[Federal Register Volume 67, Number 187 (Thursday, September 26, 2002)]
[Proposed Rules]
[Pages 60607-60611]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-24290]


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NATIONAL CREDIT UNION ADMINISTRATION

12 CFR Part 741


Requirements for Insurance

AGENCY: National Credit Union Administration.

ACTION: Proposed rule.

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SUMMARY: The National Credit Union Administration (NCUA) is proposing a 
regulation on the requirements for federally-insured credit unions that 
wish to branch outside the United States. The proposed rule requires a 
credit union to develop a business plan and receive foreign government 
and NCUA approval before establishing a branch outside the United 
States.

DATES: The NCUA must receive comments on or before December 26, 2002.

ADDRESSES: Direct comments to Becky Baker, Secretary of the Board. Mail 
or hand-deliver comments to: National Credit Union Administration, 1775 
Duke Street, Alexandria, Virginia 22314-3428, or you may fax comments 
to (703) 518-6319 or e-mail comments to [email protected]. Please 
send comments by one method only.

FOR FURTHER INFORMATION CONTACT: Michael J. McKenna, Senior Staff 
Attorney, Division of Operations, Office of General Counsel, at the 
above address or telephone: (703) 518-6540 or Lynn Markgraf, Program 
Officer, Office of Examination and Insurance, at the above address or 
telephone: (703) 518-6360.

SUPPLEMENTARY INFORMATION: On September 7, 2000, the Board issued an 
advance notice of proposed rulemaking (ANPR) on whether NCUA should 
insure state-chartered credit unions that branch outside the United 
States. 65 FR 55464 (September 14, 2000). The comment period ended on 
November 14, 2000. The key issues raised in the ANPR included NCUA 
Board policy considerations, legal concerns, supervision and 
examination considerations, options for insuring foreign branches of 
state-chartered credit unions and options for restricting insurance 
coverage for state-chartered credit unions operating foreign branches.
    The NCUA Board stated in the ANPR that it was considering numerous 
options to address the issues raised by state-chartered credit unions 
branching outside the United States. One option discussed was to permit 
federally-insured, state-chartered credit unions to serve foreign 
nationals in their fields of membership on the same terms currently 
permitted for federal credit unions. That is, foreign nationals in the 
field of membership could be served pursuant to an approved business 
plan, with branches being limited to U.S embassies and U.S. military 
instillations. A second option discussed insuring state-chartered 
credit unions that operate foreign branches, but with regulatory 
limitations designed to mitigate risk to the National Credit Union 
Share Insurance Fund (NCUSIF). The following were the limitations, 
among others, that the Board stated it might consider:
    [sbull] Allow foreign branches for the purpose of serving employees 
of U.S. or international organizations in a credit union's field of 
membership, but prohibit select employee group expansions or other 
expansion based on the foreign branch;
    [sbull] Provide that accounts at foreign branches are not insured 
or give credit unions the option to insure those accounts;
    [sbull] Require a separate application for insurance for foreign 
branch operations with the factors to be considered enumerated in 
NCUA's regulations;
    [sbull] Limit the amount of total loans, issued at a foreign 
branch, in relation to insured and uninsured shares at the foreign 
branch;
    [sbull] Require specific, minimum capital amounts based on the size 
of the loan portfolio and require mandatory charge-offs of loans more 
than 120 days past due; and
    [sbull] Limit the amount of loans to foreign nationals outside the 
United States to the uninsured deposits at the foreign branch. 
Uninsured shares would act as the primary offset for loan loses after 
capital reserved for the branch is depleted.
    The NCUA Board has decided not to propose any of these regulatory 
limitations but rather to propose a more streamlined and less intrusive 
approach that still maintains safety and soundness. As discussed below, 
the NCUA Board is proposing a simple approval process that requires a 
credit union to obtain host country approval and develop a 
comprehensive business plan in order to obtain NCUA approval to 
establish a branch in a foreign country.

Legal Background

    The Federal Deposit Insurance Corporation (FDIC) reviews the 
insurance application for each branch located outside the United 
States. When reviewing an insurance application for foreign banks or 
foreign branches, FDIC must consider:
    (1) The financial history and condition of the bank,
    (2) The adequacy of its capital structure,
    (3) Its future earnings prospects,
    (4) The general character and fitness of its management, including 
but not limited to the management of the branch proposed to be insured,
    (5) The risk presented to the Bank Insurance Fund or the Savings 
Association Insurance Fund,
    (6) The convenience and needs of the community to be served by the 
branch,
    (7) Whether or not its corporate powers, insofar as they will be 
exercised through the proposed insured branch, are consistent with the 
purposes of [the FDIC] Act, and
    (8) The probable adequacy and reliability of information supplied 
and to be supplied by the bank to the Corporation to enable it to carry 
out its functions under [the FDIC] Act.
    12 U.S.C. 1815(b). This review is similar to NCUA's review of an 
insurance application under the Federal Credit Union Act (Act). 12 
U.S.C. 1781(c)(1).
    Bank and thrift deposits held outside the United States are not 
insured unless the financial institution has an express agreement with 
the depositor. The term ``deposit'' is defined to exclude:

    [A]ny obligation of a depository institution which is carried on 
the books and records of an office of such bank or savings 
association located outside of any State, unless--
    (i) such obligation would be a deposit if it were carried on the 
books and records of the depository institution, and would be 
payable at, an office located in any State; and
    (ii) the contract evidencing the obligation provides by express 
terms, and not by implication, for payment at an office of the 
depository institution located in any State.

12 U.S.C. 1813(l)(5)(A). An account in a foreign branch of an FDIC-
insured branch is a ``deposit'' and insured only if it meets the above 
exception to the

[[Page 60608]]

exclusion. The general practice in the banking industry is to establish 
accounts in foreign branches as uninsured accounts.
    There is no comparable definition of deposit or share account in 
the Act or NCUA's regulations that provides a credit union with the 
ability to choose whether a foreign share account is federally-insured. 
Therefore, without a regulatory change, if a federally-insured, state-
chartered credit union opens a branch office outside the United States, 
the member share accounts at that branch would be federally-insured.
    Section 201(c)(1) of the Act authorizes NCUA to determine 
insurability of accounts of federally-insured, state-chartered credit 
unions. 12 U.S.C. 1781(c)(1). It states, in part, that the NCUA Board 
must disapprove the application of any credit union for insurance of 
its member accounts if it finds that:

    [I]nsurance of its member accounts would otherwise involve undue 
risk to the fund, or that its powers and purposes are inconsistent 
with the promotion of thrift among its members and the creation of a 
source of credit for provident or productive purposes.

Comments

    Nineteen comments were received. Comments were received from four 
federal credit unions, three state-chartered credit unions, seven state 
leagues, four credit union trade associations, and one research 
institute. In general, the commenters believed NCUA needs to address 
the multitude of issues raised by foreign branching. Some commenters 
addressed the safety and soundness concerns raised in the ANPR, with 
most of these commenters stating that the safety and soundness issues 
are not insurmountable. Three commenters stated that NCUA should not 
encroach upon the authority of state regulators to oversee the 
operations of state-chartered credit unions. Some commenters 
recommended that NCUA work with state regulators to develop insurance 
requirements that mitigate risks associated with foreign branching 
while preserving the ability for qualified credit unions to operate 
foreign branches.

Previously Discussed Options

Only Permit Federally-Insured State-Chartered Credit Unions To Serve 
Foreign Nationals in Their Fields of Membership on the Same Terms 
Currently Permitted for Federal Credit Unions

    Eight commenters opposed any provision imposing field of membership 
limits upon state credit unions, either inside or outside the United 
States. Most of these commenters believe that a state-chartered credit 
union should have the authority to establish branches outside of the 
United States consistent with the laws enacted by its state 
legislature. Five commenters stated that select group expansions around 
a stated-chartered credit union's foreign branch should not be 
permitted.
    Two commenters approved of this restrictive field of membership 
option because of the risks described in the ANPR. One of these 
commenters also stated that, if this option is not accepted by NCUA, 
the agency should consider imposing additional requirements similar to 
those of the Federal Reserve's Regulation K.

Other Regulatory Limitations

    Eleven commenters stated that NCUA should adopt policies and 
procedures similar to those established by the Federal Reserve Act and 
FDIC deposit insurance requirements, with regulatory limitations 
designed to mitigate risk to the NCUSIF. Two commenters proposed 
minimum capital requirements that were significantly less than one 
million dollars. One commenter believes there should be specific, 
minimum capital amounts based on the size of the loan portfolio. One 
commenter would require foreign branches to adhere to a perceived 
international standard ``of a minimum capital base (excluding ownership 
shares) of ten percent of total assets.'' One commenter stated that 
NCUA should establish minimum capital levels in relation to total 
assets and loans and receivables from foreign nationals. Four 
commenters opposed minimum capital standards for foreign branches.
    Seven commenters specifically stated that NCUA should approve any 
branch that is to be operated outside the United States. One commenter 
disapproved of prior NCUA approval since this commenter believes this 
is the state regulator's responsibility.
    Four commenters opposed mandatory charge-offs beyond 120 days. Six 
commenters opposed limiting the aggregate loan amount to the amount of 
uninsured deposits at the foreign branch.
    One commenter stated that only well capitalized, adequately insured 
credit unions with the ability to audit foreign operations should be 
allowed to branch outside the United States. One commenter supports the 
use of opinion audits for all credit unions, regardless of size, that 
have foreign branches not located on a U.S. military instillation or in 
a U.S. territory. One commenter believes that, instead of an opinion 
audit, a good internal audit should suffice.
    One commenter believes NCUA should require a specific plan for 
addressing foreign currency risk to be enumerated in an NCUA-approved 
business plan. One commenter stated that NCUA should impose additional 
regulatory requirements if the NCUA Board decides to insure shares held 
by the foreign branches of state-chartered credit unions. One commenter 
stated that the agency should not mandate any specific regulatory 
requirements for credit unions with foreign branches that do not 
currently exist for domestic credit unions. One commenter stated that, 
as the costs of regulation increase, state-chartered credit unions with 
foreign branches should pay incrementally higher percentages of their 
assets to the NCUSIF to cover the additional risks associated with 
these ventures.

Deposit Insurance

    One commenter stated that the Board should adopt the FDIC 
definition of ``deposit'' for defining ``share'' and provide that only 
shares are eligible for insurance coverage. Two commenters believe that 
NCUA has the authority to permit deposits outside the U.S. to be either 
insured or not insured. These commenters urged NCUA to permit state-
chartered credit unions to offer foreign accounts that are not insured. 
Another commenter stated that member accounts in foreign branches 
should not be insured by the NCUSIF. Five commenters stated that NCUA 
should either not insure foreign deposits or provide an option for 
insurance. One commenter would oppose any requirement that share 
deposits from members outside the U.S. be insured by the NCUSIF and 
encouraged NCUA to adopt flexible regulatory language allowing 
federally-insured, state-chartered credit unions to open insured and 
uninsured accounts at foreign branches.
    One commenter favors NCUSIF insuring deposits in overseas branches 
of credit unions given appropriate safeguards. One commenter believes 
that credit unions should maintain deposit insurance although this 
commenter is not sure it would be prudent for the NCUA to refrain from 
requiring insurance through the NCUSIF. One commenter stated that 
member shares, regardless of the location of the branch in which 
transactions occur, should be insured.
    Two commenters would require a separate application for foreign 
branch insurance coverage. One commenter did not approve of an 
application for

[[Page 60609]]

separate insurance coverage. One commenter stated that, for 
occupational or employee credit unions, insurance coverage should be 
limited to deposits of foreign national members closely associated with 
the credit union's sponsor or sponsors. One commenter believes state-
chartered credit unions should have the option to federally insure 
accounts pursuant to the requirements of each foreign nation in which 
they operate branches. This commenter also stated that credit unions 
utilizing the NCUSIF should bear the additional costs associated with 
providing federal insurance in a foreign nation to compensate NCUA.
Proposed Rule
    After carefully considering the comments and discussing the issues 
with state regulators, the NCUA Board has decided to propose a rule 
that is similar to Regulation K but is tailored to the unique nature of 
credit unions. NCUA is proposing a three-step process.
    First, the credit union needs to receive written approval from the 
host country to establish the branch that explicitly recognizes NCUA's 
authority to examine and take any enforcement action with regard to 
that branch office, including conservatorship and liquidation actions. 
If a credit union is state-chartered, it must also obtain written 
approval from the state supervisory agency and submit it with the 
application.
    Second, a credit union must develop a detailed business plan that 
addresses the following: (1) Analysis of market conditions in the area 
the branch is to be established; (2) the credit union's plan for 
addressing foreign currency risk; (3) operating facilities, including 
office space, equipment and supplies; (4) safeguarding of assets, 
insurance coverage, and records preservation; (5) written policies 
regarding the branch (shares, lending, capital, charge-offs, 
collections); (6) the field of membership or portion of the field of 
membership to be served through the foreign branch and the financial 
needs of the members to be served and services and products to be 
provided; (7) detailed pro forma financial statements for branch 
operations (balance sheet and income and expense projections) for the 
first and second year, including assumptions; (8) internal controls, 
including cash disbursal procedures for shares and loans at the branch; 
(9) accounting procedures used to identify branch activity and 
performance; and (10) foreign income taxation.
    Third, the credit union must submit documentation showing host 
country approval, state regulator approval if applicable, and the 
business plan to NCUA and receive NCUA approval before establishing the 
branch office.
    The regional director has 60 days to approve the application but 
may extend the time period for good cause. The regional director may 
revoke approval of the branch office for failure to follow the business 
plan in any material respect or for substantive and documented safety 
and soundness reasons. If the credit union wants to make a material 
deviation from its previously approved business plan, it should submit 
a new business plan for approval. If the regional director revokes the 
approval, the credit union will have six months from the date of the 
revocation letter to terminate the operations of the branch. The credit 
union can appeal this revocation directly to the NCUA Board.
    The NCUA Board has decided not to propose any field of membership 
restrictions on the foreign branch or capital requirements above those 
required by the Prompt Corrective Action rule. 12 CFR Part 702. 
However, the business plan must specifically address the field of 
membership to be served by the foreign branch. The NCUA Board believes 
this proposal will minimize risk without interfering with the 
operations of a credit union or its plans to serve its membership. The 
Board reviewed all of the available options and believes this course of 
action is the least burdensome to credit unions while still maintaining 
safety and soundness. If this proposal is adopted in final, the NCUA 
Board will monitor the performance and safeguards of foreign branches 
through its examination functions to ensure this approach continues to 
minimize risk and maintains safety and soundness, without unduly 
hindering the business decisions of credit unions.
    The Board wishes to clarify that a representation office or a 
liaison office is not a branch office as defined by NCUA. It is the 
Board's understanding that such offices do not engage in processing 
loan applications and do not disburse loans. Rather loan documents are 
transferred from the liaison office to the credit union's main office 
in the United States where loan decisions are made and loan disbursals 
are made in U.S. dollars. For purpose of this regulation, such liaison 
or representation offices are not considered a branch.
    On the issue of insurance, if there are no changes to NCUA's 
insurance regulation, a federally-insured credit union that opens a 
branch office outside the United States would have its member share 
accounts at that branch federally-insured. However, the NCUA Board is 
still reviewing this issue. In some cases, host-country laws may 
require that accounts opened and payable at the foreign branch be 
denominated in local currency and insured by the host country's 
insurance system. It would be unnecessary and inappropriate for these 
accounts to be NCUSIF insured as well. The NCUA Board is considering 
following a modified version of the FDIC rule on insurance coverage. 
Specifically, the credit union's business plan would be required to 
address the insured status of member accounts and, in any event, 
accounts would be NCUSIF insured only if denominated in U.S. dollars 
and only payable, by the term of the account agreement, at a U.S. 
office of the credit union. If the host country requires insurance from 
its own system, such accounts will not be insured by the NCUSIF. The 
NCUA Board seeks comment, on this proposal or any other alternative for 
addressing NCUSIF coverage related to foreign branching and accounts 
opened and maintained at a foreign branch.

Miscellaneous

    Six commenters requested that federal credit unions be able to 
establish foreign branches on foreign soil for the purpose of serving 
foreign nationals. They request that NCUA reevaluate its policy on 
foreign branching by federal credit unions. Some of these commenters 
want to open branches to serve employees of their select employee 
groups. Although federal credit unions can now serve these foreign 
nationals of their sponsors overseas, they are limited in the location 
of their foreign branches.
    The Board is seeking comment on whether to apply the same 
requirements for federal credit unions as it does for state credit 
unions regarding foreign branching. That is, whether the Board should 
remove the limitation on the location of foreign branches imposed by 
NCUA's Chartering and Field of Membership Manual and, instead, require 
federal credit unions to follow the requirements of this proposed rule. 
If the NCUA Board decides to apply this rule to federal credit unions 
in the final rule, it will simultaneously amend Interpretive Ruling and 
Policy Statement 99-1 to conform it to this rule.
    Finally, the Board is aware if it allows this activity that NCUA's 
current investment rule (Part 703) may not authorize sufficient 
investment tools to manage currency risk. For example, the Board is 
sensitive to the risk of currency fluctuations in making Euro 
denominated loans. The Board is reviewing the investment rule and will

[[Page 60610]]

address the issue of currency risk when a revised investment rule is 
proposed in the next few months.
Regulatory Procedures

Regulatory Flexibility Act

    The Regulatory Flexibility Act requires NCUA to prepare an analysis 
to describe any significant economic impact any proposed regulation may 
have on a substantial number of small entities (those under $1 million 
in assets). The NCUA Board has determined and certifies that the 
proposed rule will not have a significant economic impact on a 
substantial number of small credit unions. The reason for this 
determination is that small credit unions do not have the financial 
capability and experience to establish a branch in a foreign country. 
Accordingly, the NCUA Board has determined that a Regulatory 
Flexibility Analysis is not required.

Paperwork Reduction Act

    The proposed regulation contains a voluntary application. As part 
of that application, a credit union must develop a detailed business 
plan regarding the establishment of a foreign branch.
    The Board estimates that it will take an average of sixteen hours 
for a credit union to prepare a voluntary application and business 
plan. The Board also estimates ten credit unions may apply annually for 
approval under the rule. The cumulative total annual paperwork burden 
is estimated to be approximately 160 hours.
    NCUA will submit the collection of information requirements 
contained in the regulation to the OMB in accordance with the Paperwork 
Reduction Act of 1995. 44 U.S.C. 3507. The NCUA will use any comments 
received to develop its new burden estimates. Comments on the 
collection of information should be sent to: Office of Management and 
Budget, Reports Management Branch, New Executive Office Building, Room 
10235, Washington, DC 20503; Attention: Joseph F. Lackey, Jr., Desk 
Officer for NCUA. Please send NCUA a copy of any comments submitted to 
OMB.

Executive Order 13132

    Executive Order 13132 encourages independent regulatory agencies to 
consider the impact of their actions on state and local interests. In 
adherence to fundamental federalism principles, NCUA, an independent 
regulatory agency as defined in 44 U.S.C. 3502(5), voluntarily complies 
with the executive order. The executive order states that: ``National 
action limiting the policymaking discretion of the states shall be 
taken only where there is constitutional and statutory authority for 
the action and the national activity is appropriate in light of the 
presence of a problem of national significance.'' The risk of loss to 
federally-insured credit unions and the NCUSIF caused by the 
establishment of foreign branches is a concern of national scope. The 
proposed rule, if adopted, will help assure that proper safeguards are 
in place to ensure the safety and soundness of federally-insured credit 
unions that establish branches in foreign countries.
    The proposed rule, if adopted, applies to all federally-insured 
credit unions. NCUA believes that the protection of those credit 
unions, and ultimately the NCUSIF, warrants application of the proposed 
rule to all federally-insured credit unions. The proposed rule does not 
impose additional costs or burdens on the states or affect the states' 
ability to discharge traditional state government functions. NCUA has 
determined that this proposal 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. However, the potential risk to the NCUSIF 
without the proposed rule justifies this action.

The Treasury and General Government Appropriations Act, 1999--
Assessment of Federal Regulations and Policies on Families

    The NCUA has determined that this proposed rule will not affect 
family well-being within the meaning of section 654 of the Treasury and 
General Government Appropriations Act, 1999, Pub. L. 105-277, 112 Stat. 
2681 (1998).
Agency Regulatory Goal
    NCUA's goal is to promulgate clear and understandable regulations 
that impose minimal regulatory burden. We request your comments on 
whether the proposed rule is understandable and minimally intrusive if 
implemented as proposed.

List of Subjects in 12 CFR Part 741

    Bank deposit insurance, Credit unions.

    By the National Credit Union Administration Board on September 
19, 2002.
Becky Baker,
Secretary of the Board.
    For the reasons set forth in the preamble, the National Credit 
Union Administration proposes to amend 12 CFR part 741 as follows:

PART 741--REQUIREMENTS FOR INSURANCE

    1. The authority citation for part 741 continues to read as 
follows:

    Authority: 12 U.S.C. 1757, 1766(a), and 1781-1790; Pub. L.101-
73.

    2. Add Sec.  741.11 to subpart A to read as follows:


Sec.  741.11  Foreign branching.

    (a) Application and prior NCUA approval required. Any credit union 
insured pursuant to Title II of the Act must apply for and receive 
approval from the regional director before establishing a credit union 
branch outside the United States unless the foreign branch is located 
on a United States military institution or embassy outside the United 
States. The regional director will have 60 days to take action on the 
request.
    (b) Contents of application. The application must include a 
business plan, written approval by the state supervisory agency if the 
applicant is a state-chartered credit union, and documentation 
evidencing written permission from the host country to establish the 
branch that explicitly recognizes NCUA's authority to examine and take 
any enforcement action, to include conservatorship and liquidation 
actions.
    (c) Contents of business plan. The written business plan must 
address the following:
    (1) Analysis of market conditions in the area the branch is to be 
established;
    (2) The credit union's plan for addressing foreign currency risk;
    (3) Operating facilities, including office space/equipment and 
supplies;
    (4) Safeguarding of assets, insurance coverage, and records 
preservation;
    (5) Written policies regarding the branch (shares, lending, 
capital, charge-offs, collections);
    (6) The field of membership or portion of the field of membership 
to be served through the foreign branch and the financial needs of the 
members to be served and services and products to be provided;
    (7) Detailed pro forma financial statements for branch operations 
(balance sheet and income and expense projections) for the first and 
second year including assumptions;
    (8) Internal controls including cash disbursal procedures for 
shares and loans at the branch;
    (9) Accounting procedures used to identify branch activity and 
performance; and
    (10) Foreign income taxation.
    (d) Revocation of approval. The regional director may revoke 
approval of

[[Page 60611]]

the branch office for failure to follow the business plan in a material 
respect or for substantive and documented safety and soundness reasons. 
If the regional director revokes the approval, the credit union will 
have six months from the date of the revocation letter to terminate the 
operations of the branch. The credit union can appeal this revocation 
directly to the NCUA Board within 30 days of the date of the revocation 
letter.

[FR Doc. 02-24290 Filed 9-25-02; 8:45 am]
BILLING CODE 7535-01-P