[Federal Register Volume 61, Number 142 (Tuesday, July 23, 1996)]
[Proposed Rules]
[Pages 38117-38119]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-18453]


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NATIONAL CREDIT UNION ADMINISTRATION

12 CFR Part 704


Corporate Credit Unions

AGENCY: National Credit Union Administration (NCUA).

ACTION: Proposed rule.

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SUMMARY: NCUA recently issued a proposed rule to revise the regulations 
governing corporate credit unions. At the time the proposal was 
released, NCUA indicated that special consideration would have to be 
provided for wholesale corporate credit unions, due to their unique 
role in the credit union system. NCUA and the one wholesale corporate 
credit union that currently exists have worked together to develop this 
proposal, which provides for such consideration. This proposal would 
amend the regulations on corporate credit unions by adding a new 
section, to follow the numbering of the recent proposal, governing 
wholesale corporate credit unions. Final provisions governing wholesale 
corporate credit unions, as well as other corporate credit unions, will 
be adopted after consideration of public comments.

DATES: Comments must be received on or before September 3, 1996.

ADDRESSES: Comments should be directed to Becky Baker, Secretary of the 
Board. Mail or hand-deliver comments to: National Credit Union 
Administration, 1775 Duke Street, Alexandria, Virginia 22314-3428. Fax 
comments to (703) 518-6319. Post comments on NCUA's electronic bulletin 
board by dialing (703) 518-6480. E-mail comments to [email protected]. 
Please send comments by one method only.

FOR FURTHER INFORMATION CONTACT: Robert F. Schafer, Acting Director, 
Office of Corporate Credit Unions, at the above address, telephone: 
(703) 518-6640, or E-mail: [email protected]; or Edward Dupcak, 
Director, Office of Investment Services, at the above address, 
telephone: (703) 518-6620, or E-mail: [email protected].

SUPPLEMENTARY INFORMATION:

Background

    On May 22, 1996, NCUA issued a proposed rule to revise the 
regulations for corporate credit unions. 61 FR 28085 (June 4, 1996). 
The comment period expires on September 3, 1996. The proposal sets 
forth requirements and authorities that would apply to all corporate 
credit unions, and then provides, through appendices, additional 
requirements and authorities for those corporate credit unions that 
have more developed infrastructures and more experienced staffs. 
Currently, the credit union system supports one ``wholesale'' corporate 
credit union, which is a corporate credit union that serves corporate 
credit unions. It was expected that this wholesale corporate credit 
union would seek to obtain the authorities available under Appendix B 
of the proposed rule. It was also expected that certain adjustments to 
the general requirements and the requirements of Appendix B would have 
to be made to allow the wholesale corporate credit union to fulfill its 
role as an ultimate liquidity provider to the system.
    NCUA and the wholesale corporate credit union have worked closely 
on these adjustments, pending adoption of final revised rules governing 
corporate credit unions. For several reasons, NCUA has determined to 
incorporate these adjustments into the proposed revisions to Part 704. 
First, the wholesale corporate credit union should have the assurance 
that, once these adjustments are made final, it will remain entitled to 
them, unless the regulation is changed. Second, the importance of the 
wholesale corporate credit union to the entire credit union system 
warrants public comment on the adjustments. Further, the adjustments 
should be standardized in the event other corporate credit unions wish 
to become wholesale corporate credit unions. Accordingly, this proposed 
rule adds a new Section 704.19 governing wholesale corporate credit 
unions. Public comment is requested. Final action on this proposal will 
coincide with final action on the broader proposed Part 704.

Analysis

    -Proposed Section 704.19(a) provides that wholesale corporate 
credit unions must comply with Part 704, unless there is a specific 
provision to the contrary in Section 704.19. Thus, a wholesale 
corporate credit union that wishes to have access to the broader 
investment powers of Appendix B of the May proposal must meet the 
general requirements of that proposal, except as modified by Appendices 
B and C and proposed Section 704.19. For a wholesale corporate credit 
union, where Section 704.19 conflicts with Appendices B or C, Section 
704.19 prevails.
    -For example, Section 704.3(b)(1) of the May proposal contains a 
general requirement that a corporate credit union maintain a capital 
ratio of 4 percent. To engage in Part II authorities, though, a 6 
percent ratio is required. For a wholesale corporate credit union, 
however, proposed Section 704.19(b)(1) requires only a 5 percent ratio. 
This is partly justified by proposed Section 704.19(c), which 
establishes a narrower limit for risk taking than is available to other 
corporate credit unions with Part II authority. It is also justified 
because of the membership of a wholesale corporate credit union. Senior 
managers of corporate credit unions have specialized expertise in the 
areas of investments and asset and liability management. NCUA believes 
that corporate credit union managers, as members and board 
representatives, will analyze and question the balance sheet strength 
and financial activities of the wholesale corporate credit union, 
keeping its risk-taking in check. Finally, the lower ratio is justified 
because a wholesale corporate credit union has a greater capacity to 
raise paid-in capital from non-credit union sources if the need arises.
    -Section 704.3(b)(2) of the May proposal provides that a corporate 
credit union's monthly reserve transfers are based upon the level of 
its reserve ratio, which is calculated by dividing the institution's 
moving daily average net assets into the total of its reserves and 
undivided earnings plus paid-in capital. Where the reserve ratio is 
greater than or equal to 3 percent but less than 4 percent, the 
corporate credit union must transfer .10 percent of its moving daily 
average net assets. Where the reserve ratio is less than 3 percent, the 
corporate credit union must transfer .15 percent of its moving daily 
average net assets. The amount to be transferred must be calculated 
monthly, but the funds may come out of earnings for the quarter. This 
formula is maintained even for a corporate credit union operating with 
Part II authorities.
    -Proposed Section 704.19(b)(2), however, allows a wholesale 
corporate

[[Page 38118]]

credit union to make reserve transfers at the lesser of .10 percent of 
its moving daily average net assets or the amount, depending on its 
reserve ratio, that would be required under Section 704.3(c). A lower 
requirement is appropriate to provide competitive wholesale corporate 
credit union services. Proposed 704.19(b)(2) also provides that reserve 
transfers may be made from earnings in either the prior calendar month 
or prior twelve- month period. It may be necessary for a wholesale 
corporate credit union to utilize the earnings accumulated over a year, 
rather than just a quarter, to balance occasional short-term losses 
with overall long-term gain.
    -Section 704.8(e)(1) of the May proposal requires a corporate 
credit union to evaluate the risk in its balance sheet by measuring, at 
least quarterly, the impact of a 300 basis point interest rate shock. A 
corporate credit union must structure its balance sheet so that its 
after-shock MVPE ratio does not fall below 1 percent. If the ratio 
falls below 2 percent, the corporate credit union must conduct the 
tests monthly. Section 704.8(e)(2) of the May proposal provides that a 
corporate credit union must limit its risk exposure to levels that do 
not result in an after-shock decline in MVPE of more than 18 percent. 
Pursuant to Appendix B, a corporate credit union with Part II 
authorities may structure its balance sheet so that its MVPE declines 
as much as 50 percent after a 300 basis point shock.
    -Proposed Section 704.19(c) permits a wholesale corporate credit 
union's after- shock MVPE ratio to go as low as .75 percent and 
restricts the absolute decline in MVPE to 35 percent. The MVPE floor 
was lowered in the belief that the 1 percent level could unduly 
restrict a wholesale corporate credit union and prevent it from 
providing essential services to members. Since the MVPE floor serves, 
in part, as a cushion for MVPE modeling errors, lowering the floor 
requires greater assurance that the modeling system is reliable. 
Accordingly, proposed Section 704.19(c)(2) requires a wholesale 
corporate credit union to obtain, at its expense, an annual third-party 
review of its asset and liability management modeling system. --
    -In light of the forbearance provided in the capital and MVPE 
requirements, NCUA believes that a wholesale corporate credit union 
should operate with a lower limit on the permitted decline in MVPE than 
provided in Appendix B, Part II. The proposed limit is consistent with 
the level of risk a wholesale corporate credit union should undertake 
in light of its mission to provide liquidity to the credit union 
system.

Regulatory Procedures

Regulatory Flexibility Act

    -The NCUA Board certifies that the proposed rule, if made final, 
will not have a significant economic impact on small credit unions 
(those under $1 million in assets).

Paperwork Reduction Act

    -The paperwork requirements of this proposed rule are incorporated 
in the requirements set forth in a proposed rule issued by NCUA on May 
22, 1996. 61 FR 28085 (June 4, 1996). NCUA invites comment on: (1) 
whether the collection of the information is necessary for the proper 
performance of the functions of NCUA, including whether the information 
will have practical utility; (2) the accuracy of NCUA's estimate of the 
burden of the collection of information; (3) ways to enhance the 
quality, utility, and clarity of the information to be collected; and 
(4) ways to minimize the burden of collection of information. Comments 
on the collection of information should be directed to Ms. Beauchesne, 
at the National Credit Union Administration, 1775 Duke Street, 
Alexandria, Virginia 22314-3428; Fax No. (703) 518-6433; E-Mail 
Address: [email protected], by September 3, 1996. Comments should also be 
sent to the OMB Desk Officer at the following address: Mr. Milo 
Sunderhauf, OMB Reports Management Branch, New Executive Office 
Building, Rm. 10202, Washington, DC 20530.

Executive Order 12612

    -Executive Order 12612 requires NCUA to consider the effect of its 
actions on state interests. It states that: ``Federal action limiting 
the policy-making discretion of the states should be taken only where 
constitutional authority for the action is clear and certain, and the 
national activity is necessitated by the presence of a problem of 
national scope.'' The risk of loss to federally insured credit unions 
and the NCUSIF caused by actions of corporate credit unions are 
concerns of national scope. The proposed rule would help assure that 
proper safeguards are in place to ensure the safety and soundness of 
corporate credit unions.
    -Proposed Part 704 applies to all corporate credit unions that 
accept funds from federally insured credit unions. NCUA believes that 
the protection of such credit unions, and ultimately, the NCUSIF, 
warrants application of the proposed rule to non federally insured 
corporate credit unions. NCUA, pursuant to Executive Order 12612, has 
determined that this rule may have an occasional 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 and the states, or on the distribution of 
power and responsibilities among the various levels of government. 
However, the potential risk to the NCUSIF without these changes 
justifies them.

List of Subjects in 12 CFR Part 704

    Credit unions, Reporting and recordkeeping requirements.

    By the National Credit Union Administration Board on July 16, 
1996.
Becky Baker,
Secretary of the Board.

    For the reasons set forth in the preamble, NCUA proposes to amend 
12 CFR Part 704, as proposed to be revised at 61 FR 28098, June 4, 
1996, as follows:

PART 704--CORPORATE CREDIT UNIONS

    1. The authority citation for part 704 continues to read as 
follows:

    Authority: 12 U.S.C. 1762, 1766(a), 1781, and 1789.

    -2. Section 704.19 is added to read as follows:


Sec. 704.19   Wholesale corporate credit unions.

    -(a) General. Wholesale corporate credit unions are subject to the 
requirements of this part, except as set forth in this section.
    -(b) Capital. (1) A wholesale corporate credit union will maintain 
a minimum capital ratio of 5 percent.
    -(2) A wholesale corporate credit union shall make reserve 
transfers at the lower of .10 percent of its moving daily average net 
assets or the amount that would be required under Sec. 704.3(c).
    -(i) Required transfers are to be made from earnings in either the 
prior calendar month or prior twelve-month period. Transfers made 
during the prior twelve-month period must be greater than or equal to 
the aggregate amount of required reserve transfers for each of the 
months in that twelve-month period.
    -(ii) NCUA and, in the case of state-chartered wholesale corporate 
credit unions, the state supervisory authority, must be notified within 
15 business days of the close of any calendar month in which a 
wholesale corporate credit union's required reserve transfer exceeds 
earnings for that month. The notice must include the dollar amounts

[[Page 38119]]

of the required reserve transfer and earnings for that month and for 
the prior twelve-month period. The notice must also provide an 
explanation of why the current month's required reserve transfer 
exceeded earnings for that month.
    -(c) Asset and liability management. (1) In conducting the interest 
rate sensitivity analysis set forth in Sec. 704.8(e)(1)(i), a wholesale 
corporate credit union must limit its risk exposure to levels that do 
not result, at any time, in an MVPE ratio below .75 percent or a 
decline in MVPE of more than 35 percent.
    -(2) A wholesale corporate credit union must obtain, at its 
expense, an annual third-party review of its asset and liability 
management modeling system. -

[FR Doc. 96-18453 Filed 7-22-96; 8:45 am]
BILLING CODE 7535-01-P