[Federal Register Volume 82, Number 224 (Wednesday, November 22, 2017)]
[Rules and Regulations]
[Pages 55497-55500]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-25223]
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NATIONAL CREDIT UNION ADMINISTRATION
12 CFR Part 704
RIN 3133-AE75
Corporate Credit Unions
AGENCY: National Credit Union Administration (NCUA).
ACTION: Final rule.
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SUMMARY: The NCUA Board (Board) is amending its regulations governing
corporate credit unions (corporates) and the scope of their activities.
Specifically, the amendments revise provisions on retained earnings and
Tier 1 capital.
DATES: The rule is effective December 22, 2017.
FOR FURTHER INFORMATION CONTACT: Yvonne Applonie, Director of
Supervision, Office of National Examinations and Supervision, at 1775
Duke Street, Alexandria, Virginia 22314 or telephone (703) 518-6595; or
Marvin Shaw, Staff Attorney, Office of General Counsel, at the above
address or telephone (703) 518-6553.
SUPPLEMENTARY INFORMATION:
I. Background
The Financial Crisis of 2007-2009
The financial crisis of 2007-2009 took a heavy toll on the
corporate credit union system. The crisis, largely mortgage related,
greatly affected the investment portfolios of many corporates, causing
widespread liquidity problems, instability in the system, and failures.
During this period, the NCUA took extraordinary short and mid-term
measures to stabilize the corporate system. Among other things, it: (1)
Made capital injections; (2) approved the Temporary Corporate Credit
Union Share Guarantee Program, which guaranteed uninsured shares at
participating corporates; (3) retained an independent third party to
analyze expected non-recoverable credit losses for distressed
securities held by corporates; (4) conserved five corporates; and (5)
created the NCUA Guaranteed Note Program.\1\
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\1\ As part of the corporate system resolution, the NCUA created
the NCUA Guaranteed Note Program to provide long-term funding for
distressed investment securities (Legacy Assets) from the five
failed corporates. Legacy Assets consisted of over 2,000 investment
securities secured by approximately 1.6 million residential
mortgages, as well as commercial mortgages and other securitized
assets.
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The 2010 Amendments
In 2010, the Board comprehensively revised the regulations
governing corporates and their activities to provide longer term
structural enhancements to the corporate system.\2\ The 2010 rule
established a regulatory framework that provides a foundation for a
healthy corporate system that: (1) Delivers important services to the
corporates' natural person credit union members, such as payment
systems and liquidity; and (2) builds and attracts sufficient
capital.\3\ The 2010 rule also sought to prevent the recurrence of
financial losses similar to those that led to the failure of the
referenced five corporates and weakened the financial condition of
others.
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\2\ 12 CFR part 704; 75 FR 64786 (Oct. 20, 2010).
\3\ 75 FR 64787, 64787 (Oct. 20, 2010).
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The 2010 rule curtailed several practices that contributed to the
corporate failures. Specifically, it established investment
concentration limits, limited asset maturities, and prohibited
investments in subordinated and private label mortgage-backed
securities. The 2010 rule also implemented a prompt corrective action
(PCA) regime stipulating capital adequacy for corporates. Largely based
on the Basel I requirements, the capital requirements of the 2010 rule
emphasized corporates holding tangible and durable capital.
The Current Environment
The provisions of the 2010 rule have successfully stabilized the
corporate system and improved the corporates' ability to function and
provide services to natural person credit unions. Additionally, since
2010, the overall economy has improved greatly, thereby improving the
economic landscape in which corporates operate. Further, the large
concentration of troubled assets within the corporate system has been
reduced through portfolio repositioning or the NCUA's intervention. The
corporate system has significantly contracted and consolidated, with
assets declining from approximately $81.7 billion prior to the 2010
rule to approximately $24.9 billion today. In that same time period,
the number of corporates has decreased from 26 to 11. Given these
developments, the Board decided to revisit the 2010 rule's capital
standards.
II. July 2017 Proposal
As a result of its review of the corporate capital standards, in
July 2017, the Board published amendments to the corporate rule, which
primarily affect the calculation of capital after corporates
consolidate and set a retained earnings ratio target in meeting PCA
standards.\4\
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\4\ 82 FR 30774 (July 3, 2017).
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Specifically, the Board proposed incorporating ``GAAP equity
acquired in a merger'' as a component of retained earnings. This
amendment to the definition of ``retained earnings'' in turn affects
the definition of ``Tier 1 capital,'' which includes retained earnings
as one component of Tier 1 capital. In the proposal, the Board stated
that expressly including such equity acquired in a merger as retained
earnings and referencing GAAP clarifies that this capital is available
to cover losses, enhances transparency, and reduces ambiguity.\5\ The
Board also proposed deleting the phrase ``the retained earnings of any
acquired credit union, or an integrated set of activities and assets,
calculated at the point of acquisition, if the acquisition is a mutual
combination'' from the current definition of ``Tier 1 capital,'' given
that it would be redundant as a result of the proposal.
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\5\ Id.
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In the 2010 rule, the Board encouraged corporates to build retained
earnings, which has generally yielded positive results. Nevertheless,
in the July 2017 proposal, the Board proposed amending this aspect of
the regulation for three reasons: (1) The 2010 rule's language did not
expressly reference ``GAAP equity acquired in mergers'' as a component
of retained earnings; (2) the 2010 rule's language limited perpetual
contributed capital (PCC) for regulatory capital purposes; and (3) the
2010 rule's language was inconsistent with other capital regulations.
Specifically, the Board proposed removing the requirement \6\ to limit
PCC counted as Tier 1 capital to the amount of retained earnings.
Further, the Board proposed permitting a corporate to include in its
Tier 1 capital all PCC that is sourced from an entity not covered by
federal share insurance.
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\6\ This requirement would not have gone into effect until
October 2020.
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Further, as discussed in greater detail below, the Board proposed
adding a definition of ``retained earnings ratio'' to the regulation.
Under the proposal, that term would mean ``the corporate credit union's
retained earnings divided by its moving daily average net assets.'' The
Board proposed requiring all corporates
[[Page 55498]]
to achieve an eventual retained earnings ratio of 250 basis points,
recognizing the importance of retained earnings to the corporate system
and the National Credit Union Share Insurance Fund. Under the proposal,
upon attaining this benchmark, a corporate would be permitted to
include all PCC in its Tier 1 capital, regardless of source. Until a
corporate achieved that benchmark, it would be required to deduct PCC
exceeding retained earnings by 200 basis points from its Tier 1
capital. As noted in the proposal, the Board believes this requirement
provides an inducement to build retained earnings and promotes clarity
as to the minimum amount of retained earnings held by a corporate to
account for potential losses.
Lastly, in Appendix B to part 704, the Board proposed adding a
``retained earnings ratio'' requirement to the Part I expanded
investment authorities. The Board believed that by doing so, the
retained earnings ratio requirement would limit the risk of the
expanded investment portfolios. Specifically, the Board proposed to
employ an indexed retained earnings requirement, thereby correlating
with actual risk taking.
III. Summary of Comments on the July 2017 Proposal
The NCUA received 38 comments on the proposal, including those from
corporates, individual credit unions, trade associations, and credit
union leagues. These commenters uniformly supported the proposed rule.
No commenter opposed the proposal.
As an overview, commenters stated that the proposed rule: (1)
Enhances transparency; reduces ambiguity; and better aligns capital
regulations with the financial marketplace, GAAP accounting standards,
and treatment by other financial institutions and their regulators; (2)
provides greater flexibility in calculating and treating capital and
promotes increased certainty and stability in the credit union system;
(3) enhances the safety and soundness of corporate credit unions, which
are essential for the credit union system; (4) provides greater
liquidity to the benefit of natural person credit unions; and (5)
reflects the improved health of the economy, the credit union system,
and the corporates since 2010.
Each specific proposal and the corresponding public comments are
discussed below in more detail.
A. Corporate Consolidations and Capital in Mergers--Definition of
Retained Earnings
As noted above, the Board proposed amending the definition of
``retained earnings.'' The definition of ``retained earnings'' prior to
the proposal included undivided earnings, regular reserve, reserve for
contingencies, supplemental reserves, reserve for leases, and other
appropriations from undivided earnings as designated by management or
the NCUA. The proposal added ``GAAP equity acquired in a merger'' to
that list. The Board stated that expressly including equity acquired in
a merger as retained earnings and referencing GAAP would clarify that
this capital is available to cover losses, enhances transparency, and
reduce ambiguity.
No commenter objected to this proposal. Approximately 30 commenters
specifically supported it. These commenters stated that including such
equity acquired in a merger as retained earnings and referencing GAAP
provides consistency with other regulators and will help match
regulatory principles with GAAP and other financial measurements within
the industry. In turn, this enhances transparency of capital adequacy
and eliminates confusion for users of financial statements. A few
commenters stated that the change would not increase risk to the
corporate system.
Consistent with the proposal and the comments, the Board amends the
definition of ``retained earnings'' to incorporate ``GAAP equity
acquired in a merger'' as proposed.
B. Retained Earnings Ratio
As mentioned above, in 2010, the Board comprehensively modified
Part 704, with particular focus on providing incentives to increase
retained earnings. The 2010 rule's PCA provisions require corporates to
meet a leverage ratio. This leverage ratio consists of retained
earnings and PCC.\7\ While noting that this effort to increase retained
earnings has been successful, the Board also stated that the language
in the current rule is indirect and may disadvantage corporates working
with third parties. Specifically, the limitation on PCC for regulatory
capital purposes does not recognize the full value of PCC that stands
to absorb losses and protect counterparties. Accordingly, in the 2017
proposal, the Board proposed modifying the manner in which PCC is
treated during a ten-year phase-in period. The phase-in period for PCC
is intended to provide an incentive to corporates to increase retained
earnings.
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\7\ Perpetual Contributed Capital means accounts or other
interests of a corporate credit union that are perpetual, non-
cumulative dividend accounts; are available to cover losses that
exceed retained earnings, and are not insured by the National Credit
Union Share Insurance Fund.
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In the 2017 proposal, the Board proposed to remove the current
requirement \8\ to limit PCC counted as Tier 1 capital to the amount of
retained earnings. Further, the Board proposed to permit a corporate to
include in its Tier 1 capital all PCC that is sourced from an entity
not covered by federal share insurance. Recognizing that retained
earnings is critical to the health of the corporate system and the
share insurance fund, the Board proposed adding a provision to part 704
requiring all corporates to achieve eventual retained earnings of 250
basis points. To this end, the Board proposed adding a definition of
retained earnings ratio to mean ``the corporate credit union's retained
earnings divided by its moving daily average of net assets.'' Upon
attaining the benchmark of 250 basis points, a corporate would be
permitted to include all PCC, regardless of its source, in its Tier 1
capital. Prior to attaining the benchmark, the corporate would be
required to deduct the amount of PCC exceeding retained earnings by 200
basis points as an inducement to build retained earnings.
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\8\ This requirement would not have gone into effect until 2020.
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No commenter objected to this proposal. Approximately 30 commenters
expressly supported it. These commenters stated that the 2010
amendments resulted in corporates accumulating sufficient retained
earnings to meet or exceed adequate capitalization under PCA through
the 2016 phase-in adjustment. Thus, they agreed with the NCUA's
proposal to remove the requirement to limit PCC counted as Tier 1
capital, stating that the amendment enhances clarity, helps ensure
capital adequacy, and provides the first layer of insulation to protect
the share insurance fund. They stated that the change would better
align a corporate's use of capital with the expectations of member
credit unions.
One commenter requested modifying the proposed definition of Tier 1
capital as follows: ``If a corporate credit union's retained earnings
ratio is less than two and a half percent, deduct the amount of PCC
received from federally insured credit unions less retained earnings
that exceeds two percent of moving daily average net assets (MDANA).''
It believed that this change would clarify the NCUA's acceptance of
capital received by corporates from members. The Board has compared
this recommended language with the proposed regulatory text and has
determined that the Board's proposed language is more direct and more
readily understandable. Accordingly, the Board is adopting the proposed
[[Page 55499]]
language in the final rule without change.
Another commenter suggested that the corporate call report continue
to clearly reflect the amount of PCC that is not being counted in the
leverage ratio, as it currently does in the ``PCC calculation'' section
of the call report. The Board notes that it will continue to require
this information in the call report.
C. Appendix B to Part 704--Expanded Authorities
Appendix B to part 704 enumerates the expanded authorities
available to corporates and procedures that a corporate must follow to
be granted such authorities. Specifically, the Board proposed adding a
retained earnings ratio requirement to the expanded investment
authorities. The Board believed such an addition would limit the risk
of the expanded investment portfolios.
No commenters addressed this issue. The Board is adopting this
amendment as proposed.
D. Miscellaneous Comments Beyond the Scope of the Final Rule
Several commenters requested that the NCUA conduct a comprehensive
review of Part 704 in 2018. The commenters stated that such a review is
overdue considering the last comprehensive review of the corporate rule
occurred in 2010. The commenters stated that such a review would allow
stakeholders to explore other rule modernization opportunities. One
commenter suggested such a review might result in ``thoughtful
loosening'' of the corporate rules. One commenter requested that the
NCUA improve coordination with state credit union regulators and
reinforce the dual chartering system and joint supervision.
IV. Regulatory Procedures
1. Regulatory Flexibility Act
The Regulatory Flexibility Act requires the NCUA to prepare an
analysis of any significant economic impact a regulation may have on a
substantial number of small entities (primarily those under $100
million in assets).\9\ This rule only affects corporate credit unions,
all of which have more than $100 million in assets. Accordingly, the
NCUA certifies the rule will not have a significant economic impact on
a substantial number of small credit unions.
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\9\ 5 U.S.C. 603(a).
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2. Paperwork Reduction Act
The Paperwork Reduction Act of 1995 (PRA) applies to rulemakings in
which an agency by rule creates a new paperwork burden or modifies the
existing burden.\10\ For purposes of the PRA, a paperwork burden may
take the form of a reporting or recordkeeping or third party disclosure
requirement, both referred to as information collections. The rule does
not contain information collection requirements that require approval
by OMB under the PRA (44 U.S.C. 3501).
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\10\ 44 U.S.C. 3507(d); 5 CFR part 1320.
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3. 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
Administrative Procedure Act. After reviewing the rule and its likely
impacts, NCUA believes that the rule is mostly technical and will not
lead to a measurable change to (1) credit union lending to consumers or
businesses, (2) net worth of natural person credit unions, or (3)
interest rates paid or received by natural person credit unions.
Accordingly, NCUA believes this final rule is a not ``major rule''
within the meaning of the relevant sections of SBREFA. As required by
SBREFA, NCUA has filed the appropriate reports so that this final rule
may be reviewed.
4. Executive Order 13132
Executive Order 13132 encourages independent regulatory agencies to
consider the impact of their actions on state and local interests. The
NCUA, an independent regulatory agency as defined in 44 U.S.C. 3502(5),
voluntarily complies with the executive order to adhere to fundamental
federalism principles. The rule does not have substantial direct
effects on the states, on the relationship between the national
government and the states, or on the distribution of power and
responsibilities among the various levels of government. The NCUA has,
therefore, determined that this rule does not constitute a policy that
has federalism implications for purposes of the executive order.
5. Assessment of Federal Regulations and Policies on Families
The NCUA has determined that this rule will not affect family well-
being within the meaning of Sec. 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 704
Credit unions, Corporate credit unions, Reporting and recordkeeping
requirements.
By the National Credit Union Administration Board on November
16, 2017.
Gerard Poliquin,
Secretary of the Board.
For the reasons discussed above, the National Credit Union
Administration Board amends 12 CFR part 704 as follows:
PART 704--CORPORATE CREDIT UNIONS
0
1. The authority citation for part 704 continues to read as follows:
Authority: 12 U.S.C. 1766(a), 1781, and 1789.
0
2. Amend Sec. 704.2 by:
0
a. Revising the definition of ``Retained earnings'';
0
b. Adding in alphabetical order a definition for ``Retained earnings
ratio''; and
0
c. Revising the definition of ``Tier 1 capital''.
The revisions and addition read as follows:
Sec. 704.2 Definitions.
* * * * *
Retained earnings means undivided earnings, regular reserve,
reserve for contingencies, supplemental reserves, reserve for losses,
GAAP equity acquired in a merger, and other appropriations from
undivided earnings as designated by management or the NCUA.
Retained earnings ratio means the corporate credit union's retained
earnings divided by its moving daily average net assets.
* * * * *
Tier 1 capital means the sum of items in paragraphs (1) and (2) of
this definition from which items in paragraphs (3) through (6) are
deducted:
(1) Retained earnings;
(2) Perpetual contributed capital;
(3) Deduct the amount of the corporate credit union's intangible
assets that exceed one half percent of its moving daily average net
assets (however, the NCUA may direct the corporate credit union to add
back some of these assets on the NCUA's own initiative, or the NCUA's
approval of petition from the applicable state regulator or application
from the corporate credit union);
(4) Deduct investments, both equity and debt, in unconsolidated
CUSOs;
[[Page 55500]]
(5) Deduct an amount equal to any PCC or NCA that the corporate
credit union maintains at another corporate credit union;
(6) Deduct any amount of PCC received from federally insured credit
unions that causes PCC minus retained earnings, all divided by moving
daily average net assets, to exceed two percent when a corporate credit
union's retained earnings ratio is less than two and a half percent.
* * * * *
0
3. In Appendix B to part 704, in part I, revise paragraphs (b)(2) and
(3) to read as follows:
Appendix B to Part 704--Expanded Authorities and Requirements
* * * * *
Part I
* * * * *
(b) * * *
(2) 28 percent if the corporate credit union has a seven percent
minimum leverage ratio and a two and a half percent retained
earnings ratio, and is specifically approved by the NCUA; or
(3) 35 percent if the corporate credit union has an eight
percent minimum leverage ratio and a three percent retained earnings
ratio and is specifically approved by the NCUA.
* * * * *
[FR Doc. 2017-25223 Filed 11-21-17; 8:45 am]
BILLING CODE 7535-01-P