Prompt Corrective Action–Risk-Based Capital

SUMMARY: The NCUA Board (Board) is proposing to amend NCUA's regulations regarding prompt corrective action (PCA) to restructure the part, and make various revisions, including replacing the agency's current risk-based net worth requirements with new risk-based capital requirements for federally insured "natural person" credit unions. The proposed risk-based capital requirements would be more consistent with NCUA's risk-based capital measure for corporate credit unions and the regulatory risk-based capital measures used by the Federal Deposit Insurance Corporation, Board of Governors of the Federal Reserve, and Office of the Comptroller of Currency (Other Federal Banking Regulatory Agencies). In addition, the proposed revisions would revise the risk-weights for many of NCUA's current asset classifications; require higher minimum levels of capital for federally insured natural person credit unions with concentrations of assets in real estate loans, member business loans (MBLs) or higher levels of delinquent loans; and set forth the process for NCUA to require an individual federally insured natural person credit union to hold higher levels of risk-based capital to address unique supervisory concerns raised by NCUA. The proposed revisions would also eliminate several of NCUA's provisions, including provisions relating to regular reserve accounts, risk-mitigation credits, and alternative risk-weights.

DATES: Comments must be received on or before May 28, 2014.

ADDRESSES: You may submit comments, identified by RIN 3133-AD77, by any of the following methods (Please send comments by one method only):

* Federal eRulemaking Portal: http://www.regulations.gov. Follow the instructions for submitting comments.

* NCUA Web site: http://www.ncua.gov/Legal/Regs/Pages/PropRegs.aspx. Follow the instructions for submitting comments.

* Email: Address to [email protected]. Include "[Your name]--Comments on Proposed Rule: PCA--Risk-Based Capital" in the email subject line.

* Fax: (703) 518-6319. Use the subject line described above for email.

* Mail: Address to Gerard Poliquin, Secretary of the Board, National Credit Union Administration, 1775 Duke Street, Alexandria, Virginia 22314-3428.

* Hand Delivery/Courier: Same as mail address.

You can view all public comments on NCUA's Web site at http://www.ncua.gov/Legal/Regs/Pages/PropRegs.aspx as submitted, except for those we cannot post for technical reasons. NCUA will not edit or remove any identifying or contact information from the public comments submitted. You may inspect paper copies of comments in NCUA's law library at 1775 Duke Street, Alexandria, Virginia 22314, by appointment weekdays between 9:00 a.m. and 3:00 p.m. To make an appointment, call (703) 518-6546 or send an email to [email protected].

FOR FURTHER INFORMATION CONTACT: Technical: Steven Farrar, Loss/Risk Analyst, Office of Examination and Insurance, at 1775 Duke Street, Alexandria, VA 22314 or telephone: (703) 518-6393, or Legal: John H. Brolin, Staff Attorney, Office of General Counsel, at 1775 Duke Street, Alexandria, VA 22314 or telephone: (703) 518-6438.

SUPPLEMENTARY INFORMATION:

I. Summary of the Proposed Rule

II. Section-by-Section Analysis

III. Effective Date

IV. Regulatory Procedures

I. Summary of the Proposed Rule

The Board is proposing to revise and replace NCUA's current PCA rules for federally insured natural person credit unions. /1/ The proposed revisions would include a new method for computing NCUA's risk-based capital measure that is more consistent with the risk-based capital measure for corporate credit unions /2/ and the risk-based capital measures used by the Other Federal Banking Regulatory Agencies. /3/ In general, the revisions would adjust the risk-weights for many asset classifications to lower the minimum risk-based capital requirement for credit unions with low risk operations. Conversely, the revisions would require higher minimum levels of risk-based capital for credit unions with concentrations of assets in real estate loans, MBLs, or high levels of delinquent loans. In addition, due to the known limitations of any widely applied risk-based measurement system, the proposed rule includes procedures for NCUA to require an individual credit union to hold a higher level of risk-based capital where specific supervisory concerns arise regarding the credit union's condition. Finally, the revisions would eliminate the provisions of current SEC 702.401(b) relating to transfers to the regular reserve account, current SEC 702.106 regarding the standard calculation of risk-based net worth requirement, current SEC 702.107 regarding alternative components for standard calculation, and current SEC 702.108 regarding risk-mitigation credit.

FOOTNOTE 1 12 CFR Part 702. END FOOTNOTE

FOOTNOTE 2 See 12 CFR Part 704. END FOOTNOTE

FOOTNOTE 3 See 78 FR 55339 (Sept. 10, 2013). END FOOTNOTE

A. Background

NCUA's primary mission is to ensure the safety and soundness of federally insured credit unions. NCUA performs this public function by examining and supervising all federal credit unions, participating in the examination and supervision of federally insured state chartered credit unions in coordination with state regulators, and insuring federally insured credit union members' accounts. /4/ In its role as administrator of the National Credit Union Share Insurance fund (NCUSIF), NCUA insures and regulates approximately 6,753 federally insured credit unions, holding total assets exceeding $1 trillion and representing approximately 94.6 million members.

FOOTNOTE 4 Within the nine states that allow privately insured credit unions, approximately 133 state-chartered credit unions are privately insured and are not subject to NCUA regulation or oversight. END FOOTNOTE

In 1998, Congress enacted the Credit Union Membership Access Act (CUMAA). /5/ Section 301 of CUMAA added new section 216 to the Federal Credit Union Act (FCUA), /6/ which requires the Board to adopt by regulation a system of PCA to restore the net worth of federally insured "natural person" credit unions (credit unions) that become inadequately capitalized. In developing the system, the Board is required to take into account that credit unions do not issue capital stock, must rely on retained earnings to build net worth, and have boards of directors that consist primarily of volunteers. In 2000, the Board implemented the required system of PCA primarily under part 702 of NCUA's regulations. /7/

FOOTNOTE 5 Public Law 105-219, 112 Stat. 913 (1998). END FOOTNOTE

FOOTNOTE 6 12 U.S.C. 1790d. END FOOTNOTE

FOOTNOTE 7 12 CFR Part 702; see also 65 FR 8584 (Feb. 18, 2000) and 65 FR 44950 (July 20, 2000). END FOOTNOTE

The purpose of section 216 of the FCUA is to "resolve the problems of [federally] insured credit unions at the least possible long-term loss to the [NCUSIF]." /8/ 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 NCUA; (2) an alternative system of PCA to be developed by NCUA for credit unions defined as "new"; and (3) a risk-based net worth requirement to apply to credit unions that NCUA defines as "complex." This proposed rule is primarily focused on principal components (1) and (3), although amendments to part 702 of NCUA's regulations relating to principal component (2) are also being proposed.

FOOTNOTE 8 12 U.S.C. 1790d(a)(1). END FOOTNOTE

Section 216(c) of the FCUA requires NCUA to, among other things, use a credit union's net worth ratio to determine its classification among five "net worth categories" set forth in the statute. /9/ In general, "net worth" is defined as the retained earnings balance of the credit union, /10/ and a credit union's "net worth ratio" is the ratio of its net worth to its total assets. /11/ 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. /12/

FOOTNOTE 9 Section 1790d(c). END FOOTNOTE

FOOTNOTE 10 Section 1790d(o)(2). END FOOTNOTE

FOOTNOTE 11 Section 1790d(o)(3). END FOOTNOTE

FOOTNOTE 12 Section 1790d(c)-(g); 12 CFR 702.204(a)-(b). END FOOTNOTE

In addition to the net worth ratio component described above, section 216(d) of the FCUA requires NCUA to define the term "complex" credit union "based on the portfolios of assets and liabilities of credit unions." /13/ It also requires NCUA to formulate a risk-based net worth (RBNW) requirement to apply to credit unions meeting that definition. /14/ The RBNW requirement must "take account of any material risks against which the net worth ratio required for [a federally] insured credit union to be adequately capitalized [(6 percent net worth ratio)] may not provide adequate protection." /15/ Congress encouraged NCUA to, "for example, consider whether the 6 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 [RBNW] requirement should reflect a reasoned judgment about the actual risks involved." /16/

FOOTNOTE 13 Section 1790d(d). END FOOTNOTE

FOOTNOTE 14 Id. END FOOTNOTE

FOOTNOTE 15 Section 1790d(d)(2). END FOOTNOTE

FOOTNOTE 16 S. Rep. No. 193, 105th Cong., 2d Sess. 13 (1998) (S. Rep.). END FOOTNOTE

--This is a summary of a Federal Register article originally published on the page number listed below--

Proposed rule.

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

RIN Number: "RIN 3133-AD77"

Citation: "79 FR 11184"

Federal Register Page Number: "11184"

"Proposed Rules"