[Federal Register Volume 83, Number 215 (Tuesday, November 6, 2018)]
[Rules and Regulations]
[Pages 55467-55478]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-24171]


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NATIONAL CREDIT UNION ADMINISTRATION

12 CFR Parts 700, 701, 702, 703, 713, 723, and 747

RIN 3133-AE90


Risk-Based Capital

AGENCY: National Credit Union Administration (NCUA).

ACTION: Final rule; supplemental.

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SUMMARY: The NCUA Board (Board) is amending the NCUA's previously 
revised regulations regarding prompt corrective action (PCA). The final 
rule delays 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 
will remain in effect. The final rule also amends 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 changes provide covered credit 
unions and the NCUA with additional time to prepare for the rule's 
implementation, and exempt an additional 1,026 credit unions from the 
risk-based capital requirements of the 2015 Final Rule without 
subjecting the National Credit Union Share Insurance Fund (NCUSIF) to 
undue risk.

DATES: The effective date of the final rule published on October 29, 
2015 (80 FR 66625) is delayed until January 1, 2020. In addition, the 
amendments to Sec.  702.103 in this final rule are effective on January 
1, 2020.

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, Risk Officer, Division 
of Risk Management, Office of Examination and Insurance, at (703) 548-
2456; Julie Decker, Risk Officer, Division of Risk Management, Office 
of Examination and Insurance, at (703) 518-3684; Aaron Langley, Risk 
Management Officer, Data Analysis Division, Office of Examination and 
Insurance, at (703) 518-6387; Legal: John Brolin, Senior 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 5,573 
federally insured credit unions, holding total assets exceeding $1.4 
trillion and serving 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

[[Page 55468]]

amend Part 702 of the NCUA's current 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 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 current PCA regulations 
and makes various revisions, including amending the agency's 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 Board originally set the effective date of the 2015 Final Rule 
for January 1, 2019 to provide credit unions and the NCUA with 
sufficient time to make the necessary adjustments--such as systems, 
processes, and procedures--and to reduce the burden on affected credit 
unions.
    On August 8, 2018, the Board published a proposed rule \5\ (the 
Proposal) to amend the NCUA's 2015 Final Rule by (1) delaying the 
effective date of the rule until January 1, 2020; and (2) increasing 
the threshold level for coverage for NCUA's risk-based capital 
requirements from $100 million to $500 million by amending the 
definition of a ``complex'' credit union. This final rule adopts all 
the provisions in the Proposal with only one minor change, which is 
discussed in detail below.
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    \5\ 83 FR 38997 (Aug. 8, 2018).
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II. The Final Rule and Public Comments on the Proposed Rule

    The NCUA received 38 comment letters in response to its August 8, 
2018 Proposal. These comment letters were received from credit union 
trade associations, Federal credit unions, state credit unions, state 
and regional credit union leagues, and other individuals.

A. Delayed 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 the fact that the agency 
proposed changing the definition of a complex credit union, the Board 
proposed delaying the effective date of the 2015 Final Rule by one 
year, from January 1, 2019 to January 1, 2020. The Board believed 
extending the effective date was necessary and beneficial, and would 
provide covered credit unions with additional time to adjust systems, 
processes, and procedures affected by the requirements of the 2015 
Final Rule.
    Under the Proposal, the NCUA's current PCA regulation would have 
remained in effect until the 2015 Final Rule's proposed new effective 
date, January 1, 2020. The NCUA would have continued to enforce the 
capital standards currently in place and addressed any supervisory 
concerns through existing regulatory and supervisory mechanisms during 
the extended implementation period. The Board believed 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.
Public Comments on the Proposed Delay
    Fourteen commenters explicitly supported delaying the 
implementation of the 2015 Final Rule until January 1, 2020 to allow 
the NCUA additional time to provide early guidance on new reporting 
requirements, and to help mitigate any potential impact the 2015 Final 
Rule may have on the credit union industry. Twenty two of the 
commenters stated that they appreciated the delay, but believed the 
delay should be longer. Of those commenters, all suggested that the 
delay should be for at least two years, with a few suggesting that more 
than two years might be appropriate. A number of commenters remarked 
that a two-year delay would be consistent with the timeframe set forth 
in legislation currently before Congress, such as section 701 of H.R. 
5841, and suggested that the two-year delay was necessary to provide 
credit unions and the agency sufficient time to implement necessary 
systems, processes, and procedures. Three commenters suggested the 2015 
Final Rule should be delayed for two years or more to give credit 
unions adequate time to make the necessary adjustments to meet the 10 
percent risk-based capital target. Two commenters suggested that, in 
light of the health of the credit union system, the NCUA can afford to 
provide even more time, on a reasonable basis, to facilitate the 
development of its own examiners, as well as provide additional time 
for covered credit unions to make any strategic and operational changes 
they need to prepare for risk-based capital implementation. Two 
commenters suggested the 2015 Final Rule should be delayed two years or 
more to give credit unions time to understand and coordinate compliance 
with the Financial Accounting Standards Board's final current expected 
credit loss (CECL) standard, and its relation to the requirements of 
the 2015 Final Rule.
    Two commenters recommend the proposed one year delay be expanded to 
include the grandfathering of the ``excluded goodwill'' and ``excluded 
other intangible assets'' provisions of the 2015 Final Rule, which are 
currently set to expire on January 1, 2029. In particular, the 
commenters suggested that the proposed delay of the 2015 Final Rule 
should also apply to the ten-year deferral period associated with 
supervisory mergers (example: The January 1, 2029 effective date should 
be adjusted to January 1, 2030). The commenters suggested this 
additional time would benefit credit unions that hold a significant 
amount of excluded goodwill or other intangible assets, as those terms 
are defined in the 2015 Final Rule.
    Eight commenters recommended delaying implementation of the risk-
based capital rule until revisions to the NCUA's regulations regarding

[[Page 55469]]

alternative capital \6\ are finalized. Commenters stated a delay would 
give the NCUA time to finalize an alternative capital rule permitting 
credit unions additional ways to increase capital to meet the risk-
based capital requirements.
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    \6\ Commenters referred to secondary capital, supplemental 
capital, and alternative capital.
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Discussion of Delay in Implementation
    Several commenters recommended delaying implementation of the 2015 
Final Rule to be consistent with legislation before Congress. The Board 
is aware there are bills before Congress that would extend the 
effective date of the 2015 Final Rule for two years; \7\ however, the 
Board continues to believe a one-year delay is sufficient. Since the 
2015 Final Rule was issued in final form, covered credit unions and the 
NCUA have had more than three years to prepare for its implementation. 
Providing credit unions an additional year before implementing the 2015 
Final Rule, making the total implementation period four years, should 
be more than sufficient to allow credit unions to incorporate the 
changes in the definition of complexity made under this final rule. 
Further, the change made by this final rule to the definition of 
complex credit union substantially reduces the number of credit unions 
subject to the 2015 Final Rule's risk-based capital requirements. Since 
the 2015 Final Rule was approved in October 2015, the cumulative net 
worth of credit unions with more than $500 million in assets has grown 
by more than 34 percent.\8\ Credit unions that meet the definition of 
complex already hold, on average, more than 17 percent capital, or 70 
percent more than the 10 percent required to be well-capitalized under 
the rule.\9\ Accordingly, the Board believes the proposed delay of one-
year will provide the NCUA and covered credit unions with more than 
enough time to make the necessary system changes, and provide guidance 
and training to implement the 2015 Final Rule by January 1, 2020.
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    \7\ See, e.g., Section 701 of H.R. 5841 (If passed, the bill 
would delay the 2015 Final Rule, which defines complex credit unions 
as those with greater than $100 million in total assets, for two 
years past its current effective date.).
    \8\ Based on December 31, 2017 Call Report Data.
    \9\ Based on December 31, 2017 Call Report Data. Under the 2015 
Final Rule, credit unions with total assets greater than $100 
million hold more than 18 percent capital, or 80 percent more than 
the 10 percent capital required, to be well-capitalized under the 
risk-based capital standard. Under this final rule 6 credit unions 
are required to hold additional capital, representing 1 percent of 
the complex credit unions.
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    Additionally, while the Board recognizes that CECL will have an 
impact on some credit unions' financial posture, it does not believe it 
is necessary or appropriate to wait until the implementation of the 
standard to implement the 2015 Final Rule's risk-based capital 
requirements, as some commenters requested. Under the 2015 Final Rule, 
all allowance for loan and lease loss (ALLL) accounts are captured in 
the numerator of the risk-based capital ratio, thus implementation of 
CECL will not be a change in the accounting and classification of the 
ALLL.\10\ Therefore, it is not necessary to delay implementation of 
risk-based capital to align with the implementation of CECL.
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    \10\ Credit unions can early adopt CECL as soon as 2019; thus, 
it is not necessary to delay implementation of the 2015 Final Rule's 
risk-based capital requirements.
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    Commenters requested that the delay of the 2015 Final Rule's 
effective date should also apply to the goodwill and intangible asset 
deferral period. The 2015 Final Rule provides credit unions with 13 
years to write down, or otherwise adjust their balance sheets, to 
account for goodwill and other intangible assets acquired through a 
supervisory merger or combination before December 28, 2015.\11\ Only 6 
credit unions with assets greater than $500 million, report total 
goodwill and intangible assets of more than 1 percent of assets, and 
the valuation under Generally Accepted Accounting Principles (GAAP) of 
these existing assets will be immaterial by the end of the extended 
sunset date.\12\ Accordingly, the Board continues to believe 13 years 
to respond to this change is more than sufficient for credit unions 
impacted.
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    \11\ 80 FR 66625, 66648, 66707 (Oct. 29, 2015).
    \12\ Based on December 31, 2017 Call Report Data.
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    Some commenters requested the effective date of the 2015 Final Rule 
be delayed to coincide with possible changes to supplemental capital 
rules. As noted in the 2015 Final Rule, the NCUA plans to address 
additional forms of supplemental capital in a separate proposed rule. 
In February 2017, the NCUA issued an advanced notice of proposed 
rulemaking for alternative capital,\13\ and the NCUA's Regulatory 
Review Task Force agenda, published in August 2017, addresses the 
NCUA's intent with regard to the 2015 Final Rule, with approximately 99 
percent of complex credit unions holding enough capital to meet the 
risk-based capital requirements. Accordingly, the NCUA believes further 
delay of the 2015 Final Rule to provide time for the implementation of 
an alternative capital rule is not necessary.
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    \13\ 82 FR 9691 (Feb. 8, 2017).
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    For the reasons discussed above, the NCUA continues to believe that 
extending the effective date of the 2015 Final Rule by one year is 
necessary, will benefit the credit union industry and the NCUA, and 
will not pose an undue risk to the NCUSIF. Accordingly, this final rule 
amends the 2015 Final Rule to delay its effective date until January 1, 
2020.

B. Definition of ``Complex'' Credit Union

    Under Sec.  702.103 of the NCUA's 2015 Final Rule, a credit union 
was defined as ``complex'' and the NCUA's risk-based capital ratio 
measure was applicable only if the credit union's quarter-end total 
assets exceeded $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.\14\
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    \14\ 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, discussed in more detail below, the 
Board believed that $500 million in total assets would be a more 
appropriate threshold level for defining a complex credit union. 
Increasing the threshold level to $500 million in total assets would 
reduce 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 \15\ 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.\16\ Accordingly, consistent with requirements of section 
216(d)(1) of the

[[Page 55470]]

FCUA, proposed Sec.  702.103 provided 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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    \15\ 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.
    \16\ 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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    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.\17\
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    \17\ 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 
union's 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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    The Board proposed revising 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 were ``complex.'' The 
RCI would have amended 6 of the indicators in the original complexity 
index so the index would 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 was the same as the original complexity index, with 
the following six changes:
     It replaced the indicator for ``member business loans'' 
with an indicator for ``commercial loans'' to reflect changes to the 
NCUA's member business lending rule,\18\ and current Call Report data 
collection requirements.
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    \18\ See 12 CFR 723.2; and 81 FR 13529, 13538 (March 14, 2016).
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     It replaced 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.
     It replaced 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.
     It removed 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.
     It removed 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.
     It replaced 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 mortgages'' to account for 
the most complex component of real estate loans.
    The NCUA believed 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.'' 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.\19\
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    \19\ Based on December 31, 2017 Call Report data.
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    In addition to the RCI, the Board also proposed 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, took into account the volume of the complex activity 
engaged in by complex credit unions and provided a more accurate 
measure of credit union complexity.\20\ The numerator of the CR was 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 was the total assets of the credit union.
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    \20\ 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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    Credit unions with greater than $500 million in total assets held 
complex assets and liabilities as a larger share of their total assets 
than smaller credit unions.\21\ The complexity ratio increased from 23 
percent among credit unions with less than $500 million in total assets 
to 40 percent among credit unions with more than $500 million in total 
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--were held among 
credit unions with more than $500 million in total assets.\22\
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    \21\ Based on December 31, 2017 Call Report data.
    \22\ Credit unions with total 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 total assets (23 percent), but it remains below the 
share of complex assets in credit unions above $500 million in 
assets (40 percent).
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    Larger credit unions were much more likely to have a significant 
share of their balance sheet in complex assets and liabilities.\23\ 
Nearly all credit unions (95 percent) with more than $500 million in 
total assets have complex assets and liabilities greater than 10 
percent of their total assets, and 66 percent have

[[Page 55471]]

complex assets and liabilities greater than 30 percent of their total 
assets.
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    \23\ Based on December 31, 2017 Call Report data.
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    In general, two-thirds of credit unions with more than $500 million 
in total assets had complex assets and liabilities ratios above 30 
percent. Only 11 percent of credit unions with less than $500 million 
in total assets had complexity ratios above 30 percent.\24\
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    \24\ Credit unions with total 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 total 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 total 
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 total assets have a CR greater than 30 percent.
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    Using both the proposed revised complexity index and the proposed 
complexity ratio to determine the appropriate threshold for defining 
complex credit unions would have excluded 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.\25\ Moreover, the revised definition of a 
complex credit union would not have represented undue risk to the 
NCUSIF, nor significantly decreased 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 have fallen from 
93 percent \26\ to 76 percent when compared to the $100 million 
threshold adopted in the 2015 Final Rule,\27\ 85 percent of complex 
assets and liabilities would have still been covered under the 
proposal.
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    \25\ Based on December 31, 2017 Call Report data.
    \26\ 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.
    \27\ 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 NCUA found that the share 
of total assets covered under the Proposal would have risen in the 
future, potentially reaching 90 percent of total assets within the next 
10 years. The higher asset threshold also would have still captured 
those credit unions that, if they failed, could have individually 
presented an undue risk of loss to the NCUSIF. 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, the NCUA found that total losses to the NCUSIF 
over the next 10 years would likely be significantly larger for credit 
unions with more than $500 million in total assets than for those with 
total assets between $100 million and $500 million.
    Under the 2015 Final Rule, an estimated 505 credit unions would 
have faced higher required capital levels as a result of risk-based 
capital requirements. These 505 credit unions had total assets of $439 
billion and the 2015 Final Rule would have raised their required 
capital levels by approximately $800 million above what is required by 
the net worth ratio.\28\ Under the proposal, the 284 credit unions with 
total assets between $100 and $500 million would have no longer have 
been required to hold higher capital levels as a result of risk-based 
capital requirements. However, as reflected in Table 1, the Proposal 
would still capture most of the credit union assets subject to higher 
capital requirements, and incremental capital required by risk-based 
capital requirement, under the 2015 Final Rule.
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    \28\ 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 
requirement or the net-worth-based capital requirement.

                   Table 1--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
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    Under the Proposal, the NCUA found that exempting credit unions 
with total assets between $100 million and $500 million represented 
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. The Proposal, however, still 
encompassed approximately 84 percent of the total assets of credit 
unions with required capital levels above what was required by the net 
worth ratio, and almost 80 percent of the incremental capital the 
system was 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.\29\ Under the proposal, 6 credit 
unions (net) with total assets of $8.8 billion would have had a lower 
PCA classification and a capital deficiency of $71 million. Thus, the 
Proposal encompassed approximately 80 percent of the downgraded credit 
union assets and approximately 85 percent of the capital shortfall for 
those institutions.
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    \29\ Based on December 31, 2017 Call Report Data.
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    The Board also noted in the Proposal that 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.\30\ As of June 30, 2018, the NCUSIF equity ratio was 1.35 
percent, including the equity distribution of approximately $736 
million paid to credit unions on July 23, 2018.\31\ The total funds 
held in the NCUSIF as of June 30, 2018, are approximately $15 billion 
after the equity distribution, about $2.6 billion more than the $12.3 
billion held in the fund in 2015.\32\
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    \30\ At the time the 2015 Final Rule was approved by the Board.
    \31\ The June 30, 2018 Retained Earnings was decreased to 
reflect the equity distribution of $735.7 million payable to insured 
credit unions in the third quarter of 2018 as declared at the 
February 2018 Open Board Meeting.
    \32\ The June 30, 2018 NCUSIF balance is based on the 
Preliminary and Unaudited Financial Highlights. The 2015 NCUSIF 
balance at the time the 2015 Final Rule was approved by the Board.
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Public Comments on the Proposed Definition of Complex Credit Union
    Twelve commenters stated they agreed with increasing the threshold

[[Page 55472]]

level for defining a credit union as complex from $100 million in total 
assets to $500 million in total assets as proposed. All but one of the 
other commenters stated they supported increasing the threshold, but 
suggested that the threshold level should be higher. Four commenters 
suggested that the asset size threshold should be increased to $1 
billion. One of those commenters pointed out that the NCUA's data shows 
53 percent of credit unions with assets between $500 million and $750 
million engage in six or more complex activities; however, for credit 
unions with assets greater than $1 billion, this number increases to 77 
percent. In addition, the commenter also suggested that Congress' 
directive to the NCUA for designing the risk-based capital requirement 
was to address those risks for which the standard leverage ratio was 
insufficient and to base its definition of ``complex'' credit unions 
``on the portfolios of assets and liabilities of credit unions;'' and 
that a $1 billion complexity threshold would more closely align with 
the spirit of the Federal Credit Union Act.
    With regard to the proposed $500 million threshold, two commenters 
stated that the NCUA's data does not provide a complexity ratio 
categorization at other asset levels. They recommend the NCUA consider 
how the complexity ratio for credit unions with $500 million in total 
assets compares to those with $1 billion in total assets, and requested 
that such information be provided and considered in setting the asset 
size threshold.
    Eleven commenters recommend the threshold level be raised to $10 
billion, which they pointed out would align with both the NCUA's Office 
of National Examinations and Supervision (ONES) and the Bureau of 
Consumer Financial Protection (BCFP) supervisory authorities. They also 
suggested a $10 billion threshold would provide several additional 
credit unions with regulatory relief, while still protecting the NCUSIF 
from larger, more impactful losses. One commenter suggested that having 
different asset thresholds among rules from myriad departments and 
divisions across Federal and state regulatory bodies contributes to 
duplicative and inconsistent oversight. One commenter suggested that 
raising the asset threshold for complex credit unions to $10 billion 
would be consistent with the recommendations of the U.S. Department of 
Treasury and with the thresholds set by the NCUA and other Federal 
regulatory agencies.\33\ One commenter suggested that a $10 billion 
threshold was appropriate because of recent easing of regulatory 
oversight that has taken place in the banking sector. The commenter 
suggested that with the recent enactment of S.2155, which increased the 
Dodd-Frank Act threshold for bank holding company enhanced prudential 
standards from $50 billion in assets to $250 billion, credit unions are 
increasingly forced to compete with large banking organizations, whose 
hundreds-of-attorneys-strong compliance and economic departments dwarf 
the average two to five compliance personnel at a credit union with 
$500 million in total assets. The commenter suggested further that, 
even a credit union with $500 million in assets, risk-based capital 
compliance will be an additional layer of regulatory compliance 
filings, which removes personnel from the Main Street-focused business 
of community lending.
---------------------------------------------------------------------------

    \33\ A FINANCIAL SYSTEM THAT CREATES ECONOMIC OPPORTUNITIES: 
BANKS AND CREDIT UNIONS, U.S. DEP'T OF THE TREASURY 59 (2017) 
(``NCUA should revise the risk-based capital requirements to only 
apply to credit unions with total assets in excess of $10 billion or 
eliminate altogether risk-based capital requirements for credit 
unions satisfying a 10% simple leverage (net worth) test.''), 
available at https://www.treasury.gov/press-center/press-releases/Documents/A%20Financial%20System.pdf.
---------------------------------------------------------------------------

    One commenter objected to raising the threshold, suggesting that, 
of the 10 costliest natural person credit union failures to the NCUSIF, 
nearly all resulted from credit unions with less than $500 million in 
total assets. In addition, the commenter suggested the proposed 
increase in the asset size threshold to $500 million in assets would 
exclude 17 credit unions with CAMEL codes of 4 or 5 and 105 credit 
unions with a CAMEL code of 3 from the risk-based capital rule, based 
on March 2018 data. The commenter suggested these 122 credit unions 
have approximately $21.4 billion in insured shares, and any credit 
union with a CAMEL code of 3 or more should be subject to a risk-based 
capital requirement to help limit losses to the NCUSIF arising from the 
potential failure of these credit unions and future premium assessments 
to the NCUSIF. The commenter also pointed out that, while credit unions 
with less than $500 million in total assets may not pose a systemic 
risk to the NCUSIF, losses to the NCUSIF from the failure of credit 
unions excluded from the cap could result in premium assessments for 
all credit unions. As an alternative, the commenter recommended the 
NCUA should authorize credit unions with at least $100 million in total 
assets to substitute a higher leverage ratio for the risk-based capital 
requirement--consistent with section 216 of the Federal Credit Union 
Act \34\ and Section 201 of the Economic Growth, Regulatory Relief, and 
Consumer Protection Act,\35\ which mandates that the Federal banking 
agencies establish a community bank leverage ratio of tangible equity 
to average consolidated assets of not less than eight percent and not 
more than ten percent for banks with less than $10 billion in total 
consolidated assets.
---------------------------------------------------------------------------

    \34\ 12 U.S.C. 1790d(c)(2).
    \35\ Public Law 115-174 (May 24, 2018).
---------------------------------------------------------------------------

    Two commenters specifically stated their support for using a single 
asset-size threshold, based on a complexity index and complexity ratio. 
One suggested using a single asset-size threshold allows for some 
differentiation between credit unions without making the rule overly 
complex. The other suggested that using a single asset-size threshold 
was appropriate because smaller credit unions do not normally have the 
size or capacity to make large commercial loans, sell participation 
loans, or get involved with complex transactions.
    Ten commenters specifically objected to using a single asset-size 
threshold, based on a complexity index and complexity ratio. Four 
commenters stated that assets should not be the only consideration when 
assessing the complexity of a credit union because such an approach 
does not sufficiently capture the risk-based complexities of a given 
credit union's balance sheet or activities. One stated it was wary of 
legislative or regulatory thresholds that are foreseeably likely to be 
outdated nearly as soon as the Federal Register ink is dry given the 
speed of technological innovation. One pointed out that, in the 
preamble to the proposal, the NCUA stated it will address material-risk 
capital levels for credit unions $500 million in assets and below 
through the supervisory process. The commenter suggested that, for 
credit unions that are deemed ``complex,'' the NCUA should utilize its 
supervisory authority to exempt, on a case-by-case basis, credit unions 
whose net worth ratios provide adequate protection from material risks 
irrespective of asset size. One commenter asked, if a credit union has 
over $500 million in assets, but has a very low complexity ratio, why 
should they need to reserve additional capital based on the riskiness 
of their business? The commenter suggested there should be a threshold 
complexity ratio, under which a credit union would be exempt from the 
NCUA's risk-based capital requirement, regardless of asset size. If 
not, the commenter stated, the

[[Page 55473]]

complexity ratio is only an after-the-fact measure of risk and not a 
determinant of whether the risk-based capital requirement applies. The 
commenter also suggested that such a ratio should allow low-risk credit 
unions to avoid the extra reserves.
    One commenter suggested that the proposed $500 million threshold 
should be used in combination with the actual operational complexity of 
individual credit unions, as measured by that credit union's RCI and 
CR. The commenter provided the following example, the NCUA could tailor 
the definition of ``complex'' to include only federally insured credit 
unions with assets above $500 million and an RCI and/or CR value higher 
than a certain threshold (e.g., an RCI value of 6 or more and/or a CR 
of at least 45 percent). The commenter suggested this more tailored 
definition would ensure that credit unions would be treated as 
``complex'' based not just on asset size, but also on whether a credit 
union actually offers a substantial amount of complex products and 
services.
    One commenter recommended that the NCUA annually index any 
threshold for growth and adopt exemptions from such classification 
wherever possible, such as for credit unions with more traditional 
products and services.
    One commenter suggested a better approach for identifying 
complexity would be to look at the business model of the credit union 
based on its assets and liabilities. The commenter suggested that, at a 
minimum, the NCUA should require credit unions that have more than a de 
minimis level of commercial loans be subject to the agency's risk-based 
capital requirements. One commenter suggested the NCUA's regulation 
should move to a regulatory and capital regime that recognizes two 
types of credit unions, those that are complex with assets greater than 
$500 million and those that are non-complex.
    Eight commenters expressed general support for the proposed 
amendments to the complexity index and the development of the 
complexity ratio. Seven commenters stated they agreed with the NCUA's 
proposal to remove the indicator for internet banking from the 
complexity index because offering such services is not an indication of 
risk.
    Two commenters stated they agreed with the NCUA's proposal to 
restrict ``participation loans'' to ``participation loans sold'' 
because doing so properly captures the riskier part of this business. 
Two commenters stated they agreed with the NCUA's proposal to replace 
``member business loans'' (MBL) with ``commercial loans'' to bring this 
rule into conformity with recent changes in MBL rules. One commenter 
recommend redefining ``commercial loans'' within the list of complex 
products and services to exclude inherently less complex categories of 
such loans based on other existing regulatory requirements already in 
place to mitigate risks. One commenter agreed with the NCUA's proposal 
to replace ``real estate loans'' with ``sold mortgages'' because the 
proposed change better captures risk. One commenter recommended 
redefining ``real-estate loans'' within the list of complex products 
and services to exclude inherently less complex categories of such 
loans based on other existing regulatory requirements already in place 
to mitigate risks. One commenter stated they disagreed with the NCUA's 
proposal to remove first lien mortgages from the ``interest only 
loans'' indicator because interest-only loans are risky, regardless of 
position.
Discussion of the Definition of Complex Credit Union
    Several commenters recommended changing the definition of 
complexity. The Board established the $500 million total asset size 
threshold based on the number and volume of credit unions engaged in 
complex activities. Section 216(d)(1) of the FCUA directs NCUA, in 
determining which credit unions will be subject to the risk-based net 
worth requirement, to base its definition of complex ``on the 
portfolios of assets and liabilities of credit unions.'' The statute 
does not require, as some commenters have argued, that the Board adopt 
a definition of ``complex'' that takes into account the portfolio of 
assets and liabilities of each credit union on an individualized basis. 
Rather, section 216(d)(1) authorizes the Board to develop a single 
definition of complexity that takes into account the portfolios of 
assets and liabilities of all credit unions. The Board is responsible 
for defining complexity and, as explained in detail above, the NCUA's 
proposed analysis supports defining complex credit unions as those with 
assets greater than $500 million in total assets.
    As stated in the 2015 Final Rule and the Proposal, the Board 
continues to believe that using a single asset size threshold is a good 
proxy for complexity, simplifies the application of the rule, provides 
regulatory relief for small institutions, and eliminates the potential 
unintended consequences of having a checklist of activities that would 
determine whether or not a credit union is subject to the risk-based 
capital requirement.
    Commenters further recommended tying the complexity definition to 
other regulatory thresholds, such as the $10 billion in total asset 
threshold used for assigning supervision to the NCUA's ONES and for the 
BCFP. The Board recognizes that various regulatory agencies, including 
the NCUA, have differing thresholds for establishing requirements. 
These thresholds are established based on fundamental elements or 
objectives of the particular statute or regulation in question. The 
NCUA set the asset size threshold size at $500 million based on the 
analysis of the portfolios of assets and liabilities of credit unions 
discussed above. In addition, it provides a balance between providing 
reasonable regulatory relief, and protecting the credit union system 
and the NCUSIF. The proposed $500 million total asset size threshold 
will provide relief to 90 percent of credit unions while still covering 
85 percent of all complex assets and liabilities in the credit union 
system, and 76 percent of total assets. The NCUA's proposed methodology 
for determining complexity based on the portfolios of assets and 
liabilities of credit unions does not support increasing the threshold 
above $500 million as there is no significantly meaningful difference 
in the volume and number of complex activities above this level. 
Moreover, raising the threshold to $10 billion, as some commenters 
suggested, would only cover approximately 14 percent of the complex 
assets and liabilities in the credit union system and approximately 15 
percent of the total assets in the credit union system.\36\ 
Accordingly, the Board believes raising the proposed threshold further 
would not be consistent with the results of the NCUA's analysis of the 
portfolios of the assets and liabilities of credit unions and would 
impose an undue risk to the NCUSIF by excluding too large a percentage 
of the assets covered by the risk-based capital requirement.
---------------------------------------------------------------------------

    \36\ Based on December 31, 2017 Call Report data.
---------------------------------------------------------------------------

    A number of commenters requested exemptions from the definition of 
complex under certain circumstances, such as credit unions that do not 
have a very high complexity ratio, receiving a waiver on a case-by-case 
basis, or recognizing when a credit union's net worth ratio provides 
more than adequate protection for the risk. Based on the proposed 
approach, credit unions that meet the definition of complex must be 
subject to the risk-based net worth requirement, thus, a waiver 
provision is not possible. A simplified way of complying with the risk-
based net worth requirement, such as a highly

[[Page 55474]]

capitalized credit union that is not otherwise a risk outlier, would be 
outside the scope of this proposal.\37\ This suggestion was referred to 
the NCUA's Regulatory Reform Task Force for further consideration.
---------------------------------------------------------------------------

    \37\ See, e.g., Pub. L. 115-174, 132 Stat. 1296 (2018) 
(Requiring the Federal banking agencies to establish a ``community 
bank leverage ratio.'').
---------------------------------------------------------------------------

    As noted previously, the $500 million total asset threshold is 
based on the NCUA's analysis of the portfolio of assets and liabilities 
of credit unions. The NCUA's analysis took into account the number and 
volume of activity engaged in by credit unions. A hybrid approach to 
defining complexity, for example using an asset threshold in 
conjunction with a complexity ratio, would likely still result in 
credit unions with more than $500 million in assets being considered 
complex. The Board does not agree that only credit unions that are very 
complex (such as six or more complex activities) should be considered 
complex, as at least one commenter suggested. Also, a hybrid approach 
could create unintended consequences for credit unions and the NCUA, 
would make the rule more difficult to administer, and lead to greater 
regulatory burden.
    A commenter recommended the definition of complexity be tied to a 
growth index. As required by the statute, the definition of complex is 
based on the NCUA's analysis of the portfolio of assets and 
liabilities, as previously discussed. Therefore, it is not appropriate 
to index the $500 million asset threshold to inflation or some other 
growth index. However, the Board will continue to periodically update 
its analysis to ensure the complexity definition reflects changes in 
the composition of the portfolio of assets and liabilities of credit 
unions.
    Commenters suggested additional analysis be provided at different 
asset levels to further support the definition of complexity. Table 2 
provides additional data on the CR at a number of different asset size 
thresholds above $500 million. The NCUA concluded in the Proposal that 
a significant level of complexity exists in credit unions with assets 
greater than $500 million based on the volume of activity with no 
meaningful distinction at higher thresholds. The Board continues to 
believe the $500 million threshold is appropriate as it covers the 
majority of complex assets and liabilities (85 percent) while providing 
significant regulatory relief without posing undue risk to the NCUSIF.

                     Table 2--Complexity Ratio by Asset Categories, 2017Q4 Call Report Data
----------------------------------------------------------------------------------------------------------------
                                                    Complexity      Complexity      Complexity      Complexity
                 Asset category                      ratio >10       ratio >20       ratio >30       ratio >40
                                                     (percent)       (percent)       (percent)       (percent)
----------------------------------------------------------------------------------------------------------------
<$500M..........................................              29              18              11               6
$500M-$750M.....................................              92              82              58              40
$750M-$1B.......................................              96              80              65              47
$1B-$10B........................................              96              86              71              51
>$10B...........................................              86              86              71              43
----------------------------------------------------------------------------------------------------------------

    Another commenter states 53 percent of credit unions with assets 
between $500 million and $750 million engage in six or more complex 
activities; and at $1 billion this number increases to 77 percent. The 
commenter is referring to the RCI, as shown in Table 3, which counts 
the number of complex activities. The Board does not agree that only 
credit unions that are very complex (such as six or more complex 
activities) should be considered complex. The Board concludes that a 
significant level of complexity exists in credit unions with assets 
greater than $500 million based on the number and volume of complex 
activities.

                                       Table 3--Complexity Index by Asset Categories, 2017Q4 Call Report Data \38\
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                             Number of     Average index     Index>=1        Index>=2        Index>=3        Index>=5        Index>=6
             Asset category                credit unions       value         (percent)       (percent)       (percent)       (percent)       (percent)
--------------------------------------------------------------------------------------------------------------------------------------------------------
>$500M..................................           5,042             1.5              52              35              24              10               6
$500-$750M..............................             149             5.7             100              98              96              73              53
$750-$1B................................              95             6.1             100             100              97              79              64
$1B-10B.................................             280             6.9             100              99              96              88              78
$10B+...................................               7             8.6             100              86              86              86              71
--------------------------------------------------------------------------------------------------------------------------------------------------------

    One commenter \38\ disagreed with raising the threshold for 
defining a complex credit union. The commenter noted the majority of 
the ten largest losses to the NCUSIF derived from credit unions 
(excluding corporate credit unions) below the $500 million threshold. 
The losses total approximately $723 million based on loss projections 
at time of the associated credit unions failures. However, the Board 
notes that nearly one-third of these losses were the result of 
fraud.\39\ Risk-based capital is designed to address credit risk. It is 
not designed to address fraud. As previously stated, if the historical 
trends continue, total losses to the NCUSIF over the next 10 years will 
likely be larger for credit unions with more than $500 million in total 
assets than for those with assets between $100 million and $500 million 
in total assets. Accordingly, the Board continues to believe the 
threshold of $500 million for determining complexity captures most of 
the risk to the NCUSIF.
---------------------------------------------------------------------------

    \38\ Table 3 results differ from the proposed rule as they 
reflect additional asset categories.
    \39\ Based on Material Loss Reviews conducted by the NCUA Office 
of Inspector General.
---------------------------------------------------------------------------

    The Board disagrees with the commenter who recommended tying the 
risk-based capital requirements to CAMEL ratings. The CAMEL rating 
system is not designed to measure the complexity of the portfolio of 
assets and liabilities of credit unions. Rather, the CAMEL rating 
reflects the financial and operational condition of the credit

[[Page 55475]]

union on a scale of one to five. Therefore, a credit union rated CAMEL 
3, 4, or 5 may not necessarily have a high degree of complexity in the 
composition of its assets and liabilities.
    In drafting the Proposal, the NCUA reviewed the RCI indicators and 
restricted the indicators to only the most complex components. One 
commenter stated interest only-real estate loans present risk 
regardless of lien position. Based on this comment, the NCUA re-ran its 
complexity analysis with all interest-only real estate loans included 
in this indicator. There were no significant changes in the percent of 
credit unions, by total asset threshold, participating in these 
activities, by number and volume. The analysis continues to support 
defining complexity as credit unions with assets greater than $500 
million. The Board agrees with the commenter's assessment of similar 
risk attributes and will, going forward, include first-lien, interest-
only real estate loans within the interest only loan indicator.
    A commenter recommended the Board redefine ``commercial loans'' to 
exclude inherently less complex categories of such loans. The Board 
continues to believe the loans defined as ``commercial loans'' in the 
NCUA's Regulations are complex enough to warrant inclusion as a 
complexity indicator. ``Commercial loans'' by definition no longer 
include the less complex components, including but not limited to, 1-4 
family residential property secured loans not serving as the borrower's 
primary residence, or vehicles manufactured for household use.\40\ 
Therefore, the Board will continue to use ``commercial loans,'' as 
currently defined as an indicator.
---------------------------------------------------------------------------

    \40\ See 12 CFR 723.2.
---------------------------------------------------------------------------

    For the reasons discussed above, the NCUA continues to believe that 
$500 million in total assets is an appropriate threshold level for 
defining a credit union as ``complex,'' thereby subjecting it to the 
NCUA's risk-based capital requirement. As such, this final rule amends 
Sec.  702.103 of the 2015 Final Rule to 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.
    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.\41\ 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.
---------------------------------------------------------------------------

    \41\ 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.).
---------------------------------------------------------------------------

IV. Legal Authority

    In 1998, Congress enacted the Credit Union Membership Access Act 
(CUMAA).\42\ Section 301 of CUMAA added section 216 to the FCUA,\43\ 
which required the Board to adopt by regulation a system of PCA to 
restore the net worth of credit unions that become inadequately 
capitalized.\44\ 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).\45\ 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).\46\ The 
Board initially implemented the required system of PCA in 2000,\47\ 
primarily in part 702 of the NCUA's Regulations, and most recently made 
substantial updates to the regulation in October 2015.\48\
---------------------------------------------------------------------------

    \42\ Public Law 105-219, 112 Stat. 913 (1998).
    \43\ 12 U.S.C. 1790d.
    \44\ 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).
    \45\ 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).
    \46\ 12 U.S.C. 1790d(b)(1)(B).
    \47\ 12 CFR part 702; see also 65 FR 8584 (Feb. 18, 2000) and 65 
FR 44950 (July 20, 2000).
    \48\ 80 FR 66625 (Oct. 29, 2015).
---------------------------------------------------------------------------

    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].'' \49\ 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.''
---------------------------------------------------------------------------

    \49\ 12 U.S.C. 1790d(a)(1).
---------------------------------------------------------------------------

    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.\50\ Section 
216(o) generally defines a credit union's ``net worth'' as its retained 
earnings balance,\51\ and a credit union's ``net worth ratio,'' as the 
ratio of its net worth to its total assets.\52\ 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.\53\
---------------------------------------------------------------------------

    \50\ 12 U.S.C. 1790d(c).
    \51\ 12 U.S.C. 1790d(o)(2).
    \52\ 12 U.S.C. 1790d(o)(3).
    \53\ 12 U.S.C. 1790d(c)-(g); 12 CFR 702.204(a)-(b).
---------------------------------------------------------------------------

    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 \54\ requirement for insured credit 
unions that are complex, as defined by the Board. . . .'' \55\ The FCUA 
directs the NCUA to base its definition of ``complex'' credit unions 
``on the portfolios of assets and liabilities of

[[Page 55476]]

credit unions.'' \56\ It also requires the NCUA to design a risk-based 
net worth requirement to apply to such ``complex'' credit unions.\57\
---------------------------------------------------------------------------

    \54\ 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.
    \55\ 12 U.S.C. 1790d(d)(1).
    \56\ 12 U.S.C. 1790d(d).
    \57\ Id.
---------------------------------------------------------------------------

V. Impact of the Final Rule

    This final 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 credit unions. The new 
definition of complex credit union adopted in this final rule exempts a 
total of 90 percent (5,042) of all credit unions as of December 31, 
2017.\58\ For comparison, if the threshold were to remain at $100 
million only about 72 percent of all credit unions would be exempt.
---------------------------------------------------------------------------

    \58\ This final rule 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.
---------------------------------------------------------------------------

    While under this final rule 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.\59\ 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.\60\
---------------------------------------------------------------------------

    \59\ 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.
    \60\ 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.
---------------------------------------------------------------------------

    The credit unions that are defined as complex under this final rule 
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 
final rule.\61\ Table 4 shows the distribution of estimated risk-based 
capital ratios for all complex credit unions based on this final rule.
---------------------------------------------------------------------------

    \61\ 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 4--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%
--------------------------------------------------------------------------------------------------------------------------------------------------------
# of CUs.........................               7              110              153              144              101               14                2
--------------------------------------------------------------------------------------------------------------------------------------------------------

    As shown in Table 4, 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 final rule, 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.\62\ Overall, 98.7 percent of all complex credit unions are 
well capitalized under this final rule.
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    \62\ 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.
---------------------------------------------------------------------------

    Credit unions often hold some margin above regulatory capital 
requirements. Table 5 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.

                            Table 5--Distribution of Net Worth Ratios and Risk-Based Capital Ratios for Complex Credit Unions
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                             Less than well    Well capitalized   Well capitalized   Well capitalized  Greater than well
                      Number of CUs                           capitalized        to well + 2%      + 2% to + 3.5%     + 3.5% to + 5%    capitalized + 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 6 summarizes the 
distribution of credit unions by the ratio of risk-weighted assets to 
total assets for credit unions bound by each capital requirement.

[[Page 55477]]



             Table 6--Distribution of Risk-Weighted Assets to Total Assets Ratios for Complex Credit Unions by Governing Capital Requirement
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                  Risk weighted assets/total assets
                                                                    Total   ----------------------------------------------------------------------------
                                                                    number    Avg. (%)     <50%      50-60%     60-70%     70-80%     80-90%      >90%
--------------------------------------------------------------------------------------------------------------------------------------------------------
# Bound by Net Worth Ratio......................................        310       58.9         49        101        147         10          2          1
# 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.\63\ 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.
---------------------------------------------------------------------------

    \63\ 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 6 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.\64\ Table 6 
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 under 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.
---------------------------------------------------------------------------

    \64\ 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.
---------------------------------------------------------------------------

VI. Regulatory Procedures

Regulatory Flexibility Act

    The Regulatory Flexibility Act (RFA) generally requires that, in 
connection with a final rule, an agency prepare and make available for 
public comment a final regulatory flexibility analysis that describes 
the impact of the final 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) \65\ and 
publishes its certification and a short, explanatory statement in the 
Federal Register together with the rule.
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    \65\ See 80 FR 57512 (Sept. 24, 2015).
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    The amendments to the 2015 Final Rule and part 702 affect only 
complex credit unions, which were those with greater than $100 million 
in assets under the 2015 Final Rule and, as amended, are now only those 
with greater than $500 million in assets under this final rule. As a 
result, credit unions with $100 million or less in total assets would 
not be affected by this final rule. Accordingly, the NCUA certifies 
that this final rule 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) (44 U.S.C. 3501 et seq.) 
requires that the Office of Management and Budget (OMB) approve all 
collections of information by a Federal agency from the public before 
they can be implemented. Respondents are not required to respond to any 
collection of information unless it displays a current, valid OMB 
control number.
    In accordance with the PRA, the information collection requirements 
included in this final rule has been submitted to OMB for approval 
under control number 3133-0191.\66\
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    \66\ Proposed revisions to OMB control number 3133-0191 have 
been submitted to OMB for approval in accordance with 5 CFR 1320.11.
---------------------------------------------------------------------------

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 final 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 a material impact for purposes of 
Executive Order 13132.

Assessment of Federal Regulations and Policies on Families

    The NCUA has determined that this final 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 October 18, 
2018.
Gerard Poliquin,
Secretary of the Board.

    For the reasons discussed above, the Board further amends 12 CFR 
part 702, as amended in the final rule published at 80 FR 66625 (Oct. 
29, 2015), 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.

[[Page 55478]]

Sec.  702.103   [Amended]

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

[FR Doc. 2018-24171 Filed 11-5-18; 8:45 am]
 BILLING CODE 7535-01-P