[Federal Register Volume 65, Number 226 (Wednesday, November 22, 2000)]
[Proposed Rules]
[Pages 70319-70322]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-29837]


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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. 65, No. 226 / Wednesday, November 22, 2000 / 
Proposed Rules

[[Page 70319]]



NATIONAL CREDIT UNION ADMINISTRATION

12 CFR Part 704


Corporate Credit Unions

AGENCY: National Credit Union Administration (NCUA).

ACTION: Advance notice of proposed rulemaking.

-----------------------------------------------------------------------

SUMMARY: NCUA requests public comment on revisions to the rule 
governing corporate credit unions (corporates). As part of its 
regulatory review process and in conjunction with a prior advance 
notice of proposed rulemaking, NCUA has identified provisions for 
further clarification or revision. Comments from interested parties on 
these issues will assist NCUA in its regulatory review process.

DATES: Comments must be received on or before February 20, 2001.

ADDRESSES: Direct comments to Becky Baker, Secretary of the Board. Mail 
or hand-deliver comments to: National Credit Union Administration, 1775 
Duke Street, Alexandria, Virginia 22314-3428. You may fax comments to 
(703) 518-6319. Please send comments by one method only.

FOR FURTHER INFORMATION CONTACT: Robert F. Schafer, Director, Office of 
Corporate Credit Unions, at the above address or telephone (703) 518-
6640; or Mary Rupp, Staff Attorney, Office of General Counsel, at the 
above address or telephone (703) 518-6540.

SUPPLEMENTARY INFORMATION:

A. Background

    On July 28, 1999, NCUA issued an advance notice of proposed 
rulemaking that requested comment on several issues the Board 
identified as areas of the corporate rule it was interested in 
clarifying or revising. 64 FR 40787 (July 28, 1999). In addition, the 
Board welcomed comment on other sections of part 704 not addressed in 
the advanced notice. Id. As a result of those comments, the Board has 
identified additional areas of part 704 it is interested in revising or 
clarifying. Before issuing a proposed rule, the Board believes it would 
be helpful to receive additional comment and guidance on those issues 
not identified in the July 28, 1999, advance notice. The Board again 
welcomes comment on other sections of part 704 not addressed in its 
advance notice. Upon receipt of comments to this advance notice, the 
Board plans to issue a proposed rule that incorporates the comments to 
both this advance notice and the July 28, 1999, advance notice.

B. Specific Areas for Review

    As explained more fully below, the Board is seeking comment on the 
following issues: capital; credit concentration; asset liability 
management; aggregate investment by federal credit unions in paid-in 
capital and membership capital in corporate credit unions; and 
corporate credit union service organizations.

Capital

    Based on previous comments, the Board is considering eliminating 
the distinction between capital and the components of capital that are 
available for determining credit concentration limits. The following 
questions on capital relate either directly or indirectly to this 
proposed change.
1. Would a Change of Our Capital Definitions So That They Are Analogous 
to Those Used by Other Financial Regulators Provide Benefits to 
Corporate Credit Unions and Their Members?
    Currently, capital includes reserves and undivided earnings (RUDE), 
paid-in capital (PIC) and membership capital (MC), but for purposes of 
establishing credit concentration limits, MC is not included in 
capital. 12 CFR 704.2 and 704.6. Thus, corporate credit unions have two 
capital measurements: one that includes all capital; and one that 
includes only specific components of capital for credit concentration 
limits. NCUA is considering changes that would result in one measure of 
capital. These changes, for the purpose of credit concentration limits, 
would permit a portion or possibly all PIC and MC (under certain 
conditions) to be included. Overall, NCUA believes these changes would 
result in corporates having more capital for purposes of credit 
concentration limits.
    Generally, a corporate's capital includes PIC with a stated 
maturity date (term PIC) that is reduced monthly from five years to 
three years of maturity and all MC. Comparable components of a bank's 
total risk-based capital are scaled down by 20 percent per year within 
5 years of maturity. The result of this difference is that banks may 
have a more restrictive measure of total risk-based capital.
    The Board is considering amending the definition of reserve ratio 
to include only PIC that would qualify as capital under Generally 
Accepted Accounting Principles (GAAP), that is, non-cumulative 
dividend, perpetual maturity PIC. Existing PIC, for example, term PIC, 
could be ``grandfathered'' into the reserve ratio computation, subject 
to a reduction for term PIC of 20 percent per year for each year within 
5 years of maturity. Thus, term PIC would be fully amortized when there 
was a remaining maturity of less than 1 year, rather than the 3-year 
remaining maturity provision of the current rule.
    Similarly, the Board is considering revising the definition of 
capital ratio, so that, MC and PIC not qualifying as capital under GAAP 
would be subject to a reduction of 20 percent per year as illustrated 
in the second chart below.

[[Page 70320]]



                                   Illustrative Changes to Capital Definitions
----------------------------------------------------------------------------------------------------------------
                                                                                          Analogous provision of
          Current provision               Current definition     Illustrative change to   depository institution
                                                                       definition               regulators
----------------------------------------------------------------------------------------------------------------
RUDE.................................  Retained earnings......  None...................  Undivided profits and
                                                                                          capital reserves.
Reserve ratio........................  Sum of RUDE and PIC      Sum of RUDE and PIC      Core (Tier 1) capital
                                        divided by DANA.         qualifying as GAAP       ratio.
                                                                 capital divided by
                                                                 DANA.
Capital..............................  Sum of RUDE, PIC, and    Sum of RUDE, eligible    Total capital (risk
                                        MC.                      PIC, and eligible MC.    based).
----------------------------------------------------------------------------------------------------------------
Abbreviations used in table: DANA = moving daily average net assets; GAAP = generally accepted accounting
  principles; MC = membership capital; PIC = paid in capital; and RUDE = reserves and undivided earnings.


                Illustrative Reduction of MC and Term PIC
------------------------------------------------------------------------
                                                              Percentage
                                                 Reduction     of MC or
 Shorter of remaining maturity or any minimum     in MC or       PIC
           withdrawal notice period                 PIC      eligible as
                                                 (percent)     capital
------------------------------------------------------------------------
5 or more years...............................            0          100
4 to less than 5 years........................           20           80
3 to less than 4 years........................           40           60
2 to less than 3 years........................           60           40
1 to less than 2 years........................           80           20
Less than 1 year..............................          100            0
------------------------------------------------------------------------

    NCUA's intent is to retain the current capital ratio requirement of 
at least 4 percent. Although the proposed change to the definition of 
capital ratio would result in a reduction in eligible capital, it would 
increase capital used for credit and concentration limits. For example, 
only 60 percent of MC with a 3-year notice would be eligible for 
inclusion in the capital ratio. This change would not affect the level 
of MC counted as capital if a corporate credit union replaced existing 
MC with newly issued MC having a minimum notice period and a term of 5 
years. In addition, NCUA's intent is to remove the current restriction 
that eligible PIC not exceed RUDE. 12 CFR 704.2.
2. Should the Rule Require That the Measure for Adjusted Balance MC 
Accounts Be Based on a 12-Month Average, Rather Than a Measure Based on 
a Particular Point in Time? Further, Is There a Need for Adjusted 
Balance MC Accounts?
    Currently, the rule provides that an adjusted balance MC account 
may be adjusted in relation to a measure and gives as an example one 
percent of a member credit union's assets. 12 CFR 704.2. Depending on 
the measure used, there is the potential for dramatic increases or 
decreases in the adjusted balance MC account. To avoid this result, the 
Board is considering requiring that the adjustment be based on a 
percentage of the measure's average balance for the preceding 12 
months.
    If adjusted balance MC accounts are included in capital for credit 
concentration and interest rate risk limits, the Board is concerned 
that these accounts may lack the appropriate degree of permanency. The 
current definition of MC does not restrict the measure used to adjust 
the MC balance. It gives one percent of a member credit union's assets 
as an example. Rather than using assets, a corporate may use the dollar 
amount that a natural person member credit union has invested in the 
corporate as the basis for calculating adjusted balance MC accounts. In 
that case, a member could receive all of its MC account simply by 
withdrawing its investments.
3. Should There Be a Minimum RUDE Ratio (Defined as RUDE Divided by 
DANA) of 2 Percent for All Corporate Credit Unions?
    The Board believes a minimum RUDE ratio requirement would ensure 
stability of corporate credit union capital. Further, it would ensure a 
minimum component of the corporate's capital is not also reflected in 
the net worth of member credit unions.
4. Should There Be a Credit-Risk Weighted Capital Requirement?
    NCUA believes corporates have capital in relation to risk that is 
comparable to the (risked-based) total capital of other financial 
institutions, but, because of current definitions and lack of a 
required measurement, this comparability may not be evident. 12 CFR 
part 3, Appendix A.
    NCUA is considering a credit-risk weighted capital requirement for 
corporate credit unions. While corporate credit unions must comply with 
stringent interest rate risk regulations, corporate credit unions are 
not currently subject to credit-risk weighted capital requirements. 
Some corporates have expressed an interest in reinstituting this 
requirement because it would provide a risk-based capital ratio that is 
comparable to that used by other financial institutions.

Credit Concentration

1. Should Credit Concentration Limits Be Set as a Percentage of 
Capital?
    Currently, credit concentration limits are based on percentages of 
RUDE and PIC, rather than a broader measure such as capital. As part of 
its changes to the capital requirements, the Board is considering 
changing this requirement, so that credit concentration limits are 
based on a percentage of capital. This change would enable the Board to 
use a uniform measure of capital for all purposes.
2. Should Credit Concentration Limits Vary Depending Upon the Credit 
Rating of an Investment, for Example, the Lower the Credit Rating, the 
More Restrictive the Credit Concentration Limit?
    In conjunction with the previously discussed changes to capital, 
NCUA is considering lowering the minimum

[[Page 70321]]

credit rating requirements for investments to permit corporates to be 
more competitive with other depository institutions that are permitted 
to invest in the full range of investment grade securities. NCUA 
recognizes the increased quality of corporates' credit analysis skills 
and improved capital levels. The effect of lowering the minimum credit 
rating requirements would be to allow additional permissible 
investments. As illustrated in the table below, the requirements are 
linked to the corporate's level of expanded authority.

Example Minimum Credit Rating Requirements

                         Minimum Credit Ratings for Long-Term and Short-Term InvestmentS
                          [Stated in terms of Standard & Poor's Ratings or Equivalents]
----------------------------------------------------------------------------------------------------------------
                                                                    Part I expanded          Part II expanded
                                          Base and base plus           authority                authority
----------------------------------------------------------------------------------------------------------------
Long-term Investments................  No lower than AA-......  No lower than A-.......  No lower than BBB
                                                                                          (flat).
Short-term Investments...............  No lower than A-1......  No lower than A-2, with  No lower than A-2, with
                                                                 a minimum long-term      a minimum long-term
                                                                 debt rating of the       debt rating of the
                                                                 obligor of A-.           obligor of BBB (flat).
----------------------------------------------------------------------------------------------------------------

    With the contemplated inclusion of eligible MC as part of the 
capital base for credit concentration limits and the permissibility of 
lower rated investments, the current credit concentration limits are 
too high. NCUA is considering reducing the existing percentages and 
reorganizing the limits into the categories of long-term and short-term 
investments, as illustrated in the tables below.

Example Credit Concentration Limits

                                                    Long-Term Investment Credit Concentration Limits
                                                               [As percentage of capital]
--------------------------------------------------------------------------------------------------------------------------------------------------------
 
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                    Limits by Obligor
--------------------------------------------------------------------------------------------------------------------------------------------------------
Long-term investments:
    Credit Rating...............  AAA- and higher.............  AA- and higher..............  A- and higher...............  BBB (flat) and higher.
    Concentration Limits........  25%.........................  20%.........................  15%.........................  10%.
--------------------------------------------------------------------------------------------------------------------------------------------------------


                                                    Short-Term Investment Credit Concentration Limits
                                                               [As percentage of capital]
--------------------------------------------------------------------------------------------------------------------------------------------------------
 
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                    Limits by Obligor
--------------------------------------------------------------------------------------------------------------------------------------------------------
Short-term investments:
    Credit Rating.................  A-1...................................  A-2, with a minimum long-term rating   A-2, with a minimum long-term rating
                                                                             of the obligor of A-.                  of the obligor of BBB (flat).
    Concentration Limits..........  25%...................................  15%..................................  10%.
    Repurchase Transaction          50%...................................  30%..................................  20%.
     Concentration Limits.
--------------------------------------------------------------------------------------------------------------------------------------------------------

3. NCUA Seeks Comment on Establishing a Limit for the Aggregate Credit 
Exposure to a Single Obligor That Has Issued Debt Obligations Across 
Multiple Rating Categories. The Proposed Limits Are Listed in the Two 
Tables Above
4. Should Corporate Credit Unions Be Exempt From Credit Concentration 
Limits When Investing in Other Corporate Credit Unions?
    Exemptions to the current credit concentration limits only apply to 
investments in a wholesale corporate credit union. NCUA believes 
extension of these exemptions to all corporate credit unions will 
facilitate more efficient movement of liquidity throughout the system.
5. Should There Be a De Minimis Exemption From Credit Concentration 
Limits and, if so, What Amount?
    NCUA is considering a de minimis exemption from credit 
concentration limits (such as $5 million) to permit smaller corporate 
credit unions to execute institutional block size transactions, such as 
Fed Funds.

Asset Liability Management

1. NCUA Seeks Comment on Changing the Definition of Net Economic Value 
(NEV)
    NEV means the fair value of assets minus the fair value of 
liabilities. 12 CFR 704.2. Currently, the definition of NEV treats MC 
as a liability for purposes of the NEV calculation. NCUA intends to 
change the definition of NEV to exclude eligible MC and eligible PIC 
(including grandfathered PIC) from liabilities. The proposed 
definitions of eligible MC and eligible PIC are reflected in the chart 
entitled Illustrative Reduction of MC and Term PIC. In turn, 
noneligible MC and noneligible PIC are treated as liabilities for 
purposes of the NEV calculation. This change would tend to increase the 
reported base case NEV ratio.
2. NCUA Seeks Comment on Increasing the Minimum NEV Ratio to 2 Percent
    In conjunction with the proposed change to the definition of NEV, 
NCUA proposes increasing the minimum NEV ratio to 2 percent. Section 
704.8(d)(1)(ii) requires a NEV ratio of 1 percent. 12 CFR 
704.8(d)(1)(ii). By increasing the base case NEV through inclusion of 
eligible MCs, larger dollar amounts could be exposed to interest rate 
risk.

[[Page 70322]]

    Under the current rule, for example, if a corporate credit union 
has base-plus expanded authority and a base case NEV ratio of 1.40 
percent, the rule permits the NEV ratio to decline 25 percent. This 
would be a decline of 35 basis points. Under the proposal, with the 
inclusion of eligible MC, the corporate credit union would have a base 
case NEV ratio of 2.40 percent and the permissible decline would 
increase to 60 basis points. This decline is large in relation to the 
low level of base case NEV. By increasing the minimum NEV ratio from 1 
percent to 2 percent, the decline would be limited to no more than 40 
basis points.

Example of Including Eligible MCs and Increasing Minimum NEV Ratio

                                      Impact of Change to Minimum NEV Ratio on Hypothetical Corporate Credit Union
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                                     Including eligible MCs in NEV and
                                                 Current rule                   Including eligible MCs in NEV        increasing minimum NEV ratio to 2%
--------------------------------------------------------------------------------------------------------------------------------------------------------
Base case NEV ratio...............  1.4%..................................  2.4%.................................  2.4%.
Permitted decline (25 percent of    35 basis points.......................  60 basis points......................  Limited to 40 basis points by minimum
 base case).                                                                                                        NEV ratio.
Resulting NEV ratio (not less than  1.05%.................................  1.8%.................................  2%.
 minimum NEV ratio).
Minimum NEV ratio.................  1%....................................  1%...................................  2%.
--------------------------------------------------------------------------------------------------------------------------------------------------------

3. Should the Minimum NEV Ratio That Triggers Monthly Interest Rate 
Sensitivity Analysis Testing Be Increased?
    Section 704.8(d)(1)(i) currently increases the requirement for 
testing from quarterly to monthly when the base case NEV ratio falls 
below 2 percent. The Board is considering raising it to 3 percent 
because, when the measured minimum NEV ratio is low, it is reasonable 
to monitor interest rate sensitivity more frequently. The contemplated 
changes to the NEV definition may increase the level of both the base 
case NEV and the minimum NEV.

Aggregate Investment by Federal Credit Unions in PIC and MC in 
Corporate Credit Unions

    1. NCUA seeks comment on whether the Board should amend 
Sec. 703.100(c) to increase the limit on the aggregate purchase of 
member PIC and MC in one corporate credit union from one percent to two 
percent. In conjunction with this change, the Board is considering 
adding a new provision that imposes a four percent limit on the 
aggregate purchase of member PIC and MC in all corporate credit unions.

Corporate Credit Union Service Organizations (CUSOs)

    1. NCUA seeks comment on the definition of a corporate CUSO. 
Currently, the rule defines a corporate CUSO as an entity that is ``at 
least partly owned by a corporate credit union'' but does not specify a 
minimum ownership requirement. 12 CFR 704.11(a)(1). The Board believes 
that the definition of a corporate CUSO should be amended to ensure 
that there is a significant ownership interest by corporate credit 
unions. The Board is considering amending the definition to require 
that a CUSO be considered a corporate CUSO only if any corporate credit 
union owns a minimum 25 percent interest or the aggregate interest by 
all corporate credit unions exceeds 50 percent.

    By the National Credit Union Administration Board on November 
16, 2000.
Becky Baker,
Secretary of the Board.
[FR Doc. 00-29837 Filed 11-21-00; 8:45 am]
BILLING CODE 7535-01-U