[Federal Register Volume 86, Number 244 (Thursday, December 23, 2021)]
[Rules and Regulations]
[Pages 72784-72806]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2021-27644]


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NATIONAL CREDIT UNION ADMINISTRATION

12 CFR Parts 702 and 703

RIN 3133-AF12


Capital Adequacy: The Complex Credit Union Leverage Ratio; Risk-
Based Capital

AGENCY: National Credit Union Administration (NCUA).

ACTION: Final rule.

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SUMMARY: This final rule provides a simplified measure of capital 
adequacy for federally insured, natural-person credit unions (credit 
unions) classified as complex (those with total assets greater than 
$500 million). Under the final rule, a complex credit union that 
maintains a minimum net worth ratio, and that meets other qualifying 
criteria, is eligible to opt into the complex credit union leverage 
ratio (CCULR) framework if they have a minimum net worth ratio of nine 
percent. A complex credit union that opts into the CCULR framework need 
not calculate a risk-based capital ratio under the NCUA Board's October 
29, 2015 risk-based capital final rule, as amended on October 18, 2018. 
A qualifying complex credit union that opts into the CCULR framework 
and maintains the minimum net worth ratio is considered well 
capitalized. The final rule also makes several amendments to update the 
NCUA's October 29, 2015 risk-based capital final rule, including 
addressing asset securitizations issued by credit unions, clarifying 
the treatment of off-balance sheet exposures, deducting certain 
mortgage servicing assets from a complex credit union's risk-based 
capital numerator, revising the treatment of goodwill, and amending 
other asset risk weights.

DATES: The final rule is effective January 1, 2022.

FOR FURTHER INFORMATION CONTACT: Policy and Accounting: Thomas Fay, 
Director, Division of Capital Markets, Office of Examination and 
Insurance, at (703) 518-1179; Legal: Rachel Ackmann, at (703) 548-2601 
or Ariel

[[Page 72785]]

Pereira, at (703) 548-2778; or by mail at National Credit Union 
Administration, 1775 Duke Street, Alexandria, Virginia 22314.

SUPPLEMENTARY INFORMATION:

Table of Contents

I. Background
    A. The NCUA's Risk-Based Capital Requirements
    B. The Other Banking Agencies' Risk-Based Capital and CBLR 
Framework
    C. The NCUA's Advance Notice of Proposed Rulemaking
II. Legal Authority
III. Proposed Rule
IV. Final Rule
    A. Overview of the CCULR Framework
    B. Qualifying Complex Credit Unions
    C. The CCULR Ratio
    D. Calibration of the CCULR
    E. Opting into the CCULR Framework
    F. Voluntarily Opting Out of the CCULR Framework
    G. Compliance With the Criteria To Be a Qualifying Complex 
Credit Union
    H. Treatment of a Qualifying Complex Credit Union That Falls 
Below the CCULR Requirement
    I. Transition Provision
    J. Reservation of Authority
    K. Effect of the CCULR on Other Regulations
    L. Amendments to the 2015 Final Rule
    M. Technical Amendments
    N. Other Comments Beyond the Scope of the Proposed Rule
V. Regulatory Procedures
    A. Regulatory Flexibility Act
    B. Paperwork Reduction Act
    C. Executive Order 13132 on Federalism
    D. Assessment of Federal Regulations and Policies on Families
    E. Small Business Regulatory Enforcement Fairness Act
    F. Administrative Procedure Act

I. Background

A. The NCUA'S Risk-Based Capital Requirements

    The NCUA ensures the safety and soundness of federally insured 
credit unions (FICUs) by examining and supervising federally chartered 
credit unions (FCUs); participating in the examination and supervision 
of federally insured, state-chartered credit unions in coordination 
with state regulators; and insuring members' accounts at all FICUs up 
to the statutorily prescribed limits.
    Capital adequacy standards are an important prudential tool to 
ensure the safety and soundness of individual credit unions and the 
credit union system as a whole. Capital serves as a buffer for credit 
unions to prevent institutional failure and dramatic deleveraging 
during times of stress. During a financial crisis, a buffer can mean 
the difference between the survival or failure of a financial 
institution. Capital levels commensurate with risk insulate credit 
unions from the effects of unexpected adverse developments in their 
financial condition, reduce the probability of a systemic crisis, allow 
credit unions to continue to serve as credit providers during times of 
stress without government intervention, and provide benefits that 
outweigh the associated costs.
    Following the 2007-2009 recession, the NCUA substantially 
reevaluated its capital adequacy standards, which are codified in 12 
CFR part 702. On October 29, 2015, as amended on October 18, 2018, the 
NCUA Board (Board) published a final rule restructuring its capital 
adequacy regulations (2015 Final Rule).\1\ The effective date of the 
2015 Final Rule was originally January 1, 2019. The overarching intent 
of the 2015 Final Rule was to reduce the likelihood that a relatively 
small number of high-risk credit unions would exhaust their capital and 
cause large losses to the National Credit Union Share Insurance Fund 
(NCUSIF). Under the Federal Credit Union Act (FCUA), FICUs are 
collectively responsible for capitalizing and replenishing losses to 
the NCUSIF.\2\ The 2015 Final Rule restructured the NCUA's current 
capital adequacy regulations and made various revisions, including 
amending the agency's risk-based net worth requirement by replacing a 
credit union's risk-based net worth ratio with a risk-based capital 
ratio. The risk-based capital requirements in the 2015 Final Rule are 
more consistent with the NCUA's risk-based capital ratio measure for 
corporate credit unions, consistent with the FCUA, and more comparable 
to the risk-based capital measures implemented by the Federal Deposit 
Insurance Corporation (FDIC), Board of Governors of the Federal Reserve 
System (Federal Reserve Board), and Office of the Comptroller of 
Currency (OCC) (collectively, the other banking agencies) in 2013.\3\
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    \1\ 80 FR 66626 (Oct. 29, 2015). See also, 83 FR 55467 (Oct. 18, 
2018).
    \2\ See 12 U.S.C. 1782(c). The FCUA requires each insured credit 
union to pay an insurance premium equal to a percentage of the 
credit union's insured shares when the Board, subject to statutory 
parameters, assesses a premium. The FCUA also requires each insured 
credit union to pay and maintain a deposit with the NCUSIF equaling 
one percent of the credit union's insured shares. The NCUSIF's funds 
are available to pay share insurance claims, to aid in connection 
with the liquidation or threatened liquidation of credit unions, and 
for administrative and other expenses the Board incurs in carrying 
out the purposes of the share insurance subchapter of the FCUA. See 
12 U.S.C. 1783(a).
    \3\ The Federal Reserve Board and OCC issued a joint final rule 
on October 11, 2013 (78 FR 62018), and the FDIC issued a 
substantially identical interim final rule on September 10, 2013 (78 
FR 55340). On April 14, 2014 (79 FR 20754), the FDIC adopted the 
interim final rule as a final rule with no substantive changes.
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    On November 6, 2018, the Board published a supplemental final rule 
that raised the threshold level for a complex credit union to $500 
million (2018 Supplemental Rule).\4\ The 2018 Supplemental Rule also 
delayed the effective date of the 2015 Final Rule for one year (from 
January 1, 2019, to January 1, 2020).
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    \4\ 83 FR 55467 (Nov. 6, 2018).
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    The effective date was delayed a second time through a final rule 
published on December 17, 2019 (2019 Supplemental Rule).\5\ The 2015 
Final Rule is now scheduled to become effective on January 1, 2022. The 
delay has provided credit unions and the NCUA with additional time to 
implement the 2015 Final Rule. Further, as explained in the 2019 
Supplemental Rule, the delay enabled the Board to holistically and 
comprehensively evaluate the NCUA's capital standards for credit 
unions.\6\ Among the items highlighted by the Board for possible 
consideration during the delay were adoption of a community bank 
leverage ratio (CBLR) analogue, the treatment of asset securitizations 
issued by credit unions, finalization of the Subordinated Debt rule and 
implementation of the current expected credit loss (CECL) standard.\7\
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    \5\ 84 FR 68781 (Dec. 17, 2019).
    \6\ Id. at 68782.
    \7\ Id.
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B. The Other Banking Agencies' Risk-Based Capital and CBLR Framework

    As discussed in the proposed rule, the other banking agencies 
adopted in 2013 a revised risk-based capital rule, which was designed 
to strengthen their capital requirements and improve risk sensitivity.
    In 2018, section 201 of the Economic Growth, Regulatory Relief, and 
Consumer Protection Act directed the other banking agencies to propose 
a simplified, alternative measure of capital adequacy for certain 
federally insured banks.\8\ On November 13, 2019, the other banking 
agencies issued a final rule implementing this statutory directive 
(CBLR Final Rule).\9\
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    \8\ Public Law 115-174 (May 24, 2018). Section 201 is codified 
at 12 U.S.C. 5371 note.
    \9\ 84 FR 61776 (Nov. 13, 2019).
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    Under the CBLR Final Rule, the CBLR framework is an option for 
depository institutions and depository institution holding companies 
that meet the following criteria:

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    (1) A CBLR greater than nine percent; \10\
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    \10\ Under section 4012 of the Coronavirus Aid, Relief, and 
Economic Security Act (CARES Act), Public Law 116-136, 134 Stat. 281 
(Mar. 27, 2020), the CBLR was temporarily set to eight percent. See, 
85 FR 22924 (Apr. 23, 2020). Under the statute, the temporary CBLR 
of eight percent ended on December 31, 2020. The CBLR transitions 
back to nine percent on January 1, 2022. See, 85 FR 22930 (Apr. 23, 
2020).
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    (2) Total consolidated assets of less than $10 billion; \11\
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    \11\ See, 85 FR 77345 (Dec. 2, 2020), providing temporary relief 
from December 2, 2020 through December 31, 2021 for purposes of 
determining the asset size of an institution.
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    (3) Total off-balance sheet exposures of 25 percent or less of its 
total consolidated assets;
    (4) Trading assets plus trading liabilities of five percent or less 
of its total consolidated assets; and
    (5) Not an advanced approaches banking organization (advanced 
approaches banking organizations are generally those with at least $250 
billion in total consolidated assets or at least $10 billion in total 
on-balance sheet foreign exposure, and depository institution 
subsidiaries of those firms).
    In March 2020, the CBLR was temporarily set to eight percent by 
statute.\12\ Accordingly, effective the second quarter of 2020, the 
CBLR requirement was eight percent or greater.\13\ In early 2021, the 
CBLR requirement was increased to 8.5 percent or greater. During the 
grace period, the minimum requirement is 7.5 percent.\14\ Effective 
January 1, 2022, the CBLR requirement will return to nine percent and 
the minimum requirement during the grace period will return to eight 
percent.
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    \12\ Public Law 116-136.
    \13\ See, 85 FR 22924 (Apr. 23, 2020).
    \14\ See, 85 FR 22930 (Apr. 23, 2020). The grace period is the 
two-calendar quarter period a depository institution or depository 
institution holding company has to satisfy the requirements to be a 
qualifying institution or to calculate a risk-based capital ratio.
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C. The NCUA's Advance Notice of Proposed Rulemaking

    At its January 14, 2021 meeting, the Board issued an advance notice 
of proposed rulemaking and solicited comments on two approaches to 
simplify the 2015 Final Rule.\15\ Almost all commenters supported the 
stated goal of simplifying the 2015 Final Rule. In general, commenters 
favored the NCUA developing a CCULR complement to risk-based capital. 
Almost all commenters who favored the CCULR framework noted that its 
flexibility is attributable to the option complex credit unions have in 
calculating the more complex risk-based capital measure, which produces 
a more precise, and generally lower, overall capital requirement. A few 
commenters also stated that a benefit of the CCULR framework is its 
similarity to the capital framework of the other banking agencies.
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    \15\ See, 86 FR 13498 (March 9, 2021).
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II. Legal Authority

    This final rule provides a simple measure of capital adequacy for 
credit unions classified as complex based on the principles of the CBLR 
framework. The CCULR relieves complex credit unions that meet specified 
qualifying criteria from having to calculate the risk-based capital 
ratio.\16\ In exchange, the credit union is required to maintain a 
higher net worth ratio than is otherwise required for the well-
capitalized classification. This trade-off is akin to the decision 
qualifying community banks make under the CBLR. A qualifying complex 
credit union that has a net worth ratio of nine percent or greater is 
eligible to opt into the CCULR framework.
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    \16\ See Section IV.B. Qualifying Credit Unions for more 
information on the qualifying criteria.
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    The Board received no comments on its legal authority to issue the 
final rule and thus affirms its conclusions and interpretations in the 
proposed rule. The Board is issuing this final rule pursuant to its 
authority under the FCUA. The FCUA grants the NCUA a broad mandate to 
issue regulations governing both FCUs and all FICUs. Section 120 of the 
FCUA is a general grant of regulatory authority and authorizes the 
Board to prescribe rules and regulations for the administration of the 
FCUA.\17\ Section 207 of the FCUA is a specific grant of authority over 
share insurance coverage, conservatorships, and liquidations.\18\ 
Section 209 of the FCUA is a plenary grant of regulatory authority to 
the Board to issue rules and regulations necessary or appropriate to 
carry out its role as share insurer for all FICUs.\19\ Accordingly, the 
FCUA grants the Board broad rulemaking authority to ensure that the 
credit union industry and the NCUSIF remain safe and sound.
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    \17\ 12 U.S.C. 1766(a).
    \18\ 12 U.S.C. 1787(b)(1).
    \19\ 12 U.S.C. 1789(a)(11).
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    The FCUA also expressly grants authority for the Board to develop 
capital adequacy standards for credit unions. In 1998, Congress enacted 
the Credit Union Membership Access Act (CUMAA).\20\ Section 301 of 
CUMAA added section 216 to the FCUA,\21\ which required the Board to 
adopt by regulation a system of prompt corrective action (PCA) to 
resolve the problems of insured credit unions when the net worth of 
credit unions declines below certain levels.\22\ Section 216(b)(1)(A) 
requires the Board to adopt by regulation a system of PCA for credit 
unions consistent with section 216 of the FCUA and comparable to 
section 38 of the Federal Deposit Insurance Act (FDI Act).\23\ Section 
216(b)(1)(B) requires that the Board, in designing the PCA system, also 
consider the ``cooperative character of credit unions''.\24\ The Board 
initially implemented the required system of PCA in 2000,\25\ primarily 
in part 702. As discussed previously, the Board most recently made 
substantial updates to the regulation in the 2015 Final Rule.
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    \20\ Public Law 105-219, 112 Stat. 913 (1998).
    \21\ 12 U.S.C. 1790d.
    \22\ The risk-based net worth requirement for credit unions 
meeting the definition of complex was first applied based on 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 
member business loans, 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); 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); and revisions 
were made in 2020 to reflect loans issued under the Paycheck 
Protection Program, 85 FR 23212 (Apr. 27, 2020).
    \23\ 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 insured 
banks). In discussing the statutory requirement for comparability, 
the 2019 Supplemental Rule stated that ``the FCUA requires the Board 
to adopt a PCA framework comparable to the PCA framework in the FDI 
Act. The FCUA, however, does not require the Board to adopt a system 
of risk-based capital identical to the risk-based capital framework 
for federally insured banking organizations.''
    \24\ That is, 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. 12 U.S.C. 1790d(b)(1)(B).
    \25\ 12 CFR part 702; see also 65 FR 8584 (Feb. 18, 2000) and 65 
FR 44950 (July 20, 2000).
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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.\26\ Section 
216(o) generally defines a credit union's net worth as its retained 
earnings balance as determined under generally accepted accounting 
principles (GAAP); \27\ and a credit union's net worth ratio as the 
ratio of its net worth to its total assets.\28\ As a credit union's net 
worth ratio declines, so does

[[Page 72787]]

its classification among the five net worth categories, thus subjecting 
it to an expanding range of mandatory and discretionary supervisory 
actions.\29\
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    \26\ 12 U.S.C. 1790d(c).
    \27\ 12 U.S.C. 1790d(o)(2).
    \28\ 12 U.S.C. 1790d(o)(3).
    \29\ 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 the NCUA's system of PCA 
include, besides the statutorily defined net worth ratio requirement, 
``a risk-based net worth \30\ requirement for credit unions that are 
complex, as defined by the Board.'' \31\ The FCUA directs the NCUA to 
base its definition of complex credit unions ``on the portfolios of 
assets and liabilities of credit unions.'' \32\ If a credit union is 
not classified as complex, as defined by the NCUA, it is not subject to 
a risk-based net worth requirement. Besides granting the NCUA broad 
authority to determine which credit unions are complex, and thus 
subject to a risk-based net worth requirement, the FCUA also grants the 
NCUA broad authority to design a risk-based net worth requirement to 
apply to such complex credit unions.\33\ Specifically, unlike the terms 
``net worth'' and ``net worth ratio,'' the term ``risk-based net 
worth'' is undefined in the FCUA. Accordingly, section 216 grants the 
Board the authority to design risk-based net worth requirements, so 
long as the regulations are comparable to those applicable to other 
federally insured depository institutions and consistent with FCUA 
requirements.
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    \30\ 12 U.S.C. 1790d(d)(2). 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 risk-based net worth 
requirement to take account of any material risks against which the 
net worth ratio required for an insured credit union to be 
adequately capitalized may not provide adequate protection. 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 final rule would have no 
substantive effect on the requirements of the FCUA and is intended 
only to reduce confusion for the reader.
    \31\ 12 U.S.C. 1790d(d)(1).
    \32\ 12 U.S.C. 1790d(d).
    \33\ Id.
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    The CCULR framework is comparable to section 38 of the FDI Act, as 
implemented by CBLR Final Rule.\34\ As discussed previously, section 
201 of the Economic Growth, Regulatory Relief, and Consumer Protection 
Act amended part of the other banking agencies' capital adequacy 
framework to direct the other banking agencies to propose a simplified, 
alternative measure of capital adequacy for certain federally insured 
banks.\35\ The other banking agencies implemented this requirement, 
including amendments to their PCA regulations under section 38 of the 
FDI Act, in the CBLR Final Rule.
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    \34\ 12 CFR part 3 (OCC), 12 CFR part 217 (Federal Reserve 
Board), and 12 CFR part 324 (FDIC).
    \35\ 12 U.S.C. 5371.
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    Besides satisfying the comparability requirement in section 216, 
the CCULR framework also meets the requirements in section 216 of the 
FCUA for the NCUA's risk-based net worth framework. Section 216 has two 
express provisions that authorize an NCUA analogue to the CBLR--the 
definition of complex credit unions and the mandate for the Board to 
design a risk-based net worth requirement. In designing its CCULR 
framework, the Board considered both its legal authority to exclude 
credit unions from risk-based net worth requirements under the 
definition of complex, and its authority to design a system of risk-
based net worth that includes a higher net worth ratio in place of 
calculating a ratio based on risk-adjusted assets.\36\
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    \36\ The Board also briefly considered an additional independent 
legal basis for the CCULR framework. As discussed in the section 
III.D. Calibration of the CCULR, the CCULR framework results in 
complex credit unions generally holding more capital than under the 
2015 Final Rule. Because of the higher capital requirements under 
the CCULR framework, the Board also considered whether the framework 
could be considered an alternative method to demonstrate compliance 
with the 2015 Final Rule, instead of an alternative measure of risk-
based net worth. This approach would be within the Board's general 
discretion to determine the means and manner by which it measures 
compliance with its regulations, including the risk-based net worth 
requirement. Considering the express statutory authority to define 
complex and design a risk-based net worth framework, however, the 
Board believes this alternative basis, while valid, is unnecessary 
to support the final rule.
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    The Board considered its express authority under section 216 to 
define which credit unions are complex, and thus exclude noncomplex 
credit unions from the risk-based net worth requirement.\37\ The 
express delegation grants the Board significant discretion to determine 
which credit unions are considered complex. Under this legal basis, the 
Board would continue to limit the definition of complex to only those 
credit unions with quarter-end total assets that exceed $500 million 
dollars. In using asset size as a proxy for complexity, the Board 
complied with the statutory directive that the definition of complex be 
based on the portfolios of assets and liabilities of credit unions. 
Specifically, the Board relied on a complexity index that counted the 
number of complex products and services provided by credit unions.\38\ 
The complexity index demonstrated that credit unions with greater than 
$500 million in total assets held more complex assets and liabilities 
as a larger share of their total assets than smaller credit unions.\39\
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    \37\ When Congress expressly authorizes or directs an agency to 
define a statutory term, it grants the agency broad discretion. 
Under these circumstances, an agency is permitted to interpret a 
term so long as its interpretation is not manifestly contrary to the 
statute. The interpretation need not conform to the ordinary meaning 
of the term. See Am. Bankers Ass'n v. Nat'l Credit Union Admin., 934 
F.3d 649, 663 (D.C. Cir. 2019) (``An express delegation of 
definitional power ``necessarily suggests that Congress did not 
intend the [terms] to be applied in [their] plain meaning sense,'' 
Women Involved in Farm Econ. v. U.S. Dep't of Agric., 876 F.2d 994, 
1000 (D.C. Cir. 1989), that they are not ``self-defining,'' id., and 
that the agency ``enjoy[s] broad discretion'' in how to define them, 
Lindeen v. SEC, 825 F.3d 646, 653 (D.C. Cir. 2016)).
    \38\ Supra note 4 at 55470.
    \39\ Id.
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    The Board, however, could also have drafted a definition of complex 
that looks at the individual portfolios of credit unions with total 
assets greater than $500 million rather than examining the assets and 
liabilities of credit unions in the aggregate. This approach is also 
consistent with the statutory provision that the complex definition 
should be based on the portfolios of assets and liabilities of credit 
unions. The Board would have used the same qualifying criteria as in 
the final rule as measures of complexity. If a credit union would 
otherwise meet the definition of a qualifying credit union, it would be 
considered not complex. Thus, it would not be subject to risk-based 
capital, as implemented by the 2015 Final Rule. This alternative 
approach would have created a functionally equivalent requirement to 
the one set forth in this final rule, with the only difference being 
the technical details of the implementing regulatory text in part 702.
    The Board also considered its express authority and mandate to 
design the CCULR on the basis that the CCULR constitutes a risk-based 
net worth requirement, as required for complex credit unions in section 
216(d). As noted previously, the FCUA does not define the term ``risk-
based net worth requirement'' and sets forth only general guidelines 
for the design of the risk-based net worth requirement mandated under 
section 216(d)(1). Specifically, section 216(d)(2) requires that the 
Board ``design the risk-based net worth requirement to take account of 
any material risks against which the net worth ratio required for an 
insured credit union to be adequately capitalized may not provide 
adequate protection.'' Under section 216(c)(1)(B) of the FCUA, the net 
worth ratio required for a credit union to be adequately capitalized is 
six percent.

[[Page 72788]]

    The plain language of section 216(d)(2) supports the NCUA's 
interpretation that Congress intended for the NCUA to design the risk-
based net worth requirement to factor any material risks beyond those 
already addressed through the statutory six percent net worth ratio 
required for a credit union to be adequately capitalized. In other 
words, the language in section 216(d)(2) simply identifies the types of 
risks that the NCUA's risk-based net worth requirement must address--
that is, those risks not already addressed by the statutory six percent 
net worth requirement. Notably, the FCUA does not require the risk-
based net worth requirement include risk-adjusted assets as part of its 
calculation.\40\ Instead, the Board interprets ``risk-based'' to 
require an accounting for risks in some manner--that is, the measure 
must be based on a consideration of risks--but not any particular 
manner of doing so.\41\ Thus, if the Board determines that the CCULR 
considers all material risks not addressed by the six percent net worth 
ratio, then the Board has satisfied the statutory requirements for a 
risk-based net worth ratio.\42\
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    \40\ Case law research revealed no decisions discussing the 
meaning of ``risk-based'' under the FCUA or other statutes that 
impose risk-based capital requirements on financial institutions.
    \41\ By contrast, in 2010, Congress specifically elaborated on 
the risk-based measures applicable to banks by providing that the 
generally applicable risk-based capital requirements for those 
institutions must include risk-weighted assets in the denominator of 
the ratio. Public Law 111-203, codified at 12 U.S.C. 5371. Congress 
did not elect to amend the FCUA to add a similar elaboration on the 
risk-based net worth requirement applicable to complex credit 
unions, which is consistent with the Board's interpretation that the 
term risk-based by itself does not necessarily entail risk-weighted 
assets. This reading is consistent with judicial interpretations of 
the closely related phrase ``based on,'' which the Supreme Court has 
held to indicate a causal or but-for-causation relationship between 
the phrase ``based on'' and the term it modifies. Babb v. Wilkie, 
140 S.Ct. 1168, 2020 WL 1668281, at *4 (Apr. 6. 2020). Similarly, a 
``risk-based'' requirement can be understood as a requirement that 
bears a causal relationship to the relevant risks but does not 
require a specific form for the calculation of this requirement.
    \42\ Similarly, the Board initially explored a non-risk-adjusted 
approach in the advance notice of proposed rulemaking that the Board 
issued following CUMAA's enactment in 1998, in which it requested 
comments on addressing this provision through increased net worth 
requirements as well as through risk-adjusted measures. 63 FR 57938 
(Oct. 29, 1998). This approach is also consistent with the Senate 
report accompanying CUMAA, which stated: ``The NCUA must design the 
risk-based net worth requirement to take into account any material 
risks against which the 6 percent net worth ratio required for an 
insured credit union to be adequately capitalized may not provide 
adequate protection. Thus, the NCUA should, for example, consider 
whether the six percent requirement provides adequate protection 
against interest-rate risk and other market risks, credit risk, and 
the risks posed by contingent liabilities, as well as other relevant 
risks. The design of the risk-based net worth requirement should 
reflect a reasoned judgment about the actual risks involved.'' S. 
Rep. No. 105-193 at 14 (May 21, 1998) (emphasis added). The report 
indicates that Congress did not intend to prescribe how the Board 
accounts for any relevant risks that the six percent net worth ratio 
does not adequately address.
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    The Board believes that either the complex-based approach or the 
risk-based approach to designing the CCULR framework are supported by 
the FCUA. The Board, however, chose to draft the final rule under its 
authority to design a risk-based net worth requirement. The Board 
believes that considering the CCULR as an alternative way to calculate 
a risk-based net worth requirement is more straightforward, consistent 
with the structure of section 216, and simpler for complex credit 
unions to implement.

III. Proposed Rule

    The Board issued the proposed rule to provide a simplified measure 
of capital adequacy for complex credit unions at its July 22, 2021, 
meeting.\43\ The proposed rule provided for a 60-day comment period 
that ended on October 15, 2021. The Board received 21 comments from 
credit unions, both state and federal; credit union leagues and trade 
associations; a banking trade organization; individuals; and an 
association of state credit union supervisors. Many of the commenters 
supported the goal of providing a simplified, alternative measure of 
capital adequacy for certain highly capitalized complex credit unions. 
Most commenters, however, expressed some concerns about specific 
aspects of the proposal. The final rule and a discussion of the Board's 
responses to the comments are discussed in the following sections.
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    \43\ 86 FR 45825 (Aug. 16, 2021).
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IV. Final Rule

A. Overview of the CCULR Framework

    The final rule provides a simplified measure of capital adequacy 
for credit unions classified as complex (credit unions with total 
assets greater than $500 million). Under the final rule, a qualifying 
complex credit union that meets the minimum CCULR, which is equal to 
its net worth ratio, is eligible to opt into the CCULR framework and is 
considered well capitalized. The CCULR framework is based on the 
principles of the CBLR framework. As discussed previously in this 
preamble, it relieves complex credit unions that meet specified 
qualifying criteria and have opted into the CCULR framework from having 
to calculate a risk-based capital ratio, as implemented by the 2015 
Final Rule. In exchange, the qualifying complex credit union is 
required to maintain a higher net worth ratio than is otherwise 
required for the well-capitalized classification. This is a similar 
trade-off to the one qualifying community banking organizations can 
make under the CBLR.
    Most commenters generally supported the CCULR framework. Several 
commenters noted that credit unions could choose to comply with the 
current risk-based capital rule or the CCULR. One commenter stated 
that, with the CCULR framework, the Board can maximize synergy with the 
risk-based capital rule, maintain flexibility, and achieve greater 
consistency with sound public policy and the FCUA. In contrast, another 
commenter opposed the optionality in the CCULR framework and stated 
that allowing credit unions to opt-in to the CCULR framework creates 
two populations of credit unions based on nothing but the compliance of 
internal actors of the credit unions. The Board believes that 
implementing a CCULR framework furthers the goal of the FCUA's PCA 
requirements by ensuring complex credit unions continue to hold 
sufficient capital, while minimizing the burden associated with 
complying with the NCUA's risk-based capital requirement. In response 
to comments, however, the final rule makes several material changes to 
the CCULR framework. These changes include: (1) Calibrating the CCULR 
at nine percent instead of 10 and forgoing any transition period; (2) 
removing the written notification requirement for exiting the CCULR 
framework after opting in; (3) permitting a grace period for credit 
unions that no longer meet the qualifying criteria due to a supervisory 
merger; and (4) amending the treatment of goodwill in both the CCULR 
framework and risk-based capital framework. The Board has not amended 
the effective date in response to the comments; the final rule, along 
with the 2015 Final Rule, is effective on January 1, 2022. Several 
commenters stated that this date should be delayed because the 
effective date of risk-based capital is in less than three months after 
the comment period closed for the proposed rule. Other commenters 
discussed the need to comment on Call Report changes. Commenters also 
stated that the NCUA should factor in the effective date of CECL, which 
will have a significant impact on net worth and the current economic 
conditions related to COVID-19.
    Commenters recommended different alternative effective dates for 
the CCULR framework. Several commenters

[[Page 72789]]

recommended January 1, 2023. Other commenters recommended six months 
after publication of the final rule in the Federal Register.
    In contrast, one banking trade organization recommended that the 
Board first subject credit unions to the risk-based capital standards 
before implementing an opt-in to the CCULR framework. This argument 
appeared to be based primarily or solely on the fact that banks 
complied with risk-based capital before Congress enacted and the other 
banking agencies implemented the CBLR. The Board found no new evidence 
or information that would warrant it refraining from adopting the CCULR 
framework now. As discussed in the proposed rule and this final rule 
preamble, a complex credit union which opts into the CCULR framework 
will generally increase the overall capital requirement. The Board 
continues to find that implementing the CCULR framework alongside the 
2015 Final Rule will balance flexibility and choice for complex credit 
unions with safety and soundness and overall capital adequacy.
    The Board is not delaying the implementation of either the CCULR 
framework or the 2015 Final Rule. The Board did not propose to delay 
the 2015 Final Rule and does not believe that credit unions need 
additional time to comply with either framework.\44\ The Board 
acknowledges that January 1, 2022, is less than the standard effective 
date of 30 days following the publication of this final rule. There 
are, however, several factors that persuade the Board that credit 
unions will not be disadvantaged. First, credit unions are not required 
to comply with the CCULR framework as it is an optional framework to 
the 2015 Final Rule. Also, credit unions do not have to select their 
framework until the end of the first quarter in 2022, which is a few 
months after the publication of the final rule in the Federal Register. 
The final rule does not include any new calculations for complex credit 
unions and relies on the net worth ratio, an existing capital measure 
that credit unions report each quarter. Finally, the Board is not 
persuaded that credit unions are unprepared to choose between the CCULR 
framework and the risk-based capital framework due to Call Report 
amendments. The proposed rule included sample Call Report 
illustrations. While the Board did not seek specific comments in the 
proposed rule on the Call Report changes, credit unions knew of the 
potential changes and no comments were received expressing general 
confusion. The agency also published a Notice and Request for Comment 
on the proposed Call Report changes on September 27, 2021.\45\ Thus, 
the Board believes a January 1, 2022 effective date for the CCULR 
framework is reasonable and not disadvantageous to credit unions.
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    \44\ Because the Board did not propose any change to the 2015 
Final Rule's effective date, a change in this final rule would not 
be within the scope of the proposed rule.
    \45\ 86 FR 53351 (Sept. 27, 2021).
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B. Qualifying Complex Credit Unions

    Under the final rule, a qualifying complex credit union is defined 
as a complex credit union under 12 CFR 702.103 that meets the following 
criteria (qualifying criteria), each as described further as follows:

    (1) Has a CCULR (net worth ratio) of 9 percent or greater; \46\
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    \46\ For an additional discussion on why the Board set the ratio 
to nine percent, see Section D. Calibration of the CCULR.
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    (2) Has total off-balance sheet exposures of 25 percent or less 
of its total assets;
    (3) Has the sum of total trading assets and total trading 
liabilities of 5 percent or less of its total assets; and
    (4) Has the sum of total goodwill and total other intangible 
assets of 2 percent or less of its total assets.

    The Board believes complex credit unions that do not meet any one 
of the qualifying criteria should remain subject to risk-based capital 
to ensure that such credit unions hold capital commensurate with the 
risk profile of their activities. The Board will continue to evaluate 
the qualifying criteria over time to ensure it continues to be 
appropriate.
1. CCULR of Nine Percent or Greater
    The final rule requires a complex credit union to have a CCULR of 
at least nine percent to be classified as a qualifying complex credit 
union. Given this change from 10 percent in the proposal, the Board is 
not adopting the proposed transition provision, which would have set 
the CCULR at 9 percent initially, then increased it to 10 percent by 
January 1, 2024. For a discussion of the relevant comments, see Section 
D. Calibration.
2. Off-Balance Sheet Exposures
    The Board did not receive substantial comment on the proposed off-
balance sheet exposure criterion. One commenter requested further 
guidance on this criterion. Another credit union said this criterion is 
better addressed through the examination process. The proposed rule 
provided substantial detail on the eight off-balance sheet exposures. 
The Board also disagrees that this criterion is better addressed 
through the supervisory process; rather, the Board believes the off-
balance sheet criterion is essential in determining the appropriateness 
of the CCULR framework for a specific credit union. If a complex credit 
union has substantial off-balance sheet exposures, the Board believes 
the more precise risk-based capital framework is necessary to determine 
its capital adequacy.
    Under the final rule, a qualifying complex credit union is required 
to have total off-balance sheet exposures of 25 percent or less of its 
total assets, as of the end of the most recent calendar quarter. The 
Board is including these qualifying criteria in the CCULR framework 
because the CCULR includes only on-balance sheet assets in its 
denominator. Thus, it does not require a qualifying complex credit 
union to hold capital against its off-balance sheet exposures. This 
qualifying criterion is intended to reduce the likelihood that a 
qualifying complex credit union with significant off-balance sheet 
exposures would be required to hold less capital under the CCULR 
framework than under the risk-based capital ratio.\47\
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    \47\ The amendments to Sec.  702.104, Risk-Based Capital Ratio, 
include credit conversion factors and risk-weights for off-balance 
sheet exposures.
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    The other banking agencies' CBLR framework also excludes banking 
organizations with significant off-balance sheet exposures. The other 
banking agencies' definition of off-balance sheet exposures, however, 
has several differences from the current definition of off-balance 
sheet exposures in the 2015 Final Rule. Thus, to make the CCULR 
framework more comparable to the CBLR and to improve on the 
effectiveness of the 2015 Final Rule, the final rule amends the NCUA's 
definition of off-balance sheet exposures. The amendments to the 
definition of off-balance sheet exposure apply to both the CCULR 
framework and the risk-based capital framework.\48\
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    \48\ The final rule also includes risk weights for each new 
exposure in the definition of off-balance sheet exposure. See, 
Section L. Amendments to the 2015 Final Rule.
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    Under the CCULR framework, off-balance sheet exposures mean:

    (1) For unfunded commitments, excluding unconditionally 
cancellable commitments, the remaining unfunded portion of the 
contractual agreement.
    (2) For loans transferred with limited recourse, or other 
seller-provided credit enhancements, and that qualify for true sale 
accounting, the maximum contractual amount the credit union is 
exposed to according to the agreement, net of any related valuation 
allowance.
    (3) For loans transferred under the Federal Home Loan Bank 
(FHLB) mortgage

[[Page 72790]]

partnership finance program, the outstanding loan balance as of the 
reporting date, net of any related valuation allowance.
    (4) For financial standby letters of credit, the total potential 
exposure of the credit union under the contractual agreement.
    (5) For forward agreements that are not derivative contracts, 
the future contractual obligation amount.
    (6) For sold credit protection through guarantees and credit 
derivatives, the total potential exposure of the credit union under 
the contractual agreement.
    (7) For off-balance sheet securitization exposures, the notional 
amount of the off-balance sheet credit exposure (including any 
credit enhancements, representations, or warranties that obligate a 
credit union to protect another party from losses arising from the 
credit risk of the underlying exposures) that arises from a 
securitization.
    (8) For securities borrowing or lending transactions, the amount 
of all securities borrowed or lent against collateral or on an 
uncollateralized basis.

    Each element of the off-balance sheet definition is discussed in 
detail in the proposed rule.
3. Trading Assets and Liabilities
    Commenters raised no objections to the proposed criterion related 
to trading assets and labilities. Thus, the Board is finalizing this 
provision as proposed. Under the final rule, a qualifying complex 
credit union is required to have the sum of its total trading assets 
and total trading liabilities be five percent or less of its total 
assets, each measured as of the end of the most recent calendar 
quarter. This criterion, including related definitions, is discussed in 
detail in the proposed rule.
4. Goodwill and Other Intangible Assets
    Under the proposal, a qualifying complex credit union was required 
to have the sum of total goodwill and other intangible assets of two 
percent or less of its total assets. As proposed, qualifying complex 
credit unions were required to include excluded goodwill and excluded 
other intangible assets in this calculation.\49\ Five commenters 
objected to the inclusion of a criterion related to goodwill and 
intangible assets. One commenter stated that previous accounting 
changes resulted in increased amounts of goodwill related to 
supervisory mergers. This commenter stated that credit unions that 
support the NCUA and the NCUSIF by assisting in supervisory mergers 
should not be penalized by subsequent restrictions on the holding of 
supervisory goodwill.\50\ Several commenters requested that supervisory 
goodwill and elective goodwill should be treated differently. Another 
commenter stated that only impaired goodwill should be deducted. 
Another commenter preferred that the goodwill criterion be removed but 
stated that, at the very least, the Board should not include excluded 
goodwill and excluded other intangible assets. Finally, one commenter 
stated that goodwill is not an eligibility criterion for the CBLR. The 
Board notes that goodwill is deducted from insured banks' numerator for 
purposes of the CBLR. Other commenters generally supported the 
inclusion of goodwill as a criterion.
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    \49\ Excluded goodwill means the outstanding balance, maintained 
in accordance with GAAP, of any goodwill originating from a 
supervisory merger or combination that was completed on or before 
December 28, 2015. Excluded other intangible assets means the 
outstanding balance, maintained in accordance with GAAP, of any 
other intangible assets such as core deposit intangible, member 
relationship intangible, or trade name intangible originating from a 
supervisory merger or combination that was completed on or before 
December 28, 2015.12 CFR 702.2 (effective Jan. 1, 2022).
    \50\ Supervisory goodwill is goodwill originating from a 
supervisory merger or combination, as defined in the 2015 Final 
Rule.
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    In response to the comments received, the Board has revised the 
treatment of goodwill in the final rule. The final rule will not 
include excluded goodwill and excluded other intangible assets as part 
of the calculation for the two percent eligibility requirement. As a 
result of these changes, a complex credit union need not include 
excluded goodwill or excluded other intangible assets for purposes of 
calculating the two percent goodwill qualifying criterion under the 
CCULR framework. Related to this change, the 2015 Final Rule has been 
amended to permanently grandfather excluded goodwill and excluded other 
intangible assets. Thus, under the 2015 Final Rule, a complex credit 
union will not deduct excluded goodwill or excluded other intangible 
assets from its risk-based capital numerator after the sunset date of 
January 1, 2029. For additional information on this change, see Section 
L. Amendments to the 2015 Final Rule.
    The Board made these changes in response to commenters' concerns 
about equity related to subsequent changes to the treatment of 
supervisory goodwill. Certain commenters expressed concern about 
unforeseen capital implications related to goodwill acquired as part of 
a supervisory merger or combination before December 28, 2015. In this 
case, the Board agrees that credit unions that assisted in previous 
supervisory mergers and combinations should not be unduly penalized by 
subsequent restrictions on excluded goodwill. Thus, the Board will not 
require credit unions to include such exposures when calculating the 
two percent threshold under the CCULR framework.
    The Board, however, still believes a qualifying criterion related 
to goodwill and other intangible assets should be included in the final 
rule. The Board also recognizes that other intangible assets contain a 
high level of uncertainty regarding a credit union's ability to realize 
value from these assets, especially under adverse financial conditions. 
Due to the uncertainty of recognizing value from goodwill and other 
intangible assets, the other banking agencies require insured banks to 
deduct goodwill and intangible assets from tier one capital.\51\ The 
Board believes it is prudent to assess the credit union's balance of 
goodwill and other intangible assets to ensure comparability with the 
banking industry. Without this criterion, a qualifying credit union 
could violate the principles of the CBLR framework by using the CCULR 
despite substantial goodwill and intangible assets. The Board also 
notes that, under the 2015 Final Rule, goodwill and other intangible 
assets are deducted from both the risk-based capital ratio numerator 
and denominator.
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    \51\ See e.g., 12 CFR 324.22.
---------------------------------------------------------------------------

    The Board believes that complex credit unions with two percent or 
less of their assets in goodwill and other intangibles assets would not 
hold less capital under the CCULR framework than under the risk-based 
capital ratio. In addition, as of June 30, 2021, it is estimated that 
the two percent threshold would not exclude any complex credit unions 
from the CCULR framework. Thus, the Board believes a two percent 
threshold balances regulatory relief for most qualifying complex credit 
unions with recognizing the uncertainty and volatility of goodwill and 
other intangible assets. The Board believes that complex credit unions 
with substantial goodwill and other intangible assets should calculate 
their capital adequacy using the risk-based capital ratio, as their 
portfolios may require higher capital levels.
5. Other CBLR Eligibility Criteria
Total Assets of Less Than $10 Billion
    Under the other banking agencies' CBLR framework, only depository 
institutions or depository institution holding companies with total 
consolidated assets of less than $10 billion are eligible to use the 
CBLR.
    The Board did not include this qualifying criterion in the proposed 
rule. Several commenters supported this position. Commenters reiterated 
the

[[Page 72791]]

Board's justification in the proposed rule. For example, commenters 
noted that credit unions' stringent portfolio-shaping rules mitigate 
many of the risks associated with larger institutions in the banking 
sector. Also, credit unions with $10 billion or more in assets are 
generally required to conduct capital planning, and credit unions with 
$15 billion or more in assets are generally required to conduct stress 
testing.\52\
---------------------------------------------------------------------------

    \52\ 12 CFR part 702, subpart E.
---------------------------------------------------------------------------

    One commenter objected to the inclusion of all qualifying credit 
unions by noting that Congress limited the asset size threshold for a 
qualifying community bank to less than $10 billion in assets. The 
commenter presented no new information or considerations beyond those 
the Board addressed in the proposed rule. The Board disagrees and, for 
the reasons discussed in the proposed rule preamble, continues to 
believe the CCULR is an appropriate capital framework for all complex 
credit unions as the FCUA limits the types of assets an FCU can hold 
compared to banking organizations. The Board also finds that the 
legislative cap on eligibility for the CBLR does not require the Board 
to impose the same cap on the CCULR framework, which is tailored to the 
requirements of the FCUA and the risks associated with complex credit 
unions. Thus, the Board is finalizing this provision as proposed.
Other Qualifying Criteria
    In the proposed rule, the Board asked whether the final rule should 
include other qualifying criteria. Several commenters stated they did 
not support expanding the qualifying criteria to include certain 
categories discussed in the proposed rule, including ``heightened 
risk'' asset categories, investments in CUSOs, or concentrations of 
mortgage servicing assets (MSAs). Several commenters stated that the 
other banking agencies do not have similar qualifying criteria.
    One banking trade organization stated that the CCULR framework 
should only be made available to those credit unions that do not 
originate or hold a significant amount of member business loans.
    The Board is not adding any additional qualifying criteria with a 
CCULR of nine percent. The Board believes that a CCULR of nine percent 
is appropriate because most complex credit unions would be required to 
hold more capital under the CCULR framework than under the risk-based 
capital framework. This would be true even if a complex credit union's 
portfolio included greater than average amount of assets with higher 
risk weights under the 2015 Final Rule, such as concentrations in 
junior-lien mortgages and commercial loans, investments in CUSOs, or 
concentrations of MSAs. The Board considered adding qualifying criteria 
to account for adopting the CCULR at 9 percent instead of 10 percent 
but does not believe it is necessary now as credit unions do not hold 
less capital under the CCULR framework than the risk-based capital 
framework.
    The Board may consider future qualifying criteria as it gains 
experience in supervising complex credit unions under the CCULR 
framework or if the risk-profile of credit union assets change. For 
example, if the credit union industry begins to hold larger 
concentrations of high-risk assets, including junior lien mortgages, 
commercial loans, MSAs, corporate credit unions investments, or CUSO 
investments, then the Board may reconsider whether additional 
qualifying criteria are necessary. If an individual credit union holds 
significant concentrations of these assets, then the Board may exercise 
its reservation of authority to require the credit union to calculate 
its capital adequacy under the risk-based capital framework.\53\
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    \53\ See, Section J. Reservation of Authority.
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C. The CCULR Ratio

    Under the proposal, the CCULR would be the net worth ratio, which 
is defined under the 2015 Final Rule as the ratio of the credit union's 
net worth to its total assets rounded to two decimal places (for 
example 9.32 percent).\54\
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    \54\ 12 CFR 702.2 (effective Jan. 1, 2022).
---------------------------------------------------------------------------

    The Board proposed to use the net worth ratio for the CCULR for its 
simplicity. Complex credit unions are required to calculate their net 
worth ratio regardless of whether they opt into the CCULR framework. 
Thus, complex credit unions are not required to calculate a unique 
ratio for purposes of opting into the CCULR framework. Also, complex 
credit unions are already familiar with the net worth ratio, which 
reduces compliance costs compared to a unique ratio designed for the 
CCULR framework.
    Several commenters supported using the net worth ratio for the 
CCULR for the reasons stated in the proposed rule. But three commenters 
recommended that the Board create a new measure of capital for the 
CCULR framework. Specifically, commenters recommended the inclusion of 
subordinated debt for credit unions that are not low-income designated 
credit unions. Alternatively, commenters also recommended the inclusion 
of other types of capital shares akin to the perpetual contributed 
capital shares issued by corporate credit unions. An association of 
credit union supervisors stated that subordinated debt should be 
included because during times of economic dislocation, even healthy 
institutions may not be able to accelerate their capital replenishment. 
This commenter further stated that allowing for additional sources of 
capital such as subordinated debt strengthens the credit union system 
and protects the NCUSIF. One commenter stated that goodwill should be 
deducted from net worth for purposes of CCULR.
    The Board considered an alternative measure of capital in the 
proposed rule that included subordinated debt parallel to the risk-
based capital ratio numerator from the 2015 Final Rule.\55\ The Board 
has not adopted a new measure of capital in the final rule. First, the 
Board believes that the numerator to the 2015 Final Rule is a more 
conservative measure of capital compared to the numerator in the net 
worth ratio. Second, as the proposed rule preamble stated, a new 
measure of capital would likely include several deductions, including 
deductions for the NCUSIF capitalization deposit, goodwill, other 
intangible assets, and identified losses and would be more complicated 
to calculate than the net worth ratio.
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    \55\ 12 CFR 702.104(b) (effective Jan. 1, 2022).
---------------------------------------------------------------------------

    Regarding commenters' characterization of subordinated debt as a 
useful tool to build capital when a credit union is experiencing a 
capital hardship, the Board acknowledges the benefits of issuing 
subordinated debt, but also notes that subordinated debt can be an 
expensive form of capital, both in the terms of the cost of issuing it 
and in terms of necessary rate of return to investors. Also, it may not 
be readily available during times of stress.

D. Calibration of the CCULR

    The proposed rule would have allowed a qualifying complex credit 
union to opt into the CCULR framework if it met the minimum CCULR at 
the time of opting into the CCULR framework. The proposed rule 
initially set the CCULR at 9 percent and transitioned to 10 percent 
over two years. Almost all commenters objected to calibrating the CCULR 
ratio at 10 percent, and instead recommended a 9 percent measure in 
conformance with the ratio used for the CBLR. Other commenters were 
concerned that fewer credit unions could take advantage of the CCULR 
framework if it is set at 10

[[Page 72792]]

percent. Some commenters stated that a nine percent CCULR would provide 
greater regulatory relief. Several commenters generally discussed that 
higher capital may restrict credit union growth and mean less resources 
to invest in products and services that benefit the member-owners. One 
commenter stated that a 10 percent calibration could restrict credit 
unions' ability to expand access to the underserved and underbanked. 
One commenter discussed that accelerated asset growth as a result of 
COVID-19 should favor a lower CCULR. Another commenter recommended that 
the Board set CCULR at less than nine percent and recommended a ratio 
closer to eight percent.
    In contrast, one credit union commenter supported a CCULR of 10 
percent. One banking trade organization generally supported sufficient 
capital requirements.
    The Board understands the commenters' concerns about a 10 percent 
CCULR, due in part to the recent downward pressure on credit union net 
worth ratios from the rapid growth in assets during 2020 and 2021. The 
Board also understands that a higher capital requirement may restrict 
credit union ability to invest in member products and services. As the 
proposed rule explained, the Board initially considered setting the 
CCULR between 9 and 11 percent and presented analysis on the potential 
impact in terms of safety and soundness and burden reduction for 
potential CCULRs at 9 and 10 percent.
    In recognition of this fact, and in response to the comments 
received, the Board has adopted a CCULR of nine percent and is forgoing 
the transition provision. The Board finds that this calibration of the 
CCULR will provide appropriate regulatory burden relief and serve as 
further incentive for complex credit unions to opt into the CCULR with 
the benefit of maintaining strong capital levels in the credit union 
system and ensuring safety and soundness.
    Guided by the goals stated in the proposed rule's calibration 
discussion--maintaining strong capital levels in the credit union 
system, ensuring safety and soundness, and providing appropriate 
regulatory relief to as many credit unions as possible--the Board 
considered several factors in adopting a CCULR of nine percent.
    First, the Board considered aggregate levels of capital among 
complex credit unions. The CCULR framework does not result in a 
reduction of the minimum required amount of capital held by complex 
credit unions and results in an overall increase in the minimum amount 
of required capital held by complex credit unions. Based on reported 
data as of June 30, 2021, approximately 70 percent of complex credit 
unions qualify to use the CCULR framework and would be well capitalized 
under a 9 percent calibration. This was a significant decrease in the 
number of eligible credit unions at 9 percent when compared to pre-
pandemic net worth ratios, when approximately 90 percent would have 
been eligible. Of the total 680 complex credit unions as of June 30, 
2021, 473 have a net worth ratio greater than nine percent and would be 
well capitalized under a nine percent CCULR standard. Of those 473 
credit unions, the Board estimates that all of them meet the qualifying 
criteria, and are thus eligible to opt into the CCULR framework. Under 
the CCULR, if all 473 credit unions opted into the CCULR and held the 
minimum nine percent net worth ratio required to be well capitalized, 
the total minimum net worth required is estimated at $111.8 billion, an 
increased capital requirement of $24.3 billion over the minimum 
required under the 2015 Final Rule. The Board is not aware of any 
qualifying complex credit unions that would reduce their capital 
requirement with a CCULR of nine percent as compared to the 2015 Final 
Rule.
    The Board also considered the extent of the burden relief provided 
by the CCULR framework. The Board believes a CCULR of 9 percent is 
preferable to a CCULR of 10 percent as it permits an additional 173 
complex credit unions (473 eligible at 9 percent versus 300 at 10 
percent) to opt-into the CCULR framework, which supports the Board's 
goal of reducing regulatory burden for as many complex credit unions as 
possible.
    Next, the Board considered that the 8 to 10 percent range 
established by Congress for the CBLR is 300 to 500 basis points higher 
than the 5 percent leverage ratio required for well-capitalized status 
under the other banking agencies' PCA framework.\56\ As detailed in the 
proposed rule preamble, the Board reviewed the basis for the 7 percent 
net worth ratio for insured credit unions and considered a range 
between 9 and 11 percent for the CCULR. The Board's analysis 
established that setting the CCULR 300 basis points higher than the 
seven percent net worth ratio while the other banking agencies have set 
the CBLR 400 basis points higher than the comparable leverage 
requirements for insured banks would be appropriate because of changes 
in credit union investments in corporate credit unions since Congress 
established the seven percent net worth ratio in 1998. But the proposed 
rule did not conclude that a 9 percent CCULR would be inappropriate and 
specifically analyzed the merits of 9 and 10 percent in the calibration 
discussion.
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    \56\ 12 CFR 6.4 (OCC), 12 CFR 208.43 (Federal Reserve Board), 
and 12 CFR 324.403 (FDIC).
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    Upon reconsideration, the Board is adopting a nine percent CCULR 
based on its effect on capital levels and burden reduction, rather than 
calibrating CCULR based on the analysis of the seven percent net worth 
ratio and relative difference between the CBLR and the leverage ratio 
for insured banks. The Board acknowledges, however, that setting CCULR 
at nine percent is only 200 basis points above the statutory well-
capitalized threshold for the net worth ratio absent consideration of 
the reduced corporate credit union investments. The Board also 
recognizes it is less than the 400 basis point differential established 
by the other banking agencies in setting the CBLR when compared to the 
leverage ratio. The Board, however, believes a CCULR of nine percent is 
prudent and does not present undue safety and soundness risk. A primary 
reason that other banking agencies chose a CBLR of nine percent was to 
ensure qualifying community banks generally maintain their current 
level of capital. As discussed previously, a CCULR of nine percent 
increases the total minimum net worth required to $111.8 billion, an 
increased capital requirement of $24.3 billion over the minimum 
required under the 2015 Final Rule. The Board also notes that the 
analysis in the proposed rule comparing bank and credit union net worth 
and leverage ratios was not a decisive factor but one of several 
factors forming the overall proposal, which included a nine percent 
CCULR in the range of consideration.
    Also, as a separate point that confirms the Board's approach and 
conclusion, the other banking agencies also designed the CBLR framework 
to reduce the likelihood that a banking organization would not hold 
less capital under the CBLR framework than under the risk-based capital 
framework. The Board estimates that no qualifying complex credit union 
would reduce its capital requirement with a CCULR of nine percent as 
compared to the 2015 Final Rule. Thus, the Board does not believe a 
reduced CCULR of nine percent will result in the potential for 
regulatory arbitrage between the two frameworks.
    Finally, as noted in the proposed rule preamble, the Board 
specifically considered comparability to the other

[[Page 72793]]

banking agencies' CBLR framework when designing the CCULR framework. 
The other banking agencies established a CBLR of nine percent--that is, 
if an insured bank has a CBLR of nine percent and meets other 
requirements, it is considered well capitalized. Adopting the CCULR at 
nine percent will make the two frameworks generally consistent in the 
actual level of capital required.
    In sum, the Board believes a CCULR of nine percent is prudent and 
does not present undue safety and soundness risk. This calibration is 
also within the range of consideration from the proposed rule and meets 
the goal of reducing regulatory burden when appropriate. Also, a CCULR 
of nine percent is comparable to the calibration of the CBLR. Thus, 
based on a reconsideration of the perspective on the calibration level 
relative to the CBLR and credit union net worth requirements, and a 
further analysis of net worth levels at 9 and 10 percent net worth 
ratios, the Board finds that adopting a 9 percent CCULR provides 
adequate protection for the NCUSIF. The Board intends to continue to 
monitor the impact of CCULR and RBC on credit unions and the NCUSIF 
going forward.

E. Opting Into the CCULR Framework

    Most commenters supported a credit union's ability to opt into 
CCULR at the end of each calendar quarter. A few credit unions also 
requested that they be permitted to freely switch between the risk-
based capital framework and CCULR framework and the NCUA not to limit 
how frequently a credit union opts into the CCULR framework. The Board 
has made no changes to the opt-in procedures. Under the final rule, a 
qualifying complex credit union with a CCULR of nine percent or greater 
may opt into the CCULR framework at the end of each calendar quarter. A 
qualifying complex credit union choosing to opt into the CCULR would 
indicate its decision by completing a CCULR reporting schedule in its 
Call Report.

F. Voluntarily Opting Out of the CCULR Framework

    Under the proposal, after a qualifying complex credit union opted 
into the CCULR framework, it may voluntarily opt out of the framework 
by providing written notice to the appropriate Regional Director or the 
Director of the Office of National Examinations and Supervision.
    Most commenters on the opt-out procedures stated that prior notice 
to NCUA should not be required and qualifying credit unions should be 
able to perform the required analysis and switch between the two 
options with the same ease as banking organizations. One commenter 
stated it is reasonable to expect that any complex credit union would 
not choose to opt-out of the CCULR framework without first performing a 
preliminary risk-based ratio calculation. The commenter wrote that if 
there is any possibility a credit union would skip performing such 
calculation, that possibility is not a justification for subjecting all 
complex credit unions to a notification requirement. Another commenter 
stated if the Board is concerned that qualifying complex credit unions 
are not prepared to implement risk-based capital, an alternative may be 
for the agency to only require advance notice in the first year of 
CCULR's implementation.
    The Board has removed the written notice requirement for opting out 
of the CCULR framework. Under the other banking agencies' CBLR 
framework, qualifying banks that have opted into the CBLR may opt out 
of the framework at any time. The Board agrees with commenters and has 
aligned the final rule with the CBLR. The Board has reconsidered its 
position for several reasons. First, the Board believes that switching 
between CCULR and risk-based capital would be an infrequent activity 
and, potentially, of little benefit to the credit union. For any credit 
union that raises potential concerns, the NCUA can review its capital 
adequacy, including its choice of capital framework, through the normal 
supervisory process. And, the notice requirement in the proposed rule 
only provided the NCUA 61 days prior notice as compared to the 
timeframe notice would be provided through the Call Report under the 
final rule. The Board does not believe this 61-day period justifies 
subjecting all credit unions to the proposed notification. There is 
also no general requirement for credit unions to submit a Call Report 
schedule with risk-based capital before the first reporting period of 
March 2022, or whenever a credit union becomes complex and must 
calculate risk-based capital. The Board believes if it can manage the 
transition of newly complex credit unions to the risk-based capital 
framework without notification, notification is unnecessary for credit 
unions switching from the CCULR framework.
    The Board also notes that, although a credit union may choose to 
use the CCULR framework, a credit union that frequently switched 
between CCULR and risk-based capital may raise supervisory concerns.

G. Compliance With the Criteria To Be a Qualifying Complex Credit Union

    Under the proposed CCULR framework, complex credit unions have a 
two-calendar quarter grace period if they no longer meet one of the 
qualifying criteria to either begin calculating a risk-based capital 
ratio or to meet all the CCULR eligibility criteria. Commenters who 
discussed the grace period generally supported it and did not support 
creating a separate prompt corrective action framework for CCULR. One 
commenter objected to the required notice if the credit union is not 
likely to remain eligible for the CCULR framework. One commenter 
suggested a three-year grace period for a credit union that fails to 
comply with an eligibility requirement due to a merger, rather than 
immediately subjecting the credit union to the risk-based capital 
requirements. As discussed in the following paragraphs, the Board has 
made two changes to the proposed grace period in response to 
commenters.
    Under the final rule, after a qualifying complex credit union has 
adopted the CCULR framework and then no longer meets the qualifying 
criteria, it is required, within a limited grace period of two calendar 
quarters, either to once again meet the qualifying criteria or comply 
with the risk-based capital ratio requirements. The grace period begins 
at the end of the calendar quarter in which the credit union ceases to 
satisfy the criteria to be a qualifying complex credit union and ends 
after two consecutive calendar quarters. For example, if the complex 
credit union ceases to satisfy one of the qualifying criteria after 
December 31st (and still does not meet the criteria as of the end of 
that quarter), the grace period for this credit union would begin at 
the quarter ending March 31st and would end at the quarter ending 
September 30th. The complex credit union could continue to use the 
CCULR framework as of June 30th but would need to fully comply with the 
risk-based capital ratio and the associated reporting requirements as 
of September 30th, unless at that time the qualifying complex credit 
once again met the qualifying criteria of the CCULR framework. The 
Board believes this limited grace period is appropriate to mitigate 
potential volatility in capital and associated regulatory reporting 
requirements based on temporary changes in a credit union's risk 
profile from quarter to quarter, while capturing more permanent changes 
in the risk profile.
    During the grace period, the credit union continues to be treated 
as a qualifying complex credit union and

[[Page 72794]]

must continue calculating and reporting its CCULR, unless it has opted 
out of using the CCULR framework. Also, the qualifying complex credit 
union continues to be considered to have met the capital ratio 
requirements for the well-capitalized capital category during the grace 
period. If the qualifying complex credit union has a CCULR of less than 
seven percent, however, it is not considered to be well capitalized. 
Instead, its capital classification is determined by its net worth 
ratio. For additional discussion on the treatment of a qualifying 
complex credit union when its CCULR falls below nine percent, see 
Section H--Treatment of a Qualifying Complex Credit Union That Falls 
Below the CCULR Requirement.
    The two-quarter grace period is akin to the other banking agencies' 
CBLR framework. The proposed rule differed from the CBLR framework 
because a qualifying complex credit union that may fail to meet the 
requirements to be a qualifying complex credit union by the end of the 
grace period was required to submit written notification to the 
appropriate Regional Director or the Director of Office of National 
Examinations and Supervision. Consistent with the reasons discussed for 
credit unions voluntarily opting out of the CCULR framework, the Board 
has decided to remove the notification requirements in the final rule. 
The Board no longer believes notification is necessary and will monitor 
compliance and a credit union's adoption of risk-based capital through 
the supervisory process.
    Under the CBLR Final Rule, a qualifying community banking 
organization that ceases to meet the qualifying criteria as a result of 
a business combination is not provided a grace period. The proposed 
rule included a similar limitation. One commenter suggested a three-
year grace period for a credit union that fails to comply with an 
eligibility requirement due to a merger, rather than immediately 
subjecting the credit union to the risk-based capital requirements. In 
general, the Board believes credit unions that no longer meet the CCULR 
eligibility requirements due to a merger do not need a grace period, as 
complex credit unions should consider the regulatory capital 
implications of a planned business combination and be prepared to 
comply with the applicable requirements.
    The Board, however, believes that supervisory mergers should be an 
exception to this general policy. As defined in the 2015 Final Rule, a 
supervisory merger or combination is a transaction that involved the 
following:

    (1) An assisted merger or purchase and assumption where funds 
from the NCUSIF were provided to the continuing credit union;
    (2) A merger or purchase and assumption classified by the NCUA 
as an ``emergency merger'' where the acquired credit union is either 
insolvent or ``in danger of insolvency'' as defined under appendix B 
to part 701; or
    (3) A merger or purchase and assumption that included the NCUA's 
or the appropriate state official's identification and selection of 
the continuing credit union.\57\
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    \57\ 12 CFR 702.2 (effective Jan. 1, 2022).

    The Board believes it is reasonable to provide a limited grace 
period for this select group of mergers because continuing credit 
unions in supervisory mergers may not have the benefit of time to plan 
for the capital implications of a merger. As a result, continuing 
credit unions may need additional time to meet the CCULR eligibility 
criteria following a supervisory merger. The Board believes a limited, 
two-quarter grace period is reasonable.

H. Treatment of a Qualifying Complex Credit Union That Falls Below the 
CCULR Requirement

    A qualifying complex credit union that has opted into the CCULR 
framework and has a CCULR of nine percent or greater is considered well 
capitalized. A qualifying complex credit union's CCULR may deteriorate 
due to a decline in its level of retained earnings, growth in its total 
assets, or a combination of both. In this case, a credit union may 
choose to stop using the CCULR framework and instead become subject to 
the risk-based capital requirement. The Board recognizes, however, that 
some qualifying complex credit unions may find it unduly burdensome to 
begin complying with the more complex risk-based capital requirements 
while the credit union is experiencing a decline in its CCULR.
    Under the proposed rule, a minimum CCULR is one of the qualifying 
criteria. Thus, if a qualifying complex credit union has a CCULR that 
falls below the minimum requirement, it would receive the same grace 
period of two calendar quarters, as applicable when a credit union 
ceases to meet the other qualifying criteria. The Board received no 
comments on this provision and is finalizing it as proposed.
    Thus, under the final rule a credit union is permitted a two-
quarter grace period when its CCULR falls below the minimum 
requirement. After the two-quarter grace period, the qualifying complex 
credit union must either once again meet the minimum CCULR ratio or 
comply with the risk-based capital requirements. During the grace 
period, the credit union is deemed to have met the well-capitalized 
capital ratio requirements for PCA purposes, provided its net worth 
ratio remains at seven percent or greater.
    If a credit union's net worth ratio falls below seven percent, it 
is not considered to have met the capital ratio requirements for the 
well-capitalized capital category and its capital classification is 
determined by its net worth ratio.

I. Transition Provision

    The Board proposed a two-year transition provision to delay the 
introduction of a 10 percent CCULR. All commenters who discussed the 
transition period favored a longer transition, and most recommended 
four years. Commenters generally discussed uncertainty due to COVID-19, 
upcoming CECL implementation, and the need for additional time to build 
capital. A few commenters who recommended a nine percent CCULR also 
recommended setting CCULR at eight percent during the transition 
period. One commenter recommended the agency commit to future 
retargeting of a fully phased in CCULR once additional data is 
collected during the transition period.
    Because the Board is finalizing the CCULR at 9 percent instead of 
10, it is not adopting the transition provision. As proposed, the 
transition provision would have applied if the permanent CCULR were 10 
percent. Thus, the change in the CCULR in the final rule makes the 
transition provision unnecessary and of no effect.
    The Board is not adopting a transition provision with an initial 
CCULR of eight percent, as several commenters suggested, for two 
reasons. First, the Board does not believe there is sufficient logical 
outgrowth from the proposal to adopt a CCULR of eight percent. 
Separately from the transition provision, the proposed rule posed a 
question on calibrating the CCULR at eight percent but did not 
otherwise discuss it or provide a basis to support this level of 
capital being sufficient to protect the NCUSIF. Second, the Board does 
not believe a CCULR of eight percent is necessary to ensure most 
complex credit unions are eligible to opt into the CCULR framework. As 
previously mentioned, an estimated 70 percent of complex credit unions 
will be eligible to opt into the CCULR framework on January 1, 2022.

J. Reservation of Authority

    The proposed rule included a reservation of authority for the Board 
to require a credit union to use the risk-

[[Page 72795]]

based capital framework in specific cases. As detailed in this section, 
the final rule adopts this provision as proposed. Most commenters who 
discussed the reservation of authority did not object to it. A few 
noted it was analogous to the reservation of authority for the other 
banking agencies under the CBLR. Several commenters recommended the 
Board provide greater detail on how this process will work, who at NCUA 
makes the decision, and what information would be provided to the 
credit union. Three commenters also requested an appeal process. Two 
commenters objected to the reservation of authority. One commenter 
characterized the provision as providing NCUA with ``subjective 
judgment'' to establish minimum capital levels which should be left out 
of any minimum capital threshold. The final rule adopts the reservation 
of authority as proposed. Additional information is discussed in the 
following paragraphs in response to commenters.
    In general, a complex credit union that meets the eligibility 
criteria may opt into the CCULR framework. There may be limited 
instances, however, whereby the CCULR framework would be inappropriate 
and not require sufficient capital to adequately protect the NCUSIF. To 
address such situations, the final rule includes a reservation of 
authority that can be exercised by the Board. Under the reservation of 
authority, the Board can require a complex credit union that has opted 
into the CCULR framework to use the risk-based capital framework to 
calculate its capital adequacy if the Board determines that the complex 
credit union's capital requirements are not commensurate with its 
credit or other risks. When deciding, the Board would consider all 
relevant factors affecting the complex credit union's safety and 
soundness. Also, the Board expects to provide a credit union 
potentially subject to use of the reservation of authority with an 
opportunity to present evidence on why the CCULR framework is 
appropriate for that institution.
    The Board expects to apply the reservation of authority only in 
limited circumstances. Under the reservation of authority, credit 
unions are entitled to a two-quarter grace period before being required 
to comply with the risk-based capital framework. No appeal process is 
being provided, however, because under this final rule, the Board would 
exercise the reservation of authority.

K. Effect of the CCULR on Other Regulations

1. Member Business Loan Cap
    The Board did not receive any comments on the proposed member 
business loans (MBL) analysis and thus, affirms its conclusions and 
interpretations in the proposed rule. Section 107A of the FCUA 
generally limits the aggregate amount of MBLs that an insured credit 
union may make, subject to exceptions for some categories of loans, 
such as loans granted by a corporate credit union to another credit 
union.\58\ In addition, the FCUA exempts certain credit unions from 
complying with the aggregate MBL limit. Specifically, an insured credit 
union chartered to make MBLs, or has a history of making MBLs to its 
members, as determined by the Board, is not subject to the aggregate 
MBL limit.\59\ Also, an insured credit union that serves predominantly 
low-income members, as defined by the Board, or is a community 
development financial institution, as defined in 12 U.S.C. 4702, is 
also not subject to the aggregate MBL limit.\60\
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    \58\ 12 U.S.C. 1757a(c)(1)(B).
    \59\ 12 U.S.C. 1757a(b)(1).
    \60\ 12 U.S.C. 1575a(b)(2).
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    An insured credit union that is subject to the aggregate MBL limit 
may not make an MBL that would result in the total amount of 
outstanding MBLs at the credit union being more than the lesser of 1.75 
times the actual net worth of the credit union or 1.75 times the 
minimum net worth required for a credit union to be well capitalized 
under section 216(c)(1)(A) of the FCUA.\61\ Section 107A defines net 
worth for purposes of that section, providing that it includes the 
retained earnings balance, as determined under GAAP. Under this 
section, for credit unions that serve predominantly low-income members, 
net worth also includes secondary capital accounts that are uninsured 
and subordinate to all other claims against the credit union, including 
the claims of creditors, shareholders, and the NCUSIF.\62\
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    \61\ 12 U.S.C. 1757a(a).
    \62\ This definition does not expressly cover two elements that 
were added to the definition of net worth in section 216(o)(2) for 
PCA purposes in a 2011 enactment: (1) Amounts that were previously 
retained earnings of any other credit union with which the insured 
credit union has combined; and (2) assistance that the Board has 
provided under Section 208. Public Law 111-382, 124 Stat. 4135 (Jan. 
4, 2011). In the 2016 MBL final rule, the Board included these 
elements in net worth for purposes of the MBL limitation by defining 
net worth in the MBL regulation through a cross-reference to the 
current part 702 definition of net worth, which includes all the 
elements in section 216(o)(2). The 2015 Final Rule amended the 
definition of net worth in part 702 effective January 1, 2022 but 
did not add or remove any of the components of net worth in the 
current regulation.
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    For credit unions that are not complex and thus are not subject to 
a risk-based net worth requirement under section 216(d) of the FCUA, 
MBLs are limited to 1.75 times the net worth required for the credit 
union to meet the seven percent net worth ratio under section 
216(c)(1)(A)(i), assuming the credit union's actual net worth is 
greater than the minimum required to be well capitalized. To determine 
its maximum allowable outstanding balance of MBLs, a credit union 
multiplies 1.75 by seven percent of its total assets.
    Until 2016, the Board calculated the MBL limitation in the same 
manner for complex credit unions that are subject to a risk-based net 
worth requirement under section 216(d) without considering any greater 
amount of net worth that a complex credit union might need to hold to 
be well capitalized under a risk-based net worth requirement.\63\ In 
the 2015 proposed rule on MBLs, the Board proposed to amend the MBL 
regulation to incorporate section 107A more faithfully and noted that 
complex credit unions could have a different limitation caused by the 
need to hold more net worth under the risk-based requirement.\64\ The 
preamble to the 2016 Final Rule on MBLs and commercial loans analyzed 
this issue in response to comments on the rule and explained that under 
the 2015 Final Rule on risk-based capital, the MBL limitation would be 
calculated in the following manner. When actual net worth is greater 
than the minimum to be well capitalized, the limit on MBLs is 1.75 
times the greater of the following calculations: (i) The minimum amount 
of capital (in dollars) required by the net worth ratio, which is 7 
percent times total assets; and (ii) the minimum amount of capital (in 
dollars) required by the risk-based capital ratio, which is 10 percent 
times total risk-weighted assets. Then, the credit union must solve for 
the minimum amount of net worth needed after accounting for other forms 
of qualifying capital allowed under the 2015 Final Rule.\65\
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    \63\ Before amendments that the Board adopted in the 2016, the 
MBL regulation limited MBLs to 12.25 percent of an insured credit 
union's total assets--1.75 times the seven percent net worth ratio.
    \64\ 80 FR 37898, 37909 (July 1, 2015).
    \65\ 81 FR 13530, 13548 (Mar. 14, 2016).
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    Thus, a complex credit union subject to a risk-based capital 
requirement under the 2015 Final Rule would have to calculate the 
minimum amount of net worth required by both its net worth ratio and 
risk-based capital requirement. First, the net worth ratio requires a

[[Page 72796]]

complex credit union to hold net worth (in dollars) equal to seven 
percent of its total assets. Second, for purposes of computing the MBL 
cap,\66\ the risk-based capital ratio requires a complex credit union 
to hold net worth (in dollars) equal to 10 percent of the credit 
union's risk-weighted assets as calculated under 12 CFR 702.104. The 
complex credit union would then compare the two net worth amounts as 
calculated in the preceding discussion. The credit union would take the 
larger of the two net worth amounts, which is the minimum amount of net 
worth necessary to be well capitalized under either the net worth ratio 
or the risk-based capital ratio and compare that to actual net worth. 
The lesser of these two net worth amounts is used to compute the 
complex credit union's MBL cap, which would be 1.75 times the lesser of 
these two net worth amounts. While the 2015 Final Rule is not yet 
effective, the agency currently implements this approach for the small 
number of complex credit unions that are required to hold more net 
worth under the current risk-based net worth requirement than the net 
worth ratio.
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    \66\ The Board notes that the amount of capital a complex credit 
union needs to be well capitalized under the 2015 Final Rule for PCA 
purposes is a different calculation than the amount of net worth 
required to be well capitalized for purposes of the MBL cap. The 
reason is the 2015 Final Rule permits complex credit unions to 
include several forms of capital for purposes of determining its PCA 
status that do not meet the statutory definition of net worth. The 
MBL cap, however, is limited by statute to net worth.
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    The Board continues to find this approach reflects the correct 
reading of sections 107A and 216 and re-affirms this interpretation 
over any prior interpretation that disregarded the risk-based net worth 
requirement for this purpose.\67\ For complex credit unions, the amount 
to be well capitalized under section 216(c)(1)(A) is seven percent of 
total assets (the net worth ratio) or the amount required by the risk-
based net worth requirement, which could be either the risk-based 
capital ratio under the 2015 Final Rule or the CCULR framework. A 
complex credit union must satisfy both of these requirements to be well 
capitalized under section 216(c)(1)(A), which means that, in section 
107A's terms, the minimum net worth required to be well capitalized is 
the higher of the amount required by the net worth ratio or the risk-
based net worth requirement. The Board finds this is a clear, plain 
language reading of both provisions. Section 107A(a) points to section 
216(c)(1)(A) to determine the minimum net worth required for complex 
credit unions, and in turn, section 216(c)(1)(A) includes both the 
seven percent net worth ratio and the net worth required by any 
applicable risk-based net worth requirement. Reading section 107A(a) to 
exclude the net worth required for complex credit unions under section 
216(c)(1)(A)(ii) would ignore a key component of the plain language of 
section 216(c)(1)(A) contrary to principles of statutory 
interpretation.
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    \67\ Thus, the current language in part 723 remains valid, and 
the Board is not currently adopting any changes to part 723.
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    The Board also finds that even if sections 107A and 216(c)(1)(A) 
were considered ambiguous or unclear, it would interpret them in the 
same way. For instance, the Board observes two key textual indicators 
that Congress did not intend to limit this calculation to the seven 
percent net worth ratio. First, section 107A was enacted in the same 
legislation as section 216. Thus, Congress was aware that section 
216(c)(1)(A) set a seven percent net worth ratio to be well 
capitalized. Yet in section 107A(a), Congress chose not to specify that 
the MBL limitation is determined by the amount of net worth required to 
achieve a seven percent net worth ratio. Instead, Congress provided 
more broadly that the limitation is determined by reference to the 
minimum net worth required under section 216(c)(1)(A). Second, Congress 
could have limited this calculation to the seven percent net worth 
ratio by providing the MBL limitation is determined by reference only 
to the minimum net worth required under section 216(c)(1)(A)(i), which 
would have excluded the risk-based net worth requirement. Instead, 
section 107A points to section 216(c)(1)(A), which encompasses both 
applicable net worth requirements for complex credit unions.
    The Board acknowledges that the Senate Report associated with the 
legislation that enacted sections 107A and 216 refers to the MBL 
limitation as being based on the seven percent net worth ratio in a 
parenthetical statement. A statement by an individual Senator also 
refers to the limitation as being determined by the seven percent net 
worth ratio.\68\ But this discussion in the Senate Report is brief and 
does not touch upon the risk-based net worth requirement or explain how 
the Senate believed the MBL limitation should work for complex credit 
unions, which are subject to additional net worth requirements. In any 
event, this general discussion does not expressly contradict the 
language and structure of sections 107A and 216, which the Board finds 
to be better indicators of the meaning and purpose of these provisions.
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    \68\ S. Rep. No. 105-193 (May 21, 1998), at 5, 10, 29.
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    Applying this approach to the CCULR framework, qualifying complex 
credit unions opting into the CCULR framework would calculate a 
different limitation on MBLs from their current calculation under the 
seven percent net worth ratio. This is because, as discussed previously 
in the Legal Authority section, the CCULR is considered a risk-based 
net worth requirement, and thus falls under section 216(c)(1)(A)(ii) as 
a measure of the minimum net worth required to be well capitalized. 
Accordingly, under the final rule, a qualifying complex credit union 
that opts into the CCULR determines its MBL limitation by reference to 
the amount of net worth required to be well capitalized under the 
CCULR. Complex credit unions that do not qualify or do not opt into the 
CCULR framework determine their MBL limitation by reference to the 10 
percent risk-based capital ratio, as described in the 2016 MBL final 
rule. In either scenario, if a complex credit union has actual net 
worth below those measures, its actual net worth would determine its 
MBL limitation.
2. Capital Adequacy
    Under the 2015 Final Rule, a complex credit union must have a 
process for assessing its overall capital adequacy in relation to its 
risk profile and a comprehensive written strategy for maintaining an 
appropriate level of capital.\69\ While a qualifying complex credit 
union opting into the CCULR framework is required to have a 
comprehensive written strategy for maintaining an appropriate level of 
capital, this strategy may be straightforward and minimally state how 
the credit union intends to comply with the CCULR framework, including 
minimum capital requirements and qualifying criteria. In contrast, 
complex credit unions that do not opt into the CCULR framework will be 
required to have a more detailed written strategy. One commenter 
expressed concern about the subjective nature of this provision, and 
whether the agency has the statutory authority to adopt the provision 
if it would require individual credit unions to hold capital above 
those required by the rule or the FCUA. The Board disagrees. As 
discussed in the 2015 Final Rule, the NCUA has a long-established 
policy that FICUs should hold capital commensurate with the level and 
nature of the risks to which they are exposed. In some cases, this may 
entail holding capital above

[[Page 72797]]

the minimum requirements, depending on the nature of the credit union's 
activities and risk profile. The FCUA grants NCUA broad authority to 
take action to ensure the safety and soundness of credit unions and the 
NCUSIF and to carry out the powers granted to the Board. Requiring 
credit unions to maintain capital adequacy is part of ensuring safety 
and soundness and is not a new concept. This provision is focused on 
the credit union's own process and strategy for assessing and 
maintaining its overall capital adequacy in relation to its risk 
profile and does not affect credit unions' PCA capital category. The 
provision is only intended to support the assessment of capital 
adequacy in the supervisory process, for example when assigning CAMELS 
and risk ratings.\70\
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    \69\ 12 CFR 702.101(b)(2) (effective Jan. 1, 2022).
    \70\ 86 FR 59282 (Oct. 27, 2021). The final rule updating the 
CAMEL system to CAMELS becomes effective April 1, 2022.
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L. Amendments to the 2015 Final Rule

    The Board stated its intent to holistically and comprehensively 
reevaluate the NCUA's capital standards for credit unions in the 2019 
Final Rule. A principal component of this review is the CCULR 
framework. The Board also stated it would consider whether to make more 
substantive revisions to the 2015 Final Rule.\71\ The Board has 
completed this analysis and is including several changes to the 2015 
Final Rule. Each change is discussed in the following sections. The 
proposed changes are generally adopted as final without change.
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    \71\ 84 FR 68781, 68783 (Dec. 17, 2019).
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1. Off-Balance Sheet Exposure Risk Weights
    The 2015 Final Rule states that the risk-weighted amounts for all 
off-balance sheet items \72\ are determined by multiplying the off-
balance sheet exposure amount \73\ by the appropriate credit conversion 
factor and the assigned risk weight. But the definition of off-balance 
sheet items is not aligned with the definition of off-balance sheet 
exposure. Under the 2015 Final Rule, only commitments, loans 
transferred with limited recourse, and loans transferred under the FHLB 
mortgage partnership finance program are provided explicit exposure 
amounts. The rule is silent on the appropriate treatment for the 
remaining items included in the definition of off-balance sheet items, 
for example contingent items, guarantees, certain repo-style 
transactions, financial standby letters of credit, and forward 
agreements. In addition, the 2015 Final Rule does not include a credit 
conversion factor or risk weight for the off-balance sheet items that 
are not provided a specific exposure amount in the definition of off-
balance sheet exposure.
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    \72\ Off-balance sheet items are defined as items such as 
commitments, contingent items, guarantees, certain repo-style 
transactions, financial standby letters of credit, and forward 
agreements that are not included on the statement of financial 
condition, but are normally reported in the financial statement 
footnotes. 12 CFR 702.2 (effective Jan. 1, 2022).
    \73\ Off-balance sheet exposure means: (1) For loans transferred 
under the Federal Home Loan Bank mortgage partnership finance 
program, the outstanding loan balance as of the reporting date, net 
of any related valuation allowance; (2) For all other loans 
transferred with limited recourse or other seller-provided credit 
enhancements and that qualify for true sales accounting, the maximum 
contractual amount the credit union is exposed to according to the 
agreement, net of any related valuation allowance; and (3) For 
unfunded commitments, the remaining unfunded portion of the 
contractual agreement. 12 CFR 702.2 (effective Jan. 1, 2022).
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    The final rule makes several changes to clarify the treatment of 
off-balance sheet items. First, as discussed previously, the final rule 
amends the definition of off-balance sheet exposures. This definition 
is used as one of the CCULR eligibility criteria and is amended to more 
closely align with the other banking agencies' CBLR framework. As a 
consequence of amending the definition of off-balance sheet exposure 
for the CCULR framework, the off-balance sheet exposure definition also 
more closely aligns with the existing definition of off-balance sheet 
items.\74\ Thus, several items currently defined as an off-balance 
sheet item, but not included in the current definition of off-balance 
sheet exposure, are now provided an exposure amount. This change 
reduces ambiguity in the 2015 Final Rule. Further, each item included 
in the definition of off-balance sheet exposure in the final rule is 
provided an explicit credit conversion factor and risk weight for 
purposes of the risk-based capital rule. The Board did not receive any 
comments on the proposed off-balance sheet risk weights and is adopting 
them as final without change. Each change to the risk-based capital 
rule is discussed in detail in the following paragraphs.
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    \74\ The only item included in the current definition of off-
balance sheet item that is not provided an explicit exposure amount 
is contingent items. As discussed subsequently in this preamble, 
however, the Board is amending the definition of off-balance sheet 
item and no longer includes contingent items.
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    The final rule states that unconditionally cancellable commitments 
have a zero percent credit conversion factor. Thus, any unconditionally 
cancellable commitment is excluded from a credit union's risk-based 
capital calculation. Under the 2015 Final Rule, these exposures receive 
a minimum of a 10 percent credit conversion factor and could receive up 
to a 50 percent credit conversion factor. The Board believes that many 
of credit unions' commitments qualify as unconditionally cancellable 
and that credit unions are currently subject to a more conservative 
treatment for unfunded commitments than banking organizations. Thus, 
the Board believes providing a zero percent conversion factor will not 
only make the 2015 Final Rule more comparable to the other banking 
agencies' 2013 capital rule but will also provide a significant burden 
reduction for credit unions calculating their capital adequacy under 
the 2015 Final Rule.
    The 2015 Final Rule does not provide a credit conversion factor for 
financial standby letters of credit. Including an explicit 100 percent 
conversion factor provides parity between the other banking agencies 
and the NCUA. The final rule provides that financial standby letters of 
credit are given a 100 percent credit conversion factor.
    The 2015 Final Rule does not provide a credit conversion factor for 
forward agreements that are not derivative contracts. Including an 
explicit 100 percent conversion factor provides parity between the 
other banking agencies and the NCUA. For forward agreements that are 
not derivative contracts, the final rule provides for a 100 percent 
credit conversion factor.
    The 2015 Final Rule does not provide a credit conversion factor for 
sold credit protection through guarantees or credit derivatives. The 
final rule provides different risk weights for guarantees and credit 
derivatives. Guarantees would receive a 100 percent risk weight. For 
credit derivatives, the risk weight is determined through the 
applicable provisions of the FDIC's capital rules. A credit union 
offering credit protection through a credit derivative risk weights the 
exposure according to 12 CFR 324.34 (for derivatives that are not 
cleared) or 12 CFR 324.35 (for derivatives that are cleared exposures). 
For sold credit protection through guarantees and credit derivatives, 
the final rule provides for a 100 percent credit conversion factor.
    The Board understands the treatment of credit derivatives is 
complex and compliance with these requirements increases the regulatory 
burden for credit unions that offer credit protection through credit 
derivatives. But credit derivatives are complex instruments. And, 
credit derivatives are not a permissible activity for FCUs, and the 
Board believes that state-chartered credit unions should only offer 
credit

[[Page 72798]]

derivatives if the credit union has the appropriate resources and 
capabilities to manage the associated complexity. The Board believes 
any credit union that has offered credit protection through credit 
derivatives should also be capable of complying with the complexity in 
the FDIC's capital rules. Thus, the Board believes it is appropriate to 
reference the other banking agencies' 2013 capital rules when 
determining the appropriate risk weights for credit derivatives.\75\
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    \75\ The Board is adopting these references for consistency and 
believes they are appropriate, but the Board will review these 
references in the future if the FDIC makes changes and will consider 
any adjustments as necessary.
---------------------------------------------------------------------------

    For off-balance sheet securitization exposures, the credit 
conversion factor is 100 percent. The 2015 Final Rule does not 
currently provide a credit conversion factor for the off-balance sheet 
portion of securitization exposures. The risk weight is determined as 
if the exposure is an on-balance sheet securitization exposure. Under 
the 2015 Final Rule, the risk weight for securitization exposures is 
dependent upon whether the exposure is a subordinated or non-
subordinated tranche. Non-subordinated tranches can receive a 100 
percent risk weight (credit unions again have the option to use the 
gross up approach).\76\ In contrast, a subordinated tranche receives a 
1,250 percent risk weight. Credit unions also have the option to use 
the gross-up approach.\77\
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    \76\ 12 CFR 702.104(c)(2)(v)(B)(8) (effective Jan. 1, 2022).
    \77\ 12 CFR 702.104(c)(2)(x) (effective Jan. 1, 2022).
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    The 2015 Final Rule does not provide a credit conversion factor for 
securities borrowing or lending transactions. Including an explicit 100 
percent credit conversion factor provides parity between the other 
banking agencies and the NCUA. Unlike the other banking agencies' 
rules, the final rule includes a risk weight of 100 percent for these 
transactions. The Board is aware this may be a more conservative risk 
weight than for securities borrowing and lending transactions under the 
other banking agencies' 2013 capital rule. For securities borrowing or 
lending transactions, the credit conversion factor is 100 percent.
    The final rule includes a 100 percent risk weight for simplicity. A 
credit union, however, may recognize the credit risk mitigation 
benefits of financial collateral by risk weighting the collateralized 
portion of the exposure under the applicable provisions of 12 CFR 
324.35 or 324.37. Any collateral recognized must meet the definition of 
financial collateral under the other banking agencies 2013 capital 
rules.\78\
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    \78\ See 12 CFR 324.2. Financial collateral means collateral: 
(1) In the form of: (i) Cash on deposit with the FDIC-supervised 
institution (including cash held for the FDIC-supervised institution 
by a third-party custodian or trustee); (ii) Gold bullion; (iii) 
Long-term debt securities that are not resecuritization exposures 
and that are investment grade; (iv) Short-term debt instruments that 
are not resecuritization exposures and that are investment grade; 
(v) Equity securities that are publicly traded; (vi) Convertible 
bonds that are publicly traded; or (vii) Money market fund shares 
and other mutual fund shares if a price for the shares is publicly 
quoted daily; and (2) In which the FDIC-supervised institution has a 
perfected, first-priority security interest or, outside of the 
United States, the legal equivalent thereof (with the exception of 
cash on deposit; and notwithstanding the prior security interest of 
any custodial agent or any priority security interest granted to a 
CCP in connection with collateral posted to that CCP).
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    The final rule also includes a specific credit conversion factor 
and risk weight for the off-balance sheet exposure amount of repurchase 
transactions.\79\ Under the final rule, the off-balance sheet exposure 
amount for a repurchase transaction equals all of the positions the 
credit union has sold or bought subject to repurchase or resale, which 
equals the sum of the current fair values of all such positions. The 
off-balance sheet exposure amounts of repurchase transactions are not 
provided a credit conversion factor under the 2015 Final Rule. The 
final rule provides a 100 percent risk weight for the off-balance sheet 
exposure amounts of repurchase transactions. A credit union may 
recognize the credit risk mitigation benefits of financial collateral, 
as defined by 12 CFR 324.2, by risk weighting the collateralized 
portion of the exposure under the applicable provisions of 12 CFR 
324.35 or 324.37.\80\
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    \79\ Repurchase transactions means either a transaction in which 
a credit union agrees to sell a security to a counterparty and to 
repurchase the same or an identical security from that counterparty 
at a specified future date and at a specified price or a transaction 
in which an investor agrees to purchase a security from a 
counterparty and to resell the same or an identical security to that 
counterparty at a specified future date and at a specified price.
    \80\ The Board is adopting references to the FDIC's regulations 
for consistency and believes that these references are appropriate, 
but the Board will review these references in the future if the FDIC 
makes changes and will consider any adjustments as necessary.
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    The Board notes that repurchase transactions are not included in 
the definition of off-balance sheet exposure. This exclusion of 
repurchase transactions from the definition of off-balance sheet 
exposure is because the other banking agencies did not include 
repurchase transactions in their related measure of CBLR and the 
definition of off-balance sheet exposure is used for purposes of the 
CCULR eligibility criteria.\81\
---------------------------------------------------------------------------

    \81\ 12 CFR 324.12(a)(2)(iii).
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    Even though, for purposes of the CCULR framework, repurchase 
transactions are excluded from the off-balance sheet criterion, the 
Board believes that the off-balance sheet portion of repurchase 
transactions should be risk-weighted under the risk-based capital 
ratio. First, repurchase transactions are included in the current 
definition of off-balance sheet items. Second, the other banking 
agencies risk-weight the off-balance sheet portion of repurchase 
transactions in their risk-based capital framework.\82\
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    \82\ 12 CFR 324.33(b)(4)(ii).
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    The Board, however, does not believe that repurchase transactions 
are a material exposure for credit unions. As of June 30, 2021, there 
are 26 complex credit unions with repurchase transactions on their 
balance sheets. Thus, the final rule includes the off-balance sheet 
portion of repurchase transactions for purposes of risk-based capital, 
even though such transactions are not included as part of the off-
balance sheet eligibility criteria under the CCULR framework.\83\
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    \83\ The final rule also revises the definition of off-balance 
sheet items. The definition of off-balance sheet items includes off-
balance sheet exposures and the off-balance sheet exposure amount of 
repurchase transactions. This change is necessary to ensure 
repurchase transactions are not included as part of the off-balance 
sheet criteria for eligibility in the CCULR framework.
---------------------------------------------------------------------------

    Finally, the final rule includes a ``catchall'' category. Under the 
final rule, all other off-balance sheet exposures not explicitly 
provided a credit conversion factor or risk weight that meet the 
definition of a commitment are given a credit conversion factor of 100 
percent and a risk weight of 100 percent. The Board believes a catchall 
category is necessary given that the definition of commitment is broad. 
Commitments include any legally binding arrangement that obligates the 
credit union to extend credit, purchase or sell assets, enter into a 
borrowing agreement, or enter into a financial transaction.\84\ To 
ensure all off-balance sheet exposures that met the definition of 
commitment are provided a credit conversion factor and risk weight, the 
final rule includes a new catchall category for such exposures.
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    \84\ 12 CFR 702.2 (effective Jan. 1, 2022).
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2. Asset Securitizations Issued by Complex Credit Unions
    The 2019 Supplemental Rule included asset securitizations as one of 
the reasons the Board sought a holistic reevaluation of the 2015 Final 
Rule. The Board has further considered asset

[[Page 72799]]

securitizations issued by credit unions and has decided to amend the 
2015 Final Rule to explicitly address credit union issued 
securitizations.
    The proposed rule required credit unions that issue securitizations 
to use the other banking agencies' 2013 capital rules when determining 
whether assets transferred in connection with a securitization are 
excluded from risk-based capital. The Board reviewed these standards 
and found they would be appropriate as applied to credit union 
securitizations, with the minor differences noted below. Specifically, 
under the final rule, a credit union must follow the requirements of 
the applicable provisions of 12 CFR 324.41 when it transfers exposures 
in connection with a securitization. A credit union may only exclude 
the transferred exposures from the calculation of its risk-weighted 
assets if each condition in 12 CFR 324.41 is satisfied. The conditions 
for traditional securitizations in 12 CFR 324.41 are as follows 
(adapted for credit unions):

    (1) The exposures are not reported on the credit union's 
consolidated balance sheet under GAAP;
    (2) The credit union has transferred to one or more third 
parties credit risk associated with the underlying exposures;
    (3) Any clean-up calls relating to the securitization are 
eligible clean-up calls (a defined term under the other banking 
agencies' 2013 capital rules); \85\ and
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    \85\ Under the other banking agencies' 2013 capital rules, 
eligible clean-up call means a clean-up call that: (1) Is 
exercisable solely at the discretion of the originating institution 
or servicer; (2) is not structured to avoid allocating losses to 
securitization exposures held by investors or otherwise structured 
to provide credit enhancement to the securitization; and (3)(i) for 
a traditional securitization, is only exercisable when 10 percent or 
less of the principal amount of the underlying exposures or 
securitization exposures (determined as of the inception of the 
securitization) is outstanding; or (ii) for a synthetic 
securitization, is only exercisable when 10 percent or less of the 
principal amount of the reference portfolio of underlying exposures 
(determined as of the inception of the securitization) is 
outstanding.
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    (4) The securitization does not:
    (i) Include one or more underlying exposures in which the 
borrower is permitted to vary the drawn amount within an agreed 
limit under a line of credit; and
    (ii) Contain an early amortization provision.

    A credit union that meets the conditions, but retains any credit 
risk for the transferred exposures, must hold risk-based capital 
against the credit risk it retains in connection with the 
securitization.
    The other banking agencies' 2013 rule includes conditions for both 
traditional securitizations and synthetic securitizations.\86\ The 
Board believes almost all securitizations issued by credit unions would 
be traditional securitizations and subject to the conditions in 12 CFR 
324.41(a). The Board does not believe that credit unions are likely to 
engage in synthetic securitizations; however, if a credit union issues 
a synthetic securitization, it is subject to the conditions in 12 CFR 
324.41(b).
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    \86\ Under the other banking agencies' 2013 capital rule, a 
synthetic securitization means a transaction in which: (1) All or a 
portion of the credit risk of one or more underlying exposures is 
retained or transferred to one or more third parties through the use 
of one or more credit derivatives or guarantees (other than a 
guarantee that transfers only the credit risk of an individual 
retail exposure); (2) The credit risk associated with the underlying 
exposures has been separated into at least two tranches reflecting 
different levels of seniority; (3) Performance of the securitization 
exposures depends upon the performance of the underlying exposures; 
and (4) All or substantially all of the underlying exposures are 
financial exposures (such as loans, commitments, credit derivatives, 
guarantees, receivables, asset-backed securities, mortgage-backed 
securities, other debt securities, or equity securities). See, 12 
CFR 324.2.
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    The Board also notes that 12 CFR 324.41(c) includes explicit due 
diligence requirements for banking organizations' investments in 
securitizations. The Board is not currently adopting these 
requirements. The final rule only references 12 CFR 324.41 to 
incorporate the factors a credit union must consider when excluding 
assets transferred in connection with a securitization from risk-
weighted assets. The Board intends to use its supervisory authority to 
monitor securitizations for safety and soundness purposes and is not 
currently adopting any new regulatory requirements for such 
transactions.
    The other banking agencies' 2013 capital rule has an explicit 
treatment for any gain-on-sale in connection with a securitization 
exposure and any credit-enhancing interest only strips (CEIOs) retained 
by a banking organization that do not qualify as a gain-on-sale. Any 
gain-on-sale in connection with a securitization exposure is deducted 
from a banking organization's common equity tier 1 capital.\87\ CEIOs 
that do not qualify as a gain-on-sale are given a 1,250 percent risk 
weight.\88\ The other banking agencies provided punitive treatments for 
these exposures because of historical supervisory concerns with the 
subjectivity involved in valuations of gains-on-sale and CEIOs. And 
though the treatments for gains-on-sale and CEIOs can increase an 
originating banking organization's risk-based capital requirement 
following a securitization, the other banking agencies believe that 
such anomalies are rare where a securitization transfers significant 
credit risk to third parties.
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    \87\ See, 12 CFR 324.22(a)(4) and 12 CFR 324.42(a)(1).
    \88\ See, 12 CFR 324.42(a)(1).
---------------------------------------------------------------------------

    The 2015 Final Rule does not include specific treatments for gain-
on-sales or CEIOs because, as discussed previously, in 2015 credit 
unions had not issued any securitizations. Under the 2015 Final Rule, 
however, most CEIOs would still receive a 1,250 percent risk weight 
because they constitute a subordinated tranche, but the 2015 Final Rule 
permits a credit union to use the gross-up approach as an alternative. 
The Board believes that credit union-issued securitizations should be 
given a similar capital treatment under the 2015 Final Rule as under 
the other banking agencies' risk-based capital rule.
    Thus, the final rule includes a specific risk weight for certain 
exposures associated with securitization activities. While the Board 
believes the capital treatment for credit union-issued securitizations 
should be akin to bank-issued securitizations, the final rule is 
slightly different than the other banking agencies' 2013 risk-based 
capital rule for simplicity. Under the final rule, the gain-on-sale 
amount from a securitization transaction, generally the CEIO, will be 
included in the numerator in calculating a credit union's net worth. 
This is a different approach than the other banking agencies' rule, 
which excludes gains-on-sale in calculating a bank's common equity tier 
1 capital. Instead, the Board has chosen to address the risks 
associated with a gain-on-sale amount by requiring that a 1,250 percent 
risk weighting be applied to retained non-security beneficial 
interests.
    One commenter specifically supported the securitization framework, 
which generally references the capital rule of the other banking 
agencies. Another commenter questioned why the Board did not adopt the 
entirety of the other banking agencies' framework and recommended 
granting complex credit unions the option to use the gross-up approach 
for risk weighting non-security beneficial interest of a 
securitization. The commenter stated that this would ensure that credit 
unions have at least the same flexibility as non-advanced approaches 
banks. The other banking agencies do not permit the use of the gross-up 
approach for a securitization gain-on-sale, and require the full 
deduction of the gain-on-sale from the tier 1 capital numerator.\89\ 
Further, the Board believes its approach is simpler and provides a more 
conservative overall risk weight. The Board believes this approach is 
warranted given the limited

[[Page 72800]]

securitizations issued by credit unions at this time.
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    \89\ 12 CFR 324.22(a)(4).
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    Under the final rule, a non-security beneficial interest is defined 
as the residual equity interest in the special purpose entity that 
represents a right to receive possible future payments after specified 
payment amounts are made to third-party investors in the securitized 
receivables. Thus, under the final rule, if a credit union has a non-
security beneficial interest, such as a CEIO or cash collateral 
account, it cannot be risk-weighted with the gross-up approach and 
instead would be given a 1,250-risk weight. The Board believes this 
treatment is akin to the treatment provided by the other banking 
agencies in their 2013 risk-based capital rule.
    The Board notes that subordinate tranches, either retained by the 
securitization sponsor or offered to investors as securities, that are 
also senior in payment priority to the non-security beneficial 
interest, can be risk-weighted using the gross-up approach.
    The Board also notes that although the final rule is currently 
adopting the FDIC's approach to securitization through a cross 
reference, as with other FDIC provisions referenced elsewhere in this 
final rule, the Board will review the FDIC's treatment of 
securitizations in the future if it makes changes and will consider any 
adjustments as necessary.
3. Mortgage Servicing Assets
    The Board proposed to amend 12 CFR 702.104(b), risk-based capital 
numerator, to deduct mortgage servicing assets that exceed 25 percent 
of the sum of the capital elements in 12 CFR 702.104(b)(1), less 
deductions required under 12 CFR 702.104(b)(2)(i) through (iv) of this 
section. A few commenters did not support the proposed deduction of 
MSAs. One commenter noted that CCULR lacks a comparable restriction and 
the risk-based capital rule is primarily designed for credit risk and 
not operational or market risk.
    The Board is not making changes in response to the commenters.
    The Board is including a deduction to the risk-based capital 
numerator for MSAs that exceed 25 percent of the risk-based capital 
numerator for two primary reasons. First, this change will make the 
NCUA's risk-based capital calculation more consistent with the other 
banking agencies' revised risk-based capital rules as the other banking 
agencies simplified their MSA calculation post-issuance of the 2015 
Final Rule.\90\ Under the other banking agencies' revised risk-based 
capital rule, banking organizations deduct MSAs that exceed 25 percent 
of the banking organization's common equity tier 1 capital.\91\ The 
Board believes the simplification of the other banking agencies' 
approach allows the NCUA to be consistent with the other banking 
agencies' risk-based capital rule. Also, the Board believes it is 
important to implement prudential conditions around MSAs as the Board 
is considering a final rule to amend parts 703 and 721 to allow FCUs to 
purchase mortgage servicing rights \92\ from other FICUs.\93\ This rule 
may potentially increase MSA holdings for complex credit unions.
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    \90\ 84 FR 35234 (July 22, 2019).
    \91\ 12 CFR 324.22(d).
    \92\ The terms mortgage servicing rights and MSAs are used 
interchangeably.
    \93\ 85 FR 86867 (Dec. 31, 2020).
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    The Board believes that, by including a deduction to the risk-based 
capital numerator for MSAs in risk-based capital, complex credit unions 
will be encouraged to avoid excessive exposures in MSAs relative to the 
other risks on their balance sheets. As mentioned in the preamble of 
the 2015 Final Rule, the risks of MSAs contribute to a high level of 
uncertainty regarding the ability of credit unions to realize value 
from these assets. Thus, the Board believes it is appropriate to add 
the risk-based numerator deduction to address the potential of complex 
credit unions purchasing MSAs from other FICUs.
    The treatment would not have an immediate effect on complex credit 
unions. As of June 30, 2021, the largest concentration in MSAs held by 
complex credit unions was just under 12 percent of the credit union's 
net worth. While net worth and the risk-based capital numerator are 
different calculations, the two calculations are similar enough to 
state, with a high degree of certainty, there are no complex credit 
unions as of June 30, 2021, that would be required to deduct MSAs from 
the risk-based capital numerator.
    Finally, the Board is aware that some commenters believe deducting 
exposures of MSAs over 25 percent of their risk-based capital numerator 
is punitive. The Board notes both the Board and other banking agencies 
have stated that MSAs have a relatively high level of uncertainty 
regarding the ability to both value and realize value from these 
assets.\94\ The Board also believes including the MSA deduction from 
the risk-based capital numerator is prudent for potential balance 
sheets complex credit union may have in the future.
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    \94\ Report to Congress on the Effect of Capital Rules on 
Mortgage Servicing Assets, Report to the Congress on the Effect of 
Capital Rules on Mortgage Servicing Assets, June 2016, available at 
https://www.federalreserve.gov/publications/other-reports/files/effect-capital-rules-mortgage-servicing-assets-201606.pdf.
---------------------------------------------------------------------------

    To determine if a complex credit union would be subject to the MSA 
deduction from the risk-based capital numerator, the complex credit 
union first needs to calculate the risk-based capital numerator before 
the MSA deduction. This calculation is in the 2015 Final Rule and 
requires the complex credit union add all the capital elements of the 
risk-based capital numerator and subtract all risk-based capital 
numerator deductions, not including the MSA deduction. The complex 
credit union would then determine if its MSA exposure exceeds 25 
percent of the previous calculation. If its MSAs do not exceed 25 
percent, the previous calculation is the risk-based capital numerator. 
If its MSAs exceed 25 percent, the complex credit union will need to 
deduct the amount of MSAs that exceed 25 percent from the previous 
calculation. All MSA exposures that are not deducted from the risk-
based capital numerator are risk-weighted in the risk-based capital 
denominator at 250 percent.
4. Supranational Organizations and Multilateral Development Banks
    The Board proposed amending the risk-based capital rule to assign a 
risk weighting of zero percent to an obligation of the Bank for 
International Settlements, the European Central Bank, the European 
Commission, the International Monetary Fund, the European Stability 
Mechanism, the European Financial Stability Facility, and multilateral 
development banks (MDBs). The 2015 Final Rule did not specifically 
discuss MDBs, which would have a risk weight of 100 percent under the 
catchall category for all other assets not specifically assigned a risk 
weight.\95\ Assigning a risk-weight of zero percent is consistent with 
the other banking agencies' risk-based capital rule and the Board 
believes the zero percent risk weight is appropriate due to the 
generally high-credit quality of the issuers. A few commenters 
specifically supported the zero percent risk weight for supranational 
entities, and none opposed it. The Board is finalizing this provision 
without change. The Board notes that MDBs are not permissible 
investments for FCUs under the general investment authorities but may 
be permissible for federally insured, state-chartered credit unions 
under state investment authorities. But FCUs may invest in MDBs under 
12 CFR 701.19

[[Page 72801]]

and 721.3(b), subject to some conditions.
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    \95\ 12 CFR 702.104(c)(2)(v)(C) (effective Jan. 1, 2022).
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5. Paycheck Protection Program Loans
    As discussed previously in connection with the other banking 
agencies' CBLR regulation, the CARES Act was enacted in 2020 to provide 
aid to the U.S. economy during COVID-19.\96\ The CARES Act authorized 
the Small Business Administration (SBA) to create a loan guarantee 
program, the Paycheck Protection Program (PPP), to help certain 
affected businesses meet payroll needs and utilities as a result of 
COVID-19, including employee salaries, sick leave, other paid leave, 
and health insurance expenses. Provided credit union lenders comply 
with the applicable lender obligations set forth in the SBA's interim 
final rule, the SBA fully guaranteed loans issued under the PPP. Most 
FICUs were eligible to make PPP loans to members. Under the CARES Act, 
PPP loans must receive a zero percent risk weighting under the NCUA's 
risk-based capital requirements.\97\
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    \96\ Public Law 116-136 (Mar. 27, 2020).
    \97\ Public Law 116-136, 134 Stat. 281 (Mar. 27, 2020)
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    The NCUA issued a 2020 interim final rule to explicitly state that 
PPP loans under the risk-based net worth requirement receive a zero 
percent risk-weight.\98\ The 2020 interim final rule stated the NCUA's 
risk-based capital regulations would be amended in the future. The 
Board proposed to update the 2015 Final Rule to reflect that PPP loans 
receive a zero percent risk weight. No comments were received on this 
proposed change and the Board is now finalizing it as proposed.
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    \98\ 85 FR 23212 (Apr. 27, 2020).
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6. Updates to Derivative-Related Definitions
    The Board recently amended its rule on derivatives to modernize the 
rule and make it more principles-based while retaining key safety and 
soundness components.\99\ The rulemaking amended several defined terms 
that are also included in the 2015 Final Rule. For consistency, the 
proposed rule updated those definitions that are also included in the 
2015 Final Rule. The Board received no comments on these changes and is 
now finalizing it without additional change. First, under the final 
rule, the term derivative is defined as ``a financial contract that 
derives its value from the value and performance of some other 
underlying financial instrument or variable, such as an index or 
interest rate.'' \100\ Second, the rule makes minor changes to the 
definitions of a derivative clearing organization and swap dealer by 
including a more general reference to the Commodity Futures Trading 
Commission (CFTC)'s regulations. For both definitions, the 2015 Final 
Rule references the definitions used by the CFTC.\101\ The Board is 
adopting references to the CFTC regulations for consistency and 
believes these definitions appropriately define the terms, but the 
Board will review these references in the future if the CFTC makes 
changes and will adjust as necessary.
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    \99\ 86 FR 28241 (May 26, 2021).
    \100\ The 2015 Final Rule defines a derivative contract as ``a 
financial contract whose value is derived from the values of one or 
more underlying assets, reference rates, or indices of asset values 
or reference rates. Derivative contracts include interest rate 
derivative contracts, exchange rate derivative contracts, equity 
derivative contracts, commodity derivative contracts, and credit 
derivative contracts. Derivative contracts also include unsettled 
securities, commodities, and foreign exchange transactions with a 
contractual settlement or delivery lag that is longer than the 
lesser of the market standard for the particular instrument or five 
business days.'' 12 CFR 702.2 (effective Jan. 1, 2022).
    \101\ The 2015 Final Rule states a derivative clearing 
organization is ``as defined by the Commodity Futures Trading 
Commission in 17 CFR 1.3(d).'' The final rule defines a derivative 
clearing organization ``as defined by the Commodity Futures Trading 
Commission (CFTC) in 17 CFR 1.3.'' Essentially the final rule 
removes the ``(d)''. Similarly, the more specific reference in the 
2015 Final Rule is updated with the more general reference included 
in the recent derivative rule.
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7. Definitions of Consumer Loan and Current
    The Board proposed to amend the definitions for Consumer Loan and 
Current in 12 CFR 702.2. The Board received no comments on this 
proposed change and is now finalizing it without change. The Board is 
amending these definitions to clarify the 2015 Final Rule. The 2015 
Final Rule does not include leases in the definition of Consumer Loan, 
although the 2014 Risk-Based Capital notice of proposed rulemaking 
stated ``[c]onsumer loans (unsecured credit card loans, lines of 
credit, automobile loans, and leases) are generally highly desired 
credit union assets and a key element of providing basic financial 
services.'' \102\ Without this change the treatment of consumer leases 
is unclear and, thus, may be risk-weighted in the catchall category of 
100 percent. The change makes clear that consumer leases receive a 75 
percent risk weight. Due to the amendment in the definition of a 
consumer loan, the definition of current is also amended for 
consistency and includes the term leases.
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    \102\ 79 FR 11184, 11198 (Feb. 27, 2014).
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8. Treatment of Goodwill in the 2015 Final Rule
    The 2015 Final Rule requires complex credit unions to deduct 
goodwill \103\ from the risk-based capital numerator. The proposed rule 
did not include any changes to the deduction of goodwill under the 2015 
Final Rule. The proposed rule, however, asked about the advantages and 
disadvantages of deducting goodwill from regulatory capital under the 
2015 Final Rule. The proposed rule also asked commenters whether not 
deducting goodwill from regulatory capital would adequately protect the 
NCUSIF in the event of a failure and liquidation given that goodwill is 
not a tangible asset. Several commenters urged the agency to permit 
credit unions to include goodwill in the risk-based capital numerator. 
One commenter stated that deducting supervisory goodwill restricts 
growth and decreases the likelihood that a healthy, well-capitalized 
credit union will assist with a supervisory merger of an under-
capitalized credit union. Another commenter said the deduction 
penalizes credit unions that have just gone through a merger.
---------------------------------------------------------------------------

    \103\ Note that under the 2015 Final Rule, the term goodwill 
does not include excluded goodwill. See, 12 CFR 702.2 (effective 
Jan. 1, 2022).
---------------------------------------------------------------------------

    Under the 2015 Final Rule, the Board permitted credit unions to 
exclude certain goodwill and other intangible assets from the deduction 
in the numerator that occurred on or before December 28, 2015. The 
proposed rule asked whether this date should be updated considering the 
subsequent delays to the risk-based capital rule. A few commenters 
encouraged the agency to alleviate any potential confusion by amending 
this date. Several commenters suggested grandfathering all goodwill 
prior the effective date of the CCULR framework or the risk-based 
capital framework. Another commenter recommended establishing a formal 
approval process for grandfathered goodwill with required criteria such 
as annual goodwill impairment testing. Another commenter stated that 
the relief provided by the original 13-year period, in which 
grandfathered goodwill is not deducted, has been diminished due to the 
delayed effective date for the risk-based capital rule.
    As discussed previously, in response to comments about the proposed 
treatment of goodwill, the Board has made two changes in the final 
rule. The first change modifies the CCULR qualifying criteria by not 
including excluded goodwill and excluded other intangible assets as 
part of the calculation of the two percent qualifying

[[Page 72802]]

criteria. This change aligns the treatment of goodwill in CCULR with 
the treatment in risk-based capital. For additional discussion on this 
change, see Section B. Qualifying Complex Credit Unions.
    The final rule also amends the treatment of goodwill under the 2015 
Final Rule. Specifically, the final rule removes the 2029 sunset date 
for excluded goodwill and excluded other intangible assets. Under the 
final rule, credit unions will not be required to deduct excluded 
goodwill from the risk-based capital numerator, even after January 1, 
2029. Credit unions would not be required to deduct other intangible 
assets such as core deposit intangible, member relationship intangible, 
or trade name intangible originating from a supervisory merger or 
combination that was completed on or before December 28, 2015. The 
Board believes credit unions that previously supported the NCUSIF by 
assisting in supervisory mergers should not be penalized for these 
decisions. Specifically, the Board is amending the 2015 Final Rule in 
response to commenters' concerns relating to the deduction of excluded 
goodwill from the risk-based capital numerator after the completion of 
supervisory mergers. The Board does not believe the subsequent change 
in capital treatment will unduly penalize credit unions.

M. Technical Amendments

    The final rule includes several technical amendments to part 702, 
including some discussed in the proposed rule and others that the Board 
has identified in finalizing this rule. First, the definition of total 
assets in 12 CFR 702.2 is amended to carry forward the PPP-related 
change made in the 2020 interim final rule. Specifically, under the 
final rule, the definition of total assets would be amended to 
explicitly state that PPP loans pledged to the Federal Reserve Board's 
PPP Lending Facility to support PPP lending are excluded from the 
definition of total assets.\104\ This 2020 interim final rule made this 
change to the definition of total assets in the currently effective 
version of 12 CFR 702.2, but did not make the change to the definition 
of total assets as implemented by the 2015 Final Rule. This technical 
correction will ensure the definition carries past 2021 as intended. 
The definition will also include an amended citation. The 2015 Final 
Rule stated that, for each quarter, a credit union must elect one of 
the measures of total assets to apply except for 12 CFR 702.103 through 
702.106 (risk-based capital requirement). The exception should be for 
12 CFR 702.103 through 702.105. This change has been made in the final 
rule.
---------------------------------------------------------------------------

    \104\ Specifically, the 2020 interim final rule updated the 
currently effective Sec.  702.2 and the definition of total assets, 
however, the interim final rule did not update the definition of 
total assets that will be effective January 1, 2022.
---------------------------------------------------------------------------

    The second technical amendment adjusts the definition of the net 
worth ratio from the 2015 Final Rule. The change clarifies that the net 
worth ratio is rounded to two decimal places, but the rounding occurs 
only after the ratio is expressed as percentage.
    The final rule also includes two technical amendments to 12 CFR 
part 703 that were included in the proposed rule. Both amendments make 
minor corrections related to the 2015 Final Rule. The Board received no 
comment on the proposed amendments and is finalizing them without 
change.

N. Other Comments Beyond the Scope of the Proposed Rule

    Several commenters offered recommendations that went beyond the 
scope of the proposed changes to the 2015 Final Rule. For example, 
several commenters recommended the Board consider rescinding or 
delaying the 2015 Final Rule. The Board continues to believe the 
current risk-based net worth standards have weaknesses and revised 
standards with enhanced risk sensitivity are appropriate for complex 
credit unions. The Board is not currently rescinding the 2015 Final 
Rule. Delaying the 2015 Final Rule is also outside the scope of the 
proposed rule, which did not discuss amending the effective date of the 
2015 Final Rule. Also, the Board continues to believe that a delay to 
the effective date of the 2015 Final Rule is unnecessary, as discussed 
previously.
    Another commenter recommended the Board consider refinements to the 
subordinated debt framework contemporaneously with changes to the risk-
based capital rule. Neither the subordinated debt final rule nor the 
2015 Final Rule are yet effective. The Board will separately monitor 
implementation of the subordinated rule and consider any appropriate 
changes in the future.
    Other commenters urged the Board to eliminate the higher risk-
weighting for concentrations of first-lien mortgages, junior-lien 
mortgages, MSAs, and commercial loans. One commenter stated these 
concentration limits are not generally comparable to the risk-based 
capital rules of the other banking agencies or the Basel Framework. One 
commenter requested investments in CUSOs be risk-weighted at no more 
than 100 percent. Another commenter stated MSAs should not be subject 
to a higher risk weight under the risk-based capital rule, which is 
currently 250 percent. The commenter recommended 150 percent. The Board 
believes these recommendations are beyond the scope of the proposed 
rule. As discussed previously, amendments to risk-weights can be 
considered anytime in the future by the Board, or during the Board's 
regular process to review regulations every three years.

V. Regulatory Procedures

A. Regulatory Flexibility Act

    The Regulatory Flexibility Act \105\ requires the NCUA to prepare 
an analysis describing any significant economic impact a regulation may 
have on a substantial number of small entities (primarily those under 
$100 million in assets).\106\ This final rule affects only credit 
unions with over $500 million in assets, which are subject to the 2015 
Final Rule and the 2018 Supplemental Rule when they go into effect in 
January 2022. As a result, credit unions with under $100 million in 
total assets would not be affected by this final rule. Accordingly, the 
NCUA certifies this final rule does not have a significant economic 
impact on substantial number of small credit unions.
---------------------------------------------------------------------------

    \105\ 5 U.S.C. 601 et seq.
    \106\ 5 U.S.C. 603(a).
---------------------------------------------------------------------------

B. 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 amends an existing burden. For purposes of the PRA, a 
paperwork burden may take the form of a reporting, disclosure or 
recordkeeping requirement, each referred to as an information 
collection. The final rule will revise existing information collection 
requirements to the Call Report (Office of Management and Budget 
control number 3133-0004). These revisions will be addressed in a 
separate Federal Register notice and will be submitted for approval by 
the Office of Information and Regulatory Affairs at the Office of 
Management and Budget.

C. Executive Order 13132 on Federalism

    Executive Order 13132 encourages independent regulatory agencies to 
consider the impact of their actions on state and local interests.\107\ 
The NCUA, an independent regulatory agency, as defined in 44 U.S.C. 
3502(5), voluntarily complies with the executive order to

[[Page 72803]]

adhere to fundamental federalism principles. The final rule applies to 
all federally insured natural-person credit unions, including federally 
insured, state-chartered natural-person credit unions. Accordingly, the 
Final Rule 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. The Board believes this impact is minor, and it is an 
unavoidable consequence of executing the statutory mandate to adopt a 
system of PCA to apply to all federally insured, natural-person credit 
unions. The NCUA has consulted with representatives of state regulators 
regarding the impact of the final rule during the rulemaking process.
---------------------------------------------------------------------------

    \107\ 64 FR 43255 (Aug. 4, 1999).
---------------------------------------------------------------------------

D. Assessment of Federal Regulations and Policies on Families

    The NCUA has determined that this rule would 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).

E. Small Business Regulatory Enforcement Fairness Act

    The Small Business Regulatory Enforcement Fairness Act of 1996 
(SBREFA) generally provides for congressional review of agency 
rules.\108\ A reporting requirement is triggered in instances where the 
NCUA issues a final rule as defined in the Administrative Procedure 
Act.\109\ Besides being subject to congressional oversight, an agency 
rule may also be subject to a delayed effective date if it is a ``major 
rule.'' As required by SBREFA, the NCUA will submit this final rule to 
the Office of Management and Budget for it to determine if it is a 
``major rule'' for purposes of SBREFA. The NCUA also will file 
appropriate reports with Congress and the Government Accountability 
Office so this rule may be reviewed.
---------------------------------------------------------------------------

    \108\ 5 U.S.C. 551.
    \109\ Id.
---------------------------------------------------------------------------

F. Administrative Procedure Act

    The Administrative Procedure Act typically requires a 30-day 
delayed effective date, except for (1) substantive rules which grant or 
recognize an exemption or relieve a restriction; (2) interpretative 
rules and statements of policy; or (3) as otherwise provided by the 
agency for good cause.\110\ Because qualifying complex credit unions 
that opt into the CCULR framework under the final rule are exempt from 
compliance with the 2015 Final Rule, the final rule is exempt from the 
Administrative Procedure Act's delayed effective date requirement.
---------------------------------------------------------------------------

    \110\ 5 U.S.C. 553(d).
---------------------------------------------------------------------------

List of Subjects

12 CFR Part 702

    Credit unions, Reporting and recordkeeping requirements.

12 CFR Part 703

    Credit unions, Investments, Reporting and recordkeeping 
requirements.

    By the National Credit Union Administration Board on December 
16, 2021.
Melane Conyers-Ausbrooks,
Secretary of the Board.

    For the reasons stated in the preamble, the NCUA amends 12 CFR 
parts 702 and 703, as follows:

PART 702--CAPITAL ADEQUACY

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

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


0
2. Amend Sec.  702.2 by:
0
a. Adding in alphabetical order the definitions of ``CCULR'';
0
b. Revising the definition of ``Consumer Loan'',
0
c. Adding in alphabetical order the definition of ``Credit 
derivative'';
0
d. Revising the definitions of ``Current'', ``Derivative contract'', 
``Derivatives Clearing Organization'', ``Excluded goodwill'', 
``Excluded other intangible assets'';
0
e. Adding in alphabetical order the definitions of ``Forward 
agreement'', ``Multilateral development bank'';
0
f. Revising the definition of ``Net worth ratio'';
0
g. Adding in alphabetical order the definition of ``Non-security 
beneficial interest'';
0
h. Revising the definition of ``Off-balance sheet exposure'', ``Off-
balance sheet items'';
0
i. Adding in alphabetical order the definition of ``Repurchase 
transaction,''
0
j. Revising the definitions of ``Swap dealer'', and ``Total assets''; 
and
0
k. Adding in alphabetical order the definitions ``Trading assets'', 
``Trading liabilities'', and ``Unconditionally cancelable''.
    The revisions and additions read as follows:


Sec.  702.2   Definitions.

* * * * *
    CCULR means the complex credit union leverage ratio. It is 
calculated in the same manner as the net worth ratio under Sec.  702.2.
* * * * *
    Consumer loan means a loan or lease for household, family, or other 
personal expenditures, including any loans or leases that, at 
origination, are wholly or substantially secured by vehicles generally 
manufactured for personal, family, or household use regardless of the 
purpose of the loan or lease. Consumer loan excludes commercial loans, 
loans to CUSOs, first- and junior-lien residential real estate loans, 
and loans for the purchase of one or more vehicles to be part of a 
fleet of vehicles.
* * * * *
    Credit derivative means a financial contract executed under 
standard industry credit derivative documentation that allows one party 
(the protection purchaser) to transfer the credit risk of one or more 
exposures (reference exposure(s)) to another party (the protection 
provider) for a certain period of time.
* * * * *
    Current means, with respect to any loan or lease, that the loan or 
lease is less than 90 days past due, not placed on non-accrual status, 
and not restructured.
* * * * *
    Derivative contract means a financial contract that derives its 
value from the value and performance of some other underlying financial 
instrument or variable, such as an index or interest rate.
    Derivatives Clearing Organization has the meaning as defined by the 
Commodity Futures Trading Commission (CFTC) in 17 CFR 1.3.
* * * * *
    Excluded goodwill means the outstanding balance, maintained in 
accordance with GAAP, of any goodwill originating from a supervisory 
merger or combination that was completed on or before December 28, 
2015.
    Excluded other intangible assets means the outstanding balance, 
maintained in accordance with GAAP, of any other intangible assets such 
as core deposit intangible, member relationship intangible, or trade 
name intangible originating from a supervisory merger or combination 
that was completed on or before December 28, 2015.
* * * * *
    Forward agreement means a legally binding contractual obligation to 
purchase assets with certain drawdown at a specified future date, not 
including commitments to make residential mortgage loans or forward 
foreign exchange contracts.
* * * * *
    Multilateral development bank (MDB) means the International Bank 
for

[[Page 72804]]

Reconstruction and Development, the Multilateral Investment Guarantee 
Agency, the International Finance Corporation, the Inter-American 
Development Bank, the Asian Development Bank, the African Development 
Bank, the European Bank for Reconstruction and Development, the 
European Investment Bank, the European Investment Fund, the Nordic 
Investment Bank, the Caribbean Development Bank, the Islamic 
Development Bank, the Council of Europe Development Bank, and any other 
multilateral lending institution or regional development bank in which 
the U.S. government is a shareholder or contributing member.
* * * * *
    Net worth ratio means the ratio of the net worth of the credit 
union to the total assets of the credit union, expressed as a 
percentage rounded to two decimal places.
* * * * *
    Non-security beneficial interest is defined as the residual equity 
interest in the Special Purpose Entity (SPE) that represents a right to 
receive possible future payments after specified payment amounts are 
made to third-party investors in the securitized receivables. For 
purposes of this definition, a SPE means a trust, bankruptcy remote 
entity or other special purpose entity which is wholly owned, directly 
or indirectly, by the credit union and which is formed for the purpose 
of, and engages in no material business other than, acting as an issuer 
or a depositor in a securitization.
* * * * *
    Off-balance sheet exposure means:
    (1) For unfunded commitments, excluding unconditionally cancellable 
commitments, the remaining unfunded portion of the contractual 
agreement.
    (2) For loans transferred with limited recourse, or other seller-
provided credit enhancements, and that qualify for true sales 
accounting, the maximum contractual amount the credit union is exposed 
to according to the agreement, net of any related valuation allowance.
    (3) For loans transferred under the Federal Home Loan Bank (FHLB) 
mortgage partnership finance program, the outstanding loan balance as 
of the reporting date, net of any related valuation allowance.
    (4) For financial standby letters of credit, the total potential 
exposure of the credit union under the contractual agreement.
    (5) For forward agreements that are not derivative contracts, the 
future contractual obligation amount.
    (6) For sold credit protection through guarantees and credit 
derivatives, the total potential exposure of the credit union under the 
contractual agreement.
    (7) For off-balance sheet securitization exposures, the notional 
amount of the off-balance sheet credit exposure (including any credit 
enhancements, representations, or warranties that obligate a credit 
union to protect another party from losses arising from the credit risk 
of the underlying exposures) that arises from a securitization.
    (8) For securities borrowing or lending transactions, the amount of 
all securities borrowed or lent against collateral or on an 
uncollateralized basis.
    Off-balance sheet items means off-balance sheet exposures and the 
off-balance sheet exposure amount of repurchase transactions.
* * * * *
    Repurchase transactions means either a transaction in which a 
credit union agrees to sell a security to a counterparty and to 
repurchase the same or an identical security from that counterparty at 
a specified future date and at a specified price or a transaction in 
which an investor agrees to purchase a security from a counterparty and 
to resell the same or an identical security to that counterparty at a 
specified future date and at a specified price. The off-balance sheet 
exposure amount for a repurchase transaction equals all of the 
positions the credit union has sold or bought subject to repurchase or 
resale, which equals the sum of the current fair values of all such 
positions.
* * * * *
    Swap Dealer has the meaning as defined by the CFTC in 17 CFR 1.3.
* * * * *
    Total assets means a credit union's total assets as measured by 
either:
    (1)(i) Average quarterly balance. The credit union's total assets 
measured by the average of quarter-end balances of the current and 
three preceding calendar quarters;
    (ii) Average monthly balance. The credit union's total assets 
measured by the average of month-end balances over the three calendar 
months of the applicable calendar quarter;
    (iii) Average daily balance. The credit union's total assets 
measured by the average daily balance over the applicable calendar 
quarter; or
    (iv) Quarter-end balance. The credit union's total assets measured 
by the quarter-end balance of the applicable calendar quarter as 
reported on the credit union's Call Report.
    (2) For each quarter, a credit union must elect one of the measures 
of total assets listed in paragraph (1) of this definition to apply for 
all purposes under this part except Sec. Sec.  702.103 through 702.105 
(risk-based capital requirement).
    (3) Notwithstanding paragraph (1) of this definition, a credit 
union may exclude loans pledged as collateral for a non-recourse loan 
that is provided as part of the Paycheck Protection Program Lending 
Facility, announced by the Federal Reserve Board on April 7, 2020, from 
the calculation of total assets for the purpose of calculating its net 
worth ratio. For the purpose of this provision, a credit union's 
liability under the Facility must be reduced by the principal amount of 
the loans pledged as collateral for funds advanced under the Facility.
* * * * *
    Trading assets means securities or other assets acquired, not 
including loans originated by the credit union, for the purpose of 
selling in the near term or otherwise with the intent to resell in 
order to profit from short-term price movements. Trading assets would 
not include shares of a registered investment company or a collective 
investment fund used for liquidity purposes.
    Trading liabilities means the total liability for short positions 
of securities or other liabilities held for trading purposes.
* * * * *
    Unconditionally cancelable means with respect to a commitment, that 
a credit union may, at any time, with or without cause, refuse to 
extend credit under the commitment (to the extent permitted under 
applicable law).
* * * * *

0
3. In Sec.  702.101, revise paragraph (a)(2) to read as follows:


Sec.  702.101   Capital measures, capital adequacy, effective date of 
classification, and notice to NCUA.

    (a) * * *
    (2) If determined to be applicable under Sec.  702.103, either the 
risk-based capital ratio under Sec.  702.104(a) through (c) or the 
CCULR framework under Sec.  702.104(d).
* * * * *

0
4. In Sec.  702.102, revise paragraphs (a)(1)(i) and (ii), and Table 1 
to read as follows:


Sec.  702.102   Capital classification.

    (a) * * *
    (1) * * *
    (i)(A) Net worth ratio. The credit union has a net worth ratio of 
7.0 percent or greater; and
    (B) Risk-based capital ratio. The credit union, if complex, has a 
risk-

[[Page 72805]]

based capital ratio of 10 percent or greater; or
    (ii) Complex credit union leverage ratio. (A) The complex credit 
union is a qualifying complex credit union that has opted into the 
CCULR framework under Sec.  702.104(d) and it has a CCULR of 9.0 
percent or greater; or
    (B) The complex credit union is a qualifying complex credit union 
that has opted into the CCULR framework under Sec.  702.104(d), is in 
the grace period, as defined in Sec.  702.104(d)(7), and has a CCULR of 
7.0 percent or greater.
* * * * *

                                                      Table 1 to Sec.   702.102--Capital Categories
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                         Risk-based capital
      Capital classification          Net worth ratio                        ratio, if                          CCULR, if       And subject to following
                                                                             applicable                         applicable          condition(s) . . .
--------------------------------------------------------------------------------------------------------------------------------------------------------
Well Capitalized.................  7% or greater.......  And..........  10% or greater.....  Or..........  9% or greater *....  ........................
Adequately Capitalized...........  6% or greater.......  And..........  8% or greater......  Or..........  N/A................  And does not meet the
                                                                                                                                 criteria to be
                                                                                                                                 classified as well
                                                                                                                                 capitalized.
Undercapitalized.................  4% to 5.99%.........  Or...........  Less than 8%.......  Or..........  N/A................  ........................
Significantly Undercapitalized...  2% to 3.99%.........                 N/A................                N/A................  Or if ``undercapitalized
                                                                                                                                 at <5% net worth and
                                                                                                                                 (a) fails to timely
                                                                                                                                 submit, (b) fails to
                                                                                                                                 materially implement,
                                                                                                                                 or (c) receives notice
                                                                                                                                 of the rejection of a
                                                                                                                                 net worth restoration
                                                                                                                                 plan.
Critically Undercapitalized......  Less than 2%........                 N/A................                N/A................  ........................
--------------------------------------------------------------------------------------------------------------------------------------------------------
\*\ A qualifying complex credit union opting into the CCULR framework should refer to 12 CFR 702.104(d)(7) if its CCULR falls below 9.0 percent.

* * * * *

0
5. Revise Sec.  702.103 to read as follows:


Sec.  702.103   Applicability of risk-based capital measures.

    For purposes of Sec.  702.102, a credit union is defined as 
``complex'' and a risk-based capital measure is applicable only if the 
credit union's quarter-end total assets exceed five hundred million 
dollars ($500,000,000), as reflected in its most recent Call Report. A 
complex credit union may calculate its risk-based capital measure 
either by using the risk-based capital ratio under Sec.  702.104(a) 
through (c), or, for a qualifying complex credit union opting into the 
CCULR framework, by using the CCULR framework under Sec.  702.104(d).

0
6. In Sec.  702.104:
0
a. Revise the introductory text;
0
b. Remove the word ``and'' at the end of paragraph (b)(2)(iii);
0
c. Remove the period at the end of paragraph (b)(2)(iv) and add in its 
place ``; and;
0
d. Add paragraph (b)(2)(v);
0
e. Add paragraphs (c)(2)(i)(B)(3) and (c)(2)(i)(D);
0
f. Revise paragraphs (c)(2)(vii) and (x);
0
g. Revise paragraph (c)(4) introductory text;
0
h. Redesignate paragraphs (c)(4)(iii)(A) through (E) as (c)(4)(iii)(B) 
through (F) and add new paragraph (c)(4)(iii)(A);
0
i. Add paragraphs (c)(4)(iv) through (x); and
0
j. Add paragraphs (c)(6), (d), and (e).
    The revisions and additions read as follows:


Sec.  702.104   Risk-based capital ratio.

    A complex credit union must calculate its risk-based capital 
measure in accordance with this section. A complex credit union may 
calculate its risk-based capital measure either by using the risk-based 
capital ratio under paragraphs (a) through (c) of this section, or, for 
a qualifying complex credit union opting into the CCULR framework, by 
using the CCULR framework under paragraph (d) of this section.
* * * * *
    (b) * * *
    (2) * * *
    (v) Mortgage servicing assets that exceed 25 percent of the sum of 
the capital elements in paragraph (b)(1) of this section, less 
deductions required under paragraphs (b)(2)(i) thorough (iv) of this 
section.
    (c) * * *
    (2) * * *
    (i) * * *
    (B) * * *
    (3) An obligation of the Bank for International Settlements, the 
European Central Bank, the European Commission, the International 
Monetary Fund, the European Stability Mechanism, the European Financial 
Stability Facility, or an MDB.
* * * * *
    (D) Covered loans issued under the Small Business Administration's 
Paycheck Protection Program, 15 U.S.C. 636(a)(36).
* * * * *
    (vii) Category 7--250 percent risk weight. A credit union must 
assign a 250 percent risk weight to the carrying value of mortgage 
servicing assets not deducted from the risk-based capital numerator 
pursuant to Sec.  702.104(b).
* * * * *
    (x) Category 10--1,250 percent risk weight. A credit union must 
assign a 1,250 percent risk weight to the exposure amount of any 
subordinated tranche of any investment, with the option to use the 
gross-up approach in paragraph (c)(3)(iii)(A) of this section. However, 
a credit union may not use the gross-up approach for non-security 
beneficial interests.
* * * * *
    (4) Risk weights for off-balance sheet items. The risk weighted 
amounts for all off-balance sheet items are determined by multiplying 
the off-balance sheet exposure amount by the appropriate CCF and the 
assigned risk weight as follows:
* * * * *
    (iii) * * *
    (A) For a commitment that is unconditionally cancelable, a 0 
percent CCF.
* * * * *
    (iv) For financial standby letter of credits, a 100 percent CCF and 
a 100 percent risk weight.
    (v) For forward agreements that are not derivative contracts, a 100 
percent CCF and a 100 percent risk weight.
    (vi) For sold credit protection through guarantees and credit 
derivatives, a 100 percent CCF and a 100 percent risk weight for 
guarantees; for credit derivatives the risk weight is determined by the 
applicable provisions of 12 CFR 324.34 or 324.35.
    (vii) For off-balance sheet securitization exposures, a 100 percent 
CCF, and the risk weight is determined

[[Page 72806]]

as if the exposure is an on-balance sheet securitization exposure.
    (viii) For securities borrowing or lending transactions, a 100 
percent CCF and a 100 percent risk weight. A credit union may recognize 
the credit risk mitigation benefits of financial collateral, as defined 
under 12 CFR 324.2, by risk weighting the collateralized portion of the 
exposure under the applicable provisions of 12 CFR 324.35 or 324.37.
    (ix) For the off-balance sheet portion of repurchase transactions, 
a 100 percent CCF and a 100 percent risk weight. A credit union may 
recognize the credit risk mitigation benefits of financial collateral, 
as defined by 12 CFR 324.2, by risk weighting the collateralized 
portion of the exposure under the applicable provisions of 12 CFR 
324.35 or 324.37.
    (x) For all other off-balance sheet exposures not explicitly 
provided a CCF or risk weight in this paragraph (c) that meet the 
definition of a commitment, a 100 percent CCF and a 100 percent risk 
weight.
* * * * *
    (6) Asset Securitizations Issued by Complex Credit Unions. A credit 
union must follow the requirements of the applicable provisions of 12 
CFR 324.41 when it transfers exposures in connection with a 
securitization. A credit union may only exclude the transferred 
exposures from the calculation of its risk-weighted assets if each 
condition in 12 CFR 324.41 is satisfied. A credit union that meets 
these conditions, but retains any credit risk for the transferred 
exposures, must hold risk-based capital against the credit risk it 
retains in connection with the securitization.
    (d) Complex Credit Union Leverage Ratio (CCULR) Framework. (1) 
General. A qualifying complex credit union that has opted into the 
CCULR framework under paragraph (d)(5) of this section is considered to 
have met the capital ratio requirements for the well capitalized 
capital category under Sec.  702.102(a)(1) if it has a CCULR of 9.0 
percent or greater.
    (2) Qualifying Complex Credit Union. For purposes of this part, a 
qualifying complex credit union means a complex credit union under 
Sec.  702.103 that satisfies all of the following criteria:
    (i) Has a CCULR of 9.0 percent or greater;
    (ii) Has total off-balance sheet exposures of 25 percent or less of 
its total assets;
    (iii) Has the sum of total trading assets and total trading 
liabilities of 5 percent or less of its total assets; and
    (iv) Has the sum of total goodwill and total other intangible 
assets of 2 percent or less of its total assets.
    (3) Calculation of Qualifying Criteria. Each of the qualifying 
criteria in paragraph (d)(2) of this section is calculated based on 
data reported in the Call Report as of the end of the most recent 
calendar quarter.
    (4) Calculation of the CCULR. A qualifying complex credit union 
opting into the CCULR framework under this paragraph (d) calculates its 
CCULR in the same manner as its net worth ratio under Sec.  702.2.
    (5) Opting into the CCULR Framework. (i) A qualifying complex 
credit union may opt into the CCULR framework by completing the 
applicable reporting requirements of its Call Report.
    (ii) A qualifying complex credit union can opt into the CCULR 
framework at the end of each calendar quarter.
    (6) Opting Out of the CCULR Framework. (i) A qualifying complex 
credit union may voluntarily opt out of the framework at the end of 
each calendar quarter.
    (7) Treatment when ceasing to meet the qualifying complex credit 
union requirements. (i) If a qualifying complex credit union that has 
opted into the CCULR framework ceases to meet the qualifying criteria 
in paragraph (d)(2) of this section, the credit union has two calendar 
quarters (grace period) either to satisfy the requirements to be a 
qualifying complex credit union or to calculate its risk-based capital 
ratio under paragraphs (a) through (c) of this section.
    (ii) The grace period begins at the end of the calendar quarter in 
which the credit union no longer satisfies the criteria to be a 
qualifying complex credit union. The grace period ends on the last day 
of the second consecutive calendar quarter following the beginning of 
the grace period.
    (iii) During the grace period, the credit union continues to be 
treated as a qualifying complex credit union for the purpose of this 
part and must continue calculating and reporting its CCULR, unless the 
qualifying complex credit union has opted out of using the CCULR 
framework under paragraph (d)(6) of this section. The qualifying 
complex credit union also continues to be considered to have met the 
capital ratio requirements for the well capitalized capital category 
under Sec.  702.102(a)(1). However, if the qualifying complex credit 
union has a CCULR of less than seven percent, it will not be considered 
to have met the capital ratio requirements for the well capitalized 
capital category under Sec.  702.102(a)(1) and its capital 
classification is determined by its net worth ratio.
    (v) A qualifying complex credit union that ceases to meet the 
qualifying criteria in paragraph (d)(2) of this section as a result of 
a merger or acquisition that is not a supervisory merger or combination 
has no grace period and must comply with the risk-based capital ratio 
under paragraphs (a) through (c) of this section in the quarter it 
ceases to be a qualifying complex credit union.
    (e) Reservation of Authority. The NCUA may require a complex credit 
union that otherwise would meet the definition of a qualifying complex 
credit union to comply with the risk-based capital ratio under 
paragraphs (a) through (c) of this section if the NCUA determines that 
the complex credit union's capital requirements under paragraph (d) of 
this section are not commensurate with its risks. Any credit union 
required to comply with the risk-based capital ratio under this 
paragraph (e), would be permitted a minimum of a two-quarter grace 
period before being subject to risk-based capital requirements.


Sec.  702.111   [Amended]

0
7. In Sec.  702.111, amend paragraph (c)(1)(i) by removing ``risk-based 
capital ratio'' and adding in its place ``risk-based capital measure''.

PART 703--INVESTMENT AND DEPOSIT ACTIVITIES

0
8. The authority citation for part 703 continues to read as follows:

    Authority:  12 U.S.C. 1757(7), 1757(8), 1757(15).


Sec.  703.2   [Amended]

0
9. In Sec.  703.2, amend the definition of ``Net worth'' by removing 
``Sec.  702.2(f)'' and adding in its place ``Sec.  702.2''.


Sec.  703.13   [Amended]

0
11. In Sec.  703.13, amend paragraph (d)(3)(iii) by
0
a. Removing the phrase ``net worth classification'' and adding in its 
place the phrase ``capital classifications''; and
0
b. Removing the phrase ``or, if subject to a risk-based net worth 
(RBNW) requirement under part 702 of this chapter, has remained ``well 
capitalized'' for the six (6) immediately preceding quarters after 
applying the applicable RBNW requirement''.

[FR Doc. 2021-27644 Filed 12-22-21; 8:45 am]
BILLING CODE 7535-01-P