[Federal Register Volume 83, Number 153 (Wednesday, August 8, 2018)]
[Proposed Rules]
[Pages 38997-39004]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-16888]


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NATIONAL CREDIT UNION ADMINISTRATION

12 CFR Part 702

RIN 3133-AE90


Risk-Based Capital--Supplemental Rule

AGENCY: National Credit Union Administration (NCUA).

ACTION: Proposed rule.

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SUMMARY: The NCUA Board (Board) is seeking comment on a proposed rule 
that would amend the NCUA's previously revised regulations regarding 
prompt corrective action (PCA). The proposal would delay the effective 
date of the NCUA's October 29, 2015 final rule regarding risk-based 
capital (2015 Final Rule) for one year, moving the effective date from 
January 1, 2019 to January 1, 2020. During the extended delay period, 
the NCUA's current PCA requirements would remain in effect. The 
proposal would also amend the definition of a ``complex'' credit union 
adopted in the 2015 Final Rule for risk-based capital purposes by 
increasing the threshold level for coverage from $100 million to $500 
million. These proposed changes would provide covered credit unions and 
the NCUA with additional time to prepare for the rule's implementation, 
and would exempt an additional 1,026 credit unions from the rule 
without subjecting the National Credit Union Share Insurance Fund 
(NCUSIF) to undue risk.

DATES: Comments must be received by September 7, 2018.

ADDRESSES: You may submit written comments, identified by RIN 3133-
AE90, 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 website: http://www.ncua.gov/Legal/Regs/Pages/PropRegs.aspx. Follow the instructions for submitting comments.
     Email: Address to [email protected]. Include ``[Your 
name]--Comments on Proposed Rule: Risk-Based Capital--Supplemental 
Proposal'' in the email subject line.
     Fax: (703) 518-6319. Use the subject line described above 
for email.
     Mail: Address to Gerard Poliquin, Secretary of the Board, 
National Credit Union Administration, 1775 Duke Street, Alexandria, 
Virginia 22314-3428.
     Hand Delivery/Courier: Same as mail address.
    You can view all public comments on the NCUA's website at http://www.ncua.gov/Legal/Regs/Pages/PropRegs.aspx as submitted, except for 
those we cannot post for technical reasons. The NCUA will not edit or 
remove any identifying or contact information from the public comments 
submitted. You may inspect paper copies of comments in the 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 email to [email protected].

FOR FURTHER INFORMATION CONTACT: Policy and Analysis: Julie Cayse, 
Director, Division of Risk Management, Office of Examination and 
Insurance, at (703) 518-6360; Kathryn Metzker, Loss/Risk Analyst, 
Division of Risk Management, Office of Examination and Insurance, at 
(703) 548-2456; Julie Decker, Loss/Risk Analyst, Division of Risk 
Management, Office of Examination and Insurance, at (703) 518-3684; 
Aaron Langley, Risk Management Officer, Division of Analytics and 
Surveillance, Office of Examination and Insurance, at (703) 518-6387; 
Legal: John Brolin, Staff Attorney, Office of General Counsel, at (703) 
518-6540; or by mail at National Credit Union Administration, 1775 Duke 
Street, Alexandria, VA 22314.

SUPPLEMENTARY INFORMATION: 

I. Introduction

    The NCUA's primary mission is to ensure the safety and soundness of 
federally insured credit unions. The agency performs this function by 
examining and supervising all federal credit unions, participating in 
the examination and supervision of federally insured, state-chartered 
credit unions in coordination with state regulators, and insuring 
members' accounts at federally insured credit unions.\1\ In its role as 
administrator of the NCUSIF, the NCUA insures and regulates 
approximately 5,573 federally insured credit unions, holding total 
assets exceeding $1.4 trillion and representing approximately 111 
million members.\2\
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    \1\ As of December 31, 2017, within the nine states that allow 
privately insured credit unions, approximately 116 state-chartered 
credit unions are privately insured and are not subject to the 
NCUA's regulation and oversight.
    \2\ Based on December 31, 2017 Call Report Data.
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    At its October 2015 meeting, the Board issued the 2015 Final Rule 
to amend Part 702 of the NCUA's PCA regulations to require that credit 
unions taking certain risks hold capital commensurate with those 
risks.\3\ The risk-based capital provisions of the 2015 Final Rule 
apply only to federally insured, natural-person credit unions with 
quarter-end total assets exceeding $100 million. The overarching intent 
of the 2015 Final Rule is to reduce the likelihood that a relatively 
small number of high-risk outlier credit unions would exhaust their 
capital and cause large losses to the NCUSIF. Under

[[Page 38998]]

the Federal Credit Union Act (FCUA), federally insured credit unions 
are collectively responsible for replenishing losses to the NCUSIF.\4\
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    \3\ 80 FR 66625 (Oct. 29, 2015).
    \4\ See 12 U.S.C. 1782(c)(2)(A) (The FCUA requires that each 
federally insured credit unions to pay a federal share insurance 
premium equal to a percentage of the credit union's insured shares 
to ensure that the NCUSIF has sufficient reserves to pay potential 
share insurance claims by credit union members, and to provide 
assistance in connection with the liquidation or threatened 
liquidation of federally insured credit unions in troubled 
condition.).
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    The 2015 Final Rule restructures the NCUA's PCA regulations and 
makes various revisions, including amending the agency's current risk-
based net worth requirement by replacing the risk based net worth ratio 
with a new risk-based capital ratio for federally insured, natural-
person credit unions (credit unions). The risk-based capital 
requirements set forth in the 2015 Final Rule are more consistent with 
the NCUA's risk-based capital ratio measure for corporate credit unions 
and, as the law requires, are more comparable to the regulatory risk-
based capital measures used by the Federal Deposit Insurance 
Corporation (FDIC), Board of Governors of the Federal Reserve System, 
and Office of the Comptroller of Currency (Other Banking Agencies). The 
2015 Final Rule also eliminates several provisions in the NCUA's 
current PCA regulations, including provisions related to the regular 
reserve account, risk-mitigation credits, and alternative risk weights.
    The 2015 Final Rule is currently set to become effective on January 
1, 2019. The NCUA delayed the effective date until January 1, 2019 to 
provide credit unions and the NCUA sufficient time to make the 
necessary adjustments, such as systems, processes, and procedures; to 
reduce the burden on affected credit unions.

II. Legal Authority

    In 1998, Congress enacted the Credit Union Membership Access Act 
(CUMAA).\5\ Section 301 of CUMAA added section 216 to the FCUA,\6\ 
which required the Board to adopt by regulation a system of PCA to 
restore the net worth of credit unions that become inadequately 
capitalized.\7\ Section 216(b)(1)(A) requires the Board to adopt by 
regulation a system of PCA for federally insured credit unions 
``consistent with'' section 216 of the FCUA and ``comparable to'' 
section 38 of the Federal Deposit Insurance Act (FDI Act).\8\ Section 
216(b)(1)(B) requires that the Board, in designing the PCA system, also 
take into account the ``cooperative character of credit unions'' (i.e., 
credit unions are not-for-profit cooperatives that do not issue capital 
stock, must rely on retained earnings to build net worth, and have 
boards of directors that consist primarily of volunteers).\9\ The Board 
initially implemented the required system of PCA in 2000,\10\ primarily 
in Part 702 of the NCUA's Regulations, and most recently made 
substantial updates to the regulation in October 2015.\11\
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    \5\ Public Law 105-219, 112 Stat. 913 (1998).
    \6\ 12 U.S.C. 1790d.
    \7\ The risk-based net worth requirement for credit unions 
meeting the definition of ``complex'' was first applied on the basis 
of data in the Call Report reflecting activity in the first quarter 
of 2001. 65 FR 44950 (July 20, 2000). The NCUA's risk-based net 
worth requirement has been largely unchanged since its 
implementation, with the following limited exceptions: revisions 
were made to the rule in 2003 to amend the risk-based net worth 
requirement for MBLs, 68 FR 56537 (Oct. 1, 2003); revisions were 
made to the rule in 2008 to incorporate a change in the statutory 
definition of ``net worth,'' 73 FR 72688 (Dec. 1, 2008); revisions 
were made to the rule in 2011 to expand the definition of ``low-risk 
assets'' to include debt instruments on which the payment of 
principal and interest is unconditionally guaranteed by NCUA, 76 FR 
16234 (Mar. 23, 2011); and revisions were made in 2013 to exclude 
credit unions with total assets of $50 million or less from the 
definition of ``complex'' credit union, 78 FR 4033 (Jan. 18, 2013).
    \8\ 12 U.S.C. 1790d(b)(1)(A); see also 12 U.S.C. 1831o (Section 
38 of the FDI Act setting forth the PCA requirements for banks).
    \9\ 12 U.S.C. 1790d(b)(1)(B).
    \10\ 12 CFR part 702; see also 65 FR 8584 (Feb. 18, 2000) and 65 
FR 44950 (July 20, 2000).
    \11\ 80 FR 66625 (Oct. 29, 2015).
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    The purpose of section 216 of the FCUA is to ``resolve the problems 
of [federally] insured credit unions at the least possible long-term 
loss to the [NCUSIF].'' \12\ To carry out that purpose, Congress set 
forth a basic structure for PCA in section 216 that consists of three 
principal components: (1) A framework combining mandatory actions 
prescribed by statute with discretionary actions developed by the NCUA; 
(2) an alternative system of PCA to be developed by the NCUA for credit 
unions defined as ``new;'' and (3) a risk-based net worth requirement 
to apply to credit unions the NCUA defines as ``complex.''
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    \12\ 12 U.S.C. 1790d(a)(1).
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    Among other things, section 216(c) of the FCUA requires the NCUA to 
use a credit union's net worth ratio to determine its classification 
among five ``net worth categories'' set forth in the FCUA.\13\ Section 
216(o) generally defines a credit union's ``net worth'' as its retained 
earnings balance,\14\ and a credit union's ``net worth ratio,'' as the 
ratio of its net worth to its total assets.\15\ 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.\16\
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    \13\ 12 U.S.C. 1790d(c).
    \14\ 12 U.S.C. 1790d(o)(2).
    \15\ 12 U.S.C. 1790d(o)(3).
    \16\ 12 U.S.C. 1790d(c)-(g); 12 CFR 702.204(a)-(b).
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    Section 216(d)(1) of the FCUA requires that the NCUA's system of 
PCA include, in addition to the statutorily defined net worth ratio 
requirement applicable to federally insured natural-person credit 
unions, ``a risk-based net worth \17\ requirement for insured credit 
unions that are complex, as defined by the Board. . . .'' \18\ The FCUA 
directs the NCUA to base its definition of ``complex'' credit unions 
``on the portfolios of assets and liabilities of credit unions.'' \19\ 
It also requires the NCUA to design a risk-based net worth requirement 
to apply to such ``complex'' credit unions.\20\
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    \17\ For purposes of this rulemaking, the term ``risk-based net 
worth requirement'' is used in reference to the statutory 
requirement for the Board to design a capital standard that accounts 
for variations in the risk profile of complex credit unions. The 
term ``risk-based capital ratio'' is used to refer to the specific 
standards established in the 2015 Final Rule to function as criteria 
for the statutory risk-based net worth requirement. The term ``risk-
based capital ratio'' is also used by the Other Banking Agencies and 
the international banking community when referring to the types of 
risk-based requirements that are addressed in the 2015 Final Rule. 
This change in terminology throughout the proposal would have no 
substantive effect on the requirements of the FCUA, and is intended 
only to reduce confusion for the reader.
    \18\ 12 U.S.C. 1790d(d)(1).
    \19\ 12 U.S.C. 1790d(d).
    \20\ Id.
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III. Proposed Rule

    Under Sec.  702.103 of the NCUA's 2015 Final Rule, a credit union 
is defined as ``complex'' and the NCUA's risk-based capital ratio 
measure is applicable only if the credit union's quarter-end total 
assets exceed $100 million, as reflected in its most recent Call 
Report. Consistent with the spirit and intent of Executive Order 13777, 
the NCUA further analyzed the impact of the NCUA's risk-based capital 
requirements and the portfolios of assets and liabilities of credit 
unions to identify potential ways to reduce regulatory burden on credit 
unions.\21\
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    \21\ The Board has always intended to periodically review the 
threshold of a complex credit union, as noted in the preamble to the 
2015 proposed Risk Based Capital Rule. 80 FR 4339, 4378 (January 27, 
2015).
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    Based on the NCUA's analysis, which is discussed in more detail 
below, the Board believes that $500 million in total assets would be a 
more appropriate threshold level for defining a complex credit union, 
and therefore subjecting it to the risk-based capital requirement. 
Increasing the threshold level to $500 million in assets would reduce

[[Page 38999]]

regulatory burden on credit unions by more closely tailoring the 
applicability of the NCUA's risk-based capital requirement to cover 
only those credit unions that, if they failed, individually could 
present an undue risk of loss to the NCUSIF. This amendment would 
exempt an additional 1,026 credit unions--a total of 90 percent \22\ of 
all credit unions--from the 2015 Final Rule's risk-based capital 
requirements. However, approximately 85 percent of the complex assets 
and liabilities and 76 percent of the total assets in the credit union 
system would still be subject to the risk-based capital 
requirement.\23\ Accordingly, consistent with requirements of section 
216(d)(1) of the FCUA, proposed Sec.  702.103 would provide that, for 
purposes of Sec.  702.102, a credit union is defined as ``complex,'' 
and a risk-based capital ratio requirement is applicable, only if the 
credit union's quarter-end total assets exceed $500 million, as 
reflected in its most recent Call Report.
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    \22\ Based on December 31, 2017 Call Report data. For 
comparison, if the threshold were to remain at $100 million about 72 
percent of all credit unions would be exempt.
    \23\ For comparison, if the threshold were to remain at $100 
million about 98 percent of the complex assets and liabilities and 
93 percent of the total assets in the credit union system would be 
subject to the risk based capital requirement.
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    Under the 2015 Final Rule, the NCUA determined that credit unions 
exceeding the $100 million asset-size threshold had portfolios of 
assets and liabilities that were complex based on the products and 
services in which such credit unions engaged. As explained further 
below, the $100 million asset-size threshold was developed as a proxy 
measure based on a detailed analysis performed by the NCUA. The 
threshold set forth a clear demarcation line, above which the NCUA 
determined all credit unions engaged in complex activities, and where 
almost all such credit unions (99 percent) were involved in multiple 
complex activities.\24\ The NCUA continues to believe that using a 
single asset-size threshold is appropriate, as it is clear, logical, 
and easy to administer. Moreover, using a single asset-size threshold 
provides regulatory relief for smaller institutions, and eliminates the 
potential unintended consequences of having a checklist of activities 
that would determine complexity on an institution-by-institution basis.
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    \24\ 80 FR 66625, 66663 (Oct. 29, 2015).
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    The $100 million asset threshold adopted in the 2015 Final Rule for 
determining whether a credit union is complex was based on a complexity 
index (original complexity index or OCI). The OCI counted the number of 
complex products and services provided by credit unions based on the 
following indicators:

 Member Business Loans
 Participation Loans
 Interest-Only Loans
 Indirect Loans
 Real Estate Loans
 Non-Federally Guaranteed Student Loans
 Investments with Maturities of Greater than Five Years (where 
the investments are greater than one percent of total assets)
 Non-Agency Mortgage-Backed Securities
 Non-Mortgage Related Securities With Embedded Options
 Collateralized Mortgage Obligations/Real Estate Mortgage 
Investment Conduits
 Commercial Mortgage-Related Securities
 Borrowings (Draws Against Lines of Credit, Borrowing 
Repurchase Transactions, Other Notes, Promissory Notes, and Interest 
Payable)
 Repurchase Transactions
 Derivatives
 Internet Banking
    As discussed in more detail in the 2015 Final Rule, these products 
and services were determined by the NCUA to be good indicators of 
complexity.\25\
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    \25\ 80 FR 66625, 66663 (Oct. 29, 2015). The 2015 Final Rule 
states ``For the purpose of defining a complex credit union, assets 
include tangible and intangible items that are economic resources 
(products and services) that are expected to produce economic 
benefit (income), and liabilities are obligations (expenses) the 
credit union has to outside parties. The Board recognizes there are 
products and services--which under GAAP are reflected as the credit 
unions' portfolio of assets and liabilities--in which credit unions 
are engaged that are inherently complex based on the nature of their 
risk and the expertise and operational demands necessary to manage 
and administer such activities effectively. Thus, credit unions 
offering such products and services have complex portfolios of 
assets and liabilities for purposes of NCUA's risk-based net worth 
requirement.''
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    To define ``complex'' credit unions for the 2015 Final Rule, the 
NCUA used the original complexity index to analyze June 30, 2014 and 
March 31, 2015 Call Report data. Based on the OCI, for credit unions 
with more than $100 million in assets, 100 percent engaged in offering 
at least one complex activity; 99 percent engaged in two or more 
complex activities; and 87 percent engaged in four or more complex 
activities. Accordingly, the Board determined it was appropriate to set 
the asset size threshold for ``complex'' credit unions at $100 million 
in total assets, subjecting credit unions with more than $100 million 
in assets to the NCUA's risk-based capital requirements.
    As discussed in more detail below, the OCI did not take into 
account the volume of the complex activity engaged in by such credit 
unions.
    Following a careful review of the 2015 Final Rule by the NCUA's 
regulatory reform task force,\26\ the Board is now proposing to revise 
the original complexity index (revised complexity index or RCI), and to 
apply a new complexity ratio (complexity ratio or CR) for analyzing the 
portfolios of assets and liabilities of credit unions to determine 
which are ``complex.'' The RCI would amend 6 of the indicators in the 
original complexity index so the index will more accurately reflect 
``complexity'' in credit unions and take into account certain 
regulatory changes that were made after the 2015 Final Rule was 
approved. The revised complexity index would be the same as the 
original complexity index, with the following six changes:
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    \26\ See 82 FR 39702, 39706 (Aug. 22, 2017).
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     Replace the indicator for ``member business loans'' with 
an indicator for ``commercial loans'' to reflect changes to the NCUA's 
member business lending rule,\27\ and current Call Report data 
collection requirements.
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    \27\ See 12 CFR 723.2; and 81 FR 13529, 13538 (March 14, 2016).
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     Replace the indicator for ``participation loans'' (which 
included participation loans sold and participation loans held) with an 
indicator for ``participation loans sold'' to restrict the indicator to 
the most complex component of participation loans.
     Replace the indicator for ``interest-only loans'' to 
exclude first-lien mortgages. The remaining interest only loans include 
complex payment options. For example, only requiring monthly payments 
of interest during draw periods.
     Remove the indicator for ``internet banking'' because it 
has become a typical mechanism for members to transact business with 
most credit unions, with 78 percent of credit unions engaging in some 
type of internet banking. Also, it is not an asset or liability--
therefore there is no suitable way to translate the volume into a 
financial measure for purposes of defining complex.
     Remove the indicator for ``investments with maturities 
greater than five years (where the investments are greater than one 
percent of total assets)'' because the indicator is adequately captured 
in the other index components.
     Replace the indicator for ``real estate loans (where the 
loans are greater than five percent of assets and/or sold mortgages)'' 
with an indicator for ``sold

[[Page 39000]]

mortgages'' to account for the most complex component of real estate 
loans.
    The NCUA believes the revised complexity index would provide a more 
accurate methodology, based on the assets and liabilities of credit 
unions, for identifying when credit unions engage in complex activities 
and defining credit unions as ``complex.'' Table 1 shows that, among 
credit unions with $500 million or more in total assets, 100 percent 
engage in at least one complex activity, and 96 percent engage in three 
or more complex activities.

                                      Table 1--Revised Complexity Index by Asset Category, 2017Q4 Call Report Data
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                                                   Number of
                 Asset category                      credit      Average       Median     Index >=1    Index >=2    Index >=3    Index >=5    Index >=6
                                                     unions    index value  index value      (%)          (%)          (%)          (%)          (%)
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<$100M..........................................        4,016          0.8          0.0           41           21           10            2            1
$100M-$250M.....................................          692          3.7          4.0           98           89           73           32           16
$250M-$500M.....................................          334          4.9          5.0           99           96           88           57           40
$500M-$750M.....................................          149          5.7          6.0          100           98           96           73           53
$750M-$1B.......................................           95          6.1          7.0          100          100           97           79           64
$1B+............................................          287          7.0          7.0          100           98           96           88           77
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    In addition to the revised complexity index, the NCUA is also 
proposing to use a ratio of complex assets and liabilities to total 
assets (complexity ratio or CR) to evaluate the extent to which credit 
unions are involved in complex activities. The CR, when used in 
conjunction with the revised complexity index, takes into account the 
volume of the complex activity engaged in by complex credit unions and 
provides a more accurate measure of credit union complexity.\28\ The 
numerator of the CR would be the dollar value sum of the complex assets 
and the liabilities held by a credit union, where complex assets and 
liabilities are determined using the same complexity indicators as used 
in the RCI. The denominator of the CR would be the total assets of the 
credit union.
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    \28\ See 80 FR 66625, 66661 (Oct. 29, 2015) (As pointed out by 
at least one commenter, credit unions should not be considered 
complex unless complex activities are undertaken in significant 
volumes. The commenter provided the following example: A credit 
union that lends a member $60,000 to purchase new equipment for his 
bakery is engaged in member business lending, but that credit union 
should not be designated as complex by virtue of that single loan--
assuming it is not a significant share of the credit union's 
assets.).
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    As shown in Table 2 below, credit unions with greater than $500 
million in total assets hold complex assets and liabilities as a larger 
share of their total assets than smaller credit unions. The complexity 
ratio increases from 23 percent among credit unions with less than $500 
million in assets to 40 percent among credit unions with more than $500 
million in assets. Of the $497 billion in complex assets and 
liabilities in the credit union system, $423 billion (85 percent)--the 
majority of complex assets and liabilities in the credit union system--
are held among credit unions with more than $500 million in assets.\29\
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    \29\ Credit unions with assets between $250 million and $500 
million hold a higher share of their portfolio in complex assets (32 
percent) than the entire group of credit unions below $500 million 
in assets (23 percent), but it remains below the share of complex 
assets in credit unions above $500 million in assets (40 percent).

                                         Table 2--Complexity Ratio by Asset Categories, 2017Q4 Call Report Data
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                                                                                                                                            Cumulative
                                                                                                                             Share of        share of
                                                             Number of    Complex assets                   Complex ratio   complex A & L   complex A & L
                     Asset category                        credit unions        and        Total assests        (%)        in the credit   in the credit
                                                                            liabilities                                    union system    union system
                                                                                                                                (%)             (%)
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<$500M..................................................           5,042          74,600         330,545              23              15              15
>$500M..................................................             531         422,553       1,048,289              40              85             100
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    Table 3 below shows the share of credit unions in each asset 
category above various complex ratio thresholds. Larger credit unions 
are much more likely to have a significant share of their balance sheet 
in complex assets and liabilities. Nearly all credit unions (95 
percent) with more than $500 million in assets have complex assets and 
liabilities greater than 10 percent of their total assets, and 66 
percent have complex assets and liabilities greater than 30 percent of 
their total assets.

                 Table 3--Complexity Ratio Above Various Thresholds by Asset Categories, 2017Q4
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                                                                   Complex ratio   Complex ratio   Complex ratio
                         Asset category                                >10%            >20%            >30%
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<$500M..........................................................              29              18              11
>$500M..........................................................              95              84              66
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[[Page 39001]]

    In general, two-thirds of credit unions with more than $500 million 
in total assets have complex assets and liabilities ratios above 30 
percent. Only 11 percent of credit unions with less than $500 million 
have complexity ratios above 30 percent.\30\
    Using both the revised complexity index and the complexity ratio to 
determine the appropriate threshold for defining complex credit unions 
would exclude approximately 90 percent of credit unions from the risk-
based capital requirement, while still covering approximately 76 
percent of the assets held by federally insured credit unions.\31\ 
Moreover, the revised definition of a complex credit union would not 
represent undue risk to the NCUSIF, nor significantly decrease the 
level of complex assets and liabilities covered by the risk-based 
capital requirement. Even though the percent of total assets covered by 
the rule would fall from 93 percent \32\ to 76 percent when compared to 
the $100 million threshold adopted in the 2015 Final Rule,\33\ 85 
percent of complex assets and liabilities would still be covered.
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    \30\ Credit unions with assets between $250 million and $500 
million are more likely to have a CR greater than 10 percent (88 
percent) than the entire group of credit unions below $500 million 
in assets (29 percent), but it remains below the share of complex 
assets in credit unions above $500 million in assets (95 percent). 
Further, the difference widens significantly for CRs above 10 
percent. Less than half (47 percent) of credit unions with assets 
between $250 million and $500 million have a CR greater than 30 
percent, whereas over two-thirds of credit unions with more than 
$500 million in assets have a CR greater than 30 percent.
    \31\ Based on December 31, 2017 Call Report data.
    \32\ Based on December 31, 2017 Call Report data, 93 percent of 
credit union assets would be covered based on the $100 million 
threshold established by the 2015 Final Rule.
    \33\ Based on December 31, 2017 Call Report data.
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    In addition, if the historical trends in changes to the composition 
of the credit union community continue, the share of total assets 
covered by the rule will rise in the future, potentially reaching 90 
percent of total assets within the next 10 years. Also, the higher 
asset threshold still captures those credit unions that, if they 
failed, individually could present an undue risk of loss to the NCUSIF. 
In addition, if the historical trends in changes to the composition of 
the credit union community continue and historical probability of 
failure and loss given failure rates (excluding fraud related failures) 
for credit unions with total assets between $100 and $500 million and 
those with total assets over $500 million remain the same, total losses 
to the NCUSIF over the next 10 years would likely be significantly 
larger for credit unions with more than $500 million in assets than for 
those with assets between $100 million and $500 million.

                   Table 4--Credit Unions Bound by Risk-Based Capital, 2017Q4 Call Report Data
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                                                         Number of complex   Capital required
                                                           credit unions       over the net       Total assets
                     Asset category                        bound by risk-      worth ratio         (billion)
                                                           based capital        (million)
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Assets $100M-$500M.....................................                284               $165                $69
Assets >$500M..........................................                221                635                370
                                                        --------------------------------------------------------
    Total..............................................                505                800                439
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    Under the 2015 Final Rule, an estimated 505 credit unions would 
face higher required capital levels as a result of risk-based capital 
requirements. These 505 credit unions have total assets of $439 billion 
and the 2015 Final Rule would raise their required capital levels by 
approximately $800 million above what is required by the net worth 
ratio.\34\ Under this proposal, the 284 credit unions with assets 
between $100 and $500 million would no longer have higher required 
capital levels as a result of risk-based capital requirements. However, 
as reflected in Table 4, this proposal would maintain most of the 
credit union assets subject to higher capital requirements, and 
incremental capital required by risk-based capital, under the 2015 
Final Rule.
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    \34\ Based on December 31, 2017 Call Report data. It is 
important to note that almost all of these credit unions already 
hold enough capital to meet either the risk-based capital 
requirements or the net-worth-based capital requirements.
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    Exempting credit unions with assets between $100 million and $500 
million represents approximately 16 percent of the total assets of 
credit unions with required capital levels above what is required by 
the net worth ratio, and about 21 percent of the incremental capital 
the system is required to hold under the 2015 Final Rule. However, this 
proposal still encompasses approximately 84 percent of the total assets 
of credit unions with required capital levels above what is required by 
the net worth ratio, and almost 80 percent of the incremental capital 
the system is required to hold under the 2015 Final Rule.
    Under the 2015 Final Rule, a net of 20 credit unions with total 
assets of $11.5 billion would have a lower PCA classification with a 
capital shortfall of $84 million.\35\ Under this proposal, 6 credit 
unions (net) with total assets of $8.8 billion would have a lower PCA 
classification and a capital deficiency of $71 million. Therefore, this 
proposal encompasses approximately 80 percent of the downgraded credit 
union assets and approximately 85 percent of the capital shortfall for 
these institutions.
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    \35\ Based on December 31, 2017 Call Report Data.
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    The Board also notes the NCUSIF is much stronger today than it was 
in 2015 when the agency passed the 2015 Final Rule. The equity ratio of 
the NCUSIF was 1.29 percent in 2015. In 2018, the NCUSIF equity ratio 
will be 1.39 percent even after an equity distribution of $736 million 
is paid to credit unions. The total funds held in the NCUSIF will be 
approximately $16 billion after the equity distribution this year, 
about $3.5 billion more than the $12.4 billion held in the fund in 
2015.
    The NCUA will continue to address any deficiencies in the capital 
levels of credit unions with $500 million or less in assets through the 
examination process.\36\ Sound capital levels are vital to the long-
term health of all credit unions. Credit unions need to hold capital 
commensurate with their risk. Balancing proper capital accumulation 
with product offering and pricing strategies helps ensure credit unions 
are able to provide affordable member services over time. Credit unions 
are already expected to incorporate into their business models and 
strategic plans provisions for maintaining prudent levels of capital.
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    \36\ See, e.g., Sec.  702.102(b) (Authorizes the NCUA Board to 
reclassify a well-capitalized credit union as adequately capitalized 
and may require an adequately capitalized or undercapitalized credit 
union to comply with certain mandatory or discretionary supervisory 
actions as if it were classified in the next lower capital 
category.).

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[[Page 39002]]

    Also, the Board wants to clarify for commenters that the standard 
under the Regulatory Flexibility Act for how the NCUA defines a ``small 
credit union'' \37\ is different from the standard under the FCUA for 
how the agency defines ``complex credit union'' for purposes of the 
risk-based net worth requirement.\38\ While both definitions currently 
use an asset threshold of greater than $100 million in total assets, 
the thresholds were arrived at using different methodologies. The 
methodologies necessarily vary to address the different applicable 
statutory provisions.\39\ This proposal addresses and amends only the 
NCUA's definition of ``complex'' credit unions as that term is defined 
under the 2015 Final Rule. It does not address or propose to amend the 
NCUA's current definition of ``small credit unions'' for purposes of 
the Regulatory Flexibility Act.\40\
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    \37\ NCUA Interpretative Ruling and Policy Statement 15-1, 
available at https://www.ncua.gov/regulation-supervision/Pages/rules/interpretive-rulings-policy-statements.aspx.
    \38\ 80 FR 66625, 66663-66664 (October 29, 2015).
    \39\ Compare 80 FR 66663-66664, with 80 FR 57512, 57514-57516 
(Sept. 24, 2015).
    \40\ 5 U.S.C. 601 et seq.
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V. Effective Date of the 2015 Final Rule

    The Board initially established the effective date of the 2015 
Final Rule as January 1, 2019 to provide credit unions and the NCUA 
with an extended period to make necessary adjustments to systems, 
processes, and procedures, and to reduce the burden on affected credit 
unions in meeting the new requirements. Based on feedback from the 
credit union community and agency staff, and that the agency is 
proposing to change the definition of complex credit union, the Board 
believes it is necessary and beneficial to delay the effective date of 
the 2015 Final Rule as amended by this proposal by one year. Extending 
the effective date would provide covered credit unions additional time 
to adjust systems, processes, and procedures; and would help smooth the 
transition for complex credit unions affected by the requirements of 
the 2015 Final Rule.
    Until the 2015 Final Rule's effective date, the NCUA's current PCA 
regulation will remain in effect. The NCUA will continue to enforce the 
capital standards currently in place and address any supervisory 
concerns through existing regulatory and supervisory mechanisms. The 
Board believes that, given the facts above, extending the 
implementation period of the 2015 Final Rule for an additional year 
would be reasonable and would not pose undue risk to the NCUSIF. 
Accordingly, the Board proposes to change the effective date for the 
2015 Final Rule, and any changes to that rule finalized as part of this 
rulemaking, from January 1, 2019 to January 1, 2020.

VI. Impact of the Proposed Regulation

    The proposed rule will lower the overall impact of the 2015 Final 
Rule by reducing the number of credit unions subject to the risk-based 
capital requirements of the rule. By increasing the threshold for 
defining a complex credit union from more than $100 million to more 
than $500 million in assets, an additional 1,026 credit unions would be 
exempt from the 2015 Final Rule's risk-based capital requirements. This 
represents significant burden relief for these relatively small credit 
unions, as half of them have assets of $190 million or less. The 
proposed new definition of complex credit union would exempt a total of 
90 percent (5,042) of all credit unions as of December 31, 2017.\41\ 
For comparison, if the threshold were to remain at $100 million only 
about 72 percent of all credit unions would be exempt.
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    \41\ This proposal would limit risk-based capital requirements 
to only credit unions with assets of more than $500 million compared 
to the Other Banking Agencies' risk-based capital standards that 
apply to banks of all sizes. As of December 31, 2017, there were 
1,450 and 4,294 FDIC-insured banks with assets of $100 million and 
$500 million or less, respectively.
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    While under this proposal 9 out of 10 credit unions would be 
exempt, these institutions only hold 24 percent of total assets in the 
credit union system and 15 percent of complex assets and 
liabilities.\42\ Thus, approximately 85 percent of the complex assets 
and liabilities and 76 percent of the total assets in the credit union 
system would still be subject to the risk based capital 
requirement.\43\
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    \42\ Credit unions with assets between $100 million and $500 
million make up 17 percent of assets in the credit union system, and 
only hold 13 percent of complex assets and liabilities.
    \43\ For comparison, if the threshold were to remain at $100 
million about 98 percent of the complex assets and liabilities and 
93 percent of the total assets in the credit union system would 
still be subject to the risk-based capital requirement.
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    The credit unions that would be defined as complex under this 
proposal have estimated aggregate and average risk-based capital ratios 
of 16.8 and 17.2 percent, respectively. The aggregate risk-weighted 
assets to total assets ratio is 63 percent for complex credit unions 
under this proposal.\44\ Table 5 shows the distribution of estimated 
risk-based capital ratios for all complex credit unions based on this 
proposed rule.
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    \44\ By way of comparison, the bank aggregate total risk-
weighted assets to total assets ratio is 72.4 percent as of December 
31, 2017. Further, complex credit unions maintain a median risk-
based capital ratio of 15.8 percent compared to a bank median risk-
based capital ratio of 15.9 percent. Bank comparisons exclude banks 
with less than $50 million in total assets and more than $60 billion 
in total assets to arrive at a more comparable asset profile to 
credit unions.

                                 Table 5--Distribution of Estimated Risk Based Capital Ratios for Complex Credit Unions
--------------------------------------------------------------------------------------------------------------------------------------------------------
            RBC Ratio                    <10%            10-13%           13-16%           16-20%           20-30%           30-50%            >50%
--------------------------------------------------------------------------------------------------------------------------------------------------------
Number of CUs....................               7              110              153              144              101               14                2
--------------------------------------------------------------------------------------------------------------------------------------------------------

    As shown in Table 5 above, most complex credit unions will have a 
risk-based capital ratio well in excess of the 10 percent level 
required to be well capitalized. Under this proposal, six complex 
credit unions with total assets of $8.8 billion would have a lower 
capital classification, with a capital shortfall of approximately $71 
million.\45\ Overall, 98.7 percent of all complex credit unions are 
well capitalized under this proposed rule.
    Credit unions often hold some margin above regulatory capital 
requirements. Table 6 below provides a comparison of the margins 
complex credit unions currently hold in excess of both the net worth 
ratio requirement and the risk-based capital requirement.
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    \45\ Of the 531 impacted credit unions, only 7, or 1.3 percent, 
would have less than the 10 percent risk-based capital requirement 
to be well capitalized. Of these, one has a net worth ratio less 
than 7 percent and is therefore not a new downgrade in capital 
classification, but already categorized as less than well 
capitalized. If the asset threshold for the definition of complex 
credit union remained at $100 million, a net of 20 credit unions 
with total assets of $11.5 billion would have a lower capital 
classification, with a capital shortfall of approximately $84 
million.

[[Page 39003]]



                   Table 6--Distribution of Net Worth Ratio and Risk-Based Capital Ratio for Complex Credit Unions Under This Proposal
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                                                                                                                                          Greater than
                         Number of CUs                           Less than well   Well capitalized  Well capitalized  Well capitalized  well capitalized
                                                                   capitalized      to well + 2%      +2% to + 3.5%     +3.5% to + 5%         + 5%
--------------------------------------------------------------------------------------------------------------------------------------------------------
Net Worth Ratio...............................................               <7%             7%-9%          9%-10.5%         10.5%-12%              >12%
RBC Ratio.....................................................              <10%           10%-12%         12%-13.5%         13.5%-15%              >15%
Net Worth Ratio...............................................                 2                90               166               141               132
RBC Ratio.....................................................                 7                54                82                88               300
--------------------------------------------------------------------------------------------------------------------------------------------------------

    Both measures indicate the large majority of complex credit unions 
hold margins well above the levels required to be well-capitalized.
    The NCUA also analyzed complex credit unions to determine whether 
the net worth or risk-based capital requirement would require a credit 
union to hold more dollars of capital. Table 7 below summarizes the 
distribution of credit unions by the ratio of risk-weighted assets to 
total assets for credit unions bound by each capital requirement.

             Table 7--Distribution of Risk-Weighted Assets to Total Assets Ratios for Complex Credit Unions by Governing Capital Requirement
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                  Risk weighted assets/total assets
                                                     Total     Average (%) -----------------------------------------------------------------------------
                                                     number                     <50%        50-60%       60-70%       70-80%       80-90%        >90%
--------------------------------------------------------------------------------------------------------------------------------------------------------
Number Bound by Net Worth Ratio.................          310         58.9           49          101          147           10            2            1
Number Bound by Risk Based Capital..............          221         71.9            0            3           81          128            6            3
--------------------------------------------------------------------------------------------------------------------------------------------------------

    Forty-two percent of complex credit unions (221 complex credit 
unions with $370.3 billion in total assets) are estimated to have a 
higher minimum capital requirement in terms of dollars under the risk-
based capital ratio than the net worth ratio.\46\ These 221 complex 
credit unions have a notably higher risk profile than the other 310 
complex credit unions. The ratio of average risk weighted assets to 
total assets for the 221 complex credit unions is 72 percent, compared 
with 59 percent for the remaining 310 complex credit unions. Therefore, 
relative to what qualifies as capital for risk-based capital purposes, 
these institutions must hold more net worth in dollars to achieve a 
well-capitalized designation over what the net worth ratio requires.
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    \46\ The required dollar amount for risk based capital is 
calculated as [(risk-weighted assets times 10 percent) - allowance 
for loan losses - equity acquired in merger + total adjusted 
retained earnings acquired through business combinations + NCUA 
share insurance capitalization deposit + goodwill + identifiable 
intangible assets] - (total assets x 7 percent). Complex credit 
unions in Table 7 are categorized by whichever calculation results 
in a higher dollar volume.
---------------------------------------------------------------------------

    In addition, despite holding a greater share of risk-weighted 
assets, the risk-based capital-bound group of 221 complex credit unions 
also has, on average, a net worth ratio that is 100 basis point below 
the net worth ratio of the other 310 complex credit unions.\47\ Table 7 
highlights the distribution of credit unions by risk weighted assets to 
total assets depending on whether the risk-based capital requirement 
necessitates more capital than the net worth ratio. The risk-based 
capital-bound group of 221 complex credit unions would have to retain 
more net worth in dollars than what is currently required due to the 
net worth ratio to satisfy the well-capitalized threshold. However, 
over 97 percent (215) of these institutions already hold more than 
enough capital to meet the risk-based capital requirement.
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    \47\ The average net worth ratio is 10.3 percent for the 212 
complex credit unions bound by risk-based capital while the average 
net worth ratio for the 310 complex credit unions bound by the net 
worth ratio is 11.4 percent.
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VI. Request for Comment

    The Board is requesting comment on all aspects of the changes 
proposed in this proposed rule. In particular, the agency requests 
comments on:
    1. Whether the definition of a complex credit union, as defined 
under Sec.  701.103 of the 2015 Final Rule, should be amended to 
increase the threshold level for coverage from more than $100 million 
in total assets to more than $500 million in total assets?
    2. Whether the implementation date for the 2015 Final Rule should 
be amended to extend the effective date of the rule until January 1, 
2020?

VII. Regulatory Procedures

Regulatory Flexibility Act

    The Regulatory Flexibility Act (RFA) generally requires that, in 
connection with a notice of proposed rulemaking, an agency prepare and 
make available for public comment an initial regulatory flexibility 
analysis that describes the impact of a proposed rule on small 
entities. A regulatory flexibility analysis is not required, however, 
if the agency certifies that the rule will not have a significant 
economic impact on a substantial number of small entities (defined for 
purposes of the RFA to include credit unions with assets less than $100 
million) \48\ and publishes its certification and a short, explanatory 
statement in the Federal Register together with the rule.
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    \48\ See 80 FR 57512 (Sept. 24, 2015).
---------------------------------------------------------------------------

    The proposed amendments to the 2015 Final Rule and part 702 would 
only affect complex credit unions, which are those with greater than 
$100 million in assets under the 2015 Final Rule and would be amended 
to cover only those with greater than $500 million in assets under this 
proposal. As a result, credit unions with $100 million or less in total 
assets would not be affected by this proposal. Accordingly, the NCUA 
certifies that this proposal will not have a significant economic 
impact on a substantial number of small credit unions.

Paperwork Reduction Act

    The Paperwork Reduction Act of 1995 (PRA) applies to rulemakings in 
which an agency by rule creates a new paperwork burden on regulated 
entities or modifies an existing burden.\49\ For purposes of the PRA, a 
paperwork burden may take the form of a reporting, disclosure, or 
recordkeeping requirement, each referred to as an

[[Page 39004]]

information collection. The NCUA may not conduct or sponsor, and the 
respondent is not required to respond to, an information collection 
unless it displays a currently valid Office of Management and Budget 
(OMB) control number.
---------------------------------------------------------------------------

    \49\ 44 U.S.C. 3507(d).
---------------------------------------------------------------------------

    The proposed changes to part 702 would increase the asset size of 
credit unions identified as complex from greater than $100 million to 
greater than $500 million. This change would reduce the number of 
credit unions who must comply with recordkeeping requirements 
prescribed by Sec.  702.101(b). Therefore, the burden cleared under OMB 
number 3133-0191 will be revised to reflect the reduction in the number 
of respondents.\50\
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    \50\ Proposed revisions to OMB control number 3133-0191 have 
been submitted to OMB for approval in accordance with 5 CFR 1320.11.
---------------------------------------------------------------------------

    Title of Information Collection: Prompt Corrective Action--Risk-
Based Capital.
    OMB Control Number: 3133-0191.
    Affected Public: Private Sector: Not-for-profit institutions--
Complex Credit Unions.
    Estimated Number of Respondents: 531.
    Estimated Number of Responses per Respondent: 1.
    Estimated Hours per Response: 40.
    Estimated Total Annual Burden Hours: 21,240.
    By exempting credit unions with assets between $100 million and 
$500 million, the NCUA estimates that the burden under this proposed 
rule would be 41,040 fewer hours.
    The Board invites comment on (a) whether the collections of 
information are necessary for the proper performance of the agency's 
function, including practical utility; (b) the accuracy of estimates of 
the burden of the information collections, including the validity of 
the methodology and assumptions used; (c) ways to enhance the quality, 
utility, and clarity of the information being collected, and (d) ways 
to minimize the burden of the information collection on respondents, 
including through the use of automated collection techniques or other 
forms of information technology.
    All comments are a matter of public record. Comments regarding the 
information collection requirements of this rule should be sent to (1) 
Dawn Wolfgang, NCUA PRA Clearance Officer, National Credit Union 
Administration, 1775 Duke Street, Suite 5080, Alexandria, Virginia 
22314, or Fax No. 703-519-8572, or Email at [email protected] and 
the (2) Office of Information and Regulatory Affairs, Office of 
Management and Budget, Attention: Desk Officer for NCUA, New Executive 
Office Building, Room 10235, Washington, DC 20503, or email at 
OIRA_Submission,@OMB.EOP.gov.
    Submission of comments. The NCUA considers comments by the public 
on this proposed collection of information in:
     Evaluating whether the proposed collection of information 
is necessary for the proper performance of the functions of the NCUA, 
including whether the information will have a practical use;
     Evaluating the accuracy of the NCUA's estimate of the 
burden of the proposed collection of information, including the 
validity of the methodology and assumptions used;
     Enhancing the quality, usefulness, and clarity of the 
information to be collected; and
     Minimizing the burden of collection of information on 
those who are to respond, including through the use of appropriate 
automated, electronic, mechanical, or other technological collection 
techniques or other forms of information technology; e.g., permitting 
electronic submission of responses.

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 principles of the executive order to 
adhere to fundamental federalism principles. This proposed rule reduces 
the number of federally insured natural-person credit unions, including 
federally insured, state-chartered natural-person credit unions that 
would be subject to the 2015 Final Rule. It may have, to some degree, a 
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. It does not, 
however, rise to the level of material impact for purposed of Executive 
Order 13132.

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, Public Law 105-277, 112 
Stat. 2681 (1998).

List of Subjects in 12 CFR Part 702

    Credit unions, Reporting and recordkeeping requirements.


    By the National Credit Union Administration Board on August 2, 
2018.
Gerard Poliquin,
Secretary of the Board.

    For the reasons discussed above, the Board proposes to further 
amend 12 CFR part 702, as amended in a final rule at 80 FR 66625 (Oct. 
29, 2015), effective January 1, 2019, as follows:

PART 702--CAPITAL ADEQUACY

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


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


Sec.  702.103   [Amended]

0
2. Amend Sec.  702.103 by removing the words ``one hundred million 
dollars ($100,000,000)'' and add in their place ``five hundred million 
dollars ($500,000,000).''

[FR Doc. 2018-16888 Filed 8-7-18; 8:45 am]
 BILLING CODE 7535-01-P