation before Congress. The Board is aware there are bills before Congress that would extend the effective date of the 2015 Final Rule for two years; \7\ however, the Board continues to believe a one-year delay is sufficient. Since the 2015 Final Rule was issued in final form, covered credit unions and the NCUA have had more than three years to prepare for its implementation. Providing credit unions an additional year before implementing the 2015 Final Rule, making the total implementation period four years, should be more than sufficient to allow credit unions to incorporate the changes in the definition of complexity made under this final rule. Further, the change made by this final rule to the definition of complex credit union substantially reduces the number of credit unions subject to the 2015 Final Rule's risk-based capital requirements. Since the 2015 Final Rule was approved in October 2015, the cumulative net worth of credit unions with more than $500 million in assets has grown by more than 34 percent.\8\ Credit unions that meet the definition of complex already hold, on average, more than 17 percent capital, or 70 percent more than the 10 percent required to be well-capitalized under the rule.\9\ Accordingly, the Board believes the proposed delay of one- year will provide the NCUA and covered credit unions with more than enough time to make the necessary system changes, and provide guidance and training to implement the 2015 Final Rule by January 1, 2020. --------------------------------------------------------------------------- \7\ See, e.g., Section 701 of H.R. 5841 (If passed, the bill would delay the 2015 Final Rule, which defines complex credit unions as those with greater than $100 million in total assets, for two years past its current effective date.). \8\ Based on December 31, 2017 Call Report Data. \9\ Based on December 31, 2017 Call Report Data. Under the 2015 Final Rule, credit unions with total assets greater than $100 million hold more than 18 percent capital, or 80 percent more than the 10 percent capital required, to be well-capitalized under the risk-based capital standard. Under this final rule 6 credit unions are required to hold additional capital, representing 1 percent of the complex credit unions. --------------------------------------------------------------------------- Additionally, while the Board recognizes that CECL will have an impact on some credit unions' financial posture, it does not believe it is necessary or appropriate to wait until the implementation of the standard to implement the 2015 Final Rule's risk-based capital requirements, as some commenters requested. Under the 2015 Final Rule, all allowance for loan and lease loss (ALLL) accounts are captured in the numerator of the risk-based capital ratio, thus implementation of CECL will not be a change in the accounting and classification of the ALLL.\10\ Therefore, it is not necessary to delay implementation of risk-based capital to align with the implementation of CECL. --------------------------------------------------------------------------- \10\ Credit unions can early adopt CECL as soon as 2019; thus, it is not necessary to delay implementation of the 2015 Final Rule's risk-based capital requirements. --------------------------------------------------------------------------- Commenters requested that the delay of the 2015 Final Rule's effective date should also apply to the goodwill and intangible asset deferral period. The 2015 Final Rule provides credit unions with 13 years to write down, or otherwise adjust their balance sheets, to account for goodwill and other intangible assets acquired through a supervisory merger or combination before December 28, 2015.\11\ Only 6 credit unions with assets greater than $500 million, report total goodwill and intangible assets of more than 1 percent of assets, and the valuation under Generally Accepted Accounting Principles (GAAP) of these existing assets will be immaterial by the end of the extended sunset date.\12\ Accordingly, the Board continues to believe 13 years to respond to this change is more than sufficient for credit unions impacted. --------------------------------------------------------------------------- \11\ 80 FR 66625, 66648, 66707 (Oct. 29, 2015). \12\ Based on December 31, 2017 Call Report Data. --------------------------------------------------------------------------- Some commenters requested the effective date of the 2015 Final Rule be delayed to coincide with possible changes to supplemental capital rules. As noted in the 2015 Final Rule, the NCUA plans to address additional forms of supplemental capital in a separate proposed rule. In February 2017, the NCUA issued an advanced notice of proposed rulemaking for alternative capital,\13\ and the NCUA's Regulatory Review Task Force agenda, published in August 2017, addresses the NCUA's intent with regard to the 2015 Final Rule, with approximately 99 percent of complex credit unions holding enough capital to meet the risk-based capital requirements. Accordingly, the NCUA believes further delay of the 2015 Final Rule to provide time for the implementation of an alternative capital rule is not necessary. --------------------------------------------------------------------------- \13\ 82 FR 9691 (Feb. 8, 2017). --------------------------------------------------------------------------- For the reasons discussed above, the NCUA continues to believe that extending the effective date of the 2015 Final Rule by one year is necessary, will benefit the credit union industry and the NCUA, and will not pose an undue risk to the NCUSIF. Accordingly, this final rule amends the 2015 Final Rule to delay its effective date until January 1, 2020. B. Definition of ``Complex'' Credit Union Under Sec. 702.103 of the NCUA's 2015 Final Rule, a credit union was defined as ``complex'' and the NCUA's risk-based capital ratio measure was applicable only if the credit union's quarter-end total assets exceeded $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.\14\ --------------------------------------------------------------------------- \14\ 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). --------------------------------------------------------------------------- Based on the NCUA's analysis, discussed in more detail below, the Board believed that $500 million in total assets would be a more appropriate threshold level for defining a complex credit union. Increasing the threshold level to $500 million in total assets would reduce 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 \15\ 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.\16\ Accordingly, consistent with requirements of section 216(d)(1) of the [[Page 55470]] FCUA, proposed Sec. 702.103 provided 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. --------------------------------------------------------------------------- \15\ 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. \16\ 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. --------------------------------------------------------------------------- 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.\17\ --------------------------------------------------------------------------- \17\ 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 union's 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.'' --------------------------------------------------------------------------- The Board proposed revising 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 were ``complex.'' The RCI would have amended 6 of the indicators in the original complexity index so the index would 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 was the same as the original complexity index, with the following six changes: It replaced the indicator for ``member business loans'' with an indicator for ``commercial loans'' to reflect changes to the NCUA's member business lending rule,\18\ and current Call Report data collection requirements. --------------------------------------------------------------------------- \18\ See 12 CFR 723.2; and 81 FR 13529, 13538 (March 14, 2016). --------------------------------------------------------------------------- It replaced 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. It replaced 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. It removed 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. It removed 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. It replaced 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 mortgages'' to account for the most complex component of real estate loans. The NCUA believed 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.'' 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.\19\ --------------------------------------------------------------------------- \19\ Based on December 31, 2017 Call Report data. --------------------------------------------------------------------------- In addition to the RCI, the Board also proposed 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, took into account the volume of the complex activity engaged in by complex credit unions and provided a more accurate measure of credit union complexity.\20\ The numerator of the CR was 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 was the total assets of the credit union. --------------------------------------------------------------------------- \20\ 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.). --------------------------------------------------------------------------- Credit unions with greater than $500 million in total assets held complex assets and liabilities as a larger share of their total assets than smaller credit unions.\21\ The complexity ratio increased from 23 percent among credit unions with less than $500 million in total assets to 40 percent among credit unions with more than $500 million in total 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--were held among credit unions with more than $500 million in total assets.\22\ --------------------------------------------------------------------------- \21\ Based on December 31, 2017 Call Report data. \22\ Credit unions with total 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 total assets (23 percent), but it remains below the share of complex assets in credit unions above $500 million in assets (40 percent). --------------------------------------------------------------------------- Larger credit unions were much more likely to have a significant share of their balance sheet in complex assets and liabilities.\23\ Nearly all credit unions (95 percent) with more than $500 million in total assets have complex assets and liabilities greater than 10 percent of their total assets, and 66 percent have [[Page 55471]] complex assets and liabilities greater than 30 percent of their total assets. --------------------------------------------------------------------------- \23\ Based on December 31, 2017 Call Report data. --------------------------------------------------------------------------- In general, two-thirds of credit unions with more than $500 million in total assets had complex assets and liabilities ratios above 30 percent. Only 11 percent of credit unions with less than $500 million in total assets had complexity ratios above 30 percent.\24\ --------------------------------------------------------------------------- \24\ Credit unions with total 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 total 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 total 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 total assets have a CR greater than 30 percent. --------------------------------------------------------------------------- Using both the proposed revised complexity index and the proposed complexity ratio to determine the appropriate threshold for defining complex credit unions would have excluded 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.\25\ Moreover, the revised definition of a complex credit union would not have represented undue risk to the NCUSIF, nor significantly decreased 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 have fallen from 93 percent \26\ to 76 percent when compared to the $100 million threshold adopted in the 2015 Final Rule,\27\ 85 percent of complex assets and liabilities would have still been covered under the proposal. --------------------------------------------------------------------------- \25\ Based on December 31, 2017 Call Report data. \26\ 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. \27\ Based on December 31, 2017 Call Report data. --------------------------------------------------------------------------- In addition, if the historical trends in changes to the composition of the credit union community continue, the NCUA found that the share of total assets covered under the Proposal would have risen in the future, potentially reaching 90 percent of total assets within the next 10 years. The higher asset threshold also would have still captured those credit unions that, if they failed, could have individually presented an undue risk of loss to the NCUSIF. 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, the NCUA found that total losses to the NCUSIF over the next 10 years would likely be significantly larger for credit unions with more than $500 million in total assets than for those with total assets between $100 million and $500 million. Under the 2015 Final Rule, an estimated 505 credit unions would have faced higher required capital levels as a result of risk-based capital requirements. These 505 credit unions had total assets of $439 billion and the 2015 Final Rule would have raised their required capital levels by approximately $800 million above what is required by the net worth ratio.\28\ Under the proposal, the 284 credit unions with total assets between $100 and $500 million would have no longer have been required to hold higher capital levels as a result of risk-based capital requirements. However, as reflected in Table 1, the Proposal would still capture most of the credit union assets subject to higher capital requirements, and incremental capital required by risk-based capital requirement, under the 2015 Final Rule. --------------------------------------------------------------------------- \28\ 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 requirement or the net-worth-based capital requirement. Table 1--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 ---------------------------------------------------------------------------------------------------------------- Under the Proposal, the NCUA found that exempting credit unions with total assets between $100 million and $500 million represented 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. The Proposal, however, still encompassed approximately 84 percent of the total assets of credit unions with required capital levels above what was required by the net worth ratio, and almost 80 percent of the incremental capital the system was 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.\29\ Under the proposal, 6 credit unions (net) with total assets of $8.8 billion would have had a lower PCA classification and a capital deficiency of $71 million. Thus, the Proposal encompassed approximately 80 percent of the downgraded credit union assets and approximately 85 percent of the capital shortfall for those institutions. --------------------------------------------------------------------------- \29\ Based on December 31, 2017 Call Report Data. --------------------------------------------------------------------------- The Board also noted in the Proposal that 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.\30\ As of June 30, 2018, the NCUSIF equity ratio was 1.35 percent, including the equity distribution of approximately $736 million paid to credit unions on July 23, 2018.\31\ The total funds held in the NCUSIF as of June 30, 2018, are approximately $15 billion after the equity distribution, about $2.6 billion more than the $12.3 billion held in the fund in 2015.\32\ --------------------------------------------------------------------------- \30\ At the time the 2015 Final Rule was approved by the Board. \31\ The June 30, 2018 Retained Earnings was decreased to reflect the equity distribution of $735.7 million payable to insured credit unions in the third quarter of 2018 as declared at the February 2018 Open Board Meeting. \32\ The June 30, 2018 NCUSIF balance is based on the Preliminary and Unaudited Financial Highlights. The 2015 NCUSIF balance at the time the 2015 Final Rule was approved by the Board. --------------------------------------------------------------------------- Public Comments on the Proposed Definition of Complex Credit Union Twelve commenters stated they agreed with increasing the threshold [[Page 55472]] level for defining a credit union as complex from $100 million in total assets to $500 million in total assets as proposed. All but one of the other commenters stated they supported increasing the threshold, but suggested that the threshold level should be higher. Four commenters suggested that the asset size threshold should be increased to $1 billion. One of those commenters pointed out that the NCUA's data shows 53 percent of credit unions with assets between $500 million and $750 million engage in six or more complex activities; however, for credit unions with assets greater than $1 billion, this number increases to 77 percent. In addition, the commenter also suggested that Congress' directive to the NCUA for designing the risk-based capital requirement was to address those risks for which the standard leverage ratio was insufficient and to base its definition of ``complex'' credit unions ``on the portfolios of assets and liabilities of credit unions;'' and that a $1 billion complexity threshold would more closely align with the spirit of the Federal Credit Union Act. With regard to the proposed $500 million threshold, two commenters stated that the NCUA's data does not provide a complexity ratio categorization at other asset levels. They recommend the NCUA consider how the complexity ratio for credit unions with $500 million in total assets compares to those with $1 billion in total assets, and requested that such information be provided and considered in setting the asset size threshold. Eleven commenters recommend the threshold level be raised to $10 billion, which they pointed out would align with both the NCUA's Office of National Examinations and Supervision (ONES) and the Bureau of Consumer Financial Protection (BCFP) supervisory authorities. They also suggested a $10 billion threshold would provide several additional credit unions with regulatory relief, while still protecting the NCUSIF from larger, more impactful losses. One commenter suggested that having different asset thresholds among rules from myriad departments and divisions across Federal and state regulatory bodies contributes to duplicative and inconsistent oversight. One commenter suggested that raising the asset threshold for complex credit unions to $10 billion would be consistent with the recommendations of the U.S. Department of Treasury and with the thresholds set by the NCUA and other Federal regulatory agencies.\33\ One commenter suggested that a $10 billion threshold was appropriate because of recent easing of regulatory oversight that has taken place in the banking sector. The commenter suggested that with the recent enactment of S.2155, which increased the Dodd-Frank Act threshold for bank holding company enhanced prudential standards from $50 billion in assets to $250 billion, credit unions are increasingly forced to compete with large banking organizations, whose hundreds-of-attorneys-strong compliance and economic departments dwarf the average two to five compliance personnel at a credit union with $500 million in total assets. The commenter suggested further that, even a credit union with $500 million in assets, risk-based capital compliance will be an additional layer of regulatory compliance filings, which removes personnel from the Main Street-focused business of community lending. --------------------------------------------------------------------------- \33\ A FINANCIAL SYSTEM THAT CREATES ECONOMIC OPPORTUNITIES: BANKS AND CREDIT UNIONS, U.S. DEP'T OF THE TREASURY 59 (2017) (``NCUA should revise the risk-based capital requirements to only apply to credit unions with total assets in excess of $10 billion or eliminate altogether risk-based capital requirements for credit unions satisfying a 10% simple leverage (net worth) test.''), available at https://www.treasury.gov/press-center/press-releases/Documents/A%20Financial%20System.pdf. --------------------------------------------------------------------------- One commenter objected to raising the threshold, suggesting that, of the 10 costliest natural person credit union failures to the NCUSIF, nearly all resulted from credit unions with less than $500 million in total assets. In addition, the commenter suggested the proposed increase in the asset size threshold to $500 million in assets would exclude 17 credit unions with CAMEL codes of 4 or 5 and 105 credit unions with a CAMEL code of 3 from the risk-based capital rule, based on March 2018 data. The commenter suggested these 122 credit unions have approximately $21.4 billion in insured shares, and any credit union with a CAMEL code of 3 or more should be subject to a risk-based capital requirement to help limit losses to the NCUSIF arising from the potential failure of these credit unions and future premium assessments to the NCUSIF. The commenter also pointed out that, while credit unions with less than $500 million in total assets may not pose a systemic risk to the NCUSIF, losses to the NCUSIF from the failure of credit unions excluded from the cap could result in premium assessments for all credit unions. As an alternative, the commenter recommended the NCUA should authorize credit unions with at least $100 million in total assets to substitute a higher leverage ratio for the risk-based capital requirement--consistent with section 216 of the Federal Credit Union Act \34\ and Section 201 of the Economic Growth, Regulatory Relief, and Consumer Protection Act,\35\ which mandates that the Federal banking agencies establish a community bank leverage ratio of tangible equity to average consolidated assets of not less than eight percent and not more than ten percent for banks with less than $10 billion in total consolidated assets. --------------------------------------------------------------------------- \34\ 12 U.S.C. 1790d(c)(2). \35\ Public Law 115-174 (May 24, 2018). --------------------------------------------------------------------------- Two commenters specifically stated their support for using a single asset-size threshold, based on a complexity index and complexity ratio. One suggested using a single asset-size threshold allows for some differentiation between credit unions without making the rule overly complex. The other suggested that using a single asset-size threshold was appropriate because smaller credit unions do not normally have the size or capacity to make large commercial loans, sell participation loans, or get involved with complex transactions. Ten commenters specifically objected to using a single asset-size threshold, based on a complexity index and complexity ratio. Four commenters stated that assets should not be the only consideration when assessing the complexity of a credit union because such an approach does not sufficiently capture the risk-based complexities of a given credit union's balance sheet or activities. One stated it was wary of legislative or regulatory thresholds that are foreseeably likely to be outdated nearly as soon as the Federal Register ink is dry given the speed of technological innovation. One pointed out that, in the preamble to the proposal, the NCUA stated it will address material-risk capital levels for credit unions $500 million in assets and below through the supervisory process. The commenter suggested that, for credit unions that are deemed ``complex,'' the NCUA should utilize its supervisory authority to exempt, on a case-by-case basis, credit unions whose net worth ratios provide adequate protection from material risks irrespective of asset size. One commenter asked, if a credit union has over $500 million in assets, but has a very low complexity ratio, why should they need to reserve additional capital based on the riskiness of their business? The commenter suggested there should be a threshold complexity ratio, under which a credit union would be exempt from the NCUA's risk-based capital requirement, regardless of asset size. If not, the commenter stated, the [[Page 55473]] complexity ratio is only an after-the-fact measure of risk and not a determinant of whether the risk-based capital requirement applies. The commenter also suggested that such a ratio should allow low-risk credit unions to avoid the extra reserves. One commenter suggested that the proposed $500 million threshold should be used in combination with the actual operational complexity of individual credit unions, as measured by that credit union's RCI and CR. The commenter provided the following example, the NCUA could tailor the definition of ``complex'' to include only federally insured credit unions with assets above $500 million and an RCI and/or CR value higher than a certain threshold (e.g., an RCI value of 6 or more and/or a CR of at least 45 percent). The commenter suggested this more tailored definition would ensure that credit unions would be treated as ``complex'' based not just on asset size, but also on whether a credit union actually offers a substantial amount of complex products and services. One commenter recommended that the NCUA annually index any threshold for growth and adopt exemptions from such classification wherever possible, such as for credit unions with more traditional products and services. One commenter suggested a better approach for identifying complexity would be to look at the business model of the credit union based on its assets and liabilities. The commenter suggested that, at a minimum, the NCUA should require credit unions that have more than a de minimis level of commercial loans be subject to the agency's risk-based capital requirements. One commenter suggested the NCUA's regulation should move to a regulatory and capital regime that recognizes two types of credit unions, those that are complex with assets greater than $500 million and those that are non-complex. Eight commenters expressed general support for the proposed amendments to the complexity index and the development of the complexity ratio. Seven commenters stated they agreed with the NCUA's proposal to remove the indicator for internet banking from the complexity index because offering such services is not an indication of risk. Two commenters stated they agreed with the NCUA's proposal to restrict ``participation loans'' to ``participation loans sold'' because doing so properly captures the riskier part of this business. Two commenters stated they agreed with the NCUA's proposal to replace ``member business loans'' (MBL) with ``commercial loans'' to bring this rule into conformity with recent changes in MBL rules. One commenter recommend redefining ``commercial loans'' within the list of complex products and services to exclude inherently less complex categories of such loans based on other existing regulatory requirements already in place to mitigate risks. One commenter agreed with the NCUA's proposal to replace ``real estate loans'' with ``sold mortgages'' because the proposed change better captures risk. One commenter recommended redefining ``real-estate loans'' within the list of complex products and services to exclude inherently less complex categories of such loans based on other existing regulatory requirements already in place to mitigate risks. One commenter stated they disagreed with the NCUA's proposal to remove first lien mortgages from the ``interest only loans'' indicator because interest-only loans are risky, regardless of position. Discussion of the Definition of Complex Credit Union Several commenters recommended changing the definition of complexity. The Board established the $500 million total asset size threshold based on the number and volume of credit unions engaged in complex activities. Section 216(d)(1) of the FCUA directs NCUA, in determining which credit unions will be subject to the risk-based net worth requirement, to base its definition of complex ``on the portfolios of assets and liabilities of credit unions.'' The statute does not require, as some commenters have argued, that the Board adopt a definition of ``complex'' that takes into account the portfolio of assets and liabilities of each credit union on an individualized basis. Rather, section 216(d)(1) authorizes the Board to develop a single definition of complexity that takes into account the portfolios of assets and liabilities of all credit unions. The Board is responsible for defining complexity and, as explained in detail above, the NCUA's proposed analysis supports defining complex credit unions as those with assets greater than $500 million in total assets. As stated in the 2015 Final Rule and the Proposal, the Board continues to believe that using a single asset size threshold is a good proxy for complexity, simplifies the application of the rule, provides regulatory relief for small institutions, and eliminates the potential unintended consequences of having a checklist of activities that would determine whether or not a credit union is subject to the risk-based capital requirement. Commenters further recommended tying the complexity definition to other regulatory thresholds, such as the $10 billion in total asset threshold used for assigning supervision to the NCUA's ONES and for the BCFP. The Board recognizes that various regulatory agencies, including the NCUA, have differing thresholds for establishing requirements. These thresholds are established based on fundamental elements or objectives of the particular statute or regulation in question. The NCUA set the asset size threshold size at $500 million based on the analysis of the portfolios of assets and liabilities of credit unions discussed above. In addition, it provides a balance between providing reasonable regulatory relief, and protecting the credit union system and the NCUSIF. The proposed $500 million total asset size threshold will provide relief to 90 percent of credit unions while still covering 85 percent of all complex assets and liabilities in the credit union system, and 76 percent of total assets. The NCUA's proposed methodology for determining complexity based on the portfolios of assets and liabilities of credit unions does not support increasing the threshold above $500 million as there is no significantly meaningful difference in the volume and number of complex activities above this level. Moreover, raising the threshold to $10 billion, as some commenters suggested, would only cover approximately 14 percent of the complex assets and liabilities in the credit union system and approximately 15 percent of the total assets in the credit union system.\36\ Accordingly, the Board believes raising the proposed threshold further would not be consistent with the results of the NCUA's analysis of the portfolios of the assets and liabilities of credit unions and would impose an undue risk to the NCUSIF by excluding too large a percentage of the assets covered by the risk-based capital requirement. --------------------------------------------------------------------------- \36\ Based on December 31, 2017 Call Report data. --------------------------------------------------------------------------- A number of commenters requested exemptions from the definition of complex under certain circumstances, such as credit unions that do not have a very high complexity ratio, receiving a waiver on a case-by-case basis, or recognizing when a credit union's net worth ratio provides more than adequate protection for the risk. Based on the proposed approach, credit unions that meet the definition of complex must be subject to the risk-based net worth requirement, thus, a waiver provision is not possible. A simplified way of complying with the risk- based net worth requirement, such as a highly [[Page 55474]] capitalized credit union that is not otherwise a risk outlier, would be outside the scope of this proposal.\37\ This suggestion was referred to the NCUA's Regulatory Reform Task Force for further consideration. --------------------------------------------------------------------------- \37\ See, e.g., Pub. L. 115-174, 132 Stat. 1296 (2018) (Requiring the Federal banking agencies to establish a ``community bank leverage ratio.''). --------------------------------------------------------------------------- As noted previously, the $500 million total asset threshold is based on the NCUA's analysis of the portfolio of assets and liabilities of credit unions. The NCUA's analysis took into account the number and volume of activity engaged in by credit unions. A hybrid approach to defining complexity, for example using an asset threshold in conjunction with a complexity ratio, would likely still result in credit unions with more than $500 million in assets being considered complex. The Board does not agree that only credit unions that are very complex (such as six or more complex activities) should be considered complex, as at least one commenter suggested. Also, a hybrid approach could create unintended consequences for credit unions and the NCUA, would make the rule more difficult to administer, and lead to greater regulatory burden. A commenter recommended the definition of complexity be tied to a growth index. As required by the statute, the definition of complex is based on the NCUA's analysis of the portfolio of assets and liabilities, as previously discussed. Therefore, it is not appropriate to index the $500 million asset threshold to inflation or some other growth index. However, the Board will continue to periodically update its analysis to ensure the complexity definition reflects changes in the composition of the portfolio of assets and liabilities of credit unions. Commenters suggested additional analysis be provided at different asset levels to further support the definition of complexity. Table 2 provides additional data on the CR at a number of different asset size thresholds above $500 million. The NCUA concluded in the Proposal that a significant level of complexity exists in credit unions with assets greater than $500 million based on the volume of activity with no meaningful distinction at higher thresholds. The Board continues to believe the $500 million threshold is appropriate as it covers the majority of complex assets and liabilities (85 percent) while providing significant regulatory relief without posing undue risk to the NCUSIF. Table 2--Complexity Ratio by Asset Categories, 2017Q4 Call Report Data ---------------------------------------------------------------------------------------------------------------- Complexity Complexity Complexity Complexity Asset category ratio >10 ratio >20 ratio >30 ratio >40 (percent) (percent) (percent) (percent) ---------------------------------------------------------------------------------------------------------------- <$500M.......................................... 29 18 11 6 $500M-$750M..................................... 92 82 58 40 $750M-$1B....................................... 96 80 65 47 $1B-$10B........................................ 96 86 71 51 >$10B........................................... 86 86 71 43 ---------------------------------------------------------------------------------------------------------------- Another commenter states 53 percent of credit unions with assets between $500 million and $750 million engage in six or more complex activities; and at $1 billion this number increases to 77 percent. The commenter is referring to the RCI, as shown in Table 3, which counts the number of complex activities. The Board does not agree that only credit unions that are very complex (such as six or more complex activities) should be considered complex. The Board concludes that a significant level of complexity exists in credit unions with assets greater than $500 million based on the number and volume of complex activities. Table 3--Complexity Index by Asset Categories, 2017Q4 Call Report Data \38\ -------------------------------------------------------------------------------------------------------------------------------------------------------- Number of Average index Index>=1 Index>=2 Index>=3 Index>=5 Index>=6 Asset category credit unions value (percent) (percent) (percent) (percent) (percent) -------------------------------------------------------------------------------------------------------------------------------------------------------- >$500M.................................. 5,042 1.5 52 35 24 10 6 $500-$750M.............................. 149 5.7 100 98 96 73 53 $750-$1B................................ 95 6.1 100 100 97 79 64 $1B-10B................................. 280 6.9 100 99 96 88 78 $10B+................................... 7 8.6 100 86 86 86 71 -------------------------------------------------------------------------------------------------------------------------------------------------------- One commenter \38\ disagreed with raising the threshold for defining a complex credit union. The commenter noted the majority of the ten largest losses to the NCUSIF derived from credit unions (excluding corporate credit unions) below the $500 million threshold. The losses total approximately $723 million based on loss projections at time of the associated credit unions failures. However, the Board notes that nearly one-third of these losses were the result of fraud.\39\ Risk-based capital is designed to address credit risk. It is not designed to address fraud. As previously stated, if the historical trends continue, total losses to the NCUSIF over the next 10 years will likely be larger for credit unions with more than $500 million in total assets than for those with assets between $100 million and $500 million in total assets. Accordingly, the Board continues to believe the threshold of $500 million for determining complexity captures most of the risk to the NCUSIF. --------------------------------------------------------------------------- \38\ Table 3 results differ from the proposed rule as they reflect additional asset categories. \39\ Based on Material Loss Reviews conducted by the NCUA Office of Inspector General. --------------------------------------------------------------------------- The Board disagrees with the commenter who recommended tying the risk-based capital requirements to CAMEL ratings. The CAMEL rating system is not designed to measure the complexity of the portfolio of assets and liabilities of credit unions. Rather, the CAMEL rating reflects the financial and operational condition of the credit [[Page 55475]] union on a scale of one to five. Therefore, a credit union rated CAMEL 3, 4, or 5 may not necessarily have a high degree of complexity in the composition of its assets and liabilities. In drafting the Proposal, the NCUA reviewed the RCI indicators and restricted the indicators to only the most complex components. One commenter stated interest only-real estate loans present risk regardless of lien position. Based on this comment, the NCUA re-ran its complexity analysis with all interest-only real estate loans included in this indicator. There were no significant changes in the percent of credit unions, by total asset threshold, participating in these activities, by number and volume. The analysis continues to support defining complexity as credit unions with assets greater than $500 million. The Board agrees with the commenter's assessment of similar risk attributes and will, going forward, include first-lien, interest- only real estate loans within the interest only loan indicator. A commenter recommended the Board redefine ``commercial loans'' to exclude inherently less complex categories of such loans. The Board continues to believe the loans defined as ``commercial loans'' in the NCUA's Regulations are complex enough to warrant inclusion as a complexity indicator. ``Commercial loans'' by definition no longer include the less complex components, including but not limited to, 1-4 family residential property secured loans not serving as the borrower's primary residence, or vehicles manufactured for household use.\40\ Therefore, the Board will continue to use ``commercial loans,'' as currently defined as an indicator. --------------------------------------------------------------------------- \40\ See 12 CFR 723.2. --------------------------------------------------------------------------- For the reasons discussed above, the NCUA continues to believe that $500 million in total assets is an appropriate threshold level for defining a credit union as ``complex,'' thereby subjecting it to the NCUA's risk-based capital requirement. As such, this final rule amends Sec. 702.103 of the 2015 Final Rule to 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. 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.\41\ 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. --------------------------------------------------------------------------- \41\ 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.). --------------------------------------------------------------------------- IV. Legal Authority In 1998, Congress enacted the Credit Union Membership Access Act (CUMAA).\42\ Section 301 of CUMAA added section 216 to the FCUA,\43\ which required the Board to adopt by regulation a system of PCA to restore the net worth of credit unions that become inadequately capitalized.\44\ 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).\45\ 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).\46\ The Board initially implemented the required system of PCA in 2000,\47\ primarily in part 702 of the NCUA's Regulations, and most recently made substantial updates to the regulation in October 2015.\48\ --------------------------------------------------------------------------- \42\ Public Law 105-219, 112 Stat. 913 (1998). \43\ 12 U.S.C. 1790d. \44\ 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). \45\ 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). \46\ 12 U.S.C. 1790d(b)(1)(B). \47\ 12 CFR part 702; see also 65 FR 8584 (Feb. 18, 2000) and 65 FR 44950 (July 20, 2000). \48\ 80 FR 66625 (Oct. 29, 2015). --------------------------------------------------------------------------- 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].'' \49\ 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.'' --------------------------------------------------------------------------- \49\ 12 U.S.C. 1790d(a)(1). --------------------------------------------------------------------------- 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.\50\ Section 216(o) generally defines a credit union's ``net worth'' as its retained earnings balance,\51\ and a credit union's ``net worth ratio,'' as the ratio of its net worth to its total assets.\52\ 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.\53\ --------------------------------------------------------------------------- \50\ 12 U.S.C. 1790d(c). \51\ 12 U.S.C. 1790d(o)(2). \52\ 12 U.S.C. 1790d(o)(3). \53\ 12 U.S.C. 1790d(c)-(g); 12 CFR 702.204(a)-(b). --------------------------------------------------------------------------- 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 \54\ requirement for insured credit unions that are complex, as defined by the Board. . . .'' \55\ The FCUA directs the NCUA to base its definition of ``complex'' credit unions ``on the portfolios of assets and liabilities of [[Page 55476]] credit unions.'' \56\ It also requires the NCUA to design a risk-based net worth requirement to apply to such ``complex'' credit unions.\57\ --------------------------------------------------------------------------- \54\ 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. \55\ 12 U.S.C. 1790d(d)(1). \56\ 12 U.S.C. 1790d(d). \57\ Id. --------------------------------------------------------------------------- V. Impact of the Final Rule This final 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 credit unions. The new definition of complex credit union adopted in this final rule exempts a total of 90 percent (5,042) of all credit unions as of December 31, 2017.\58\ For comparison, if the threshold were to remain at $100 million only about 72 percent of all credit unions would be exempt. --------------------------------------------------------------------------- \58\ This final rule 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. --------------------------------------------------------------------------- While under this final rule 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.\59\ 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.\60\ --------------------------------------------------------------------------- \59\ 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. \60\ 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. --------------------------------------------------------------------------- The credit unions that are defined as complex under this final rule 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 final rule.\61\ Table 4 shows the distribution of estimated risk-based capital ratios for all complex credit unions based on this final rule. --------------------------------------------------------------------------- \61\ 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 4--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% -------------------------------------------------------------------------------------------------------------------------------------------------------- # of CUs......................... 7 110 153 144 101 14 2 -------------------------------------------------------------------------------------------------------------------------------------------------------- As shown in Table 4, 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 final rule, 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.\62\ Overall, 98.7 percent of all complex credit unions are well capitalized under this final rule. --------------------------------------------------------------------------- \62\ 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. --------------------------------------------------------------------------- Credit unions often hold some margin above regulatory capital requirements. Table 5 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. Table 5--Distribution of Net Worth Ratios and Risk-Based Capital Ratios for Complex Credit Unions -------------------------------------------------------------------------------------------------------------------------------------------------------- Less than well Well capitalized Well capitalized Well capitalized Greater than well Number of CUs capitalized to well + 2% + 2% to + 3.5% + 3.5% to + 5% capitalized + 5% -------------------------------------------------------------------------------------------------------------------------------------------------------- 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 -------------------------------------------------------------------------------------------------------------------------------------------------------- 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 6 summarizes the distribution of credit unions by the ratio of risk-weighted assets to total assets for credit unions bound by each capital requirement. [[Page 55477]] Table 6--Distribution of Risk-Weighted Assets to Total Assets Ratios for Complex Credit Unions by Governing Capital Requirement -------------------------------------------------------------------------------------------------------------------------------------------------------- Risk weighted assets/total assets Total ---------------------------------------------------------------------------- number Avg. (%) <50% 50-60% 60-70% 70-80% 80-90% >90% -------------------------------------------------------------------------------------------------------------------------------------------------------- # Bound by Net Worth Ratio...................................... 310 58.9 49 101 147 10 2 1 # Bound by Risk Based Capital................................... 221 71.9 0 3 81 128 6 3 -------------------------------------------------------------------------------------------------------------------------------------------------------- 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.\63\ 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. --------------------------------------------------------------------------- \63\ 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 6 are categorized by whichever calculation results in a higher dollar volume. --------------------------------------------------------------------------- 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.\64\ Table 6 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 under 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. --------------------------------------------------------------------------- \64\ 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. --------------------------------------------------------------------------- VI. Regulatory Procedures Regulatory Flexibility Act The Regulatory Flexibility Act (RFA) generally requires that, in connection with a final rule, an agency prepare and make available for public comment a final regulatory flexibility analysis that describes the impact of the final 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) \65\ and publishes its certification and a short, explanatory statement in the Federal Register together with the rule. --------------------------------------------------------------------------- \65\ See 80 FR 57512 (Sept. 24, 2015). --------------------------------------------------------------------------- The amendments to the 2015 Final Rule and part 702 affect only complex credit unions, which were those with greater than $100 million in assets under the 2015 Final Rule and, as amended, are now only those with greater than $500 million in assets under this final rule. As a result, credit unions with $100 million or less in total assets would not be affected by this final rule. Accordingly, the NCUA certifies that this final rule 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) (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 3133-0191.\66\ --------------------------------------------------------------------------- \66\ Proposed revisions to OMB control number 3133-0191 have been submitted to OMB for approval in accordance with 5 CFR 1320.11. --------------------------------------------------------------------------- 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 final 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 a material impact for purposes of Executive Order 13132. Assessment of Federal Regulations and Policies on Families The NCUA 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). List of Subjects in 12 CFR Part 702 Credit unions, Reporting and recordkeeping requirements. By the National Credit Union Administration Board on October 18, 2018. Gerard Poliquin, Secretary of the Board. For the reasons discussed above, the Board further amends 12 CFR part 702, as amended in the final rule published at 80 FR 66625 (Oct. 29, 2015), 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. [[Page 55478]] Sec. 702.103 [Amended] 0 2. Amend Sec. 702.103 by removing the words ``one hundred million dollars ($100,000,000)'' and adding in their place ``five hundred million dollars ($500,000,000).'' [FR Doc. 2018-24171 Filed 11-5-18; 8:45 am] BILLING CODE 7535-01-P
![Federal Register / Vol. 83, No. 215 / Tuesday, November 6, 2018 / Rules and Regulations 55467
6. For 11 drawings, UA1 through Accordingly, for reasons set forth in remain in effect. The final rule also
UC2–2, cable riser shield is removed the preamble, chapter XVII, title 7, the amends the definition of a ‘‘complex’’
and separated into new UP unit. Code of Federal Regulations is amended credit union adopted in the 2015 Final
7. For 5 drawings, UG6 through as follows: Rule for risk-based capital purposes by
UG17–3, combinations of elbows, increasing the threshold level for
arresters, and connector blocks are PART 1728—ELECTRIC STANDARDS coverage from $100 million to $500
added. AND SPECIFICATIONS FOR million. These changes provide covered
8. Due to obsolete practices, the MATERIALS AND CONSTRUCTION credit unions and the NCUA with
following drawings are removed: UM3– additional time to prepare for the rule’s
44, UM3–45, UM3–46, UM5–6, UM5– ■ 1. The authority citation for part 1728 implementation, and exempt an
6A, UM6–35, UM6–36, UM7–1, UM8–5, continues to read as follows: additional 1,026 credit unions from the
UM8–6, UM8–7, UM9–2, UM12, UM48– Authority: 7 U.S.C. 901 et seq., 1921 et risk-based capital requirements of the
3, UM48–4, UX7. seq., 6941 et seq. 2015 Final Rule without subjecting the
9. Three new drawings for Single ■ 2. Revise § 1728.97(a)(24) to read as National Credit Union Share Insurance
Phase Riser Pole Assembly Units, UA4, follows: Fund (NCUSIF) to undue risk.
UA.G, and UA1.USG, are added. DATES: The effective date of the final
10. Two new drawings for Two Phase § 1728.97 Incorporation by reference of
rule published on October 29, 2015 (80
Riser Pole Assembly Units, UB5 and electric standards and specifications.
FR 66625) is delayed until January 1,
UB6, are added. * * * * * 2020. In addition, the amendments to
11. Eight new drawings for Three (a) * * * § 702.103 in this final rule are effective
Phase Riser Pole Assembly Units, UC3, (24) Bulletin 1728F–806 (D–806) on January 1, 2020.
UC4, UC5, UC7.1, UC7.3, UC7.4, UC8.1, Specifications and Drawings for
FOR FURTHER INFORMATION CONTACT:
and UC8.2, are added. Underground Electric Distribution,
Policy and Analysis: Julie Cayse,
12. Six new drawings for Foundation October 11, 2018, incorporation
Director, Division of Risk Management,
and Assembly Units, UF.PBC, UF.PBN, approved for § 1728.98.
Office of Examination and Insurance, at
UF3.BC, UF3.BN, UF3.PN, and UF3.VC, * * * * * (703) 518–6360; Kathryn Metzker, Risk
are added. ■ 3. Revise § 1728.98(a)(24) to read as Officer, Division of Risk Management,
13. Five new drawings for follows: Office of Examination and Insurance, at
Transformer Assembly Units, UG1.01,
(703) 548–2456; Julie Decker, Risk
UG1.02, UG1.2, UG3.01, and UG3.02, § 1728.98 Incorporation by reference of
electric standards and specifications. Officer, Division of Risk Management,
are added.
14. Four new drawings for Grounding Office of Examination and Insurance, at
(a) * * *
Assembly Units, UH2.0, UH2.2, UH2.7, (703) 518–3684; Aaron Langley, Risk
(24) Bulletin 1728F–806 (D–806)
and UH4.1G, are added. Management Officer, Data Analysis
Specifications and Drawings for
15. Two new drawings for Secondary Division, Office of Examination and
Underground Electric Distribution),
Assembly Units, UJ3.3 and UJ4.3, are Insurance, at (703) 518–6387; Legal:
October 11, 2018.
added. John Brolin, Senior Staff Attorney,
* * * * * Office of General Counsel, at (703) 518–
16. Three new drawings for Service
Assembly Units, UK2.1, UK2.2, and Dated: October 31, 2018. 6540; or by mail at National Credit
UK4, are added. Christopher A. McLean, Union Administration, 1775 Duke
17. Five new drawings for Acting Administrator, Rural Utilities Service. Street, Alexandria, VA 22314.
Miscellaneous Assembly Units, [FR Doc. 2018–24248 Filed 11–5–18; 8:45 am] SUPPLEMENTARY INFORMATION:
UM1.XX, UM3, UM6.JN6226, BILLING CODE ;P I. Introduction
UM6.PKG, and UM6.RK, are added.
18. Two new drawings for Outdoor The NCUA’s primary mission is to
Lighting Assembly Units, UO1 and ensure the safety and soundness of
NATIONAL CREDIT UNION
UO2, are added. federally insured credit unions. The
ADMINISTRATION
19. Eight new drawings for System agency performs this function by
Protection Assembly Units, UP7.04, 12 CFR Parts 700, 701, 702, 703, 713, examining and supervising all Federal
UP7.B1, UP7.B2, UP7.B3, UP7.C, 723, and 747 credit unions, participating in the
UP7.FC, UP7.UG, and UP8, are added. examination and supervision of
RIN 3133–AE90 federally insured, state-chartered credit
20. A new drawing for Metering
Assembly Units, UQG, is added. unions in coordination with state
Risk-Based Capital
21. A new drawing for Recloser regulators, and insuring members’
Assembly Units, UR3, is added. AGENCY: National Credit Union accounts at federally insured credit
22. A new drawing for Sectionalizing Administration (NCUA). unions.1 In its role as administrator of
Assembly Units, US1.DC, is added. ACTION: Final rule; supplemental. the NCUSIF, the NCUA insures and
23. Four new drawings for Trench regulates 5,573 federally insured credit
Assembly Units, UT2, UT3, UT4, and SUMMARY: The NCUA Board (Board) is unions, holding total assets exceeding
UT5, are added. amending the NCUA’s previously $1.4 trillion and serving approximately
24. Four new drawings for Voltage revised regulations regarding prompt 111 million members.2
Control Assembly Units, UY1.1XX, corrective action (PCA). The final rule At its October 2015 meeting, the
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UY1.1.XXSW, UY3.2L, and UY3.3L, are delays the effective date of the NCUA’s Board issued the 2015 Final Rule to
added. October 29, 2015 final rule regarding
risk-based capital (2015 Final Rule) for 1 As of December 31, 2017, within the nine states
List of Subjects in 7 CFR Part 1728 one year, moving the effective date from that allow privately insured credit unions,
approximately 116 state-chartered credit unions are
Electric power, Incorporation by January 1, 2019 to January 1, 2020. privately insured and are not subject to the NCUA’s
reference, Loan programs-energy, Rural During the extended delay period, the regulation and oversight.
areas. NCUA’s current PCA requirements will 2 Based on December 31, 2017 Call Report Data.
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![Federal Register / Vol. 83, No. 215 / Tuesday, November 6, 2018 / Rules and Regulations 55475
union on a scale of one to five. to the long-term health of all credit the NCUA’s Regulations, and most
Therefore, a credit union rated CAMEL unions. Credit unions need to hold recently made substantial updates to the
3, 4, or 5 may not necessarily have a capital commensurate with their risk. regulation in October 2015.48
high degree of complexity in the Balancing proper capital accumulation The purpose of section 216 of the
composition of its assets and liabilities. with product offering and pricing FCUA is to ‘‘resolve the problems of
In drafting the Proposal, the NCUA strategies helps ensure credit unions are [federally] insured credit unions at the
reviewed the RCI indicators and able to provide affordable member least possible long-term loss to the
restricted the indicators to only the most services over time. Credit unions are [NCUSIF].’’ 49 To carry out that purpose,
complex components. One commenter already expected to incorporate into Congress set forth a basic structure for
stated interest only-real estate loans their business models and strategic PCA in section 216 that consists of three
present risk regardless of lien position. plans provisions for maintaining principal components: (1) A framework
Based on this comment, the NCUA re- prudent levels of capital. combining mandatory actions
ran its complexity analysis with all prescribed by statute with discretionary
IV. Legal Authority actions developed by the NCUA; (2) an
interest-only real estate loans included
in this indicator. There were no In 1998, Congress enacted the Credit alternative system of PCA to be
significant changes in the percent of Union Membership Access Act developed by the NCUA for credit
credit unions, by total asset threshold, (CUMAA).42 Section 301 of CUMAA unions defined as ‘‘new;’’ and (3) a risk-
participating in these activities, by added section 216 to the FCUA,43 which based net worth requirement to apply to
number and volume. The analysis required the Board to adopt by credit unions the NCUA defines as
continues to support defining regulation a system of PCA to restore the ‘‘complex.’’
complexity as credit unions with assets net worth of credit unions that become Among other things, section 216(c) of
greater than $500 million. The Board inadequately capitalized.44 Section the FCUA requires the NCUA to use a
agrees with the commenter’s assessment 216(b)(1)(A) requires the Board to adopt credit union’s net worth ratio to
of similar risk attributes and will, going by regulation a system of PCA for determine its classification among five
forward, include first–lien, interest-only federally insured credit unions ‘‘net worth categories’’ set forth in the
real estate loans within the interest only ‘‘consistent with’’ section 216 of the FCUA.50 Section 216(o) generally
loan indicator. FCUA and ‘‘comparable to’’ section 38 defines a credit union’s ‘‘net worth’’ as
A commenter recommended the of the Federal Deposit Insurance Act its retained earnings balance,51 and a
Board redefine ‘‘commercial loans’’ to (FDI Act).45 Section 216(b)(1)(B) credit union’s ‘‘net worth ratio,’’ as the
exclude inherently less complex requires that the Board, in designing the ratio of its net worth to its total assets.52
categories of such loans. The Board PCA system, also take into account the As a credit union’s net worth ratio
continues to believe the loans defined as ‘‘cooperative character of credit unions’’ declines, so does its classification
‘‘commercial loans’’ in the NCUA’s (i.e., credit unions are not-for-profit among the five net worth categories,
Regulations are complex enough to cooperatives that do not issue capital thus subjecting it to an expanding range
warrant inclusion as a complexity stock, must rely on retained earnings to of mandatory and discretionary
indicator. ‘‘Commercial loans’’ by build net worth, and have boards of supervisory actions.53
definition no longer include the less directors that consist primarily of Section 216(d)(1) of the FCUA
complex components, including but not volunteers).46 The Board initially requires that the NCUA’s system of PCA
limited to, 1–4 family residential implemented the required system of include, in addition to the statutorily
property secured loans not serving as PCA in 2000,47 primarily in part 702 of defined net worth ratio requirement
the borrower’s primary residence, or applicable to federally insured natural-
vehicles manufactured for household as adequately capitalized and may require an person credit unions, ‘‘a risk-based net
adequately capitalized or undercapitalized credit worth 54 requirement for insured credit
use.40 Therefore, the Board will union to comply with certain mandatory or
continue to use ‘‘commercial loans,’’ as discretionary supervisory actions as if it were
unions that are complex, as defined by
currently defined as an indicator. classified in the next lower capital category.). the Board. . . .’’ 55 The FCUA directs
For the reasons discussed above, the 42 Public Law 105–219, 112 Stat. 913 (1998). the NCUA to base its definition of
NCUA continues to believe that $500
43 12 U.S.C. 1790d. ‘‘complex’’ credit unions ‘‘on the
million in total assets is an appropriate
44 The risk-based net worth requirement for credit
portfolios of assets and liabilities of
unions meeting the definition of ‘‘complex’’ was
threshold level for defining a credit first applied on the basis of data in the Call Report 48 80 FR 66625 (Oct. 29, 2015).
union as ‘‘complex,’’ thereby subjecting reflecting activity in the first quarter of 2001. 65 FR
49 12
44950 (July 20, 2000). The NCUA’s risk-based net U.S.C. 1790d(a)(1).
it to the NCUA’s risk-based capital 50 12 U.S.C. 1790d(c).
worth requirement has been largely unchanged
requirement. As such, this final rule since its implementation, with the following 51 12 U.S.C. 1790d(o)(2).
amends § 702.103 of the 2015 Final Rule limited exceptions: revisions were made to the rule 52 12 U.S.C. 1790d(o)(3).
to provide that, for purposes of in 2003 to amend the risk-based net worth 53 12 U.S.C. 1790d(c)–(g); 12 CFR 702.204(a)–(b).
requirement for MBLs, 68 FR 56537 (Oct. 1, 2003);
§ 702.102, a credit union is defined as revisions were made to the rule in 2008 to
54 For purposes of this rulemaking, the term ‘‘risk-
‘‘complex,’’ and a risk-based capital based net worth requirement’’ is used in reference
incorporate a change in the statutory definition of to the statutory requirement for the Board to design
ratio requirement is applicable, only if ‘‘net worth,’’ 73 FR 72688 (Dec. 1, 2008); revisions a capital standard that accounts for variations in the
the credit union’s quarter-end total were made to the rule in 2011 to expand the risk profile of complex credit unions. The term
definition of ‘‘low-risk assets’’ to include debt
assets exceed $500 million, as reflected instruments on which the payment of principal and
‘‘risk-based capital ratio’’ is used to refer to the
in its most recent Call Report. specific standards established in the 2015 Final
interest is unconditionally guaranteed by NCUA, 76 Rule to function as criteria for the statutory risk-
The NCUA will continue to address FR 16234 (Mar. 23, 2011); and revisions were made based net worth requirement. The term ‘‘risk-based
any deficiencies in the capital levels of in 2013 to exclude credit unions with total assets
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capital ratio’’ is also used by the Other Banking
credit unions with $500 million or less of $50 million or less from the definition of Agencies and the international banking community
‘‘complex’’ credit union, 78 FR 4033 (Jan. 18, 2013). when referring to the types of risk-based
in assets through the examination 45 12 U.S.C. 1790d(b)(1)(A); see also 12 U.S.C.
requirements that are addressed in the 2015 Final
process.41 Sound capital levels are vital 1831o (Section 38 of the FDI Act setting forth the Rule. This change in terminology throughout the
PCA requirements for banks). Proposal would have no substantive effect on the
40 See12 CFR 723.2. 46 12 U.S.C. 1790d(b)(1)(B). requirements of the FCUA, and is intended only to
41 See,e.g., § 702.102(b) (Authorizes the NCUA 47 12 CFR part 702; see also 65 FR 8584 (Feb. 18, reduce confusion for the reader.
Board to reclassify a well-capitalized credit union 2000) and 65 FR 44950 (July 20, 2000). 55 12 U.S.C. 1790d(d)(1).
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![Federal Register / Vol. 83, No. 215 / Tuesday, November 6, 2018 / Rules and Regulations 55477
TABLE 6—DISTRIBUTION OF RISK-WEIGHTED ASSETS TO TOTAL ASSETS RATIOS FOR COMPLEX CREDIT UNIONS BY
GOVERNING CAPITAL REQUIREMENT
Risk weighted assets/total assets
Total
number Avg. <50% 50–60% 60–70% 70–80% 80–90% >90%
(%)
# Bound by Net Worth Ratio ........................... 310 58.9 49 101 147 10 2 1
# Bound by Risk Based Capital ....................... 221 71.9 0 3 81 128 6 3
Forty-two percent of complex credit VI. Regulatory Procedures Executive Order 13132
unions (221 complex credit unions with
Regulatory Flexibility Act Executive Order 13132 encourages
$370.3 billion in total assets) are
estimated to have a higher minimum The Regulatory Flexibility Act (RFA) independent regulatory agencies to
capital requirement in terms of dollars generally requires that, in connection consider the impact of their actions on
under the risk-based capital ratio than with a final rule, an agency prepare and state and local interests. The NCUA, an
make available for public comment a independent regulatory agency as
the net worth ratio.63 These 221
final regulatory flexibility analysis that defined in 44 U.S.C. 3502(5), voluntarily
complex credit unions have a notably
describes the impact of the final rule on complies with the principles of the
higher risk profile than the other 310
small entities. A regulatory flexibility executive order to adhere to
complex credit unions. The ratio of fundamental federalism principles. This
average risk weighted assets to total analysis is not required, however, if the
agency certifies that the rule will not final rule reduces the number of
assets for the 221 complex credit unions federally insured natural-person credit
is 72 percent, compared with 59 percent have a significant economic impact on
a substantial number of small entities unions, including federally insured,
for the remaining 310 complex credit state-chartered natural-person credit
unions. Therefore, relative to what (defined for purposes of the RFA to
include credit unions with assets less unions that would be subject to the 2015
qualifies as capital for risk-based capital Final Rule. It may have, to some degree,
than $100 million) 65 and publishes its
purposes, these institutions must hold a direct effect on the states, on the
certification and a short, explanatory
more net worth in dollars to achieve a relationship between the national
statement in the Federal Register
well-capitalized designation over what government and the states, or on the
together with the rule.
the net worth ratio requires. distribution of power and
The amendments to the 2015 Final
In addition, despite holding a greater Rule and part 702 affect only complex responsibilities among the various
share of risk-weighted assets, the risk- credit unions, which were those with levels of government. It does not,
based capital-bound group of 221 greater than $100 million in assets however, rise to the level of a material
complex credit unions also has, on under the 2015 Final Rule and, as impact for purposes of Executive Order
average, a net worth ratio that is 100 amended, are now only those with 13132.
basis point below the net worth ratio of greater than $500 million in assets Assessment of Federal Regulations and
the other 310 complex credit unions.64 under this final rule. As a result, credit Policies on Families
Table 6 highlights the distribution of unions with $100 million or less in total
credit unions by risk weighted assets to assets would not be affected by this final The NCUA has determined that this
total assets depending on whether the rule. Accordingly, the NCUA certifies final rule will not affect family well-
risk-based capital requirement that this final rule will not have a being within the meaning of section 654
necessitates more capital than the net significant economic impact on a of the Treasury and General
worth ratio. The risk-based capital- substantial number of small credit Government Appropriations Act, 1999,
bound group of 221 complex credit unions. Public Law 105–277, 112 Stat. 2681
unions would have to retain more net (1998).
Paperwork Reduction Act
worth in dollars than what is currently List of Subjects in 12 CFR Part 702
required under the net worth ratio to The Paperwork Reduction Act of 1995
satisfy the well-capitalized threshold. (PRA) (44 U.S.C. 3501 et seq.) requires Credit unions, Reporting and
However, over 97 percent (215) of these that the Office of Management and recordkeeping requirements.
institutions already hold more than Budget (OMB) approve all collections of
By the National Credit Union
enough capital to meet the risk-based information by a Federal agency from Administration Board on October 18, 2018.
capital requirement. the public before they can be
Gerard Poliquin,
implemented. Respondents are not
required to respond to any collection of Secretary of the Board.
63 The required dollar amount for risk based
capital is calculated as [(risk-weighted assets times information unless it displays a current, For the reasons discussed above, the
10 percent) ¥ allowance for loan losses¥equity valid OMB control number. Board further amends 12 CFR part 702,
acquired in merger + total adjusted retained In accordance with the PRA, the
earnings acquired through business combinations + as amended in the final rule published
NCUA share insurance capitalization deposit + information collection requirements at 80 FR 66625 (Oct. 29, 2015), as
included in this final rule has been
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goodwill + identifiable intangible assets]¥(total follows:
assets × 7 percent). Complex credit unions in Table submitted to OMB for approval under
6 are categorized by whichever calculation results control number 3133–0191.66
in a higher dollar volume. PART 702—CAPITAL ADEQUACY
64 The average net worth ratio is 10.3 percent for
65 See80 FR 57512 (Sept. 24, 2015).
the 212 complex credit unions bound by risk-based ■ 1. The authority citation for part 702
capital while the average net worth ratio for the 310 66 Proposed revisions to OMB control number continues to read as follows:
complex credit unions bound by the net worth ratio 3133–0191 have been submitted to OMB for
is 11.4 percent. approval in accordance with 5 CFR 1320.11. Authority: 12 U.S.C. 1766(a), 1790d.
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![55478 Federal Register / Vol. 83, No. 215 / Tuesday, November 6, 2018 / Rules and Regulations
§ 702.103 [Amended] identified. To address the approaching rate loans as described in 13 CFR
■ 2. Amend § 702.103 by removing the sunset of LIBOR and the need for a new 120.214(c). SBA will address the
words ‘‘one hundred million dollars benchmark for the calculation of the variable rate bases, including a
($100,000,000)’’ and adding in their maximum allowable fixed interest rate replacement for the LIBOR base rate, in
place ‘‘five hundred million dollars for a 7(a) loan, SBA will use the prime a future rulemaking.
($500,000,000).’’ rate (Prime), as described in 13 CFR Effective November 6, 2018, for any
120.214(c), as the base rate for complete 7(a) loan application received
[FR Doc. 2018–24171 Filed 11–5–18; 8:45 am]
determining the maximum allowable by SBA or any request for an SBA Loan
BILLING CODE 7535–01–P
fixed interest rate for 7(a) loans Number submitted by a Lender with
(including SBA Express and Export delegated authority (including fixed rate
Express loans). SBA Express and Export Express loans
SMALL BUSINESS ADMINISTRATION SBA reviewed and compared the and excluding EWCP loans and
interest rate difference between the Community Advantage loans), the
13 CFR Part 120
Fixed Base Rate and Prime from October maximum allowable fixed interest rate
Maximum Allowable 7(a) Fixed Interest 1, 2009 through August 1, 2018. The will be the Prime rate in effect on the
Rates Fixed Base Rate was, on average, first business day of the month plus:
approximately 200 basis points higher (i) 600 basis points for loans of
AGENCY: U.S. Small Business than Prime during this period and, as of $25,000 or less, plus the 200 basis
Administration. August 2018, the Fixed Base Rate was points permitted by 13 CFR 120.215;
ACTION: Notification announcing the approximately 300 basis points higher (ii) 600 basis points for loans over
maximum allowable fixed interest rates. than Prime. To address this difference, $25,000 but not exceeding $50,000, plus
SBA is increasing the maximum the 100 basis points permitted by 13
SUMMARY: This document announces the allowable spread as follows: For 7(a) CFR 120.215;
maximum allowable fixed interest rates fixed rate loans of $250,000 or less, SBA (iii) 600 basis points for loans greater
for 7(a) guaranteed loans. is setting the maximum allowable than $50,000, up to and including
DATES: This announcement of interest spread over Prime at 6% (plus the $250,000; or
rates is effective November 6, 2018. additional spread permitted under 13 (iv) 500 basis points for loans over
CFR 120.215 for very small loans). For $250,000.
FOR FURTHER INFORMATION CONTACT:
7(a) fixed rate loans over $250,000, SBA The following examples compare the
Robert Carpenter, Acting Chief, 7(a)
is setting the maximum allowable maximum fixed rate that was in effect
Loan Program and Policy Branch, Office
spread over Prime at 5%. The maximum during August 2018 with the maximum
of Financial Assistance, U.S. Small
allowable spread will no longer depend fixed rate established by this Notice,
Business Administration, 409 Third
on the term of the loan. had it been in effect at that time:
Street SW, Washington, DC 20416; Example 1: For a 7(a) loan (other than
telephone: (202) 205–7654; email: The increase in the maximum
SBA Express or Export Express) in the
robert.carpenter@sba.gov; or the Lender allowable spread neutralizes the impact
amount of $200,000 with a 7-year
Relations Specialist in the local Small of replacing the Fixed Base Rate with
maturity, the maximum allowable fixed
Business Administration (SBA) District Prime. A new fixed rate maximum also
interest rate was 10.88% [8.13% (SBA
Office. The local SBA District Office provides greater opportunity for Lenders
Fixed Base Rate for August 2018 based
may be found at https://www.sba.gov/ to make loans using fixed rates and may
on LIBOR) + 2.75% (SBA maximum
tools/local-assistance/districtoffices. offset the cost of underwriting,
spread for loans over $50,000 with a
SUPPLEMENTARY INFORMATION: disbursing, and servicing loans of
maturity of 7 years or longer)].
Agency regulations at 13 CFR $250,000 or less. SBA notes that the The new maximum allowable fixed
120.213(a), Fixed Rates for Guaranteed higher maximum interest rates rate for the same loan would be 11.00%
Loans, state that ‘‘[a] loan may have a permitted under 13 CFR 120.215 for [5.00% (Prime rate for August 2018) +
reasonable fixed interest rate. SBA very small loans (i.e., loans under 6.00% (maximum spread over Prime for
periodically publishes the maximum $50,000) continue to apply. a fixed rate loan greater than $50,000,
allowable rate in the Federal Register.’’ The interest rates set forth in this but less than $250,000, regardless of the
On September 30, 2009, SBA Notice are applicable to all 7(a) fixed maturity)].
published a Federal Register Notice (74 rate loans (including fixed rate SBA Example 2: For an SBA Express or
FR 50263) establishing the use of the Express and Export Express loans 1), Export Express loan in the amount of
London Interbank Offered Rate (LIBOR) with the exception of the Export $200,000, the maximum allowable fixed
(as defined in 13 CFR 120.214(c)), plus Working Capital Program 2 (EWCP) interest rate was 9.5% [5.00% (Prime
300 basis points, plus the average of the loans and Community Advantage loans. rate for August 2018) + 4.5% (maximum
5-year and 10-year LIBOR swap rates, as This Notice does not affect the spread over Prime for an SBA Express
the SBA ‘‘Fixed Base Rate.’’ According allowable base rates used for variable or Export Express loan over $50,000,
to the September 30, 2009 Notice, the regardless of maturity)].
1 It should be noted that SBA’s recently published
maximum allowable fixed interest rate The new maximum allowable fixed
proposed rule for the Express loan programs
for 7(a) loans (other than SBA Express contemplates certain maximum fixed interest rates rate for the same loan would be 11.00%
and Export Express loans) was the Fixed for SBA Express and Export Express loans. See 83 [5.00% (Prime rate for August 2018) +
Base Rate, plus a maximum allowable FR 49001 (September 28, 2018). Notwithstanding 6.00% (maximum spread over Prime for
spread based on the term of the loan, the proposed rule, today’s Notice regarding
a fixed rate loan greater than $50,000,
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Maximum Allowable 7(a) Fixed Interest Rates sets
plus an additional spread for very small the maximum allowable fixed interest rates for SBA but less than $250,000, regardless of the
loans. Express and Export Express loans at the same levels maturity)].
On July 27, 2017, the U.K. Financial as the maximum fixed rates allowable for 7(a) loans Example 3: For a 7(a) loan (other than
Conduct Authority announced that it generally. SBA will reflect any necessary changes SBA Express or Export Express) in the
when it finalizes the proposed rule.
would phase-out LIBOR by the end of 2 In accordance with 13 CFR 120.344(c), ‘‘SBA amount of $350,000 with less than a 7-
2021. No generally accepted does not prescribe the interest rates for the EWCP, year maturity, the maximum allowable
replacement for LIBOR has been but will monitor these rates for reasonableness.’’ fixed interest rate was 10.38% [8.13%
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Document Created: 2018-11-06 00:18:47
Document Modified: 2018-11-06 00:18:47
| 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; supplemental. | |
| Dates | The effective date of the final rule published on October 29, 2015 (80 FR 66625) is delayed until January 1, 2020. In addition, the amendments to Sec. 702.103 in this final rule are effective on January 1, 2020. | |
| Contact | Policy and Analysis: Julie Cayse, Director, Division of Risk Management, Office of Examination and Insurance, at (703) 518-6360; Kathryn Metzker, Risk Officer, Division of Risk Management, Office of Examination and Insurance, at (703) 548- 2456; Julie Decker, Risk Officer, Division of Risk Management, Office of Examination and Insurance, at (703) 518-3684; Aaron Langley, Risk Management Officer, Data Analysis Division, Office of Examination and Insurance, at (703) 518-6387; Legal: John Brolin, Senior Staff Attorney, Office of General Counsel, at (703) 518-6540; or by mail at National Credit Union Administration, 1775 Duke Street, Alexandria, VA 22314. | |
| FR Citation | 83 FR 55467 | |
| RIN Number | 3133-AE90 | |
| CFR Citation | 12
CFR
700 12 CFR 701 12 CFR 702 12 CFR 703 12 CFR 713 12 CFR 723 12 CFR 747 | |
| CFR Associated | Credit Unions and Reporting and Recordkeeping Requirements |
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