Risk-Based Net Worth-COVID-19 Regulatory Relief
| Published date | 23 February 2021 |
| Citation | 86 FR 10872 |
| Record Number | 2021-01400 |
| Section | Proposed rules |
| Court | National Credit Union Administration |
Federal Register, Volume 86 Issue 34 (Tuesday, February 23, 2021)
[Federal Register Volume 86, Number 34 (Tuesday, February 23, 2021)]
[Proposed Rules]
[Pages 10872-10875]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2021-01400]
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Proposed Rules
Federal Register
________________________________________________________________________
This section of the FEDERAL REGISTER contains notices to the public of
the proposed issuance of rules and regulations. The purpose of these
notices is to give interested persons an opportunity to participate in
the rule making prior to the adoption of the final rules.
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Federal Register / Vol. 86, No. 34 / Tuesday, February 23, 2021 /
Proposed Rules
[[Page 10872]]
NATIONAL CREDIT UNION ADMINISTRATION
12 CFR Part 702
RIN 3133-AF21
Risk-Based Net Worth--COVID-19 Regulatory Relief
AGENCY: National Credit Union Administration (NCUA).
ACTION: Proposed rule.
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SUMMARY: The NCUA Board (Board) is issuing this proposal to raise the
asset threshold for defining a credit union as ``complex'' for purposes
of being subject to any risk-based net worth requirement in the NCUA's
regulations. The proposed rule would amend the NCUA's regulations to
provide that any risk-based net worth requirement will be applicable
only to a federally insured natural-person credit union (credit union)
with quarter-end assets that exceed $500 million and a risk-based net
worth requirement that exceeds six percent. The COVID-19 pandemic has
created a vital need for financial institutions, including credit
unions, to provide access to responsible credit and other member
services to support consumers. Implementing this regulatory change in
advance of January 1, 2022, the effective date of the 2015 final risk
based capital (RBC) rule issued by the NCUA, would provide necessary
capital relief to a significant number of credit unions without
substantially decreasing the safety and soundness of credit unions or
the National Credit Union Share Insurance Fund (NCUSIF).
DATES: Comments must be received on or before March 25, 2021.
ADDRESSES: You may submit written comments, identified by RIN 3133-
AF21, by any of the following methods (Please send comments by one
method only):
Federal eRulemaking Portal: http://www.regulations.gov.
Follow the instructions for submitting comments.
Fax: (703) 518-6319. Include ``[Your Name]--Comments on
Risk-Based Net Worth--COVID-19 Regulatory Relief'' in the transmittal.
Mail: Address to Melane Conyers-Ausbrooks, Secretary of
the Board, National Credit Union Administration, 1775 Duke Street,
Alexandria, Virginia 22314-3428.
Public Inspection: You may view all public comments on the Federal
eRulemaking Portal at http://www.regulations.gov as submitted, except
for those we cannot post for technical reasons. The NCUA will not edit
or remove any identifying or contact information from the public
comments submitted. Due to social distancing measures in effect, the
usual opportunity to inspect paper copies of comments in the NCUA's law
library is not currently available. After social distancing measures
are relaxed, visitors may make an appointment to review paper copies by
calling (703) 518-6540 or emailing [email protected].
FOR FURTHER INFORMATION CONTACT: Policy and Analysis: Kathryn Metzker,
Risk Management Division, Office of Examination and Insurance, at (571)
438-0073; Legal: Thomas Zells, Staff Attorney, Office of General
Counsel, at (703) 518-6540; Rachel Ackmann, Senior Staff Attorney,
Office of General Counsel, at (703) 548-2601; or by mail at: National
Credit Union Administration, 1775 Duke Street, Alexandria, Virginia
22314.
SUPPLEMENTARY INFORMATION:
I. Introduction
II. Legal Authority
III. The Proposed Rule
IV. Impact of the Proposed Rule
V. Regulatory Procedures
I. Introduction
In 1998, Congress enacted the Credit Union Membership Access Act
(CUMAA).\1\ Section 301 of CUMAA added section 216 to the Federal
Credit Union Act (FCU Act),\2\ which required the Board to adopt by
regulation a system of prompt corrective action (PCA) to restore the
net worth of credit unions that become inadequately capitalized. The
purpose of section 216 of the FCU Act is to ``resolve the problems of
[federally] insured credit unions at the least possible long-term loss
to the [NCUSIF].'' \3\ To carry out that purpose, Congress set forth a
basic structure for PCA in section 216 that consists of three principal
components: (1) A framework combining mandatory actions prescribed by
statute with discretionary actions developed by the NCUA; (2) an
alternative system of PCA to be developed by the NCUA for credit unions
defined as ``new;'' and (3) a risk-based net worth requirement to apply
to credit unions the NCUA defines as ``complex.''
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\1\ Public Law 105-219, 112 Stat. 913 (1998).
\2\ 12 U.S.C. 1790d.
\3\ 12 U.S.C. 1790d(a)(1).
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The Board initially implemented the required system of PCA in
2000,\4\ primarily in part 702 of the NCUA's regulations, and most
recently made substantial updates to the regulation in October 2015 \5\
and October 2018.\6\ The risk-based net worth requirement for credit
unions meeting the definition of ``complex'' was first applied on the
basis of data in the Call Report reflecting activity in the first
quarter of 2001.\7\ The NCUA's risk-based net worth requirement has
been largely unchanged since its implementation, with limited
exceptions.\8\ Currently, the NCUA defines a credit union as complex
and thus subject to the requirement only if the credit union has
quarter-end assets that exceed $50 million and its risk-based net worth
requirement exceeds six percent.\9\
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\4\ 12 CFR part 702; see also 65 FR 8584 (Feb. 18, 2000) and 65
FR 44950 (July 20, 2000).
\5\ 80 FR 66626 (Oct. 29, 2015).
\6\ 83 FR 55467 (Nov. 6, 2018).
\7\ 65 FR 44950 (July 20, 2000).
\8\ The NCUA's risk-based net worth requirement has been largely
unchanged since its implementation, with 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 the 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 amendments were made in April 2020 to
define loans made by credit unions under the Small Business
Administration's Paycheck Protection Program as ``low-risk assets,''
85 FR 23212 (Apr. 27, 2020).
\9\ 12 CFR 702.103.
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As described more fully below, while the risk-based net worth
requirement remains in place, the NCUA has issued multiple final rules
to implement a requirement that utilizes an RBC ratio to replace the
current requirement. The
[[Page 10873]]
RBC requirement is based on the same provisions in the FCU Act, but
uses different terminology and standards to distinguish it from the
current risk-based net worth requirement. However, the effective date
of the RBC amendments has been delayed until January 1, 2022, and the
rule is currently undergoing a holistic review as part of that delay.
Further, and of particular relevance to this proposed rule, the
prospective RBC requirement applies only if a credit union's quarter-
end total assets exceed $500 million, whereas the current risk-based
net worth requirement applies if a credit union has quarter-end assets
that exceed $50 million and its risk-based net worth requirement, as
calculated under current part 702, exceeds six percent.
As noted, at its October 2015 meeting, the Board issued a final
rule (2015 Final Rule) to amend part 702 of the NCUA's current PCA
regulations to require that credit unions taking certain risks hold
capital commensurate with those risks.\10\ The RBC provisions of the
2015 Final Rule applied only to credit unions with quarter-end total
assets exceeding $100 million. The overarching intent of the 2015 Final
Rule was to reduce the likelihood that a relatively small number of
high-risk outlier credit unions would exhaust their capital and cause
large losses to the NCUSIF. Under the FCU Act, federally insured credit
unions are collectively responsible for replenishing losses to the
NCUSIF.\11\
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\10\ 80 FR 66626 (Oct. 29, 2015).
\11\ See 12 U.S.C. 1782(c)(2)(A) (The FCU Act requires that each
federally insured credit union pay a Federal share insurance premium
equal to a percentage of the credit union's insured shares to ensure
that the NCUSIF has sufficient reserves to pay potential share
insurance claims by credit union members, and to provide assistance
in connection with the liquidation or threatened liquidation of
federally insured credit unions in troubled condition.).
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The 2015 Final Rule restructures the NCUA's current PCA regulations
and makes various revisions, including amending the agency's risk-based
net worth requirement by replacing it with a new RBC ratio. The Board
originally set the effective date of the 2015 Final Rule for January 1,
2019 to provide credit unions and the NCUA with sufficient time to make
the necessary adjustments--such as systems, processes, and procedures--
and to reduce the burden on affected credit unions.
At its October 2018 meeting, the Board issued a final rule (2018
Supplemental Rule) to delay the effective date of the 2015 Final Rule
for an additional year, moving the effective date from January 1, 2019
to January 1, 2020.\12\ Importantly, the 2018 Supplemental Rule also
amended the definition of ``complex'' credit union, adopted in the 2015
Final Rule for RBC purposes, by increasing the threshold level for
coverage from $100 million to $500 million. Therefore, only credit
unions with over $500 million in assets will be subject to the 2015
Final Rule.\13\ These changes provided these covered credit unions and
the NCUA with additional time to prepare for the rule's implementation,
and exempted an additional 1,026 credit unions from the RBC
requirements of the 2015 Final Rule without subjecting the NCUSIF to
undue risk.
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\12\ 83 FR 55467 (Nov. 6, 2018).
\13\ The risk-based net worth requirement currently in effect
applies to a credit union only if it has quarter-end assets that
exceed $50 million and its risk-based net worth requirement exceeds
six percent.
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In December 2019, the Board issued a final rule (2019 Supplemental
Rule) to further delay the effective date of the 2015 Final Rule an
additional two years, until January 1, 2022.\14\ The Board issued the
2019 Supplemental Rule to allow the Board more time to holistically and
comprehensively evaluate capital standards for credit unions \15\ and
provide covered credit unions and the NCUA with additional time to
prepare for the 2015 Final Rule's implementation.
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\14\ 84 FR 68781 (Dec. 17, 2019).
\15\ The final rule provided several examples of issues the
Board would consider during the delay, including asset
securitization, subordinated debt, and a community bank leverage
ratio analog.
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Under the 2019 Supplemental Rule, the NCUA's current PCA regulation
remains in effect until the 2015 Final Rule's amended effective date,
January 1, 2022. The NCUA has enforced, and will continue to enforce,
the capital standards currently in place and address any supervisory
concerns through existing regulatory and supervisory mechanisms. Until
that amended effective date, a credit union that would be exempted from
any future RBC requirement because it does not have over $500 million
in total assets remains subject to the current risk-based net worth
requirement if it has over $50 million in total assets and a risk-based
net worth requirement that exceeds six percent. The Board now believes
that this is an unnecessary restriction and is proposing to increase
the threshold for defining a complex credit union for purposes of the
current risk-based net worth requirement to $500 million to match the
prospective RBC requirement while retaining the requirement that a
credit union's risk-based net worth requirement also exceeds six
percent. This capital relief would enable credit unions to provide
better service and more loans to their members.
II. Legal Authority
As discussed above, in 1998, Congress enacted CUMAA.\16\ Section
301 of CUMAA added section 216 to the FCU Act,\17\ which required the
Board to adopt by regulation a system of PCA to restore the net worth
of credit unions that become inadequately capitalized.\18\ 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 FCU Act and
``comparable to'' section 38 of the Federal Deposit Insurance Act (FDI
Act).\19\ Section 216(b)(1)(B) requires that the Board, in designing
the PCA system, also take into account the ``cooperative character of
credit unions'' (i.e., credit unions are not-for-profit cooperatives
that do not issue capital stock, must rely on retained earnings to
build net worth, and have boards of directors that consist primarily of
volunteers).\20\ Among other things, section 216(c) of the FCU Act
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
FCU Act.\21\ Section 216(o) generally defines a credit union's ``net
worth'' as its retained earnings balance,\22\ and a credit union's
``net worth ratio,'' as the ratio of its net worth to its total
assets.\23\ As a credit union's net worth ratio declines, so does its
classification among the five net worth categories, thus subjecting it
to an expanding range of mandatory and discretionary supervisory
actions under PCA.\24\
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\16\ Public Law 105-219, 112 Stat. 913 (1998).
\17\ 12 U.S.C. 1790d.
\18\ The risk-based net worth requirement for credit unions
meeting the definition of ``complex'' was first applied on the basis
of data in the Call Report reflecting activity in the first quarter
of 2001. 65 FR 44950 (July 20, 2000).
\19\ 12 U.S.C. 1790d(b)(1)(A); see also 12 U.S.C. 1831o (Section
38 of the FDI Act setting forth the PCA requirements for banks).
\20\ 12 U.S.C. 1790d(b)(1)(B).
\21\ 12 U.S.C. 1790d(c).
\22\ 12 U.S.C. 1790d(o)(2).
\23\ 12 U.S.C. 1790d(o)(3).
\24\ 12 U.S.C. 1790d(c)-(g); 12 CFR 702.204(a)-(b).
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Section 216(d)(1) of the FCU Act requires that the NCUA's system of
PCA include, in addition to the statutorily defined net worth ratio
requirement applicable to credit unions, ``a risk-based net worth \25\
requirement for
[[Page 10874]]
insured credit unions that are complex, as defined by the Board.'' \26\
The FCU Act directs the NCUA to base its definition of ``complex''
credit unions ``on the portfolios of assets and liabilities of credit
unions.'' \27\ It also requires the NCUA to design a risk-based net
worth requirement to apply to such ``complex'' credit unions.\28\
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\25\ For purposes of this rulemaking, the term ``risk-based net
worth requirement'' is used in reference to the statutory
requirement for the Board to design a capital standard that accounts
for variations in the risk profile of complex credit unions. The
term RBC 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 Federal 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 has no substantive effect on the requirements
of the FCU Act, and is intended only to reduce confusion for the
reader.
\26\ 12 U.S.C. 1790d(d)(1).
\27\ 12 U.S.C. 1790d(d).
\28\ Id.
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In addition to the specific regulatory authority provided to the
NCUA by the above-referenced statutory provisions of the FCU Act, the
FCU Act also grants the NCUA broad plenary rulemaking authority.
III. The Proposed Rule
The COVID-19 pandemic has created a vital need for financial
institutions, including credit unions, to provide access to responsible
credit and other member services to support consumers. The Board is
working with Federal and state regulatory agencies, in addition to
credit unions, to assist credit unions in managing their operations and
to facilitate continued assistance to credit union members and
communities impacted by the coronavirus. As part of these ongoing
efforts, the Board is proposing to raise the asset threshold for
defining a credit union as ``complex'' for purposes of the current
risk-based net worth requirement. Under the proposal, any risk-based
net worth requirement would be applicable to only a credit union with
quarter-end assets that exceed $500 million whose risk-based net worth
requirement also exceeds six percent. This would remain in place until
the effective date of the above-referenced RBC rule. The Board believes
that this increase would provide necessary relief to a significant
number of credit unions and their members without substantially
increasing the risk to credit unions or the NCUSIF, consistent with the
NCUA's responsibility to maintain the safety and soundness of the
credit union system.
The NCUA seeks to strike the appropriate balance between providing
for the safety and soundness of the credit union industry, while not
restricting credit union activities by requiring a credit union to hold
excessive levels of capital. Requiring a credit union to hold excess
capital above what is necessary to account for risk limits its ability
to increase lending or provide necessary services to members.
Specifically, potential consequences of the higher capital requirements
include: Reduced or higher-cost lending, limited products, higher
compliance cost, and increased merger activity.
In 2018, the NCUA determined that increasing the applicability
threshold for RBC to $500 million did not pose undue risk to the NCUSIF
because credit unions with assets greater than $500 million account for
the majority of industry assets (both total assets and complex assets,
as explained below). Based on September 30, 2020 data, credit unions
with assets between $50 million and $500 million account for 15.9
percent of industry assets and 33.8 percent of credit unions. The
average asset size of a credit union in this cohort is $164 million.
Conversely, credit unions with assets greater than $500 million account
for 81.6 percent of industry assets and only 12.4 percent of total
credit unions. Therefore, raising the risk-based net worth requirement
threshold to $500 million would still cover the majority of assets in
the credit union system and not pose undue risk to the NCUSIF for the
same reasons that the Board found in the 2018 Supplemental Rule. In the
2015 Final Rule and 2018 Supplemental Rule, the NCUA determined a
credit union was complex by evaluating whether its portfolios of assets
and liabilities were complex based on the products and services in
which such credit unions engaged. An asset size threshold was developed
as a proxy measure based on a detailed analysis performed by the
NCUA.\29\ The threshold set forth a clear demarcation line, above which
the NCUA determined all credit unions engaged in complex activities,
and where almost all such credit unions were involved in multiple
complex activities.
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\29\ See the 2015 Final Rule and 2018 Supplemental Rule for
reasons the NCUA believes a single asset-size threshold is
appropriate for determining whether a credit union is complex for
purposes of prompt corrective action. See 80 FR 66626 (Oct. 29,
2015) and 83 FR 55467 (Nov. 6, 2018).
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The asset threshold adopted in the 2015 Final Rule and revised in
the 2018 Supplemental Rule for determining whether a credit union is
complex was based on a complexity index.\30\ The 2018 Supplemental Rule
also used a complexity ratio, a ratio of complex assets and liabilities
to total assets, to evaluate the extent to which credit unions are
involved in complex activities. The 2018 Supplemental Rule noted that
of the $497 billion in complex assets and liabilities in the credit
union system, $423 billion (85 percent)--the majority of complex assets
and liabilities in the credit union system--are held among credit
unions with more than $500 million in assets.\31\ In general, two-
thirds of credit unions with more than $500 million in total assets had
complex assets and liabilities ratios above 30 percent. Only 11 percent
of credit unions with less than $500 million had complexity ratios
above 30 percent.
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\30\ The 2015 Final Rule and 2018 Supplemental Rule both used a
complexity index, however the original complexity index used in the
2015 Final Rule was amended in the 2018 Supplemental Rule. The 2018
Supplemental Rule used a revised complexity index that amended six
of the indicators in the original complexity index so the index more
accurately reflected ``complexity'' in credit unions and took into
account certain regulatory changes that were made after the 2015
Final Rule was approved.
\31\ This was based on available data at the time of the 2018
Supplemental Rule.
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Using both the revised complexity index and the complexity ratio,
the 2018 Supplemental Rule noted the $500 million threshold for
defining complex credit unions would not represent undue risk to the
NCUSIF as approximately 76 percent of the assets held by federally
insured credit unions would still be covered. As noted above, credit
unions with assets above $500 million represent 81.6 percent of
industry assets as of September 30, 2020.
The Board believes this change would provide relief to many credit
unions and help to maintain confidence in the system of cooperative
credit, consistent with the NCUA's mission.
IV. Impact of the Proposed Rule
Increasing the complexity threshold to $500 million would provide
potential relief to 1,737 credit unions. While all complex credit
unions meet their risk-based net worth requirement as of September 30,
2020, because their net worth ratio exceeds their risk-based net worth
requirement, immediate capital relief can be provided to some of these
credit unions. As shown in Table 1, there are 94 complex credit unions
with assets totaling $66 billion which are required to hold capital
above 7 percent to be well capitalized based on their risk-based net
worth requirement. Of the 94 credit unions, 67 have assets less than
$500 million and would no longer be required to hold more capital to
remain well capitalized. Additionally, increasing the complexity
threshold now rather than when the 2015 Final Rule goes into effect
will not pose
[[Page 10875]]
undue risk to the NCUSIF as the 67 credit unions provided relief
represent less than 1 percent of industry assets.
Table 1--Complex Credit Unions With a Risk Based Net Worth Requirement Greater Than 7 Percent
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Percent of
Asset category Number of Total assets industry
credit unions (million) assets
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Assets >$50M \32\............................................... 94 $66.0 3.7
Assets >$500M \33\.............................................. 27 54.6 3.1
$50M44 U.S.C. 3507(d)). For
purposes of the PRA, a paperwork burden may take the form of a
reporting, recordkeeping, or a third-party disclosure requirement,
referred to as an information collection. The NCUA may not conduct or
sponsor, and the respondent is not required to respond to, an
information collection unless it displays a valid Office of Management
and Budget (OMB) control number. This proposed rule contains no
provisions constituting a collection of information under the Paperwork
Reduction Act of 1995 (44 U.S.C. et seq.).
C. Executive Order 13132
Executive Order 13132 encourages independent regulatory agencies to
consider the impact of their actions on state and local interests. The
NCUA, an independent regulatory agency as defined in 44 U.S.C. 3502(5),
voluntarily complies with the Executive order to adhere to fundamental
federalism principles.
This proposed rule would not have substantial direct effects on the
states, on the relationship between the National Government and the
states, or on the distribution of power and responsibilities among the
various levels of government. The NCUA has therefore determined that
this proposed rule does not constitute a policy that has federalism
implications for purposes of the Executive order.
D. Assessment of Federal Regulations and Policies on Families
The NCUA has determined that this proposed rule will not affect
family well-being within the meaning of section 654 of the Treasury and
General Government Appropriations Act, 1999, Public Law 105-277, 112
Stat. 2681 (1998).
List of Subjects in 12 CFR Part 702
Credit, Credit unions, Reporting and recordkeeping requirements.
By the NCUA Board on January 14, 2021.
Melane Conyers-Ausbrooks,
Secretary of the Board.
For the reasons discussed in the preamble, the Board proposes to
amend part 702 of chapter VII of title 12 of the Code of Federal
Regulations as follows:
PART 702--CAPITAL ADEQUACY
0
1. The authority citation for part 702 continues to read as follows:
Authority: 12 U.S.C. 1766(a), 1790d.
Sec. 702.103 [Amended]
0
2. Amend Sec. 702.103(a) by removing the words ``fifty million dollars
($50,000,000)'' and add in their place ``five hundred million dollars
($500,000,000).''
[FR Doc. 2021-01400 Filed 2-22-21; 8:45 am]
BILLING CODE 7535-01-P
