[Federal Register Volume 75, Number 208 (Thursday, October 28, 2010)]
[Rules and Regulations]
[Pages 66298-66300]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2010-27150]


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NATIONAL CREDIT UNION ADMINISTRATION

12 CFR Part 702

RIN 3133-AD81


Prompt Corrective Action; Amended Definition of Low-Risk Assets

AGENCY: National Credit Union Administration (NCUA).

ACTION: Interim final rule with request for comments.

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SUMMARY: NCUA is issuing this Interim Final Rule to amend the 
definition of ``low-risk assets'' for regulatory capital purposes. 
Assets in this category receive a risk-weighting of zero, reflecting 
the absence of credit risk. The amendment will expand the definition of 
``low-risk assets'' to include debt instruments on which the payment of 
principal and interest is unconditionally guaranteed by NCUA as an 
agency of the Executive Branch of the United States.

DATES: This rule is effective October 28, 2010. Comments must be 
received on or before November 29, 2010.

ADDRESSES: You may submit comments by any of the following methods 
(Please send comments by one method only):
     Federal eRulemaking Portal: http://www.regulations.gov. 
Follow the instructions for submitting comments.
     NCUA Web Site: http://www.ncua.gov/Resources/RegulationsOpinionsLaws/ProposedRegulations.aspx. Follow the 
instructions for submitting comments.
     E-mail: Address to [email protected]. Include ``[Your 
name] Comments on Risk Portfolio Defined'' in the e-mail subject line.
     Fax: (703) 518-6319. Use the subject line described above 
for e-mail.
     Mail: Address to Mary Rupp, Secretary of the Board, 
National Credit Union Administration, 1775 Duke Street, Alexandria, 
Virginia 22314-3428.
     Hand Delivery/Courier: Same as mail address.

FOR FURTHER INFORMATION CONTACT: Steven W. Widerman, Trial Attorney, at 
the above address, or telephone: (703) 518-6557.

SUPPLEMENTARY INFORMATION: 
    Public Inspection of Comments: All public comments are available on 
the agency's Web site at: http://www.ncua.gov/Resources/RegulationsOpinionsLaws/RegulationComments.aspx as submitted, except as 
may not be possible for technical reasons. Public comments will not be 
edited to remove any identifying or contact information. Paper copies 
of comments may be inspected in NCUA's law library at 1775 Duke Street, 
Alexandria, Virginia 22314, by appointment weekdays between 9 a.m. and 
3 p.m. To make an appointment, call (703) 518-6546 or send an e-mail to 
[email protected].

A. Background

    1. Prompt Corrective Action. In 1998, the Credit Union Membership 
Access Act, Public Law 105-219, 112 Stat. 913, mandated a system of 
regulatory capital standards for natural person credit unions entitled 
``Prompt Corrective Action'' (``PCA''). 12 U.S.C. 1790d et seq. PCA 
imposes minimum capital standards and corresponding remedies to improve 
a credit union's net worth. Id. The NCUA Board implemented a 
comprehensive system of PCA primarily under Part 702.\1\ 12 CFR 702 et 
seq.
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    \1\ Part 702 has been amended five times since it was originally 
adopted in 2000: First, to incorporate limited technical 
corrections. 65 FR 55439 (Sept. 14, 2000). Second, to delete 
sections made obsolete by adoption of a uniform quarterly schedule 
for filing Call Reports. 67 FR 12459 (March 19, 2002). Third, to 
incorporate a series of revisions and adjustments to improve and 
simplify PCA implementation. 67 FR 71078 (Nov. 29, 2002). Fourth, to 
add a third risk-weighting tier to the standard risk-based net worth 
component for member business loans. 68 FR 56537, 56546 (Oct. 1, 
2003). A proposal to modify the criteria for filing a net worth 
restoration plan, 67 FR 7113 (Nov. 29, 2002), was never adopted. 
Fifth, to implement a statutory amendment allowing the acquirer in a 
merger of credit unions to combine the merging credit union's 
retained earnings with its own to determine the acquirer's post-
merger ``net worth.'' 73 FR 72688 (Dec. 1, 2008).
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    Under PCA, a natural person credit union's ``net worth ratio'' 
determines its classification among five statutory net worth 
categories. 12 U.S.C. 1790d(c); 12 CFR 702.102. A credit union's 
minimum required ``net worth ratio'' is based upon a risk-weighting 
applied to each of eight different portfolios of credit union 
assets.\2\ Id. Sec.  702.104. 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. 12 U.S.C. 1790d(e), (f) and (g); 12 
CFR 702.204(a)-(b).
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    \2\ ``Long-term real estate loans,'' ``Member Business Loans 
(``MBL'') outstanding,'' ``Investments,'' ``Low-risk assets,'' 
``Average-risk assets,'' ``Loans sold with recourse,'' ``Unused MBL 
commitments'' and ``Allowance.'' 12 CFR 702.104.
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    2. Corporate System Resolution. In response to the unprecedented 
disruption in the nation's credit markets over the last two years, NCUA 
and other federal banking regulators have taken a series of steps to 
preserve the nation's confidence in financial institutions. Through its 
Corporate Stabilization Program, NCUA has taken specific actions to 
stabilize the corporate credit union (``CCU'') system and to address 
problems associated with the impact of the economic downturn on CCUs. 
Chief among these problems is the substantial devaluation of the 
mortgage-backed and asset-backed securities (``the distressed assets'') 
held in the investment portfolios of CCUs. In several cases, the 
realization of losses on these distressed assets has driven the CCU 
into insolvency, requiring NCUA to place the CCU into liquidation.
    To monetize the distressed assets held by the liquidated CCUs, NCUA 
has embarked on a Corporate System Resolution Program primarily to sell 
those distressed assets to a trust established by NCUA. The trust will 
then resecuritize the distressed assets in the form of senior debt 
instruments denominated ``NCUA Guaranteed Notes'' (``NGNs'') that will 
be offered to public investors, including financial institutions.\3\ 
The trust will pass through to the NGN-holders the monthly cash flows 
produced by the

[[Page 66299]]

underlying distressed assets. The NGNs will benefit from the credit 
enhancement provided by the overcollateralization and excess interest 
generated by the underlying distressed assets.
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    \3\ The first offering of this senior debt consists of $3.8 
billion in fixed- and floating-rate ``NCUA Guaranteed Notes 2010-
R1.'' The underlying distressed assets of this debt are the 
residential mortgage-backed securities held by the liquidation 
estate of U.S. Central Federal Credit Union. Credit unions purchased 
a significant proportion of the first NGN offering. NCUA anticipates 
a series of similar NGN offerings.
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    3. NCUA Guaranty. As a further incentive to instill investor 
confidence in the NGNs, NCUA, as an agency of the Executive Branch of 
the United States, has fully and unconditionally guaranteed to 
investors the timely payment of principal and interest (``the NCUA 
Guaranty''). As is the case with debt issued and guaranteed by other 
federal financial institution regulators, the NCUA Guaranty is backed 
by the full faith and credit of the United States. As a result of the 
NCUA Guaranty, the NGNs are legally permissible investments for federal 
credit unions. For state-chartered credit unions, the NGNs are legally 
permissible investments if they comply with state law at the time of 
purchase. Currently, the NGNs are permissible investments for CCUs, but 
may be purchased by CCUs only with NCUA prior approval once the 
recently adopted part 704 final rule takes effect on January 18, 
2011.\4\ See 75 FR 64786 (October 20, 2010).
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    \4\ CCUs that purchase the NGNs prior to January 18, 2011 will 
not be required to divest provided the NGNs pose no safety and 
soundness concerns when assessed as part of the credit union's 
overall business strategy and balance sheet structure.
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    4. Risk-Weighting of Guaranteed Notes. Under PCA as it exists 
today, the NGNs held by a natural person credit union would fall within 
the ``investments'' risk portfolio, consisting of investments ``[a]s 
defined by federal regulation or applicable State law.'' 12 CFR 
702.104(c). The minimum risk-weighting applied to assets in that 
portfolio, based on their weighted average life, is 3 percent. Id. 
Sec.  702.106(c)(1). The ``investments'' portfolio does not permit a 
risk-weighting of zero to be applied to an investment even when it 
carries no credit risk. The ``Low-risk assets'' risk portfolio, in 
contrast, does apply a risk-weighting of zero, but the NGNs presently 
do not fall within its scope. Id. Sec.  702.106(d). Only ``Cash on hand 
* * * and the NCUSIF deposit'' meet the definition of ``Low-risk 
assets.'' Id. Sec.  702.104(d).
    Recognizing that an obligation supported by the full faith and 
credit of the United States carries no credit risk, the four other 
federal financial institution regulators--the Board of Governors of the 
Federal Reserve System (``Federal Reserve Board''), the Office of the 
Comptroller of the Currency (``OCC''), the Federal Deposit Insurance 
Corporation (``FDIC'') and the Office of Thrift Supervision (``OTS'')--
have jointly confirmed that their respective institutions may apply a 
zero percent risk-weighting to the NGNs the institutions purchase 
because of the direct, unconditional guaranty by NCUA.\5\ The purpose 
of the Interim Final Rule is to accord the same zero percent risk-
weighting to NGNs purchased by natural person credit unions.
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    \5\ See joint letter dated October 13, 2010, from the Federal 
Reserve Board, OCC, FDIC and OTS to Director, Division of 
Supervision, NCUA Office of Examination and Insurance.
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    To that end, the Interim Final Rule expands the PCA definition of 
``Low-risk assets'' to extend that risk portfolio's zero percent risk 
weighting to ``debt instruments unconditionally guaranteed by the 
National Credit Union Administration,'' such as the NGNs, and thus 
backed by the full faith and credit of the United States. Were the 
definition not expanded to include guaranteed debt instruments, 
potential credit union investors in the NGNs would face a disincentive 
to invest: A minimum 3 percent risk-weighting--and the adverse effect 
on PCA net worth--even though the NGNs are free of credit risk.

B. Interim Final Rule and Immediate Effective Date

    NCUA is issuing this rulemaking as an Interim Final Rule effective 
upon publication. The Administrative Procedure Act (``APA''), 5 U.S.C. 
553, requires that before a rulemaking can be finalized, it must first 
be published as a notice of proposed rulemaking with the opportunity 
for public comment, unless the agency for good cause finds that notice 
and public comment are impracticable, unnecessary, or contrary to the 
public interest. Except for good cause, the APA further requires a 
final rule to have an effective date no earlier than 30 days from the 
date of publication.
    In this rulemaking, NCUA invokes the good cause exception to the 
requirements of the APA. Good cause exists to issue as an interim final 
rule effective immediately that expands the ``Low-risk assets'' risk 
portfolio to include the NGNs that NCUA already has begun offering to 
investors, including credit unions. A series of similar NGN offerings 
is expected. To maximize credit union participation in these offerings 
of risk-free debt--beginning with the first one, which is set to close 
imminently--it is essential to implement a rule immediately expanding 
the ``Low-risk assets'' definition to include the NGNs, thus relieving 
credit unions of the risk-weighting disincentive explained above.
    In this rulemaking, NCUA has determined that the APA's usual 
requirements for public notice and participation before a regulation 
may take effect would be contrary to the public interest and, further, 
that good cause exists to waive the customary 30-day period preceding 
the effective date. Nonetheless, NCUA believes it would benefit from 
public comments on the Interim Final Rule before adopting a permanent 
Final Rule. The public is therefore invited to submit comments during a 
30-day comment period commencing on the date this Interim Final Rule is 
published. NCUA plans to revise Interim Final Rule, where appropriate, 
to reflect the public comments it receives.

C. Regulatory Procedures

Regulatory Flexibility Act

    The Regulatory Flexibility Act requires NCUA to prepare an analysis 
to describe any significant economic impact a rule may have on a 
substantial number of small entities (primarily those under ten million 
dollars in assets). The rule will not have a significant economic 
impact on a substantial number of small credit unions. Thus, a 
Regulatory Flexibility Analysis is not required.

Paperwork Reduction Act

    NCUA has determined that this rule will not increase paperwork 
requirements under the Paperwork Reduction Act of 1995 and regulations 
of the Office of Management and Budget.

Executive Order 13132

    Executive Order 13132 encourages independent regulatory agencies to 
consider the impact of their regulatory actions on State and local 
interests. NCUA, an independent regulatory agency as defined in 44 
U.S.C. 3502(5), voluntarily adheres to the fundamental federalism 
principles addressed by the Executive Order. This rule would not have a 
substantial 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. 
Accordingly, this rule does not constitute a policy that has federalism 
implications for purposes of the Executive Order.

Treasury and General Government Appropriations Act, 1999

    NCUA has determined that the rule will not affect family well-being 
within the meaning of section 654 of the

[[Page 66300]]

Treasury and General Government Appropriations Act, 1999, Public Law 
105-277, 112 Stat. 2681 (1998).

Small Business Regulatory Enforcement Fairness Act

    The Small Business Regulatory Enforcement Fairness Act of 1996 
(Pub. L. 104-121) (SBREFA) provides generally for congressional review 
of agency rules. A reporting requirement is triggered in instances 
where NCUA issues a final rule as defined by Section 551 of the APA. 5 
U.S.C. 551. NCUA does not believe this interim final rule is a ``major 
rule'' within the meaning of the relevant sections of SBREFA. NCUA has 
submitted the rule to the Office of Management and Budget for its 
determination in that regard.

List of Subjects in 12 CFR Part 702

    Credit unions, Reporting and recordkeeping requirements.

    By the National Credit Union Administration Board on October 21, 
2010.
Mary F. Rupp,
Secretary of the Board.

0
For the reasons discussed above, 12 CFR part 702 is amended as follows:

PART 702--PROMPT CORRECTIVE ACTION

0
1. The authority citation for part 702 continues to read as follows:

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


0
2. Amend Sec.  702.104 by revising paragraph (d) to read as follows:


Sec.  702.104  Risk portfolios defined.

* * * * *
    (d) Low-risk assets. Cash on hand (e.g., coin and currency, 
including vault, ATM and teller cash), the NCUSIF deposit, and debt 
instruments unconditionally guaranteed by the National Credit Union 
Administration;
* * * * *

[FR Doc. 2010-27150 Filed 10-27-10; 8:45 am]
BILLING CODE 7535-01-P