[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]


=======================================================================
-----------------------------------------------------------------------

NATIONAL CREDIT UNION ADMINISTRATION

12 CFR Part 704

RIN 3133-AE75


Corporate Credit Unions

AGENCY: National Credit Union Administration (NCUA).

ACTION: Final rule.

-----------------------------------------------------------------------

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\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

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.
---------------------------------------------------------------------------

    \2\ 12 CFR part 704; 75 FR 64786 (Oct. 20, 2010).
    \3\ 75 FR 64787, 64787 (Oct. 20, 2010).
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \4\ 82 FR 30774 (July 3, 2017).
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \5\ Id.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \6\ This requirement would not have gone into effect until 
October 2020.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \8\ This requirement would not have gone into effect until 2020.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \9\ 5 U.S.C. 603(a).
---------------------------------------------------------------------------

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).
---------------------------------------------------------------------------

    \10\ 44 U.S.C. 3507(d); 5 CFR part 1320.
---------------------------------------------------------------------------

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