4340 Federal Register / Vol. 80, No. 17 / Tuesday, January 27, 2015 / Proposed Rules 

1Within the nine states that allow privately 

insured credit unions, approximately 133 statechartered credit unions are privately insured and 

are not subject to NCUA regulation or oversight. 

2 79 FR 11183 (Feb. 27, 2014). 

3See 12 CFR part 704. 

4See 78 FR 55339 (Sept. 10, 2013). 

NATIONAL CREDIT UNION 

ADMINISTRATION 

12 CFR Parts 700, 701, 702, 703, 713, 

723, and 747 

RIN 3133–AD77 

Risk-Based Capital 

AGENCY: National Credit Union 

Administration (NCUA). 

ACTION: Proposed rule. 

SUMMARY: The NCUA Board (Board) is 

seeking comment on a second proposed 

rule that would amend NCUA’s current 

regulations regarding prompt corrective 

action (PCA) to require that credit 

unions taking certain risks hold capital 

commensurate with those risks. The 

proposal would restructure NCUA’s 

PCA regulations and make various 

revisions, including amending the 

agency’s current risk-based net worth 

requirement by replacing the current 

risk-based net worth ratio with a new 

risk-based capital ratio for federally 

insured natural person credit unions 

(credit unions). The proposal would 

also, in response to public comments 

received, make a number of changes to 

the original proposed rule that the 

Board published in the Federal Register 

on February 27, 2014. These changes 

include, among other things, exempting 

credit unions with up to $100 million in 

total assets from the new rule, lowering 

the risk-based capital ratio level 

required for an affected credit union to 

be classified as well capitalized from 

10.5 percent to 10 percent, lowering the 

risk weights for various classes of assets, 

removing interest rate risk components 

from the risk weights, and extending the 

implementation timeframe to January 1, 

2019. These changes would 

substantially reduce the number of 

credit unions subject to the rule, reduce 

the impact on affected credit unions, 

and afford affected credit unions 

sufficient time to prepare for the rule’s 

implementation. 

The proposed risk-based capital 

requirement set forth in this proposal 

would be more consistent with NCUA’s 

risk-based capital measure for corporate 

credit unions and more comparable to 

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 Banking Agencies). 

In addition, the proposed revisions 

would amend the risk weights for many 

of NCUA’s current asset classifications; 

require higher minimum levels of 

capital for credit unions with 

concentrations of assets in real estate 

loans or commercial loans or higher 

levels of non-current loans; and set forth 

how NCUA can address a credit union 

that does not hold capital that is 

commensurate with its risk. 

The proposed revisions would also 

eliminate several provisions in NCUA’s 

current PCA regulations, including 

provisions relating to the regular reserve 

account, risk-mitigation credits, and 

alternative risk weights. (For clarity, the 

‘‘current’’ PCA regulations would 

remain in force until the effective date 

of a final risk-based capital rule.) 

DATES: Comments must be received by 

April 27, 2015. 

ADDRESSES: You may submit written 

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 regcomments@

ncua.gov. Include ‘‘[Your name]— 

Comments on Proposed Rule: RiskBased 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 OGCMail@

ncua.gov. 

FOR FURTHER INFORMATION CONTACT: 

Larry Fazio, Director, Office of 

Examination and Insurance, at (703) 

518–6360; JeanMarie Komyathy, 

Director, Division of Risk Management, 

Office of Examination and Insurance, at 

(703) 518–6360; Steven Farrar, Loss/

Risk Analyst, Division of Risk 

Management, Office of Examination and 

Insurance, at (703) 518–6393; John 

Shook, Loss/Risk Analyst, Division of 

Risk Management, Office of 

Examination and Insurance, at (703) 

518–3799; Tom Fay, Senior Capital 

Markets Specialist, Division of Capital 

and Credit Markets, Office of 

Examination and Insurance, at (703) 

518–1179; Rick Mayfield, Senior Capital 

Markets Specialist, Division of Capital 

and Credit Markets, Office of 

Examination and Insurance, at (703) 

518–6501; or by mail at National Credit 

Union Administration, 1775 Duke 

Street, Alexandria, VA 22314. 

SUPPLEMENTARY INFORMATION: 

I. Introduction 

II. Legal Authority 

III. Summary of the Original Proposal and 

This Proposal 

IV. Section-by-Section Analysis 

V. Effective Date 

VI. Impact of this Proposed Rule 

VII. Regulatory Procedures 

I. Introduction 

NCUA’s primary mission is to ensure 

the safety and soundness of federally 

insured credit unions. NCUA performs 

this function by examining and 

supervising all federal credit unions, 

participating in the examination and 

supervision of federally insured, statechartered credit unions in coordination 

with state regulators, and insuring 

members’ accounts at federally insured 

credit unions.1 In its role as 

administrator of the National Credit 

Union Share Insurance fund (NCUSIF), 

NCUA insures and regulates 

approximately 6,400 federally insured 

credit unions, holding total assets 

exceeding $1.1 trillion and representing 

approximately 99 million members. 

At its January 2014 meeting, the 

Board issued a proposed rule (the 

Original Proposal) 2 to amend NCUA’s 

PCA regulations, part 702. The Original 

Proposal sought to enhance risk 

sensitivity and address weaknesses in 

the existing regulatory capital 

framework for credit unions. The 

revisions in the Original Proposal 

included a new method for computing 

NCUA’s risk-based requirement that 

would be more consistent with the riskbased capital ratio measure used for 

corporate credit unions 3 and more 

comparable to the risk-based capital 

ratio measures used by the Other 

Banking Agencies.4 In general, this new 

method for computing NCUA’s riskbased requirement would have adjusted 

the risk weights for many asset 


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Federal Register / Vol. 80, No. 17 / Tuesday, January 27, 2015 / Proposed Rules 4341 

5Public Law 105–219, 112 Stat. 913 (1998). 

6 12 U.S.C. 1790d. 

7The 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). NCUA’s risk-based net worth 

requirement has been largely unchanged since its 

implementation, with the following limited 

exceptions: Revisions were made to the rule in 2003 

to amend the risk-based net worth requirement for 

MBLs, 68 FR 56537 (Oct. 1, 2003); revisions were 

made to the rule in 2008 to incorporate a change 

in the statutory definition of ‘‘net worth,’’ 73 FR 

72688 (Dec. 1, 2008); revisions were made to the 

rule in 2011 to expand the definition of ‘‘low-risk 

assets’’ to include debt instruments on which the 

payment of principal and interest is 

unconditionally guaranteed by NCUA, 76 FR 16234 

(Mar. 23, 2011); and revisions were made in 2013 

to exclude credit unions with total assets of $50 

million or less from the definition of ‘‘complex’’ 

credit union, 78 FR 4033 (Jan. 18, 2013). 

8 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). 

9 12 U.S.C. 1790d(b)(1)(B). 

10 12 CFR part 702; see also 65 FR 8584 (Feb. 18, 

2000) and 65 FR 44950 (July 20, 2000). 

11 12 U.S.C. 1790d(a)(1). 

12Section 1790d(c). 

13Section 1790d(o)(2). 

14Throughout this document the terms ‘‘net 

worth ratio’’ and ‘‘leverage ratio’’ are used 

interchangeably. 

15Section 1790d(o)(3). 

16Section 1790d(c) through (g); 12 CFR 

702.204(a) and (b). 

17For purposes of this rulemaking, the term ‘‘riskbased 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 union. The terms 

‘‘risk-based capital ratio’’ and ‘‘risk-based capital 

ratio’’ are used to refer to the specific standards this 

rulemaking proposes to function as criteria for the 

statutory risk-based net worth requirement. For 

example, this rulemaking’s proposed risk-based 

capital ratio would replace the risk-based net worth 

ratio in the current rule. The term ‘‘risk-based 

capital ratio’’ is also used by the Other Banking 

Agencies and the international banking community 

Continued 

classifications to lower the minimum 

risk-based capital ratio requirement for 

credit unions with lower-risk 

operations. Conversely, this new 

method would have required higher 

minimum levels of risk-based capital for 

credit unions with concentrations of 

assets in residential real estate loans or 

commercial loans, or high levels of noncurrent loans. 

In addition, due to the inherent 

limitations of any widely applied riskbased capital measurement system, the 

Original Proposal also included 

procedures for the Board to require an 

individual credit union to hold a higher 

level of risk-based capital where NCUA 

staff raised specific supervisory 

concerns regarding the credit union’s 

condition. Finally, the Original Proposal 

eliminated the provisions of current 

§ 702.401(b) relating to transfers to the 

regular reserve account, current 

§ 702.106 regarding the standard 

calculation of the RBNW ratio 

requirement, current § 702.107 

regarding alternative components for the 

standard calculation, and current 

§ 702.108 regarding the risk-mitigation 

credit. 

In response to the Original Proposal, 

the Board received over 2,000 comments 

with many suggestions on how to 

improve the Original Proposal. The 

Board has reviewed the comments and 

determined that it was appropriate to 

issue a second proposed rule. The Board 

notes that, because this is a new 

proposed rule, it is not required to 

respond to any comments received on 

the Original Proposal. However, the 

Board believes it is important to address 

those comments, and has, therefore, 

included comment summaries and 

responses throughout the preamble to 

this proposal. 

The Board is now requesting 

comment on this second proposed rule 

regarding risk-based capital. Based 

largely on comments it received on the 

Original Proposal, the Board is 

proposing many improvements to the 

Original Proposal, including: (1) 

Amending the definition of ‘‘complex’’ 

credit union by increasing the asset 

threshold from $50 million to $100 

million; (2) reducing the number of 

asset concentration thresholds for 

residential real estate loans and 

commercial loans (formerly classified as 

MBLS); (3) assigning one-to-four family 

non-owner-occupied residential real 

estate loans the same risk weights as 

other residential real estate loans; (4) 

eliminating IRR from this proposed rule; 

(5) extending the implementation 

timeframe to January 1, 2019; and (6) 

eliminating the Individual Minimum 

Capital Requirement (IMCR) provision. 

Among other things, these changes 

would substantially reduce the number 

of credit unions subject to the rule, and 

would afford affected credit unions 

sufficient time to prepare for the rule’s 

full implementation. A full discussion 

of the impact of these and other changes 

in this proposed rule is contained in 

Impact of the Proposed Regulation part 

of the preamble below. 

As discussed in more detail below, 

the revisions in the Original Proposal 

and this proposal are intended to 

implement the statutory requirements of 

the Federal Credit Union Act (FCUA) 

and follow recommendations made by 

the Government Accountability Office 

(GAO). 

II. Legal Authority 

In 1998, Congress enacted the Credit 

Union Membership Access Act 

(CUMAA).5 Section 301 of CUMAA 

added new section 216 to the FCUA,6

which requires the Board to adopt by 

regulation a system of PCA to restore the 

net worth of credit unions that become 

inadequately capitalized.7 Section 

216(b)(1)(A) requires the Board to adopt 

by regulation a system of PCA for 

federally insured credit unions that is 

‘‘consistent with’’ section 216 of the 

FCUA and ‘‘comparable to’’ section 38 

of the Federal Deposit Insurance Act 

(FDI Act).8 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., that 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).9 In 2000, the Board 

implemented the required system of 

PCA, primarily in part 702 of NCUA’s 

regulations.10

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].’’ 11 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 focuses 

primarily on principal components (1) 

and (3), although amendments to part 

702 of NCUA’s regulations relating to 

principal component (2) are also 

included as part of this proposal. 

Among other things, section 216(c) of 

the FCUA requires NCUA to use a credit 

union’s net worth ratio to determine its 

classification among five ‘‘net worth 

categories’’ set forth in the FCUA.12

Section 216(o) generally defines a credit 

union’s ‘‘net worth’’ as its retained 

earnings balance,13 and a credit union’s 

‘‘net worth ratio’’ 14 as the ratio of its net 

worth to its total assets.15 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.16

Section 216(d)(1) of the FCUA 

requires that NCUA’s system of PCA 

include, in addition to the statutorily 

defined net worth ratio requirement 

applicable to federally insured naturalperson credit unions, ‘‘a risk-based net 

worth 17 requirement for insured credit 


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4342 Federal Register / Vol. 80, No. 17 / Tuesday, January 27, 2015 / Proposed Rules 

when referring to the types of risk-based 

requirements that are addressed in this proposal. 

This change in terminology throughout the proposal 

would have no substantive effect on the 

requirements of the FCUA, and is intended only to 

reduce confusion for the reader. 

18 12 U.S.C. 1790d(d)(1). 

19See 12 U.S.C. 1790d(o) (Congress specifically 

defined the terms ‘‘net worth’’ and ‘‘net worth 

ratio’’ in the FCUA, but did not define the statutory 

term ‘‘risk-based net worth.’’). 

20 12 U.S.C. 1790d(d). 

21 Id. 

22 12 U.S.C. 1790d(d)(2). 

23S. Rep. No. 193, 105th Cong., 2d Sess. 13 

(1998). 

24 12 U.S.C. 1790d(c). 

25The risk-based net worth requirement also 

indirectly impacts credit unions in the 

‘‘undercapitalized’’ and lower net worth categories, 

which are required to operate under an approved 

net worth restoration plan. The plan must provide 

the means and a timetable to reach the ‘‘adequately 

capitalized’’ category. See 12 U.S.C. 1790d(f)(5) and 

12 CFR 702.206(c). However, for ‘‘complex’’ credit 

unions in the ‘‘undercapitalized’’ or lower net 

worth categories, the minimum net worth ratio 

‘‘gate’’ to that category will be six percent or the 

credit union’s risk-based net worth requirement, if 

higher than 6 percent. In that event, a complex 

credit union’s net worth restoration plan will have 

to prescribe the steps a credit union will take to 

reach a higher net worth ratio ‘‘gate’’ to that 

category. See 12 CFR 702.206(c)(1)(i)(A) and 12 

U.S.C. 1790d(c)(1)(A)(ii) and (c)(1)(B)(ii). 

26 12 U.S.C. 1790d(c)(1)(c)(ii). 

27 12 U.S.C. 1790d(c)(1)(A)–(C) (emphasis added). 

28 Id. at section 1790d(d). 

29 Id. at section 1790d(d)(2). 

30 Id. at section 1790d(c)(1)(B). 

unions that are complex, as defined by 

the Board . . . .’’ 18 Unlike the terms 

‘‘net worth’’ and ‘‘net worth ratio,’’ the 

term ‘‘risk-based net worth’’ is not 

defined in the FCUA.19 Accordingly, 

when read together, sections 216(b)(1) 

and 216(d)(1) grant the Board broad 

authority to design PCA regulations, 

including a risk-based net worth 

requirement, so long as the regulations 

are comparable to the Other Banking 

Agencies’ PCA requirements and 

consistent with the requirements of 

section 216 of the FCUA and the 

cooperative character of credit unions. 

The FCUA directs NCUA to base its 

definition of ‘‘complex’’ credit unions 

‘‘on the portfolios of assets and 

liabilities of credit unions.’’ 20 It also 

requires NCUA to design a risk-based 

net worth requirement to apply to such 

‘‘complex’’ credit unions.21 The riskbased net worth 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 [(six percent net 

worth ratio)] may not provide adequate 

protection.’’ 22 In the Senate Report on 

CUMAA, Congress expressed its intent 

with regard to the design of the riskbased requirement and the meaning of 

section 216(d)(2) by providing: 

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 a credit union to be 

adequately capitalized may not provide 

adequate protection. Thus the NCUA should, 

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 risk-based 

net worth requirement should reflect a 

reasoned judgment about the actual risks 

involved.23

Section 216(c) of the FCUA requires 

that, if a credit union meets the 

definition of ‘‘complex’’ and its net 

worth ratio initially indicates that it 

meets or exceeds the net worth ratio 

requirement to be either ‘‘adequately 

capitalized’’ or ‘‘well capitalized,’’ the 

credit union must still satisfy the 

separate risk-based net worth 

requirement.24 Under the separate riskbased net worth requirement, the 

complex credit union must, in addition 

to meeting the statutory net worth ratio 

requirement, also meet or exceed the 

minimum risk-based net worth 

requirement that corresponds to either 

the adequately capitalized or well 

capitalized capital category in order to 

receive a capital classification of 

adequately capitalized or well 

capitalized, as the case may be.25 For 

example, if a complex credit union 

meets or exceeds the net worth ratio 

requirement to be classified as well 

capitalized, then it must also meet or 

exceed the corresponding risk-based net 

worth requirement to be well 

capitalized. 

If any complex credit union meets or 

exceeds the net worth ratio requirement 

to be classified as well capitalized or 

adequately capitalized, but fails to meet 

the corresponding risk-based net worth 

requirement to be well capitalized or 

adequately capitalized, then the credit 

union’s capital classification is 

determined based on the risk-based net 

worth requirement. For example, if a 

complex credit union is classified as 

well capitalized based on its net worth 

ratio, but only meets the risk-based net 

worth requirement that corresponds 

with the adequately capitalized capital 

category, then that credit union’s capital 

classification would be adequately 

capitalized. Similarly, if a complex 

credit union meets the risk-based net 

worth requirement to be well 

capitalized, but only meets the net 

worth ratio requirement to be 

undercapitalized, then that credit 

union’s overall capital classification is 

undercapitalized. In either case, the 

credit union would be subject to any 

mandatory and discretionary 

supervisory actions applicable to its 

lowest capital classification category.26

In response to the Original Proposal, 

some commenters questioned NCUA’s 

legal authority to impose a risk-based 

net worth requirement on both well 

capitalized and adequately capitalized 

credit unions. NCUA’s position is that 

the Board is authorized to do so under 

the FCUA. Section 216(c)(1)(A) 

specifically provides that, to be 

classified as well capitalized, a complex 

credit union must meet the statutory net 

worth ratio requirement and any 

applicable risk-based net worth 

requirement. Section 216(c)(1) provides, 

in relation to ‘‘net worth categories,’’ 

that: (1) An insured credit union is 

‘‘well capitalized’’ if it has a net worth 

ratio of not less than 7 percent; and it 

meets any applicable risk-based net 

worth requirement under subsection (d) 

of this section; (2) an insured credit 

union is ‘‘adequately capitalized’’ if it 

has a net worth ratio of not less than 6 

percent; and it meets any applicable 

risk-based net worth requirement under 

subsection (d) of this section; and (3) an 

insured credit union is 

‘‘undercapitalized’’ if it has a net worth 

ratio of less than 6 percent; or it fails to 

meet any applicable risk-based net 

worth requirement under subsection (d) 

of this section.27 The language in 

components (1) and (2), when read in 

conjunction with the language in 

section 216(d), authorizes NCUA to 

impose risk-based net worth 

requirements on both well capitalized 

and adequately capitalized credit 

unions. 

In addition, section 216(d)(2) of the 

FCUA sets forth specific requirements 

for the design of the risk-based net 

worth requirement mandated under 

section 216(d)(1).28 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.’’ 29 Under section 

216(c)(1)(B) of the FCUA, the net worth 

ratio required for an insured credit 

union to be adequately capitalized is six 

percent.30 The plain language of section 

216(d)(2) supports NCUA’s 

interpretation that Congress intended 

for the Board to design a risk-based net 

worth requirement to take into account 

any material risks beyond those already 

addressed through the statutory 6 

percent net worth ratio required for a 


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Federal Register / Vol. 80, No. 17 / Tuesday, January 27, 2015 / Proposed Rules 4343 

31See S. Rep. No. 193, 105th Cong., 2d Sess. 

(1998) (providing in relevant part: ‘‘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.’’). 

32See 12 U.S.C. 1831o, and, e.g., 12 CFR 

324.403(b). 

33See S. Rep. No. 193, 105th Cong., 2d Sess., 12 

(1998) (Providing in relevant part: ‘‘New section 

216 [of the FCUA] is modeled on section 38 of the 

Federal Deposit Insurance Act, which has applied 

to FDIC-insured depository institutions since 

1992.’’). 

34 12 U.S.C. 1831o(c)(1)(A) (emphasis added). 

35Credit unions play a sizable role in the U.S. 

depository system. Assets in the credit union 

system amount to more than $1.1 trillion, roughly 

8 percent of U.S. chartered depository institution 

assets (source: NCUA Calculation using the 

financial accounts of the United States, Federal 

Reserve Statistical Release Z.1, Table L.110, 

September 18, 2014). Data from the Federal Reserve 

indicate that credit unions account for about 12 

percent of private consumer installment lending. 

(Source: NCUA calculations using data from the 

Federal Reserve Statistical Release G.19, Consumer 

Credit, September 2014. Total consumer credit 

outstanding (not mortgages) was $3,246.8 billion of 

which $826.2 billion was held by the federal 

government and $293.1 billion was held by credit 

unions. The 12 percent figure is the $293.1 billion 

divided by the total outstanding less the federal 

government total). Just over a third of households 

have some financial affiliation with a credit union. 

(Source: NCUA calculations using data from the 

Federal Reserve 2013 survey of Consumer Finance.) 

All Federal Reserve Statistical Releases are 

available at http:\\www.federalreserve.gov\

econresdata\statisticsdata.htm. 

36Basel Committee on Banking Supervision, An 

assessment of the long-term economic impact of 

stronger capital and liquidity requirements 3–4 

(August 2010), available at http://www.bis.org/publ/ 

bcbs173.pdf. These losses do not explicitly account 

for government interventions that ameliorated the 

observed economic impact. This is the median loss 

estimate. 

37The National Bureau of Economic Research 

Business Cycle Dating Committee defines the 

beginning date of the recession as December 2007 

(2007Q4) and the ending date of the recession as 

June 2009 (2009Q2). See the National Bureau of 

Economic Research Web site: http://www.nber.org/ 

cycles/cyclesmain.html. The real GDP decline was 

calculated by NCUA using data for 2007Q4 and 

2009Q2 from the National Income and Product 

Accounts, Bureau of Economic Analysis, U.S. 

Department of Commerce; see Table 1.1.3. Data are 

available at http://www.bea.gov/iTable/iTable.cfm?

ReqID=9&step=1#reqid=9&step=1&isuri=1. Data 

accessed November 11, 2014. The jobs lost figure 

was calculated by NCUA using data from the 

Bureau of Labor Statistics (BLS), U.S. Department 

of Labor, Current Employment Statistics, CES PeakTrough Tables. The statistic cited is the decline in 

total nonfarm employees from December 2007 

through February 2010, which BLS defines as the 

trough of the employment series. Data available at: 

http://www.bls.gov/ces/cespeaktrough.htm and 

accessed on November 11, 2014. The 

unemployment rate was taken from the Bureau of 

Labor Statistics, U.S. Department of Labor, Current 

Population Survey, series LNS14000000. Accessed 

November 11, 2014 at http://data.bls.gov/pdq/

SurveyOutputServlet. The unemployment rate 

peaked at 10 percent in October 2009. 

38NCUA calculations based on from the National 

Income and Product Accounts, Bureau of Economic 

Analysis, U.S. Department of Commerce. Data from 

Table 1.1.6 show real GDP at $14.992 trillion in 

2007Q4 in chained 2009 dollars. Adjusting to 2014 

dollars using the GDP price index and using the 60 

percent loss figure cited yields an estimated loss of 

approximately $10 trillion in 2014 dollars. Data are 

available at http://www.bea.gov/iTable/iTable.cfm?

ReqID=9&step=1#reqid=9&step=1&isuri=1. 

39Tyler Atkinson, David Luttrell & Harvey 

Rosenblum, Fed. Reserve Bank of Dall, How Bad 

Was It? The Costs and Consequences of the 2007– 

2009 Financial Crisis (July 2013), available at 

https://dallasfed.org/assets/documents/research/

staff/staff1301.pdf. 

credit union to be adequately 

capitalized.31

In other words, the language in 

section 216(d)(2) of the FCUA simply 

identifies the types of risks that NCUA’s 

risk-based net worth requirement must 

address (i.e., those risks not already 

addressed by the statutory six percent 

net worth ratio requirement). It is a 

misinterpretation of section 216(d)(2) to 

argue, as some commenters have in 

response to the Original Proposal, that 

Congress’ use of the term ‘‘adequately 

capitalized’’ in section 216(d)(2) 

somehow limits the Board’s authority to 

impose a higher risk-based capital ratio 

level for well capitalized credit unions. 

Rather than prohibiting the Board from 

imposing a higher risk-based capital 

ratio level for well capitalized credit 

unions, section 216(d)(2) simply 

requires that the Board design the riskbased net worth requirement to take into 

account those risks not adequately 

addressed by the statute’s six percent 

net worth ratio requirement. Thus, the 

plain language of section 216(d) does 

not support these commenters’ 

interpretation. 

NCUA’s interpretation of its legal 

authority to impose a risk-based net 

worth requirement on both well 

capitalized and adequately capitalized 

credit unions is further supported by the 

Other Banking Agencies’ PCA statute 

and regulations.32 Section 38(c)(1)(A) of 

the FDI Act, upon which section 216 of 

the FCUA was modeled,33 requires that 

the Other Banking Agencies’ ‘‘relevant 

capital measures’’ ‘‘include (i) a leverage 

limit; and (ii) a risk-based capital 

requirement.’’ 34 Despite Congress’ use 

of the singular noun ‘‘requirement’’ in 

section 38 of the FDI Act, the Other 

Banking Agencies’ PCA regulations, 

which went into effect before Congress 

passed CUMAA, have long required that 

their regulated institutions meet 

different risk-based capital ratio levels 

to be classified as well capitalized, 

adequately capitalized, 

undercapitalized, or significantly 

undercapitalized. Therefore, by setting 

different risk-based capital ratio levels 

for credit unions to be adequately and 

well capitalized, NCUA’s risk-based 

capital requirement would be consistent 

with the requirements of section 216 of 

the FCUA and would be ‘‘comparable’’ 

to the Other Banking Agencies’ PCA 

regulations. 

III. Summary of the Original Proposal 

and this Second Proposal 

A. The Important Role and Benefit of 

Capital 

Capital is the buffer that depository 

institutions, including credit unions, 

use to prevent institutional failure or 

dramatic deleveraging during times of 

strees. As evidenced by the recent 

recession, during a financial crisis a 

buffer can mean the difference between 

the survival or failure of a financial 

insitution. Financial crises are very 

costly, both to the economy in general 

and to individual depository 

institutions.35 While the onset of a 

financial crisis is inherently 

unpredictable, a review of the historical 

record over a range of countries and 

recent time periods has suggested that a 

significant crisis involving depository 

institutions occurs about once every 20 

to 25 years, and has a typical 

cumulative discounted cost in terms of 

lost aggregate output relative to the 

precrisis trend of about 60 percent of 

precrisis annual output.36 In other 

words, the typical crisis results in losses 

over time, relative to the precrisis trend 

economic growth, that amount to more 

than half of the economy’s output before 

the onset of the crisis. 

The 2007–2009 financial crisis and 

the associated economic dislocations 

during the Great Recession were 

particularly costly to the United States 

in terms of lost output and jobs. Real 

GDP declined more than four percent, 

almost nine million jobs were lost, and 

the unemployment rate rose to 10 

percent.37 The cited figures are just the 

direct losses. Compared to where the 

economy would have been had it 

followed the precrisis trend, the losses 

in terms of GDP and jobs would be 

higher. For example, using the results 

described in the previous paragraph as 

a guide, the cumulative loss of output 

from the recent financial crisis is 

roughly $10 trillion (2014 dollars).38

Other estimates of the total loss, derived 

using approaches different than 

described in the previous paragraph, are 

similar. For example, researchers at the 

Federal Reserve Bank of Dallas, using a 

different approach that achieved results 

within the same range, estimated a 

range of loss of $6 trillion to $14 trillion 

due to the crisis.39

Research using bank data across 

several countries and time periods 

indicates that higher levels of capital 

insulate financial institutions from the 


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4344 Federal Register / Vol. 80, No. 17 / Tuesday, January 27, 2015 / Proposed Rules 

40See An Assessment of the Long-Term Economic 

Impact of Stronger Capital and Liquidity 

Requirements, Basel Committee on Banking 

Supervision, August 2010. Pages 14–17. The study 

indicates that the seven percent TCE/RWA ratio is 

equivalent to a five percent ratio of equity to total 

assets. The average ratio of equity to total assets for 

the 14 largest OECD countries from 1980 to 2007 

was 5.3 percent. 

41 Id. 

42 Id. 

43 Id. 

44See An Assessment of the Long-Term Economic 

Impact of Stronger Capital and Liquidity 

Requirements, Basel Committee on Banking 

Supervision, August 2010. Pages 21–27. 

45There are a number of simplifying assumptions 

involved in the calculation, including the 

assumption that banks fully pass through the 

increase in the cost of capital to their borrowers. 

See Basel Committee on Banking Supervision, An 

Assessment of the Long-Term Economic Impact of 

Stronger Capital and Liquidity Requirements 21–27 

(Aug. 2010). 

46Tier 1 common equity is made up of common 

stock, retained earnings, accumulated other 

comprehensive income, and some miscellaneous 

minority interests and common stock as part of an 

employee stock ownership plan. 

47To be clear, the 0.1 percent figure represents 

the one-time, long-term loss, which should be 

compared with the 60 percent loss potentially 

avoided by reducing the probability of a financial 

crisis by a little more than one percentage point. 

See An Assessment of the Long-Term Economic 

Impact of Stronger Capital and Liquidity 

Requirements, Basel Committee on Banking 

Supervision, August 2010. Pages 21–27. 

48For a readable overview of the 2007–2008 

financial crisis and the government response see, 

The Final Report of the Congressional Oversight 

Panel, Congressional Oversight Panel, March 16, 

2011. See also Ben S. Bernanke, ‘‘Some Reflections 

on the Crisis and the Policy Response,’’ Speech at 

the Russell Sage Foundation and The Century 

Foundation Conference on ‘‘Rethinking Finance,’’ 

New York, New York, April 13, 2012. Available at: 

http://www.federalreserve.gov/newsevents/speech/

2012speech.htm. 

49See 12 U.S.C. 1790d(b)(1)(A)(ii) (Requiring that 

the NCUA’s system of PCA be ‘‘comparable’’ to the 

PCA requirements in section 1831o of the Federal 

Deposit Insurance Act). 

50 78 FR 55339 (Sept. 10, 2013) (The FDIC 

published an interim final rule regarding regulatory 

capital for their regulated institutions separately 

from the Other Banking Agencies.) and 78 FR 62017 

(Oct. 11, 2013) (The Office of the Comptroller of the 

Currency and the Board of Governors of the Federal 

Reserve System later published a regulatory capital 

final rule for their regulated institutions, which is 

consistent with the requirements in the FDIC’s 

IFR.). 

51See U.S. Govt. Accountability Office, GAO–12– 

247, Earlier Actions Are Needed to Better Address 

Troubled Credit Unions, (Jan. 2012) available at 

http://www.gao.gov/products/GAO-12-247. 

effects of unexpected adverse 

developments in their asset portfolio or 

their deposit liabilities.40 For the 

financial system as a whole, research on 

the banking sector has shown that 

higher levels of capital can reduce the 

probability of a systemic crisis.41 By 

reducing the probability of a systemic 

financial crisis and insulating 

individual institutions from failure, 

higher capital requirements confer very 

large benefits to the overall economy.42

With the median long-term output loss 

associated with a crisis in the range of 

60 percent of precrisis GDP, a one 

percentage point reduction in the 

probability of a crisis would add 

roughly 0.6 percent to GDP each year 

(permanently).43

While higher levels of capital can 

insulate depository institutions from 

adverse shocks, holding higher levels of 

capital does have costs, both to 

individual institutions and to the 

economy as a whole. For the most part, 

the largest cost associated with holding 

higher levels of capital, in the long term, 

is foregone opportunities; that is, from 

the loss of potential earnings from 

making loans, from the cost to bank 

customers and credit union members of 

higher loan rates and lower deposit 

rates, and the downstream costs from 

the customers’ and members’ reduced 

spending.44 Estimating the size of these 

effects is difficult. However, despite 

limitations on the ability to quantify 

these effects, the annual costs appear to 

be significantly smaller than the losses 

avoided by reducing the probability of 

a systemic crisis. For example, research 

using data on banking systems across 

developed countries indicates that a one 

percentage point increase in the capital 

ratio increases lending spreads (the 

spread between lending rates and 

deposit rates) by 13 basis points.45 The 

research also shows that the long-run 

reduction in output (real GDP) 

consistent with a one percentage point 

increase in the Tier 1 common equity 46

to risks assets ratio would be on the 

order of 0.1 percent.47 Thus, it is clear 

that the relatively large potential longterm benefits of holding higher levels of 

capital outweigh the relatively small 

long-term costs. 

The recent financial crisis revealed a 

number of inadequacies in the current 

approach to capital requirements. 

Banks, in particular, experienced an 

elevated number of failures and the 

need for federal intervention in the form 

of capital infusions.48 As discussed in 

more detail below, credit unions also 

experienced elevated losses and the 

need for government intervention. The 

clear implication is that capital levels in 

these cases were inadequate, especially 

relative to the riskiness of the assets that 

some institutions were holding on their 

books. 

In a risk-based capital system, 

institutions that are holding assets that 

have historically shown higher levels of 

risk are generally required to hold more 

capital against those assets. At the same 

time, an institution’s leverage ratio, 

which does not account for the riskiness 

of assets, can provide a baseline level of 

capital adequacy in the event that the 

approach to assigning risk weights does 

not capture all risks. A system including 

well-designed and well-calibrated riskbased capital standards is generally 

more efficient from the point of view of 

the overall economy, as well as for 

individual institutions. In general, riskbased capital standards increase capital 

requirements at those institutions whose 

asset portfolios have, on average, higher 

risk. Conversely, risk-based capital 

standards generally decrease the cost of 

holding capital for institutions whose 

strategies focus on lower risk activities. 

In that way, risk-based capital standards 

generate the benefits of helping to 

insulate the economy from financial 

crises, while also preventing some of the 

potential costs that would occur from 

holding unnecessarily high levels of 

capital at low-risk institutions. 

B. Why did the Board issue the Original 

Proposal? 

The Original Proposal would have 

amended NCUA’s risk-based net worth 

requirements to be more comparable to 

the Other Banking Agencies’ 

regulations, as required by the FCUA.49

In 2013, the Other Banking Agencies 

issued final rules materially updating 

the risk-based capital requirements for 

insured banks.50 These changes to the 

Other Banking Agencies’ risk-based 

capital requirements, the weaknesses in 

NCUA’s current risk-based net worth 

ratio requirement exposed by the 

recession of 2007–2009, and the fact 

that NCUA’s risk-based net worth 

requirement had not been meaningfully 

updated since 2002, prompted the 

Board to reconsider NCUA’s current 

risk-based net worth ratio requirement 

and other aspects of NCUA’s current 

PCA regulations. In so doing, the Board 

was also guided by specific 

recommendations to update NCUA’s 

PCA regulations made by GAO in its 

January 2012 review of NCUA’s system 

of PCA.51

The Board issued the Original 

Proposal to enhance risk sensitivity and 

address weaknesses in the existing 

regulatory capital framework for credit 

unions. Under the current rule, only two 

credit unions are required to hold more 

capital as a result of the required riskbased net worth ratio measure. The 

Board emphasized that capital and risk 

operate synchronously, and that credit 

union senior management, boards, and 

regulators are all accountable for 

ensuring that appropriate capital levels 

are in place based on the credit union’s 

risk exposure. The Original Proposal 

reflected the Board’s initial effort to 

establish a system for assigning risk 


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52These figures are based on data collected by 

NCUA throughout the crisis, and do not include the 

costs associated with failures of corporate credit 

unions. 

53See, e.g., OIG–13–10, Material Loss Review of 

Chetco Federal Credit Union (October 1, 2013), 

OIG–13–05, Material Loss Review of Telesis 

Community Credit Union (March 15, 2013), OIG– 

10–15, Material Loss Review of Ensign Federal 

Credit Union, (Sept. 23, 2010), OIG–10–03, Material 

Loss Reviews of Cal State 9 Credit union (April 14, 

2010). 54As most of these credit unions are still active 

institutions, or have merged into other active 

institutions, NCUA cannot provide additional 

details publicly. 

55This statement and the majority of the related 

analysis in this section is specific to credit unions 

with $100 million in assets or greater, unless 

otherwise noted, as this proposed rule would only 

apply to credit unions at or above this level. 

56The aggregate core capital (leverage) ratio for all 

FDIC-insured institutions as of December 2013 was 

9.41 percent. FDIC Quarterly, 2014, Volume 8, No. 

1. 

weights that was more indicative of the 

potential risks existing within credit 

unions. Accordingly, the Original 

Proposal was intended to help credit 

unions better absorb losses and establish 

a safer, more resilient, and more stable 

credit union system that could weather 

periods of financial stress, thereby 

reducing risks to the NCUSIF. 

The recent economic crisis 

highlighted the need for a sound system 

of capital requirements to address risk. 

From 2008 through 2012, 27 credit 

unions with assets greater than $50 

million (the current threshold for 

applicability of the risk-based net worth 

requirement) failed at a cost of $728 

million to the NCUSIF,52 due in large 

part to holding inadequate levels of 

capital relative to the levels of risk 

associated with their assets and 

operations. In many cases, the capital 

deficiencies relative to elevated risk 

levels were identified by examiners and 

communicated through the examination 

process to officials at these credit 

unions.53 Although the credit union 

officials were provided with notice of 

the capital deficiencies, they ignored the 

supervisory concerns or did not act in 

a timely manner to address the concerns 

raised. Furthermore, NCUA’s ability to 

take enforcement actions to address 

supervisory concerns in a timely 

manner was cited by GAO as limited 

under NCUA’s current regulations. As a 

result, over a dozen very large consumer 

credit unions, and numerous smaller 

ones, were in danger of failing and 

required extensive NCUA intervention, 

financial assistance, or both, along with 

increased reserve levels for the 

NCUSIF.54 The Original Proposal sought 

to incorporate the lessons learned from 

those failures, and near failures, and 

better account for risks not addressed by 

NCUA’s current PCA rule. 

The Board notes that, in general, most 

credit unions with over $100 million in 

assets (the proposed new threshold for 

applicability of the risk-based capital 

ratio measure) hold capital well above 

the statutory net worth ratio for credit 

unions to be classified as well 

capitalized, as shown in the following 

table.55

NUMBER OF CREDIT UNIONS WITH ASSETS OF AT LEAST $100 MILLION, BY NET WORTH RATIO

2006 2007 2008 2009 2010 2011 2012 2013 

Net Worth Ratio: 

Less than 6 percent .................................. 3 5 10 42 35 16 11 7 

6 percent to 7 percent .............................. 8 7 32 63 44 35 17 9 

7 percent to 8 percent .............................. 39 42 109 188 162 152 138 103 

8 percent to 9 percent .............................. 123 109 185 248 243 256 269 234 

9 percent to 10 percent ............................ 193 197 213 244 289 299 293 305 

10 percent to 11 percent .......................... 205 217 212 192 192 213 231 257 

Greater than 11 percent ........................... 628 642 522 388 404 430 478 540 

Total ................................................... 1,199 1,219 1,283 1,365 1,369 1,401 1,437 1,455 

Many credit unions hold additional 

capital as a cushion against an 

unexpected adverse shock that might 

drive their net worth ratios below the 

well capitalized level. Because credit 

unions primarily generate capital only 

through retained earnings, there is an 

added incentive to hold higher levels of 

capital. Most banks, however, also hold 

capital in excess of their required well 

capitalized thresholds and on par with 

total capital levels held by credit 

unions, despite having the ability to 

raise capital outside of retained 

earnings.56 This suggests that strong 

capital levels serve an important 

purpose for financial institutions 

despite any associated cost of the 

capital. 

As shown in the table below, at year 

end 2013, 119 credit unions, or 7.3 

percent of all credit unions with assets 

greater than $100 million in assets, 

exhibited a net worth ratio below eight 

percent. Of that 7.3 percent of credit 

unions, all were either already below 

the seven percent well capitalized 

threshold or were only slightly above, so 

they were vulnerable to falling below 

the well capitalized level with only a 

modest shock to their net income. Call 

report data as of December 31, 2013, 

indicates that these 119 credit unions 

hold assets of $68.7 billion, which is 

more than seven percent of all credit 

union assets (see table below). 

PERCENTAGE DISTRIBUTION OF TOTAL ASSETS OF CREDIT UNIONS WITH ASSETS OF AT LEAST $100 MILLION, BY NET

WORTH RATIO 57

2006 2007 2008 2009 2010 2011 2012 2013 

Percent 

Net Worth Ratio: 

Less than 6 percent .................................. 0.1 0.2 1.4 2.6 2.6 0.5 0.4 0.3 

6 percent to 7 percent .............................. 0.8 1.0 5.9 7.5 1.6 2.5 0.5 0.2 

7 percent to 8 percent .............................. 4.9 5.8 10.9 13.6 15.3 12.6 9.1 6.8 

8 percent to 9 percent .............................. 12.5 12.4 15.7 19.2 18.5 16.7 19.1 12.5 

9 percent to 10 percent ............................ 18.2 21.6 23.2 24.8 28.1 24.5 21.1 22.9 


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57 Data based on year end Call Report data. 

58Based on Call Report data, using annualized 

growth 2007 Q4–2013 Q4. 

59Low-income designated credit unions can issue 

secondary capital accounts that count as net worth 

for PCA purposes. As of June 30, 2014, there are 

2,107 low-income designated credit unions. Given 

the nature (e.g., size) of these credit unions and the 

types of instruments they can offer, however, there 

is often a very limited market for these accounts. 

PERCENTAGE DISTRIBUTION OF TOTAL ASSETS OF CREDIT UNIONS WITH ASSETS OF AT LEAST $100 MILLION, BY NET

WORTH RATIO 57—Continued 

2006 2007 2008 2009 2010 2011 2012 2013 

Percent 

10 percent to 11 percent .......................... 16.3 18.2 15.3 12.3 12.3 20.4 23.9 19.0 

Greater than 11 percent ........................... 47.1 40.8 27.6 20.0 21.6 22.8 25.8 38.3 

Total Assets, billions $ ...................... 582.4 628.1 686.3 760.1 790.2 839.4 901.7 945.4 

The table below shows that credit 

unions falling below the seven percent 

well capitalized net worth ratio 

requirement tend to contract their asset 

base. By contrast, over the same period, 

credit unions that did not fall below the 

seven percent well capitalized net worth 

ratio requirement experienced 

annualized asset growth of almost seven 

percent. 

GROWTH IN ASSETS AT CREDIT

UNIONS WITH MORE THAN $100 

MILLION IN ASSETS 58

Growth over the four 

quarters after a 

decline in the net 

worth ratio below 7% 

Growth over the four 

quarters where the 

net worth ratio did not 

fall below 7% 

¥4.3% +6.8% 

Unlike banks that can issue other 

forms of capital like common stock, 

credit unions that need to raise 

additional capital when faced with a 

capital shortfall generally have no 

choice except to reduce member 

dividends or other interest payments, 

raise lending rates, or cut non-interest 

expenses in an attempt to direct more 

income to retained earnings.59 Thus, the 

first round impact of falling or low 

capital levels at credit unions is likely 

a direct reduction in credit union 

members’ access to credit or interest 

bearing accounts. Hence, an important 

policy objective of capital standards is 

to ensure that financial institutions 

build sufficient capital to continue 

functioning as financial intermediaries 

during times of stress without 

government intervention or assistance. 

NCUA’s analysis of credit union Call 

Report data from 2006 forward, as 

detailed below, also makes it clear that 

higher capital levels keep credit unions 

from becoming undercapitalized during 

periods of economic stress. The table 

below summarizes the changes in the 

net worth ratio that occurred during the 

recent economic crisis. Of credit unions 

with a net worth ratio of less than eight 

percent in the fourth quarter of 2006, 80 

percent fell below seven percent at some 

time during the financial crisis and its 

immediate aftermath. Of credit unions 

with 8 percent to 10 percent net worth 

ratios in the fourth quarter of 2006, just 

under 33 percent fell below seven 

percent during the crisis period. 

However, of credit unions that entered 

the crisis with at least 10 percent net 

worth ratios, less than five percent fell 

below the seven percent well 

capitalized standard during the crisis or 

its immediate aftermath. 

DISTRIBUTION OF NET WORTH RATIOS OF CREDIT UNIONS WITH AT LEAST $100 MILLION IN ASSETS BY LOWEST NET

WORTH RATIO DURING THE FINANCIAL CRISIS

Lowest Net Worth Ratio between 2007Q1 and 2010Q4 

<6% 6–7% 7–8% 8–10% ≥10% Total 

Number of 

credit 

unions 

Net Worth Ratio in 2006Q4 

<8 percent ......................................... 44.0 36.0 20.0 0.0 0.0 100.0 50 

8–10 percent ..................................... 13.0 19.6 38.0 29.4 0.0 100.0 316 

≥10 percent ....................................... 1.9 2.8 9.4 38.8 47.1 100.0 830 

Similarly, the table below shows how 

credit unions with at least $100 million 

in assets in the fourth quarter of 2006 

fared during the five years after the 

fourth quarter of 2007, which was the 

period that encompassed the Great 

Recession. The table shows that the 

credit unions that survived the crisis 

and recession had higher net worth 

ratios going into the Great Recession. In 

particular, credit unions with more than 

$100 million in assets before the crisis 

began, but failed during the crisis, had 

a median precrisis net worth ratio of 

less than nine percent, while similarly 

sized institutions that survived the 

crisis had, on average, precrisis net 

worth ratios in excess of 11 percent. 


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60See table above (referencing the 27 failures of 

credit unions over $100 million in assets). 

CHARACTERISTICS OF FICUS WITH ASSETS > $100 MILLION AT THE END OF 2006 BY FIVE YEAR SURVIVAL BEGINNING

2007 Q4 

Number of 

institutions 

Median 

Assets 

($M) 

Net Worth 

Ratio 

(percent) 

Loan to Asset 

Ratio 

(percent) 

Real Estate 

Loan Share 

(percent) 

Member 

Business 

Loan Share 

(percent) 

Failures .................................................... 27 162.7 8.97 84.0 58.0 8.3 

Survivors .................................................. 1138 237.9 11.20 71.0 49.0 0.7 

Survivorship is determined based on whether a FICU stopped filing a Call Report over the five years starting in the fourth quarter of 2007. Failures exclude credit unions that merged or voluntarily liquidated. Note: All failures had precrisis net worth ratios in excess of seven percent. 

Aside from demonstrating the 

differences in the capital positions of 

credit unions that failed from those that 

did not fail, the table above highlights 

two additional considerations. First, the 

table shows that other performance 

indicators were different between the 

two groups of credit unions. In 

particular, the survivors had a lower 

median loan-to-asset ratio, a lower 

median share of total loans in real estate 

loans, and a lower share of member 

business loans in their overall loan 

portfolio. 

A key limitation of the leverage ratio 

is that it is a lagging indicator because 

it is based largely on accounting 

standards. Accounting figures are pointin-time values largely based on 

historical performance to date. Further, 

the leverage ratio does not discriminate 

between low-risk and high-risk assets or 

changes in the composition of the 

balance sheet. A risk-based capital ratio 

measure is more prospective in that, as 

a credit union makes asset allocation 

choices, it drives capital requirements 

before losses occur and capital levels 

decline. The differences in indicators 

between the failure group and the 

survivors in the table above demonstrate 

that factors in addition to capital levels 

play an important role in preventing 

failure. For example, all of the failures 

listed in the table above had net worth 

ratios in excess of the well capitalized 

level at the end of 2006. The severe 

weakness of NCUA’s current risk-based 

net worth requirement is further 

demonstrated by the fact that, of the 27 

credit unions that failed during the 

Great Recession, only two of those 

credit unions were considered less than 

well capitalized due to the existing 

RBNW requirement.60 A well designed 

risk-based capital ratio standard would 

have been more successful in helping 

credit unions avoid failure precisely 

because such standards are targeted at 

activities that result in elevated risk. 

The need for a risk-based capital 

standard beyond a leverage ratio is 

further supported when considering a 

more comprehensive review of credit 

union failures. The figures below 

present data from NCUA’s review of the 

192 credit union failures that occurred 

over the past 10 years and indicates that 

160 failed credit unions had net worth 

ratios greater than seven percent two 

years prior to their failure. Further, the 

failed credit unions exhibited a 12 

percent average net worth ratio two 

years prior to their failure. 


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4348 Federal Register / Vol. 80, No. 17 / Tuesday, January 27, 2015 / Proposed Rules 

The table above shows that credit 

unions with high net worth ratios can 

and have failed, demonstrating that a 

leverage ratio alone has not always 

proven to be an adequate predictor of a 

credit union’s future viability. However, 


wreier-aviles on DSK4TPTVN1PROD with PROPOSALS2EP27JA15.004</GPH> EP27JA15.005</GPH>

Net Worth Ratio 24 Months Prior to Failure (All CU Failures in the Last 10 Years) 

35 

30 

25 

20 

15 

10 

5 

0 

Ill 

s:::: 

.!:! 

s:::: 

:::J 

.... 

::c 

QJ 

... 

u 

3 

I 

N/A* 

Average NW Ratio 

24 months prior to failure= 

12.06% 

1 

0-2% 

-

29 CUs (15%) were 

<Well Capitalized 

3 

I I I 

2-4% 4-5% 

26 

160 CUs (85%) were Well Capitalized 

30 

27 

26 

19 

18 

Fraud 

was a 

factor in 

failure for 

41% {78) 

of the 

CUs. 

9 

I 5 I 

*3 CUs were outliers as they had 

5-6% 6-7% 7-8% 8-9% 9-10% 10-12%12-15%15-20%20-30%30-80% 

Net Worth Ratio 

limited or no history 24 mas. ago 24 Months (aprox.} Prior to Failure 

Net Worth Ratio 24 Months Prior to Failure of CU s - Non-Fraud (Last 10 Years) 

25 

20 

Ill 

s:::: 15 

.!:! 

s:::: 

:::J 

.... 

::c 

e 10 u 

5 

0 

1 

• 

Average NW Ratio 

24 months prior to failure= 

10.71% 

1 

• 

21 CUs (18%) were 

<Well Capitalized 

1 

• 

9 

8 

*1 CU was an outlier with limited history 24 mos. ago 

192 CUs (82%) were Well Capitalized I 

23 

15 15 

12 

11 

8 

6 

I 

2 I 2 

I 
Federal Register / Vol. 80, No. 17 / Tuesday, January 27, 2015 / Proposed Rules 4349 

61Credit unions play a sizable role in the U.S. 

depository system. Assets in the credit union 

system amount to more than $1.1 trillion, roughly 

eight percent of U.S. chartered depository 

institution assets (source: NCUA calculation using 

the financial accounts of the United States, Federal 

Reserve Statistical Release Z.1, Table L.110, 

September 18, 2014). Data from the Federal Reserve 

indicate that credit unions account for about 12 

percent of private consumer installment lending. 

(Source: NCUA calculations using data from the 

Federal Reserve Statistical Release G.19, Consumer 

Credit, September 2014. Total consumer credit 

outstanding (not mortgages) was $3,246.8 billion of 

which $826.2 billion was held by the federal 

government and $293.1 billion was held by credit 

unions. The 12 percent figure is the $293.1 billion 

divided by the total outstanding less the federal 

government total). Just over a third of households 

have some financial affiliation with a credit union. 

(Source: NCUA calculations using data from the 

Federal Reserve 2013 survey of Consumer Finance.) 

All Federal Reserve Statistical Releases are 

available at http:\\www.federalreserve.gov\

econresdata\statisticsdata.htm. 

62See the definition of ‘‘net worth’’ at 12 U.S.C. 

1790d(o)(2)(A) through (C). 

63See section 1790d(d)(2) (Recognizing the 

limitations of the net worth ratio, Congress directed 

the Board to develop a risk-based net worth 

requirement that ‘‘take[s] account of any material 

risks against which the net worth ratio . . . may not 

provide adequate protection.’’). 

64 Id. 

65S. Rep. No. 193, 105th Cong., 2d Sess. 13 

(1998). 

a more robust risk-based capital 

standard would reflect the presence of 

elevated balance sheet risk sooner, and 

in relevant cases would improve a credit 

union’s odds of survival. 

A recession or other source of 

financial stress poses more difficulties 

for credit unions with limited capital 

options and with capital levels lower 

than what their risks warrant. A capital 

shortfall reduces a credit union’s ability 

to effectively serve its members. At the 

same time, the shortfall can cascade to 

the rest of the credit union system 

through the NCUSIF, potentially 

affecting an even broader number of 

credit union members. Credit unions are 

an important source of consumer credit 

and a capital shortfall that affects the 

credit union system could reduce 

general consumer access to credit for 

millions of credit union members. 61

Accordingly, a risk-based capital rule 

that is effective in requiring credit 

unions with low capital ratios and a 

large share of high-risk assets to hold 

more capital relative to their risk profile, 

while limiting the burden on already 

well capitalized credit unions, should 

provide positive net benefits to the 

credit union system and the United 

States economy. Improved resilience 

enhances credit unions’ ability to 

function during periods of financial 

stress and reduce risks to the NCUSIF. 

The Original Proposal reflected the 

Board’s objective of modifying the 

existing system for assigning risk 

weights to make it more indicative of 

the risks in credit unions. The Board 

intended it to help credit unions better 

absorb losses and establish a safer, more 

resilient, and more stable credit union 

system. However, as noted below, the 

Board believes the Original Proposal can 

be improved and is, therefore, issuing 

this second proposal. 

C. What significant changes would the 

Original Proposal have made? 

The Original Proposal would have 

changed the current risk-based net 

worth requirement applicable to 

complex credit unions (which was then 

defined as credit unions with more than 

$50 million in assets). In particular, the 

Original Proposal would have replaced 

the current risk-based net worth ratio 

measure with a new risk-based capital 

ratio measure that would have been 

more comparable to the risk-based 

capital requirement in the Other 

Banking Agencies’ regulations. NCUA’s 

capital requirements and PCA 

supervisory actions for ‘‘new’’ credit 

unions and credit unions with $50 

million or less in assets would have 

remained largely unchanged, with a few 

exceptions. 

The Board intended the change in the 

risk-based capital methodology in the 

Original Proposal to improve the 

comparability of risk-based capital 

ratios across financial institutions. 

Compared to the current risk-based net 

worth ratio measure, the methodology 

under the Original Proposal would have 

provided a more common measure both 

of credit union capital available to 

absorb losses and of asset risk. 

Moreover, the use of a consistent 

framework for assigning risk weights 

would have resulted in better 

comparability and improved 

understanding between all types of 

federally insured financial institutions, 

and would have increased the 

correlation between required capital 

levels and risk. 

The Original Proposal would have 

replaced the current method used by 

credit unions to apply risk weights to 

their assets with a new risk-based 

capital ratio measure that is more 

commonly applied to depository 

institutions worldwide. The proposed 

risk-based capital ratio measure was the 

percentage of a credit union’s capital 

available to cover losses, divided by the 

credit union’s defined risk weighted 

asset base. 

Under the current rule, the numerator 

of the RBNW ratio is ‘‘net worth’’ as 

defined in section 216(o)(2).62 However, 

as discussed in the Legal Authority 

section of this preamble, the FCUA 

gives the Board broad discretion in 

designing the risk-based capital 

requirement.63 Thus, the Original 

Proposal would have broadened the 

definition of the risk-based capital ratio 

numerator. 

The Board chose to take this approach 

to provide a more comparable measure 

of capital across all financial 

institutions and to better account for 

those related elements of the financial 

statement that are available to cover 

losses and protect the NCUSIF. Under 

the Original Proposal, the risk-based 

capital ratio numerator essentially 

started with the generally accepted 

accounting principles (GAAP) definition 

of equity (which is broader than the 

statutory definition of ‘‘net worth’’), 

adding the allowance for loan and lease 

losses (ALLL) account subject to some 

limitations, and deducting goodwill, 

intangible assets, and the NCUSIF 

deposit. In addition, to more accurately 

reflect capital available to absorb losses, 

this broader definition of the risk-based 

capital ratio numerator would have 

contributed over 50 basis points, on 

average, to credit unions’ risk-based 

capital ratio. 

With regard to the denominator for 

the risk-based capital ratio, Congress 

recognized that operating a credit union 

involves taking and managing a variety 

of risks. As stated previously, the FCUA 

mandates that NCUA’s risk-based net 

worth requirement ‘‘take account of any 

material risks against which the net 

worth ratio required for [a federally] 

insured credit union to be adequately 

capitalized may not provide adequate 

protection.’’ 64 In the Senate Report on 

CUMAA, Congress expressed its intent 

with regard to the design of the riskbased net worth requirement by 

directing NCUA to ‘‘consider whether 

the 6 percent [net worth ratio] 

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.’’ 65

The risk-based net worth ratio 

measure in NCUA’s current PCA 

regulation, which has not been 

substantially updated since 2002, was 

designed to primarily address credit 

risk, concentration risk, interest rate risk 

(IRR), and liquidity risk. The current 

rule does this through the assignment of 

risk weights to different types of assets 

based on the predominant form of risk 

that is associated with the asset type. 

Loans and investments make up the vast 

majority (88 percent based on December 

2013 Call Report data) of credit union 

assets and, therefore, are the primary 

variables for the denominator of a credit 


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66Concentration risk is mainly accounted for in 

commercial and real estate loans because, 

historically, this is where credit unions have 

experienced concentration and IRR problems. These 

types of assets are longer and/or provide fewer 

options and greater challenges in managing, 

restructuring, or selling such portfolios. Cash flows 

for shorter-term loans, like auto loans, are typically 

much less susceptible to changing rates; and 

portfolios customarily cash flow fast enough to 

mitigate concentration and IRR concerns. 

67Per the FCUA, ‘‘undercapitalized’’ is the lowest 

PCA category in which a failure to meet the riskbased net worth requirement can result. 

68See, e.g., 12 CFR 324.10, 324.11 and 324.403. 

69 78 FR 4032 (Jan. 18, 2013). 

union’s current risk-based net worth 

ratio. 

Under the current rule, most types of 

loans have risk weights based on credit 

risk. Concentration risk and IRR are 

incorporated for real estate loans and 

member business loans (MBLs) using a 

tiered risk weight framework. As a 

credit union’s concentration in these 

loans increases, incrementally higher 

levels of capital are required. This 

requirement was intended to provide 

capital to protect against the 

concentration risk and IRR inherent in 

a long duration and/or complex whole 

loan portfolio with limited liquidity.66

The Original Proposal would have 

maintained a very similar risk weight 

structure for loans, with a few 

exceptions. The Original Proposal 

would have effectively reduced the 

capital required for a credit union to 

hold first-lien residential real estate 

loans, and raised the capital required to 

hold junior-lien residential real estate 

loans, consumer loans, and MBLs. 

The current rule, as opposed to this 

second proposal, assigns risk weights to 

most types of investments based on 

their IRR and liquidity risk. The 

rationale for doing so was that most 

credit unions maintain liquidity in their 

investment portfolio. For credit unions 

with high loan volume involving longterm fixed rate products, the investment 

portfolio can exacerbate the interest rate 

and liquidity risks involved in meeting 

member lending and deposit 

preferences. NCUA’s current rule, 

unlike this second proposal, assigns risk 

weights to most investments based on 

their weighted average life, with the 

weights generally calibrated to the 

projected loss in value of a U.S. 

Treasury security if interest rates 

increased by 300 basis points. The 

Original Proposal would have retained 

this approach to assigning investment 

risk weights. However, the Original 

Proposal would have effectively 

reduced the capital required for 

investments with weighted average lives 

of less than five years, and increased the 

capital required for investments with 

weighted average lives of greater than 

five years. 

The Original Proposal was 

intentionally designed to parallel the 

current approach to applying risk 

weights to assets using existing 

information contained in the Call 

Report, thereby minimizing transition 

costs and associated reporting burdens. 

In comparison to the current risk-based 

net worth ratio method however, the 

originally proposed risk-based capital 

ratio method would have included a 

greater number of exposure categories 

for purposes of calculating a credit 

union’s risk-weighted assets. Thus, the 

Original Proposal would have required 

that some additional data be collected 

on the Call Report. However, this 

additional data would not have 

represented a material increase to the 

burden of completing the Call Report. 

Further, under the Original Proposal, 

the rule would have provided an 18- 

month implementation period for credit 

unions to adjust their systems to 

account for the additional data items 

that would have been collected in the 

Call Report. 

The way in which the risk-based net 

worth ratio functions in relation to the 

net worth categories under the current 

rule could result in a credit union’s 

capital classification declining directly 

from well capitalized to 

undercapitalized if it fails to meet the 

required risk-based net worth ratio 

level.67 The Original Proposal would 

have modified this approach by 

requiring credit unions to meet different 

risk-based capital ratio levels for the 

well capitalized (10.5 percent) and 

adequately capitalized (eight percent) 

categories. This formulation would have 

been comparable with the Other 

Banking Agencies’ capital rules,68 and 

would have encouraged (but did not 

require) credit unions to build capital 

sufficient to absorb losses and prevent 

precipitous declines in their overall 

capital classification. In addition to 

providing greater comparability with the 

Other Banking Agencies’ rules, the 

different threshold levels also would 

have resulted in a risk-based net worth 

requirement that could have effectively 

addressed any ‘‘outlier’’ credit unions 

and encouraged them to accumulate 

additional capital. 

The Original Proposal would have 

generally retained the definition of 

‘‘complex’’ in the current rule so the 

proposed changes to the risk-based net 

worth requirement would have applied 

to all credit unions with over $50 

million in total assets.69

D. Public Comments on the Original 

Proposal 

The Board received 2,056 public 

comments on the Original Proposal from 

credit unions, trade associations, state 

credit union leagues, state supervisory 

authorities, public officials (including 

current and former members of the U.S. 

Congress), Federal Home Loan Banks, 

credit union members, and other 

interested parties. Because this is a new 

proposed rule, the Board notes it is not 

required to respond to any comments 

received on the Original Proposal. 

However, the Board believes it is 

important to address all relevant 

comments. Therefore, the Board has 

included comment summaries and 

responses throughout the preamble to 

this proposal. 

Overall, while some commenters 

supported the concept of adopting riskbased capital standards for complex 

credit unions that were more 

comparable to those applicable to banks, 

most commenters opposed the Original 

Proposal, particularly those 

requirements that the commenters 

believed exceeded the requirements 

imposed on banks. 

Most commenters also expressed 

concerns about the potential costs and 

burdens of various aspects of the 

Original Proposal. A significant number 

of commenters argued that new riskbased capital standards were not 

necessary at this time, particularly given 

the success of consumer credit unions 

during the recent financial crisis. A 

number of commenters also requested 

that the Board withdraw the Original 

Proposal and reissue a proposal for 

another round of public comments with 

significant revisions to the risk weights. 

Many commenters also asked for 

additional time to implement the new 

requirements and adjust their balance 

sheets. 

The Board responds to the significant 

comments received on the Original 

Proposal throughout this preamble. 

More detailed discussions on the 

comments received on particular 

aspects of the Original Proposal, and 

NCUA’s responses to those comments, 

are primarily provided in the sectionby-section analysis part of the preamble. 

General Comments on Application of 

Risk-Based Capital Standards to Credit 

Unions 

The Board received over 2,000 

comments regarding the application of 

risk-based capital standards to credit 

unions under the Original Proposal. A 

majority of the commenters stated that 

NCUA’s current risk-based net worth 

ratio standard is working well, 


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particularly given that the credit union 

industry survived the recent financial 

crisis, and that maintaining the current 

system is far preferable to adopting the 

Original Proposal. Some commenters 

stated they were opposed to imposing a 

more sophisticated risk-based capital 

framework on credit unions. Other 

commenters stated they appreciated 

NCUA’s efforts to keep the new 

requirements relatively simple and to 

minimize the implementation burden 

on affected institutions. A substantial 

number of other commenters agreed that 

updates to NCUA’s risk-based net worth 

regulations were necessary to keep up 

with what other financial institutions 

are doing, but did not agree with certain 

aspects of the Original Proposal. Other 

commenters stated that some form of 

risk-based capital calculation was 

prudent to reward those institutions that 

do not stretch too hard for earnings or 

put their members’ deposits at 

extraordinary risk. A significant number 

of commenters specifically suggested 

that the rule be amended to match the 

risk-based capital requirement for 

banks, the Basel III risk-based capital 

standards, or both. Other commenters 

suggested that the structure and 

performance of credit unions suggests 

that the risk weights should be less 

stringent than the risk weights applied 

to banks. Still other commenters 

suggested that instead of focusing on the 

past failures of credit unions, the Board 

should be focused on the successes of 

credit unions and issue regulations that 

help credit unions achieve success. 

The Board received a significant 

number of comments questioning 

whether the proposal would actually 

serve to protect the NCUSIF and make 

the industry safer and sounder. A 

number of commenters stated that the 

proposal essentially represented a de 

facto assumption of important balance 

sheet management decisions by NCUA 

for purposes of protecting the NCUSIF 

at the expense of the current 

prerogatives and interests of individual 

credit unions and their members. 

Commenters contended that since the 

implicit incentives in the proposal are 

the same for every credit union, over the 

long run, the Original Proposal would 

cause credit unions to become less 

financially diverse, which would 

increase the vulnerability of the 

industry and NCUSIF to some future 

widespread economic adversity. 

Commenters stated that credit unions 

are in the risk business by nature and 

that the proposal was too focused on a 

number-generated, one-size-fits-all 

solution. Other commenters requested 

that the Board be mindful that the risk 

weights that are adopted in the rule 

could ultimately drive which types of 

products and services are offered by 

credit unions. 

Some commenters suggested NCUA 

include a risk-capital model calculation 

as part of the examination process, 

similar to NCUA requirements for other 

types of modeling such as the model 

required for IRR testing. Those 

commenters suggested that the results of 

the risk-based capital model could be 

used to identify ‘‘potential risk’’ by 

examiners and credit union boards, 

calling for additional scrutiny in the 

exam, instead of prescribing a rule that 

is assumed to quantify ‘‘actual’’ risk. 

A small number of commenters 

suggested that the Other Banking 

Agencies are all leaning toward simply 

using a simplified leverage ratio to 

account for risks. 

Justification and Supporting Analysis 

A number of commenters commented 

on the Board’s justification and analysis 

supporting the need for a proposed rule. 

Commenters suggested the proposal was 

arbitrary and developed without 

feedback from the credit union industry. 

Other commenters suggested that the 

Board should have provided 

stakeholders with a more thorough 

discussion of how the proposal would 

fit into NCUA’s regulatory framework, 

including recently issued final rules 

regarding liquidity risk, IRR, and stress 

testing and capital planning. 

Commenters stated there was no 

credible analysis available in the 

Original Proposal to suggest credit 

unions overall are unlikely to perform 

well under the current PCA system, 

which already includes a risk-based net 

worth requirement. Others commented 

that the proposal provided no evidence 

that this rule would help members. 

Commenters suggested the Board did 

not sufficiently take into account the 

unique nature of credit unions and the 

financial performance and distinctive 

structure of credit unions in developing 

the proposal. They argued this was 

problematic because the Board is 

required to take into account the unique 

nature of credit unions in designing a 

system of PCA, and that by failing to 

sufficiently account for credit union 

differences and the lower level of risk 

that credit unions demonstrate as a 

result led to a proposal that would 

require well-managed credit unions to 

hold too much capital. Others suggested 

that the proposal failed to consider how 

the use of bank style capital levels could 

adversely impact credit unions. There 

were those who felt that the Board 

should propose a rule only if NCUA has 

prepared a reasoned determination that 

the rule’s benefits justify its costs. They 

suggested that any benefits in terms of 

reduced NCUSIF losses would be minor 

at best and the very real costs of 

unnecessarily high capital requirements 

would be substantial. Commenters also 

suggested that the proposal was not 

tailored to impose the least burden. 

The Board received a number of 

comments on the basis provided for the 

proposed rule. Commenters suggested 

the proposal should have been based on 

historical perspectives, and stated that 

based on their own analysis the 

proposal would have avoided few if any 

past credit union failures. One 

commenter stated that only 1.1 percent 

of credit unions with more than $50 

million in assets have failed in the sixand-a-half years since the beginning of 

the worst financial crisis and recession 

in 80 years. The commenter did, 

however, acknowledge that the 

proposed system would have been more 

effective than the current system in 

identifying credit unions that 

subsequently failed. 

One commenter suggested that the 

Board’s justification that the proposal 

seeks to incorporate lessons learned 

from past failures of credit unions to 

hold sufficient levels of capital despite 

warnings from NCUA examiners was 

unsupportable because NCUA and state 

officials have various supervisory 

enforcement measures at their disposal 

(e.g., preliminary warning letters, letters 

of understanding and agreement, and 

cease and desist orders) to force a credit 

union to improve the alignment 

between its risk exposures and its 

available capital. 

A significant number of commenters 

questioned the Board’s supporting 

analysis for various aspects of the 

proposal. Commenters suggested that 

the empirical foundation provided for 

the proposed risk weights was not 

sufficient. Other commenters stated that 

the Board should provide additional 

justification and more clarity as to why 

the proposed risk weights differ from 

those for other community financial 

institutions. Many commenters stated 

they would like an opportunity to 

review and comment on empirical data, 

but that they were not provided 

sufficient information to understand 

how the metrics behind the proposal 

were determined and how historic 

losses contributed to each calculation. 

One commenter suggested that NCUA 

should expand its research horizons to 

include data-sourcing outside the 

natural-person credit union space, 

claiming the Original Proposal 

contained several examples where 

‘‘uncertain’’ conclusions were drawn 

from insufficient data or those where 


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70Basel 1 (First Capital Accord) established 

minimum capital standards (1998). Basel II 

established the three pillar framework (first issued 

in 2004). Basel III is the most recent and builds 

upon Basel II pillars and enhances the core 

principles (first issued in 2010). 

research was halted due to the 

burdensome process of data collection. 

The commenter suggested that often 

these data sources are limited to naturalperson credit unions, many of which 

have little exposure to the asset classes 

in question. 

Another commenter suggested that 

the stated purpose of the proposal was 

to mitigate losses to the NCUSIF that 

could result from inadequate capital, 

but that GAO and NCUA’s Office of 

Inspector General (OIG) reports 

demonstrate that deficiencies in the 

examination process contributed 

substantially to losses during the 

financial crisis, and that such 

deficiencies continue to be a significant 

factor in more recent credit unions 

failures. That commenter suggested that 

instead of focusing on a risk-based 

capital requirement for credit unions to 

contain NCUSIF losses, the Board 

should be improving examiner training 

so that agency field staff can more 

readily identify material risks without 

increasing the agency’s budget, which is 

funded by credit unions. 

A significant number of commenters 

expressed concerns regarding the 

justification and explanation of how 

credit risks as well as interest rate, 

concentration, liquidity, operational, 

market risks, and other types of risk 

were addressed in the proposed rule. 

Commenters questioned the Board’s 

justification for including IRR and 

concentration risk in the proposed risk 

weights for investments, real estate 

loans, and member business loans. A 

small number of commenters suggested 

that there was no explanation of which 

portion of the proposed risk weight is 

intended to address each of these risk 

elements, and that, as a result, the risk 

weights did not reflect a reasoned 

judgment about the actual risks 

involved. 

Competitive Concerns and Concerns 

Related to the Unique Nature of Credit 

Unions 

The Board received a significant 

number of comments expressing 

concerns that the proposed rule would 

have put credit unions at a competitive 

disadvantage to banks. A majority of the 

commenters suggested that the 

differences between NCUA’s proposed 

risk weights and the Other Banking 

Agencies’ capital rules would have 

constrained the healthy growth of the 

credit union industry. Commenters 

suggested that the statutory seven 

percent net worth requirement to be 

classified as well capitalized was set 

artificially high by Congress to slow the 

growth of credit unions and that the 

proposed rule would build on that 

artificially high net worth requirement 

and further slow the growth of credit 

unions, putting credit unions at a 

further disadvantage to banks. A 

significant number of commenters 

stated that the competitive 

disadvantages in the proposed rule 

could incentivize many credit unions to 

switch to bank charters. Other 

commenters suggested that NCUA’s 

proposed risk-based capital ratios were 

much more volatile than the risk 

weights under the Other Banking 

Agencies’ rule, and that the proposed 

risk weights for some investments were 

excessively punitive and should be 

changed to match the risk weights used 

in Basel 70 and the Other Banking 

Agencies’ calculations. Still others 

suggested that it would be appropriate 

for NCUA to establish new risk-based 

capital ratio levels only when the 

leverage ratio requirements for credit 

unions to be adequately and well 

capitalized were lowered. 

A small number of commenters stated 

that they appreciated that the Board 

kept the proposed risk-based capital 

calculation less complicated than the 

banking risk-based capital calculation. 

A substantial number of commenters 

suggested that it was not appropriate for 

the Board to adopt the framework of the 

Basel system in the proposal and also 

take parts from NCUA’s current PCA 

regulation that bear no relationship to 

Basel. A substantial number of 

commenters stated that neither Basel III 

nor the Other Banking Agencies rules 

attempt to capture IRR, liquidity risk, 

market risk, or operational risk in their 

risk weights, and that Basel III and the 

Other Banking Agencies’ capital rules 

are only designed to take into account 

credit risk. Many commenters stated 

that adopting either the Basel III format 

or the Other Banking Agencies’ risk 

weights accurately would give both 

NCUA and the credit union industry 

credibility to all outside parties. Other 

commenters suggested that, because of 

these and other differences, the proposal 

was not ‘‘comparable’’ with the Other 

Banking Agencies’ rules, which is a 

requirement of the FCUA. 

A substantial number of commenters 

stated that the structure and 

performance of credit unions suggests 

that the risk weights should be less 

stringent than the risk weights applied 

to banks. Other commenters suggested 

that the proposed risk-based capital 

standards for credit unions are 

comparable to FDIC standards, but that 

they fail to take into account the unique 

characteristics of the credit union 

system as required by the FCUA. 

Commenters noted that unlike banks, 

credit unions do not have capital stock 

and cannot go to outside investors to 

seek equity capital to fuel growth or 

shore up capital ratios in times of stress. 

They stated that the rule and associated 

risk weights should recognize that 

sources of capital within the credit 

union industry are not as easily 

acquired as capital sources for banks. A 

number of commenters stated that if 

Congress had intended credit unions to 

be subject to the same requirements as 

banks it would have said so, and 

suggested that the Board should stop 

treating credit unions like banks and 

judging them by return on investment, 

and instead judge them on how 

effectively they deliver on their mission 

and make a distinctive impact relative 

to their resources. 

One commenter suggested that the 

rule should be based on three 

principles: (1) Risk weights should 

generally be similar to those applied to 

community banks in the United States; 

(2) for those assets where credit union 

loss experience is historically lower 

than bank loss rates, credit union risk 

weights should be at or below bank risk 

weights; and (3) concentration risk and 

IRR should not be incorporated into the 

risk-based capital system, but instead, 

should be addressed in the regulatory, 

examination and supervision process. 

Another commenter claimed that the 

risk weights established by FDIC do not 

exceed 100 percent so NCUA’s rule 

should not establish levels over 100 

percent as it would impede growth and 

preclude credit unions from generating 

net income. 

Commenters suggested that the 

differences between proposed risk 

weights and banks’ rules would 

encourage credit unions to make 

consumer loans by discouraging credit 

unions from making other types of 

loans, such as mortgage loans, MBLs, or 

agricultural loans. Others suggested that 

the proposed rule would have forced all 

credit unions into a bank model that 

would have required them to pay less, 

charge more, and increase fees. Other 

commenters suggested that the proposed 

risk weights could drive many credit 

unions to a ‘‘cookie cutter’’ balance 

sheet where each credit union has the 

same percentage of total assets allocated 

to specific loan types, which could force 

a high percentage of credit unions into 

less profitable asset growth and make it 

challenging to differentiate themselves 

from competitors. 


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Commenters suggested that credit 

unions generally operate as portfolio 

lenders, making and holding highquality consumer and residential real 

estate loans that serve their members 

and improve their communities, and 

that credit unions often carry 

significantly less exposure to volatile 

product lines such as acquisition 

development and construction loans, 

commercial real estate, and complex 

derivatives products. 

Commenters added that credit unions 

also face stringent regulatory restrictions 

on their investment powers, and as a 

result, natural-person credit unions 

fared substantially better during the 

recent financial crisis than many other 

entities, including banks. Those 

commenters concluded that an 

appropriate risk-based capital 

requirement would reflect these 

important differences with a 

streamlined program that recognizes 

credit unions as strong counter-cyclical 

lenders while bolstering safety and 

soundness through meaningful 

benchmarks and access to supplemental 

capital. 

Impacts 

The Board received a substantial 

number of comments concerning the 

impact that the Original Proposal would 

have had on credit unions. In general, 

most of these commenters expressed 

concern that the Original Proposal 

would have had a material adverse 

impact on individual credit unions and 

the entire credit union industry. This 

section outlines these concerns. 

A majority of commenters stated that 

the proposed risk-based capital 

requirement would weaken credit 

unions’ ability to build the capital 

cushions they need to protect 

themselves against risk and would 

hamper credit unions’ ability to grow 

and provide services to their members. 

Other commenters stated that the 

Original Proposal would constrain 

future investments by credit unions and, 

thus, would limit credit unions’ ability 

to provide certain services, better loan 

rates, and dividends to their members. 

Others expressed concern that the 

proposal would impede growth and 

deter lending among credit unions, even 

those with demonstrated long-term 

ability to manage risk and net worth. 

Many commenters stated that the 

Original Proposal seemed to be a 

reaction to the Great Recession and that 

the Board should further consider the 

Original Proposal’s impact on the future 

of the credit union industry. 

Commenters suggested that the 

proposed requirement to hold a higher 

capital-to-asset ratio would cause credit 

union asset growth to stagnate and 

decline over the long term, for any given 

rate of return on assets, and that the 

Board should try to quantify these costs 

and weigh them against the uncertain 

benefits of minor reductions in the 

relative cost of credit union failures. 

Using the rule that the sustainable asset 

growth rate is equal to the return on 

equity, or Asset Growth Rate = ROA/

Capital Ratio, some commenters 

estimated that asset growth for credit 

unions would slow to eight percent 

under the Original Proposal, or 1.1 

percent lower than the asset growth rate 

would be without the Original Proposal. 

Commenters stated that because credit 

unions can only build capital through 

retained earnings, the Original Proposal 

could severely limit credit unions’ 

ability to grow, to increase the products 

and services they provide to their 

members, and to help their local 

communities prosper. They also 

suggested that the Original Proposal 

may actually reduce credit unions’ 

ability to absorb losses, given their 

limited access to capital markets. 

A number of commenters stated that 

the low risk weights applied to 

consumer loans and the high risk 

weights applied to first-lien mortgage 

loans, mortgage servicing rights, and 

subordinate-lien mortgage loans would 

push credit unions to make more 

consumer loans and fewer mortgage 

loans, despite a significant demand for 

real estate lending services at some 

credit unions. Other commenters stated 

that the Original Proposal would induce 

credit unions to focus on risk-based 

capital instead of growth in real capital. 

Still other commenters suggested the 

proposed risk weights would penalize 

non-consumer lending, which could 

force small credit unions to only make 

consumer loans on very low margins, a 

strategy that would not survive in the 

future. 

One commenter suggested that the 

Original Proposal did not properly 

account for the effect of economic 

downturns on credit unions, and that it 

would be difficult or impossible for 

downgraded credit unions to rebuild 

following an economic downturn. 

A substantial number of commenters 

suggested that NCUA underestimated 

the adverse effect of the Original 

Proposal. They maintained that the 

Board understated the number of credit 

unions whose net worth would have 

decreased to just barely over well 

capitalized or adequately capitalized 

levels. One commenter suggested that, 

under the Original Proposal, 

approximately 1,000 credit unions 

would be required to raise $4 billion in 

additional capital. Other commenters 

proffered that the Original Proposal 

would require the credit union industry 

to hold an additional $6.5 billion to $7 

billion dollars in additional capital to 

retain the same buffers that exist today 

and still be considered well capitalized. 

Commenters suggested that the Board 

considered only the narrowest 

interpretation of the Original Proposal’s 

impact, ignoring the immediate and 

long-term effects that it would have on 

individual credit unions and the entire 

credit union system. They stated that 

credit unions cannot easily manage their 

capital to the exact dollar level that 

equates to NCUA’s proposed standards, 

and that credit unions typically strive to 

maintain sufficient space or buffers 

between their actual net worth ratios 

and the minimum required levels to be 

well capitalized because of the 

significant consequences of not meeting 

the net worth standards. According to 

the commenters, credit unions choosing 

to regain their buffer would only have 

three choices: (1) Rebalance their assets, 

recognizing an opportunity cost when 

they forego higher earnings, which 

would diminish their ability to grow; (2) 

ration services, stifling asset and 

membership growth; or (3) require 

members to pay more, resulting in fewer 

member benefits and increased 

competition from banks. 

Commenters added that the Original 

Proposal would require many credit 

unions to adjust their capital levels to 

maintain current margins above the well 

capitalized threshold, at the same time 

as earnings at credit unions continue to 

be squeezed by low interest rates, 

downward pressure on other revenue 

streams, and moderate loan growth. 

They argued that these adjustments 

would pressure credit unions, already 

suffering from low to moderate loan-toshare ratios, to decrease their assets by 

curbing lending in an attempt to comply 

with the new requirements. 

A significant number of commenters 

stated that the Original Proposal would 

cause the reallocation of credit union 

capital toward less productive uses. One 

commenter suggested that, for some 

credit unions, the Original Proposal 

would increase the amount of capital 

required to be well capitalized above the 

current level of seven percent of total 

assets, positing that 10.5 percent of risk 

assets amounts to more than seven 

percent of total assets for most credit 

unions, depending on the ratio of risk 

assets to total assets. The commenter 

assumed that, across all potentially 

affected credit unions, the total amount 

of capital necessary to be well 

capitalized would increase by $7.6 

billion, or, in other words, that the 

Original Proposal would increase the 


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71 12 U.S.C. 1757a. 

well capitalized net worth ratio 

requirement an average of 0.76 percent, 

from seven percent to 7.76 percent. 

A number of commenters also noted 

their concern that the Original Proposal 

would force many credit unions out of 

business. 

A significant number of commenters 

expressed concern that the Original 

Proposal would curtail MBL activities. 

They stated that the Original Proposal 

unfairly penalized credit unions that are 

exempt from the MBL limits in § 107A 

of the FCUA.71 Other commenters 

suggested that the Original Proposal 

would stifle the strategic business plans 

of credit unions that specialize in MBLs 

to grow their assets with additional 

commercial and real estate loans. They 

also stated that the Original Proposal 

would drive down MBL activity in rural 

areas because credit unions specializing 

in MBLs, particularly in agricultural 

loans and/or loans secured by farm 

land, cannot diversify their portfolio by 

providing other types of loans not 

needed by their members. Others stated 

that the proposed risk weights for MBLs 

would discriminate against credit 

unions that serve underserved and 

credit-challenged Americans—taxi 

drivers, farmers, and those in faithbased credit unions. Commenters 

suggested that, in order to increase their 

risk-based capital ratios required under 

the Original Proposal, credit unions may 

feel forced to reduce mortgage and 

business lending or increase loan rates 

and fees. They stated that the Original 

Proposal would have a negative effect 

on agricultural lending, farming 

communities, and credit union 

members, particularly those in rural and 

low-income areas. A number of 

commenters urged the Board to further 

consider the economic impact and 

consequences of reduced liquidity and 

financing for families and small 

businesses. Others argued that the 

Original Proposal would eliminate 

credit unions’ business models 

centering on mortgage lending. 

Commenters suggested that the 

proposed risk weights would discourage 

well capitalized credit unions from 

engaging in mergers of undercapitalized 

credit unions because the Original 

Proposal would force credit unions into 

less profitable asset growth. Other 

commenters maintained that the 

reduction of credit unions’ capital 

margin or cushion would negatively 

impact credit unions’ ability to merge, 

and would permit only the largest credit 

unions to merge with smaller credit 

unions. Still others suggested that the 

Original Proposal would encourage 

mergers of credit unions not meeting the 

risk-based requirements. 

A substantial number of commenters 

stated that the Original Proposal would 

have a direct negative impact on credit 

union service organizations (CUSOs) by 

discouraging investment in CUSOs, 

thereby forcing many credit unions to 

limit services to their members. 

Commenters feared that the Original 

Proposal would result in stricter 

scrutiny by examiners, which would 

increase NCUA’s examination and 

supervision costs and, therefore, the 

costs borne by credit union members. 

Other commenters suggested that NCUA 

already has a large examination and 

oversight budget to eliminate risk to the 

NCUSIF; they contended the Original 

Proposal did not sufficiently address the 

aggregate costs of these initiatives to 

credit union members. According to 

these commenters, the impact of the 

Original Proposal on credit union 

members, in the form of excessive 

supervision and lost earnings due to 

overcapitalization, could itself pose a 

risk to the NCUSIF. 

Some commenters shared their belief 

that the Original Proposal would reduce 

lending in dramatic ways and stifle the 

economy. Other commenters asserted 

that the Original Proposal would 

decrease member benefits, such as 

patronage dividends and reduced 

expenses. A number of commenters 

stated that the Original Proposal failed 

to consider impacts on businesses and 

the economy, particularly on small 

businesses that rely on credit unions for 

credit. Several commenters suggested 

that the Original Proposal would force 

some credit unions away from their 

missions to serve member in 

predominantly rural and low-income 

fields of membership. 

A small number of commenters 

encouraged the Board to follow the costbenefit analysis blueprint established by 

Executive Orders 13563 and 13579. 

Doing so, they argued, would allow 

meaningful, cumulative analysis that 

would result in a more coherent rule 

with fewer harmful, unintended 

consequences for the American 

economy. 

A number of commenters expressed 

significant concerns about the Original 

Proposal’s negative impact on the 

growth and viability of small credit 

unions. They suggested that the Original 

Proposal would inhibit the growth of 

credit unions that are developing from 

small credit unions (less than $50 

million) to medium-size credit unions 

($50 million–$99 million). Other 

commenters suggested it would reduce 

the monetary and other support that 

larger credit unions historically have 

provided to their smaller counterparts. 

They noted that some small credit 

unions depend on grants, scholarships, 

and training opportunities funded by 

larger credit unions. If these larger 

credit unions were compelled to change 

their loan and investment portfolios, or 

are required to adjust their capital, those 

commenters concluded their income 

levels would decline, thereby rendering 

it more difficult for them to fund as 

many opportunities for small credit 

unions. One credit union with less than 

$10 million in assets asserted that it 

would be adversely affected by the 

proposed change in the capital reserves 

requirement. 

Other commenters suggested that the 

Original Proposal imposed unnecessary 

regulatory burdens that would impede 

small credit unions’ ability to serve their 

members. A substantial number of 

commenters stated that small credit 

unions not classified as ‘‘complex’’ and 

not subject to the risk-based capital 

requirement would still be negatively 

affected because the Original Proposal 

estimated the paperwork burdens 

include over 160 hours of work for 

credit unions, which is significant for 

small credit unions with limited 

resources. Other commenters suggested 

that small credit unions would suffer 

significantly due to the complexity of 

this regulation and its implementation 

costs. Many commenters stated that 

small credit unions cannot survive 

under the current regulatory burdens. 

Others foresaw potentially disastrous 

consequences if this regulation were 

pushed down to small credit unions. An 

official at one small credit union 

asserted that the Original Proposal 

would affect its strategic planning as it 

approached $50 million in assets. 

Another commenter stated that, as a 

credit union with under $50 million in 

assets, it was concerned about the 

uncertainty of how the Original 

Proposal would affect privately insured 

credit unions. 

Other Concerns 

Several commenters expressed 

concerns that the proposal did not 

provide for input from state regulators 

who may have a different view or 

approach from that of NCUA. Other 

commenters suggested that the proposal 

was developed with no involvement or 

dialogue with state regulators. 

Commenters suggested that the Board 

should ensure that NCUA properly 

implements directives in the FCU Act 

and coordinates with state officials in 

implementing risk-based requirements 

and PCA. 


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72 12 U.S.C. 1790d(d)(2) (emphasis added). 

73S. Rep. No. 193, 105th Cong., 2d Sess. 13 

(1998). 

74 12 U.S.C. 1831o. 

75 78 FR 55349, 55362 (Sept. 10, 2013) (‘‘The riskbased capital ratios under these rules do not 

explicitly take account of the quality of individual 

asset portfolios or the range of other types of risk 

to which FDIC-supervised institutions may be 

exposed, such as interest rate, liquidity, market, or 

operational risks.’’). 

76 IRR has been NCUA’s top supervisory priority 

for the last few years, and has appeared as an issue 

of significant concern in the Financial Stability 

Oversight Council’s 2012 and 2013 Annual Reports. 

77 77 FR 5155 (February 2, 2012). 

E. What are the primary changes the 

Board has included in this proposal? 

Similar to the Original Proposal, this 

proposal would replace the method 

currently used by credit unions to apply 

risk weights to their assets with a new 

risk-based capital ratio measure that is 

more comparable to that applied to 

depository institutions worldwide. The 

proposed risk-based capital ratio 

measure would be the percentage of a 

credit union’s capital available to cover 

losses, divided by the credit union’s 

defined risk-weighted asset base. 

As noted in the introduction, this 

proposed rule would make substantial 

modifications to the Original Proposal 

to address specific concerns that were 

raised by commenters regarding the 

proposal’s cost, complexity, and burden. 

These changes would include: (1) 

Amending the definition of ‘‘complex’’ 

credit union by increasing the asset 

threshold from $50 million to $100 

million; (2) reducing the number of 

asset concentration thresholds for 

residential real estate loans and 

commercial loans (formerly classified as 

MBLS); (3) assigning one-to-four family 

non-owner-occupied residential real 

estate loans the same risk weights as 

other residential real estate loans; (4) 

eliminating IRR from this proposed rule; 

(5) extending the implementation 

timeframe to January 1, 2019; and (6) 

eliminating the Individual Minimum 

Capital Requirement (IMCR) provision. 

Among other things, these changes 

would substantially reduce the number 

of credit unions subject to the rule, and 

would afford affected credit unions 

sufficient time to prepare for the rule’s 

full implementation. A full discussion 

of the impact of these and other changes 

in this proposed rule is contained in 

Impact of the Proposed Regulation part 

of the preamble below. 

As discussed previously, the FCUA 

gives NCUA broad discretion in 

designing the risk-based net worth 

requirement. Thus, this proposal would 

incorporate a broadened definition of 

capital to be used as the numerator in 

calculating the proposed new risk-based 

capital ratio measure. The Board is 

proposing this change to provide a more 

comparable measure of capital across all 

financial institutions and to better 

account for related elements of the 

financial statement that are available to 

cover losses and protect the NCUSIF. 

This broader definition of capital would 

more accurately reflect the amount of 

capital that is available at a credit union 

to absorb losses. On average, it would 

increase a credit union’s risk-based 

capital ratio by over 50 basis points as 

discussed in more detail below. 

The Board agrees with the various 

comments received on the Original 

Proposal that suggested the allowance 

for loan and lease losses (ALLL) account 

should be included in its entirety in the 

risk-based capital ratio numerator (that 

is, not subject to a 1.25 percent cap), 

and that goodwill and other intangible 

assets specifically related to a 

supervisory merger that occurs before 

the Board finalizes its risk-based capital 

ratio rule should be included in the riskbased capital ratio numerator for some 

period of time before being excluded 

(approximately 10 years after any final 

rule is published in the Federal 

Register). For a more detailed 

discussion on these and the other 

proposed changes, and responses to the 

comments received on the Original 

Proposal, refer to the section-by-section 

analysis part of this preamble below. 

In terms of the denominator for the 

risk-based capital ratio measure, section 

216(d)(2) of the FCUA requires that the 

Board, in designing a risk-based net 

worth requirement, ‘‘take account of any 

material risks against which the net 

worth ratio required for [a federally] 

insured credit union to be adequately 

capitalized may not provide adequate 

protection.’’ 72 Congress specifically 

listed IRR with respect to this provision 

in the Senate Report accompanying 

CUMAA, which added the 

aforementioned requirement to the 

FCUA.73 Section 216(d)(2) of the FCUA 

differs from the corresponding provision 

in section 38 of the FDI Act,74 which 

requires the Other Banking Agencies to 

implement risk-based capital 

requirements, because section 216(d)(2) 

specifically requires that NCUA’s riskbased requirement address ‘‘any 

material risks.’’ Accordingly, despite the 

absence of an IRR component in the 

Other Banking Agencies’ risk-based 

capital requirements,75 the Board is still 

required to account for any material 

risks in the risk-based requirement 

unless the risk is deemed immaterial 

because of the existence of some other 

mechanism that the Board believes 

adequately accounts for the risk. 

NCUA’s risk-based net worth 

requirement has included some aspect 

of IRR since its inception in 2000. 

Further, the Board continues to believe 

that IRR, if not adequately addressed 

through some regulatory, statutory or 

supervisory mechanism, can represent a 

material risk for purposes of NCUA’s 

risk-based requirement.76 The Board 

noted its concerns about IRR in the 

preamble of the final IRR rule issued in 

January 2012 when it highlighted the 

need for federally insured credit unions 

to have an effective IRR management 

program.77 NCUA’s requirement to have 

an effective IRR management program 

was necessitated in part by the Board’s 

concern over the steady lengthening in 

maturity of average credit union assets, 

an increase that in turn was fueled by 

a steady and extended expansion into 

mortgage loans and investments. At the 

same time credit unions were 

experiencing an increase in the 

weighted average maturity of their 

assets, much of their current portfolio 

was established in a period of recordlow interest rates and at contractually 

fixed coupon amounts. These asset 

factors, coupled with a large influx of 

non-maturity shares also priced at 

historically low rates, has created a 

unique mismatch between assets and 

liabilities and a potentially volatile 

sensitivity in earnings and capital. 

Accordingly, the Board continues to 

view IRR as a major risk facing credit 

unions. 

Based on long-term balance sheet 

trends at credit unions and NCUA’s 

experiences dealing with problem 

institutions, the Board has concluded 

that NCUA’s current regulations and 

supervisory process alone cannot 

adequately address IRR. However, the 

Board agrees with commenters on the 

Original Proposal who suggested that 

measures of IRR based comprehensively 

on assets and liabilities (including 

hedges) should be favored over 

measures that are based upon an assetonly approach, which is the approach 

taken in the current rule and was also 

the approach taken in the Original 

Proposal. Accordingly, the Board is now 

proposing to exclude consideration of 

IRR from the risk-based capital ratio 

measure, but in the future intends to 

consider alternative approaches for 

taking into account the IRR at credit 

unions. 

The proposed methodology for 

assigning risk weights in this proposed 

rule, therefore, would account only for 

credit risk and concentration risk. The 

Board believes that a capital-at-risk 

methodology is more appropriate for 


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78See also 78 FR 4032, 4037 (Jan. 18, 2013). 

79See U.S. Govt. Accountability Office, GAO–12– 

247, Earlier Actions Are Needed to Better Address 

Troubled Credit Unions, (Jan. 2012) available at 

http://www.gao.gov/products/GAO-12-247. 

80See, e.g., 12 CFR 324.32. 

81Basel Committee on Banking Supervision, 

‘‘International Convergence of Capital Measurement 

and Capital Standards: A Revised Framework, 

Comprehensive Version’’ 214 (June 2006) available 

at http://www.bis.org/publ/bcbs128.pdf (Basel II). 

82See U.S. Govt. Accountability Office, GAO–12– 

247, Earlier Actions are Needed to Better Address 

Troubled Credit Unions (2012), available at 

http://www.gao.gov/products/GAO-12-247. 

83See Office of Inspector General, National Credit 

Union Administration, OIG–10–03, Material Loss 

Review of Cal State 9 Credit Union (April 14, 2010), 

available at http://www.ncua.gov/about/Leadership/ 

CO/OIG/Documents/OIG201003MLRCalState9.pdf; 

Office of Inspector General, National Credit Union 

Administration, OIG–11–07, Material Loss Review 

of Beehive Credit Union (July 7, 2011), available at 

http://www.ncua.gov/about/Leadership/CO/OIG/

Documents/OIG201107MLRBeehiveCU.pdf; Office 

of Inspector General, National Credit Union 

Administration, OIG–10–15, Material Loss Review 

of Ensign Federal Credit Union, (September 23, 

2010), available at http://www.ncua.gov/about/

Leadership/CO/OIG/Documents/

OIG201015MLREnsign.pdf. 

84The definition of commercial loans and the 

differences between commercial loans and MBLs 

are discussed in more detail in the section-bysection analysis. 

85The tiered framework would provide for an 

incrementally higher capital requirement resulting 

measuring the risks arising from the 

changes in interest rates. The use of 

capital-at-risk methodologies to identify, 

measure and control IRR is a long 

standing practice in larger credit unions 

and a standard expectation among 

depository institution supervisors, 

including NCUA. Net economic value 

(NEV) is the most prevalent tool credit 

unions use to measure capital-at-risk. 

NEV measures the effect of changes in 

interest rates on a credit union’s 

economic value. NCUA has had a 

supervisory expectation for the use of 

asset liability management modeling by 

large credit unions for decades. In 2013, 

NCUA codified the requirement for IRR 

policies and management programs 

under section 741.3(b)(5).78 Paragraph 

(b)(5) currently requires federally 

insured credit unions with over $50 

million in assets to develop and adopt 

a written policy on IRR management, 

and a program to effectively implement 

that policy, as part of their asset liability 

management responsibilities. 

Because IRR will no longer be 

included in this proposal, NCUA will 

consider what alternative approaches 

can be taken to account for IRR at credit 

unions. Alternative approaches that 

could be taken include adding a 

separate IRR standard as a 

subcomponent of the risk-based net 

worth requirement to complement the 

proposed risk-based capital ratio 

measure. Conceptually, a separate IRR 

standard should be based on a 

comprehensive balance sheet measure, 

like NEV, that takes into account 

offsetting risk effects between assets and 

liabilities (including benefits from 

derivative transactions). The intent of 

such a measure would be to measure 

IRR consistently and transparently 

across all asset and liability categories, 

to address both rising and falling rate 

scenarios, and to supplement the 

supervisory process with a measure 

calibrated to address severe outliers. 

This approach would also incorporate a 

forward-looking, proactive measure into 

NCUA’s capital standards, as 

recommended by GAO.79

In light of the proposed elimination of 

IRR measures from the current rule, and 

GAO’s recommendation for NCUA to 

incorporate a forward-looking measure 

into credit union’s capital standards, the 

Board specifically requests comments 

on alternative approaches that could be 

taken in the future to reasonably 

account for IRR. 

Because the Board has decided to 

exclude IRR from the computation of 

the risk weights for assets in this 

proposal, it was necessary to propose 

significant changes to how investments 

are currently risk-weighted. This 

proposal adopts a risk weight 

framework for investments based largely 

on the credit risk of the issuer or 

underlying collateral. This proposed 

approach would be substantially similar 

to the Other Banking Agencies’ 

framework for investments.80 Because 

the same types of investments generally 

perform identically on a credit risk basis 

for credit unions and banks, the 

variations in this proposal from the 

Other Banking Agencies’ investment 

risk weights primarily involve credit 

union-specific type investments. For 

example, the proposed risk weights 

assigned to investments in capital 

instruments issued by corporate credit 

unions and credit union service 

organizations would differ from the 

corresponding risk-weights assigned to 

bank investments. While this approach 

to assigning risk weight to investments 

would require credit unions to report 

additional data on the Call Report, the 

Board believes such an approach would 

result in net benefits to credit unions in 

terms of the improved precision of the 

capital requirements. Further, the more 

granular data will improve NCUA’s 

offsite supervision capabilities. The 

section-by-section analysis part of the 

preamble contains more detailed 

discussions on the specific changes 

being proposed to the investment risk 

weights. 

Concentration risk can also be a 

material risk. As the Basel Committee 

on Banking Supervision explained in 

Basel II: 

Risk concentrations are arguably the single 

most important cause of major problems in 

banks. Risk concentrations can arise in a 

bank’s assets, liabilities, or off-balance sheet 

items, through the execution or processing of 

transactions (either product or service), or 

through a combination of exposures across 

these broad categories. Because lending is the 

primary activity of most banks, credit risk 

concentrations are often the most material 

risk concentrations within a bank. Credit risk 

concentrations, by their nature, are based on 

common or correlated risk factors, which, in 

times of stress, have an adverse effect on the 

creditworthiness of each of the individual 

counterparties making up the 

concentration.81

The concept of higher risk weights for 

concentrations of real estate loans and 

MBLs exists in the current risk-based 

requirement. Eliminating the 

concentration dimension for risk 

weights would be a step backward and 

is inconsistent with the concerns raised 

regarding concentration risk by GAO 

and in Material Loss Reviews (MLRs) 

conducted by NCUA’s OIG. The 2012 

GAO report notes credit concentration 

risk contributed to 27 of 85 credit union 

failures that occurred between January 

1, 2008, and June 30, 2011. Credit 

unions with high MBL concentrations 

are particularly susceptible to changes 

in business conditions that can affect 

borrower cash flow, collateral value, or 

other factors increasing the probability 

of default. GAO found in its 2012 report 

that credit unions who failed had more 

MBLs as a percentage of total assets than 

peers and the industry average. GAO 

advised NCUA to revise PCA taking into 

account credit unions with a high 

percentage of MBLs to total assets. The 

report documented NCUA’s agreement 

to revise PCA regulations so that capital 

standards adequately address 

concentration risk.82

GAO also recommended NCUA 

address the real estate concentration 

risk concerns raised by NCUA’s OIG, 

who completed several MLRs where 

failed credit unions had large real estate 

loan concentrations. The NCUSIF 

incurred losses of at least $25 million in 

each of these cases. The credit unions 

reviewed held substantial residential 

real estate loan concentrations in either 

first-lien mortgage loans, home equity 

lines of credit (HELOCS), or both.83

Accordingly, the Board is now 

proposing to include a tiered risk weight 

framework for high concentrations of 

residential real estate loans and 

commercial loans 84 in NCUA’s riskbased capital ratio measure.85 As a 


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in a blended rate for the corresponding portfolio. 

That is, the portion of the portfolio below the 

threshold would receive a lower risk weight, and 

the portion above the threshold would receive a 

higher risk weight. The higher risk weight would 

be consistent across asset categories as a 50 percent 

increase from the base rate. Some comments on the 

Original Proposal suggested NCUA should have 

combined similar exposures across asset classes, 

such as investments and loans. For example, 

residential mortgage-backed security concentrations 

could have been included with the real estate loan 

thresholds due to the similarity of the underlying 

assets. However, given the more liquid nature and 

price transparency of a security, the Board believes 

including this with the risk thresholds for real 

estate lending is not necessary. 

86The concentration threshold for real estate 

loans is approximately two standard deviations 

from the mean. The concentration threshold for 

commercial loans is over five standard deviations 

from the mean. 

87Based on NCUA’s analysis of call report data, 

approximately 90 percent of complex credit unions 

operate at levels below the concentration thresholds 

proposed for residential real estate loans. Over 99 

percent of complex credit unions operate at levels 

below the concentration thresholds proposed for 

commercial loans. See also, e.g., 12 CFR 324.32(f) 

and (g) (corresponding FDIC risk weights). 

88NCUA has attempted to simplify certain 

aspects of this proposed rule to take into account 

the cooperative character of credit unions while 

still imposing risk-based capital standards that are 

substantially similar and equivalent in rigor to the 

standards imposed on banks. See 12 U.S.C. 

1790d(b)(1)(B). 

credit union’s concentration in these 

asset classes increases, incrementally 

higher levels of capital would be 

required. This approach would address 

concentration risk as it relates to 

minimum required capital levels 

through a transparent, standardized, 

regulatory requirement. Considering 

concentration risk solely in the 

examination process would be less 

consistent and transparent, and would 

lack a strong enforcement framework. 

The Board agrees with various 

commenters on the Original Proposal 

that the tiered risk weight system 

should be adjusted so as to focus on 

material outliers, thereby creating more 

consistency of capital treatment with 

banks. Accordingly, the Board proposes 

to use a single, higher concentration 

threshold to simplify the risk weight 

framework and calibrate it to be 

applicable only to credit unions that 

deviate significantly from the mean.86

This single, higher concentration 

threshold would provide sufficient 

flexibility for the vast majority of credit 

unions to operate at a level where the 

risk weights are substantially similar to 

the risk weights applied to similar bank 

assets under the Other Banking 

Agencies’ capital regulations.87

The concentration thresholds would 

not limit a credit union’s lending 

activity; rather, the thresholds would 

merely require the credit union to hold 

capital for the elevated risk. The Board 

does not believe credit unions would be 

at a competitive disadvantage because 

most loans (except for loans at 

extremely high concentrations) would 

be assigned risk weights similar to those 

applicable to banks. 

Consistent with section 

216(b)(1)(A)(ii) of the FCUA, which 

requires NCUA’s PCA requirement be 

comparable to the Other Banking 

Agencies’ PCA requirements, the Board 

largely relied on the risk weights 

assigned to various asset classes under 

the Basel Accords and the Other 

Banking Agencies’ risk-based capital 

rules, as well as the underlying 

principles, for this proposal.88 NCUA 

has, however, tailored the risk weights 

in this proposal for certain assets that 

are unique to credit unions; where a 

demonstrable and compelling case 

exists, based on contemporary and 

sustained performance differences, to 

differentiate for certain asset classes 

between banks and credit unions; or 

where a provision of the FCUA required 

doing so. Thus, this proposal provides 

for even greater comparability to Other 

Banking Agencies’ risk weights than the 

Original Proposal by adjusting asset 

classes and recalibrating risk weight, 

including for all loans changing the 

definition of ‘‘current’’ from less than 60 

to less than 90 days past due. 

The following is a table showing a 

summary of the risk weights included in 

this proposal. See the section-by-section 

analysis part of the preamble below for 

more detail on the proposed changes to 

the asset classes and risk weights. 

SUMMARY OF PROPOSED RISK WEIGHTS

0% 20% 50% 75% 100% 150% 250% 300% 400% 1250% 

Cash/Currency/Coin ......................................... X ............ ............ ............ ............ ............ ............ ............ ............ ............

Investments:.

Unconditional Claims—U.S. Govt. 

(Treas./GNMA) ...................................... X ............ ............ ............ ............ ............ ............ ............ ............ ............

Balances Due from Federal Reserve 

Banks ..................................................... X ............ ............ ............ ............ ............ ............ ............ ............ ............

Federally Insured Deposits in Financial 

Institutions ............................................. X ............ ............ ............ ............ ............ ............ ............ ............ ............

Debt Instruments issued by NCUA and 

FDIC ...................................................... X ............ ............ ............ ............ ............ ............ ............ ............ ............

CLF Stock ................................................. X ............ ............ ............ ............ ............ ............ ............ ............ ............

Uninsured deposits at U.S. Federally Insured Inst. .............................................. X ............ ............ ............ ............ ............ ............ ............ ............

Agency Obligations ................................... X ............ ............ ............ ............ ............ ............ ............ ............

FNMA and FHLMC pass through MBS .... X ............ ............ ............ ............ ............ ............ ............ ............

Gen. Oblig. Bonds Issued by State or Political Sub. .............................................. X ............ ............ ............ ............ ............ ............ ............ ............

FHLB Stock and Balances ........................ X ............ ............ ............ ............ ............ ............ ............ ............

Senior Agency Residential MBS or Asset 

Backed Securities (ABS) Structured ..... X ............ ............ ............ ............ ............ ............ ............ ............

Revenue Bonds Issued by State or Political Sub. ................................................. X ............ ............ ............ ............ ............ ............ ............

Senior Non-Agency Residential MBS 

Structured .............................................. X ............ ............ ............ ............ ............ ............ ............

Corporate Membership Capital ................. X ............ ............ ............ ............ ............

Senior Non-Agency ABS Structured Securities ................................................... X ............ ............ ............ ............ ............

Industrial Development Bonds .................. X ............ ............ ............ ............ ............

Agency Stripped MBS (Int. Only and Prin. 

Only) ...................................................... X ............ ............ ............ ............ ............


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89The ‘‘look-through’’ approaches are discussed 

in more detail in part of the preamble discussing 

§ 702.103(c)(4) of this proposal. 

90The ‘‘gross-up’’ approach is discussed in more 

detail in part of the preamble discussing 

§ 702.103(c)(4) of this proposal. 

91See, e.g., 12 CFR 324.1(a). 

92See, e.g., 12 CFR 324.1(d). 93 78 FR 55362, Tuesday, September 10, 2013. 94See, e.g., 12 CFR 324.10(d)(1) and (2). 

SUMMARY OF PROPOSED RISK WEIGHTS—Continued 

0% 20% 50% 75% 100% 150% 250% 300% 400% 1250% 

Mutual Funds Part 703 Compliant ............ X * ............ ............ ............ ............ ............

Value of General Account Insurance 

(BOLI/CUOLI) ........................................ X * ............ ............ ............ ............ ............

Corporate Perpetual Capital ..................... X ............ ............ ............ ............

Mortgage Servicing Assets ....................... X ............ ............ ............

Separate Account Life Insurance ............. X * ............ ............

Publicly Traded Equity Investment (non 

CUSO) ................................................... X ............ ............

Mutual Funds Part 703 Non-Compliant .... X * ............ ............

Non-Publicly Traded Equity Inv. (non 

CUSO) ................................................... X ............

Subordinated Tranche of Any Investment X ** 

Consumer Loans: 

Share-Secured .......................................... X ............ ............ ............ ............ ............ ............ ............ ............

Current Secured ........................................ X ............ ............ ............ ............ ............ ............

Current Unsecured .................................... X ............ ............ ............ ............ ............

Non-Current .............................................. X ............ ............ ............ ............

Real Estate Loans: 

Share-Secured .......................................... X ............ ............ ............ ............ ............ ............ ............ ............

Current First Lien < 35% of Assets .......... X ............ ............ ............ ............ ............ ............ ............

Current First Lien > 35% of Assets .......... X ............ ............ ............ ............ ............ ............

Not Current First Lien ............................... X ............ ............ ............ ............ ............

Current Junior Lien < 20% of Assets ....... X ............ ............ ............ ............ ............

Current Junior Lien > 20% of Assets ....... X ............ ............ ............ ............

Noncurrent Junior Lien ............................. X ............ ............ ............ ............

Commercial Loans: 

Share-Secured .......................................... X ............ ............ ............ ............ ............ ............ ............ ............

Portion of Commercial Loans with Compensating Balance ................................. X ............ ............ ............ ............ ............ ............ ............ ............

Commercial Loans < 50% of Assets ........ X ............ ............ ............ ............ ............

Commercial Loans > 50% of Assets ........ X ............ ............ ............ ............

Non-current ............................................... X ............ ............ ............ ............

Miscellaneous: 

Loans to CUSOs ....................................... X ............ ............ ............ ............ ............

Equity Investment in CUSO ...................... X ............ ............ ............ ............

Other Balance Sheet Items not Assigned X ............ ............ ............ ............ ............

* With the option to use the look-through options.89

** With the option to use the gross-up approach.90

The Board notes that FDIC’s capital 

standards are the ‘‘minimum capital 

requirements and overall capital 

adequacy standards for FDIC-supervised 

institutions . . . include[ing] 

methodologies for calculating minimum 

capital requirements . . .’’ 91

The FDIC may require an FDICsupervised institution to hold an 

amount of regulatory capital greater 

than otherwise required under its 

capital rules if the FDIC determines that 

the institution’s capital requirements 

under its capital rules are not 

commensurate with the institution’s 

credit, market, operational, or other 

risks.92

Further, the September 10, 2013 

preamble to part 324 of FDIC’s 

regulations states that: 

The FDIC’s general risk-based capital rules 

indicate that the capital requirements are 

minimum standards generally based on broad 

credit-risk considerations. The risk-based 

capital ratios under these rules do not 

explicitly take account of the quality of 

individual asset portfolios or the range of 

other types of risk to which FDIC-supervised 

institutions may be exposed, such as interestrate risk, liquidity, market, or operational 

risks . . . In light of these considerations, as 

a prudent matter, an FDIC-supervised 

institution is generally expected to operate 

with capital positions well above the 

minimum risk-based ratios and to hold 

capital commensurate with the level and 

nature of the risks to which it is exposed, 

which may entail holding capital 

significantly above the minimum 

requirements.93

As indicated above, FDIC’s approach 

to risk weights is calibrated to be the 

minimum regulatory capital standard. 

Similarly, this proposal is calibrated to 

be the minimum regulatory capital 

standard. Therefore, the Board believes 

it is necessary to incorporate a broader 

regulatory provision requiring complex 

credit unions to maintain capital 

commensurate with the level and nature 

of all risks to which they are exposed, 

and to maintain a written strategy for 

assessing capital adequacy and 

maintaining an appropriate level of 

capital. 

Proposed new § 702.101(b) is based 

on a similar provision in the Other 

Banking Agencies’ rules.94 This 

provision would not affect a complex 

credit union’s PCA classification. It 

would, however, support NCUA’s 

assessment of complex credit unions’ 

capital adequacy in the supervisory 

process (e.g., assigning CAMEL and risk 

ratings). Following the publication of a 

final risk-based capital rule, NCUA 

would develop and publish supervisory 

guidance for examiners and credit 

unions on the application of this 

provision. Please refer to the section-byVerDate Sep<11>2014 09:20 Jan 26, 2015 Jkt 235001 PO 00000 Frm 00020 Fmt 4701 Sfmt 4702 E:\FR\FM\27JAP2.SGM 27JAP2

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95See § 702.1(d) of this proposed rule and the 

current rule. 96See section 1790(d)(h) of the Federal Credit 

Union Act, and § 702.102(b) of this proposed rule 

and the current rule. 97E.g., 12 CFR 702.202(b) and (c). 

98 12 U.S.C. 1790d(k). 

99Several trade association commenters 

advocated limiting the scope of the IMCR to IRR 

and concentration risk only, otherwise excluding 

those two risks from the scope of the proposed rule. 

100 12 U.S.C. 1790d(h). 101See, e.g., 12 CFR 324.403. 102The ‘‘capital conservation buffer’’ is explained 

in more detail in the discussion on proposed 

§ 702.102(a) in the section-by-section analysis part 

of the preamble. 

103See, e.g., 12 CFR 324.32. 

104See, e.g., 12 CFR 324.403. 

105There is no exemption for banks from the riskbased capital requirements of the other banking 

agencies. There are 1,975 FDIC-insured banks with 

assets less than $100 million as of June 2014. 

106 12 CFR 702.106. 

107Based upon December 31, 2013 Call Report 

data. 

section analysis part of this preamble for 

a more detailed discussion of this new 

provision and the related supervisory 

process considerations. 

Because of this proposed new capital 

adequacy provision, existing 

enforcement authority for unsafe and 

unsound conditions or practices,95

NCUA’s authority to reclassify an 

insured credit union into a lower net 

worth category,96 and comments on the 

Original Proposal, the Board has 

decided to eliminate the provision in 

the Original Proposal for imposing an 

IMCR. 

Under the Original Proposal, 

proposed § 702.105(a) would have 

introduced rules and procedures to 

permit the Board, on a case-by-case 

basis, to impose an IMCR that exceeds 

the risk-based capital requirement that 

otherwise would apply to a credit union 

under subpart A of part 702. 

Under the Original Proposal, 

§ 702.105(a) would have prescribed 

criteria to determine when a credit 

union’s capital is, or may become, 

inadequate, making it appropriate to 

impose a higher capital requirement. It 

then would have prescribed standards 

to determine what heightened capital 

requirement to impose in such cases, 

based not only on mathematical and 

objective criteria, but on subjective 

judgment grounded in agency expertise. 

Under the Original Proposal, a stafflevel decision to impose a discretionary 

supervisory action (DSA) under part 

702,97 and a decision to impose an 

IMCR would have been treated as a 

‘‘material supervisory determination.’’ 98

As such, proposed § 747.2006 would 

have required NCUA to provide the 

affected credit union with reasonable 

notice of a proposed IMCR, and it 

established an independent process by 

which to challenge the proposed IMCR, 

culminating in Board review. 

With a few notable exceptions,99 the 

comments addressing the IMCR were 

critical of the concept itself, NCUA’s 

legal authority to impose an IMCR, the 

scope of an IMCR, the criteria and 

procedures for imposing it, the 

subjectivity and discretion involved, or 

the lack of an option for review by an 

independent third party. 

Now that the IMCR provision in this 

proposal has been removed, the 

commenters’ concerns with the various 

aspects of the IMCR are no longer 

relevant. NCUA would be able to 

address any deficiencies in a credit 

union’s capital levels relative to its risk 

by: (1) Reclassifying the credit union 

into a lower net worth category under 

§ 702.102(b) of this proposal and 

FCUA; 100 (2) determining in relation to 

proposed § 702.101(b) that capital levels 

are not commensurate with the level or 

nature of the risks to which the credit 

union is exposed; or (3) using other 

supervisory authorities to address 

unsafe or unsound conditions or 

practices as noted in § 702.1(d) of this 

proposal and the current rule. As a 

practical matter, in using these 

authorities, NCUA may provide specific 

metrics for necessary reductions in risk 

levels, increases in capital levels beyond 

those otherwise required under this 

part, and some combination of risk 

reduction and increased capital so it is 

clear how the credit union can address 

NCUA’s supervisory concerns. Then it 

would be up to the credit union to 

decide which particular option to 

pursue to remedy NCUA’s enforcement 

action. 

As discussed earlier in this preamble, 

the Original Proposal would have 

required that credit union meet different 

risk-based capital ratio levels for the 

adequately capitalized category (eight 

percent) and the well capitalized 

category (10.5 percent). Commenters on 

the Original Proposal questioned 

NCUA’s legal authority to require 

complex credit unions to meet one riskbased capital ratio to be adequately 

capitalized and a different, higher riskbased capital ratio to be classified as 

well capitalized. As explained in the 

legal authority section of this preamble, 

the Board has the authority under the 

FCUA to take this approach. 

However, the Board supports 

lowering the risk-based capital ratio 

level required for a complex credit 

union to be classified as well capitalized 

from 10.5 percent to 10 percent. The 

Board agrees with commenters that a 10 

percent risk-based capital ratio level for 

well capitalized credit unions simplifies 

the comparison with the Other Banking 

Agencies’ rules 101 by removing the 

effect of the capital conservation 

buffer.102 Capital ratio thresholds are 

largely a function of risk weights. As 

discussed in other parts of this proposal, 

the Board is now proposing to more 

closely align NCUA’s risk weights with 

those assigned by the Other Banking 

Agencies,103 so it follows that the riskbased capital ratio thresholds should 

also align as much as possible. The 

proposed 10 percent risk-based capital 

ratio level for well capitalized credit 

unions, along with the eight percent 

risk-based capital ratio level for 

adequately capitalized credit unions, 

would be comparable to the total riskbased capital ratio requirements 

contained in the Other Banking 

Agencies’ capital rules.104

The Original Proposal would have 

applied to all credit unions with over 

$50 million in total assets. Based on 

NCUA’s analysis of the comments 

received on the Original Proposal, the 

Board is now proposing to define a 

credit union as ‘‘complex’’ if it has 

assets of more than $100 million.105

Credit unions meeting this threshold 

have a portfolio of assets and liabilities 

that are complex, based upon the 

products and services in which they are 

engaged. Credit unions with $100 

million in assets or less generally do not 

have a complex structure of assets and 

liabilities and are a small share of the 

overall assets in the credit union 

system, thereby limiting the exposure of 

the NCUSIF to these institutions. As 

discussed later in this document, the 

$100 million asset threshold is a clear 

demarcation above which all credit 

unions engage in complex activities, 

and where almost all such credit unions 

(99 percent) are involved in multiple 

complex activities, in stark contrast to 

credit unions with $100 million in 

assets or less. 

The Board believes an asset threshold 

would be clear, logical, and easy to 

administer when compared to the more 

complicated formula credit unions are 

required to follow under the current 

rule 106 to determine if they are 

complex. Using a more straightforward 

proxy for complex credit unions would 

also help account for the fact that credit 

unions have boards of directors that 

consist primarily of volunteers. The 

$100 million dollar asset size threshold 

would exempt almost 80 percent of 

credit unions 107 from any regulatory 

burden associated with complying with 

this rule, while covering nearly 90 

percent of the assets in the credit union 

system. The threshold would also be 

consistent with the fact that the majority 


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108Under both current § 702.301(b) and proposed 

§ 702.201(b), a credit union is ‘‘new’’ if it is ‘‘a 

federally-insured credit union that both has been in 

operation for less than ten (10) years and has total 

assets of not more than $10 million. A credit union 

which exceeds $10 million in total assets may 

become ‘new’ if its total assets subsequently decline 

below $10 million while it is still in operation for 

less than 10 years.’’ 

109 12 U.S.C. 1790d(b)(1). 

110Section 1790d(a)(1). 

111 12 CFR 700.2; 12 CFR 703.2; 12 CFR 704.2. 

of losses (as measured as a proportion 

of the total dollar cost) to the NCUSIF 

result from credit unions with assets 

greater than $100 million. For a more 

detailed discussion of the rationale the 

Board considered in defining complex, 

see the discussion associated with 

proposed § 702.103 in the section-bysection analysis part of the preamble. 

The Original Proposal would have 

provided an 18-month implementation 

period for credit unions to adjust to the 

new requirements. The Board agrees 

with the comments received on the 

Original Proposal that a longer 

implementation period is necessary due 

to the complexity of this rule and the 

changes needed in the Call Report. 

Therefore, the Board is proposing to 

more than double the implementation 

period by extending it to January 1, 

2019, to provide both credit unions and 

NCUA sufficient time to make the 

necessary adjustments, such as systems, 

processes, and procedures, and to 

reduce the burden on affected credit 

unions in meeting the new 

requirements. 

IV. Section-by-Section Analysis 

Part 702—Capital Adequacy 

Revised Structure of Part 702 

Consistent with the Original Proposal, 

this proposed rule would reorganize 

part 702 by consolidating NCUA’s PCA 

requirements, which are currently 

included under subsections A, B, C, and 

D, under proposed subparts A and B. 

Proposed subpart A would be titled 

‘‘Prompt Corrective Action’’ and 

proposed subpart B would be titled 

‘‘Alternative Prompt Corrective Action 

for New Credit Unions.’’ 108 The 

reorganization of the proposed rule is 

designed so that credit unions need only 

reference the subpart applying to their 

institution to identify the applicable 

minimum capital standards and PCA 

regulations. The Board believes that 

consolidating these sections would 

reduce confusion and save credit union 

staff from having to frequently flip back 

and forth through the four subparts of 

the current PCA rule. 

In general, this proposed rule would 

restructure part 702 by consolidating 

most of the rules relating to capital and 

PCA that are applicable to credit unions 

that are not ‘‘new’’ credit unions under 

new subpart A. This change is intended 

to simplify the structure of part 702. The 

specific sections that would be included 

in new subpart A and the proposed 

changes to those sections are discussed 

in more detail below. 

Similarly, this proposed rule would 

consolidate most of NCUA’s rules 

relating to alternative capital and PCA 

requirements for ‘‘new’’ credit unions 

under new subpart B. This change is 

intended to simplify the structure of 

part 702. The sections under new 

subpart B would remain largely 

unchanged from the requirements of 

current part 702 relating to alternative 

capital and PCA, except for revisions to 

the sections relating to reserves and the 

payment of dividends. The specific 

sections included in new subpart B and 

the specific changes to the sections 

under new subpart B are discussed in 

more detail below. 

Finally, this proposed rule would 

retain subpart E of part 702, Stress 

Testing, but would re-designate and renumber the current subpart as subpart 

C. Other than re-designating and renumbering the subpart, the language 

and requirements of current subpart E 

would remain unchanged. 

Section 702.1 Authority, Purpose, 

Scope, and Other Supervisory Authority 

Consistent with the Original Proposal, 

proposed § 702.1 would remain 

substantially similar to current § 702.1, 

but would be amended to update 

terminology and internal cross 

references within the section, consistent 

with the changes that are being 

proposed in other sections of part 702. 

No substantive changes to the section 

are intended. 

The Board received a number of 

comments expressing concerns 

regarding the Boards authority to issue 

the Original Proposal. Several 

commenters stated that the Board lacks 

legal authority to issue a rule 

implementing the risk-based capital 

requirement as proposed. Other 

commenters suggested that the Board 

did not adequately account for the 

unique nature of credit unions in the 

Original Proposal. Another commenter 

suggested that the language of the FCUA 

does not mean that there should be one 

approach and one universal algorithm 

applied to all risk in the same fashion. 

Other commenters suggested that the 

Original Proposal was inconsistent with 

the statutory requirement for the Board 

to design a system of PCA that is 

comparable to that of FDIC. Other 

commenters argued that the proposed 

risk-based capital requirement was 

inconsistent with the FCUA because 

they believed it ignored the fact that 

most credit unions raise net worth only 

through retained earnings. 

The Board has carefully considered 

these comments and generally disagrees 

with commenters’ reading of the FCUA. 

Section 216(b)(1) of the FCUA requires 

the Board to adopt by regulation a 

system of PCA for insured credit unions 

that is ‘‘comparable to’’ the system of 

PCA prescribed in the FDI Act, that is 

also ‘‘consistent’’ with the requirements 

of section 216 of the FCUA, and that 

takes into account the cooperative 

character of credit unions.109 Paragraph 

(d)(1) of the same section requires that 

NCUA’s system of PCA include ‘‘a riskbased net worth requirement for insured 

credit unions that are complex . . .’’ 

When read together, these sections grant 

the Board broad authority to design 

reasonable risk-based capital regulations 

to carry out the stated purpose of 

section 216, which is to ‘‘resolve the 

problems of [federally] insured credit 

unions at the least possible long-term 

loss to the [National Credit Union Share 

Insurance] Fund.’’ 110 As explained in 

more detail below, the Board believes 

that this proposed rule is comparable, 

although not identical in detail, to the 

PCA and risk-based capital 

requirements for banks. In addition, as 

explained throughout the preamble to 

this proposed rule, this proposal 

deviates from the PCA and risk-based 

capital requirements applicable to banks 

as required by section 216 of the FCUA 

and takes into account the cooperative 

character of credit unions. Accordingly, 

the Board believes that this proposed 

rule would implement the risk-based 

net worth requirement consistent with 

section 216 of the FCUA. 

Section 702.2—Definitions 

Under the Original Proposal, 

proposed § 702.2 would have retained 

many of the definitions in current 

§ 702.2 with no substantive changes. 

The Original Proposal would, however, 

have removed the paragraph number 

assigned to each of the definitions under 

current § 702.2 and would have 

reorganized the section so the new and 

existing definitions were listed in 

alphabetic order. This reformatting 

would have made § 702.2 more 

consistent with current §§ 700.2, 703.2 

and 704.2 of NCUA’s regulations.111 In 

addition, the originally proposed § 702.2 

would have added a number of new 

definitions, and amended some existing 

definitions in § 702.2. These changes 

were intended to help clarify the 


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112 12 U.S.C. 1782(a)(6)(C)(i). 

113Many of the descriptions below overlap and 

are not intended to be an all-inclusive list. 

meaning of terms used in the Original 

Proposal. 

The Board received no comments on 

these technical changes to § 702.2 and 

has decided to retain the changes 

described above in this second proposal. 

Consistent with section 202 of the 

FCUA,112 the Board has incorporated 

the phrase ‘in accordance with GAAP’ 

into many of the definitions to clarify 

that generally accepted accounting 

principles would be used determine 

how an item is recorded on the 

statement of financial condition from 

which it would be incorporated into the 

risk-based capital calculation. The 

following definitions, some of which 

were included in the Original Proposal, 

would be added, amended, or removed 

under this proposed rule: 

Allowances for loan and lease losses 

(ALLL). Under the Original Proposal, the 

term ‘‘allowance for loan and lease loss’’ 

would have been defined as reserves 

that have been established through 

charges against earnings to absorb future 

losses on loans, lease financing 

receivables, or other extensions of 

credit. 

The Board received no comments on 

the definition of ALLL in the Original 

Proposal and has decided to retain the 

term and definition in this second 

proposal with the following changes. As 

discussed in more detail below, the 

Board is now proposing to amend the 

definition of ALLL to address the 

importance of maintaining ALLL in 

accordance with GAAP since the 

integrity of the risk-based capital ratio is 

dependent upon an accurate ALLL, 

particularly now that this second 

proposal would allow the entire ALLL 

balance to be included in the risk-based 

capital ratio numerator. A credit union 

maintaining ALLL in accordance with 

GAAP will make timely adjustments to 

the ALLL including the timely charge 

off of loan losses. Accordingly, under 

this proposed rule, the term ‘‘ALLL’’ 

would be defined as valuation 

allowances that have been established 

through a charge against earnings to 

cover estimated credit losses on loans, 

lease financing receivables or other 

extensions of credit as determined in 

accordance with GAAP. 

Amortized cost. Under this proposed 

rule, the new term ‘‘amortized cost’’ 

would be defined as the purchase price 

of a security adjusted for amortizations 

of premium or accretion of discount if 

the security was purchased at other than 

par or face value. 

This proposed new term is being 

added because investments accounted 

for as held-to-maturity are reported on 

the balance sheet at amortized cost 

while investments accounted for as 

available-for-sale are reported on the 

balance sheet at fair value. As explained 

in more detail below, to ensure 

consistency in the measure of minimum 

capital for held-to-maturity or availablefor-sale investments, the risk weights 

will be applied to the amortized cost. 

Appropriate regional director. This 

proposed rule would amend the 

definitions section to remove the 

definition of the term ‘‘appropriate 

regional director’’ from the current rule. 

The definition is unnecessary and 

redundant because the term ‘‘Regional 

Director’’ is already defined for 

purposes of NCUA’s regulations in 

§ 700.2. 

Appropriate state official. Under this 

proposed rule, the term ‘‘appropriate 

state official’’ would be defined as the 

state commission, board or other 

supervisory authority having 

jurisdiction over the credit union. The 

proposal would amend the current 

definition of ‘‘appropriate state official’’ 

to provide additional clarity by adding 

the italicized words above (‘‘state’’ and 

‘‘the’’) to the definition, and by 

removing the words ‘‘chartered by the 

state which chartered the affected credit 

union,’’ which the Board believes are 

unnecessary. 

Call Report. Under the Original 

Proposal, the term ‘‘Call Report’’ would 

have been defined as the Call Report 

required to be filed by all credit unions 

under § 741.6(a)(2). 

The Board received no comments on 

the definition of ‘‘Call Report’’ and has 

decided to retain the definition 

unchanged in this proposal. 

Carrying value. Under this proposed 

rule, the new term ‘‘carrying value’’ 

would be defined, with respect to an 

asset, as the value of the asset on the 

statement of financial condition of the 

credit union, determined in accordance 

with GAAP. Under this proposed rule, 

for many assets, the carrying value 

would be the amount subject to the 

application of the associated risk 

weight. 

Central counterparty (CCP). Under 

this proposed rule, the new term 

‘‘central counterparty’’ would be 

defined as a counterparty (for example, 

a clearing house) that facilitates trades 

between counterparties in one or more 

financial markets by either guaranteeing 

trades or novating contracts. The Board 

is proposing to add this term to coincide 

with amendments it is making in the 

derivatives section of this proposal. 

Commercial loan. Under this 

proposed rule, the new term 

‘‘commercial loan’’ would be defined as 

any loan, line of credit, or letter of credit 

(including any unfunded commitments) 

to individuals, sole proprietorships, 

partnerships, corporations, or other 

business enterprises for commercial, 

industrial, and professional purposes, 

but not for investment or personal 

expenditure purposes. The definition 

would also provide that the term 

commercial loan excludes loans to 

CUSOs, first- or junior-lien residential 

real estate loans, and consumer loans. 

The Board is proposing to adopt a 

different approach from the Original 

Proposal, in which it applied risk 

weights to assets that fell within the 

statutory definition of MBLs, and is now 

proposing to assign specific risk weights 

to all loans meeting the new definition 

of commercial loans provided above. 

The proposed definition of commercial 

loans is more reflective of the risk of 

these loans than the previously defined 

term MBL, which would no longer be 

used in proposed § 702.104, and, as 

discussed in more detail below, is 

intended to better identify the loans 

made for a commercial purpose and 

having similar risk characteristics. 

Classification of a loan as a commercial 

loan would be based upon the purpose 

of the loan, the use of the proceeds of 

the loan, and the type of underlying 

collateral. Commercial loans may take 

the form of direct or purchased loans. 

For example, commercial loans would 

generally include the following types of 

loans: 113

• Loans for commercial, industrial 

and professional purposes to: 

Æ Mining, oil- and gas-producing, and 

quarrying companies; 

Æ Manufacturing companies of all 

kinds, including those which process 

agricultural commodities; 

Æ Construction companies; 

Æ Transportation and 

communications companies and public 

utilities; 

Æ Wholesale and retail trade 

enterprises and other dealers in 

commodities; 

Æ Cooperative associates including 

farmers’ cooperatives; 

Æ Service enterprises such as hotels, 

motels, laundries, automotive service 

stations, and nursing homes and 

hospitals operated for profit; 

Æ Insurance agents; and 

Æ Practitioners of law, medicine and 

public accounting. 

• Loans for the purpose of financial 

capital expenditures and current 

operations. 

• Loans to finance agricultural 

production and other loans to farmers, 

including: 


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114Under this proposal, loans secured by one-tofour family residential property are defined as first 

or junior lien residential real estate loans. 115See, e.g., 12 CFR 324.32(k). 

Æ Loans and advances made for the 

purpose of financing agricultural 

production, including the growing and 

storing of crops, the marketing or 

carrying of agricultural products by the 

growers thereof, and the breeding, 

raising, fattening, or marketing of 

livestock; 

Æ Loans and advances made for the 

purpose of financial fisheries and 

forestries, including loans to 

commercial fishermen; 

Æ Agricultural notes and other notes 

of farmers that the credit union has 

discounted, or purchased from, 

merchants and dealers, either with or 

without recourse to the seller; 

Æ Loans and advances to farmers for 

purchase of farm machinery, equipment, 

and implements; 

Æ Loans and advances to farmers for 

all other purposes associated with the 

maintenance or operations of the farm. 

• Loan secured by multifamily 

residential properties with 5 or more 

dwelling units in structures (including 

apartment buildings and apartment 

hotels) used primarily to accommodate 

a household on a more or less 

permanent basis and cooperative-type 

apartment buildings containing 5 or 

more dwelling units.114

• Loans secured by real estate as 

evidenced by mortgages or other liens 

on business and industrial properties, 

hotels, churches, hospitals, educational 

and charitable institutions, dormitories, 

clubs, lodges, association buildings, 

‘‘homes’’ for aged persons and orphans, 

golf courses, recreational facilities, and 

similar properties. 

• Loans to finance leases for fleets of 

vehicles used for commercial purposes. 

Commitment. Under the Original 

Proposal, the term ‘‘commitment’’ 

would have been defined as any legally 

binding arrangement that obligated the 

credit union to extend credit or to 

purchase assets. 

The Board received no comments on 

the definition of ‘‘commitment’’ and has 

decided to retain the definition in this 

proposal, but with a minor change. In 

this proposal, the term ‘‘commitment’’ 

would be defined as any legally binding 

arrangement that obligates the credit 

union to extend credit, to purchase or 

sell assets, or enter into a financial 

transaction. The italicized words would 

be added to expand the definition to 

provide additional clarity and to 

encompass a broader range of financial 

transactions than just extending credit 

or purchasing assets. 

Consumer loan. Under this proposed 

rule, the new term ‘‘consumer loan’’ 

would be defined as a loan to one or 

more individuals for household, family, 

or other personal expenditures, 

including any loans secured by vehicles 

generally manufactured for personal, 

family, or household use regardless of 

the purpose of the loan. The proposed 

definition would provide further that 

the term consumer loan excludes 

commercial loans, loans to CUSOs, firstand junior-lien residential real estate 

loans, and loans for the purchase of fleet 

vehicles. 

For example, under this proposed 

rule, consumer loans would include 

direct and indirect loans for the 

following purposes: 

• Purchases of new and used 

passenger cars and other vehicles such 

as minivans, sport-utility vehicles, 

pickup trucks, and similar light trucks 

or heavy duty trucks generally 

manufactured for personal, family, or 

household use and not used as fleet 

vehicles or to carry fare-paying 

passengers; 

• Purchases of household appliances, 

furniture, trailers, and boats; 

• Repairs or improvements to the 

borrower’s residence (that do not meet 

the definition of a loan secured by real 

estate); 

• Education expenses, including 

student loans; 

• Medical expenses; 

• Personal taxes; 

• Vacations; 

• Consolidation of personal debts; 

• Purchases of real estate or mobile 

homes to be used as the borrower’s 

primary residence (that do not meet the 

definition of a loan secured by real 

estate); and 

• Other personal expenses. 

The Board is proposing to add this 

new term and definition to part 702 to 

distinguish loans made for a consumer 

purpose from real estate loans and 

commercial loans so each can be 

assigned to an appropriate risk weight 

category. 

Contractual compensating balance. 

Under this proposed rule, the new term 

‘‘contractual compensating balance’’ 

would be defined as the funds a 

commercial loan borrower must 

maintain on deposit at the lender credit 

union as security for the loan in 

accordance with the loan agreement, 

subject to a proper account hold and on 

deposit as of the measurement date. 

The Board is proposing this new term 

because it recognizes that the portion of 

commercial loans covered by 

contractual compensating balances 

present a lower credit risk, and thus 

should be assigned a lower risk weight 

provided the credit union has a proper 

hold and maintains the compensating 

balance. 

Credit conversion factor (CCF). Under 

this proposed rule, the new term ‘‘credit 

conversion factor’’ would be defined as 

the percentage used to assign a credit 

exposure equivalent amount for selected 

off-balance sheet accounts. 

This definition is being proposed to 

help clarify the process used to 

calculate the credit exposure equivalent 

for off-balance sheet items. Specific offbalance sheet items have a probability of 

becoming an actual credit exposure and 

shifting on to the balance sheet. The 

CCF is an estimate of this probability. 

Credit union. Under this proposed 

rule, the term ‘‘credit union’’ would be 

defined as a federally insured, naturalperson credit union, whether federally 

or state-chartered. The proposal would 

amend the current definition of the term 

‘‘credit union’’ to remove the words ‘‘as 

defined by 12 U.S.C. 1752(6)’’ from the 

end of the definition because they are 

unnecessary, and could mistakenly be 

read to limit the definition of ‘‘credit 

unions’’ to state-chartered credit unions. 

Current. Under this proposed rule, the 

new term ‘‘current’’ would be defined to 

mean, with respect to any loan, that the 

loan is less than 90 days past due, not 

placed on non-accrual status, and not 

restructured. 

Commenters suggested that loans 

carried on non-accrual status should not 

be included with delinquent loans, and 

that the Original Proposal did not take 

into consideration the balances in the 

ALLL if the credit union is able, under 

GAAP, to reserve for individual losses. 

Other commenters suggested that the 

definition of ‘‘delinquent loans’’ should 

be amended to match the Other Banking 

Agencies’ regulations, which count 

loans as delinquent only if they are 90 

days or more past due. 

The Board is now proposing to count 

loans as non-current if they are 90 days 

past due (rather than 60 days past due), 

and, as explained in more detail below, 

to assign them to the higher risk weight 

category associated with past due loans. 

This change would better align this 

proposal with the definition of ‘‘current 

loan’’ under the Other Banking Agencies 

regulations.115 The change to 90 days 

past due would also be consistent with 

§ 741.3(b)(2), which specifies that a 

credit union’s written lending policies 

must include ‘‘loan workout 

arrangements and nonaccrual standards 

that include the discontinuance of 

interest accrual on loans past due by 90 

days or more.’’ 

In general, loans that are more than 90 

days past due, or restructured, tend to 


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have higher incidences of default 

resulting in losses. The Board is aware 

that the historical and individual loan 

losses are reflected in the balance of the 

ALLL, and believes that removal of the 

1.25 percent of assets limit on the ALLL 

addresses the concerns expressed by 

commenters that, under the Original 

Proposal, there was a potential for 

negative consequences for maintaining 

an adequate ALLL for delinquent loans. 

This definition would replace the 

term ‘‘delinquent loans,’’ which was 

used in the Original Proposal, when 

referring to whether a loan is past due, 

placed on non-accrual status, modified, 

or restructured. The Board believes 

using the term ‘‘current’’ when referring 

to loans will eliminate confusion caused 

by using the term ‘‘delinquent loan’’ in 

reference to regulatory reporting 

requirements or proper accounting 

treatment. Under this second proposed 

rule, loans are either current or noncurrent for purposes of determining 

their appropriate risk weight category. 

CUSO. Under the Original Proposal, 

the term ‘‘CUSO’’ would have been 

defined as a credit union service 

organization as defined in parts 712 and 

741. 

The Board received no comments on 

the proposed definition of ‘‘CUSO’’ and 

has decided to retain the definition 

unchanged in this proposal. 

Custodian. Under this proposed rule, 

the new term ‘‘custodian’’ would be 

defined as a financial institution that 

has legal custody of collateral as part of 

a qualifying master netting agreement, 

clearing agreement or other financial 

agreement. The Board is proposing to 

add this new term to coincide with 

other changes it is proposing to make in 

the derivatives section of this proposal. 

Depository institution. Under this 

proposed rule, the new term 

‘‘depository institution’’ would be 

defined as a financial institution that 

engages in the business of providing 

financial services; that is recognized as 

a bank or a credit union by the 

supervisory or monetary authorities of 

the country of its incorporation and the 

country of its principal banking 

operations; that receives deposits to a 

substantial extent in the regular course 

of business; and that has the power to 

accept demand deposits. The definition 

provides further that the term 

depository institution includes all 

federally insured offices of commercial 

banks, mutual and stock savings banks, 

savings or building and loan 

associations (stock and mutual), 

cooperative banks, credit unions and 

international banking facilities of 

domestic depository institutions, and all 

privately insured state-chartered credit 

unions. 

The term depository institution would 

primarily be used to address the risk 

weights assigned to deposits in 

depository institutions. 

Derivatives Clearing Organization 

(DCO). Under this proposed rule the 

term ‘‘Derivatives Clearing Organization 

(DCO)’’ would be defined as having the 

same definition as provided by the 

Commodity Futures Trading 

Commission in 17 CFR 1.3(d). The 

Board is proposing to add this new term 

to coincide with other changes it is 

proposing to make in the derivatives 

section of this proposal. 

Derivative contract. Under this 

proposed rule, the term ‘‘derivative 

contract’’ would be defined 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. 

The definition would provide further 

that the term derivative contract 

includes interest rate derivative 

contracts, exchange rate derivative 

contracts, equity derivative contracts, 

commodity derivative contracts, and 

credit derivative contracts. The 

definition would also provide that the 

term derivative contract also includes 

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. 

The Board received no comments on 

the proposed definition of ‘‘derivatives 

contract.’’ This proposal, however, 

includes a slightly modified definition 

of derivative contract to state derivative 

means 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. The Board believes this 

modification will make this proposal 

more clear and accurate. 

Equity investment. Under this 

proposed rule, the new term ‘‘equity 

investment’’ would be defined as 

investments in equity securities, and 

any other ownership interests, 

including, for example, investments in 

partnerships and limited liability 

companies. 

This term would be primarily used to 

address the risk weights assigned to 

equity exposures. The Board recognizes 

that equity investments contain 

significant credit risk as they are 

generally in the first loss position and 

depend upon continued profitable 

operations of a business entity to retain 

value. The liquidity of equity 

investments can vary depending upon if 

the investment is publicly traded or 

closely held. 

Equity investment in CUSOs. The 

Original Proposal would have defined 

the term ‘‘investment in CUSO’’ as the 

unimpaired value of the credit union’s 

aggregate CUSO investments as 

measured under generally accepted 

accounting principles on an 

unconsolidated basis. 

The Board received no comments on 

the definition of ‘‘investments in 

CUSO.’’ However, the Board has 

decided to change the term and the 

definition as follows. Under this 

proposed rule, the new term ‘‘equity 

investment in CUSOs’’ would be 

defined as the unimpaired value of the 

credit union’s equity investments in a 

CUSO as recorded on the statement of 

financial condition in accordance with 

GAAP. 

The Board renamed this term and 

amended the definition in this proposal 

to emphasize the importance of 

recording equity investments in CUSOs 

in accordance with GAAP and clarify 

how the equity investment in a CUSO 

for the assignment of risk weights is 

determined. By following GAAP: 

• For an unconsolidated CUSO, a 

credit union must assign the risk weight 

to the unimpaired value of the equity 

investment as presented on the 

statement of financial condition; 

• For a consolidated CUSO, a credit 

union’s equity investment is normally 

zero since the consolidation entries 

eliminate the intercompany transaction. 

Exchange. Under this proposed rule 

the new term ‘‘exchange’’ would be 

defined as a central financial clearing 

market where end users can trade 

derivatives. The Board is proposing to 

add this new term to coincide with 

other changes it is proposing to make in 

the derivatives section of this proposal. 

Excluded goodwill, and excluded 

other intangible assets. Under this 

proposed rule, the new term ‘‘excluded 

goodwill’’ would be defined as the 

outstanding balance, maintained in 

accordance with GAAP, of any goodwill 

originating from a supervisory merger or 

combination that was completed no 

more than 29 days after publication of 

this rule in final form in the Federal 


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Register. The definition would provide 

further that the term excluded goodwill 

and its accompanying definition will 

expire on January 1, 2025. 

This proposed rule would also define 

the new term ‘‘excluded other intangible 

assets’’ as the outstanding balance, 

maintained in accordance with GAAP, 

of any other intangible assets such as 

core deposit intangibles, member 

relationship intangibles, or trade name 

intangible originating from a 

supervisory merger or combination that 

was completed no more than 29 days 

after publication of this rule in final 

form in the Federal Register. The 

definition would provide further that 

the term excluded other intangible 

assets and its accompanying definition 

will expire on January 1, 2025. 

The Board added these two 

definitions as part of a response to 

certain comments on the Original 

Proposal and seeks to take into account 

the impact goodwill or other intangible 

assets recorded from transactions 

defined as supervisory mergers or 

combinations has on the calculation of 

the risk-based capital ratio upon 

implementation. This proposed 

exclusion would apply to supervisory 

mergers or combinations that are 

completed prior to a date that is 30 days 

from the date of publication of this rule 

in final form in the Federal Register. 

The Board intends to allow this 

additional time (until approximately 

2024) for supervisory mergers or 

combinations related goodwill and other 

intangible assets to be absorbed under 

the proposed risk-based capital ratio. 

Under this proposal, the amount of 

goodwill deducted from the risk-based 

capital ratio numerator would be 

reduced by the balance of excluded 

goodwill or excluded other intangible 

assets recorded in accordance with 

GAAP as of the measurement date. 

However, credit unions would still need 

to conform to GAAP in the 

measurement and disclosure of goodwill 

and other intangible assets. This 

proposed exclusion would end on 

January 1, 2025 so the last quarter-end 

date with this exclusion will be 

December 31, 2024. This means that any 

remaining goodwill or other intangible 

assets would be required to be deducted 

from the risk-based capital ratio 

numerator after January 1, 2025. 

Exposure amount. Under this 

proposed rule, the new term ‘‘exposure 

amount’’ would be defined as: 

• The amortized cost for investments 

classified as held-to-maturity and 

available-for-sale, and the fair value for 

trading securities. 

• The outstanding balance for Federal 

Reserve Bank Stock, Central Liquidity 

Facility Stock, Federal Home Loan Bank 

Stock, nonperpetual capital and 

perpetual contributed capital at 

corporate credit unions, and equity 

investments in CUSOs. 

• The carrying value for non-CUSO 

equity investments, and investment 

funds. 

• The carrying value for the credit 

union’s holdings of general account 

permanent insurance, and separate 

account insurance. 

• The amount calculated under 

§ 702.105 of this part for derivative 

contracts. 

This definition would be used to 

ensure the specific assets are assigned 

consistent risk weights based on the 

treatment of the specific assets. 

Fair value. Under this proposed rule, 

the new term ‘‘fair value’’ would be 

defined as having the same meaning as 

provided in GAAP. This definition is 

important because the proper 

accounting for some specific assets 

subject to risk weights are recorded on 

the statement of financial condition at 

fair value. 

Financial collateral. Under this 

proposed rule, the new term ‘‘financial 

collateral’’ would be defined as 

collateral approved by both the credit 

union and the counterparty as part of 

the collateral agreement in recognition 

of credit risk mitigation for derivative 

contracts. The Board is proposing to add 

this new term to coincide with other 

changes it is proposing to make in the 

derivatives section of this proposal. 

First-lien residential real estate loan. 

Under this proposed rule, the new term 

‘‘first-lien residential real estate loan’’ 

would be defined as a loan or line of 

credit primarily secured by a first-lien 

on a one-to-four family residential 

property where: (1) The credit union 

made a reasonable and good faith 

determination at or before 

consummation of the loan that the 

member will have a reasonable ability to 

repay the loan according to its terms; 

and (2) in transactions where the credit 

union holds the first-lien and juniorlien(s), and no other party holds an 

intervening lien, for purposes of this 

part the combined balance will be 

treated as a single first-lien residential 

real estate loan. 

Under the Original Proposal, the term 

‘‘first mortgage real estate loan’’ would 

have been defined as loans and lines of 

credit fully secured by first-liens on real 

estate (excluding MBLs), where the 

original amortization of the mortgage 

exposure does not exceed 30 years; the 

loan underwriting took into account all 

the borrower’s obligations, including 

mortgage obligations, principal, interest, 

taxes, insurance (including mortgage 

guarantee insurance) and assessments; 

and the loan underwriting concluded 

the borrower is able to repay the 

exposure using the maximum interest 

rate that may apply in the first five 

years, the maximum contract exposure 

over the life of the mortgage, and 

verified income. 

A number of commenters stated that 

they believed the proposed definition of 

first mortgage real estate loan would 

conflict with rules promulgated by the 

Consumer Financial Protection Bureau 

(CFPB), which may prevent credit 

unions from originating mortgage loans 

that qualify as ‘‘qualified mortgages’’ 

under CFPB’s regulations, or are 

otherwise permitted under those rules, 

without incurring an additional capital 

charge. One commenter suggested that 

the proposed definition of first mortgage 

real estate loan should be amended to 

read as follows: ‘‘A loan on realty with 

the benefit of a senior security interest 

to all others.’’ Other commenters stated 

that the definition of first mortgage real 

estate loan is overbroad and should be 

revised to exclude home equity lines of 

credit because the risks associated with 

30-year fixed-rate first-lien mortgages 

and HELOCs are vastly different and 

should not be assigned the same risk 

weight. 

In response to the comments received 

on the Original Proposal, the Board is 

now proposing to eliminate the term 

‘‘first mortgage real estate loan’’ and the 

accompanying definition and instead 

use the new term ‘‘first-lien residential 

real estate loan’’ for purposes of this 

proposal. 

The Board believes that the credit risk 

for all first-lien residential real estate 

loans, in which the credit union has 

conducted a reasonable analysis of the 

ability of the borrower to repay, are 

sufficiently similar to justify a lower 

risk weight than most other types of 

loans. Accordingly, the Board is 

proposing to remove from the definition 

of first-lien residential real estate loans 

the requirement that such loans not 

have an amortization period exceeding 

30 years. 

The Board also believes, however, 

that first-lien residential real estate 

loans with amortizations longer than 30 

years contain additional risks and must 

be underwritten with great care and 

monitored closely. Accordingly, the low 

risk weight assigned to first-lien 

residential real estate loans should not 

be viewed as encouraging certain real 

estate loan features which can be 

harmful to the credit quality of the loan, 

including an interest-only period, 

negative amortization, balloon 

payments, or excess upfront points and 

fees. 


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116See NCUA Regulatory Alert, 14–RA–01, 

Ability-to-Repay and Qualified Mortgage 

Requirements from the Consumer Financial 

Protection Bureau (CFPB), January 2014 for 

additional information. 

Credit unions must continue to make 

a good-faith effort to determine before 

the loan is made whether a borrower is 

likely to be able to repay the loan. In 

practice this means credit unions must 

generally ascertain, consider, and 

document a borrower’s income, assets, 

employment status and stability, credit 

history and current and proposed 

monthly expenses.116 NCUA does not 

intend for this definition to conflict 

with rules promulgated by CFPB. 

Rather, the Board believes the 

requirement that the credit union make 

a reasonable and good-faith effort that 

the member has the ability to repay the 

loans is consistent with CFPB 

regulations and ensures the grouping of 

loans receiving this relatively low risk 

weight would be substantially similar in 

credit quality. 

The definition of first-lien residential 

real estate loan would include first-lien 

residential real estate loans that are not 

owner occupied. First-lien residential 

real estate loans that are over $50,000 

and not the primary residence of the 

borrower would continue to count 

toward the credit union’s total of 

member business loans for the purpose 

of monitoring and compliance with the 

statutory limitation on MBLs. However, 

they would be included in the 

definition of first-lien residential real 

estate loans for the purpose of this part 

and would be risk-weighted 

accordingly. 

If a credit union holds both the firstand junior-liens on a residential real 

estate loan without an intervening lien 

holder and the loan otherwise meets 

this definition, the entire combined 

balance of the loans would be assigned 

the risk weight for first-lien residential 

real estate loans. 

GAAP. Under the Original Proposal, 

the term ‘‘GAAP’’ would have been 

defined as generally accepted 

accounting principles as used in the 

United States. 

The Board received no comments on 

the definition of ‘‘GAAP’’ and has 

decided to retain the term in this 

proposal with the following changes. 

Under this proposed rule, the term 

‘‘GAAP’’ would be defined as generally 

accepted accounting principles in the 

United States as set forth in the 

Financial Accounting Standards Board’s 

(FASB) Accounting Standards 

Codification (ASC). 

The Board is proposing to define 

‘‘GAAP’’ narrowly to retain its 

conventional meaning. However, credit 

unions should also follow joint 

accounting issuances by the chief 

accountants’ of the federal financial 

institution regulatory agencies 

(including NCUA) that provide 

implementation guidance consistent 

with GAAP practice. The guidance 

issued jointly by the federal financial 

institution regulatory agencies’ chief 

accountants’ does not add to or modify 

existing financial reporting 

requirements under GAAP but often 

narrows GAAP practice to address 

supervisory considerations related to 

financial institutions. The federal 

financial institution regulatory agencies’ 

chief accountants have a practice of 

clearing such guidance implementing 

GAAP through the FASB and the SEC’s 

Office of the Chief Accountant. 

General account permanent 

insurance. Under this proposed rule, the 

new term ‘‘general account permanent 

insurance’’ would be defined as an 

account into which all premiums, 

except those designated for separate 

accounts are deposited, including 

premiums for life insurance and fixed 

annuities and the fixed portfolio of 

variable annuities, whereby the general 

assets of the insurance company support 

the policy. 

Under this proposal, general account 

permanent insurance would include 

direct obligations to the insurance 

provider. This would mean that the 

credit risk associated with general 

account permanent insurance is to the 

insurance company, which generally 

makes these insurance accounts have a 

lower credit risk than separate account 

insurance, which is a segregated 

accounting and reporting account held 

separately from the insurer’s general 

assets. 

General obligation. Under this 

proposed rule, the new term ‘‘general 

obligation’’ would be defined as a bond 

or similar obligation that is backed by 

the full faith and credit of a public 

sector entity. 

The Board is proposing to add this 

definition to clarify that general 

obligation bonds or debt are generally 

backed by the credit and ‘‘taxing power’’ 

of the issuing jurisdiction rather than 

the revenue from a given project. 

Goodwill. Under the Original 

Proposal, the term ‘‘goodwill’’ would 

have been defined as an intangible asset 

representing the future economic 

benefits arising from other assets 

acquired in a business combination (i.e., 

merger) that are not individually 

identified and separately recognized. 

The Board received no comments on 

the definition of ‘‘goodwill’’ and has 

decided to retain the definition in this 

proposed rule, with the addition that 

goodwill must be maintained in 

accordance with GAAP and does not 

include a new term ‘‘excluded 

goodwill.’’ Accordingly, under this 

proposal, the term ‘‘goodwill’’ would be 

defined as an intangible asset, 

maintained in accordance with GAAP, 

representing the future economic 

benefits arising from other assets 

acquired in a business combination 

(e.g., merger) that are not individually 

identified and separately recognized. 

Goodwill does not include excluded 

goodwill. These proposed changes are 

intended to clarify the definition and 

make it consistent with other changes 

being made in this proposal. 

Government guarantee. Under this 

proposed rule, the new term 

‘‘government guarantee’’ would be 

defined as a guarantee provided by the 

U.S. Government, FDIC, NCUA or other 

U.S. Government agencies, or a public 

sector entity. 

The Board recognizes that government 

guarantees provide enhanced credit 

protection, particularly to loans, and 

revised the risk weights for the portion 

of loans with a government guarantee to 

a lower risk weight. 

Government-sponsored enterprise 

(GSE). Under this proposed rule, the 

new term ‘‘government-sponsored 

enterprise’’ would be defined as an 

entity established or chartered by the 

U.S. Government to serve public 

purposes specified by the U.S. Congress, 

but whose debt obligations are not 

explicitly guaranteed by the full faith 

and credit of the U.S. Government. 

Guarantee. Under this proposed rule, 

the new term ‘‘guarantee’’ would be 

defined as a financial guarantee, letter of 

credit, insurance, or similar financial 

instrument that allows one party to 

transfer the credit risk of one or more 

specific exposures to another party. The 

Board is proposing to add this definition 

to provide clarity. 

Identified losses. Under the Original 

Proposal, the term ‘‘identified losses’’ 

would have been defined as those items 

that have been determined by an 

evaluation made by a state or federal 

examiner, as measured on the date of 

examination, to be chargeable against 

income, capital and/or valuation 

allowances such as the allowance for 

loan and lease losses. That proposed 

definition also would have provided the 

following examples of identified losses: 

Assets classified as losses, off-balance 

sheet items classified as losses, any 

provision expenses that are necessary to 

replenish valuation allowances to an 

adequate level, liabilities not shown on 

the books, estimated losses in 

contingent liabilities, and differences in 

accounts that represent shortages. 


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117See, e.g., 12 CFR 324.53. 

118See, e.g., 12 CFR 324.32(g)(2). 

The Board received no comments on 

the proposed definition of ‘‘identified 

losses.’’ Nevertheless, the Board is now 

proposing to amend the definition of 

‘‘identified losses’’ from the Original 

Proposal to ensure that identified losses 

would be measured in accordance with 

GAAP. Accordingly, under this 

proposal, the term ‘‘identified losses’’ 

would be defined as those items that 

have been determined by an evaluation 

made by NCUA, or in the case of a statechartered credit union, the appropriate 

state official, as measured on the date of 

examination in accordance with GAAP, 

to be chargeable against income, equity 

or valuation allowances such as the 

allowances for loan and lease losses. 

The definition would provide further 

that examples of identified losses would 

be assets classified as losses, off-balance 

sheet items classified as losses, any 

provision expenses that are necessary to 

replenish valuation allowances to an 

adequate level, liabilities not shown on 

the books, estimated losses in 

contingent liabilities, and differences in 

accounts that represent shortages. 

Industrial development bond. Under 

this proposed rule, the new term 

‘‘industrial development bond’’ would 

be defined as a security issued under 

the auspices of a state or other political 

subdivision for the benefit of a private 

party or enterprise where that party or 

enterprise, rather than the government 

entity, is obligated to pay the principal 

and interest on the obligation. 

This definition would be added to 

ensure the ultimate obligor’s risk weight 

is used for risk-based capital 

calculations. 

Intangible assets. Under the Original 

Proposal, the term ‘‘intangible assets’’ 

would have been defined as those assets 

that are required to be reported as 

intangible assets on a credit union’s Call 

Report, including but not limited to 

purchased credit card relationships, 

goodwill, favorable leaseholds, and core 

deposit value. 

The Board received no comments on 

the definition of ‘‘Intangible assets’’, but 

is proposing to revise the definition for 

clarity. Accordingly, under this 

proposal, the term ‘‘intangible assets’’ 

would be defined as assets, maintained 

in accordance with GAAP, other than 

financial assets, that lack physical 

substance. This proposed change would 

not affect the substance of the 

definition, but will make the definition 

clearer. Additionally, the Board is 

proposing to add a definition for ‘‘other 

intangibles’’, which are a subset of 

‘‘intangible assets,’’ and discussed in 

more detail below. 

Investment fund. Under this proposed 

rule, the new term ‘‘investment fund’’ 

would be defined as an investment with 

a pool of underlying investment assets. 

The proposed definition would provide 

further that the term investment fund 

includes an investment company that is 

registered under § 8 of the Investment 

Company Act of 1940, as amended, and 

collective investment funds or common 

trust investments that are unregistered 

investment products that pool fiduciary 

client assets to invest in a diversified 

pool of investments. 

The Board is proposing to define the 

term ‘‘investment fund’’ broadly to 

capture more than SEC-registered 

investment companies and funds 

offered by banks. This broader 

definition is intended to allow for the 

use of the look-through approaches used 

in the Other Banking Agencies’ capital 

regulations,117 which are discussed in 

more detail below, to separate account 

insurance or other pooled investments. 

Junior-lien residential real estate loan. 

Under this proposed rule, the new term 

‘‘junior-lien residential real estate loan’’ 

would be defined as a loan or line of 

credit secured by a subordinate lien on 

a one-to-four family residential 

property. 

Due to the observed higher 

delinquency and losses of junior lien 

residential real estate loans, and 

consistent with the risk weights 

assigned by the Other Banking 

Agencies,118 the Board proposes 

assigning higher risk weights for juniorlien residential real estate loans than for 

first-lien residential real estate loans. 

This definition would generally include 

all residential real estate loans that do 

not meet the definition of a first-lien 

residential real estate loans since the 

credit union is secured by a second or 

subsequent lien on the residential 

property loan. 

Loan to a CUSO. Under the Original 

Proposal, the term ‘‘loans to CUSO’’ 

would have been defined as the 

aggregate outstanding loan balance, 

available line(s) of credit from the credit 

union, and guarantees the credit union 

has made to or on behalf of a CUSO. 

The Board received no comments on 

the definition of ‘‘Loans to CUSOs’’ and 

has decided to retain the term in this 

proposal with the following changes to 

the term and the definition. Under this 

proposed rule the term ‘‘loan to a 

CUSO’’ would be defined as the 

outstanding balance of any loan from a 

credit union to a CUSO as recorded on 

the statement of financial condition in 

accordance with GAAP. 

The Board originally proposed to add 

this definition to capture the importance 

of recording loans to a CUSO in 

accordance with GAAP and to clarify 

how the assignment of risk weights 

would be determined. By following 

GAAP: 

• For an unconsolidated CUSO, a 

credit union must assign the risk weight 

to the outstanding balance of the loans 

to the CUSO as presented on the 

statement of financial condition; 

• For a consolidated CUSO, the loan 

to a CUSO is normally zero since the 

consolidation entries eliminate the 

intercompany transaction. 

Loan secured by real estate. Under 

this proposed rule, the new term ‘‘loan 

secured by real estate’’ would be 

defined as a loan that, at origination, is 

secured wholly or substantially by a 

lien(s) on real property for which the 

lien(s) is central to the extension of the 

credit. The definition would provide 

further that a lien is ‘‘central’’ to the 

extension of credit if the borrowers 

would not have been extended credit in 

the same amount or on terms as 

favorable without the lien(s) on real 

property. The definition would also 

provide that, for a loan to be ‘‘secured 

wholly or substantially by a lien(s) on 

real property,’’ the estimated value of 

the real estate collateral at origination 

(after deducting any more senior liens 

held by others) must be greater than 50 

percent of the principal amount of the 

loan at origination. 

The Board proposes using this term to 

ensure consistency in the assignment of 

risk weights for real estate loans. The 

definition would clarify that the terms 

of the loan are predicated on the 

existence of the lien on real property 

and that the real estate value at 

origination of the loans must be at least 

50 percent of the principal amount of 

the loan to meet the definition. The 

Board does not intend for this to mean 

that a real estate loan with a 50 percent 

loan-to-value ratio is an appropriate 

credit risk but rather such a loan only 

meets the definition of secured by real 

estate. 

Loans transferred with limited 

recourse. Under the Original Proposal, 

the term ‘‘loans transferred with limited 

recourse’’ would have been defined as 

the total principal balance outstanding 

of loans transferred, including 

participations, for which the transfer 

qualified for true sale accounting 

treatment under GAAP, and for which 

the transferor credit union retained 

some limited recourse (i.e., insufficient 

recourse to preclude true sale 

accounting treatment). The proposed 

definition would also have clarified that 

the term does not include transfers that 

qualify for true sale accounting 

treatment but contain only routine 


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representation and warranty paragraphs 

that are standard for sale on the 

secondary market, provided the credit 

union is in compliance with all other 

related requirements such as capital 

requirements. 

Commenters suggested that the 

proposed definition be amended to 

represent the true risk associated with 

that product. Commenters stated that 

the proposed definition mirrors the Call 

Report field and includes the ‘‘total 

principal balance outstanding of loans 

transferred . . . for which the transferor 

credit union retained some limited 

recourse.’’ Although commenters stated 

they appreciated NCUA’s efforts to align 

defined terms with existing Call Report 

fields, they countered that contingent 

liabilities should be taken into account 

only to the extent the credit union 

retains contractual and legal liability on 

the exposure. On partial recourse loans, 

commenters suggested that the credit 

union only retains a small fraction of 

the liability and is not exposed on the 

total principal balance. However, 

commenters stated that, under the 

Original Proposal, a credit union would 

be treated as holding the full balance as 

a contingent liability. Commenters 

suggested that this was a significant 

misrepresentation of the risk and 

created a disincentive for credit unions 

to utilize limited recourse loan sale 

relationships, which provide credit 

unions with a valuable option in 

managing liquidity risk and IRR, while 

still incentivizing the credit union to 

make high-quality loans. Commenters 

stated that the proposal would penalize 

credit unions that have utilized these 

programs prudently and effectively as 

part of a safe and sound asset 

management program. To remedy this 

problem, commenters suggested the 

definition of the term ‘‘loans transferred 

with limited recourse’’ and the 

corresponding Call Report field should 

be amended to reflect the true recourse 

exposure of the credit union. 

In response to these comments, the 

Board is now proposing to amend the 

calculation for determining the riskbased capital requirement for loans 

transferred with limited recourse to 

more accurately align the capital 

requirement with the true recourse 

exposure. Whereas the Original 

Proposal would have required the credit 

union to multiply the face amount, or 

notional value, of the loans transferred 

with limited recourse by the appropriate 

credit conversion factor and then apply 

the appropriate risk weight, this 

proposed rule would amend the 

calculation to require a credit union to 

multiply the off-balance sheet exposure 

by the appropriate credit conversion 

factor and then apply the appropriate 

risk weight. A new definition for offbalance sheet exposure is included in 

this proposal and is discussed in more 

detail below. In addition, the definition 

of ‘‘loans transferred with limited 

recourse’’ is revised by amending all 

references to ‘‘warranty paragraphs’’ to 

read ‘‘warranty clauses’’ to clarify that it 

is the content of the document and not 

its length that is important. 

Accordingly, under this proposed 

rule, the term ‘‘Loans transferred with 

limited recourse’’ would be defined as 

the total principal balance outstanding 

of loans transferred, including 

participations, for which the transfer 

qualified for true sale accounting 

treatment under GAAP, and for which 

the transferor credit union retained 

some limited recourse (i.e., insufficient 

recourse to preclude true sale 

accounting treatment). The definition 

would provide further that the term 

loans transferred with limited recourse 

excludes transfers that qualify for true 

sale accounting treatment but contain 

only routine representation and 

warranty clauses that are standard for 

sales on the secondary market, provided 

the credit union is in compliance with 

all other related requirements, such as 

capital requirements. 

Mortgage-backed security (MBS). 

Under this proposed rule, the new term 

‘‘mortgage-backed security’’ would be 

defined as a security backed by first- or 

junior-lien mortgages secured by real 

estate upon which is located a dwelling, 

mixed residential and commercial 

structure, residential manufactured 

home, or commercial structure. This 

definition would be similar to the 

definition of MBS in part 704 of NCUA’s 

regulations. The only difference is that 

the phrase ‘‘first- or junior-lien 

mortgages’’ in the proposed part 702 

definition replaces the phrase ‘‘first or 

second mortgage’’ in the definition in 

part 704. This makes the proposed part 

702 definition more consistent with the 

terminology used throughout the 

proposal. 

Mortgage partnership finance 

program. Under this proposed rule, the 

new term ‘‘mortgage partnership finance 

program’’ would be defined as any 

Federal Home Loan Bank program 

through which loans are originated by a 

depository institution that are 

purchased or funded by the Federal 

Home Loan Banks, where the depository 

institutions receive fees for managing 

the credit risk of the loans and servicing 

them. The definition would provide 

further that the credit risk must be 

shared between the depository 

institutions and the Federal Home Loan 

Banks. 

Adding this definition is necessary 

because this proposal would apply a 

separate risk weight to the off-balance 

sheet exposure resulting from loans 

transferred under the defined program. 

Additionally, the method that would be 

used to calculate the risk-based capital 

requirement for loans in the defined 

program would be different from other 

loans transferred with limited recourse. 

A separate definition and risk weight for 

loans sold under this program would 

result in a risk-based capital 

requirement consistent with the credit 

loss history of this program. 

Mortgage servicing assets. Under the 

Original Proposal, the term ‘‘mortgage 

servicing asset’’ would have been 

defined as those assets (net of any 

related valuation allowances) resulting 

from contracts to service loans secured 

by real estate (that have been securitized 

or owned by others) for which the 

benefits of servicing are expected to 

more than adequately compensate the 

servicer for performing the servicing. 

The Board received no comments on 

the definition of ‘‘mortgage servicing 

asset’’ and has decided to retain the 

proposed definition in this proposal 

with the following changes for clarity. 

Credit unions are expected to follow 

GAAP when reporting assets, which is 

intended to clarify that credit unions 

must report mortgage servicing assets 

net of any related valuation allowance 

because it is required by GAAP. 

Accordingly, under this proposed rule, 

the term ‘‘mortgage servicing assets’’ 

would be defined as those assets, 

maintained in accordance with GAAP, 

resulting from contracts to service loans 

secured by real estate (that have been 

securitized or owned by others) for 

which the benefits of servicing are 

expected to more than adequately 

compensate the servicer for performing 

the servicing. 

NCUSIF. Under the Original Proposal, 

the term ‘‘NCUSIF’’ means the National 

Credit Union Share Insurance Fund as 

defined by 12 U.S.C. 1783. The Board 

received no comments on the definition 

of ‘‘NCUSIF’’ and has decided to retain 

the term in this proposal without 

modification. 

Net worth. Generally consistent with 

the current rule, under this proposed 

rule the term ‘‘net worth’’ would be 

defined as: 

• The retained earnings balance of the 

credit union at quarter-end as 

determined under GAAP, subject to 

bullet 3 of this definition. 

• For a low-income-designated credit 

union, net worth also includes 

secondary capital accounts that are 

uninsured and subordinate to all other 


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claims, including claims of creditors, 

shareholders, and the NCUSIF. 

• For a credit union that acquires 

another credit union in a mutual 

combination, net worth also includes 

the retained earnings of the acquired 

credit union, or of an integrated set of 

activities and assets, less any bargain 

purchase gain recognized in either case 

to the extent the difference between the 

two is greater than zero. The acquired 

retained earnings must be determined at 

the point of acquisition under GAAP. A 

mutual combination, including a 

supervisory combination, is a 

transaction in which a credit union 

acquires another credit union or 

acquires an integrated set of activities 

and assets that is capable of being 

conducted and managed as a credit 

union. 

• The term ‘‘net worth’’ also includes 

loans to and accounts in an insured 

credit union, established pursuant to 

§ 208 of the FCUA, provided such loans 

and accounts: 

Æ Have a remaining maturity of more 

than five years; 

Æ Are subordinate to all other claims 

including those of shareholders, 

creditors, and the NCUSIF; 

Æ Are not pledged as security on a 

loan to, or other obligation of, any party; 

Æ Are not insured by the NCUSIF; 

Æ Have non-cumulative dividends; 

Æ Are transferable; and 

Æ Are available to cover operating 

losses realized by the insured credit 

union that exceed its available retained 

earnings.’’ 

The Original Proposal did not revise 

the definition of the term ‘‘net worth,’’ 

and NCUA did not receive any 

comments on the definition. This 

proposal, however, would delete from 

the current definition of net worth the 

sentence ‘‘Retained earnings consists of 

undivided earnings, regular reserve, and 

any other appropriations designed by 

management or regulatory authorities,’’ 

which is included in paragraph (f)(1) of 

the current definition. That sentence 

lists items that are included in retained 

earnings and is not necessary. No 

substantive change is intended by this 

amendment. 

Paragraph (f)(3) of the current 

definition would also be revised to 

clarify that the term ‘‘mutual 

combination’’ includes a ‘‘supervisory 

combination’’ because this proposal 

introduces the new term supervisory 

merger to part 702, which is a specific 

type of mutual combination. 

Net worth ratio. Under the Original 

Proposal, the term ‘‘net worth ratio’’ 

means the ratio of the net worth of the 

credit union to the total assets of the 

credit union truncated to two decimal 

places. The Board received no 

comments on the definition of ‘‘net 

worth ratio’’ and has decided to retain 

the term in this proposal without 

modification. 

New credit union. To provide clarity 

and reduce the number of redundant 

rule sections, under this proposed rule, 

the term ‘‘new credit union’’ would be 

defined as having the same meaning as 

in § 702.201. No substantive changes to 

the current definition of ‘‘new credit 

union’’ are intended. 

Nonperpetual capital. Under this 

proposed rule, the new term 

‘‘nonperpetual capital’’ would be 

defined as having the same meaning as 

in 12 CFR 704.2 for consistency. 

Off-balance sheet items. Under the 

Original Proposal, the term ‘‘off-balance 

sheet items’’ would have been 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 

balance sheet but are normally included 

in the financial statement footnotes. 

The Board received no comments on 

the definition of ‘‘off-balance sheet 

items,’’ but is proposing to change the 

words ‘‘balance sheet’ in the definition 

to ‘‘statement of financial condition.’’ 

Accordingly, under this proposed rule, 

the term ‘‘off-balance sheet items’’ 

would be 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. 

The Board is proposing to make this 

change in a number of places 

throughout the rule to make the rule 

more accurate and to clarify the 

definition for the reader. 

Off-balance sheet exposure. Under 

this proposed rule, the new term ‘‘offbalance sheet exposure’’ would be 

defined as follows, depending on the 

type of exposure: (1) For loans sold 

under the Federal Home Loan Bank 

mortgage partnership finance (MPF) 

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; 

(3) for unfunded commitments, the 

remaining unfunded portion of the 

contractual agreement. 

The Board added the definition of offbalance sheet exposure to clarify the 

amount of the off-balance sheet item 

that will be used to calculate a credit 

union’s risk-based capital ratio. 

On-balance sheet. Under this 

proposal, the term ‘‘on-balance sheet’’ 

would be defined as a credit union’s 

assets, liabilities, and equity, as 

disclosed on the statement of financial 

condition at a specific point in time. 

Other intangible assets. Under this 

proposed rule, the new term ‘‘other 

intangible assets’’ would be defined as 

intangible assets, other than servicing 

assets and goodwill, maintained in 

accordance with GAAP. The definition 

would provide further that other 

intangible assets does not include 

excluded other intangible assets. 

Under the Original Proposal, the term 

‘‘intangible assets’’ would have been 

defined as those assets that are required 

to be reported as intangible assets on a 

credit union’s Call Report, including but 

not limited to purchased credit card 

relationships, goodwill, favorable 

leaseholds, and core deposit value. 

The Board received no comments on 

the proposed definition of ‘‘intangible 

assets,’’ but has taken the opportunity in 

this proposed rule to clarify the 

definition. The term intangible asset is 

typically defined by GAAP and includes 

goodwill. However, in the context of 

deductions from the numerator of the 

risk-based capital ratio, goodwill is 

already a deduction. Further, servicing 

assets are also typically considered an 

intangible asset. However, because 

servicing assets can typically be readily 

sold in the marketplace, the Board 

believes that intangible assets excluded 

from the risk-based capital ratio 

numerator should not include servicing 

assets. To simplify this issue, the Board 

has defined the term ‘‘other intangible 

assets’’ to be those assets defined under 

GAAP as intangible assets, except 

goodwill and servicing assets. The 

Board notes that this is not a substantive 

change between the two proposals, but 

merely a clarification to make the rule 

easier to read and understand. 

Over-the-counter (OTC) interest rate 

derivative contract. Under this proposed 

rule, the new term ‘‘over-the-counter 

(OTC) interest rate derivative contract’’ 

would be defined as a derivative 

contract that is not cleared on an 

exchange. The Board is proposing to 

add this new term to coincide with 

other changes it is proposing to make in 

the derivatives section of this proposal. 

Perpetual contributed capital. Under 

this proposed rule, the new term 

‘‘perpetual contributed capital’’ would 

be defined as having the same meaning 

as in § 704.2 of this chapter. 


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119FASB ASC 310–40, ‘‘Troubled Debt 

Restructuring by Creditors.’’ 

120See 12 U.S.C. 324.32(g). 

Public sector entity (PSE). Under this 

proposed rule, the new term ‘‘public 

sector entity’’ would be defined as a 

state, local authority, or other 

governmental subdivision of the United 

States below the sovereign level. 

Qualifying master netting agreement. 

Under this proposed rule, the term 

‘‘qualifying master netting agreement’’ 

would be defined as a written, legally 

enforceable agreement, provided that: 

• The agreement creates a single legal 

obligation for all individual transactions 

covered by the agreement upon an event 

of default, including upon an event of 

conservatorship, receivership, 

insolvency, liquidation, or similar 

proceeding, of the counterparty; 

• The agreement provides the credit 

union the right to accelerate, terminate, 

and close out on a net basis all 

transactions under the agreement and to 

liquidate or set off collateral promptly 

upon an event of default, including 

upon an event of conservatorship, 

receivership, insolvency, liquidation, or 

similar proceeding, of the counterparty, 

provided that, in any such case, any 

exercise of rights under the agreement 

will not be stayed or avoided under 

applicable law in the relevant 

jurisdictions, other than in receivership, 

conservatorship, resolution under the 

Federal Deposit Insurance Act, Title II 

of the Dodd-Frank Wall Street Reform 

and Consumer Protection Act, or under 

any similar insolvency law applicable to 

GSEs; 

• The agreement does not contain a 

walkaway clause (that is, a provision 

that permits a non-defaulting 

counterparty to make a lower payment 

than it otherwise would make under the 

agreement, or no payment at all, to a 

defaulter or the estate of a defaulter, 

even if the defaulter or the estate is a net 

creditor under the agreement); and 

• In order to recognize an agreement 

as a qualifying master netting agreement 

for purposes of this part, a credit union 

must conduct sufficient legal review, at 

origination and in response to any 

changes in applicable law, to conclude 

with a well-founded basis (and maintain 

sufficient written documentation of that 

legal review) that: 

Æ The agreement meets the 

requirements of paragraph (2) of this 

definition; and 

Æ In the event of a legal challenge 

(including one resulting from default or 

from conservatorship, receivership, 

insolvency, liquidation, or similar 

proceeding), the relevant court and 

administrative authorities would find 

the agreement to be legal, valid, binding, 

and enforceable under the law of 

relevant jurisdictions. 

The Board has retained this definition 

from the Original Proposal with only 

minor clarifying amendments. 

Recourse. Under this proposed rule, 

the new term ‘‘recourse’’ would be 

defined as a credit union’s retention, in 

form or in substance, of any credit risk 

directly or indirectly associated with an 

asset it has transferred that exceeds a 

pro-rata share of that credit union’s 

claim on the asset and disclosed in 

accordance with GAAP. The definition 

would provide further that if a credit 

union has no claim on an asset it has 

transferred, then the retention of any 

credit risk is recourse. The definition 

would also provide that a recourse 

obligation typically arises when a credit 

union transfers assets in a sale and 

retains an explicit obligation to 

repurchase assets or to absorb losses due 

to a default on the payment of principal 

or interest or any other deficiency in the 

performance of the underlying obligor 

or some other party. Finally, the 

definition would provide that recourse 

may also exist implicitly if the credit 

union provides credit enhancement 

beyond any contractual obligation to 

support assets it has transferred. 

Residential mortgage-backed security. 

Under this proposed rule, the new term 

‘‘residential mortgage-backed security’’ 

would be defined as a mortgage-backed 

security backed by loans secured by a 

first-lien on residential property. 

The Board proposes to define 

‘‘residential mortgage-backed security’’ 

similarly to the conventional usage of 

that term. This definition was added to 

allow for non-subordinated mortgagebacked securities backed by first-lien 

real estate loans to receive the same risk 

weight as first-lien residential real estate 

loans. 

Residential property. Under this 

proposed rule, the new term 

‘‘residential property’’ would be defined 

as a house, condominium unit, 

cooperative unit, manufactured home, 

or the construction thereof, and 

unimproved land zoned for one-to-four 

family residential use. The definition 

would provide further that the term 

residential property excludes boats and 

motor homes, even if used as a primary 

residence, and timeshare property. 

The purpose of this new term is to 

broadly define the types of property that 

will be considered residential property. 

The definition is intended to allow for 

the inclusion of single family residential 

construction loans. The definition is 

intended to exclude larger scale 

speculative residential land 

transactions, which would be 

considered commercial loans for 

assigning risk weights. 

Restructured. Under this proposed 

rule, the new term ‘‘restructured’’ would 

be defined, with respect to any loan, as 

a restructuring of the loan in which a 

credit union, for economic or legal 

reasons related to a borrower’s financial 

difficulties, grants a concession to the 

borrower that it would not otherwise 

consider. According to the definition of 

‘‘current’’ loan in this proposal, as 

restructured loan would not be 

considered a ‘‘current’’ loan. The 

definition would provide further that 

the term restructured excludes loans 

modified or restructured solely pursuant 

to the U.S. Treasury’s Home Affordable 

Mortgage Program. 

The restructuring of a loan may 

include, but is not necessarily limited 

to: (1) The transfer from the borrower to 

the lending credit union of real estate, 

receivables from third parties, other 

assets, or an equity interest in the 

borrower, in full or partial satisfaction 

of a loan; (2) a modification of the loan 

terms, such as a reduction of the stated 

interest rate, principal, or accrued 

interest or an extension of the maturity 

date at a stated interest rate lower than 

the current market rate for new debt 

with similar risk; or (3) a combination 

of the above.119 A loan extended or 

renewed at a stated interest rate equal to 

the current market interest rate for new 

debt with similar risk is not a 

restructured loan. 

The Board proposes to add the 

definition of ‘‘restructured’’ because a 

loan that is restructured contains 

elements, as addressed above, which 

increase the credit risk of the loan and 

therefore is assigned a higher risk 

weight associated with non-current 

loans. This definition also enables the 

definition of current loan to better align 

with the Other Banking Agencies 120

while addressing the same exception for 

loans modified or restructured pursuant 

to the U.S. Treasury’s Home Affordable 

Mortgage Program. 

Revenue obligation. Under this 

proposed rule, the new term ‘‘revenue 

obligation’’ would be defined as a bond 

or similar obligation that is an 

obligation of a PSE, but which the PSE 

is committed to repay with revenues 

from the specific project financed rather 

than general tax funds. 

Revenue obligation bonds or debt are 

generally paid with revenues from the 

specific project financed rather than the 

general credit and taxing power of the 

issuing jurisdiction. 

Risk-based capital ratio. Under the 

Original Proposal, the term ‘‘risk-based 


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capital ratio’’ would have been defined 

as the percentage, rounded to two 

decimal places, of the risk-based capital 

ratio numerator to total risk weighted 

assets, as calculated in accordance with 

§ 702.104(a). 

A number of commenters raised 

concerns with the proposed changes 

that would have been made to the 

terminology in the current rule, 

including adding the new term ‘‘riskbased capital ratio’’ to the rule. Several 

commenters suggested that the Board 

would be redefining a statutorily 

defined term by using the proposed 

term ‘‘risk-based capital ratio’’ in the 

rule instead of the statutory term ‘‘riskbased net worth ratio’’ in the proposed 

rule. 

The Board disagrees with this 

comment for reasons that are discussed 

in more detail in the portion of the 

preamble relating to § 702.102 below. 

Other than the comment above, the 

Board received no comments on the 

substance of the definition of ‘‘riskbased capital ratio’’ and has decided to 

retain the definition in this proposal 

with only non-substantive changes. 

Accordingly, under this proposed rule 

the term ‘‘risk-based capital ratio’’ 

would be defined as the percentage, 

rounded to two decimal places, of the 

risk-based capital ratio numerator to risk 

weighted assets, as calculated in 

accordance with § 702.104(a). 

Risk-weighted assets. Under the 

Original Proposal, the term ‘‘riskweighted assets’’ would have been 

defined as the total risk-weighted assets 

as calculated in accordance with 

§ 702.104(c). 

The Board received no comments on 

the definition of ‘‘risk-weighted assets’’ 

and has decided to retain the definition 

unchanged in this proposal. 

Secured consumer loan. Under this 

proposed rule, the new term ‘‘secured 

consumer loan’’ would be defined as a 

consumer loan associated with 

collateral or other item of value to 

protect against loss where the creditor 

has a perfected security interest in the 

collateral or other item of value. 

The Board recognizes that a secured 

consumer loan has lower credit risk 

than an unsecured consumer loan and, 

therefore, the Board assigns secured 

consumer loans to a lower risk weight 

than unsecured consumer loans. 

Secured consumer loans generally have 

lower delinquency rates and lower 

charge-off rates than unsecured 

consumer loans. Secured consumer 

loans generally include those 

collateralized by new and used vehicles, 

all-terrain vehicles, recreational 

vehicles, boats, motorcycles, and other 

items with a title and could also include 

a perfected security interest in furniture, 

fixtures, equipment, antiques, 

investments and collectables. 

Senior executive officer. Under the 

Original Proposal, the term ‘‘senior 

executive officer’’ would have been 

defined as a senior executive officer as 

defined by § 701.14(b)(2). 

The Board received no comments on 

the definition of ‘‘senior executive 

officer’’ and has decided to retain the 

definition unchanged in this proposal. 

Separate account insurance. Under 

this proposed rule, the new term 

‘‘separate account insurance’’ would be 

defined as an account into which a 

policyholder’s cash surrender value is 

supported by assets segregated from the 

general assets of the carrier. 

The Board added the definition of 

separate account insurance. The credit 

risk associated with separate account 

insurance may be higher than for 

general account permanent insurance 

because the separate account insurance 

is a segregated accounting and reporting 

account held separately from the 

insurer’s general assets. The 

investments in the separate account 

would typically not be permissible for 

federal credit unions; therefore the 

separate account insurance is treated as 

if it were a non-part 703 compliant 

investment fund. 

Shares. Under the Original Proposal, 

the term ‘‘shares’’ means deposits, 

shares, share certificates, share drafts, or 

any other depository account authorized 

by federal or state law. The Board did 

not receive any comments on this term 

and, therefore, has retained it in this 

proposal, without modification. 

Share-secured loan. Under this 

proposed rule, the new term ‘‘sharesecured loan’’ would be defined as a 

loan fully secured by shares on deposit 

at the credit union making the loan, and 

does not included the imposition of a 

statutory lien under 12 CFR 701.39. 

The Board recognizes that sharesecured loans have a low credit risk. It 

added this new definition to clarify 

which loans can be classified as share 

secured and, therefore, assigned a 20 

percent risk weight. A credit union 

should have proper internal controls to 

ensure that pledged shares are not 

withdrawn prior to the full payment of 

the loan they secure. This definition 

specifically excludes a loan upon which 

a credit union has impressed a statutory 

lien pursuant to § 701.39 of NCUA’s 

regulations, where the subject loan was 

not originated as share-secured. 

STRIPS. Under this proposed rule, the 

new term ‘‘STRIPS’’ would be defined 

as separate traded registered interest 

and principal security. 

The Board proposes to define 

‘‘STRIPS’’ similarly to its conventional 

usage. This definition is meant to define 

investments that are created by 

separating a coupon paying security into 

distinct interest-only and principal-only 

securities. 

Structured product. Under this 

proposed rule, the new term ‘‘structured 

product’’ would be defined as an 

investment that is linked, via return or 

loss allocation, to another investment or 

reference pool. 

The Board proposes to define 

‘‘structured product’’ to include 

investments that are created to behave 

like other investments. This definition 

is meant to ensure bonds that are 

indexed to equities are treated as 

equities for risk weight purposes. This 

definition is also meant to ensure that 

debentures that have losses that are 

allocated similarly to subordinated 

securities are treated as subordinated 

securities. 

Subordinated. Under this proposed 

rule, the new term ‘‘subordinated’’ 

would mean, with respect to an 

investment, that the investment has a 

junior claim on the underlying collateral 

or assets to other investments in the 

same issuance. The definition would 

provide further that the term 

subordinated does not apply to 

securities that are junior only to money 

market fund eligible securities in the 

same issuance. 

The Board recognizes that 

subordinated investments can contain 

substantial and complicated credit risk 

elements. The definition of 

subordinated is designed to encompass 

all investments that take losses before a 

more senior claim takes losses. This 

definition would not include an 

investment that was once subordinate to 

a senior investment, but then became 

non-subordinate because the previously 

senior investment paid off. 

Supervisory merger or combination. 

Under this proposed rule, the new term 

‘‘supervisory merger or combination’’ 

would be defined as a transaction that 

involved the following: 

• An assisted merger or purchase and 

assumption where funds from the 

NCUSIF are provided to the continuing 

credit union; 

• A merger or purchase and 

assumption classified by 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 of this chapter; 

or 

• A merger or purchase and 

assumption that included NCUA’s or 

the appropriate state official’s 


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121See, e.g., 12 CFR 324.32. 122Section 1790d(b)(2). 

identification and selection of the 

continuing credit union. 

The Board has added this definition 

to clarify which merger or combination 

transactions would be subject to an 

extended time period for absorbing the 

directly related goodwill and other 

intangible assets that are part of the 

transaction. 

Swap dealer. Under this proposed 

rule, the new term ‘‘swap dealer’’ would 

be defined as having the same meaning 

as defined by the Commodity Futures 

Trading Commission in 17 CFT 1.3(ggg). 

The Board is proposing to add this new 

term to coincide with other changes it 

is proposing to make in the derivatives 

section of this proposal. 

Total assets. The Original Proposal 

would have retained the definition of 

‘‘total assets’’ in current § 702.2, but 

would have restructured the definition 

and provided additional clarifying 

language. Under proposed paragraph (1) 

under the definition of ‘‘total assets,’’ for 

each quarter, a credit union must elect 

one of the four measures of total assets 

listed in paragraph (2) of the definition 

to apply for all purposes under part 702 

except §§ 702.103 through 702.105 (riskbased capital requirement). Proposed 

paragraph (2) under the definition of 

total assets would have provided that 

‘‘total assets’’ means a credit union’s 

total assets as measured by either: (i) 

The credit union’s total assets measured 

by the average of quarter-end balances 

of the current and three preceding 

calendar quarters; (ii) 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) the credit union’s 

total assets measured by the average 

daily balance over the applicable 

calendar quarter; or (iv) 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. 

The Board received no comments on 

the definition of ‘‘total assets’’ and has 

decided to retain the definition in this 

proposal with only minor conforming 

changes. 

Tranche. Under this proposed rule, 

the new term ‘‘tranche’’ would be 

defined as one of a number of related 

securities offered as part of the same 

transaction. The definition would 

provide further that the term tranche 

includes a structured product if it has a 

loss allocation based off of an 

investment or reference pool. 

The Board proposes to define 

‘‘tranche’’ similarly to its conventional 

usage for securitizations. Structured 

products are included in this definition 

if they are allocated losses based on a 

reference investment or reference pool. 

Unsecured consumer loan. Under this 

proposed rule, the new term ‘‘unsecured 

consumer loan’’ would be defined as a 

consumer loan not secured by collateral. 

The Board recognizes that unsecured 

consumer loans generally have a higher 

credit risk than secured consumer loans. 

Unsecured consumer loans have higher 

delinquency rates and higher charge-off 

rates than secured consumer loans. 

Unsecured consumer loans generally 

include credit card loans, signature 

loans, and co-maker and cosigner loans. 

Accordingly, the Board assigns 

unsecured consumer loans to a higher 

risk weight category than secured 

consumer loans. 

U.S. Government agency. Under the 

Original Proposal, the term ‘‘U.S. 

Government agency’’ would have been 

defined as an instrumentality of the U.S. 

Government whose obligations are fully 

and explicitly guaranteed as to the 

timely payment of principal and interest 

by the full faith and credit of the U.S. 

Government. 

The Board received no comments on 

the definition of ‘‘U.S. Government 

agency’’ and has decided to retain the 

proposed definition unchanged in this 

proposal. 

Weighted-average life of investments. 

Under this proposed rule, the definition 

of ‘‘weighted-average life of 

investments’’ and the entirety of current 

§ 702.105 of NCUA’s regulation would 

be removed. The use of weightedaverage life (WAL) of investments for 

the assignment of risk weights is in the 

current risk-based capital measure and 

would have been modified with lower 

capital requirements for shorter average 

life investments in the Original 

Proposal. Many commenters objected to 

the use of WAL for the assignment of 

risk weights for investments because the 

risk weights are based primarily on 

interest rate and liquidity risks, not 

credit risk. 

In response to the comments, the 

Board now proposes to assign 

investment risk weights primarily based 

on credit risk with risk weights more 

comparable to the risk weights assigned 

by the Other Banking Agencies.121 This 

adjustment would require additional 

granularity in the reporting of 

investments on the Call Report. 

The Board requests comments on the 

definitions included in this proposal. 

A. Subpart A—Prompt Corrective 

Action 

The Original Proposal would have 

established new subpart A titled 

‘‘Prompt Corrective Action.’’ New 

subpart A would have contained the 

sections of part 702 relating to capital 

measures, supervisory PCA actions, 

requirements for net worth restoration 

plans, and reserve requirements for all 

credit unions not defined as ‘‘new’’ 

pursuant to § 216(b)(2) of the FCUA.122

The Board received no comments on 

these changes and has decided to retain 

the changes in this proposal. 

Section 702.101 Capital Measures, 

Capital Adequacy, Effective Date of 

Classification, and Notice to NCUA 

Under the Original Proposal, the 

requirements of proposed § 702.101 

would have remained largely 

unchanged from current § 702.101. The 

title of proposed § 702.101, however, 

would have been changed to ‘‘Capital 

measures, effective date of 

classification, and notice to NCUA’’ to 

better reflect the three major topics that 

would have been covered in the section. 

In addition, the Original Proposal would 

have replaced the terms ‘‘net worth 

measures’’ with ‘‘capital measures,’’ 

‘‘net worth classification’’ with ‘‘capital 

classification,’’ and ‘‘net worth 

category’’ with ‘‘capital category’’ to 

reflect the terminology changes being 

made throughout the proposal, which 

were discussed above and are discussed 

in further detail below. 

A number of commenters raised 

concerns with the proposed changes 

that would have been made to the 

terminology in the current rule. The 

Board disagrees with these commenters 

for reasons that are discussed in more 

detail in the portion of the preamble 

relating to § 702.102. Other than the 

comments discussed in more detail 

below, the Board received no other 

comments on proposed changes to 

§ 702.101 and has decided to retain the 

changes in this proposal. 

Capital helps to ensure that 

individual credit unions can continue to 

serve as credit intermediaries even 

during times of stress, thereby 

promoting the safety and soundness of 

the overall U.S. financial system. As a 

prudential matter, the NCUA has a longestablished policy that federally insured 

credit unions 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 the minimum 

requirements, depending on the nature 

of the credit union’s activities and risk 

profile. 

The Board notes that Other Banking 

Agencies’ capital standards are the 

‘‘minimum capital requirements and 


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123See, e.g., 12 CFR 324.1(a). 

124See, e.g., 12 CFR 324.1(d). 

125 78 FR 55362, Tuesday, September 10, 2013. 

126See, e.g., 12 CFR 324.10(d)(1) and (2). 

127 12 U.S.C. 1786 and 1789. 

128See, e.g. 78 FR 55340, 55362(September 10, 

2013). 

129 12 CFR 324.10 Minimum capital requirements. 

130The Basel framework incorporates similar 

requirements under Pillar 2 of Basel II. 

131NCUA Letter to Credit Unions No. 07–CU–12, 

December 2007, CAMEL Rating System and NCUA 

Letter to Credit Unions No. 09–CU–03, November 

2009, Reviewing Adequacy of Earnings. 

overall capital adequacy standards for 

FDIC-supervised institutions . . . 

include[ing] methodologies for 

calculating minimum capital 

requirements . . . .’’ 123

The FDIC may require an FDICsupervised institution to hold an 

amount of regulatory capital greater 

than otherwise required under this part 

if the FDIC determines that the 

institution’s capital requirements under 

this part are not commensurate with the 

institution’s credit, market, operational, 

or other risks.124

Further, the September 10, 2013 

preamble to art 324 of FDIC’s 

regulations state that: 

The FDIC’s general risk-based capital rules 

indicate that the capital requirements are 

minimum standards generally based on broad 

credit-risk considerations. The risk-based 

capital ratios under these rules do not 

explicitly take account of the quality of 

individual asset portfolios or the range of 

other types of risk to which FDIC-supervised 

institutions may be exposed, such as interestrate risk, liquidity, market, or operational 

risks . . . In light of these considerations, as 

a prudent matter, an FDIC-supervised 

institution is generally expected to operate 

with capital positions well above the 

minimum risk-based ratios and to hold 

capital commensurate with the level and 

nature of the risks to which it is exposed, 

which may entail holding capital 

significantly above the minimum 

requirements.125

As indicated above, FDIC’s approach 

to risk weights is calibrated to be the 

minimum regulatory capital standard. 

This NCUA proposal would also be 

calibrated to be the minimum regulatory 

capital standard, similar to the FDIC’s 

rule, as suggested by commenters on the 

Original Proposal. Therefore, the Board 

believes it is necessary to incorporate a 

broader regulatory provision requiring 

complex credit unions to maintain 

capital commensurate with the level 

and nature of all risks to which they are 

exposed, and to maintain a written 

strategy for assessing capital adequacy 

and maintaining an appropriate level of 

capital. Proposed new § 702.101(b) is 

based on a similar provision in the 

Other Banking Agencies’ rules and 

within the Board’s authority under the 

FCUA.126 The Board notes that it has 

broad legal 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.127 Requiring credit unions to 

maintain capital adequacy is part of 

ensuring safety and soundness, and is 

not a new concept.128 Rather, as 

discussed in more detail below, NCUA 

long-standing practice is to monitor and 

enforce capital adequacy through the 

supervisory process. Therefore, 

proposed § 702.10(b) is a proper use of 

NCUA’s broad legal authority to ensure 

safety and soundness and to carry out 

its administrative powers, is consistent 

with its long-standing supervisory 

practices, and furthers comparability 

with the Other Banking Agencies’ risk 

based capital rules. 

As the Other Banking Agencies’ 

approach to risk assigning risk weights 

is calibrated to be the minimum 

regulatory capital standard, and this 

proposal is calibrated predominantly 

based on the Other Banking Agencies’ 

rules as suggested by commenters on the 

Original Proposal, the Board has 

concluded it is necessary to require 

complex credit unions to maintain 

capital commensurate with the level 

and nature of all risks to which they are 

exposed, and a written strategy for 

assessing capital adequacy and 

maintaining an appropriate level of 

capital. This provision would 

complement NCUA’s existing regulatory 

framework by working in tandem with 

other regulatory requirements, such as 

those related to liquidity, interest rate, 

and credit risk. 

Accordingly, proposed § 702.101 

would amend current § 702.101 to 

include a new capital adequacy 

provision based on a similar provision 

in FDIC’s rule.129 The new capital 

adequacy provision would be added as 

proposed § 702.101(b) and paragraphs 

(b) and (c) of current § 702.101 would be 

renumbered as paragraphs (d) and (e) of 

proposed § 702.101. The new capital 

adequacy provision would not affect 

credit unions’ PCA capital category. 

However, the Board believes it would 

support the assessment of capital 

adequacy in the supervisory process 

(assigning CAMEL and risk ratings). 

A complex credit union is generally 

expected to have internal processes for 

assessing capital adequacy that reflect a 

full understanding of its risks and to 

ensure that it holds capital 

corresponding to those risks to maintain 

overall capital adequacy.130 The nature 

of such capital adequacy assessments 

should be commensurate with the credit 

union’s size, complexity, and riskprofile. Consistent with longstanding 

NCUA practice,131 the supervisory 

assessment of capital adequacy will take 

account of whether a credit union plans 

appropriately to maintain an adequate 

level of capital given its activities and 

risk profile, as well as risks and other 

factors that can affect its financial 

condition; including, for example, the 

level and severity of problem assets and 

its exposure to operational risk, IRR and 

significant asset concentrations. In 

addition to evaluating the 

appropriateness of a credit union’s 

capital level given its overall risk 

profile, the supervisory assessment 

takes into account the quality and 

trends in a credit union’s capital 

composition, whether the credit union 

is entering new activities or introducing 

new products. The assessment also 

considers whether a credit union is 

receiving special supervisory attention, 

has or is expected to have losses 

resulting in capital inadequacy, has 

significant exposure due to risks from 

nontraditional activities, or has 

significant exposure to IRR or 

operational risk. For these reasons, 

NCUA’s supervisory assessment of 

capital adequacy may differ from 

conclusions that might be drawn solely 

from the calculation of a complex credit 

union’s regulatory capital ratios. 

An effective capital planning process 

involves an assessment of the risks to 

which a credit union is exposed and its 

processes for managing and mitigating 

those risks, an evaluation of its capital 

adequacy relative to its risks, and 

consideration of the potential impact on 

its earnings and capital base from 

current and prospective economic 

conditions. While elements of a 

supervisory review of capital adequacy 

would be similar across credit unions, 

evaluation of the level of sophistication 

of an individual credit union’s capital 

adequacy process should be 

commensurate with the institution’s 

size, sophistication, and risk profile, 

similar to the current supervisory 

practice. NCUA would develop and 

publish supervisory guidance for 

examiners on how to apply this 

provision. 

Some commenters stated that they 

manage their capital so that they operate 

with a buffer over the regulatory 

minimum and that examiners expect 

such a buffer. These commenters 

expressed concern that examiners will 

expect even higher capital levels. The 

Board notes that the credit union system 

is generally very well capitalized, and 


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132Section 1790d(c). 

133Compare section 1790d(c)(1)(A) (providing 

that a credit union is ‘‘well capitalized’’ if it meets 

both the seven percent net worth ratio requirement 

and any applicable risk-based net worth 

requirement), and section 1790d(d) (requiring the 

Board to design a risk-based net worth 

requirement), with section 1790d(o) (defining the 

term ‘‘net worth,’’ but not defining the term riskbased net worth ratio). 

134See, e.g., 12 CFR 324.403. 

135See, e.g., 12 CFR 324.10, 324.11, and 324.403. 

this provision merely reflects existing 

supervisory standards for individual 

complex credit unions. However, NCUA 

plans to incorporate in its National 

Supervision Policy Manual procedural 

controls on the discretion examiners 

employ in relation to a complex credit 

union being deemed out of compliance 

with this provision. 

101(b) Capital Adequacy 

For the reasons discussed above, this 

proposal would add new capital 

adequacy provisions to current 

§ 702.101(b). The proposed new capital 

adequacy provisions would be added as 

§ 702.101(b), and the proposal would 

redesignate paragraphs (b) and (c) of 

current § 702.101 as paragraphs (d) and 

(e) of proposed § 702.101. Proposed 

§ 702.101(b) would provide that: 

• Notwithstanding the minimum 

requirements in this part, a credit union 

defined as complex must maintain 

capital commensurate with the level 

and nature of all risks to which the 

institution is exposed. 

• A credit union defined as complex 

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. 

Section 702.102 Capital Classifications 

Under the Original Proposal, the title 

of § 702.102 would have been changed 

from ‘‘statutory net worth categories’’ to 

‘‘capital classifications.’’ The section 

would also have continued to list the 

five statutory capital categories that are 

provided in § 216(c) of the FCUA.132

A number of commenters expressed 

concerns with the changes in 

terminology that were made in this and 

other sections of the regulation. 

Commenters suggested that by using the 

terms ‘‘risk-based capital,’’ ‘‘capital 

categories,’’ ‘‘capital classifications,’’ 

and other terms not specifically 

included in the FCUA, the Board was 

redefining the statutorily defined terms 

‘‘net worth’’ and ‘‘net worth ratio’’ with 

terms that do not encompass the same 

things. 

The Board disagrees. As the Board 

explained in the Original Proposal, 

although § 216(c) of the FCUA uses the 

general term ‘‘net worth categories,’’ the 

Board believes the term ‘‘capital 

categories’’ is less confusing for industry 

practitioners and better describes the 

two measurements, ‘‘net worth ratio’’ 

and ‘‘risk-based net worth,’’ that make 

up the categories listed in the statute. It 

is clear, from the distinct uses of the 

terms ‘‘net worth’’ and ‘‘risk-based net 

worth’’ in the FCUA that Congress 

intended those terms to have different 

meanings.133 Moreover, the new terms 

were defined in the Original Proposal in 

a manner consistent with both the 

statutory terms and the FCUA’s 

requirements. The Board has considered 

the use of these new terms, as well as 

the comments received, and believes 

that the new terminology would not 

alter or otherwise be inconsistent with 

the requirements of the FCUA. Rather, 

the Board continues to believe that the 

use of these new terms will help to 

clarify the requirements of the 

regulation for credit unions and other 

interested parties. Therefore, the Board 

has decided to retain the changes and 

new terminology in this proposal. 

102(a) Capital Categories 

Under the Original Proposal, 

proposed § 702.102(a) would have 

replaced current § 702.102(a) and would 

have set forth new minimum capital 

measures for complex credit unions. 

Consistent with sections 216(c)(1)(A) 

through (E) of the FCUA, the net worth 

ratio measures listed in proposed 

§§ 702.102(a)(1) through (5) would have 

continued to match those listed in the 

statute for each capital category, and 

would have used both the net worth 

ratio and the proposed risk-based 

capital ratio as elements of the capital 

categories for ‘‘well capitalized,’’ 

‘‘adequately capitalized,’’ and 

‘‘undercapitalized’’ credit unions. The 

risk-based capital ratio would have 

included components that required 

higher capital levels to reflect increased 

risk due to IRR, concentration risk, 

credit risk, market risk, and liquidity 

risk. 

The Original Proposal also would 

have introduced a new, scaled riskbased capital ratio measurement 

approach for assigning capital 

classifications for well capitalized, 

adequately capitalized, and 

undercapitalized credit unions. This 

scaled approach would have recognized 

the relationship between higher riskbased capital ratios and the 

creditworthiness of credit unions. 

The Board received numerous general 

comments concerning the capital 

categories, nearly all advocating a 

reduction in all of the risk-based capital 

ratios for complex credit unions. Some 

commenters suggested the following 

risk-based ratios for complex credit 

unions: Eight percent or greater for well 

capitalized, 5.5 percent to 7.99 percent 

for adequately capitalized, and 5.5 

percent or lower for undercapitalized. 

Other commenters suggested that, in 

light of the historical performance of 

credit unions through the recent 

financial crisis, the risk-based capital 

ratio ratios should be: 8.5 percent or 

greater to be well capitalized, six 

percent to 8.49 percent to be adequately 

capitalized, and six percent or less to be 

undercapitalized. Still other 

commenters suggested a reduction in 

the risk-based capital ratios for each 

capital category by a minimum of 50 

basis points to avoid harming the credit 

union industry by limiting credit 

unions’ ability to make loans, 

decreasing their earnings, and 

hampering current business strategies. 

After carefully considering the 

comments, the Board is now proposing 

to reduce the risk-based capital ratio 

threshold for well capitalized from 10.5 

percent to 10 percent. All of the other 

risk-based capital ratio thresholds from 

the Original Proposal would remain 

unchanged. As discussed below, the 

Board believes this structure is within 

its legal authority to implement, and 

that this well capitalized ratio threshold 

both achieves parity with Other Banking 

Agencies’ regulations 134 and simplifies 

NCUA’s proposed risk-based capital 

ratio measure by not including the 

capital conservation buffer that is part of 

the Other Banking Agencies’ risk-based 

capital regulations. 

102(a)(1) Well Capitalized 

Under the Original Proposal, 

proposed § 702.102(a)(1) would have 

required a credit union to maintain a net 

worth ratio of seven percent or greater 

and, if it were a complex credit union, 

a risk-based capital ratio of 10.5 percent 

or greater to be classified as well 

capitalized. The higher proposed riskbased capital requirement for the well 

capitalized classification was designed 

to boost the resiliency of complex credit 

unions throughout financial cycles and 

align them with the standards used by 

the Other Banking Agencies.135 The 

proposed 10.5 percent risk-based capital 

ratio target was comparable to the Other 

Banking Agencies’ eight percent total 

risk-based capital ratio to be adequately 

capitalized plus the 2.5 percent capital 

conservation buffer that banks will be 

required to meet when the capital 

conservation buffer is fully 


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4374 Federal Register / Vol. 80, No. 17 / Tuesday, January 27, 2015 / Proposed Rules 

136On September 10, 2013, FDIC published an 

interim final rule that revised its risk-based and 

leverage capital requirements for FDIC-supervised 

institutions. 78 FR 55339 (Sept. 10, 2013). 

137See, e.g., 12 CFR 324.403. 138

implemented in 2019.136 To be well 

capitalized, the Other Banking Agencies 

require a total risk-based capital ratio of 

10 percent. Therefore, a bank can be 

well capitalized with a total risk-based 

capital ratio of 10 percent, but its 

inadequate capital conservation buffer 

would still limit its ability to make 

capital distributions and discretionary 

bonus payments. The Original Proposal 

included a 10.5 percent risk-based 

capital ratio requirement, rather than 

the Other Banking Agencies’ 10 

percent,137 to avoid the complexity of a 

capital conservation buffer. 

The Board received a substantial 

number of comments regarding the 

proposed risk-based capital ratio for a 

credit union to be classified as well 

capitalized. As a threshold matter, a 

number of commenters questioned the 

Board’s authority to impose any riskbased net worth requirement on well 

capitalized credit unions. Specifically, 

commenters suggested that § 1790d(d) of 

the FCUA, which they argued provides 

the entirety of the language in the FCUA 

dealing with the risk-based component 

of PCA, directs NCUA to connect the 

risk-based net worth requirement to the 

sufficiency of a credit union’s net worth 

only for the adequately capitalized 

classification. Commenters further 

maintained that requiring a higher riskbased capital ratio level for well 

capitalized credit unions than the level 

required for adequately capitalized 

credit unions contravened both 

Congressional intent and the Board’s 

statutory authority. They argued that, 

not only does the FCUA itself prohibit 

the Board from imposing a higher riskbased capital ratio for the well 

capitalized threshold, but that sound 

public policy also supports applying the 

risk-based net worth requirement only 

to the adequately capitalized threshold. 

They cited the seven percent net worth 

ratio for well capitalized credit unions 

as support for this argument, stating that 

this net worth ratio renders a separate, 

higher risk-based capital ratio level 

unnecessary for well capitalized credit 

unions. 

Similarly, another commenter 

recommended that the Board impose the 

same risk-based capital ratio on both 

well capitalized and adequately 

capitalized credit unions, and the 

commenter encouraged the Board not to 

increase that risk-based capital ratio 

above eight percent. As support, the 

commenter noted that, in the preamble 

to the Original Proposal, the Board 

stated that the proposed risk-based 

capital ratio of eight percent would have 

been reasonable for an adequately 

capitalized credit union. The 

commenter further suggested that 

because adequately capitalized and well 

capitalized credit unions have higher 

net worth ratio requirements than 

similarly situated banks, an eight 

percent risk-based capital ratio would 

be sufficient and that it would be 

unreasonable to require adequately 

capitalized credit unions to maintain a 

10.5 percent risk-based capital ratio. 

Other commenters suggested that the 

proposed 10.5 percent risk-based capital 

ratio for a credit union to be classified 

as well capitalized is not appropriate 

because it unfairly incorporates the 

capital conservation buffer into the PCA 

framework for credit unions. These 

commenters noted that a bank can be 

classified as well capitalized with an 

eight percent total risk-based capital 

ratio, even if the bank fails to hold the 

2.5 percent capital conservation buffer 

required under the Other Banking 

Agencies’ capital regulations, although 

the commenters acknowledged that any 

such failure to meet the capital 

conservation buffer would limit that 

bank’s ability to make capital 

distributions and discretionary bonus 

payments. These commenters 

maintained that by directly 

incorporating the capital conservation 

buffer into NCUA’s PCA framework, the 

Board would disadvantage credit unions 

by making them more vulnerable to 

downgrades in their PCA capital 

classification level, a course of action 

which the Other Banking Agencies 

specifically declined to adopt. 

Commenters further stated that because 

the capital conservation buffer was 

designed to absorb losses in stressful 

periods, the Other Banking Agencies 

believed that it was appropriate for a 

depository institution to be able to use 

some of its capital conservation buffer 

without being considered less than well 

capitalized for PCA purposes. 

Commenters suggested that the Board 

should, at a minimum, provide credit 

unions the same flexibility. Other 

commenters suggested that the Other 

Banking Agencies adopted the capital 

conservation buffer as a means to 

restrict banks from paying dividends to 

shareholders and ‘‘substantial 

discretionary bonuses’’ to management, 

which occurred even as banks’ financial 

conditions weakened during the last 

financial crisis. These commenters 

noted that even failed credit unions 

were not engaging in this practice and, 

therefore, the concern is not relevant to 

the credit union industry. Accordingly, 

the commenters argued that including 

the capital conservation buffer in the 

risk-based capital proposal and setting 

the risk-based capital ratio at 10.5 

percent was arbitrary. 

Another commenter suggested that 

the capital conservation buffer for banks 

applies only in periods of significant 

credit growth, while NCUA’s proposed 

risk-based capital ratio of 10.5 percent 

would apply at all times in a financial 

cycle. Other commenters suggested that 

the Original Proposal would have 

applied the capital conservation buffer 

only to the well capitalized 

classification, thereby subjecting 

adequately capitalized credit unions 

only to the eight percent total risk-based 

capital ratio used by the Other Banking 

Agencies. Commenters maintained that, 

for the sake of consistency and 

comparability among banks and credit 

unions, the Board should remove the 2.5 

percent capital conservation buffer from 

the well capitalized category and adjust 

the other levels accordingly. 

Alternatively, they argued that the 

Board should, at a minimum, allow 

credit unions an equivalent five-year 

implementation period to build capital 

reserves without sacrificing member 

services or dramatically increasing fees. 

One commenter supported the 

proposed 10.5 percent risk-based capital 

ratio level as the appropriate level to be 

considered well capitalized.138 This 

commenter maintained, however, that 

there should not be an associated 

increase in this risk-based capital 

requirement if NCUA determines to 

include the NCUSIF deposit in the riskbased capital ratio numerator. 

Other commenters questioned why 

well capitalized credit unions would be 

subject to a risk-based capital ratio of 

10.5 percent when banks only need a 

risk-based capital ratio of 10 percent. 

Finally, still other commenters 

suggested that credit unions receiving 

an overall capital classification of well 

capitalized be granted blanket waivers, 

fixed asset exemptions, longer exam 

cycles, and other incentives under any 

final risk-based capital rule. 

As noted in the legal authority section 

of this preamble, the Board has carefully 

considered these comments and 

generally disagrees with commenters’ 

reading and interpretation of the FCUA. 

For the reasons stated in that 

discussion, it is within NCUA’s legal 

authority to promulgate this proposal 

and to impose a separate, higher riskbased capital ratio requirement on well 

capitalized credit unions than the one 

imposed on adequately capitalized 


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139See 12 U.S.C. 1831o, and 12 CFR 324.403(b). 

140 12 U.S.C. 1831o(c)(1)(A) (emphasis added). 

141Per the FCUA, ‘‘undercapitalized’’ is the 

lowest PCA category in which a failure to meet the 

risk-based net worth requirement can result. 

142See 12 CFR 745.9–2 and 12 CFR 723.7. 

143The Other Banking Agencies’ Total Risk-Based 

Capital ratio is the most analogous standard for 

credit unions given the proposed broadening of the 

definition of capital to include accounts that would 

not be included in the definition of Tier 1 capital, 

such as the allowance for loan and lease losses and 

secondary capital for low-income designated credit 

unions. 

144See S. Rep. No. 193, 105th Cong., 2d Sess. 

(1998). 

145The benefits of a capital system better 

correlated to risk are discussed in the Summary 

section of this preamble. 

credit unions. NCUA’s interpretation of 

its legal authority to require credit 

unions to meet different risk-based 

capital ratio levels to be classified as 

either well capitalized or adequately 

capitalized is further supported by the 

Other Banking Agencies’ PCA statute 

and regulations, which require different 

risk-based capital ratio levels for banks 

to be classified as well capitalized, 

adequately capitalized, 

undercapitalized, or significantly 

undercapitalized.139 Section 38(c)(1)(A) 

of the FDI Act requires that the Other 

Banking Agencies’ relevant capital 

measures ‘‘include (i) a leverage limit; 

and (ii) a risk-based capital 

requirement.’’ 140 Therefore, by setting 

different risk-based capital ratio levels 

for credit unions to be adequately and 

well capitalized, NCUA’s risk-based 

capital requirement is more 

‘‘comparable’’ to the Other Banking 

Agencies’ risk-based capital 

requirement. 

The Board also notes there are sound 

policy reasons for setting a higher riskbased capital ratio threshold for the well 

capitalized category than the one for the 

adequately capitalized category. Under 

the current rule, a credit union’s capital 

classification could rapidly decline 

directly from well capitalized to 

undercapitalized if it fails to meet the 

required risk-based net worth ratio 

level.141 Moreover, credit unions 

classified as well capitalized are 

generally considered financially sound, 

afforded greater latitude under some 

other regulatory provisions,142 and are 

not subject to most mandatory or 

discretionary supervisory actions. In 

contrast, credit unions that fall to the 

undercapitalized category are 

financially weak and are subject to 

various mandatory and discretionary 

supervisory actions intended to resolve 

the capital deficiency and limit risk 

taking until capital levels are restored to 

prudent levels. The lack of graduated 

thresholds in the current rule’s 

construct for the risk-based net worth 

requirement does not effectively provide 

for earlier reflection in a credit union’s 

net worth category. Under the current 

rule, a change in the credit union’s risk 

profile, capital levels, or both that 

results in a decline in the risk-based net 

worth ratio does not affect its net worth 

category until it results in the credit 

union falling to the point where the 

situation requires mandatory or 

discretionary supervisory actions. 

The Board believes a more effective 

policy is to adopt a higher threshold for 

the well capitalized category than for 

the adequately capitalized category to 

provide a more graduated framework 

where a credit union does not 

necessarily drop directly from well 

capitalized to undercapitalized. In fact, 

this policy objective is reflected in how 

Congress, in section 216(c) of the FCUA, 

and the Other Banking Agencies, in 

their risk-based capital regulations, 

designed the graduated PCA capital 

categories. 

For a given risk asset, the amount of 

capital required to be held for that risk 

asset is calculated by multiplying the 

dollar amount of the risk asset times the 

risk weight times the desired capital 

level. To illustrate, where the threshold 

for well capitalized is 10 percent, a 

credit union that has one dollar in a risk 

asset assigned a 50 percent risk weight 

would need to hold capital of five cents 

($1 multiplied by 50 percent multiplied 

by 10 percent). The point of this 

illustration is that the risk weights are 

interdependent with the thresholds set 

for the regulatory capital categories. The 

Board notes the risk weights in this 

proposal are based predominantly on 

those used by the Other Banking 

Agencies, as suggested by commenters 

on the Original Proposal. For the total 

capital-to-risk assets ratio, the Other 

Banking Agencies establish a threshold 

of 10 percent to be well capitalized.143

For NCUA’s risk-based capital 

requirement to be comparable, it should 

also be equivalent in rigor to the Other 

Banking Agencies’ risk-based capital 

requirement.144 The rigor of a regulatory 

capital standard is primarily a function 

of how much capital an institution is 

required to hold for a given type of 

asset. Thus, if NCUA chose any 

threshold below 10 percent for the 

minimum required level of regulatory 

capital, it would either result in 

systematically lower incentives for 

credit unions to accumulate capital or 

the risk weights would need to be 

adjusted commensurately to offset the 

effect of the lower threshold. For 

example, if a uniform threshold for both 

well and adequately capitalized were 

maintained and set at only 8 percent, as 

some commenters suggested, there 

would be a decline in the overall rigor 

of the risk-based capital ratio. 

Alternatively, the risk weights for 

various assets could be increased by 20 

percent to offset this effect. The Board 

believes adjusting the risk weights in 

this manner would create more 

difficulty in comparing asset types and 

risk weights across financial 

institutions, and no doubt lead to 

misunderstanding and controversy. 

Conversely, a uniform threshold for 

the well capitalized and adequately 

capitalized categories could be 

maintained, but raised to maintain the 

rigor of the risk-based capital standard 

and avoid adjusting the risk weights. 

This approach would set a higher point 

at which credit unions would fall to 

undercapitalized, and therefore be 

subject to mandatory and discretionary 

supervisory actions. The Board does not 

believe this would be optimal, as the 

supervisory consequences for credit 

unions with risk-based capital ratios 

between eight percent and ten percent 

would be worse than for institutions 

operating under the Other Banking 

Agencies’ rules. 

Maintaining the rigor of the risk-based 

net worth requirement is also important 

for another key policy objective of the 

Board: Ensuring the risk-based net 

worth requirement is relevant and 

meaningful. A relevant and meaningful 

risk-based net worth requirement will 

result in capital levels better correlated 

to risk, and better inform credit union 

decision making.145 To be relevant and 

meaningful, the risk-based net worth 

requirement must result in minimum 

regulatory capital levels on par with the 

net worth ratio for credit unions with 

elevated risk, and be the governing ratio 

(require more capital than the net worth 

ratio) for credit unions with 

extraordinarily high risk profiles. If the 

highest threshold for the risk-based 

capital ratio were set as low as 8 percent 

for well capitalized credit unions, as 

some commenters suggested, the riskbased net worth requirement would 

govern very few, if any, credit unions. 

If the highest risk-based capital ratio 

threshold were set at eight percent, 

NCUA estimates at most seven credit 

unions would have the proposed riskbased ratio be the governing 

requirement, with only one credit union 

currently holding insufficient capital to 

meet the requirement. Further, only 

credit unions with risk assets greater 


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146To qualify for a higher net worth 

classification, a significantly undercapitalized 

credit union must have a net worth restoration plan 

approved by NCUA. 

than 90 percent of total assets would be 

bound by the risk-based requirement. 

Further, capital is a lagging indicator 

because it is founded primarily on 

accounting standards, which by their 

nature are largely based on past 

performance. The net worth ratio is 

even more so a lagging indicator 

because it applies capital—a lagging 

measure in itself—to total assets. Thus, 

the net worth ratio does not distinguish 

among risky assets or changes in a 

balance sheet’s composition. A riskbased capital ratio is more prospective 

by accounting for asset allocation 

choices and driving capital 

requirements before losses occur and 

capital levels decline. The more relevant 

the risk-based net worth requirement is, 

the more likely that credit unions will 

build capital sufficient to prevent 

precipitous declines in their PCA 

capital classifications that could result 

in greater regulatory oversight and even 

failure. 

To be relevant and meaningful, the 

risk-based net worth requirement also 

needs to incent credit unions to build 

and maintain capital as they increase 

risk to be able to absorb any 

corresponding unexpected losses. A 

graduated, or tiered, system of capital 

category thresholds that distinguishes 

between the well capitalized and 

adequately capitalized categories will 

incentivize credit unions to hold sound 

levels of capital without invoking 

supervisory action before necessary. 

While there is no requirement for a 

credit union to be well capitalized, and 

there are no supervisory interventions 

required for a credit union with an 

adequately capitalized classification, 

there are some regulatory privileges and 

other benefits for a credit union that is 

well capitalized. Chief among those 

benefits is the accumulation of 

sufficient capital to weather financial 

and economic stress. During the recent 

financial crisis, credit unions 

experienced large losses in a 

compressed timeframe, resulting in a 

rapid deterioration of net worth. Some 

credit unions that historically had been 

classified as well capitalized were 

quickly downgraded to 

undercapitalized. As noted in the 

summary section, credit unions that 

failed at a loss to the NCUSIF on average 

were very well capitalized, based on 

their net worth ratios, 24 months prior 

to failure (average net worth ratio of 12 

percent). Over the last 10 years, more 

than 80 percent of all credit union 

failures involved institutions that were 

well capitalized in the 24 months 

immediately preceding their failure. 

Unlike the net worth ratio, which is 

indifferent to the composition of assets, 

a well-designed risk-based net worth 

requirement would reflect material 

shifts in the risk profile of assets. 

The Board believes that a risk-based 

capital framework that encourages and 

promotes capital accumulation benefits 

not only those credit unions that 

achieve the well-capitalized 

classification, but the entire credit 

union system. Thus, the Board remains 

committed to implementing the riskbased requirement under a graduated 

(multi-tiered) capital category 

framework. 

As noted earlier in this preamble, the 

Board supports lowering the well 

capitalized risk-based capital ratio 

threshold from 10.5 percent to 10 

percent. The Board agrees with the 

commenters who suggested that a 10 

percent risk-based capital ratio would 

simplify the comparison with the Other 

Banking Agencies’ rules by removing 

the effect of the capital conservation 

buffer. The 10 percent threshold for well 

capitalized credit unions, along with the 

eight percent threshold for adequately 

capitalized credit unions, would also be 

consistent with the total risk-based 

capital ratio requirements contained in 

the Other Banking Agencies’ capital 

rules. 

Capital ratio thresholds are largely a 

function of risk weights. As discussed in 

other parts of this proposal, the Board 

is now proposing to more closely align 

NCUA’s risk weights with those 

assigned by the Other Banking 

Agencies. Therefore, the Board believes 

that NCUA’s risk-based capital ratio 

threshold levels should also align with 

those of the Other Banking Agencies as 

closely as possible. 

102(a)(2) Adequately Capitalized 

Under the Original Proposal, 

proposed § 702.102(a)(2) would have 

required a credit union to maintain a net 

worth ratio of six percent or greater and, 

if it were a complex credit union, a riskbased capital ratio of eight percent or 

greater to be classified as adequately 

capitalized. This risk-based capital ratio 

level is comparable to the eight percent 

total risk-based capital ratio level 

required by the Other Banking Agencies 

for a bank to be adequately capitalized. 

Other than the comments discussed 

above and in other parts of this 

preamble, the Board received no 

comments on the Original Proposal’s 

adequately capitalized risk-based capital 

ratio level. Therefore, the Board has 

decided to retain the changes, with only 

minor adjustments for clarity. 

This proposal would also add 

proposed § 702.102(a)(2)(iii), which 

would clarify that a credit union is 

adequately capitalized only if it meets 

the net worth and risk-based capital 

criteria in proposed paragraphs (a)(2)(i) 

and (ii), and does not meet the 

definition of a well capitalized credit 

union. 

102(a)(3) Undercapitalized 

Under the Original Proposal, 

proposed § 702.102(a)(3) would have 

classified a credit union as 

undercapitalized if the credit union 

maintained a net worth ratio of four 

percent or greater but less than six 

percent and, if it were a complex credit 

union, a risk-based capital ratio of less 

than eight percent. 

Other than the comments discussed 

above and other parts of this preamble, 

the Board received no comments on the 

Original Proposal’s undercapitalized 

risk-based capital ratio requirement. 

However, to provide additional clarity 

the Board is proposing to make 

additional minor adjustments to the 

paragraph in this proposal. 

Under this proposal, § 702.102(a)(3) 

would provide that a credit union is 

undercapitalized if: (1) The credit union 

has a net worth ratio of four percent or 

more but less than six percent; or (2) the 

credit union, if complex, has a riskbased capital ratio of less than eight 

percent. 

102(a)(4) Significantly Undercapitalized 

Under the Original Proposal, 

proposed § 702.102(a)(4) would have 

classified a credit union as significantly 

undercapitalized if: (1) It had a net 

worth ratio of less than five percent and 

had received notice that its net worth 

restoration plan had not been 

approved; 146 (2) the credit union had a 

net worth ratio of two percent or more 

but less than four percent; or (3) the 

credit union had a net worth ratio of 

four percent or more but less than five 

percent, and the credit union either 

failed to submit an acceptable net worth 

restoration plan within the time 

prescribed in § 702.110, or materially 

failed to implement a net worth 

restoration plan approved by NCUA. 

The Original Proposal would have made 

some clarifying changes to the language 

in current § 702.102(a)(4), but would not 

have changed the criteria for being 

classified as significantly 

undercapitalized under part 702. 

The Board received no comments on 

the proposed changes to this paragraph 

and has decided to retain the changes in 

this proposal with several adjustments 

for clarity. 


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Under this proposal, § 702.102(a)(4) 

would provide that a credit union is 

significantly undercapitalized if: 

• The credit union has a net worth 

ratio of two percent or more but less 

than four percent; or 

• The credit union has a net worth 

ratio of four percent or more but less 

than five percent, and either— 

Æ Fails to submit an acceptable net 

worth restoration plan within the time 

prescribed in § 702.111; 

Æ Materially fails to implement a net 

worth restoration plan approved by the 

Board; or 

Æ Receives notice that a submitted net 

worth restoration plan has not been 

approved. 

102(a)(5) Critically Undercapitalized 

Under the Original Proposal, 

proposed § 702.102(a)(5) would have 

classified a credit union as critically 

undercapitalized if it had a net worth 

ratio of less than two percent. The 

Original Proposal would have made 

some minor technical amendments to 

the language in current 702.102(a)(5), 

but would not have changed the criteria 

for being classified as critically 

undercapitalized under part 702. 

The Board received no comments on 

the proposed changes to this paragraph 

and, therefore, it has decided to retain 

the changes in this proposal. 

102(b) Reclassification Based on 

Supervisory Criteria Other Than Net 

Worth 

The Original Proposal would have 

retained current § 702.102(b), with only 

a few amendments to update 

terminology and make minor edits for 

clarity. No substantive changes were 

intended. 

The Board received no comments or 

suggested changes to this paragraph and 

has decided to retain the changes in this 

proposal. 

102(c) Non-Delegation 

Proposed § 702.102(c) would have 

been unchanged from current 

§ 702.102(c). 

The Board received no comments or 

suggested changes to this paragraph and 

has decided to make no changes in this 

proposal. 

102(d) Consultation With State Officials 

Proposed § 702.102(d) would have 

retained current § 702.102(d) with only 

a few small amendments for consistency 

with other sections of NCUA’s 

regulations. No substantive changes 

were intended. 

The Board received no comments or 

suggested changes to this paragraph and 

has decided to retain the changes in this 

proposal. 

Section 702.103 Applicability of the 

Risk-Based Capital Ratio Measure 

Under the Original Proposal, 

proposed § 702.103 would have changed 

the title of current § 702.103 from 

‘‘Applicability of risk-based net worth 

requirement’’ to ‘‘Applicability of riskbased capital ratio measure.’’ Proposed 

§ 702.103 would have provided that, for 

purposes of § 702.102, a credit union is 

defined as ‘‘complex,’’ and a risk-based 

capital ratio requirement is applicable, 

only if the credit union’s quarter-end 

total assets exceed $50 million, as 

reflected in its most recent Call Report. 

Under the current rule, credit unions 

are ‘‘complex’’ and subject to the riskbased net worth requirement only if 

they have quarter-end total assets over 

$50 million and they have a risk based 

net worth requirement exceeding six 

percent. The Original Proposal would 

have eliminated current § 702.103(b) 

and defined all credit unions with over 

$50 million in assets as ‘‘complex.’’ 

The Board received a significant 

number of comments on the proposed 

definition of complex credit unions. 

Many commenters pointed out that 

NCUA already has a complexity index 

based on deposit account types, member 

services, loan and investment types, and 

portfolio composition, and given the 

availability of such a measure, which 

takes into account ‘‘the portfolio of 

assets and liabilities’’ of credit unions. 

Commenters stated that it seemed odd 

that the Board would define complex 

based solely on credit unions’ asset size 

given the fact that the NCUA already 

has a complexity index. 

Commenters suggested that section 

1790d(d)(1) of the FCUA directs the 

Board to establish a risk-based net worth 

system for ‘‘complex’’ credit unions, but 

does not give the Board complete 

discretion on how the system must be 

structured and applied to credit unions. 

Commenters argued that defining 

‘‘complex’’ using only an asset size 

threshold fails to comply with the 

requirement in section 1790d(d)(1) that 

the Board take into account the 

‘‘portfolios of assets and liabilities of 

credit unions’’ when defining complex 

credit unions. 

Commenters also suggested that a 

single-dimension definition of 

‘‘complex’’ credit union does not 

account for actual operational 

complexity. Other commenters 

suggested that the proposed definition 

of ‘‘complex’’ was arbitrary and is too 

simplistic a measure because it did not 

take into account a credit union’s 

comprehensive book of assets, including 

all loans, investments, and liabilities, as 

well as whether a credit union’s 

operations are sufficiently diverse to 

warrant a ‘‘complex’’ designation. 

Other commenters stated that 

determining whether a credit union is 

complex should be influenced by 

whether they do real estate lending, 

member business lending, have risky 

investments, and many other factors 

contributing to the composition of a 

credit union’s balance sheet and overall 

operation. Commenters claimed that 

many larger credit unions have limited 

service offerings or narrow portfolio 

composition and are not complex 

institutions. Commenters suggested that 

NCUA’s own complexity index shows 

that using asset size alone does not 

result in an accurate measure of 

complexity for credit unions. 

One commenter suggested that all 

federally insured credit unions with 

assets above $250 million and that have 

an NCUA complexity index value of 17 

or higher be required to meet risk-based 

capital requirements. Another 

commenter suggested that, consistent 

with NCUA’s final liquidity rule, credit 

unions with over $250 million in assets 

have a great degree of 

interconnectedness with other market 

entities, and when they experience 

unexpected or severe liquidity 

constraints they are more likely to 

adversely affect the credit union system, 

public perception, and the NCUSIF. The 

commenter suggested that setting the 

size threshold at $250 million will 

encourage mid-size credit union growth. 

Other commenters believed the Board 

has defined complex in NCUA’s 

derivatives regulation and for 

examinations as $250 million in assets. 

Other commenters suggested the 

Board raise that threshold to $500 

million given the burden they believe 

would be imposed by the rule and the 

potential for unintended consequences. 

The commenters further suggested it 

would be wise to phase-in the 

application of the rule slowly by starting 

with credit unions with assets of $500 

million or more to ensure smooth 

implementation of the rule without 

threatening the viability of smaller 

institutions. 

Other commenters questioned 

whether the Board cares about the safety 

and soundness of credit unions with 

$50 million in assets or less. Several of 

those commenters suggested the riskbased capital requirements should apply 

to all credit unions regardless of size 

because if they are not subject to the 

capital regulation they will be 

unprepared when they reach $50 

million size threshold. 

Some commenters suggested that the 

situation is further compounded by the 

number of credit unions that have 


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147Products and services comprise a portfolio of 

assets and liabilities through the accounts and fixed 

assets that must be maintained to operate, the 

resources of staff and funds necessary to operate the 

credit union, and the liabilities that may arise from 

contractual obligations, among other things. 

Altogether, these products and services are 

accounted for on the balance sheet through the 

assets and liabilities according to GAAP. 

148Based on NCUA’s loss and failure data. 

149NCUA performed back testing analysis of Call 

Report and failure data to determine whether this 

proposed regulation would have resulted in earlier 

received a low-income designation. 

They envisioned a difficult transition 

for low-income credit unions going from 

no caps on commercial lending and 

commercial loan participations, to 

tiered risk weights that could become 

problematic in terms of regulatory 

compliance. 

A small number of commenters 

suggested the Board should adjust for 

inflation any asset-size threshold used 

in the definition of complex. 

Another commenter suggested that 

any credit union that is identified as 

‘‘complex’’ by NCUA should be able to 

present evidence to the agency as to 

why it is not complex and should not 

be subject to risk-based capital 

requirements. The commenter suggested 

the process for contesting an agency 

designation of ‘‘complex’’ should also 

be detailed in the rule. 

Other commenters suggested the rule 

should acknowledge the differences 

between credit unions of different asset 

sizes and assign different risk weights 

for credit unions of different asset sizes. 

The Board has carefully considered 

the comments received and generally 

agrees that a higher asset size threshold 

is appropriate. Based on comments 

received on the Original Proposal, the 

Board is now proposing to use $100 

million in assets as a proxy for 

determining whether a credit union is 

complex. Under this proposal, the title 

of current § 702.103 would continue to 

be changed from ‘‘Applicability of riskbased net worth requirement’’ to 

‘‘Applicability of risk-based capital ratio 

measure.’’ 

However, after diligently considering 

the comments on the Original Proposal 

and further analyzing the ‘‘portfolios of 

assets and liabilities of credit unions,’’ 

the Board now believes that $100 

million in assets would be a more 

appropriate threshold level for defining 

‘‘complex’’ credit unions. Accordingly, 

consistent with requirements of 

§ 216(d)(1) of the FCUA, this proposed 

§ 702.103 would now provide that, for 

purposes of § 702.102, a credit union is 

defined as ‘‘complex,’’ and a risk-based 

capital ratio requirement is applicable, 

only if the credit union’s quarter-end 

total assets exceed $100 million, as 

reflected in its most recent Call Report. 

The Board would periodically evaluate 

this threshold as part of NCUA’s annual 

review of one-third of its regulations. 

Under the current rule, credit unions 

are ‘‘complex’’ and subject to the riskbased net worth requirement only if 

they have quarter-end total assets over 

$50 million and they have a risk-based 

net worth ratio over six percent. In 

effect, this means that all credit unions 

with over $50 million in assets are 

subject to the current risk-based net 

worth requirement unless their level of 

risk assets is relatively low. 

Consistent with requirements of 

section 216(d)(1) of the FCUA, the 

Board is proposing to eliminate the 

additional complexity measure in 

current § 702.103(b) and declines to 

propose a complexity measure in 

addition to the $100 million asset sized 

threshold for defining ‘‘complex’’ credit 

unions. Accordingly, this proposal 

would eliminate current § 702.103(b) 

and define all credit unions with over 

$100 million in assets as ‘‘complex.’’ 

For reasons described more fully below, 

the Board believes that defining the 

term ‘‘complex’’ credit union using a 

single asset size threshold of $100 

million as a proxy for a credit union’s 

complexity would be accurate and 

reduce the complexity of the rule, 

would provide regulatory relief for 

smaller institutions, and would 

eliminate the complexity and potential 

unintended consequences of having a 

checklist of activities that would 

determine whether or not a credit union 

is subject to the risk-based capital 

requirement. 

Under this proposal, the term 

‘‘complex’’ is defined only for purposes 

of the risk-based capital ratio measure. 

The Board believes there are a number 

of products and services, which under 

GAAP are reflected as the credit unions 

portfolio of assets and liabilities, in 

which credit unions are engaged 147 that 

are inherently complex based on the 

nature of their risk and the expertise 

and operational demands necessary to 

manage and administer such activities 

effectively. The Board believes that 

credit unions offering such products 

and services have complex portfolios of 

assets and liabilities for purposes of 

NCUA’s risk-based net worth 

requirement. In particular, the Board 

believes that the following products and 

services engaged in by credit unions are 

good indicators of complexity: 

• Member business loans, 

• Participation loans, 

• Interest-only loans, 

• Indirect loans, 

• Real estate loans, 

• Non-federally guaranteed student 

loans, 

• Investments with maturities of 

greater than five years (where the 

investments are greater than one percent 

of total assets), 

• Non-agency mortgage-backed 

securities, 

• Non-mortgage-related securities 

with embedded options, 

• Collateralized mortgage obligations/ 

real estate mortgage investment 

conduits, 

• Commercial mortgage-related 

securities, 

• Borrowings, 

• Repurchase transactions, 

• Derivatives, or 

• Internet banking. 

Based on a review of Call Report data 

as of June 30, 2014, all credit unions 

with more than $100 million in assets 

were engaged in the products and 

services listed above, with 99 percent 

having more than one complex activity, 

and 87 percent having four or more. On 

the other hand, less than two-thirds of 

credit unions below $100 million in 

assets are involved in even a single 

complex activity, and only 15 percent 

have four or more. Moreover, credit 

unions with total assets less than $100 

million are a small share (approximately 

10 percent) of the overall assets in the 

credit union system—which limits the 

exposure of the Share Insurance Fund to 

these institutions. Accordingly, the 

Board believes $100 million in assets is 

a clear demarcation above which 

complex activities are always present, 

and where credit unions are almost 

always engaged in one or more complex 

activities, in contrast to credit unions 

$100 million or less in assets. 

As discussed earlier, and consistent 

with section 216(d)(1) of the FCUA, the 

Board believes $100 million in assets is 

an accurate proxy for complexity based 

on credit unions’ portfolios of assets and 

liabilities. It is logical, clear, and easy to 

administer. This proposed approach 

would also benefit credit union boards 

of directors, which consist primarily of 

volunteers. Based on December 31, 2013 

Call Report data, this proposed 

approach would exempt almost 80 

percent of credit unions from the 

regulatory burden associated with 

complying with the risk-based net worth 

requirement, while still covering 90 

percent of the assets in the credit union 

system. It is also consistent with the fact 

that the majority of losses (68 percent as 

measured as a proportion of the total 

dollar cost 148) to the NCUSIF over the 

last 10 years have come from credit 

unions with assets greater than $100 

million.149 Accordingly, this proposal 


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identification of emerging risks and possibly 

reduced losses to the NCUSIF. We evaluated the 

impact of this proposal on more recent failures of 

credit unions with total assets over $100 million. 

This testing revealed that maintaining a risk-based 

capital ratio in excess of 10 percent would have 

triggered eight out of nine such failing credit unions 

to hold additional capital, which could have 

prevented failure or reduced losses to the NCUSIF. 

150 12 U.S.C. 1790d(d). 151 12 U.S.C. 1790d(d). 

would eliminate current § 702.103(b) 

and amend current § 702.103 to define 

all credit unions with over $100 million 

in assets as ‘‘complex.’’ 

In addition, the Board is requesting 

comment on an alternative 

measurement for the definition of 

‘‘complex.’’ This alternative approach 

would define ‘‘complex’’ as engaging in 

a threshold number of products and 

services, such as those listed above, 

which the Board believes make up a 

complex portfolio of assets and 

liabilities. For example, this alternative 

approach could define a credit union as 

complex if it engaged in one or more of 

the products and services listed above. 

In addition to general comments on this 

approach, the Board is requesting 

comments on the following aspects of 

this alternative measurement for the 

definition of ‘‘complex’’: 

1. What specific products and services 

should the Board include in the list of 

products and services used to determine 

whether a credit union’s portfolio of 

assets and liabilities is ‘‘complex,’’ and 

why? 

2. What number of complex products 

and services should a credit union be 

allowed to engage in before being 

designated as ‘‘complex,’’ and why? 

Section 702.104 Risk-Based Capital 

Ratio 

Under the Original Proposal, the 

Board proposed changing the title of 

current § 702.104 from ‘‘Risk portfolio 

defined’’ to ‘‘Risk-based capital ratio 

measures.’’ In addition, the Board 

originally proposed entirely replacing 

the requirements for calculating the 

risk-based net worth requirement for 

‘‘complex’’ credit unions under current 

§ 702.104 with a new risk-based capital 

ratio measure.150 The proposed section 

would have required all ‘‘complex’’ 

credit unions to calculate their riskbased capital ratio as directed in the 

section. The proposed risk-based capital 

ratio was designed to enhance sound 

capital management and help ensure 

that credit unions maintain adequate 

levels of loss-absorbing capital going 

forward, strengthening the stability of 

the credit union system and ensuring 

credit unions serve as a source of credit 

in times of stress. 

NCUA received a number of general 

comments on the proposed § 702.104. 

Commenters argued that the proposed 

risk-based capital calculation did not 

match the real risk in the system. Other 

commenters suggested the proposed 

risk-based capital calculation was an 

oversimplification of risk. 

Some commenters stated that they 

generally supported the proposed 

calculation for the risk-based capital 

ratio. Other commenters stated that the 

proposed changes would make the riskbased capital ratio calculations more 

reflective of comparable calculations 

required by FDIC, provide clarity and 

understandability to a complex 

calculation, and make the resulting 

analysis more valuable and useable. 

Other commenters suggested that the 

funding source of the credit union’s 

assets should also be factored into the 

risk-based capital ratio measure, and 

that credit unions that fund assets solely 

with member deposits should be given 

a credit compared to credit unions that 

fund assets with borrowing and/or 

broker deposits. These commenters 

stated that the proposal would regulate 

only one side of the balance sheet—the 

assets—while not allowing credit 

unions the flexibility to deal with this 

new capital requirement through 

supplementary capital or the matching 

of term liabilities to specific assets. 

Similarly, other commenters suggested 

that the proposal did not effectively 

consider a credit union’s liabilities as a 

source of funds matched against its 

assets. The commenters suggested that 

the cost at which some credit unions 

can borrow funds to then loan out or 

invest is very low and carry a healthy 

spread, but they believed the proposal 

would have penalized credit unions on 

the asset side of the balance sheets 

irrespective of their management of 

matching sources and uses of funds. 

Other commenters suggested that 

applying higher risk weights on longterm assets to deal with IRR is 

misleading without considering 

liabilities. 

Commenters stated that NCUA assigns 

a CAMEL rating based on a number of 

factors, including management 

effectiveness, and that an institution 

with a more effective management team 

can adequately manage an increased 

level of risk. Commenters suggested that 

by not taking risk management 

techniques and qualities into account in 

the proposed rule when determining the 

required risk-based capital ratios, credit 

unions with strong management 

effectiveness would be essentially 

limited in how well they could utilize 

the skills that reside on their team. 

One commenter suggested that credit 

unions should be given a credit for 

checking and savings non-maturity 

deposits. Another commenter suggested 

that the Original Proposal appeared to 

concentrate on risks faced by credit 

unions in a low interest rate 

environment, but that the rule should be 

amended to be flexible enough to also 

work in high interest rate environments 

that may occur in the future. 

As discussed in more detail below, 

the Board believes most of the 

comments outlined above would be 

addressed by removing the IRR 

components from the risk weights in 

this proposal. Accordingly, consistent 

with the Original Proposal, the Board is 

now proposing to change the title of 

current § 702.104 from ‘‘Risk portfolio 

defined’’ to ‘‘Risk-based capital ratio.’’ 

In addition, the Board is now proposing, 

with some minor changes from the 

Original Proposal, to entirely replace the 

requirements for calculating the riskbased net worth ratio for ‘‘complex’’ 

credit unions under current § 702.104 

with a new risk-based capital ratio 

measure.151

Proposed § 702.104 would continue to 

require all ‘‘complex’’ credit unions to 

calculate the risk-based capital ratio as 

directed in the section. The Board 

believes the proposed risk-based capital 

ratio would enhance sound capital 

management and help ensure that credit 

unions maintain adequate levels of lossabsorbing capital going forward, 

strengthen the stability of the credit 

union system, provide a more leading 

indicator of deteriorating strength than 

the net worth ratio, and ensure credit 

unions serve as a source of credit in 

times of stress. 

104(a) Calculation of Capital for the 

Risk-Based Capital Ratio 

Under the Original Proposal, 

proposed § 702.104(a) would have 

provided that to determine its risk-based 

capital ratio, a complex credit union 

must calculate the percentage, rounded 

to two decimal places, of its risk-based 

capital ratio numerator as described in 

§ 702.104(b) to its total risk-weighted 

assets denominator as described in 

§ 702.104(c). The proposed method of 

calculating risk-based capital would 

have been generally consistent with the 

methods used in other sectors of the 

financial services industry. As with the 

current risk-based net worth 

requirement, the proposed risk-based 

capital ratio calculation would have 

been calculated primarily using 

information credit unions already report 

on the Call Report form required under 

§ 741.6(a)(2) of NCUA’s regulations. 

The Board received a number of 

comments regarding the Original 


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4380 Federal Register / Vol. 80, No. 17 / Tuesday, January 27, 2015 / Proposed Rules 

152NCUA Letter to Credit Unions No. 12–CU–12, 

October 2012, Changes Planned for Upcoming Call 

Reports. 

Proposal’s reliance primarily on 

information credit unions already report 

on the Call Report form. A number of 

commenters stated that the Call Report 

is sufficient and should not be amended 

or expanded. Commenters generally 

appreciated the Board’s awareness of 

the regulatory burdens on credit unions 

relating to reporting requirements. 

Other commenters suggested the Call 

Report information currently collected 

should be modified to properly capture 

risks associated with assets and 

liabilities in more detail. One 

commenter suggested that by supporting 

and ensuring strong risk-based capital 

calculations through enhanced Call 

Report data, the Board could help to 

improve communications between 

credit unions and examiners during the 

examination process, which could result 

in more efficient examinations and 

would help alleviate regulatory burdens 

on credit unions. 

Other commenters suggested that 

adopting investment risk weights 

consistent with the Other Banking 

Agencies’ regulations would require 

additional reporting in the Call Reports, 

but stated additional reporting would be 

a small issue for some credit unions and 

a non-event for others. 

One commenter suggested that the 

Board’s goal should be to produce the 

best risk-based capital proposal 

regardless of the current reporting 

structure and the proposal should be 

rewritten and the effort begun anew 

without the instructions to minimize 

changes to the current call report form. 

Another commenter suggested that the 

call report should be amended to 

include a separate line item labeled, 

‘‘deposits in Federal Reserve Banks,’’ 

and that such a change would not be 

burdensome, either for credit unions or 

NCUA. 

Several commenters stated that the 

revised Call Report would make the 

reporting process more costly and 

complicated for credit unions due to the 

amount of new information that credit 

unions would be required to provide 

under the Original Proposal because 

gathering new data would require 

changes by data processors, additional 

staff time and staff training, all of which 

costs money. 

Conversely, one commenter suggested 

that the vast majority of credit unions 

that would be affected by the Original 

Proposal either use systems developed 

by, or outsourced their investment 

accounting and reporting to, firms who 

already provide the required 

information to banks, and it would 

require little relative effort to modify the 

reports provided to credit unions to be 

able to report this information in the 

Call Reports. Another commenter stated 

that the Board should overhaul the 

current call reporting platform to better 

align credit union Call Report data with 

the Call Report data collected by the 

other U.S. regulated depository 

institutions to build a consistent 

framework for both the assignment of 

appropriate risk weights, as well as the 

comparability of capital adequacy across 

institutions. Still another credit union 

commenter stated that it captures credit 

scores and current loan-to-value (LTV) 

ratios and would gladly report 

additional loan information to NCUA in 

its Call Report rather than be subject to 

the proposed risk-based capital 

standards. 

The Board has decided to retain the 

original changes to § 702.104(a) in this 

proposal with only minor, nonsubstantive edits. However, the Board is 

aware that changes to the Call Report 

could create a reporting burden on 

credit unions. The Board agrees with 

commenters who encouraged Call 

Report data enhancement which would 

improve the assignment of appropriate 

risk weights using more granular data. 

While this approach would require 

more call report data, it would also 

result in improved precision of capital 

requirements, and more granular data 

that would also enhance NCUA’s offsite 

supervision capabilities. As NCUA has 

done in the past (most recently in 

October 2012), the agency will provide 

credit unions with prior notification of 

significant reporting changes to the Call 

Report,152 and credit unions will have 

an opportunity to comment via the 

related Paperwork Reduction Act filing 

through the U.S. Office of Management 

and Budget (OMB). The assignment and 

discussion of specific risk weights for 

assets that would be identified within 

the Call Report is contained in 

§ 702.104(c). 

104(b) Risk-Based Capital Ratio 

Numerator 

Under the Original Proposal, 

proposed § 702.104(b) would have 

provided that the risk-based capital ratio 

numerator is the sum of certain specific 

capital elements listed in 

§ 702.104(b)(1), minus certain regulatory 

adjustments listed in § 702.104(b)(2). 

The proposed numerator for the riskbased capital ratio would have 

continued to consist primarily of the 

components of a credit union’s net 

worth. In order to capture all of the 

material risks while keeping the 

calculation from becoming overly 

complicated, the Original Proposal 

would have added some additional 

equity and loss allowance items and 

other specified balance sheet items 

would be subtracted. The goal of the 

proposed risk-based capital ratio 

numerator was to achieve a measure 

that reflects a more accurate amount of 

equity and reserves available to cover 

losses. 

A number of commenters suggested 

that the Board should focus more on the 

numerator of the risk-based capital ratio 

in the rule by allowing credit unions to 

hedge IRR by obtaining ‘‘credits’’ for 

low-risk assets such as certificates of 

deposit. Other commenters made 

similar statements suggesting that credit 

unions should be given a credit when 

they build their own insurance through 

certificates of deposit or long-term 

borrowing because such investments are 

considered additional insurance that are 

being used to hedge IRR. 

The Board determined these 

comments are related to the IRR 

components of the risk weights in the 

Original Proposal and, as previously 

stated, this proposal would not include 

IRR components in the risk weights 

assigned to investments. The Board also 

determined quantifying ‘‘credits’’ for 

specific types of shares and liabilities 

would be extraordinarily complicated 

and require a large amount of additional 

data, and be inconsistent with how the 

Other Banking Agencies approach riskbased capital requirements. 

The Original Proposal maintained the 

structure of the computation of the riskbased capital ratio numerator with some 

revisions, which are addressed under 

the discussion on each of the individual 

elements below. Accordingly, the Board 

is now proposing to retain § 702.104(b) 

of the Original Proposal without change. 

104(b)(1) Capital Elements of the RiskBased Capital Ratio Numerator 

Section 702.104(b)(1) of the Original 

Proposal would have listed the capital 

elements of the risk-based capital ratio 

numerator as follows: undivided 

earnings (including any regular reserve); 

appropriation for non-conforming 

investments; other reserves; equity 

acquired in merger; net income; ALLL, 

limited to 1.25 percent of risk assets; 

secondary capital accounts included in 

net worth (as defined in § 702.2); and 

§ 208 assistance included in net worth 

(as defined in § 702.2). Consistent with 

the Original Proposal, § 702.104(b)(1) of 

this proposal would list the elements of 

the risk-based capital ratio numerator. 

The Board received a significant 

number of comments suggesting various 

changes or additions to the list of capital 

elements included in the Original 


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153See, e.g., 12 CFR 324.20(d). 

Proposal, which are discussed in more 

detail below. 

The Board generally disagrees with 

the comments received and has, with 

the exception of the ALLL, decided to 

retain the language from the Original 

Proposal without change. As explained 

above, the FCUA gives NCUA broad 

discretion in designing the risk-based 

net worth requirement. Thus, this 

proposal incorporates a broadened 

definition of capital for purposes of 

calculating the proposed new risk-based 

capital ratio that would serve as the 

risk-based net worth requirement. The 

Board proposes to do this to provide for 

a more comparable measure of capital 

across all financial institutions and 

better account for related elements of 

the financial statement that are available 

(or not) to cover losses and protect the 

NCUSIF. This broader definition of 

capital would contribute over 50 basis 

points, on average, to affected credit 

unions’ risk-based capital ratio. 

Undivided Earnings 

The Original Proposal would have 

included undivided earnings (including 

any regular reserve) in the risk-based 

capital ratio numerator. 

The Board received no comments on 

the inclusion of this capital element in 

the risk-based capital ratio numerator. 

Accordingly, the Board has decided to 

retain this aspect of the Original 

Proposal with a minor change. The 

reference to regular reserve would be 

removed, as the regular reserve account 

is a part of undivided earnings and this 

proposal seeks to eliminate the 

provisions of the rule relating to 

maintenance of the regular reserve 

account. 

Appropriation for Nonconforming 

Investments 

The Original Proposal would have 

included the appropriation for 

nonconforming investments in the riskbased capital ratio numerator. 

The Board received no comments on 

the inclusion of this capital element in 

the risk-based capital ratio numerator. 

Accordingly, the Board has decided to 

retain this aspect of the Original 

Proposal without change. 

Other Reserves 

The Original Proposal would have 

included other reserves in the risk-based 

capital ratio numerator. 

The Board received no comments on 

the inclusion of this capital element in 

the risk-based capital ratio numerator. 

Accordingly, the Board has decided to 

retain this aspect of the Original 

Proposal without change. 

Equity Acquired in Merger 

Under the Original Proposal, the 

proposed risk-based capital ratio 

numerator would have included the 

equity acquired in merger component of 

the balance sheet. This equity item 

would have been used in place of the 

total adjusted retained earnings 

acquired through business combinations 

amount that credit unions report on the 

PCA net worth calculation worksheet in 

the Call Report. The equity acquired in 

merger is the GAAP equity recorded in 

a business combination and can vary 

from the amount of total adjusted 

retained earnings acquired through 

business combinations, which is not a 

GAAP accounting item. The use of 

equity acquired in a merger, as 

measured using GAAP, would have 

more accurately reflected the overall 

value of the business combination 

transaction. 

The Board received no comments on 

the inclusion of this capital element in 

the risk-based capital ratio numerator. 

Accordingly, the Board has decided to 

retain this aspect of the Original 

Proposal without change. 

Net Income 

The Original Proposal would have 

included net income in the risk-based 

capital ratio numerator. 

The Board received no comments on 

the inclusion of this capital element in 

the risk-based capital ratio numerator. 

Accordingly, the Board has decided to 

retain this aspect of the Original 

Proposal without change. 

ALLL 

The Original Proposal would have 

included the ALLL in the risk-based 

capital ratio numerator. The Board 

noted in the Original Proposal that the 

ALLL would have been included in the 

risk-based capital ratio numerator 

because it is available to cover expected 

levels of loan losses at a credit union. 

The Original Proposal, however, would 

have limited the amount of the ALLL 

that a credit union could include in the 

risk-based capital ratio numerator to 

1.25 percent of total risk-weighted 

assets. In the preamble to the Original 

Proposal, the Board stated that this 

approach would have been consistent 

with the Basel III framework and the 

Other Banking Agencies’ capital 

regulations,153 and it also would have 

induced credit unions to grant quality 

loans and record loan losses in a timely 

manner. 

The Board received a number of 

comments regarding the proposed 

inclusion of the ALLL in the risk-based 

capital ratio numerator. A substantial 

number of commenters stated that the 

ALLL is a dedicated item on the balance 

sheet and should not be limited or 

restricted in any way. Commenters 

suggested that GAAP will not allow the 

ALLL to be an excessive amount, so the 

reasoning for limiting the ALLL in the 

Original Proposal was unclear, even if 

the Other Banking Agencies’ rules treat 

it that way. Commenters suggested that, 

rather than implementing a 1.25 percent 

cap to capture risks in credit unions that 

are holding excess ALLL, the Board 

should address the risks that the cap 

was intended to address one-on-one 

with ‘‘overly conservative’’ credit 

unions. Commenters suggested that risk 

reserved for within the ALLL for credit 

risk should not be duplicated under the 

risk-based capital ratio measure. Other 

commenters stated that limiting the 

ALLL would have minimal practical 

effect on the way credit unions 

underwrite loans or record losses, but it 

could create a disincentive for credit 

unions to hold higher reserves. 

Some commenters suggested that for 

banks, the 1.25 percent limitation 

prevents the use of the ALLL as a means 

to control taxable revenue by 

maintaining excessive reserves, but that 

credit unions have no incentive to 

manipulate the reserve in such a 

manner so the Board should include the 

full ALLL balance in the risk-based 

capital ratio numerator. 

Other comments stated that the 

allocation of 1.5 percent of loans in the 

current rule more appropriately 

captures the insulating contribution that 

the ALLL provides to capital, 

particularly during times of economic 

stress. 

Still other commenters stated that 

credit unions with portfolios of 

agricultural and business loans, which 

are allowed by GAAP to reserve for each 

loan individually in the ALLL rather 

than just using historical data, would be 

adversely affected by the original 

proposal because credit unions would 

have a lot less incentive to include 

economic downturns as part of their 

calculations under the rule. 

A small number of commenters 

suggested that the ALLL in excess of 

1.25 percent of risk assets should be 

recognized as a reduction of risk-based 

loans at 100 percent consistent with the 

treatment by the Other Banking 

Agencies. 

Conversely, some other commenters 

stated that both the inclusion of the 

ALLL in the risk-based capital ratio 

numerator and the 1.25 percent limit 

were appropriate based on the current 

environment. 


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4382 Federal Register / Vol. 80, No. 17 / Tuesday, January 27, 2015 / Proposed Rules 

154FASB Financial Instruments-Credit Losses 

Subtopic 825–15 (exposure drafted dated December 

20, 2012). 

155The Other Banking Agencies’ regulatory 

capital rules (12 CFR 324.22) allow institutions to 

make an opt-out election for similar accounts. See, 

e.g., 78 FR 55339 (Sept. 10, 2013). 

However, another commenter 

suggested that by excluding the amount 

of the ALLL above 1.25 percent, the 

Original Proposal would have implicitly 

encouraged credit unions to cap their 

ALLL at 1.25 percent, ignoring the 

responsibility to develop the ALLL 

based on portfolio risk. 

In response to the comments received, 

the Board is now proposing to remove 

the 1.25 percent of risk asset limit on 

the amount of the ALLL that can be 

included in the risk-based capital ratio 

numerator. Under this proposal, all of 

the ALLL, maintained in accordance 

with GAAP, would be included in the 

risk-based capital ratio numerator. The 

proposed removal of the limit on the 

ALLL would result in this reserve fully 

counting as capital. The Board believes 

this is appropriate given that credit 

unions will have already expensed 

through the income statement the 

expected credit losses on the loan 

portfolio. In times of financial stress, 

while risk may be increasing (such as 

rising non-current loans), an uncapped 

inclusion of the ALLL in the risk-based 

capital ratio numerator would allow a 

properly funded ALLL to somewhat 

offset the impact of the financial 

stressors on the risk-based capital ratio. 

The Board also believes that this 

proposed change is appropriate given 

the high quality of credit union capital. 

The quality of credit union capital 

should eliminate concerns that the 

ALLL could account for too much of the 

capital required to be held against total 

risk-weighted assets. 

Further, the Board agrees with 

commenters that NCUA’s supervision 

process could address any concerns 

with uncapping inclusion of the ALLL, 

such as artificially slow charge-offs to 

manipulate capital requirements. 

Removal of the limitation in the amount 

of the ALLL included in risk-based 

capital ratio would also address the 

treatment of excess ALLL that was 

excluded from the calculation. 

A significant number of commenters 

also stated that if the Financial 

Accounting Standards Board (FASB) 

changes the accounting standards that 

cause more than inconsequential 

increases to the normal levels of ALLL, 

the Board should increase the limit of 

ALLL to be included in the risk-based 

capital ratio numerator comparable to 

the additional levels of normal ALLL. 

Other commenters suggested that the 

Board eliminate the ALLL cap of 1.25 

percent of risk-weighted assets given the 

high risk weight associated with noncurrent loans. Further, commenters 

suggested elimination of the ALLL cap 

based on the FASB’s proposed 

accounting for credit losses, which, if 

finalized, could result in an increase of 

credit unions’ ALLL by more than 50 

percent. Another commenter suggested 

that language be added to the rule that 

states that the ALLL credit will be 

increased if FASB proposal is 

implemented. Other commenters 

suggested that reducing the ALLL 

allocation would be inconsistent with 

the expected accounting conventions for 

future allowance methodologies. 

The Board notes that eliminating the 

cap on ALLL inclusion in the risk-based 

capital ratio numerator would address 

concerns with FASB’s proposed related 

changes to GAAP.154 However, FASB 

has implied its intent in the upcoming 

Current Expected Credit Loss Model to 

change current GAAP and require 

entities to establish a day one credit loss 

allowance on Purchased Credit 

Impaired (PCI) assets. 

As the entire credit loss allowance 

would be included in a credit union’s 

risk-based capital ratio numerator under 

the proposed rule, the Board is 

requesting specific comment on how a 

final rule should mitigate strategies by 

credit unions to ‘‘purchase’’ a credit loss 

allowance by acquiring PCI assets in an 

acquisition or merger, and thus, 

artificially increase their risk-based 

capital ratio numerator. 

Secondary Capital Accounts 

The Original Proposal would have 

included secondary capital accounts 

included in net worth (as defined in 

§ 702.2) in the risk-based capital ratio 

numerator. 

The Board received no comments on 

the inclusion of this capital element in 

the risk-based capital ratio numerator. 

Accordingly, the Board has decided to 

retain this aspect of the Original 

Proposal in this proposal without 

change. 

Section 208 Assistance 

The Original Proposal would have 

included § 208 assistance included in 

net worth (as defined in § 702.2) in the 

risk-based capital ratio numerator. 

The Board received no comments on 

the inclusion of this capital element in 

the risk-based capital ratio numerator. 

Accordingly, the Board has decided to 

retain this aspect of the Original 

Proposal in this proposal without 

change. 

Call Report Equity Items Not Included 

in the Risk-Based Capital Ratio 

Numerator 

Under the Original Proposal, the 

proposed risk-based capital ratio 

numerator would not have included the 

following Call Report equity items: 

accumulated unrealized gains (losses) 

on available for sale securities; 

accumulated unrealized losses for other 

than temporary impairment (OTTI) on 

debt securities; accumulated unrealized 

net gains (losses) on cash flow hedges; 

and other comprehensive income. In 

designing the proposed rule, the Board 

recognized that the items listed above 

reflected a credit union’s actual loss 

absorption capacity at a specific point in 

time, but included gains or losses that 

may or may not be realized. The Board 

also recognized that including these 

items in the risk-based ratio numerator 

could lead to volatility in the risk-based 

capital ratio measure, difficulty in 

capital planning and asset-management, 

and other unintended consequences.155

Accordingly, the Board chose to exclude 

these items from the risk-based capital 

ratio numerator in the Original 

Proposal. 

The Board received a number of 

comments on the exclusion of 

accumulated unrealized gains and 

losses from the risk-based capital ratio 

numerator in the proposed rule. 

Commenters suggested that to offset the 

effect of unrealized gains or losses, 

credit unions should be allowed to net 

the gain or loss against the investment 

that created it, which would mean 

valuing the investment at book. 

Commenters stated that this would 

make adjustments to the unrealized 

gains or losses have no net effect on the 

calculation. Commenters stated further 

that under the Original Proposal an 

unrealized gain would increase the 

value of the investment in the 

denominator and an unrealized loss 

would decrease the value of the 

investment in the denominator, creating 

volatility. Commenters also suggested 

that with an unrealized loss there is no 

deduction from net worth and the asset 

is still decreased in the risked-based 

asset calculation; thus, a large 

unrealized loss could hide a risk that 

the net worth would have to be reduced 

if the credit union was liquidated. Other 

commenters agreed that including 

unrealized gains and losses could lead 

to volatility in the risk-based capital 

measure, difficulty in capital planning 

and asset-management, and other 

unintended consequences as the 

unrealized gain or loss expands and 

contracts. 

Still other commenters suggested that 

while the Original Proposal would have 


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156 12 U.S.C. 1757(6), 1790d(o)(2)(C) (defining 

‘‘net worth’’), and proposed § 702.2 (defining ‘‘net 

worth’’). 

157See 79 FR 11183, 11211 (Feb. 27, 2014) 

(Proposing to define ‘‘capital’’ as ‘‘the equity, as 

measured by GAAP, available to a credit union to 

cover losses.’’). 

158 702.104(b)(2) 

159See, e.g., HR 719, 113th Cong. (2013) (HR 719 

would have amended the FCUA to allow the Board 

to authorize certain forms of supplemental capital 

that could be counted toward a credit union’s ‘‘net 

worth,’’ as that term is defined in section 

1790d(o)(2)). 

160The Capital Access for Small Businesses and 

Jobs Act, HR 719, was introduced in the House of 

Representatives and referred to the House Financial 

Services Committee during the 113th Congress. 

appropriately left unrealized gains and 

losses on available-for-sale securities 

out of the risk-based capital ratio 

numerator, and explains NCUA’s sound 

reasoning behind that position, the 

proposed high risk weights applied to 

investments would almost completely 

offset this for many credit unions. These 

commenters suggested the high risk 

weights applied to investments would 

reduce some credit unions’ risk-based 

capital ratios as if they had already sold 

their entire portfolio at the loss in 

market values they would expect in an 

unrealized, instantaneous, ‘‘up 300 basis 

points’’ rate-shock scenario. 

As noted earlier, this proposal 

removes the IRR components contained 

in the risk weights, so related concerns 

raised by commenters on the investment 

risk weights should now be moot. 

Due to the changes this proposal 

would make to the assignment of risk 

weights for investments, and in 

response to the comments in agreement 

with the concerns about volatility in the 

risk-based capital ratio that can occur 

with investments, the Board has 

decided to retain this aspect of the 

Original Proposal without change. The 

proposed application of excluding 

accumulated unrealized gains (losses) 

on available-for-sale securities; 

accumulated unrealized losses for OTTI 

on debt securities; accumulated 

unrealized net gains (losses) on cash 

flow hedges, and other comprehensive 

income also would eliminate the added 

complication of an opt-in or opt-out 

approach. 

Other Supplemental Forms of Capital 

Under the Original Proposal, forms of 

supplemental capital, other than 

secondary capital accounts included in 

net worth (as defined in § 702.2), would 

not have been included in the risk-based 

capital ratio numerator. For naturalperson credit unions, the only form of 

supplemental capital the FCUA 

includes in the definition of ‘‘net 

worth’’ is secondary capital that it 

authorizes for low-income credit 

unions.156 The Board did not propose 

including other supplemental forms of 

capital in the risk-based capital ratio 

numerator. 

As a result, the Board received a 

substantial number of comments 

expressing concern about the omission 

of supplemental capital from the riskbased capital ratio numerator. 

A number of commenters suggested 

that the Original Proposal would have 

regulated only the asset side of the 

balance sheet, representing the riskbased capital ratio denominator, while 

depriving credit unions of the flexibility 

to use supplemental capital to address 

the newly introduced capital 

requirement through the risk-based 

capital ratio numerator. Other 

commenters stated that, in order for any 

credit unions but low-income credit 

unions to use supplemental capital to 

meet the risk-based net worth 

requirement, Congress would have to 

amend the FCUA to give NCUA the 

authority to permit that use of 

supplemental capital. In that regard, 

commenters contended that the Board 

should have raised the supplemental 

capital issue with Congress before 

issuing the proposed rule. 

Without being able to include 

supplemental capital in the risk-based 

capital ratio numerator, some 

commenters stated that credit unions 

would be forced to address capital 

concerns by increasing profitability 

(through higher fees and loan rates, 

etc.), shrinking assets, or both; none of 

which they suggested would be in a 

credit union’s best interest. 

A small number of commenters 

suggested that credit unions would not 

need supplemental capital to be 

effective if the Board were to devise a 

risk-based capital regulation that 

enabled credit unions to grow in a 

manner consistent with safety and 

soundness. 

Other commenters protested that 

since the Board had altered the 

definition of capital in the Original 

Proposal, it therefore should also extend 

the risk-based capital ratio numerator to 

include supplemental capital. In making 

the same argument, others noted that 

the risk-based capital ratio numerator as 

proposed already included items that 

are not part of ‘‘net worth’’ as defined 

by the FCUA. 

Commenters generally acknowledged 

that counting supplemental capital as 

part of a credit union’s net worth 

requirement (for all but low-income 

credit unions) would require an 

authorizing amendment to the FCUA, 

but they maintain that, in contrast, 

nothing in the Act prohibits the Board 

from including supplemental capital in 

the risk-based capital ratio numerator. 

More expansively, some commenters 

interpreted the absence of an express 

prohibition in the Act barring the use of 

supplemental capital by any credit 

union for any purpose as implicit 

support for allowing it to be used for 

risk-based purposes only. Under either 

interpretation, commenters urged the 

Board to make supplemental capital a 

component of the risk-based capital 

ratio numerator consistent with the 

proposed definition of capital as 

‘‘equity, as measured by GAAP, 

available to a credit union to cover 

losses.’’ 157

In contrast to the lack of authority for 

federally chartered credit unions, other 

than low-income credit unions, to 

currently accept secondary capital, 

several commenters suggested that the 

laws of some states authorize their 

federally insured state chartered credit 

unions to raise other supplemental 

forms of capital. Therefore, the 

commenters suggested the rule should 

permit those federally insured state 

chartered credit unions that are 

authorized to raise other forms of capital 

under state law to also count that capital 

in the risk-based capital ratio 

numerator. 

Commenters suggested that the FCUA 

already authorizes federally chartered 

credit unions to issue certificates of 

indebtedness, which function as loans 

from the holder to the credit union with 

interest paid to the holder, as well as to 

offer subordinated debt instruments to 

members and non-members. They urged 

the Board to allow FCUs to count those 

certificates of indebtedness, and those 

instruments that meet GAAP capital 

requirements, in the risk-based capital 

ratio numerator. 

Having considered the comments on 

supplemental capital, the Board 

declines to permit credit unions (other 

than low-income credit unions) to 

include other supplemental forms of 

capital in the risk-based capital ratio 

numerator as part of this proposal, 

pending potential Congressional action 

and more specific comments as 

described below.158

Members of Congress have introduced 

legislation in the past that would 

authorize all federally insured credit 

unions to accept supplemental 

capital.159 Individual Board members 

have publicly supported such 

legislation in the past. At this time the 

Board prefers to await the outcome of 

previously proposed legislation that, if 

passed by Congress, would expressly 

authorize supplemental capital as a 

component of net worth,160 and permit 


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4384 Federal Register / Vol. 80, No. 17 / Tuesday, January 27, 2015 / Proposed Rules 

161See U.S. Govt. Accountability Office, GAO– 

04–849, Available Information Indicates No 

Compelling Need for Secondary Capital (2004), 

available at http://www.gao.gov/assets/250/

243642.pdf. 

the Board to decide whether or how to 

include such capital in the net worth 

ratio and the risk-based net worth 

requirement. Individual Board members 

have publicly supported such 

legislation in the past. 

Such authority would also raise a host 

of other complicated issues that would 

need to be addressed through additional 

changes to NCUA’s regulations, 

including providing consumer 

protections, amending NCUSIF payout 

priorities, and imposing prudent 

limitations on the ability of non-lowincome credit union to offer and include 

supplemental capital. 

Although the FCUA does authorize 

federally chartered credit unions to 

issue certificates of indebtedness and 

subordinated debt instruments to 

members and non-members, the ability 

to include them in the risk-based capital 

ratio numerator depends on whether 

such supplemental forms of capital are 

structured to satisfy prudential capital 

and consumer protection 

requirements—issues not addressed in 

this rulemaking. 

The Board does, however, specifically 

request comment on the following 

questions regarding additional 

supplemental forms of capital. 

1. Should additional supplemental 

forms of capital be included in the riskbased capital ratio numerator and how 

would including such capital protect 

the NCUSIF from losses? 

2. If yes, to be included in the riskbased capital ratio numerator, what 

specific criteria should such additional 

forms of capital reasonably be required 

to meet to be consistent with GAAP and 

the FCUA, and why? 

3. If certain forms of certificates of 

indebtedness were included in the riskbased capital ratio numerator, what 

specific criteria should such certificates 

reasonably be required to meet to be 

consistent with GAAP and the FCUA, 

and why? 

4. In addition to amending NCUA’s 

risk-based capital regulations, what 

additional changes to NCUA’s 

regulations would be required to count 

additional supplemental forms of 

capital in NCUA’s risk-based capital 

ratio numerator? 

5. For state-chartered credit unions, 

what specific examples of supplemental 

capital currently allowed under state 

law do commenters believe should be 

included in the risk-based capital ratio 

numerator, and why should they be 

included? 

6. What investor suitability, consumer 

protection, and disclosure requirements 

should be put in place related to 

additional forms of supplemental 

capital? 

104(b)(2) Risk-based Capital Ratio 

Numerator Deductions 

Under the Original Proposal, 

proposed § 702.104(b)(2) would have 

provided that the elements deducted 

from the sum of the capital elements of 

the risk-based capital ratio numerator 

are: (1) The NCUSIF Capitalization 

Deposit; (2) goodwill; (3) other 

intangible assets; and (4) identified 

losses not reflected in the risk-based 

capital ratio numerator. 

The Board received a significant 

number of comments, which are 

outlined in detail below, regarding the 

capital elements that would have been 

deducted from the risk-based capital 

ratio numerator. However, for the 

reasons explained in more detail below, 

the Board has decided to retain most of 

these aspects of the Original Proposal 

with a few changes that are discussed in 

more detail below. 

NCUSIF capitalization deposit. The 

Original Proposal would have addressed 

concerns about the NCUSIF 

capitalization deposit being reflected on 

the NCUSIF’s balance sheet both as 

equity to pay losses and as an asset of 

the insured credit unions. Under the 

Original Proposal, the NCUSIF 

capitalization deposit would have been 

subtracted from both the numerator and 

denominator of the risk-based capital 

ratio.161 This treatment of the risk-based 

capital ratio would not have altered the 

NCUSIF capitalization deposit’s 

accounting treatment for credit unions. 

The Board received a number of 

comments expressing concerns about 

the Original Proposal’s treatment of the 

NCUSIF capitalization deposit. A 

majority of commenters disagreed with 

or questioned the treatment of the 

NCUSIF deposit. Commenters suggested 

that the NCUSIF deposit should not be 

deducted from the risk-based capital 

ratio numerator or denominator. 

Commenters stated that if the riskbased capital ratio numerator is 

intended to reflect ‘‘equity available to 

cover losses in the event of liquidation,’’ 

then the NCUSIF deposit should be 

included because it is one of the most 

reliable assets available to credit unions 

to cover losses. Commenters suggested 

that the only condition under which it 

would not be available is during a 

system-wide catastrophe, in which case 

most other credit union assets, other 

than cash, would similarly be subject to 

substantial losses. Those commenters 

argued there is no reason to believe the 

NCUSIF capitalization deposit would 

not be available to cover losses or that 

it should be excluded from the 

numerator of the risk-based capital ratio. 

Other commenters suggested that 

NCUA has control of these funds so 

credit unions should be able to count 

the deposit toward their capital 

requirement (i.e., the deposit should be 

included in the risk-based capital ratio 

numerator and be counted only as a 

zero-risk item in the risk-based capital 

ratio denominator). 

Other commenters stated that 

although banks expense their deposit 

insurance, credit unions treat the 

deposit as an asset. Commenters stated 

that while it is true that the bank’s 

deposit insurance premiums have 

reduced the bank’s capital, a credit 

union’s capital has been reduced in real 

terms by the lost income the credit 

union would have earned had it placed 

the funds in an earning asset rather than 

in a non-interest-bearing deposit to 

NCUSIF. 

Another commenter stated that it 

appeared that the Board was attempting 

to make the risk-based capital ratio 

numerator comparable to banks, which 

expense their insurance premiums paid 

by eliminating the NCUSIF 

capitalization, but that banks pay and 

expense their premiums for each period 

due and cannot get those funds back. 

The commenter stated further that 

federally insured credit unions, on the 

other hand, not only pay an upfront 

deposit of one percent of insured shares 

and record that as an asset, but also pay 

for and immediately expense periodic 

assessments from NCUA needed to 

bolster the NCUSIF. In addition, the 

commenter stated that federally insured 

credit unions can have their deposits 

returned if, for example, they convert to 

a bank, elect private insurance (in the 

nine states where private insurance is 

permitted), or complete a voluntary 

liquidation, and the NCUSIF 

capitalization deposit is an asset as 

recognized by GAAP, is tangible, and 

easily measured. 

Some commenters suggested that this 

accounting difference is already 

captured as part of the higher leverage 

ratio for credit unions as compared to 

banks. They believe Congress 

established a capital level for credit 

unions two percentage points higher 

than the capital level for banks because 

one percent of a credit union’s capital 

is dedicated to the NCUSIF and another 

one percent of the typical credit union’s 

capital is dedicated to its corporate 

credit union. Those commenters stated 

that if the Board excludes the NCUSIF 

deposit it will create an uneven playing 

field between banks and credit unions 


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162 Department of U.S. Treasury Report titled; 

Credit Unions, 1997, Page 58: ‘‘The one percent 

deposit does present a double-counting problem. 

And it would be feasible for credit unions to 

expense the deposit now, when they are healthy 

and have strong earnings. However, expensing the 

deposit would add nothing to the Share Insurance 

Fund’s reserves, and—as we will explain—better 

ways of protecting the Fund are available. 

Accordingly, we do not recommend changing the 

accounting treatment of the 1 percent deposit.’’ 

163 Id. at page 4–5 and 55–59 

164 12 U.S.C. 1782(c)(1)(B)(iii). 

165NCUA Letter 09–CU–20, Premium 

Assessments; NCUA Letter 09CU–14, Corporate 

Stabilization Fund Implementation; NCUA Letter 

09–CU–02, Letter Corporate Credit Union System 

Strategy. 

that will disadvantage credit unions by 

adjusting for the deposit twice. 

Commenters generally suggested that 

this new approach could bring the 

accounting treatment of the NCUSIF 

deposit into question; that if the deposit 

is not available to cover a credit union’s 

risks during liquidation then that leads 

to the question of whether or not the 

deposit is an asset. Going further, other 

commenters suggested the Board 

reconsider this aspect of the Original 

Proposal, as it implies that the deposit 

is worthless and should be expensed 

versus the current method of 

capitalizing the deposit. 

Conversely, another commenter stated 

that after experiencing the corporate 

credit union meltdown, it has become 

evident that NCUA has the superior 

claim on the deposit and that the credit 

union really cannot claim to own it. 

Still another commenter stated that 

perhaps the NCUSIF deposit should 

have been expensed all along, but 

writing it down now comes at a time 

when generating earnings is already a 

big challenge. 

One commenter suggested that the 

NCUSIF deposit should be treated as an 

investment like Federal Home Loan 

Bank stock, which would mean 

assigning a risk weight to account for 

the possibility of the NCUSIF having to 

use the credit union’s funds beyond 

normal premiums and losing some of 

the credit union’s equity in the NCUSIF. 

The commenter suggested that leaving 

the NCUSIF deposit on the balance 

sheet, assigning it a risk weight, and 

removing the deduction from net worth 

is the best option for accurately 

measuring the ability of each credit 

union to weather losses. Other 

commenters suggested that the deposit 

should be assigned a risk weight of 100 

percent or lower. 

It was suggested that the NCUSIF 

deposit should not be excluded from the 

calculation of risk-based capital ratios at 

all, but that excluding it from the 

denominator penalizes more than 

excluding it from the risk-based capital 

ratio numerator. 

Yet other commenters disagreed, 

suggesting that the NCUSIF deposit be 

excluded from the calculation of riskbased capital altogether. 

One commenter suggested that the 

deposit be treated like any other illiquid 

asset instead of contra-equity. 

The Board has carefully considered 

the comments received and continues to 

believe exclusion of the NCUSIF deposit 

from both the risk-based capital ratio 

numerator and denominator is the 

appropriate way to handle its risk-based 

capital treatment. Accordingly, for all 

the reasons discussed below, the Board 

has decided to retain this aspect of the 

Original Proposal without change. 

The 1997 U.S. Treasury Report on 

Credit Unions supports NCUA’s current 

position of excluding the NCUSIF 

deposit from the risk-based capital ratio 

calculation. The Treasury report 

concluded that the NCUSIF deposit is 

double counted because it is an asset on 

credit union balance sheets and equity 

in the NCUSIF.162 The Treasury noted 

that, in lieu of expensing the NCUSIF 

deposit, holding additional capital is 

necessary to offset risk of loss from 

required credit union replenishment. 

According to comments within the 1997 

Treasury Report, Congress established a 

higher statutory leverage ratio for credit 

unions in part to offset the risk of loss 

from required credit union 

replenishment.163

The Board believes the NCUSIF 

deposit deduction needs to be addressed 

in the risk-based capital ratio, not just 

the leverage ratio, to correct for the 

double-counting concern in those credit 

unions where the risk-based capital 

ratio is the governing requirement. 

The NCUSIF deposit is not available 

for a credit union to cover losses from 

risk exposures on its own individual 

balance sheet in the event of 

insolvency.164 The purpose of the 

NCUSIF deposit is to cover losses in the 

credit union system. The Board is 

required to assess premiums necessary 

to restore and maintain the NCUSIF 

equity ratio at 1.2 percent. Premiums 

were necessary from 2009 through 2011 

as a result of losses. A series of NCUA 

Letters to Credit Unions issued during 

2009 discuss the necessary write-down 

of the one percent NCUSIF deposit and 

required NCUSIF premium expenses 

needed to restore the NCUSIF equity 

ratio.165

The NCUSIF deposit is refundable in 

the event of voluntary credit union 

charter cancellation or conversion. 

However, this aspect does not change 

the unavailability of the NCUSIF 

deposit to cover individual losses while 

the credit union is an active going 

concern, or its at risk stature in the 

event of major losses to the NCUSIF. 

NCUA refunds the NCUSIF deposit only 

in the event a solvent credit union 

voluntarily liquidates, or converts to a 

bank charter or private insurance. 

Consistent with its exclusion from the 

risk-based capital ratio numerator, the 

NCUSIF deposit would also be deducted 

from the denominator under proposed 

§ 702.104(c)(1), which would properly 

adjust the risk-based capital ratio 

calculation and reduce the impact of the 

adjustment. 

Neither the Original Proposal nor this 

second proposal would adjust for the 

NCUSIF deposit twice or put credit 

unions at a disadvantage in relation to 

banks because banks have expensed 

premiums to build the Deposit 

Insurance Fund. 

The Board does not agree with 

commenters who suggested that the 

NCUSIF deposit should be treated as an 

investment similar to FHLB stock. The 

NCUSIF deposit and FHLB stock have 

several fundamental differences. The 

deposit in the NCUSIF results in double 

counting of capital within the credit 

union system. Investments in FHLB 

stock do not. A financial institution 

does not need to change its charter for 

a FHLB stock redemption as a credit 

union must do for a NCUSIF deposit 

refund. Further, unlike FHLB stock, the 

NCUSIF deposit is not an incomeproducing asset. The NCUSIF deposit 

has not paid a dividend since 2006. The 

NCUSIF cannot pay another dividend 

while the Corporate Stabilization Fund 

loan from the Treasury is still 

outstanding. 

The Board is not requiring credit 

unions to expense the NCUSIF deposit, 

and does not believe the risk-based 

capital treatment will lead to a change 

in how this asset is accounted for under 

GAAP. The Board agrees with the U.S. 

Treasury position as stated in its 1997 

Report on Credit Unions. Treasury 

stated expensing the NCUSIF deposit 

would not strengthen the NCUSIF. The 

financial structure of the NCUSIF is 

reasonable and works well for credit 

unions. 

The assignment of a risk weight for 

the NCUSIF has the potential to create 

additional criticisms, as a low risk 

weight may not capture the true nature 

of the account and a high risk weight 

could produce unnecessary concern 

about risk of the NCUSIF. The NCUSIF 

is treated similarly to other intangible 

assets, (e.g. goodwill and core deposits 

intangible assets), as they are not 

available assets upon liquidation. 


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166See, e.g., 12 CFR 324.22. 

Goodwill and Other Intangible Assets 

Under the Original Proposal, goodwill 

and other intangible assets would have 

been deducted from both the risk-based 

capital ratio numerator and 

denominator in order to achieve a riskbased capital ratio numerator reflecting 

equity available to cover losses in the 

event of liquidation. 

Goodwill and 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. 

The Board received a number of 

comments regarding the treatment of 

goodwill under the proposal. 

Commenters suggested that credit 

unions should not be required to 

subtract goodwill even though doing so 

is consistent with Basel III and the 

Other Banking Agencies’ capital 

regulations. One commenter suggested 

that the proposed rule and the treatment 

of goodwill should follow GAAP. 

Another commenter suggested that 

goodwill is an asset and should be 

counted as such. 

Other commenters suggested that 

goodwill should be excluded from the 

risk-based capital calculation because 

goodwill is not immediately available to 

absorb losses in accordance with the 

intended purpose of regulatory capital, 

but that the Board should also consider 

what impact such a change could have 

on merger incentives in the industry. 

Another commenter suggested that 

goodwill not be immediately deducted 

from the numerator of the risk-based 

capital ratio, but instead be phased out 

over a 10-year period, or longer on a 

case-by-case basis. 

Commenters generally suggested that 

the exclusion of goodwill disincentives 

merger activity, which would prevent 

healthy industry consolidation and the 

combining of unhealthy credit unions 

with stronger ones in the future. 

Other commenters suggested that not 

including intangibles resulting from a 

merger in the risk-based capital ratio 

numerator causes a reduction in the 

risk-based capital ratio for non-goodwill 

intangibles, which are not included in 

the numerator and are deducted from 

the numerator when amortized. 

Other commenters stated they agree 

with the proposed treatment of 

goodwill, but that the Board should only 

deduct those items initially included, 

and only to the extent of current (net) 

assets. 

The Board also received a few 

comments on the treatment of other 

intangible assets under the proposed 

rule. Commenters suggested the Board 

should rethink the treatment of the core 

deposit intangible and let GAAP 

determine how core deposit intangible 

is to be written off in fairness to the 

surviving credit union and to encourage 

future mergers of both healthy and 

distressed institutions whether credit 

unions or banks. 

The Board has considered the 

comments and, as explained above, has 

decided to retain the definition of 

goodwill and to clarify the definition of 

other intangibles. However, the Board 

recognizes that requiring the exclusion 

of goodwill and other intangibles 

associated with supervisory mergers and 

combinations that occurred prior to this 

proposal would directly reduce the 

credit union’s risk-based capital ratio. 

The Board is now proposing to amend 

the Original Proposal in a manner that 

would allow credit unions to include 

certain goodwill and other intangibles 

in the risk-based capital ratio 

numerator. In particular, this second 

proposed rule would exclude from the 

definition of goodwill which must be 

deducted from the risk-based capital 

ratio numerator, any goodwill acquired 

by a credit union in a supervisory 

merger or consolidation that occurred 

before the publication of this rule in 

final form. 

The Board notes, however, that this 

proposed change would not change 

financial reporting requirements for 

credit unions to use GAAP to determine 

how certain intangibles are valued over 

time. 

Under this proposal, credit unions 

would still need to account for goodwill 

in accordance with GAAP and the 

amount of excluded goodwill and other 

intangibles is based on the outstanding 

balance of the goodwill directly related 

to supervisory mergers. 

The Board is proposing to allow the 

excluded goodwill until December 31, 

2024. The Board believes this date 

would allow most, if not all, credit 

unions to adjust to this change as they 

continue to value goodwill and other 

intangibles in accordance with GAAP. 

Also, the Board notes that this provision 

would only apply to goodwill and other 

intangibles acquired through 

supervisory mergers or consolidations, 

as that term is defined above, and is not 

available for goodwill and other 

intangibles acquired from mergers or 

consolidations that do not meet this 

definition. This change would allow 

affected credit unions time to revise 

business practices to ensure goodwill 

and other intangibles directly related to 

supervisory mergers do not adversely 

impact their risk-based capital 

calculation. 

In response to commenters who 

sought to include goodwill and other 

intangibles in the risk-based capital 

ratio numerator, the Board reiterates 

that there is a high level of uncertainty 

regarding the ability of credit unions to 

realize the value of these items, 

particularly in times of adverse 

conditions. In addition, the Board notes 

that its proposed approach to other 

intangibles generally mirrors the 

treatment by the Other Banking 

Agencies.166 However, the longer 

implementation period included in this 

proposal would serve to mitigate some 

of the commenters’ concerns regarding 

existing goodwill and other intangibles 

because it would provide affected credit 

unions with approximately a 10-year 

period to write down the goodwill or 

otherwise adjust their balance sheet. 

While the Board is proposing to 

include a provision to address goodwill 

and other intangibles acquired through 

supervisory mergers and consolidations 

completed prior to this rule, the Board 

is now proposing to retain the 

requirement that all other goodwill and 

other intangibles be excluded from the 

risk-based capital ratio numerator as 

they are not available to cover losses. 

Credit unions will need to consider the 

impact future combinations will have 

on both the net worth and risk-based 

capital ratios. For mergers involving 

financial assistance from the NCUSIF, 

this means a credit union with higher 

capital may be able to outbid a 

competing credit union. A credit union 

will need to consider the impact on its 

capital when determining the 

components of a merger proposal, 

which may result in higher costs to the 

NCUSIF. However, stronger capital and 

a risk-based capital measure that is less 

lagging should reduce the number and 

cost of failures, resulting in a net 

positive benefit to the NCUSIF and the 

industry. 

Finally, in order to improve clarity 

about which particular intangible assets 

are deducted from the risk-based capital 

ratio numerator, the Board is proposing 

to revise the definition of other 

intangible assets. Specifically, the Board 

is proposing to exclude servicing assets 

from the amount of intangible assets 

deducted from the risk-based capital 

ratio numerator since they have the 

potential for value in the event of 

liquidation. 

Identified Losses Not Reflected in the 

Risk-Based Capital Ratio Numerator 

The Original Proposal would have 

included a provision to allow for 

identified losses, not reflected as 


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Federal Register / Vol. 80, No. 17 / Tuesday, January 27, 2015 / Proposed Rules 4387 

167The Basel Committee on Banking Supervision 

(BCBS) published Basel III in December 2010 and 

revised it in June 2011, available at http://

www.bis.org/publ/bcbs189.htm. 

168Section 988 of the Dodd-Frank Wall Street 

Reform and Consumer Protection Act obligates 

NCUA’s OIG to conduct MLRs of credit unions that 

incurred a loss of $25 million or more to the 

NCUSIF. In addition, section 988 requires NCUA’s 

OIG to review all losses under the $25 million 

threshold to assess whether an in-depth review is 

warranted due to unusual circumstances. The MLRs 

are available at http://www.ncua.gov/about/

Leadership/CO/OIG/Pages/

MaterialLossReviews.aspx; see also GAO/GGD–98– 

153 (July 1998); GAO–07–253 (Feb. 2007), GAO– 

11–612 (June 2011), GAO–12–247 (Jan. 2012), and 

GAO–13–71 (Jan. 2013). 169See, e.g., 12 CFR 324.32. 

adjustments in the risk-based capital 

ratio numerator, to be deducted. The 

inclusion of identified losses would 

have allowed for the calculation of an 

accurate risk-based capital ratio. 

The Board received no comments on 

this aspect of the proposal. Accordingly, 

the Board has decided to retain this 

aspect of the Original Proposal without 

change. However, the definition for 

identified losses was modified, for 

reasons articulated above, to make it 

clear any such items would be measured 

in accordance with GAAP. 

104(c) Risk-weighted Assets 

In developing the proposed risk 

weights included in the Original 

Proposal, the Board reviewed the Basel 

accords and the U.S. and various 

international banking systems’ existing 

risk weights.167 The Board considered 

the comments contained in MLRs 

prepared by the NCUA’s OIG and 

comments by GAO in their respective 

reviews of the financial services 

industry’s implementation of PCA.168

As previously mentioned, the FCUA 

requires the risk-based measure to 

include all material risks. Accordingly, 

in assigning the originally proposed risk 

weights, the Board considered credit 

risk, concentration risk, market risk, 

IRR, operational risk, and liquidity risk. 

The Board received a number of 

comments expressing general concerns 

about the proposed risk weights. A 

significant number of commenters 

suggested that the Original Proposal did 

not contain sufficient statistical analysis 

of credit union losses or failures, 

quantified and summarized data on 

historical NCUSIF loss experiences, and 

comparisons of the loss or failure rates 

at banks to rationalize the proposed 

asset risk weights. One commenter 

suggested that the risk weights reflect 

‘‘socio-economic reasons’’ instead of 

‘‘reasoned judgment about actual risks.’’ 

A number of commenters argued that 

the absence of rigorous quantitative 

analysis accompanying the proposal’s 

risk weights raises many questions and 

makes it exceedingly difficult to 

respond fully to the agency’s proposal. 

Other commenters contended that the 

proposal provides no explanation of 

how the risk-based ratings were derived 

and how they would directly correlate 

to risks the proposal attempts to 

mitigate. Commenters suggested that the 

Board’s proposed increases to various 

risk weights were excessively blunt 

given the small number of failures and 

the MLR narratives cited in the 

proposed rule. Other commenters 

suggested that some of the risk weights 

appear to be excessive, arbitrary, and/or 

appear to cover all types of risk by 

adopting excessive risk weight amounts. 

A number of commenters suggested 

that the proposed risk weights would 

encourage credit unions to increase 

levels of poorer credit quality consumer 

loans at the expense of higher levels of 

even the strongest, most secure MBLs, 

real estate loans, and longer-term 

investments. A significant number of 

commenters expressed concerns that the 

Original Proposal would have been 

inconsistent in the treatment of the real 

risks associated with some on-balance 

sheet assets when the risk weights of 

various assets were compared to one 

another; e.g., the risk weights for 

delinquent first mortgage loans, 

buildings, prepaid expenses, foreclosed 

properties, investments in CUSOs, and 

any investment with a weighted-average 

life of more than 5 years. 

Other commenters suggested that the 

Board reconsider the limitations of any 

single metric at assessing risk and match 

the consequences of a low risk-based 

capital ratio to the limitations and 

potential inaccuracy of that metric. 

One commenter suggested that, based 

on the proposal, the implied balance 

sheet structure of most credit unions 

would be as follows: (1) Commercial 

lending would be limited to roughly 15 

percent of assets, because of the heavier 

risk weight at higher thresholds; (2) real 

estate lending would be limited to 

approximately 35 percent of assets 

regardless of the repricing structure of 

the loans; (3) home equity loans/second 

lien mortgage loans would be limited to 

10 percent of assets; and (4) the 

remainder of a credit union’s balance 

sheet would be limited to consumer 

loans and very short-term investments 

because of the risk weights. 

A number of commenters suggested 

that asset quality (e.g., number of 

delinquencies, classified loans, and 

charge-offs) should also be taken into 

account in setting the risk weights to 

avoid penalizing credit unions that are 

doing their jobs well. Other commenters 

suggested that the calculation should 

provide relief to well-run credit unions 

that manage their risk appropriately. 

A number of commenters suggested 

that the Original Proposal was biased 

toward lending and against investments, 

but that many credit unions have no 

other option but to purchase 

investments to improve their interest 

income to boost their overall earnings. 

Other commenters stated that the 

proposal created a bias in favor of 

consumer loans and short-term assets, 

which, along with the investment 

portfolio risk weights, would have 

forced credit unions down the yield 

curve to short-duration assets and 

impeded their ability to build capital. A 

number of commenters suggested that 

the risk weight categories and asset 

categories were over generalized. 

A small number of commenters 

suggested that the rule would be better 

balanced if credit to the risk weights 

could be established with a rolling 

average to reward credit unions 

effectively managing their loan risks. 

The Board generally agrees with 

comments related to the need for more 

consistency of risk weights across asset 

classes, and that IRR and credit risk 

should not be commingled in the risk 

weights. Therefore, the Board has 

decided to make corresponding changes 

to the risk weights in this proposal. In 

this second proposal, the Board would 

address credit risk and concentration 

risk to be comparable to the Other 

Banking Agencies.169 The Board 

believes the other types of risks that 

would have been addressed in the 

Original Proposal are either currently 

addressed through supervision or will 

be addressed through alternative 

approaches in the future. In response to 

the comments received, particularly 

those related to investments and 

residential real estate loans, the Board 

believes deviating from the current 

rule’s and Original Proposal’s method 

for assigning risk weights would be 

more consistent with the associated 

credit risk and the risk weights assigned 

by the Other Banking Agencies. 

This proposal would substantially 

change how the risk weights for 

investments would be assigned. Instead 

of assigning the investment risk weights 

based on weighted average life, the 

investment risk weights would be 

assigned based primarily on the credit 

quality of the underlying collateral or 

repayment ability of the issuer. This 

adjustment addresses the 

inconsistencies between the risk 

weights for loans and investments. 

For example, under this proposal 

most first-lien residential real estate 


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170See, e.g., 12 CFR 324.32. 171 12 U.S.C. 1790d(d)(2). 

loans receive a 50 percent risk weight 

and an investment backed by similar 

assets would receive a 50 percent risk 

weight. Under this proposal, a credit 

union managing assets well by avoiding 

concentrations, non-current loans and 

risky investments would realize lower 

total risk-assets and thus a higher riskbased capital ratio. Further details on 

the changes to individual assets are 

addressed in the discussion on 

proposed § 702.104(c)(2) below. 

Regarding support for the risk weights 

themselves, the Board notes that given 

the requirement in section 

216(b)(1)(A)(ii) to maintain 

comparability with the Other Banking 

Agencies’ PCA requirements, NCUA 

generally relied on risk weights assigned 

to various asset classes within the Basel 

Accords and established by the Other 

Banking Agencies’ risk-based capital 

regulations to develop this proposal. 

Based on the comments received, the 

Board believes it has more precisely 

defined the risk weights. NCUA has 

tailored risk weights in this proposal for 

assets unique to credit unions, or where 

a demonstrable and compelling case 

existed based on contemporary and 

sustained performance differences as 

shown in Call Report data to 

differentiate for certain asset classes 

between banks and credit unions, or 

where a provision of the FCUA 

necessitated doing so. Thus, when 

compared to the Original Proposal, this 

second proposal would adjust asset 

classes and recalibrate risk weights, and 

is more comparable to the risk weights 

in the Other Banking Agencies’ capital 

regulations.170

104(c)(1) General 

Under the Original Proposal, 

proposed § 702.104(c)(1) would have 

provided that total risk weighted assets 

include risk-weighted on-balance sheet 

assets as described in § 702.104(c)(2), 

plus the risk-weighted off-balance sheet 

assets in § 702.104(c)(3), plus the riskweighted derivative contracts in 

§ 702.104(c)(4), minus the risk-based 

capital ratio numerator deductions in 

§ 702.104(b)(2). The proposal would 

have required a complex credit union to 

calculate its risk-weighted asset amount 

for its on- and off-balance sheet 

exposures. In the proposal, riskweighted asset amounts would have 

generally been determined by assigning 

an on-balance sheet asset to broad risk 

weight categories according to the asset 

type, collateral, and level of 

concentration. Similarly, risk-weighted 

assets amounts for off-balance sheet 

items would have been calculated using 

a two-step process: (1) Multiplying the 

notational principal or face value of the 

off-balance sheet item by a credit 

conversion factor (CCF) to determine a 

credit equivalent amount, and (2) 

assigning the credit equivalent amount 

to the relevant risk weighted category. A 

credit union would determine its total 

risk weighted assets by calculating (1) 

its risk weighted assets, minus (2) 

goodwill and other intangibles, and 

minus (3) the NCUSIF deposit. 

The Board received no comments on 

the language in this paragraph and has 

decided to retain this aspect of the 

Original Proposal with the following 

two changes. 

First, the Board proposes to add the 

following language to this subsection to 

address the assignment of a risk weight 

should a particular on- or off-balance 

sheet item meet more than one defined 

risk weight category: ‘‘If a particular 

asset, derivative contract, or off-balance 

sheet item has features or characteristics 

that suggest it could potentially fit into 

more than one risk weight category, 

then a credit union shall assign the 

asset, derivative contract, or off-balance 

sheet item to the risk weight category 

that most accurately and appropriately 

reflects its associated credit risk.’’ A 

thorough evaluation of the true credit 

risk associated with such an item would 

be the determining factor for the 

appropriate risk weight. 

Second, the Board proposes to make 

minor conforming amendments to the 

language to further clarify the 

requirements. 

Accordingly, under this proposal 

§ 702.104(c)(1) would provide that riskweighted assets includes risk-weighted 

on-balance sheet assets as described in 

§§ 702.104(c)(2) and (c)(3), plus the riskweighted off-balance sheet assets in 

§ 702.104(c)(4), plus the risk-weighted 

derivatives in § 702.104(c)(5), less the 

risk-based capital ratio numerator 

deductions in § 702.104(b)(2). In 

addition, the section would provide 

further that if a particular asset, 

derivative contract, or off balance sheet 

item has features or characteristics that 

suggest it could potentially fit into more 

than one risk weight category, then a 

credit union shall assign the asset, 

derivative contract, or off-balance sheet 

item to the risk weight category that 

most accurately and appropriately 

reflects its associated credit risk. The 

Board is proposing to add this language 

to account for the evolution of financial 

products that could lead to such 

products meeting the definition of more 

than one risk asset category. If 

necessary, NCUA would publish 

guidance to address these products, if 

and when developed. 

104(c)(2) Risk Weights for On-Balance 

Sheet Assets 

Under the Original Proposal, 

proposed § 702.104(c)(2) would have 

defined the risk categories and risk 

weights to be assigned to each 

specifically defined on-balance sheet 

asset. All on-balance sheet assets would 

be assigned to one of the 10 categories 

and risk weights. 

The Board received a significant 

number of comments on the proposed 

risk-weight categories and the risk 

weights assigned to particular assets and 

has decided to make a number of 

changes to this subsection, which are 

discussed in more detail below. 

Material Risks 

In accordance with section 216(d)(2) 

of the FCUA, which requires NCUA’s 

risk-based capital requirement ‘‘to take 

account of 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,’’ 171 the 

risk weights under the Original Proposal 

would have included elements to 

address credit, concentration, market 

risk, interest rate, and liquidity risk. In 

doing so, proposed § 702.104(c) of the 

Original Proposal would have addressed 

concentration risk by assigning higher 

risk weights to larger percentages of 

assets in MBLs and real estate loans in 

§ 702.104(c). The concentration 

threshold amounts were generally based 

on the average percentage of assets held 

in the asset types. 

The Board has addressed comments 

received on the Original Proposal 

related to specific assets in the preamble 

parts corresponding to the various types 

of assets covered by this proposal 

below. However, the Board received a 

number of general comments on total 

risk-weighted assets. 

A number of commenters stated that 

NCUA did not adequately support the 

proposed risk weights nor show a 

significant correlation between losses 

and the current risk-based capital 

structure. Some commenters argued that 

the proposed risk weights were arbitrary 

and unsupported. Other commenters 

noted that the proposed risk weights did 

not take into account the quality of 

assets, the ability of credit unions to 

manage capital, liabilities on credit 

unions’ balance sheets, or the actual loss 

experience of credit unions. A few 

commenters believed the proposal 

would create a bias against long-term 

lending and investments in favor of 

short-term assets. One commenter stated 


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172There are a few exceptions, most notably 

calculating WAL until the next adjustment date for 

variable-rate obligations. 

that all risk weights should be capped 

at 100 percent. One commenter stated 

that the proposal would essentially 

structure the balance sheet for most 

credit unions so that commercial 

lending would be limited to 15 percent 

of assets, real estate lending would be 

limited to 35 percent of assets, HELOCs 

and second-lien mortgages would be 

limited to 10 percent of assets, and the 

remainder of the balance sheet would be 

limited to short-term investments and 

consumer loans. 

After diligently considering all of the 

comments, and as discussed in more 

detail in the applicable sections, the 

Board is now proposing to make 

significant revisions to the current rule 

and the Original Proposal, which are 

discussed in more detail below, to 

address many of the concerns raised by 

commenters. 

Cash and investment risk weights. In 

general, the Original Proposal would 

have retained the approach used in the 

current rule for measuring risk weights 

for most cash items and investments. 

Consistent with the current rule, the risk 

weights for specific investments 

generally would have been based upon 

the weighted-average life of investments 

(WAL). The WAL is generally calculated 

based on the average time until a dollar 

of principal is repaid.172 Under the 

current rule, a higher risk weight is 

generally assigned to an investment 

with a longer WAL. 

Under the Original Proposal, the 

proposed risk weights for cash and 

investments would have been assigned 

as follows: 

ORIGINAL PROPOSAL—RISK WEIGHTS FOR CASH AND INVESTMENTS

Item 

Proposed 

risk weight 

percent 

Cash on hand .......................................................................................................................................................................................... 0 

NCUA and FDIC issued Guaranteed Notes ............................................................................................................................................ 0 

Direct, unconditional U.S. Government obligations ................................................................................................................................. 0 

Cash on deposit ....................................................................................................................................................................................... 20 

Cash equivalents ..................................................................................................................................................................................... 20 

Total investments with WAL ≤ 1-year ..................................................................................................................................................... 20 

Total investments with WAL > 1-year and ≤ 3-years .............................................................................................................................. 50 

Total investments with WAL > 3-year and ≤ 5-years .............................................................................................................................. 75 

Corporate credit union nonperpetual capital ........................................................................................................................................... 100 

Total investments with WAL > 5-year and ≤ 10-years ............................................................................................................................ 150 

Total investments with WAL > 10-years ................................................................................................................................................. 200 

Corporate credit union perpetual capital ................................................................................................................................................. 200 

The Original Proposal would have 

also lowered the risk weight for direct 

and unconditional U.S. Government 

obligations (FDIC-issued Guaranteed 

Notes, and other U.S. Government 

obligations) from the WAL measure to 

zero percent risk weight, and 

maintained the current zero percent risk 

weight for NCUA-guaranteed assets. 

Finally, the Original Proposal would 

have removed nonperpetual and 

perpetual capital in corporate credit 

unions from the >1–3 year WAL 

category under the current rule and 

assigned those assets their own specific 

risk weights based on factors other than 

the WAL. 

The Board received a large number of 

comments on the risk weights for 

investments. Generally, commenters 

disagreed with the proposed risk 

weights. Specifically, many commenters 

felt that the risk weights were not the 

appropriate place to address IRR and 

that many of the risk weights could act 

to limit credit unions’ investments in a 

way that would be detrimental to the 

individual credit unions and the credit 

union industry. In addition, many 

commenters cited inconsistencies 

between the risk weights for certain 

investments and the risk weights for the 

underlying assets, arguing that this may 

have the unintended consequence of 

encouraging credit unions to obtain 

riskier assets with lower risk weights 

rather than relatively safe investments 

that have much higher risk weights. 

Commenters who sought lower risk 

weights for investment varied in exactly 

how to lower risk weights. Some 

commenters argued that no investment 

should have a risk weight over 100 

percent. Other commenters requested a 

reduced number of risk weight tiers, 

stating that it is more appropriate to 

have a 20 percent risk weight on 

investments with WALs up to five years 

and a risk weight of 100 percent for 

investments that have a WAL greater 

than 5 years. Commenters suggested that 

overall the proposed risk weight 

structure penalizes credit unions for 

investing and unfairly discriminates 

against longer-term investments. Several 

commenters also sought an ‘‘other’’ 

category for investments that would 

allow credit unions to demonstrate why 

certain investments do not warrant the 

risk weight associated with their WAL. 

Still other commenters asked that the 

Board adopt the weights for investments 

that are included in FDIC’s interim final 

rule. 

In addition to requesting lower overall 

risk weights, many of the commenters 

addressing this topic also requested all 

agency and GSE securities receive a 

lower risk weight. Most commenters felt 

that securities offered by a federal 

agency or GSE and overnight Fed Fund 

deposits should have the same zero 

percent risk weight that is applied to 

NCUA- and FDIC-issued guaranteed 

notes and direct, unconditional U.S. 

Government obligations. These 

commenters argued that securities 

offered by agencies other than NCUA 

and FDIC and overnight Fed Fund 

deposits pose little to no risk to the 

investing credit unions and have an 

implicit or, in some cases, explicit 

guarantee of the U.S. Government. 

Further, commenters contend that 

without a lower risk weight on agency 

securities and overnight Fed Fund 

deposits, credit unions are actually 

incentivized to avoid these low-risk 

investments in favor of investments that 

carry greater credit risk, but offer the 

potential for a higher return as both 

types of investments carry the same risk 

weight. Commenters provided the 


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173See, e.g., 12 CFR 324.32. 

174When the Board evaluates the risk of an 

investment type, it is based on criteria such as 

volatility, historical performance of the 

investments, and standard market conventions. 

175See, e.g., 12 CFR 324.32. 

following example to illustrate this 

point: A credit union can invest in a 

private-label, asset-backed security with 

a 5.5-year WAL, or a security backed by 

the guarantee of a GSE with the same 

WAL, and both investments would have 

carried a 150 percent risk weight. 

Some commenters also asked for 

clarification on the risk weight for longterm CDs purchased from FDIC-insured 

institutions and investments in Federal 

Home Loan Banks. 

Further, a majority of the commenters 

addressing this section of the proposed 

rule argued that risk-based capital is not 

the appropriate medium to address IRR. 

Commenters stated that NCUA’s attempt 

to regulate IRR through the risk-based 

capital requirement appeared arbitrary 

and was inconsistent with treatment 

provided to banks by the Other Banking 

Agencies. One commenter stated that, if 

NCUA uses the risk-based capital 

requirement to regulate IRR, it should 

note that shocks of 300 basis points are 

rare and have not been seen since the 

early 1980’s. Further, commenters stated 

that basing risk weights on the WAL 

does not take into account credit risk, 

the funding source for the investments, 

whether the investment is fixed- or 

variable-rate, actual maturity of the 

investment, optionality, or the benefit of 

longer-term investments—all of which, 

commenters argue, provide a better 

evaluation of the risk associated with an 

investment than the WAL. 

Some commenters also noted that the 

proposed risk weights for investments 

would lead to inconsistent treatments 

among various assets. Specifically, 

commenters argued that the risk weights 

on some long-term investments that 

pose a low degree of risk are weighted 

higher than other, riskier assets. To 

support these arguments, commenters 

cited examples that included: A member 

business loan with a seven-year balloon 

would carry a lower risk weight than a 

seven-year bullet agency security; a 

current credit card loan would have a 

lower risk weight than a 5.5-year 

security guaranteed by a GSE; and an 

indirect auto loan with a 130 percent 

loan-to-value would have a lower risk 

weight than a 5.5-year GSE guaranteed 

security. Other commenters questioned 

why the risk weight for a mortgagebacked security is higher than the 

underlying 30-year mortgage that backs 

the security. 

Several commenters questioned how 

the proposal affects the authority in 

§ 701.19, which allows a federal credit 

union to purchase investments to fund 

employee benefit plans without being 

subject to NCUA’s investment rules. 

Generally, commenters requested lower 

risk weights for investments held to 

fund employee benefit plans and life 

insurance contracts held by the credit 

union on its executive-level employees. 

Commenters contend that credit unions 

may be less likely to offer and fund 

employee benefit plans because of the 

risk weights. Further, one commenter 

stated that the proposal does not take 

into account the purpose of the 

investments and their applicability to 

benefit plan funding, potentially 

creating risks from both a fiduciary 

standpoint and the loyalty of executives 

and employees. Several commenters 

also requested that the Board include 

specific risk weights for annuities and 

mutual funds used to fund employee 

benefit programs based on the 

underlying accounts and investment 

strategies. One commenter suggested 

that mutual funds be weighted based on 

the underlying investment strategy. This 

commenter suggested the following 

breakdown: State and federal 

government funds—20 percent; 

Municipal bond strategies—50 percent; 

Asset-backed, mortgage-backed, and 

bank loan funds—100 percent; Other 

funds—150 percent; Bonds—WAL; 

Equity securities—200 percent. Another 

commenter stated that life insurance 

contracts owned by the credit union 

should be rated at 20 percent for AAAand AA-rated insurers. 

The Board generally agrees with 

commenters’ concerns regarding the 

differences between the current riskbased requirements, the Original 

Proposal’s investment risk weights, and 

the risk weights assigned by the Other 

Banking Agencies. As discussed in the 

summary part of the preamble above, 

the Board believes that measures of IRR 

should be based on a credit union’s 

entire balance sheet to take into account 

the offsetting risk effects of assets and 

liabilities (including any benefits from 

derivative transactions). The Board also 

generally agrees with commenters that 

the use of asset-duration risk weights in 

the risk-based capital scheme is overly 

simplistic and does not fully take into 

account potential risk mitigation 

benefits, such as liabilities and 

derivatives. 

The Board agrees that the approach 

taken in the Original Proposal should be 

revised. Accordingly, the Board is now 

proposing to change the risk weights in 

the investment area to more closely 

align them with the risk weights in the 

Other Banking Agencies’ regulations,173

and to handle IRR outliers through 

alternative approaches and possibly a 

separate subsequent rulemaking. 

In particular, the Board is now 

proposing to eliminate the process of 

assigning risk weights for investments 

based on WAL of investments in favor 

of a credit-risk centered approach for 

investments. As discussed earlier in the 

document, the credit risk approach to 

assigning risk weights under this 

proposal is based on applying lower risk 

weights to safer investment types and 

higher risk weights to riskier investment 

types.174 The proposed investment risk 

weights would be similar to the risk 

weights assigned to investments under 

the Other Banking Agencies’ 

regulations,175 which are based on the 

credit-risk elements of the issuer and 

the position of the particular type of 

investment. The proposed changes to 

the risk weights assigned to investments 

are outlined in the following table: 

THIS PROPOSAL—RISK WEIGHTS FOR CASH AND INVESTMENTS

Item 

Proposed 

risk weight 

(percent) 

• The balance of cash, currency and coin, including vault, automatic teller machine, and teller cash ................................................. 0 

• The exposure amount of: 

Æ An obligation of the U.S. Government, its central bank, or a U.S. Government agency that is directly and unconditionally 

guaranteed, excluding detached security coupons, ex-coupon securities, and principal and interest only mortgage-backed 

STRIPS.

Æ Federal Reserve Bank stock and Central Liquidity Facility stock.

• Insured balances due from FDIC-insured depositories or federally insured credit unions ................................................................. ....................


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176Basel Committee on Banking Supervision, 

‘‘International Convergence of Capital Measurement 

and Capital Standards: A Revised Framework, 

Comprehensive Version’’ 214 (June 2006) available 

at http://www.bis.org/publ/bcbs128.pdf (Basel II) 

and Basel Committee on Banking Supervision, ‘‘An 

Explanatory Note on the Basel II IRB Risk Weight 

Functions’’ (July 2005). 177See, e.g., 12 CFR 324.32. 

THIS PROPOSAL—RISK WEIGHTS FOR CASH AND INVESTMENTS—Continued 

Item 

Proposed 

risk weight 

(percent) 

• The uninsured balances due from FDIC-insured depositories, federally insured credit unions, and all balances due from privately-insured credit unions ................................................................................................................................................................. 20 

• The exposure amount of: 

Æ A non-subordinated obligation of the U.S. Government, its central bank, or a U.S. Government agency that is conditionally 

guaranteed, excluding principal and interest only mortgage-backed STRIPS.

Æ A non-subordinated obligation of a GSE other than an equity exposure or preferred stock, excluding principal and interest 

only GSE obligation STRIPS.

Æ Securities issued by PSEs in the United States that represent general obligation securities.

Æ Investment funds whose portfolios are permitted to hold only part 703 permissible investments that qualify for the zero or 

20 percent risk categories.

Æ Federal Home Loan stock.

• Balances due from Federal Home Loan Banks.

• The exposure amount of: 50 

Æ Securities issued by PSEs in the U.S. that represent non-subordinated revenue obligation securities.

Æ Other non-subordinated, non-U.S. Government agency or non-GSE guaranteed, residential mortgage-backed securities, excluding principal and interest only STRIPS.

• The exposure amount of: 100 

Æ Industrial development bonds.

Æ All stripped mortgage-backed securities (interest only and principal only STRIPS).

Æ Part 703 compliant investment funds, with the option to use the look-through approaches.

Æ Corporate debentures and commercial paper.

Æ Nonperpetual capital at corporate credit unions.

Æ General account permanent insurance.

Æ GSE equity exposure and preferred stock.

• All other assets listed on the statement of financial condition not specifically assigned a different risk weight.

• The exposure amount of perpetual contributed capital at corporate credit unions ............................................................................. 150 

• The exposure amount of: 300 

Æ Publicly traded equity investment, other than a CUSO investment.

Æ Investment funds that are not in compliance with part 703 of this Chapter, with the option to use the look-through approaches.

Æ Separate account insurance, with the option to use the look-through approaches.

• The exposure amount of non-publicly traded equity investments, other than equity investments in CUSOs .................................... 400 

• The exposure amount of any subordinated tranche of any investment, with the option to use the gross-up approach ................... 1,250 

The Board disagrees with commenters 

who suggested that all investments 

should be assigned a risk weight of 100 

percent or less. Assigning a maximum of 

100 percent risk weight to all 

investments would not sufficiently 

capture the risk of equity or leveraged 

investments, and would unjustifiably 

differ from the risk weights used by the 

Other Banking Agencies. Based on the 

extensive analyses performed by the 

Basel Committee 176 and the Other 

Banking Agencies in the development of 

their regulations, the Board believes the 

Other Banking Agencies’ risk weights 

sufficiently reflect the credit risk in 

their respective categories. As the same 

type of investment will perform on a 

credit risk basis identically for credit 

unions and banks, in general, variations 

in this proposal from the approach 

taken by the Other Banking Agencies’ 

regulations 177 are due to differences in 

credit union investments, the 

investment authorities of credit unions, 

or are intended to offer credit unions a 

simplified but equivalent approach for 

applying risk weights. 

Another area where commenters 

expressed concern was with the risk 

weights assigned to U.S. Government 

agency and GSE securities under the 

Original Proposal. The Board believes it 

has addressed these concerns in this 

second proposed rule by removing the 

IRR component from the risk weights for 

investments. The Board also believes 

this concern would be addressed for 

these and other investment types by 

assigning risk weights on long-term 

assets only based on the credit risk, and 

not IRR. For example, an 11-year WAL 

non-subordinated mortgage-backed 

security issued by a GSE would have 

been assigned a 200 percent risk weight 

under the Original Proposal, while a 2- 

year WAL of the same security type 

would have been assigned a 50 percent 

risk weight. Conversely, under this 

second proposed rule, both securities 

would be assigned a 20 percent risk 

weight, which is based only on the 

credit risk of the investment type. 

The Board has also assigned risk 

weights to types of investments, such as 

corporate bonds, asset-backed securities 

and corporate equities, which are 

generally not available to federal credit 

unions. These risk weights were 

assigned to account for the fact that 

federally insured state chartered credit 

unions sometimes have investment 

authorities that allow then to invest in 

assets not available to FCUs. In 

addition, § 701.19 permits federal credit 

unions to purchase investments to fund 

employee benefits that are not otherwise 

available to federal credit unions under 

NCUA’s investment regulations. For 

these types of assets, the Board has 

assigned risk weights that it believes 

reflect the risk of the assets that could 

be used to fund employee benefit plans. 

The Board disagrees with commenters 

who suggested lower risk ratings should 

be applied to such assets because they 

were purchased for employee benefit 

plans. However, the Board does seek 

comment on whether lower risk weights 

should be applied to investments that 

fund employee benefit plans in which 

all of the risk of loss is held by the 


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178Public Law 111–203, Title IX, Subtitle C, 

section 939A, 124 Stat. 1376, 1887 (July 21, 2010). 

179Basel Committee on Banking and Supervision, 

An Explanatory Note on the Basel II IRB Risk 

Weight Functions, July 2005, available at http://

www.bis.org/bcbs/irbriskweight.htm. ‘‘The model 

should be portfolio invariant, i.e. the capital 

required for any given loan should only depend on 

the risk of that loan and must not depend on the 

portfolio it is added to. This characteristic has been 

deemed vital in order to make the new IRB 

framework applicable to a wider range of countries 

and institutions.’’ 180See, e.g., 12 CFR 324.32(k). 181See, e.g., 12 CFR 324.32(l)(5). 

beneficiary. For example, how should 

NCUA assign a risk weight to an equity 

investment on a credit union’s 

statement of financial condition that 

represents a holding in a credit union 

executive’s 457(b) plan? 

The Board chose not to assign risk 

weights based on credit ratings, as at 

least one commenter requested. 

Consistent with the Dodd-Frank Wall 

Street Reform and Consumer Protection 

Act of 2010, which required agencies to 

remove all references to credit ratings, 

NCUA does not use credit ratings to 

determine risk weights for part 702.178

Loans generally. NCUA received a 

substantial number of comments 

regarding the risk weights assigned to 

loans in general. A number of 

commenters stated that the proposed 

risk weights for various types of loans 

were overly broad, arbitrary, punitive, 

and did not take into account the 

individual underwriting terms, pricing 

and risk management of individual 

credit unions. Other commenters 

suggested that the proposed risk weights 

for loans failed to consider loan-to-value 

ratios, fixed- versus variable-rate loans, 

repricing opportunities, maturity length, 

and other risk mitigation strategies. Still 

other commenters stated that the quality 

of the loan portfolio is the most 

determinant of risk to capital. A number 

of commenters stated that all loans are 

not the same like the rule is treating 

them. Other commenters objected to 

laddering quantitative risk-based 

metrics for loans because doing so 

ignores credit union’s strategic and 

business plans, taking growth 

management away from the board of 

directors. 

However, the Board cannot uniformly 

use these criteria to measure minimum 

capital requirements for credit unions 

because of the indeterminate reporting 

that would be necessary and the myriad 

of variables available to establish a 

sound lending program. This second 

proposed rule is consistent with the 

regulatory capital models under the 

Basel framework, which are portfolio 

invariant.179 Being ‘‘portfolio invariant’’ 

means that the capital charge for a 

particular loan category is consistent 

among all credit union portfolios based 

on the loan characteristics, rather than 

the individual credit union’s portfolio 

performance or characteristics. Taking 

into account each credit union’s 

individual characteristics would be too 

complicated for both credit unions and 

NCUA for minimum regulatory capital 

requirements. 

A number of commenters stated that 

assigning risk weights to loans based on 

the risk of the underlying loans makes 

more sense than on the size of the 

portfolio. Other commenters suggested 

that if IRR is included in investment 

risk weights, it should also be included 

in loan risk weights. 

As noted in the summary section, the 

Board believes the revised loan 

concentration risk thresholds and 

corresponding risk weights under this 

proposal would address only credit risk 

exposures, and to a limited extent 

concentration risk exposures. While 

certain loans contain a substantial 

amount of IRR, the Board does plan to 

consider alternative approaches to 

address IRR separately from this 

rulemaking. 

Several commenters suggested that 

the Board remove the higher-risk 

components for delinquent loans 

because the ALLL balance is already 

factored into the formula. Conversely, 

other commenters stated that they 

appreciated that the Original Proposal 

assigned delinquent and non-delinquent 

loans different risk weights. 

At least one commenter suggested that 

troubled debt restructuring loans be 

risk-weighted at 50 percent. 

This proposal would maintain a 

separate, higher risk weight for loans 

that are not current, but would also, as 

discussed in detail above, eliminate the 

1.25 percent cap on the ALLL in the 

risk-based capital ratio numerator. The 

Board believes the proposed higher risk 

weight that would be assigned to noncurrent loans is warranted because such 

loans have a higher probability of 

default when compared to current loans. 

Non-current loans are more likely to 

default because repayment is already 

impaired making them one step closer 

to default compared to current loans. 

Additionally, a higher risk weight for 

non-current loans is consistent with the 

risk weights assigned by the Other 

Banking Agencies.180

A small number of commenters 

suggested that share-secured loans 

should have a risk weight between zero 

and 25 percent since they are fully 

secured. Also, some commenters noted 

that secured consumer loans generally 

pose less risk than unsecured consumer 

loans. The Board generally agrees that 

share-secured loans pose less risk to 

credit unions than other types of 

secured loans. Accordingly, under this 

second proposal share-secured loans 

would be assigned a 20 percent risk 

weight. The board does not believe a 

risk weight of zero percent is warranted 

because of the small amount of 

operational and transaction risk present 

in share-secured loans. A risk weight of 

20 percent for share-secured loans is 

proposed because it recognizes the low 

amount of risk and is consistent with 

the 20 percent risk weight for 

contractual compensating balances on 

commercial loans that are also secured 

by shares on deposit. 

The Board also agrees unsecured 

consumer loans generally pose more 

risk than secured consumer loans, and 

is therefore proposing to assign a lower 

risk weight of 75 percent to secured 

consumer loans and a higher risk weight 

of 100 percent to unsecured consumer 

loans. The 100 percent risk weight for 

unsecured consumer loans would be 

comparable to the Other Banking 

Agencies’ risk weight for consumer 

loans.181 Because secured consumer 

loans pose less risk to a credit union 

than unsecured consumer loans, the 

Board is proposing to assign secured 

consumer loans a lower risk weight of 

75 percent compared to the 100 percent 

risk weight for unsecured consumer 

loans. 

A small number of commenters 

suggested that loans held for sale should 

have a 25 percent risk weight. Other 

commenters suggested that loans held 

for sale should have a 50 percent risk 

weight. 

After considering the comments 

received, the Board continues to believe 

that loans held for sale carry identical 

risks to the originating credit union as 

other loans held in the credit union’s 

portfolio until transfer to the purchaser 

is final. Until the originating credit 

union transfers the loan to the 

purchaser, the originating credit union 

bears the risk of the loan defaulting. If 

the loan defaults prior to the finalization 

of the transfer, the originating credit 

union must account for any loss from 

the defaulting loan, similar to other 

loans held on the credit union’s books. 

Because they carry the same risks, loans 

held for sale would be assigned a risk 

weight based on the loan’s type. 

Commercial Loans. The Original 

Proposal would have increased the risk 

weights for member business loans 

(MBLs) from the current rule to address 

the historical correlation between high 

concentrations of MBLs and higher risk 

to the credit union. As noted in the 


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182 GAO found in its 2012 report that credit 

unions who failed had more MBLs as a percentage 

of total assets than peers and the industry average. 

See. U.S. Govt. Accountability Office, GAO–12–247, 

Earlier Actions Are Needed to Better Address 

Troubled Credit Unions 17 (Jan. 2012) available at 

http://www.gao.gov/products/GAO-12-247. 

183U.S. Government Accountability Office, GAO– 

13–704T, Causes and Consequences of Recent 

Community Bank Failures 4 (June 12, 2013) 

available at http://www.gao.gov/assets/660/

655193.pdf. 

184See 12 CFR 723.1. 

185See 12 CFR 723.20. 

186Under the current rule, the Original Proposal 

and this second proposal, concentration risk is 

accounted for in commercial and real estate loans 

because historically this is where credit unions 

have experienced concentration risk problems. 

187The current MBL risk weights were converted 

to a comparable risk weight by dividing the current 

risk weight by eight percent, with eight percent 

representing the level of risk weighted capital 

needed to be adequately capitalized. In the current 

rule total MBLs less than the threshold 15 percent 

of assets receive a six percent risk weight, which 

is equivalent to a 75 percent risk weight under this 

proposal (six percent divided by eight percent). The 

next threshold in the current regulation for total 

MBLs from 15 percent to 25 percent of assets 

received an eight percent risk weight, which is 

equivalent to a 100 percent risk weight under this 

proposal (eight percent divided by eight percent) 

and the highest concentrations of MBLs received a 

14 percent risk weight, which is equivalent to a 175 

percent risk weight under the proposal (14 percent 

divided by eight percent). 

188This is consistent with the Other Banking 

Agencies’ capital rules (e.g., 12 CFR 324.32), which 

maintain a 100 percent risk weight for commercial 

real estate (CRE) and includes a 150 percent risk 

weigh for loans defined as high-volatility 

commercial real estate (HVCRE). See, e.g., 78 FR 

55339 (Sept. 10, 2013). 

189Under the current rule the entire balance of 

MBLs outstanding, including any amount partially 

guaranteed by a U.S. Government agency, is 

included in the risk weight for MBLs (i.e., the 

equivalent risk-weight under the current rule for an 

MBL that is 75 percent government guaranteed is 

the same as the risk weight for any other MBL. 

Thus, this proposed rule would be more favorable 

because it would assign a low risk weight of 20% 

to the portion of the commercial loan with a U.S. 

Government guarantee. This is in addition to the 

lower risk weight that would be assigned to nonowner occupied one-to-four-family residential real 

estate loans that would not be risk-weighted as 

commercial loans under this proposal. 

Original Proposal, many of the largest 

losses the NCUSIF has experienced over 

its history have occurred in credit 

unions with high concentrations of 

MBLs.182 In addition, the failures of 

many small banks between 2008 and 

2011 were largely driven by high 

concentrations of commercial loans.183

For purposes of the Original Proposal, 

‘‘member business loans outstanding’’ 

would have consisted of loans 

outstanding that qualified as MBLs 

under NCUA’s definition,184 or under a 

state’s NCUA-approved definition.185 If 

a loan qualified as a MBL when it is 

originated, it would have remained so 

until it had been repaid in full, sold, or 

otherwise disposed of. 

Consistent with the current rule, the 

Original Proposal would have applied 

risk weights to MBLs as a percentage of 

total assets. As a credit union’s 

concentration in particular asset classes 

increased, incrementally higher levels of 

capital would have been required.186

The following table shows a comparison 

of the current rule and the Original 

Proposal: 

COMPARISON—MBL COMPONENTS OF THE CURRENT RULE AND ORIGINAL PROPOSAL

Total MBLs 

Current rule MBL risk 

weights187— 

(converted for 8% adequately capitalized level) 

Original proposal MBL 

risk weights 

0 to 15% of Assets .................................................................................................................. 75% 100%188

>15 to 25% of Assets .............................................................................................................. 100% 150% 

Amount over 25% .................................................................................................................... 175% 200% 

Under the Original Proposal, MBLs 

that were at least 75 percent guaranteed 

by the federal government, typically by 

the Small Business Administration 

(SBA) or U.S. Department of 

Agriculture, would have received a risk 

weight of 20 percent regardless of the 

percent of the credit union assets they 

represented.189

A substantial number of commenters 

addressed MBLs and generally 

disagreed with the proposed risk 

weights in the Original Proposal, noting 

that the risk weight assigned to 

commercial loans under the Other 

Banking Agencies’ capital regulations 

would have been lower for such loans 

when held in higher concentrations. 

There were, however, a few 

commenters that agreed that higher risk 

weights should be applied to MBLs held 

in higher concentrations. 

Many commenters objected to the 

Board’s methodology for assigning risk 

weights to MBLs based on 

concentration. Other commenters 

disagreed with NCUA’s methodology of 

assigning risk weights based on 

concentrations of MBLs compared to 

total assets. These commenters argued 

that risk weights based on concentration 

levels do not take into account all 

pertinent information to accurately 

determine risk. Some commenters 

believed that risk weights should be 

assigned based on the type of loan, 

specifically separating loans by business 

purpose (commercial, agricultural, or 

construction and development). Some of 

these commenters suggested the Board 

should address concentration risk 

through supervision rather than through 

a rulemaking. 

Some commenters questioned the 

interplay between exemptions from the 

statutory cap on MBLs and higher risk 

weights for credit unions that exceed 

the cap. These commenters pointed out 

that many credit unions have been given 

an exemption from the statutory MBL 

concentration limit. Some of these 

commenters stated that the proposed 

risk weights would nullify the 

exemptions included in the Federal 

Credit Union Act and may lead some 

credit unions to discontinue business 

lending, particularly in the area of 

agriculture. To that end, commenters 

requested a variety of solutions. Some 

commenters believed credit unions 

exempt from the statutory MBL cap 

should be given more time to comply 

with the MBL risk weights, while other 

commenters argued there should be a 

separate set of risk weights for exempt 

credit unions. Finally, some 

commenters requested that the Board 

allow credit unions exempt from the 

statutory MBL cap to continue following 

the risk weights in the current rule. 

Higher capital requirements for 

concentrations of MBLs exist in the 

current rule and the Board believes 

completely eliminating them would be 

a step backwards in matching risks with 

minimum risk-based capital 

requirements. Credit unions with high 

commercial loan concentrations are 

particularly susceptible to changes in 

business conditions that can affect 

borrower cash flow, collateral value, 

and other factors increasing the 

probability of default. 

NCUA does currently review credit 

concentrations during examinations as 

commenters recommended. However, as 

discussed in the summary section, the 


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190See 12 U.S.C. 1790d(d)(2). 

191 International Convergence of Capital 

Measurement and Capital Standards—June 2006. 

Basel Committee on Banking Supervision. 

192See U.S. Govt. Accountability Office, GAO– 

12–247, Earlier Actions Are Needed to Better 

Address Troubled Credit Unions (Jan. 2012) 

available at http://www.gao.gov/products/GAO–12– 

247. 

193OIG Capping Report on Material Loss Reviews, 

Report # OIG–10–20, November 23, 2010. Also see 

Material Loss Review of Telesis Community Credit 

Union, Report # OIG–13–05, March 15, 2013. 

194This is comparable with the other Federal 

Banking Regulatory Agencies’ capital rules (e.g., 12 

CFR 324.32), which maintain a 100 percent riskweight for commercial real estate (CRE) and 

includes a 150 percent risk-weight for loans defined 

as high volatility commercial real estate (HVCRE). 

See, e.g., 78 FR 55339 (Sept. 10, 2013). Basel 

Committee on Banking Supervision, International 

Convergence of Capital Measurement and Capital 

Standards, June 2006, ‘‘In view of the experience 

in numerous countries that commercial property 

lending has been a recurring cause of troubled 

assets in the banking industry over the past few 

decades, Committee holds to the view that 

mortgages on commercial real estate do not, in 

principle, justify other than a 100% risk weight of 

the loans secured.’’ Available at http://www.bis.org/ 

publ/bcbs128.htm. 

195See, e.g., 12 CFR 324.32(f). 

196 Id. 

197The effective capital rate represents the 

blended percentage of capital necessary for a given 

level of commercial loan concentration. For this 

proposal’s figures, the calculation uses 10% as the 

level of risk-based capital to be well capitalized 

under this proposal. 

198NCUA Letter to Credit Unions, 14–CU–06, 

Taxi Medallion Lending, April 2014. Financial 

Institution Letter, Prudent Management of 

Agricultural Credits Through Economic Cycles, 

FIL–39–2014, July 16, 2014. 

FCUA requires that NCUA’s risk-based 

net worth requirement account for 

material risks that the six percent net 

worth ratio may not provide adequate 

protection, which would include credit 

concentration risks.190

Basel II states, ‘‘risk concentrations 

are arguably the single most important 

cause of major problems in banks.’’ 191

In addition, GAO specifically 

recommended that the Board continue 

to address concentration risk in the riskbased capital requirement. GAO found 

in its 2012 report that credit unions that 

failed had more MBLs as a percentage 

of total assets than peers and the 

industry average.192 GAO advised the 

Board to revise NCUA’s PCA 

requirements to take into account credit 

unions with a high percentage of MBLs 

to total assets. In addition, NCUA’s OIG 

recommended in MLRs that the Board 

increase the risk weights assigned to 

MBLs, citing numerous and excessive 

NCUSIF losses related to MBLs, 

including a number of large credit 

unions with high concentrations of 

MBLs.193

However, after consideration of the 

comments, the Board is proposing to 

modify the approach to MBLs taken in 

the Original Proposal assigning risk 

weights to ‘‘commercial loans’’ rather 

than ‘‘MBLs.’’ Under this second 

proposal the risk weights assigned to 

commercial loans would generally be 

consistent with those assigned by Other 

Banking Agencies and with the 

objectives of the Basel Committee on 

Banking Supervision.194 This proposal 

reduces the number of commercial loan 

concentration thresholds from two to 

one, with a single concentration 

threshold at 50 percent of total assets. 

Applicable commercial loans less than 

the 50 percent threshold would be 

assigned a 100 percent risk weight, and 

commercial loans over the threshold 

would be assigned a 150 percent risk 

weight. Commercial loans that are not 

current would be assigned a 150 percent 

risk weight. This change to a single, 

higher concentration risk threshold 

would simplify the risk weight 

framework and calibrate it to only pick 

up outliers. The concentration threshold 

for commercial loans is well over two 

standard deviations from the mean. 

Based on December 2013 Call Report 

data, all but 12 credit unions with total 

assets of $100 million or greater operate 

at a level in which the risk weights 

assigned to commercial loans would be 

similar to the risk weight assigned by 

the Other Banking Agencies.195

Further, the 50 percent threshold and 

the risk weights of 100 percent and 150 

percent result in nearly identical capital 

requirements, as compared to the 

current rule, for high concentrations of 

commercial loans. This creates parity to 

the Other Banking Agencies’ rules196 for 

virtually all credit unions, and allows 

credit unions exempt from the MBL cap 

(with very high concentration levels) to 

continue to operate under effectively the 

same capital requirements of the current 

rule. Further, none of the credit unions 

that would be subject to the 

concentration threshold have material 

variations in the type of their MBLs. So 

such an approach would add significant 

complexity to the rule with no benefit. 

Commercial loan concentration (percent of total assets) 

15% 20% 50% 75% 100% 

Effective Capital Rate:197

Current Rule ..................................................................................... 6.0% 6.5% 10.4% 11.6% 12.2% 

This Proposal .................................................................................... 10.0% 10.0% 10.0% 11.7% 12.5% 

The Board also disagrees that 

concentration thresholds for commercial 

loans should vary based on the business 

purpose or underlying collateral. 

Utilizing specific commercial loan type 

or collateral loss history is not a reliable 

or consistent method for assigning risk 

weights in a regulatory model. Nor is it 

consistent with the Basel framework or 

the Other Banking Agencies’ capital 

models. All commercial asset classes 

experience performance fluctuations 

with variations in business cycles. Some 

sectors that have experienced minimal 

losses are now pre-disposed to 

heightened credit risk. Both NCUA and 

FDIC have recently addressed these 

types of exposures in respective Letters 

to Credit Unions and Financial 

Institution Letters.198

A large number of commenters 

addressing MBLs argued that the risk 

weights for credit unions should be 

lower than the risk weights employed 

by FDIC for banks. Commenters noted 

that the proposed risk weight of 100 

percent for total MBLs of zero to 15 

percent of total assets was the same as 

the risk weight for commercial loans 

under FDIC’s interim final regulation. 

Commenters argued, however, that 

credit unions have historically had a 

lower loss rate on MBLs than 

community banks had for commercial 

loans. These commenters argued that 

since credit unions have a lower 

historical loss rate than banks, the risk 

weights assigned to MBLs should also 

be lower. Other commenters noted that 

NCUA’s MBL regulation is more 

conservative than commercial lending 

regulations for banks, and, therefore, at 

a minimum the Board should adopt a 

100 percent risk weight, regardless of 

concentration, to mirror the commercial 

loan risk weights for banks. 

The Board does not believe the 

contemporary variances between bank 

and credit union losses on commercial 

loans are substantial enough to warrant 

assigning lower risk weights to 


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199NCUSIF losses from MBLs are a recurring 

historical trend. The U.S. Treasury Report on Credit 

Union Member Business Lending discusses 16 

credit union failures from 1987 to 1991 that cost the 

NCUSIF over $100 million. Department of the 

Treasury, Credit Union Member Business Lending 

(Washington DC January 2001). 

200See, e.g., 12 CFR 324.33. 201See, 12 U.S.C. 324.32(a). 

202This is comparable with the Other Banking 

Agencies’ capital rules (e.g., 12 CFR 324.32), which 

maintained the 50 percent risk weight for one-tofour-family real estate loans that are prudently 

underwritten, not 90 days or more past due, and not 

restructured or modified, and a 100 percent risk 

weight for such loans otherwise. See, e.g., 78 FR 

55339 (Sept. 10, 2013). 

commercial loans held by credit unions. 

Credit unions’ commercial loan loss 

experience is comparable to community 

banks after adjusting for asset size. The 

recent loss experience for credit unions 

and banks is very similar. 

3 Year average loss history 

Credit unions 

>$100M in 

assets 

Banks $100M 

to $10B in 

assets 

Commercial & Industrial .......................................................................................................................................... 0.75 0.78 

Further, credit unions’ long-term 

historical MBL losses are somewhat 

understated because the NCUA’s Call 

Report did not collect separate MBL 

data until 1992. Thus, significant MBL 

losses experienced in the late 1980s and 

early 1990s are not included in the longterm historical credit union MBL loss 

data.199

Some commenters also questioned the 

disparity between NCUA’s treatment of 

unfunded commitments and the 

treatment in Basel III. For this second 

proposal, the Board has adjusted the 

treatment for unfunded MBL 

commitments to be more comparable to 

the Other Banking Agencies’ rules.200

Under this proposal, the definition of 

‘‘commercial loans,’’ as discussed in the 

definition section of this preamble, 

would: (1) include all commercial 

purpose loans regardless of dollar 

amount; (2) exclude one-to-four-family 

non-owner occupied first-lien real estate 

loans, which would be considered 

residential real estate loans for the 

purpose of assigning risk weights in this 

proposal; (3) exclude any loans secured 

by a vehicle generally manufactured for 

personal use; (4) assign to the portion of 

a commercial loan that is insured or 

guaranteed by the U.S. Government, 

U.S. Government agency, or a public 

sector entity a lower risk weight of 20 

percent and not count such loans 

toward the 50 percent of assets 

concentration threshold; and (5) assign 

to any amount of a contractual 

compensating balance associated with a 

commercial loan and on deposit in the 

credit union a 20 percent risk weight 

and not count such amounts toward the 

50 percent of assets concentration 

threshold. The revised definition of 

commercial loan would better capture 

the loans made for a commercial 

purpose that have similar risk 

characteristics. The portion of a 

commercial loan that is insured or 

guaranteed by the U.S. Government, 

U.S. Government agency, or a public 

sector entity would be assigned a lower 

risk weight of 20 percent and would not 

count toward the 50 percent of asset 

threshold. This provision is comparable 

to the Other Banking Agencies.201 The 

amount of a contractual compensating 

balance associated with a commercial 

loan and on deposit in the credit union 

would receive a 20 percent risk weight 

and not count toward the 50 percent of 

assets concentration threshold since the 

credit union has the ability to apply the 

compensating balance against the 

amount owed, lowering the potential 

loss exposure. This provision would be 

unique to credit unions but 

appropriately reduces the risk weight 

due to the existence of the 

compensating balances. The Board 

believes these changes would encourage 

the use of government guarantees and 

compensating balances and provide 

credit unions with additional methods 

to serve commercial borrowers while 

reducing their minimum capital 

requirement without increasing risk to 

the NCUSIF for commercial loan losses. 

Residential real estate loans. The 

current standard approach to assigning 

risk weights in part 702 of NCUA’s 

regulations establishes higher capital 

requirements for only ‘‘long term’’ real 

estate loans, and excludes loans that reprice, refinance, or mature within five 

years or less. By excluding loans that reprice, refinance, or mature within five 

years or less from higher capital 

requirements, as a result, the current 

rule does not adequately account for 

credit unions that have high real estate 

loan concentrations. 

Additionally, junior-lien real estate 

loans, which have a significantly higher 

loss history, are assigned the same risk 

weight as first-lien mortgage real estate 

loans under the current rule. As a result, 

the current real estate loan risk weights 

incentivize credit unions to structure 

their mortgage products to minimize 

their capital requirements, which can 

impact the marketability of such loans. 

As discussed in more detail below, the 

Original Proposal would have made a 

number of changes to the current rule to 

address these concerns. 

Consistent with the current rule, the 

Original Proposal would have continued 

to exclude from the real estate risk 

weights those real estate loans reported 

as MBLs. The Original Proposal would 

have recognized the lower loss history 

for current, prudently written first-lien 

real estate-secured loans by assigning a 

lower risk weight of 50 percent to the 

first 25 percent of assets.202 To account 

for concentration risk, the proposal 

would have raised the risk weight for 

first-lien real estate loans between 25 

and 35 percent of assets from 50 percent 

to 75 percent. First-lien real estate loans 

over 35 percent of assets would have 

been assigned a 100 percent risk weight. 

The threshold of 25 percent was based 

on the average percentage of first-lien 

real estate loans to total assets, which, 

as of June 30, 2013, was 24.9 percent for 

complex credit unions, as defined under 

the current rule. 

Under the Original Proposal, if a 

credit union held the first- and juniorliens on a property, and no other party 

held an intervening lien, the credit 

union could have treated the combined 

exposure as a single loan secured by a 

first lien for the purpose of assigning the 

risk weight. First-lien real estate loans 

assigned to the 50 percent risk weight 

category could not have been 

restructured or modified loans. Firstlien real estate loans modified or 

restructured on a permanent or trial 

basis solely under the U.S. Treasury’s 

Home Affordability Mortgage Program 

(HAMP) would not have been 

considered restructured or modified. 

First-lien real estate loans guaranteed 

by the federal government through the 

Federal Housing Administration (FHA) 

or the Department of Veterans Affairs 

(VA) generally would have been riskweighted at 20 percent. While a U.S. 

Government guarantee against default 

mitigates credit risk, normally the loans 


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203Credit unions predominantly offering first lien 

real estate loans would have had lower capital 

requirements than the current rule. Credit unions 

predominantly offering junior-lien real estate loans 

would have had higher capital requirements than 

the current rule. Analysis of December 31, 2013, 

Call Report data indicates that the originally 

proposed risk weights produce an aggregate 

minimum capital requirement, at the well 

capitalized level, of 97 percent of the current 

minimum risk-based net worth ratio required for 

real estate loans when applied to affected credit 

unions. 

are not fully guaranteed and routinely 

subject the credit union to meeting loan 

underwriting and servicing 

requirements. 

Under the Original Proposal, real 

estate-secured loans that did not meet 

the definition of a ‘‘first mortgage real 

estate loan’’ would have been defined as 

‘‘other real estate loans’’ and assigned a 

higher risk weight. First-lien real estate 

loans delinquent for 60 days or more, or 

carried on non-accrual status, would 

have been included in the category of 

other real estate loans for the purpose of 

assigning the risk weight. Other real 

estate loans would have been assigned 

a risk weight of 100 percent for the first 

10 percent of assets. To account for 

concentration risk, the risk weight for 

other real estate loans would increase to 

125 percent for loans between 10 and 20 

percent of assets, and other real estate 

loans over 20 percent of assets would 

have been risk-weighted at 150 percent. 

The threshold of 10 percent was based 

on the average percentage of other real 

estate loans to total assets, which, as of 

June 30, 2013, was 6.85 percent for 

complex credit unions. 

Under the Original Proposal, the 

aggregate minimum capital requirement 

for first- and junior-lien real estate loans 

would have been slightly less than the 

current minimum requirement.203 The 

originally proposed risk weights for real 

estate loans, however, would have 

resulted in a higher variance in the 

minimum capital requirement for 

individual affected credit unions 

because the risk weights better 

differentiated between the risks 

associated with lien position and 

concentration. 

NCUA received a significant number 

of comments on the proposed risk 

weights for real estate loans. Most 

commenters generally disagreed with 

the proposed risk weights, stating that 

they were too high. Commenters 

suggested that, given lower historical 

loss rates on residential mortgage loans 

at credit unions compared to 

community banks and the fact that 

credit unions with higher 

concentrations of these loans tend to 

experience lower loss rates than their 

peers, the risk weights and 

concentration thresholds for real estate 

loans should be far lower than the 

Original Proposal indicated and lower 

than what banks must meet. 

Commenters generally acknowledged 

that the proposed 50 percent risk weight 

(i.e., excluding the higher weights for 

concentration risk) for first mortgage 

loans was equal to the bank risk weight, 

but argued that credit union losses on 

these loans historically have been lower 

than community bank loss totals. One 

commenter claimed that credit unions’ 

losses on first mortgage loans were in 

fact equal to 60 percent of community 

bank loss totals over the long term, since 

the start of the Great Recession, and at 

peak value losses. Based on this 

historical performance, the commenter 

suggested that if the appropriate bank 

risk weights for residential first 

mortgages is indeed 50 percent, the 

history-based risk weights for credit 

unions ought to be closer to 30 percent 

(i.e., 60 percent of 50 percent). 

The Board does not believe the 

contemporary variances between bank 

and credit union losses on real estate 

loans are substantial enough to warrant 

assigning lower risk weights. Based on 

the credit union Call Reports and FDIC 

Quarterly Banking reports for the years 

ended December 31, 2011, 2012, and 

2013, credit union real estate loan loss 

experience is comparable to community 

banks. Credit unions with over $100 

million in assets have an average overall 

real estate loan loss ratio of 0.58 percent 

over the past three years. Banks with 

assets up to $10 billion have an average 

real estate loan loss ratio of 0.65 percent 

over the same time period. Credit union 

first mortgage loan losses average 0.34 

percent over the last three years 

compared to 0.49 percent for banks. 

Credit union home equity loan losses 

average 0.96 percent over the last three 

years compared to 0.73 percent for 

banks. 

Another commenter suggested that 

NCUA’s tiered risk weight approach for 

real estate-secured loans for both the 

current risk-based net worth ratio 

framework and the proposed risk-based 

capital ratio framework is arbitrary and 

unsupported by the administrative 

record, and that NCUA has not offered 

specific analyses or other evidence to 

support either framework’s implied 

assumption that there is a correlative 

relationship between the size of a credit 

union’s portfolio of real estate secured 

loans and the risk that portfolio presents 

to the NCUSIF. 

Other commenters believed the 

proposed risk weights would 

discriminate against homeownership 

because home loans bring a positive 

reputation value that the rule cannot 

factor, and that any additional capital 

requirement for providing home loans to 

the common family is destructive. 

Commenters also suggested that the 

proposed risk weights would limit 

credit unions’ ability to help lowincome members and members with 

troubled real estate and impact credit 

unions’ ability to provide members with 

a low cost source of funds for financing 

their primary residence by discouraging 

credit unions from making real estate 

loans over 25 percent or 35 percent of 

their total assets. 

A small number of commenters 

suggested that the rule allow some type 

of waiver when it is apparent that a 

credit union can make sound real estate 

loans. Another commenter suggested 

that the rule exclude some parts of a 

credit union’s first-lien mortgage 

portfolio. 

Some commenters suggested that 

although significant losses did occur 

during the recent economic downturn, 

first-lien residential mortgage loans 

have historically been a low credit risk 

and an important part of credit unions’ 

presence and mission in their 

communities. One commenter stated 

that major progress has been made in 

underwriting first mortgage loans 

following the recent recession, that 

high-risk mortgage products are no 

longer common, and the CFPB and 

Dodd-Frank Act regulations have 

eliminated the likelihood of a repeat of 

the circumstances that caused extensive 

losses for first-lien residential mortgage 

loans during the recession. Therefore, 

the commenters suggested the Board 

should eliminate the higher risk weights 

for a concentration of first-lien 

residential mortgage loans. 

A small number of commenters 

acknowledged that there is a great deal 

of differentiation across mortgage 

products that make it difficult to 

determine the best framework to 

identify those higher-risk mortgages 

without imposing an untenable 

reporting requirement. Given the 

delicate balance between regulatory 

burden and meaningful reporting, many 

commenters suggested the Board should 

maintain the proposed definition for 

non-delinquent first mortgage real estate 

loans and risk weight them all at 50 

percent, regardless of concentration 

level. Commenters argued that such a 

change would provide parity with the 

banking system and obviate the need for 

more onerous reporting. Commenters 

argued the Board should adopt a similar 

approach for other real estate-secured 

loans by eliminating the concentration 

thresholds and, consistent with the 

Other Banking Agencies’ rules, riskweight them all at 100 percent. 


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204See 12 U.S.C. 1790d(d)(2). 

205See OIG–10–03, Material Loss Review of Cal 

State 9 Credit Union (April 14, 2010), OIG–11–07, 

Material Loss Review OF Beehive Credit Union 

(July 7, 2011), OIG–10–15, Material Loss Review OF 

Ensign Federal Credit Union, (September 23, 2010), 

available at http://www.ncua.gov/about/

Leadership/CO/OIG/Pages/MaterialLoss

Reviews.aspx 

206See U.S. Govt. Accountability Office, GAO– 

12–247, Earlier Actions are Needed to Better 

Address Troubled Credit Unions (2012), available 

at http://www.gao.gov/products/GAO–12–247. 

207See, e.g., 12 CFR 324.32(g). 

208See, e.g., 12 CFR 324.32(g). 

209 Id. 

A number of other commenters 

suggested various specific risk weight 

schemes for real estate loans, but did 

not explain why their suggested risk 

weights would more accurately account 

for risk than those originally proposed 

by the Board. 

Higher capital requirements for 

concentrations of real estate loans exists 

in the current rule, and the Board 

believes completely eliminating them 

would be a step backwards in matching 

risks with minimum risk-based capital 

requirements. Credit unions with high 

real estate loan concentrations are 

particularly susceptible to changes in 

the economy and housing market 

because a significant portion of their 

assets are focused in one industry. 

NCUA does currently review credit 

concentrations during examinations as 

commenters recommended. However, as 

discussed in the summary section, the 

FCUA requires that NCUA’s risk-based 

capital requirement account for material 

risks that the 6 percent net worth ratio 

may not provide adequate protection, 

including credit and concentration 

risks.204

Credit concentration risk can be a 

material risk under certain 

circumstances. The Board generally 

agrees that CFPB’s new ability-to-repay 

regulations should improve credit 

quality. However, the extent to which 

this will alter loss experience rates 

remains to be seen. 

NCUA has also been advised by its 

OIG and GAO to address real estate 

credit concentration risk. NCUA’s OIG 

completed several MLRs where failed 

credit unions had large real estate loan 

concentrations. The NCUSIF incurred 

losses of at least $25 million in each of 

these cases. The credit unions reviewed 

held substantial residential real estate 

loan concentrations in either first-lien 

mortgages, home equity lines of credit, 

or both.205 In addition, in 2012 GAO 

recommended that NCUA address the 

credit concentration risk concerns the 

NCUA OIG raised.206 The 2012 GAO 

report notes credit concentration risk 

contributed to 27 of 85 credit union 

failures that occurred between January 

1, 2008, and June 30, 2011. The report 

indicated that the Board should revise 

PCA so that minimum net worth levels 

emphasize credit concentration risk. 

Accordingly, the Board believes 

eliminating the concentration 

dimension for risk weights entirely 

would be inconsistent with the concerns 

raised on concentration risk by GAO 

and the MLRs conducted by NCUA’s 

OIG. 

However, after consideration of the 

comments, the Board proposes to 

modify the real estate loan risk weights 

presented in the Original Proposal. 

Under this second proposal the risk 

weights assigned to residential real 

estate loans would generally be 

consistent with those assigned by Other 

Banking Agencies.207 This proposal 

would reduce the number of first- and 

junior-lien residential real estate loan 

concentration thresholds from two to 

one, with single concentration 

thresholds at 35 percent and 20 percent 

of total assets respectively. 

RESIDENTIAL REAL ESTATE LOANS CONCENTRATION THRESHOLDS

50% 75% 100% 150% 

First-Lien ............................ Current <35% of Assets ... Current ≥35% of Assets.

Junior-Lien ......................... ........................................... ........................................... Current <20% of Assets ... Current ≥20% of Assets 

First- and junior-lien residential real 

estate loans that are not current would 

be assigned 100 percent and 150 percent 

risk weights respectively. This change to 

a single, higher concentration risk 

threshold would simplify the risk 

weight framework and calibrate it to 

only pick up outliers. The concentration 

thresholds are roughly two standard 

deviations from the mean for both first 

and junior-liens. This means that 

roughly 90 percent of credit unions with 

more than $100 million in assets operate 

at levels below the concentration 

thresholds proposed for residential real 

estate loans, and only two credit unions 

operate above both thresholds (based on 

December 2013 Call Report data). Thus, 

most credit unions would operate at a 

level in which the risk weights assigned 

to residential real estate loans would be 

the same as the risk weights of the Other 

Banking Agencies.208

The Board believes the single higher 

concentration threshold would simplify 

the risk weight framework and better 

calibrate it to apply only to credit 

unions with outlying levels of 

concentration risk. The revised 

approach taken in this second proposal 

would be more comparable with the 

approaches taken by the Other Banking 

Agencies’ rules 209 and Basel III, while 

also maintaining higher minimum 

capital requirements for large 

concentrations of real estate loans as 

recommended by GAO and OIG. The 

Board believes the proposed risk 

weights would also be consistent with 

credit union loss history and recent 

NCUSIF losses reviewed by OIG. 

The Board does not agree that the 

proposed risk weights would slow 

residential real estate loan origination, 

stifle homeownership, or limit credit 

unions’ ability to assist low-income 

members because the revised risk 

weights provide credit unions with 

continued flexibility to assist members 

in a sustainable manner while 

maintaining sufficient minimum capital. 

Commenters stated that credit unions 

should not be penalized for having highquality, performing first mortgage loan 

portfolios, suggesting that risk weights 

should be lowered on first mortgage real 

estate portfolios that demonstrate strong 

performance through lower charge-off 

ratios. Numerous commenters suggested 

that the risk weights should take 

underwriting into account that offsets 

the risk of these loans (e.g., a portfolio 

made up of borrowers with high credit 

scores is less risky than one that is made 

of low-credit-score borrowers). 

A small number of commenters 

suggested the mortgage risk weights 

could be better balanced by providing 

credit unions with some type of earned 

credit based on managed risk 

performance. 

Another commenter suggested that 

low-income credit unions that are 

Community Development Financial 

Institutions have loan portfolios that are 

primarily made up of non-prime and 

sub-prime loans, which have a greater 

propensity for delinquency. The 

commenter suggested that such 

institutions should not be penalized for 


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4398 Federal Register / Vol. 80, No. 17 / Tuesday, January 27, 2015 / Proposed Rules 

210Basel Committee on Banking and Supervision, 

An Explanatory Note on the Basel II IRB Risk 

Weight Functions, July 2005, available at http://

www.bis.org/bcbs/irbriskweight.htm: ‘‘The model 

should be portfolio invariant, i.e. the capital 

required for any given loan should only depend on 

the risk of that loan and must not depend on the 

portfolio it is added to. This characteristic has been 

deemed vital in order to make the new IRB 

framework applicable to a wider range of countries 

and institutions.’’ 

211Basel Committee on Banking Supervision, 

International Convergence of Capital Measurement 

and Capital Standards, June 2006, available at 

http://www.bis.org/publ/bcbs128.htm. ‘‘The 

Committee notes that, in their comments on the 

proposals, banks and other interested parties have 

welcomed the concept and rationale of the three 

pillars (minimum capital requirements, supervisory 

review, and market discipline) approach on which 

the revised Framework is based.’’ 

212 Junior-lien real estate loans are currently 

reported on the Call Report as part of ‘‘other real 

estate loans.’’ 

213See, e.g., 12 CFR 324.32(g)(2). 

214Under the Original Proposal, one-to-fourfamily non-owner occupied residential real estate 

loans greater than $50,000 would have been defined 

as member business loans. 

215See, e.g., 12 CFR 324.32(g). 

serving historically disenfranchised and 

marginalized populations. 

The Board agrees with commenters 

that credit scores, loan underwriting, 

portfolio seasoning, and portfolio 

performance are good measures to 

evaluate a residential real estate lending 

program. However, broadly applicable 

regulatory capital models are portfolio 

invariant. This means the capital charge 

for a particular loan category is 

consistent among all credit union 

portfolios based on the loan 

characteristics, rather than the 

individual credit union’s portfolio 

performance or characteristics. Taking 

into account each credit union’s 

individual characteristics would be too 

complicated for many credit unions and 

NCUA for minimum capital 

requirements.210 Further, such an 

approach would not be comparable to 

the risk weight framework used by the 

other banking agencies. 

NCUA will continue to take into 

account loan underwriting practices, 

portfolio performance and loan 

seasoning as part of the examination 

and supervision process. This method of 

review is consistent with the Basel 

three-pillar framework: minimum 

capital requirements, supervisory 

review, and market discipline.211 Credit 

unions should use criteria from their 

own internal risk models and loan 

underwriting in developing their 

internal risk management systems. 

The Board also agrees LTV ratios are 

an informative measure to assess risk. 

However, it is not a practical measure to 

assess minimum capital requirements 

because of volatility in values and the 

corresponding reporting burden for 

credit unions tracking LTVs and 

keeping them current. There also is no 

historical data across institutions upon 

which to base varying risk weights 

according to LTVs and other 

underwriting criteria (like credit scores). 

Examiners take LTVs into consideration 

during the examination process. 

Supervisory experience has 

demonstrated LTV verification requires 

on-site review and application of credit 

analytics to validate the most current 

information. On-site review also 

minimizes reporting requirements on 

credit unions. 

Commenters questioned why real 

estate loans were risk-weighted 

differently than GSE and other 

mortgage-backed securities. Under the 

Original Proposal, a 30-year first 

mortgage loan would have been 

assigned a 50 percent risk weight while 

a federal agency mortgage-backed 

security that has an average life of six 

years would have been assigned a 150 

percent risk weight. Numerous 

commenters remarked that the 

differences between these two risk 

weights seemed inappropriate because 

the two assets have similar interest-rate 

risk, and that the security has less credit 

risk and is more marketable. 

Commenters stated that one way credit 

unions can lower the risk of holding 

first mortgage loans on their balance 

sheets is to securitize them, making 

them more readily available to serve as 

collateral to borrow against or to sell as 

a security. Commenters also suggested 

that the higher risk weight that would 

apply to securitized mortgages would 

discourage credit unions from using this 

strategy. 

The Board agrees with the 

commenters’ concerns regarding 

consistency of risk weights across assets 

classes. As noted above, by removing 

consideration of IRR from the risk 

weights for purposes of this second 

proposal, analogous risk across loans 

and investments would be more 

consistently risk-weighted. 

Commenters suggested that the rule 

should distinguish between variablerate first mortgage loans and fixed-rate 

first mortgage loans, with lower risk 

weights associated with the variable-rate 

loans and shorter-term fixed-rate loans 

in order to capture the lower IRR 

associated with such loans as compared 

to 30-year fixed-rate first mortgage 

loans. Other commenters suggested that 

the capital requirement for adjustablerate mortgages and shorter-maturity 

fixed-rate mortgage loans should be 

lowered to take into consideration the 

reduced risk associated with these 

adjustable and shorter-term mortgage 

loan products. Commenters also 

suggested that the IRR may in fact be 

lower for junior-lien loans because 

many are home equity lines of credit 

with variable rates. The Board notes, as 

discussed above, removal of 

consideration of IRR from the risk 

weights for purposes of this second 

proposal resolves these commenters’ 

concerns. 

Commenters questioned the risk 

weight for junior-lien mortgage loans, 

suggesting such loans represent no more 

risk than first mortgage loans if 

underwritten at appropriate loan-tovalue ratios. Some of these commenters 

stated that many credit unions have 

established loan-to-value and combined 

loan-to-value limits for junior-lien real 

estate loans of 75–80 percent (or less) as 

a means of managing risk. Commenters 

suggested that consideration should also 

be given to the equity position and not 

just the lien position when setting risk 

weights. 

A small number of commenters stated 

that no clear explanation or rationale 

was offered for why junior-lien 

mortgage loans have higher risk weights 

than first mortgage loans. 

Conversely, other commenters stated 

that while they have many concerns 

about the risk weights, they agree that 

the proposed risk weights for home 

equity/second mortgages seem 

appropriate based on losses at 

comparable banks and credit unions. 

The Board continues to believe juniorlien residential real estate loans warrant 

a higher risk weight based on loss 

history. Call Report data indicates credit 

unions over $100 million in asset size 

reported three times the rate of loan 

losses (0.96 percent) on other real estate 

loans 212 when compared to first 

mortgage real estate loans (0.34 percent) 

during the past three years. In addition, 

the base risk weight for junior-lien 

residential real estate loans in this 

proposal is comparable to the Other 

Banking Agencies.213

After carefully considering the 

comments, the Board is now proposing 

to modify the definitions and risk 

weights for loans secured by residential 

real estate. Three substantive changes 

are discussed in more detail below. 

First, one-to-four family non-owneroccupied residential real estate loans 

would now be included in the 

definition of either first- or junior-lien 

residential real estate loan.214 The Board 

believes this change is consistent with 

the credit risk inherent in these loans 

and corresponding risk weights assigned 

by the Other Banking Agencies.215

Second, for a loan to be included in 

the definition of a first-lien residential 


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216The Ability-to-Repay requirements include 

eight loan underwriting factors a credit union will 

need to consider and verify. These include the 

following: (1) current or reasonably expected 

income or assets; (2) current employment status; (3) 

the monthly payment on the covered transaction; 

(4) the monthly payment on any simultaneous loan; 

(5) the monthly payment for mortgage-related 

obligations; (6) current debt obligations; (7) the 

monthly debt-to-income ratio or residual income; 

and (8) credit history. See, e.g., 78 FR 6407 at 6585 

(Jan. 30, 2013). 

217Per Call Report data for years ending 

December 31, 2012 and 2013, consumer loans were 

greater than 40 percent of loans in credit unions 

with total assets greater than $100 million. 

218The Other Banking Agencies’ capital rules 

maintained the 100 percent risk weight for current 

consumer loans. See, e.g., 12 CFR 324.32 and 78 FR 

55339 (Sept. 10, 2013). 

219Up until 2010, guaranteed student loans were 

available through private lending institutions under 

the Federal Family Education Loan Program 

(FFELP). These loans were funded by the federal 

government and administered by approved private 

lending organizations. In effect, these loans were 

underwritten and guaranteed by the federal 

government, ensuring that the private lender would 

assume no risk should the borrower ultimately 

default. Loans issued under this program prior to 

June 30, 2012 will remain on the books of credit 

unions for many years. 220See, e.g., 12 CFR 324.32(k). 

real estate loan, a reasonable and good 

faith determination must have been 

made to determine that the borrower 

had the ability to repay the loan 

according to its terms. The Board 

believes this change is consistent with 

existing legal requirements for 

residential real estate secured loans and 

prudential underwriting expectations in 

the Other Banking Agencies’ risk weight 

definitions, and would provide some 

standard of quality to justify residential 

real estate loans receiving a lower risk 

weight. Under this second proposal a 

credit union would not be required to 

underwrite ‘‘qualified mortgages’’ to 

receive a lower risk weight. However, a 

first-lien residential real estate loan 

would receive the proposed 50 percent 

risk weight only if the credit union 

underwrites them in accordance with 

CFPB’s ability-to-repay requirements 

under § 1026.43 of this title.216

Finally, this second proposal would 

provide a risk weight of 20 percent for 

the portion of real estate loans with a 

government guarantee and exclude this 

amount from the calculation of the 

concentration threshold. The Board 

believes this change would better reflect 

the risk and encourage credit unions to 

take advantage of available programs 

designed to reduce their risk of loss. 

Current consumer loans. Consumer 

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.217

For most current consumer loans, the 

Original Proposal would have assigned 

a risk weight of 75 percent.218 Nonfederally guaranteed student loans, 

which contain higher risks (e.g., default 

risk and extension risk), would have 

been risk-weighted at 100 percent under 

the Original Proposal. Federally 

guaranteed student loans would have 

received a zero percent risk weight.219

The Board received a number of 

comments regarding the risk weights for 

consumer loans. A number of 

commenters recommended the Board 

lower the risk weights for performing 

collateralized consumer loans, and that 

data on such loans is reflected on the 

Call Report and could easily be 

incorporated into the risk weights. 

Several commenters asked why a 

secured auto loan was assigned the 

same risk weight as an unsecured credit 

card loan under the Original Proposal 

when credit card loans have a 

delinquency rate more than four times 

that of auto loans. 

Other commenters stated the rule 

should take into account the type of 

consumer loan (unsecured versus 

secured, loss history, and term of the 

loan) and generation source (direct 

versus indirect) because different loan 

types and generation sources have 

different performance experiences 

historically and should be evaluated as 

part of the rulemaking. 

Another commenter stated that the 

proposal would have made no 

distinction between indirect loans and 

loans originated in-house, which would 

have encouraged ‘‘buy rate’’ indirect 

lending (i.e., markups by dealer), which 

is bad for consumers. 

Other commenters suggested different 

risk weights should be applied to 

consumer loans based on credit score 

ranges. 

A small number of commenters 

suggested that consumer loans have 

significantly less IRR than first-mortgage 

loans, but are assigned a 75 percent risk 

weight while first-mortgage loans are 

assigned a 50 percent risk weight, 

suggesting that only credit risk was 

considered in setting the risk weight for 

consumer loans. 

A small number of commenters 

suggested that consumer loans should 

be assigned a 20 percent risk weight 

because credit loss risk is covered in the 

ALLL. 

A number of other commenters 

suggested that the proposed risk weights 

for consumer loans seemed appropriate 

based on losses at comparable banks 

and credit unions. 

The Board generally agrees with 

commenters who suggested that secured 

and unsecured consumer loans have 

different levels of risk exposure. To 

address the different risks between these 

two loan types, this second proposal 

would assign separate risk weights for 

secured and unsecured consumer loans. 

To differentiate between these two loan 

types, this proposed rule would include 

new definitions for secured consumer 

loans and unsecured consumer loans. 

Loans meeting the definition of a 

current secured consumer loan would 

receive a risk weight of 75 percent, and 

those meeting the definition of a current 

unsecured consumer loan would be 

assigned a 100 percent risk weight. This 

would account for the higher risk 

associated with unsecured loans given 

their lack of collateral. 

The Board also generally agrees that 

credit scores, staff qualifications, loan 

underwriting, portfolio seasoning, and 

portfolio performance are good 

measures to evaluate a lending program. 

However, the Board cannot uniformly 

use these criteria to measure minimum 

capital requirements for all credit 

unions because of the indeterminate 

reporting requirements that would be 

necessary and the myriad variables used 

to establish sound lending programs. 

The Board disagrees that credit loss 

risk would be entirely covered in the 

ALLL. The ALLL is intended to cover 

expected losses as of the balance sheet 

date. The ALLL is not intended to cover 

unexpected losses. While a credit 

union’s funding of the ALLL through 

provision expenses decreases retained 

earnings, the proposed new risk-based 

capital ratio calculation would add back 

in the balance of the ALLL without 

limit. 

Non-current consumer loans. The 

current risk-based capital measure does 

not contain a higher risk weight for noncurrent consumer loans. Increasing 

levels of non-current loans are an 

indicator of increased risk. To reflect the 

impaired credit quality of past-due 

loans, the Original Proposal would have 

required credit unions to assign a 150 

percent risk weight to loans (other than 

real estate loans) 60 days or more past 

due or in nonaccrual status. The higher 

risk weight on past-due exposures 

ensures sufficient regulatory capital for 

the increased probability of unexpected 

losses on these exposures. The higher 

risk weights were intended to capture 

the risk associated with the impaired 

credit quality of these exposures, and 

were consistent with the risk weights 

used by Basel III and the Other Banking 

Agencies.220

A small number of commenters 

questioned why delinquent consumer 

loans were assigned a 150 percent risk 

weight under the Original Proposal 


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221See, e.g., 12 CFR 324.32(k). 

when such loans are assigned only a 100 

percent risk weight under the Other 

Banking Agencies’ capital rules. 

However, in fact, a 150 percent risk 

weight is consistent with the risk weight 

for past-due consumer loans under the 

Other Banking Agencies’ regulations 221

and would result in a risk-based capital 

measure that is more responsive to 

changes in the credit performance of the 

loan portfolio. Thus, this proposal 

would retain the 150 percent risk weight 

for consumer loans that are not current. 

Loans to CUSOs and CUSO Investments. 

Under the Original Proposal, 

investments in CUSOs were assigned a 

risk weight of 250 percent and loans to 

CUSOs were assigned a risk weight of 

100 percent. A majority of the 

commenters addressed these risk 

weights and, nearly unanimously, 

opposed them. There were, however, a 

few commenters who generally agreed 

with the proposed risk weights. 

In brief, commenters generally 

maintained that the originally proposed 

risk weight for investments in CUSOs 

was too high. Some commenters argued 

that the Original Proposal was arbitrary 

and unsupported by analytical data. 

Others stated that the risk weights did 

not take into account the requirements 

of the CUSO regulation or the nature 

and business of individual CUSOs. 

Finally, some commenters believed the 

Original Proposal would have a chilling 

effect on CUSOs and could lead credit 

unions to seek out more expensive 

third-party vendors. 

Some commenters questioned why 

the Original Proposal included different 

risk weights for investments and loans. 

Other commenters argued that there 

should be only one risk weight and that 

it should not exceed 100 percent. 

Several commenters suggested risk 

weights below 100 percent, stating that 

higher risk weights would diminish the 

cooperative nature of credit unions. A 

few commenters advocated eliminating 

risk weights for CUSOs altogether, 

claiming that assigning risk weights to 

these assets would be detrimental to 

credit unions forming and utilizing 

CUSOs. 

Other commenters stated that NCUA 

should address risk in CUSOs through 

supervision of the credit union 

investors, rather than assigning risk 

weights to investments and loans. 

One commenter expressed concern 

about investments in CUSOs being 

included in the risk-based capital ratio 

calculation on an unconsolidated basis, 

combined with including a CUSO’s 

mortgage servicing assets (MSAs) on a 

consolidated basis. This commenter 

stated that if mortgage servicing assets 

represent a significant portion of the 

equity of a CUSO on an unconsolidated 

basis, then the credit union’s MSAs 

would effectively be weighted at 500 

percent. 

Several commenters argued that the 

risk weights for CUSO loans and 

investments should be lower because 

the actual degree of risk from CUSOs is 

relatively low. A few commenters noted 

that credit unions have less than 0.2 

percent of total assets invested in 

CUSOs, which, they argued, is an 

immaterial risk to the credit union 

industry. 

Other commenters stated that the 

requirements in the recently finalized 

CUSO rule effectively reduce risk from 

CUSOs, thereby eliminating the need for 

higher risk weights. 

Several commenters expressed 

concern that the 250 percent risk weight 

on investments in CUSOs would restrict 

or reduce the benefits from using 

CUSOs. Some of these commenters 

argued that credit unions would be 

forced to contract with higher-priced 

third-party vendors for services because 

third-party vendors do not carry a 

capital risk weight. 

Several commenters also questioned 

the mechanics of the two risk weights 

that would have applied to CUSOs. One 

commenter stated that the risk weight 

for loans did not take into account 

collateral for the loan or the quality of 

any such collateral. 

Another commenter stated that there 

was no reason for a risk weight if the 

amount of an investment in a CUSO was 

fully offset by net income or cost 

savings generated by the CUSO. Other 

commenters suggested that NCUA not 

apply a risk weight to both the cash 

investment made in the CUSO and the 

CUSO’s appreciated value. 

Several commenters stated that the 

Original Proposal would have double 

counted exposure for majority-owned 

CUSOs. They reasoned that because 

risk-based capital is based on a credit 

union’s consolidated balance sheet, 

adding a schedule that shows 

unconsolidated results is essentially 

double counting. 

Several commenters addressed a 

comparison made in the Original 

Proposal between CUSOs and an 

unsecured equity investment by a bank 

in a non-publicly traded entity. These 

commenters argued that this 

comparison is not analogous and NCUA 

should abandon this approach. These 

commenters stated further that the 

regulations applying to credit union 

investments in CUSOs and the 

collaborative platform between CUSOs 

and credit unions makes this 

relationship sufficiently different, such 

that it should not be treated the same as 

a bank’s unsecured equity investment in 

a non-publicly traded entity. 

Finally, several commenters requested 

that risk weights for CUSOs take into 

account certain aspects of the specific 

CUSO. Many of these commenters 

stated that they supported risk weights 

that were based on the CUSO’s business 

function. Others stated that risk weights 

should take into account the CUSO’s 

historical profitability, if it is generating 

income for its investors, the complexity 

of the CUSO’s operations, or how long 

it has been in operation. Several 

commenters argued that a ‘‘one-sizedfits-all’’ approach is not sufficient to 

accurately risk weight investments in 

CUSOs. 

After diligent consideration of the 

comments discussed above, the Board 

has decided to rely on GAAP accounting 

standards to determine the reporting 

basis upon which any CUSO equity 

investments and loans are assigned risk 

weights. For CUSOs subject to 

consolidation under GAAP, the amount 

of CUSO equity investments and loans 

are eliminated from the consolidated 

financial statements because the loans 

and investments are intercompany 

transactions. The related CUSO assets 

that are not eliminated are added to the 

consolidated financial statement and 

receive risk-based capital treatment as 

part of the credit union’s statement of 

financial condition. For CUSOs not 

subject to consolidation, the recorded 

value of the credit union’s equity 

investment would be assigned a 150 

percent risk weight, and the balance of 

any outstanding loan would be assigned 

a 100 percent risk weight. 

NCUA recognizes the uniqueness of 

CUSOs and the support they provide. 

However, an equity investment in a 

CUSO is an unsecured, at-risk equity 

investment (first loss position), which is 

analogous to an investment in a nonpublicly traded entity. There is no price 

transparency and extremely limited 

marketability associated with CUSO 

equity exposures. In addition, unlike the 

Other Banking Agencies, NCUA has no 

enforcement authority over third-party 

vendors, including CUSOs. 

The Board recognizes there are 

statutory limits on how much a federal 

credit union can loan to and invest in 

CUSOs. However, the limitations are not 

as stringent for some state charters, and 

only binding for federal credit unions at 

the time the loan or investment is made 

(that is, the position can grow in 

proportion to assets over time). In 

setting capital standards (e.g., Basel and 

FDIC), the risk of loss is central to 


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222Further, not all CUSOs are closely held. They 

can have wider ownership distributed among many 

credit unions, none of which may have significant 

control. If a particular credit union has significant 

control, it will likely have to consolidate under 

GAAP and then there will be no risk weight 

associated with the loan or investment for the 

controlling credit union since it will be netted out 

on a consolidated basis. 

223See, e.g., 12 CFR 324.52. 

224See, e.g., 12 CFR 324.32(l)(4)(i). 

225See, e.g., 12 CFR 324.1(f). 

226This is comparable to the Other Banking 

Agencies’ capital rules (e.g., 12 CFR 324.32), which 

maintained the 100 percent risk weight for assets 

not assigned to a risk weight category. See, e.g., 78 

FR 55339 (Sept. 10, 2013). 

determining the risk weight—not the 

size of the exposure. 

In addition, while a CUSO must 

predominantly serve credit unions or 

their members (more than 50 percent) to 

be a CUSO, it can be owned and 

controlled primarily by persons and 

organizations other than credit unions. 

Therefore, it may not only serve noncredit unions, it can be majoritycontrolled by a party or parties with 

interests not necessarily aligned with 

the credit union’s interests.222

Also, given the equity investment in 

a CUSO is in a first loss position, is an 

unsecured equity investment in a nonpublicly traded entity, the significant 

history of losses to the NCUSIF related 

to CUSOs, and the fact NCUA lacks 

vendor authority, the risk weight should 

be higher than 100 percent. 

Loans to CUSOs, on the other hand, 

have a higher payout priority in the 

event of bankruptcy of a CUSO and 

therefore warrant a lower risk weight of 

100 percent, which corresponds to the 

base risk weight for commercial loans. 

The Board notes it may be possible to 

make more meaningful risk distinctions 

between the risk various types of CUSOs 

pose once the CUSO registry is in place 

and sufficient trend information has 

been collected. 

Under the Original Proposal, the risk 

weights were derived from a review of 

FDIC’s capital treatment of bank service 

organizations. FDIC’s rule looks across 

all equity exposures.223 If the total is 

‘‘non-significant’’ (less than 10 percent 

of the institution’s total capital), the 

entire amount receives a risk weight of 

100 percent. Otherwise, all the 

exposures are matched against a 

complicated risk weight framework that 

runs from a minimum of 250 percent to 

600 percent risk weight, with some 

subsidiary equity having to be deducted 

from capital. The equity investment in 

a CUSO would be treated the same as an 

equity investment in a non-publicly 

traded entity (limited marketability and 

valuation transparency), which would 

receive a 400 percent risk weight unless 

the cumulative level of all equity 

exposures held by the institution were 

‘‘non-significant.’’ 

The Board recognizes the complexity 

of FDIC’s approach and continues to 

believe that a simplified risk weight 

approach is more appropriate given the 

limited amount of credit union assets in 

CUSOs and the value CUSOs provide to 

credit unions in achieving economies of 

scale. 

Mortgage Servicing Assets (MSAs). 

The Original Proposal would have 

assigned a 250 percent risk weight to 

MSAs to address the complexity and 

volatility of these assets. In the 

preamble to the Original Proposal, the 

Board noted that MSAs typically lose 

value when interest rates fall and 

borrowers refinance or prepay their 

mortgage loans, leading to earnings 

volatility and erosion of capital. 

A large number of commenters 

addressed this provision and generally 

disagreed with the 250 percent risk 

weight. Most commenters addressing 

this topic maintained that the risk 

weight was too high and would have 

been punitive to credit unions. Further, 

some of these commenters noted that 

MSAs are an important hedge for credit 

unions and that MSAs are very liquid 

assets with an active secondary market. 

A few commenters provided 

suggestions on how to amend this 

provision of the rule. Most suggested 

lowering the risk weight to 100 percent. 

Others, however, suggested a phase-in 

approach of the 250 percent risk weight 

or assigning a risk weight above 100 

percent when a credit union reaches a 

certain concentration level of MSAs. 

One commenter suggested that 

assigning the same risk weight to all 

MSAs, as if they are all equivalent, is 

not an accurate representation of the 

actual risk involved. One other 

commenter stated that the rule should 

include a mechanism for differentiating 

between loans sold with and without 

recourse. 

Another commenter stated, ‘‘For 

many credit unions, maintaining the 

personal member relationship 

throughout the life of a transaction is of 

strategic importance. If the practical 

effect of a regulation is to force the sale 

of a mortgage or the servicing rights, the 

supervisory necessity of such a 

regulation must be unquestionably 

clear.’’ 

Finally, a few commenters predicted 

that a 250 percent risk weight on MSAs 

could discourage loan participations 

and limit the options available to 

manage balance sheet risk. One 

commenter further suggested that risk 

weights for loan participations should 

be lowered not to exceed the weight of 

the underlying loan participated. 

After considering these comments, the 

Board continues to believe that the 250 

percent risk weight is appropriate in 

light of the relatively greater risks 

inherent in these assets, and to maintain 

comparability with the risk weight 

assigned to these assets by the Other 

Banking Agencies.224 Specifically, MSA 

valuations are highly sensitive to 

unexpected shifts in interest rates and 

prepayment speeds. MSAs are also 

sensitive to the costs associated with 

servicing. These risks contribute to the 

high level of uncertainty regarding the 

ability of credit unions to realize value 

from these assets, especially under 

adverse financial conditions, and 

support assigning a 250 percent risk 

weight to MSAs. 

While the Board acknowledges that 

MSAs may provide some hedge against 

falling rates under certain 

circumstances, it further believes that 

MSAs’ effectiveness as a hedge, relative 

to particular credit unions’ balance 

sheets, is subject to too many variables 

to conclude that MSAs warrant a lower 

risk weight. More importantly, since IRR 

has been removed from the risk weights 

of this proposal, this argument is no 

longer directly applicable. 

Furthermore, NCUA does not agree 

with commenters who suggested that 

the proposed 250 percent risk weight 

assigned to this relatively small asset 

class would significantly disincentivize 

credit unions from granting loans, 

engaging in loan participations, and 

retaining servicing of their member 

loans. NCUA notes that banks have been 

subject to at least as stringent (if not 

more so) of a risk weight for MSAs for 

some time and continue to sell loans 

and retain MSAs. 

The Board believes the proposed 

January 1, 2019 effective date for this 

rule would provide credit unions 

sufficient time to adjust to this second 

proposal and would provide credit 

unions with a phase-in period 

comparable to that given to banks 

following a similar change to the Other 

Banking Agencies’ capital 

regulations.225

Other on-balance sheet assets. The 

current risk-based measure for all other 

balance sheet assets not otherwise 

assigned a specific risk weight is 100 

percent of the risk-based target. Under 

the Original Proposal, these same assets 

would have received a 100 percent risk 

weight.226


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227See, e.g., 12 CFR 324.32(l). 

228Privately insured balances are included with 

uninsured deposits and assigned a risk weight of 20 

percent as outlined in the proposed rule language. 

229See 12 CFR 324.32(a)(1)(i)(B) and (d)(1). 

230The list provided is not meant to be 

comprehensive. Any exposure in a principal- or 

interest-only mortgage-backed strip would not be 

assigned a zero percent risk weight. 

231See 12 U.S.C. 287 and 12 U.S.C. 1795f(a). 

ORIGINAL PROPOSAL—RISK WEIGHTS

FOR OTHER ON-BALANCE SHEET

ASSETS

Other asset type 

Proposed 

risk weight 

(percent) 

Loans Held for Sale .................. 100 

Foreclosed and Repossessed 

Assets ................................... 100 

Land and Building ..................... 100 

Other Fixed Assets ................... 100 

Accrued Interest on Loans ....... 100 

Accrued Interest on Investments .................................... 100 

All Other Assets not otherwise 

specifically assigned a risk 

weight .................................... 100 

The Board received a number of 

comments regarding the proposed risk 

weights for other on-balance sheet 

assets. 

A small number of commenters 

suggested that under Basel III loans held 

for sale are risk-weighted at zero as long 

as they are sold within 120 days because 

such assets are more of a receivable than 

a loan. 

Commenters suggested that a 100 

percent risk weight for land and 

building was excessive and that 

speculative land should be risk 

weighted at 50 percent and a financial 

institution building should be riskweighted at 25 percent, less 

depreciation. Other commenters stated 

that all credit unions must invest in 

fixed assets (such as buildings, furniture 

and equipment) and that the current 5 

percent cap on fixed assets helps to 

manage risk and credit unions seeking 

to exceed the 5 percent cap must obtain 

prior NCUA approval. Commenters 

suggested that consideration should be 

given to assigning a lower risk weight to 

investments in fixed assets when the 5 

percent cap is maintained. Other 

commenters suggested that assigning a 

100 percent risk weight on land, 

building and fixed assets would 

discourage investments in growing 

branch networks or modernizing 

equipment. 

A small number of commenters 

suggested that accounts receivable, 

prepaid income items, accrued interest, 

and other small items that have no 

credit risk or IRR should be assigned a 

zero percent risk weight. These 

commenters suggested that a 100 

percent risk weight assigned to accrued 

interest on loans and accrued interest on 

investments is excessive. 

As with the Original Proposal, in this 

second proposal, where the rule does 

not assign a specific risk weight to an 

asset or exposure type, the applicable 

risk weight would be 100 percent. For 

example, premises, fixed assets, and 

other real estate owned would receive a 

risk weight of 100 percent. 

The Board determined the 100 

percent risk weight would be 

appropriate for this class of assets since 

the difference between the book balance 

of some particular fixed assets and the 

value of the assets in the event of 

liquidation can be substantial. For 

example, in an area that has 

experienced a decline in the value of 

real estate, the book value of a fairly 

recently constructed credit union 

headquarters could be well below the 

fair value. Differentiating between the 

risks of types of assets not otherwise 

identified is not currently possible due 

to lack of data, would add complexity 

to the rule, and require even more Call 

Report data. 

The 100 percent risk weight would 

also be appropriate when considering 

that most assets in this group are 

predominately non-earning assets which 

can hinder a credit union’s ability to 

increase capital. 

Further, the proposed risk weights 

match the risk weights in the Other 

Banking Agencies’ capital 

regulations.227

This proposal would include loans 

held for sale within the pool of loans 

subject to assignment of risk weights by 

loan type to avoid the added complexity 

of determining the age of the loans held 

for sale. 

104(c)(2)(i) Category 1—Zero Percent 

Risk Weight 

Proposed § 702.104(c)(2)(i) would 

provide that a credit union must assign 

a zero percent risk weight to the 

following on-balance sheet assets: 

• The balance of cash, currency and 

coin, including vault, automatic teller 

machine, and teller cash. 

• The exposure amount of: 

Æ An obligation of the U.S. 

Government, its central bank, or a U.S. 

Government agency that is directly and 

unconditionally guaranteed, excluding 

detached security coupons, ex-coupon 

securities, and principal and interest 

only mortgage-backed STRIPS. 

Æ Federal Reserve Bank stock and 

Central Liquidity Facility stock. 

• Insured balances due from FDICinsured depositories or federally 

insured credit unions. 

Consistent with the Original Proposal, 

this second proposal would continue to 

assign a zero percent risk weight for 

cash, which includes the balance of 

cash, currency and coin, including 

vault, automatic teller machine, and 

other teller cash. 

This proposal would change the 

assignment of risk weights for cash on 

deposit, assigning a zero percent risk 

weight to insured cash on deposit and 

a 20 percent risk weight for all 

uninsured 228 cash on deposit as 

outlined in the proposed changes to the 

revised risk weights. Cash items in 

process of collection (currently included 

in cash on deposit) would not be 

specifically measured or assigned a risk 

weight. This change would be 

comparable with the risk weights 

applicable to banks.229 The Board 

believes having two risk weights for 

cash on deposit is appropriate because 

of the different risk profiles between 

insured and uninsured deposits. 

This proposal would apply a risk 

weight of zero percent to the exposure 

amounts of an obligation of the U.S. 

Government, its central bank, or a U.S. 

Government agency that is directly and 

unconditionally guaranteed—excluding 

detached security coupons, ex-coupon 

securities, and principal and interest 

only mortgage-backed STRIPS. This zero 

percent risk weight would also exclude 

indirect ownership and securities 

collateralized with zero percent risk 

weight assets. 

This proposal would apply a risk 

weight of zero percent to these types of 

exposures because they have no or very 

limited credit risk. 

However, exposures that are through 

a trust, or similar vehicle, would not 

receive a zero percent risk weight. In 

addition, conditional guarantees that 

can be revoked if a condition(s) is not 

met would not receive a zero percent 

risk weight. 

For example, the following types of 

investment exposures would be 

assigned a zero percent risk weight: 230

• U.S. Treasury Securities 

• GNMA securities (not including 

principal and interest only STRIPS) 

• SBA pools (not including principal 

and interest only STRIPS) 

• SBA loan participations 

• FDIC-guaranteed securities 

• NCUA-guaranteed securities 

This proposal would also apply a zero 

percent risk weight to Federal Reserve 

Bank stock and Central Liquidity 

Facility stock. Under the applicable 

statutes, these two types of ‘‘stocks’’ do 

not carry a risk of loss of principal 231


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232See, e.g., 12 CFR 324(a)(i). 

233See, e.g., 12 CFR 324.32(d)(1). 

234See, e.g., 12 CFR 324.32(a)(1)(ii) and (c). 

235See, e.g., 12 CFR 324.32(e). 

236See, e.g., 12 CFR 324.53. 

237This analysis assumes immaterial exposures to 

subordinated tranches and interest-only and 

principal-only STRIPS. 

and, therefore, the Board believes they 

warrant a zero percent risk weight. 

This proposed rule would materially 

increase the amount of zero riskweighted investments compared to the 

current rule. The proposed zero percent 

risk weight category is consistent with 

risk weights applicable to banks.232 The 

Board believes it is appropriate to assign 

a zero percent risk weight to additional 

investments under this proposal 

because IRR would no longer be 

included in the proposed risk weights. 

The Board requests comments on 

whether any items currently listed in 

this category should be assigned a 

higher risk weight and why. In addition, 

the Board requests comments on 

whether additional items should be 

assigned a zero percent risk weight and 

why. 

104(c)(2)(ii) Category 2—20 Percent Risk 

Weight 

Proposed § 702.104(c)(2)(ii) would 

provide that a credit union must assign 

a 20 percent risk weight to the following 

on-balance sheet assets: 

• The uninsured balances due from 

FDIC-insured depositories, federally 

insured credit unions, and all balances 

due from privately insured credit 

unions. 

• The exposure amount of: 

Æ A non-subordinated obligation of 

the U.S. Government, its central bank, 

or a U.S. Government agency that is 

conditionally guaranteed, excluding 

principal and interest only mortgagebacked STRIPS. 

Æ A non-subordinated obligation of a 

GSE other than an equity exposure or 

preferred stock, excluding principal and 

interest only GSE obligation STRIPS. 

Æ Securities issued by public sector 

entities in the United States that 

represent general obligation securities. 

Æ Investment funds whose portfolios 

are permitted to hold only part 703 

permissible investments that qualify for 

the zero or 20 percent risk categories. 

Æ Federal Home Loan Bank stock. 

• The balances due from Federal 

Home Loan Banks. 

• The balance of share-secured loans. 

• The portions of outstanding loans 

with a government guarantee. 

• The portions of commercial loans 

secured with contractual compensating 

balances. 

This proposal would apply a 20 

percent risk weight to uninsured 

balances due from FDIC-insured 

depositories and federally insured credit 

unions, and all balances due from 

privately insured credit unions. The 

proposed 20 percent risk weight is 

consistent with the risk weights 

applicable to banks.233 The Board 

believes it is an appropriate risk weight 

due to the low risk of loss with these 

types of exposures. 

This proposal would also apply a risk 

weight of 20 percent to nonsubordinated obligations of the U.S. 

Government, its central bank, or a U.S. 

Government agency that is conditionally 

guaranteed, excluding principal- and 

interest-only mortgage-backed STRIPS. 

This 20 percent risk weight is also 

applied to indirect and unconditionally 

guaranteed exposures to the U.S. 

Government, its central bank, or a U.S. 

Government agency. Additionally, a risk 

weight of 20 percent would be applied 

to non-subordinated exposures of a GSE, 

other than an equity exposure or 

preferred stock, excluding principaland interest-only GSE obligation 

STRIPS. 

The following are exposures that 

would be assigned a 20 percent risk 

weight: 

• Farm Credit System 

• Federal Home Loan Bank System 

• Federal Home Loan Mortgage 

Corporation 

• Federal National Mortgage 

Association 

• Financing Corporation 

• Resolution Funding Corporation 

• Tennessee Valley Authority 

• United States Postal Service 

The above list is not meant to be 

comprehensive and includes mortgagebacked securities issued and guaranteed 

by U.S. Government agencies and GSEs, 

excluding principal- and interest-only 

mortgage-backed STRIPS that are 

assigned a 100 percent risk weight. The 

above risk weights are generally 

consistent with the risk weights 

applicable to banks,234 as several 

commenters requested. Many 

commenters also requested that U.S. 

Government agency and GSE exposures 

be measured based on their risk, and not 

WAL, which is addressed by the risk 

weights above. The Board believes it is 

appropriate to assign these investments 

a 20 percent risk weight due to the fact 

that GSEs generally do not have the full 

faith and credit of the U.S. Government 

guaranteeing payment of their 

obligations. It is common, however, for 

GSEs to have an assigned federal 

regulator and an ability to borrow from 

the U.S. Treasury. 

This proposal would also apply a 20 

percent risk weight to securities issued 

by public sector entities in the United 

States that represent a general 

obligation. General obligation securities 

are backed by the full faith and credit 

of a public sector entity, which warrants 

the low risk weight. This risk weight is 

consistent with risk weights applicable 

to banks.235 The Board believes it is an 

appropriate risk weight due to the low 

risk and full faith and credit of the 

public sector entities. 

Indirect unconditionally guaranteed 

exposures to the U.S. Government, its 

Central Bank, or a U.S. Government 

agency would receive a 20 percent risk 

weight. An example is U.S. Treasury 

securities in a trust that are sold to an 

investor. The U.S. Treasury security 

would be an indirect obligation since 

the obligation is to the trust and not the 

credit union. Being indirect adds a layer 

of risk, which would increase the level 

of risk from risk-free to low, which 

warrants the 20 percent risk weight. 

This risk weight is also consistent with 

Other Banking Agencies’ corresponding 

risk weight.236

Another example of an indirect 

unconditional guarantee would be a 

U.S. Treasury security in an investment 

fund. The obligation is to the 

investment fund, and not the owner of 

the fund. This is why an investment 

fund, or individual asset in an 

investment fund, cannot have a risk 

weight of less than 20 percent. This 

proposal would apply a 20 percent risk 

weight to investment funds with 

portfolios permitted to hold only part 

703 permissible investments that qualify 

for the zero to 20 percent risk categories. 

This restriction must be stated in the 

fund documentation (e.g. prospectus), 

and must be binding (e.g. intent alone 

is not sufficient). 

Based on June 2014 Call Report data, 

approximately 93 percent of 

investments held by complex credit 

unions would receive a risk weight of 20 

percent or less, with the majority of 

investments receiving a 20 percent risk 

weight.237

As discussed earlier, the Board agrees 

with commenters who suggested that 

share-secured loans present a lower risk 

than other loan types and has added a 

new category in this proposal for sharesecured loans under the 20 percent risk 

weight, as well as for portions of 

compensating balances on commercial 

loans. 

The Board requests comments on 

whether any items currently listed in 

this category should be assigned a 

higher or lower risk weight and why. In 

addition, the Board requests comments 


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238See, e.g., 12 CFR 324.32(e)(1)(ii). 

239See, e.g., 12 CFR 324.32(g)(1). 

240 12 CFR 324.43(e). 241See, e.g., 12 CFR 324.32 and 324.42. 

on whether additional items should be 

assigned a 20 percent risk weight and 

why. 

104(c)(2)(iii) Category 3—50 Percent 

Risk Weight 

Proposed § 702.104(c)(2)(iii) would 

provide that a credit union must assign 

a 50 percent risk weight to the following 

on-balance sheet assets: 

• The outstanding balance (net of 

government guarantees), including loans 

held for sale, of current first-lien 

residential real estate loans less than or 

equal to 35 percent of assets. 

• The exposure amount of: 

Æ Securities issued by PSEs in the 

U.S. that represent non-subordinated 

revenue obligation securities. 

Æ Other non-subordinated, non-U.S. 

Government agency or non-GSE 

guaranteed, residential mortgage-backed 

security, excluding principal- and 

interest-only STRIPS. 

As discussed earlier, this proposal 

would include the use of a single 

concentration threshold for current firstlien residential real estate loans. All 

current first-lien residential real estate 

loans less than or equal to 35 percent of 

assets would receive a 50 percent risk 

weight. 

The proposal would also apply a risk 

weight of 50 percent to the exposure 

amount of securities issued by PSE in 

the U.S. that represent nonsubordinated revenue obligation 

securities (revenue bonds). These 

securities are backed by the revenue 

assigned when the security is issued. An 

example is a revenue security backed by 

tolls on the toll road for which the 

funding was used. This risk weight is 

comparable to the Other Banking 

Agencies’ capital regulations,238 which 

some commenters recommended. This 

risk weight also reflects the greater risk 

that non-subordinated revenue 

obligations have compared to securities 

issued by a PSE that represent general 

obligation securities. 

The proposal would also apply a risk 

weight of 50 percent to other nonsubordinated, non-agency and non-GSE 

guaranteed, residential mortgage-backed 

securities (RMBS), excluding principaland interest-only STRIPS. The 

underlying loans in the security must be 

first-lien residential real estate loans, in 

order to qualify. Furthermore, the 

security must be in the most senior 

position in the securitization if losses 

are applied to the securitization. The 

senior position is not based on 

allocation of principal, only losses. This 

risk weight would be consistent with 

the 50 percent risk weight that would be 

assigned to first-lien residential real 

estate loans under this proposal and 

FDIC’s capital regulation.239 Many 

commenters wanted risk weights more 

aligned with the collateral risk weight, 

which this risk weight does. 

Furthermore, this risk weight would be 

comparable with the FDIC’s approach 

for calculating the risk weight for 

RMBSs 240 as some other commenters 

requested. 

The Board requests comments on 

whether certain items currently listed in 

this category should be assigned a 

higher or lower risk weight and why. In 

addition, the Board requests comments 

on whether additional items should be 

assigned a 50 percent risk weight and 

why. 

104(c)(2)(iv) Category 4—75 Percent 

Risk Weight 

Proposed § 702.104(c)(2)(iv) would 

provide that a credit union must assign 

a 75 percent risk weight to the 

outstanding balance (net of government 

guarantees), including loans held for 

sale, of the following on-balance sheet 

assets: 

• Current first-lien residential real 

estate loans greater than 35 percent of 

assets. 

• Current secured consumer loans. 

This proposal would apply to the 

amount of first-lien residential real 

estate loans above the single 

concentration threshold of 35 percent of 

assets, which is a reduction in the 

amount of capital required due to 

exceeding the concentration thresholds 

when compared to the Original 

Proposal. 

This proposed rule would apply 

separate risk weights for current 

consumer loans based on whether they 

are secured or unsecured. Current 

secured consumer loans would receive 

a 75 percent risk weight because they 

generally have a lower credit risk than 

unsecured consumer loans due to the 

collateral available for secured loans. 

The Board requests comments on 

whether any items currently listed in 

this category should be assigned a 

higher or lower risk weight and why. In 

addition, the Board requests comments 

on whether additional items should be 

assigned a 75 percent risk weight and 

why. 

104(c)(2)(v) Category 5—100 Percent 

Risk Weight 

Proposed § 702.104(c)(2)(v) would 

provide that a credit union must assign 

a 100 percent risk weight to the 

following on-balance sheet assets: 

• The outstanding balance (net of 

government guarantees), including loans 

held for sale, of: 

Æ First-lien residential real estate 

loans that are not current. 

Æ Current junior-lien residential real 

estate loans less than or equal to 20 

percent of assets. 

Æ Current unsecured consumer loans. 

Æ Current commercial loans, less 

contractual compensating balances that 

comprise less than 50 percent of assets. 

Æ Loans to CUSOs. 

• The exposure amount of: 

Æ Industrial development bonds. 

Æ All stripped mortgage-backed 

securities (interest only and principal 

only STRIPS). 

Æ Part 703 compliant investment 

funds, with the option to use the lookthrough approaches in § 702.104(c)(3)(ii) 

of this section. 

Æ Corporate debentures and 

commercial paper. 

Æ Nonperpetual capital at corporate 

credit unions. 

Æ General account permanent 

insurance. 

Æ GSE equity exposure or preferred 

stock. 

• All other assets listed on the 

statement of financial condition not 

specifically assigned a different risk 

weight under this subpart. 

Unless otherwise noted below, the 

investment risk weights are also 

consistent with the risk weights 

applicable to banks,241 which some 

commenters requested. The Board 

believes the 100 percent risk weight for 

these investments would be appropriate 

due to their risk of loss. 

Industrial development bonds (IDB) 

are issued under the auspices of a state 

or political subdivision but are an 

obligation of a private party or 

enterprise and are therefore akin to a 

corporate exposure. An example of an 

IDB is a security issued by an airport 

authority for a terminal of an airliner. 

The security would be issued by the 

airport authority and be an obligation of 

the airliner. 

Stripped mortgage-backed securities 

(interest-only and principal-only 

STRIPS) represent either the payments 

of principal or interest from an 

underlying pool of mortgages. The 

Board believes the increased risk 

associated with these two structures 

warrants a higher risk weight compared 

to non-principal-only and non-interestonly STRIPS with similar collateral. The 

Board chose to include principal-only 

STRIPS in the 100 percent risk weight 

category due to the explicit prohibition 

of this structure in part 703. The Board 


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242See, e.g., 12 CFR 324.53. 

243See, e.g., 12 CFR 324.32. 

244See, e.g., 12 CFR 324.32(g)(2). 

245See, e.g., 12 CFR 324.32(g)(2). 

246See, e.g., 12 CFR 324.32(f) (standard 

commercial loans) and 324.32(j) (high volatility 

commercial real estate loans). 

247See. 12 CFR 723.1(b). 

248Other than auto secured loans, business 

purpose loans below $50,000 would still receive a 

100 percent risk weight as an unsecured consumer 

loan or fall into the ‘‘all other assets’’ category. 

249See, e.g., 12 CFR 324.32(l)(5). 

requests comments on whether risk 

weights for principal-only STRIPS 

should be more comparable to the Other 

Banking Agencies and assign a risk 

weight for STRIPS based on the 

underlying guarantor or collateral. 

The proposal would assign a risk 

weight of 100 percent to part 703 

compliant investment funds, with the 

option to use the look-through 

approaches in the proposal. For an 

investment fund to be assigned a 100 

percent risk weight, compliance with 

part 703 of NCUA’s regulations must be 

stated in the investment fund’s 

documentation (such as the prospectus) 

and must be binding (intent alone is 

insufficient). 

The credit union also has the ability 

to choose an alternate approach for 

investment funds. The risk weight for 

investment funds deviates slightly from 

the approach applicable to banks. The 

Board has added a standard risk weight 

of 100 percent for part 703 compliant 

funds, in addition to adopting the 

approach applicable to banks,242 as an 

additional option for credit unions. 

However, the Board believes the 

approach for investment funds is 

consistent with recommendations 

received from commenters who 

suggested the risk weights be based on 

the underlying accounts and investment 

strategies. 

The proposal would assign a risk 

weight of 100 percent to the balance of 

nonperpetual capital at corporate credit 

unions. Nonperpetual capital is 

subordinate to deposits in a corporate 

credit union, which warrants a higher 

risk weight than deposits. 

The proposal would apply the 100 

percent risk weight to general account 

permanent insurance. This type of 

insurance is typically associated with 

the funding of employee benefits. 

General account permanent insurance 

with returns indexed to equity returns 

should have the same risk weight as 

publically traded equity investments, 

unless it has a positive return floor. The 

100 percent risk weight is reflective of 

the moderate risk associated with this 

asset. 

Some commenters argued for lower 

risk weights for investments funding 

employee benefits. However, the Board 

disagrees with those commenters and, 

consistent with the general approach 

taken in assigning risk weights under 

this proposal, believes that the risk 

weight assigned to investments funding 

employee benefits should be based on 

the credit risk and not the purpose of 

the asset. The Board notes this is 

comparable to the approach taken by the 

Other Banking Agencies.243

Under this proposal, first-lien 

residential real estate loans that are not 

current would be assigned a 100 percent 

risk weight reflecting the increased 

credit risk and consistent with the risk 

weights for similar loans held by banks 

under the Other Banking Agencies’ 

regulations.244 The Board believes the 

proposed higher risk weight that would 

be assigned to non-current loans is 

warranted because such loans have a 

higher probability of default when 

compared to current loans. Non-current 

loans are more likely to default because 

repayment is already impaired making 

them one step closer to default 

compared to current loans. 

Additionally, a higher risk weight for 

non-current loans is consistent with the 

risk weights assigned by the Other 

Banking Agencies. 

Under this proposal, current juniorlien residential real estate loans under 

the single concentration threshold 

would be assigned a 100 percent risk 

weight, which would be consistent with 

the risk weight for similar residential 

real estate loans assigned by the Other 

Banking Agencies.245

The 125 percent risk category that was 

included in the Original Proposal would 

be eliminated. The 125 percent risk 

category applied to the portion of other 

real estate loans that made up between 

10 to 20 percent of a credit union’s total 

assets. The reduction in the number of 

concentration thresholds applicable to 

junior-lien real estate loans resulted in 

the elimination of the 125 percent risk 

weight. 

Under this proposal, secured and 

unsecured consumer loans would be 

separated into different risk-weight 

categories, with current unsecured 

consumer loans assigned a 100 percent 

risk weight. The higher risk weight for 

current unsecured consumer loans 

would reflect the elevated risk from this 

loan type compared to current secured 

consumer loans. Generally, unsecured 

loans reflect higher levels of 

delinquency and charge-offs, as reported 

on the quarterly Call Report, and, 

therefore, expose the credit union to 

higher risk than secured loans. 

The Board notes that under this 

proposal, student loans would be 

incorporated into the definition of 

consumer loans and risk-weighted 

accordingly. 

The approach for assigning the risk 

weight for commercial loans would be 

comparable to the Other Banking 

Agencies’ rules.246 As discussed 

previously, the changes to the definition 

of commercial loans would align the 

risk weights with actual credit risk 

exposure instead of assigning risk 

weights based on the $50,000 exemption 

as it relates to the statutory MBL cap 247

(which commenters pointed out). The 

change would result in improved and 

more easily reconcilable call reporting, 

and enhance NCUA’s ability to account 

for all loans that support commercial 

ventures.248

Consistent with the Original Proposal, 

this proposed rule would assign a 100 

percent risk weight to the outstanding 

balance of unconsolidated loans to 

CUSOs. 

This proposal would assign a 100 

percent risk weight to all other balance 

sheet assets not specifically assigned a 

different risk weight under this subpart, 

but reported on the statement of 

financial condition. This 100 percent 

risk weight is consistent with the risk 

weight applicable to banks 249 and the 

Board believes this risk weight is 

appropriate for assets not specifically 

assigned a risk weight. 

104(c)(2)(vi) Category 6—150 Percent 

Risk Weight 

Proposed § 702.104(c)(2)(vi) would 

provide that a credit union must assign 

a 150 percent risk weight to the 

following on-balance sheet assets: 

• The outstanding balance, net of 

government guarantees and including 

loans held for sale, of: 

Æ Current junior-lien residential real 

estate loans that comprise more than 20 

percent of assets. 

Æ Junior-lien residential real estate 

loans that are not current. 

Æ Consumer loans that are not 

current. 

Æ Current commercial loans (net of 

contractual compensating balances), 

which comprise more than 50 percent of 

assets. 

Æ Commercial loans (net of 

contractual compensating balances), 

which are not current. 

• The exposure amount of: 

Æ Perpetual contributed capital at 

corporate credit unions. 

Æ Equity investments in CUSOs. 

Under the Original Proposal, the risk 

weight for perpetual contributed capital 

at corporate credit unions would have 


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250See, e.g., 12 CFR 324.32(k)(1). 251See, e.g., 12 CFR 324.32(l)(4)(i). 

been 200 percent. This proposal would 

lower the risk weight for perpetual 

contributed capital at corporate credit 

unions to 150 percent. Perpetual 

contributed capital at corporate credit 

unions would receive a higher risk 

weight than nonperpetual capital at 

corporate credit unions because 

perpetual contributed capital is 

available to absorb losses before 

nonperpetual capital. The Board 

believes the 150 percent risk weight is 

appropriate due to heightened risk of 

loss compared to the 100 percent riskweighted nonperpetual capital. 

Under this proposal, current juniorlien residential real estate loans that 

exceed 20 percent of assets would be 

assigned a 150 percent risk weight. 

Additionally, any junior-lien residential 

real estate loans that are not current, as 

defined in the proposal, would receive 

the 150 percent risk weight reflecting 

the higher credit risk of such loan than 

current junior-lien real estate loans up 

to 20 percent of assets, which would 

receive a 100 percent risk weight. 

The Board also proposes that 

consumer loans that are non-current be 

assigned a 150 percent risk weight, as in 

the Original Proposal. The Board 

believes the proposed higher risk weight 

that would be assigned to non-current 

loans is warranted because such loans 

have a higher probability of default 

when compared to current loans. Noncurrent loans are more likely to default 

because repayment is already impaired 

making them one step closer to default 

compared to current loans. This rule 

would more clearly define those loans 

that are assigned a 150 percent risk 

weight through new definitions for 

consumer loan and current loan. The 

150 percent risk weight for non-current 

consumer loans is also consistent with 

the risk weight for non-current 

consumer loans assigned by the Other 

Banking Agencies.250

This proposal would maintain higher 

risk weights for high concentrations of 

commercial loans as GAO and OIG 

recommend. A high concentration is 

defined as commercial loans over 50 

percent of assets, which would receive 

the 150 percent risk weight. The amount 

of commercial loans subject to the 150 

percent concentration risk weight would 

be determined as follows: 

As discussed earlier, due to the higher 

credit risk of non-current commercial 

loans, they would receive a 150 percent 

risk weight. 

The Board requests comments on 

whether any items currently listed in 

this category should be assigned a 

higher or lower risk weight and why. In 

addition, the Board requests comments 

on whether additional items should be 

assigned a 150 percent risk weight and 

why. 

104(c)(2)(vii) Category 7—250 Percent 

Risk Weight 

Proposed § 702.104(c)(2)(vii) would 

provide that a credit union must assign 

a 250 percent risk weight to the carrying 

value of mortgage servicing assets 

(MSAs) held on-balance sheet. 

As discussed above, MSA valuations 

are highly sensitive to unexpected shifts 

in interest rates and prepayment speeds. 

As noted above, MSAs are also sensitive 

to the costs associated with servicing. 

These risks contribute to the high level 

of uncertainty regarding the ability of 

credit unions to realize value from such 

assets, especially under adverse 

financial conditions, and support this 

proposed rule’s treatment for MSAs. 

Given there is no differentiation 

between the risk as it relates to MSAs 

for credit unions versus banks, the 

Board believes this treatment would 

generally maintain comparability with 

the Other Banking Agencies’ capital 

regulations.251

The Board requests comments on 

whether any items currently listed in 

this category should be assigned a 

higher or lower risk weight and why. In 

addition, the Board requests comments 

on whether additional items should be 

assigned a 250 percent risk weight and 

why. 

104(c)(2)(viii) Category 8—300 Percent 

Risk Weight 

Proposed § 702.104(c)(2)(viii) would 

provide that a credit union must assign 

a 300 percent risk weight to the 

exposure amount of the following onbalance sheet assets: 

• Publicly traded equity investments, 

other than a CUSO investment. 

• Investment funds that are not in 

compliance with 12 CFR part 703, with 

the option to use the look-through 

approaches in § 702.104(c)(3)(ii) of this 

section. 

• Separate account insurance, with 

the option to use the look-through 

approaches in § 702.104(c)(3)(ii). 

The 300 percent risk weight category 

would be a new category relative to 

current rule and the Original Proposal. 

This second proposal would apply a 300 

percent risk weight to the exposure 

amount of publicly traded equity 


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252See, e.g., 12 CFR 324.52(b)(5). 

253See, e.g., 12 CFR 324.53. 

254See, e.g., 12 CFR 324.53. 

255See, e.g., 12 CFR 324.52(b)(6). 

256 Id. 

257The eight percent adequately capitalized level 

times 1,250 percent = 100 percent. 

investments, other than a CUSO 

investment. This proposal would also 

apply a 300 percent risk weight to 

investment funds that do not comply 

with part 703, and to separate account 

insurance, with the option to use the 

look-through approaches for both. The 

300 percent risk weight is due to the 

heightened level of uncertainty and 

potential risks within these assets as 

discussed below. 

Publicly traded equities have no 

contractual returns, no maturity date, 

and are generally considered more 

volatile than fixed-income investments. 

Furthermore, publically traded equities 

have a greater risk of loss since they are 

in a first loss position versus the debt of 

a company. Non-part 703 compliant 

investment funds and separate account 

insurance may contain equities, or other 

volatile and risky investments, which 

warrants the 300 percent risk weight. 

The risk exposure of both of these 

investments comes from the underlying 

assets supporting the investment fund 

or separate account insurance. Thus, 

credit unions would have the option of 

applying one of the look-through 

approaches discussed in more detail 

below for investment funds and separate 

account insurance risk weights to lower 

risk weights for investment funds and 

separate account insurance, if a credit 

union chooses to use one of the 

alternative approaches. 

This proposal would allow the 300 

percent risk weight to apply to all 

publicly traded equity exposures, both 

directly and indirectly. The 300 percent 

risk weight for publicly traded equities 

is generally consistent with the risk 

weight applicable to banks 252 and the 

Board believes this risk weight is 

appropriate due the elevated risk of loss 

with publicly traded equities. This 

would include direct exposure via 

purchasing an equity investment or 

having exposure to publicly traded 

equities through some other structure. 

An example of public equity exposure 

through other structures would be 

general account permanent insurance 

where the returns are indexed off of the 

Standard and Poor’s 500 Index. A 

minimum positive return floor is 

sufficient to exclude general account 

permanent insurance from the 300 

percent risk weight. Structured products 

can also be structured to have returns 

based off the return of an index or one 

or more publicly traded equities. 

The risk weights for investment funds 

and separate account insurance deviate 

slightly from the Other Banking 

Agencies’ capital regulations.253 This 

proposal adds a standard risk weight of 

300 percent for non-part 703 compliant 

funds, in addition to the approach 

applicable to banks,254 as an additional 

option for credit unions. The approach 

for investment funds and separate 

account insurance is consistent with 

several commenters who requested risk 

weights be based on the underlying 

accounts and investment strategies. 

The Board believes the 300 percent 

risk weight that would be assigned to 

non-part 703 compliant investment 

funds and separate account insurance is 

appropriate due to the potential risk the 

underlying assets may have. The risk 

weight of 300 percent for these 

exposures is due to the wide availability 

of equity-based investment funds and 

equity-based separate account insurance 

in the market. The Board notes that 

credit unions may get a lower risk 

weight if they use a look-through 

approach for investment funds and 

separate account insurance. 

The Board requests comments on 

whether any items currently listed in 

this category should be assigned a 

higher or lower risk weight and why. In 

addition, the Board requests comments 

on whether additional items should be 

assigned a 300 percent risk weight and 

why. 

104(c)(2)(ix) Category 9—400 Percent 

Risk Weight 

Proposed § 702.104(c)(2)(ix) would 

provide that a credit union must assign 

a 400 percent risk weight to the 

exposure amount of non-publicly traded 

equity investments that are held onbalance sheet, other than equity 

investments in CUSOs. 

This 400 percent risk weight is due to 

the greater relative risk versus publicly 

traded equity investments, which have 

a 300 percent risk weight. The greater 

risk is due to non-publicly traded equity 

investments not having the reporting 

requirements and active market that a 

publicly traded equity has. The 400 

percent risk weight for non-publicly 

traded equity investments is consistent 

with the risk weight applicable to 

banks 255 and the Board believes this 

risk weight is appropriate due to the 

increased risk of non-publicly traded 

equities versus publicly traded equities. 

The 400 percent risk weight category 

is a new category when compared to the 

current rule and the Original Proposal. 

This risk weight is unlikely to have an 

effect on most credit unions due to 

federal and state restrictions on credit 

union purchases of these types of 

investments. The Board, however, 

believes it is a necessary category to 

have in the unlikely event a credit 

union would own a non-publically 

traded non-CUSO investment. The 

proposed addition of this category 

would also be comparable to the Other 

Banking Agencies’ capital 

regulations.256

The Board requests comments on 

whether any items currently listed in 

this category should be assigned a 

higher or lower risk weight and why. In 

addition, the Board requests comments 

on whether additional items should be 

assigned a 400 percent risk weight and 

why. 

104(c)(2)(x) Category 10—1,250 Percent 

Risk Weight 

Under the Original Proposal, 

proposed § 702.104(c)(2)(x) would have 

required a credit union to assign a 1,250 

percent risk weight to an asset-backed 

investment for which the credit union is 

unable to demonstrate, as required 

under § 702.104(d), a comprehensive 

understanding of the features of the 

asset-backed investment that would 

materially affect its performance. A 

1,250 percent risk weight is equivalent 

to holding capital equal to 100 percent 

of the investment’s balance sheet 

value.257

During the recent financial crisis, it 

became apparent that many federally 

insured financial institutions relied 

exclusively on ratings issued by 

Nationally Recognized Statistical 

Organizations (NRSOs) and did not 

perform internal credit analysis of assetbacked investments. 

Complex credit unions must be able 

to demonstrate a comprehensive 

understanding of any investment, 

particularly an understanding of the 

features of an asset-backed investment 

that would materially affect its 

performance. Upon purchase, and on an 

ongoing basis, the credit union must 

evaluate, review, and update as 

appropriate the analysis performed on 

an asset-backed investment. In the event 

a credit union is unable to demonstrate 

a comprehensive understanding of an 

asset-backed investment, the Original 

Proposal would have provided for 

assigning a risk weight of 1,250 percent 

to that investment. 

The Board received a significant 

number of comments on the assignment 

of the 1,250 percent risk weight to 

certain investments and the proposed 

due diligence requirements in 

§ 702.104(d). Commenters generally 

agreed that credit unions should have a 


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258See, e.g., 12 CFR 324.43(e) and 324.44; Note, 

the Board is not offering the option for the 

Simplified Supervisory Formula Approach 

permitted under the Other Banking Agencies’ 

capital regulations due to its complexity and 

limited applicability. 

259Senior mezzanine tranches are subordinated to 

more senior tranches at issuance. 

comprehensive understanding of any 

investments they purchase. Several 

commenters objected to assigning a 

1,250 percent risk weight to investments 

credit unions do not understand. 

One commenter stated that the 

proposal gave the Board broad 

discretion to require dollar-for-dollar 

capital on asset-backed investments that 

NCUA determines the credit union is 

unable to demonstrate a comprehensive 

understanding. The commenter stated 

that while such an investment may 

represent a significant safety and 

soundness concern, an elevated capital 

requirement is not an appropriate means 

of addressing that risk. The commenter 

suggested that if a credit union does not 

understand an investment on its books, 

the regulator should rectify the situation 

through the supervisory process. The 

commenter stated further that, although 

this provision was adopted in the bank 

rule, use of these types of products is 

more limited in the credit union 

industry and risks can and should be 

addressed through examinations. 

Other commenters suggested that the 

Board minimize the regulatory burdens 

of this provision by limiting the 

proposed reporting requirements to 

investments identified during the 

supervisory process as a potential 

concern. 

A number of commenters expressed 

concern that NCUA would not apply the 

requirements in a fair and consistent 

manner across credit unions. A small 

number of commenters suggested that 

the Board should be required to perform 

an on-site evaluation and reach a joint 

determination with the state regulator 

before recommending a 1,250 percent 

risk weight on a state-chartered 

institution. 

Commenters suggested that the rule 

should clarify the administrative level 

within NCUA at which this 

determination will be made because 

such a finding could have a dramatic 

impact on a credit union’s PCA 

classification and major implications for 

that credit union’s balance sheet and 

management structure. Other 

commenters suggested that the rule 

should specify that a 1,250 percent risk 

weight constitutes a material 

supervisory determination that is 

subject to appeal. 

A number of commenters stated that 

the term ‘‘asset-backed investment’’ is 

not defined, which they stated could 

lead to wide interpretation both of the 

1,250 percent risk weight as well as 

potential examiner expectations of the 

initial and ongoing depth of the review, 

analysis, and documentation of assetbacked investments. Commenters 

suggested that such depth of review is 

appropriate for some types of 

investments, but not others. For 

example, commenters contended that a 

government agency-guaranteed 

mortgage-backed security does not 

warrant the type of analysis and 

documentation outlined in the Original 

Proposal because the lack of inherent 

credit risk in the government agency 

security should reduce the concern of a 

large credit loss on the investment and 

therefore should reduce the depth of 

review and analysis. 

Other commenters suggested if the 

Board determines it can provide a clear 

definition of ‘‘asset-backed 

investments,’’ it should do so in a new 

proposed rule that also outlines 

reasonable expectations and provides a 

method for fair and consistent 

application of the due diligence 

requirements. 

One commenter agreed that complex 

asset backed investments (private label) 

with inherent credit risk exposure 

should have additional due diligence 

requirements, but argued a 250 percent 

risk weight would be more appropriate. 

Another commenter suggested that the 

rule should make it clear that the due 

diligence requirement does not apply to 

any asset backed investments 

guaranteed by the U.S. Government or 

any U.S. Government agency. 

Based on a diligent review of these 

comments the Board has significantly 

revised this section and now proposes 

to require a 1,250 percent risk weight 

only for subordinated tranches of any 

investments. Specifically, the Board is 

proposing to change application of a 

1,250 percent risk weight from ‘‘assetbacked investments,’’ to ‘‘subordinated 

tranche’’ investments. 

Commenters requested clarity on the 

interpretation on what investments 

would be considered asset-backed 

investments. The Board believes 

subordinated tranche is a clearer term, 

has provided a corresponding 

definition, and thus will eliminate the 

ambiguity cited by commenters. 

The Board also believes this proposed 

change will more accurately apply risk 

weights based on risk while providing 

clarity and consistency. 

However, NCUA still expects credit 

unions to perform appropriate credit 

analysis on non-subordinated tranches 

of mortgage- and asset-backed securities. 

NCUA will address deficiencies in the 

credit analysis of non-subordinated 

tranches through the supervision 

process. 

The Board is also proposing changes 

to address concerns raised by 

commenters with respect to securities 

issued by the U.S. Government and 

NCUA’s ability to use its discretion to 

apply a 1,250 percent risk weight. 

First, the Board is proposing to 

specifically exclude senior tranches and 

most securities issued by the U.S. 

Government, any U.S. Government 

agency, or GSEs. The Board believes this 

change would address a major concern 

expressed by commenters. 

The Board is also proposing to remove 

the discretion for NCUA to impose a 

1,250 percent risk weight by allowing 

credit unions to choose the standard 

1,250 percent risk weight or allowing 

credit unions the option to use the 

gross-up approach, which is explained 

in more detail below. The Board 

believes that removing NCUA discretion 

to impose a 1,250 risk weight also 

addresses a major concern by 

commenters. As previously noted, 

deficiencies in credit analysis will be 

addressed in supervision. 

The Board believes a 1,250 percent 

risk weight is appropriate for 

subordinated tranches based on the 

leveraged nature of the credit risk in 

these investments. In addition, this 

approach is consistent with the 

approach applicable to banks,258 which 

some commenters requested. 

The Board intends for the 1,250 

percent risk weight to apply to 

subordinated tranches of MBS, assetbacked securities, revenue bonds, and 

areas where there is subordinated credit 

risk in a structured product. 

Subordinated MBS and asset-backed 

securities are the most common form of 

subordinated tranches, and include any 

MBS or asset-backed securities that take 

credit losses before a more senior class. 

Senior mezzanine tranches 259 would be 

considered subordinated unless the 

more senior tranches have paid off. A 

subordinated tranche can become a nonsubordinated tranche if the more senior 

tranches pay off. 

Subordinated revenue bonds would 

typically involve a bond similar to an 

asset-backed security that is issued as a 

revenue bond. An example is a 

subordinated revenue bond issued by a 

state corporation that facilitates the 

granting of student loans. The 

performance of these types of 

subordinated bonds is based on the 

revenue provided by the underlying 

loans, as in the case of an asset-backed 

security. 


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260Based on June 30, 2014, Call Report data, 

NCUA estimates that 93.3 percent of all investments 

for credit unions with more than $100 million in 

assets would receive a risk weight of 20 percent or 

less; and, 96.1 percent of all investments would 

receive a risk weight of 100 percent or less. 

261More simple terminology than the FDIC rule 

language is used to make this example easier to 

follow. 

Structured products that take credit 

losses based on a reference pool would 

be considered subordinated tranches. 

An example would be the loss sharing 

bonds that are issued by Fannie Mae 

and Freddie Mac. These structured 

securities are Fannie Mae or Freddie 

Mac debentures that pay less than par 

to investors if the reference pool takes 

a certain amount of losses. In this case 

the majority of the credit risk comes 

from the principal payout formula, not 

the issuer. 

As discussed above, subordinated 

tranches are leveraged. This leverage 

allocates a disproportionate amount of 

losses to subordinated tranches in 

relation to the pool of collateral, or 

reference pool. By applying a 1,250 

percent risk weight, the Board is 

ensuring that the risk of highly 

leveraged subordinated tranches would 

be captured. 

The Board is also proposing to 

provide credit unions with the ability to 

use the gross-up approach to apply a 

lower risk weight to less leveraged 

subordinated tranches, which may 

result in a lower risk weight. The grossup approach is discussed in more detail 

below. 

Accordingly, under this proposal, 

§ 702.104(c)(2)(x) would provide that a 

credit union must assign a 1,250 percent 

risk weight to the exposure amount of 

any subordinated tranche of any 

investment held on balance sheet, with 

the option to use the gross-up approach 

in § 702.104(c)(3)(i).260

The Board is not retaining the due 

diligence requirement that would have 

been contained in § 702.104(d) of the 

Original Proposal. Proposed 

§ 702.104(d) would have contained a list 

of due diligence requirements credit 

unions would have been required to 

implement to demonstrate a 

comprehensive understanding of the 

features of an asset-backed investment 

and a requirement that if a credit union 

is unable to demonstrate a 

comprehensive understanding of the 

features of an asset-backed investment 

exposure that would materially affect 

the performance of the exposure, the 

credit union must assign a 1,250 percent 

risk weight to the asset-backed 

investment exposure. The Original 

Proposal would have also required that 

the credit union’s analysis be 

commensurate with the complexity of 

the asset-backed investment and the 

materiality of the position in relation to 

regulatory capital according to this part. 

As noted above, the Board is deleting 

this section from this proposal in 

conjunction with the changes it is 

making to the requirements to apply a 

1,250 percent risk weight. 

While it remains a best practice for 

credit unions to understand the features 

that would affect the performance of all 

investments, not just asset-based 

investments, any weakness with 

investment purchase analysis and 

documentation can be addressed 

through the supervision process. 

The Board requests comments on this 

provision of the proposal. 

104(c)(3) Alternative Risk Weights for 

Certain On-Balance Sheet Assets 

Proposed § 702.104(c)(3) would 

provide that instead of using the risk 

weights assigned in § 702.104(c)(2), a 

credit union may determine the risk 

weight of investment funds and 

subordinated tranches of any 

investment using the approaches which 

are discussed in more detail below. The 

Board believes these alternative 

approaches would provide a credit 

union with the ability to risk weight 

based on the underlying exposure of the 

subordinated tranche or investment 

fund without exposing the NCUSIF to 

additional risk. This approach may also 

allow for lower risk weights compared 

to the standard risk weights proposed. 

104(c)(3)(i) Gross-up Approach 

Proposed § 702.104(c)(3)(i) would 

provide that a credit union may use the 

gross-up approach under 12 CFR 

324.43(e) to determine the risk weight of 

the carrying value of any subordinated 

tranche of any investment. As noted 

above, the Board is allowing for the use 

of the gross-up approach, included in 

the Other Banking Agencies’ capital 

rules, when applying risk weights to 

subordinated tranches of any 

investment. The Board believes this 

approach is appropriate in applying risk 

weights, if the credit union chooses to 

use it, since it captures the total 

exposure the subordinate tranche is 

supporting. 

However, the credit union can only 

use one methodology to calculate the 

risk weight for subordinate tranches, 

either the gross-up approach or a 1,250 

percent risk weight. 

The basic logic behind the gross-up 

approach is that the risk weight should 

reflect the entire amount of exposure the 

subordinated tranche is supporting. 

Said another way, the credit union must 

hold capital for the subordinated 

tranche, as well as all the senior 

tranches for which the subordinated 

tranche provides credit support. 

When calculating the risk weight 

using the gross-up approach, the credit 

union must have the following 

information: 

• Exposure amount of the 

subordinated tranche; 

• Current outstanding par value of the 

credit union’s subordinated tranche; 

• Current outstanding par value of the 

total amount of the entire tranche where 

the credit union has exposure; 

• Current outstanding par value of the 

more senior positions in the 

securitization that are supported by the 

tranche the credit union owns the 

subordinated tranche; and 

• The weighted average risk weight 

applicable to the assets underlying the 

securitization. 

The following is an example of the 

application of the gross-up approach: 261

A credit union owns $4 million (exposure 

amount and outstanding par value) of a 

subordinated tranche of a private label 

mortgage-backed security backed by first-lien 

residential mortgages. The total outstanding 

par value of the subordinated tranche that the 

credit union owns part of is $10 million. The 

current outstanding par value for the 

tranches that are senior to and supported by 

the credit union’s tranche is $90 million. 

Calculation Result 

A ........................ Current outstanding par value of the credit union’s 

subordinated tranche divided by the current outstanding par value of the entire tranche where 

the credit union has exposure.

$4,000,000/$10,000,000 .......................................... 40% 

B ........................ Current outstanding par value of the senior positions in the securitization that are supporting the 

tranche the credit union owns.

.................................................................................. $90,000,000 


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262Master trust subordinated tranches do not 

support any particular senior tranche in the trust. 

The subordinated tranche supports an amount of 

senior tranches as defined in the prospectus and the 

current servicing reports. 263Structured products may allocate losses based 

on other securities or a reference pool. The credit 

union should calculate the pro-rata senior tranche 

based on the amount the subordinated tranche 

would support if it were an actual tranched 

security. 

264At this time FCUs are not permitted to engage 

in derivative contract activity for the purpose of 

speculation. However, federally insured, statechartered credit unions may be permitted to use 

derivative contracts for speculative purposes under 

applicable state law, and thus the Board is 

including this statement to address those scenarios. 

265Fund holdings (percent of fund) multiplied by 

the credit union investment. 

266Minimum 20 percent risk weight for assets in 

an investment fund, even if the individual risk 

weight is zero percent. 

267Use 1,250 percent risk weight or gross-up 

calculation. 

268The weighted average risk weight was 

calculated by dividing the amount of risk assets 

($5,600,000) by the credit union exposure 

($10,000,000). 

Calculation Result 

C ........................ Pro-rata share of the more senior positions outstanding in the securitization that is supported 

by the credit union’s subordinated tranche: (A) 

multiplied by (B).

40% times $90,000,000 ........................................... $36,000,000 

D ........................ Current exposure amount for the credit union’s 

subordinated tranche.

.................................................................................. $4,000,000 

E ........................ Enter the sum of (C) and (D) .................................. $36,000,000 + $4,000,000 ...................................... $40,000,000 

F ........................ The higher of the weighted average risk weight applicable to the assets underlying the 

securitization or 20%.

50% primary risk weight for 1st lien residential real 

estate loan.

50% 

G ........................ Risk-weighted asset amount of the credit union’s 

purchased subordinated tranche: (E) multiplied 

by (F).

$40,000,000 times 50% ........................................... $20,000,000 

In this example, under the gross-up 

approach, the credit union would be 

required to risk weight the subordinated 

tranche at $20,000,000. Conversely, 

under the 1,250 percent risk weight 

approach, the credit union would be 

required to risk weight the subordinated 

tranche at $50 million (1250 percent 

times $4 million). The Board believes 

this example shows the benefit to credit 

unions of the proposed inclusion of the 

gross-up approach. 

In the case of master trust 262 type 

structures and structured products,263

credits unions should calculate the prorata share of the more senior positions 

using the prospectus and current 

servicing/reference pool reports. 

104(c)(3)(i) Look-Through Approaches 

Proposed § 702.104(c)(3)(ii) would 

provide that a credit union may use one 

of the look-through approaches under 

12 CFR 324.53 to determine the risk 

weight of the fair value of mutual funds 

that are not in compliance with part 703 

of this chapter, the recorded value of 

separate account insurance; or part 703 

compliant mutual funds. The Board is 

proposing this approach to allow credit 

unions to use the look-through approach 

in the Other Banking Agencies’ 

regulations for investment funds. This 

proposed provision responds to 

commenters who requested this 

authority. 

Specifically, for purposes of applying 

risk weights to investment funds, the 

Board is proposing to give credit unions 

the option of using the three lookthrough approaches that FDIC allows its 

regulated institutions to use under 12 

CFR 324.53 of its regulations, instead of 

using the standard risk weights of 20, 

100 and 300 percent that would be 

assigned under proposed 

§ 702.104(c)(2). The Board believes that 

including these alternative approaches 

makes NCUA’s risk-based capital 

requirement more comparable to the 

Other Banking Agencies’ regulations 

and grants credit unions additional 

flexibility. 

The first of the three full look-through 

approaches under 12 CFR 324.53 would 

require a credit union to look at the 

underlying assets owned by the 

investment fund and apply an 

appropriate risk weight. The other two 

approaches under 12 CFR 324.53 would 

require a credit union to use the 

information provided in the investment 

fund’s prospectus. The minimum risk 

weight for any investment fund asset 

would be 20 percent, regardless of 

which approach was used. 

The Board notes that regardless of the 

look-through approach selected, the 

credit union must include any 

derivative contract that is part of the 

investment fund, unless the derivative 

contract is used for hedging rather than 

speculative purposes and does not 

constitute a material portion of the 

fund’s exposure.264

The following examples outline each 

of the three look-through approaches: 

Full look-through approach. The full 

look-through approach would allow 

credit unions to weight the underlying 

assets in the investment fund as if they 

were owned separately, with a 

minimum risk weight of 20 percent for 

all underlying assets. Credit unions 

would be required to use the most 

recently available holdings reports 

when utilizing the full look-through 

approach. An example of the 

application of the full look-through 

approach is as follow: 

CREDIT UNION INVESTMENT—$10,000,000 

Fund investment: 

Fund holding (% of 

fund): 

Credit union 

exposure 265: Risk weight: Dollar risk weight: 

U.S. Treasury Notes: ....................... 50 $5,000,000 20% 266 ............................................ $1,000,000. 

FNMA PACs: ................................... 30 3,000,000 20% ................................................. $600,000. 

PSE Revenue Bonds: ...................... 17.5 1,750,000 50% ................................................. $875,000. 

Subordinated MBS267 ..................... 2.5 250,000 1,250% ............................................ $3,125,000. 


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269Minimum 20 percent risk weight for assets in 

an investment fund, even if the individual risk 

weight is zero percent. 

270Use 1,250 percent risk weight unless the 

prospectus limits gross-up risk weight. 

271Minimum 20 percent risk weight for assets in 

an investment fund, even if the individual risk 

weight is zero percent. 

272Use 1,250 percent risk weight unless the 

prospectus limits gross-up risk weights. 

273The weighted average risk weight was 

calculated by dividing the amount of risk assets 

($15,800,000) by the credit union exposure 

($10,000,000). 

CREDIT UNION INVESTMENT—$10,000,000—Continued 

Fund investment: 

Fund holding (% of 

fund): 

Credit union 

exposure 265: Risk weight: Dollar risk weight: 

Totals ........................................ .................... 10,000,000 56% 268 ............................................

(weighted average risk weight) .......

$5,600,000 (amount of risk assets). 

Using the above example, the 

investment fund would have a weighted 

average risk weight of 56 percent, which 

would be lower than the 100 percent 

standard risk weight for part 703 

compliant investment funds or the 

standard 300 percent risk weight for 

investment funds not compliant with 

part 703. 

Simple modified look-through 

approach. The simple modified lookthrough approach would allow credit 

unions to risk weight their holdings in 

an investment fund by the highest risk 

weight of any asset permitted by the 

investment fund’s prospectus. Credit 

unions should use the most recently 

available prospectus to determine 

investment permissibility for an 

investment fund. An example of the 

application of the simple modified lookthrough approach is as follow: 

CREDIT UNION INVESTMENT—$10,000,000 

Permissible investments: Fund limits 

(% of fund): 

Risk weight 

(percent): 

U.S. Treasury Notes: ............................................................................................................................................... 100 269 20 

Agency MBS (non IO or PO): .................................................................................................................................. 50 20 

PSE GEO Bonds: .................................................................................................................................................... 20 20 

PSE Revenue Bonds: .............................................................................................................................................. 20 50 

Non-Government/Subordinated/IO/PO MBS ........................................................................................................... 30 50 

Subordinated MBS ................................................................................................................................................... 10 270 1,250 

Using the above example, the 

investment fund would have a risk 

weight of 1,250 percent using the simple 

modified look-through approach 

because the investment fund can hold 

1,250 percent risk-weighted 

subordinated MBS. In this case, the 

credit union would most likely use a 

100 percent standard risk weight for the 

part 703 compliant investment fund or 

the standard 300 percent risk weight for 

investment funds not in compliance 

with part 703. 

Alternative modified look-through 

approach. The alternative modified 

look-through approach would allow 

credit unions to risk weight their 

holdings in an investment fund by 

applying the risk weights to the limits 

in the prospectus. In the case where the 

aggregate limits in the prospectus 

exceed 100 percent, the credit union 

must assume the fund will invest in the 

highest risk-weighted assets first. An 

example of the application of the simple 

modified look-through approach is as 

follows: 

CREDIT UNION INVESTMENT—$10,000,000 

Permissible investments: Fund limits 

(% of fund): Risk weight: CU Exposure: Dollar risk weight: 

U.S. Treasury Notes: ...................... 100 20% 271 ........................................... $0 

Agency MBS (non IO or PO): ........ 50 20% ................................................ 2,000,000 400,000. 

PSE GEO Bonds: ........................... 20 20% ................................................ 2,000,000 400,000. 

PSE Revenue Bonds: ..................... 20 50% ................................................ 2,000,000 1,000,000. 

Non-Government/ ...........................

Subordinated/IO/PO MBS ..............

30 50% ................................................ 3,000,000 1,500,000. 

Subordinated MBS ......................... 10 1,250% 272 ...................................... 1,000,000 12,500,000. 

Total ......................................... ........................ 158% 273 (weighted average risk 

weight).

$10,000,000 15,800,000 (Amount of Risk Assets). 

Using the example above, the 

investment fund would have a weighted 

average risk weight of 158 percent using 

the alternative modified look-through 

approach. In this case, the credit union 

would most likely use a 100 percent 

standard risk weight for part 703 

compliant investment funds or the 

alternative modified look-through 

approach for risk weights for investment 

funds that are not compliant with part 

703. 

104(c)(4) Risk Weights for Off-Balance 

Sheet Activities 

Under the Original Proposal, 

proposed § 702.104(b)(3), which has 

been re-numbered as § 702.104(b)(4) 

under this proposal, would have 


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4412 Federal Register / Vol. 80, No. 17 / Tuesday, January 27, 2015 / Proposed Rules 

provided that the risk-weighted 

amounts for all off-balance sheet items 

are determined by multiplying the 

notional principal, or face value, by the 

appropriate conversion factor and the 

assigned risk weight as follows: 

• A 75 percent conversion factor with 

a 100 percent risk weight for unfunded 

commitments for MBLs. 

• A 75 percent conversion factor with 

a 100 percent risk weight for MBLs 

transferred with limited recourse. 

• A 75 percent conversion factor with 

a 50 percent risk weight for first 

mortgage real estate loans transferred 

with limited recourse. 

• A 75 percent conversion factor with 

a 100 percent risk weight for other real 

estate loans transferred with limited 

recourse. 

• A 75 percent conversion factor with 

a 100 percent risk weight for nonfederally guaranteed student loans 

transferred with limited recourse. 

• A 75 percent conversion factor with 

a 75 percent risk weight for all other 

loans transferred with limited recourse. 

• A 10 percent conversion factor with 

a 75 percent risk weight for total 

unfunded commitments for nonbusiness loans. 

Under the Original Proposal, a credit 

union would have calculated the 

exposure amount of an off-balance sheet 

component, which is typically the 

contractual amount multiplied by the 

applicable credit conversion factor 

(CCF). This treatment would have 

applied to specific off-balance sheet 

items, including loans transferred with 

limited recourse, unfunded 

commitments for business loans, and 

other unfunded commitments. The 

Original Proposal would have improved 

risk sensitivity and implemented capital 

requirements for certain exposures 

through a simple methodology. 

The Board received a number of 

comments on the proposed risk weights 

for off-balance sheet activities. 

Commenters suggested that the offbalance sheet computations seemed 

excessive and added unnecessary risk 

assets. 

One commenter disagreed with the 75 

percent conversion factor with a 100 

percent risk weight for unfunded 

commitments for MBLs, if that meant 

that a $10,000 line of credit that is 

funded to $6,000 would require a riskbased capital funding of $10,000 times 

0.75, which would equal $7,500 for a 

$4,000 unfunded commitment. 

A number of commenters suggested 

that under the proposed rule, credit 

unions would have been penalized for 

having unfunded commitments on nonbusiness loans and business loans. 

Other commenters suggested that 

unfunded commitments on nonbusiness loans and business loans 

should be assigned lower risk weights 

because the proposed risk weights 

would encourage credit unions to 

terminate or decrease lines of credit to 

consumers or small business owners to 

improve their risk-based capital 

classification. Another commenter 

agreed with including off-balance sheet 

activities in the assets denominator. 

Others stated the 75 percent 

conversion factor for unfunded business 

loans did not give appropriate 

consideration to the liability side of offbalance sheet items to offset some of 

this risk or other risks needs to be 

considered for lowering the assets 

denominator. Another commenter 

appreciated the proposed approach to 

capture off-balance sheet items. 

Still others stated that the reporting of 

off-balance sheet loans sold with limited 

recourse creates a negative impact on a 

credit union’s balance sheet. One other 

commenter suggested that the rule 

should include a mechanism for 

differentiating between loans sold with 

and without recourse. 

A number of commenters stated that 

some credit unions that sell conforming 

first mortgages through the Federal 

Home Loan Banks’ (FHLB) mortgage 

partnership finance (MPF) program 

retain a limited contractual portion of 

the credit risk. Those commenters 

suggested that the proposed risk weight 

is much too high for these loans because 

credit unions must generate their net 

earnings on such transactions at 

origination. Those commenters stated 

further that to generate sufficient 

income under the proposed risk 

weights, credit unions would have to 

charge rates on the MPF loans that 

would be very high and would not be 

competitive with bank rates for the same 

types of mortgages. Other commenters 

suggested that MPF loans sold to FHLBs 

should be assigned a conversion factor 

of 50 percent or less (along with the 

proposed 50 percent risk weight) 

because of their low risk exposure and 

to allow credit unions to compete in the 

mortgage market. Those commenters 

observed that the MPF program is a 

unique secondary market outlet for 

conforming fixed rate residential 

mortgages, in which participating FHLB 

members provide a credit enhancement 

(CE) based on the characteristics of 

mortgages being originated and sold 

under the Program. Those commenters 

stated further that the CE is a fixed 

dollar exposure for a specific pool of 

loans or Master Commitment, and one 

piece of the credit support that absorbs 

losses in a specific loan pool which 

exceed homeowners’ equity, primary 

mortgage insurance and an FHLBprovided first loss account (FLA). Those 

commenters explained that in exchange 

for providing the CE, members receive 

ongoing credit enhancement fee income 

over the life of the loans. Those 

commenters stated that this approach 

rewards FHLB-member credit unions for 

quality underwriting and provides a 

superior execution because it removes 

inefficiencies associated with charging 

guarantee fees based on the possible 

future performance of loans because, 

instead of assessing charges to cover 

projected losses, actual losses are 

covered by private capital provided by 

the FHLB and its members, resulting in 

strong historic performance of the MPF 

loans. In addition, those commenters 

suggested that due to the FLA covering 

the majority of the credit risk on MPF 

loans, participating member credit 

unions do not retain any interest rate or 

concentration risk on the sold loans. 

Those commenters recommended that, 

based on the historic performance of 

MPF loans and the very small amount 

of sustained credit losses, the capital 

charge under the Original Proposal was 

too high and a lower conversion factor 

should be used that recognizes the FLA 

and the strong historic performance of 

MPF loans. 

After considering the comments, the 

Board continues to believe that the risks 

associated with recourse loans and 

unfunded commitments are analogous 

to those associated with similar onbalance sheet loans. For this reason, 

these items will continue to be included 

in the risk-based capital ratio 

calculation. The Board generally agrees, 

however, that some specific changes 

should be made to more accurately 

measure the risks this subsection of the 

proposal is intended to account. 

In particular, the Board generally 

agrees that a credit union’s risk-based 

capital ratio calculation relating to offbalance sheet items should be limited to 

the amount of the credit union’s 

contractual exposure. Accordingly, the 

Board has amended this proposal to 

require that the credit equivalent 

amount that is applied to the 

appropriate risk weight category for all 

off-balance sheet items be determined 

by multiplying the off-balance sheet 

exposure, which is newly defined in 

this rule, by the appropriate credit 

conversion factor. 

This proposal would retain the 10 

percent credit conversion factor for noncommercial unused lines of credit. 

Commenters suggested that to improve 

their risk-based capital ratio credit 

unions would have looked to either 

terminate or decrease their lines of 

credit to consumers. Open lines of 


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274Basel III was published in December 2010 and 

revised in June 2011. The text is available at http:// 

www.bis.org/publ/bcbs189.htm. 

275See, e.g., 12 CFR 324.33. 

276This proposed approach is based on historical 

loss information regarding the MPF program that 

was provided to NCUA by the Federal Home Loan 

Banks. 

277As noted earlier, FHLBs’ MPF loans are 

handled separately. 

278See, e.g., 12 CFR 324.33. 

credit to consumers, even those that are 

unconditionally cancellable, can 

quickly result in a credit union shifting 

assets from low risk weight investments 

to higher risk weight loans. Credit 

unions can be hesitant to cancel or 

reduce consumer lines of credit due to 

the potential for negative reputation 

risk. Credit unions need to monitor the 

amount and type of outstanding unused 

lines of credit. The Board believes the 

proposed 10 percent credit conversion 

factor for unused consumer lines of 

credit would encourage credit unions to 

manage open consumer lines of credit 

through active monitoring and review of 

trends and exposures, and is consistent 

with the calculation of off-balance sheet 

exposure measures contained in Basel 

III.274

The Board generally agrees with 

commenters’ who stated that the credit 

conversion factor for unfunded 

commercial loans, in the Original 

Proposal, was too high and could have 

created a competitive disadvantage for 

credit unions in relation to banks. 

Accordingly, the Board is proposing to 

reduce the credit conversion factor for 

commercial loans from 75 percent to 50 

percent. This change would be 

consistent with the credit conversion 

factor applied to longer-term 

commitments not unconditionally 

cancelable under the Other Banking 

Agencies’ regulations.275

The Board also generally agrees with 

commenters that, based on the structure 

of the CE provided through the FHLBs’ 

MPF or similar programs, loans sold 

under these programs should be 

categorized and risk-weighted 

separately from other types of loans 

transferred with limited recourse. In an 

effort to better match the minimum 

capital requirements for loans sold as 

part of the MPF or similar programs, the 

proposed credit conversion factor, 

which converts the off-balance sheet 

exposure to a credit equivalent amount, 

would be set at 20 percent and applied 

a 50 percent risk weight (the same risk 

weight applied to first-lien residential 

real estate loans), resulting in an 

effective minimum capital requirement 

of one percent of the outstanding 

balance.276 Applying the CCF against 

the outstanding loan balance would 

reduce the risk-based capital 

requirement as loans in the MPF pool 

pay down. The Board believes this 

proposed methodology and CCF would 

result in a risk-based capital 

requirement consistent with historic 

credit losses in this program. The Board 

believes such treatment is appropriate 

because a credit union incurring higher 

than normal levels of losses from loans 

in the MPF or similar programs would 

have to record a reserve for losses that 

would reduce the credit union’s 

retained earnings. 

In addition, under this proposed rule, 

credit unions would be able to deduct 

any associated established valuation 

allowance when determining the offbalance sheet exposure amount that is 

multiplied by the CCF to obtain the 

credit equivalent amount. 

The Board recognizes commenters’ 

concerns that the conversion factors and 

risk weights applicable to loans 

transferred with limited recourse could 

result in a competitive disadvantage. 

Therefore, the Board has changed its 

approach with respect to loans 

transferred with limited recourse to 

amend the conversion factors to better 

match those used by the Other Banking 

Agencies. Under this proposed rule, the 

Board has further clarified that the 

conversion factors and risk weights only 

apply to the maximum amount of the 

loan exposure, rather than the whole 

loan 277 as in the Original Proposal. The 

maximum amount of exposure is the 

portion of the loan that a credit union 

could be required to take back under the 

recourse provision of a loan sales 

contract. 

As shown in the charts and proposed 

rule text below, the Board has amended 

many of the conversion factors and 

applicable risk weights in an effort to 

lower the burden on credit unions while 

still retaining the necessary safety and 

soundness components of this section of 

the rule. 

First, the Board has lowered the 

conversion factor for unfunded 

commitments for commercial loans to 

achieve parity with the Other Banking 

Agencies’ approach.278 Further, the 

conversion factors for loans transferred 

with limited recourse would be 

consistent with the conversion factors 

assigned for banks under the Other 

Banking Agencies’ rules. 

However, under this proposal the 

conversion factor is applied only to the 

credit union’s off-balance sheet 

exposure. The Board is also proposing 

to apply a lower credit conversion factor 

to loans sold under the FHLBs’ MPF to 

more accurately account for historical 

losses in this program and to reduce the 

risk-based capital requirement as each 

loan pays down. 

The following tables summarize the 

risk weights and conversion factors 

included in this proposal: 

Loans Sold With Recourse 

ORIGINAL PROPOSAL

Conversion factor 

(applied to the 

outstanding loan 

balance) 

(percent) 

Risk weight 

(percent) 

MBLs sold with recourse ................................................................................................................................... 75 100 

First mortgage real estate loans sold with recourse ......................................................................................... 75 50 

Other real estate loans sold with recourse ....................................................................................................... 75 100 

Non-federally guaranteed student loans sold with recourse ............................................................................. 75 100 

All other loans sold with recourse ..................................................................................................................... 75 75. 


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THIS PROPOSAL

Loan type transferred with limited recourse 

Conversion factor 

(applied to the offbalance sheet 

exposure) 

(percent) 

Risk weight 

(percent) 

Outstanding balance of loans sold under the FHLB’s mortgage partnership finance or similar program ....... 20 50 

Commercial loans .............................................................................................................................................. 100 100 

First-lien residential real estate loans ................................................................................................................ 100 50 

Junior-lien residential real estate loans ............................................................................................................. 100 100 

Secured consumer loans ................................................................................................................................... 100 75 

Unsecured consumer loans ............................................................................................................................... 100 100 

Unfunded Commitments 

ORIGINAL PROPOSAL

Conversion factor 

(percent) 

Risk weight 

(percent) 

Total unfunded commitments for non-business loans ...................................................................................... 10 75 

Unused MBL commitments ............................................................................................................................... 75 100 

THIS PROPOSAL

Loan Type of Unfunded Commitment Conversion factor 

(percent) 

Risk weight 

(percent) 

Commercial loans .............................................................................................................................................. 50 100 

First-lien residential real estate loans ................................................................................................................ 10 50 

Junior-lien residential real estate loans ............................................................................................................. 10 100 

Secured consumer loans ................................................................................................................................... 10 75 

Unsecured consumer loans ............................................................................................................................... 10 100 

For the reasons discussed above, the 

Board has revised this section of the 

proposed rule and lowered many of the 

conversion factors and applicable risk 

weights. Accordingly, proposed 

§ 702.104(b)(4) would provide that the 

risk-weighted amounts for all offbalance sheet items are determined by 

multiplying the off-balance sheet 

exposure amount by the appropriate 

credit conversion factor and the 

assigned risk weight as follows: 

• For the outstanding balance of loans 

transferred to a Federal Home Loan 

Bank under the MPF program, a 20 

percent CCF and a 50 percent risk 

weight. 

• For other loans transferred with 

limited recourse, a 100 percent CCF 

applied to the off-balance sheet 

exposure and: 

Æ For commercial loans, a 100 

percent risk weight. 

Æ For first-lien residential real estate 

loans, a 50 percent risk weight. 

Æ For junior-lien residential real 

estate loans, a 100 percent risk weight. 

Æ For all secured consumer loans, a 

75 percent risk weight. 

Æ For all unsecured consumer loans, 

a 100 percent risk weight. 

• For unfunded commitments: 

Æ For commercial loans, a 50 percent 

CCF with a 100 percent risk weight. 

Æ For first-lien residential real estate 

loans, a 10 percent CCF with a 50 

percent risk weight. 

Æ For junior-lien residential real 

estate loans, a 10 percent CCF with a 

100 percent risk weight. 

Æ For all secured consumer loans, a 

10 percent CCF with a 75 percent risk 

weight. 

Æ For all unsecured consumer loans, 

a 10 percent CCF with a 100 percent risk 

weight. 

The Board requests comments on this 

provision of the proposal. 

104(c)(5) Derivatives 

This section of the Original Proposal 

addressed the risk weights for derivative 

contracts. Based on NCUA’s recently 

finalized derivatives rule, the Board is 

proposing to make minor changes and 

additions to the treatment of derivative 

contracts. Further, the Board is 

proposing to move derivative contracts 

to its own section of the rule for clarity 

and ease of reading. The full discussion 

of derivative contracts is included 

below in § 702.105. 

Current § 702.105 Weighted-Average 

Life of Investments 

As discussed above, proposed new 

§ 702.105 below would replace current 

§ 702.105 regarding weighted-average 

life of investments. The definition of 

weighted-average life of investments 

and the term ‘‘weighted-average life of 

investments’’ would be removed from 

this proposed rule altogether. 

Section 702.105 Derivatives 

This proposal separates derivatives 

into its own section, § 702.105, and 

includes a cross reference in the general 

risk weight category that indicates that 

all derivatives must be risk-weighted in 

accordance with § 702.105. This new 

proposed section includes all of the 

language from § 702.104(c)(4) of the 

Original Proposal, with only a few 

minor amendments. In addition, this 

proposed section addresses cleared 

transactions, provides further authority 

for recognizing the credit risk mitigation 

benefits of collateral, and addresses 

derivatives transactions by federally 

insured state chartered credit unions 

that are impermissible under NCUA’s 

rules. 

Derivatives rule. The Board finalized 

NCUA’s derivatives rule at its January 


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279See 78 FR 55339 (Sept. 10, 2013). 

2014 open meeting. In brief, that final 

rule allows FCUs to use specific types 

of derivatives for the purpose of 

mitigating IRR. The final rule also 

addressed ‘‘clearing,’’ which was not 

addressed in the proposed derivatives 

rule. Specifically, the final derivatives 

rule permits FCUs to clear derivatives 

transactions, provided the FCU follows 

applicable Commodity and Futures 

Trading Commission (CFTC) 

regulations. The Board notes, however, 

that NCUA’s derivatives rule only 

applied to FCUs. As discussed in the 

preamble to the final rule, federally 

insured, state-chartered credit unions 

engaging in derivatives are required to 

follow applicable state regulations. 

Proposed risk based capital treatment 

of derivatives. Based on its recently 

finalized derivatives rule, the Board is 

now proposing to adopt an approach to 

assign risk weights to derivatives that is 

generally consistent with the approach 

adopted by FDIC in its recently issued 

interim final rule regarding regulatory 

capital.279 Under FDIC’s interim rule, 

derivatives transactions covered under 

clearing arrangements are treated 

differently than non-cleared 

transactions. The Board addresses 

clearing separately below. 

The Board is proposing to focus only 

on interest rate related derivatives in the 

proposed rule and to refer credit unions 

to FDIC’s rules for all non-interest-raterelated derivatives. The Board is making 

this distinction because federal credit 

unions are restricted to interest raterelated contracts under the final 

derivatives rule approved in January 

2014; however, federally insured, statechartered credit unions may have 

broader authorization to use noninterest-rate contracts if approved by the 

respective state banking authorities. As 

of September 30th, 2014, NCUA is not 

aware of any non-interest rate derivative 

contracts being used by federally 

insured, state-chartered credit unions 

(as per the Call Report data) for 

derivative contracts. 

OTC derivatives transaction risk 

weight. The Original Proposal only 

assigned risk weights to OTC derivatives 

transactions. While the Board received 

few comments on the general language 

in this section, the Board is now 

proposing to make two amendments. 

First, the Board is proposing to state that 

the current credit exposure is the greater 

of the fair value or zero rather than the 

mark to fair value or zero. This change 

is non-substantive and only intended as 

a clarifying correction. 

Second, the Board is proposing to 

delete two subsections from the Original 

Proposal’s section on potential future 

credit exposure, §§ 702.104(d)(4)(B)(2) 

and (3) of the Original Proposal. Section 

702.104(d)(4)(B)(2) stated that for a 

derivatives contract that is structured 

such that on specified dates any 

outstanding exposure is settled and the 

terms are reset so that the fair value of 

the contract is zero, the remaining 

maturity equals the time until the next 

reset date. Section 702.104(d)(4)(B)(3) 

stated that for an interest rate derivative 

contract with a remaining maturity of 

greater than one year that meets these 

criteria, the minimum conversion factor 

is 0.005. In place of these two sections, 

the Board is now proposing to add the 

following: 

A credit union must use an OTC interest 

rate derivative contract’s effective notional 

principal amount (that is, the apparent or 

stated notional principal amount multiplied 

by any multiplier in the OTC interest rate 

derivative contract) rather than the apparent 

or stated notional principal amount in 

calculating potential future exposure (PFE). 

The Board is making these changes to 

improve how credit unions will 

calculate the PFE given the high 

probability of only having interest raterelated contracts. The Board believes 

these proposed changes make the rule 

clearer and more closely align this 

section with other changes it is 

proposing throughout this rule. 

Including the changes discussed 

above, the following is a description of 

the process a credit union would 

undertake under this proposal to 

determine the risk weight for OTC 

derivative contracts. The Board is 

proposing to require that to determine 

the risk-weighted asset amount for a 

derivatives contract; under this 

proposal, a credit union would first 

determine its exposure amount for the 

contract. It would then recognize the 

credit mitigation of financial collateral, 

if qualified, and then apply to that 

amount a risk weight based on the 

counterparty or recognized collateral or 

exchange (Derivatives Clearing 

Organization or DCO). For a single 

interest rate derivatives contract that is 

not subject to a qualifying master 

netting agreement, the proposed rule 

would require the exposure amount to 

be the sum of (1) the credit union’s 

current credit exposure (CCE), which is 

the greater of fair value or zero, and (2) 

PFE, which is calculated by multiplying 

the notional principal amount of the 

derivatives contract by the appropriate 

conversion factor, in accordance with 

the table below. Non-interest rate 

derivative contract conversion factors 

can be referenced in 12 CFR 324.34 of 

the FDIC rule. 

PROPOSED CONVERSION FACTOR MATRIX FOR INTEREST RATE DERIVATIVES CONTRACTS

Remaining maturity IRR hedge 

derivatives 

One year or less ................. 0 .00 

Greater than one year and 

less than or equal to five 

years ............................... 0 .005 

Greater than five years ....... 0 .015 

For multiple interest rate derivatives 

contracts subject to a qualifying master 

netting agreement, a credit union would 

calculate the exposure amount by 

adding the net CCE and the adjusted 

sum of the PFE amounts for all 

derivatives contracts subject to that 

qualifying master netting agreement. 

The net CCE is the greater of zero and 

the net sum of all positive and negative 

fair values of the individual derivatives 

contracts subject to the qualifying 

master netting agreement. The adjusted 

sum of the PFE amounts would be 

calculated as described in proposed 

§ 702.105(a)(2)(ii)(B). 

Under this proposal, to recognize the 

netting benefit of multiple derivatives 

contracts, the contracts would have to 

be subject to the same qualifying master 

netting agreement. For example, a credit 

union with multiple derivatives 

contracts with a single counterparty 

could net the counterparty exposure if 

the transactions fall under the same 

International Swaps and Derivatives 

Association, Inc. (ISDA) Master 

Agreement and Schedule. 

If a derivatives contract is 

collateralized by financial collateral, a 

credit union would first determine the 

exposure amount of the derivatives 

contract as described in §§ 702.105(a)(i) 

or (ii). Next, to recognize the credit risk 

mitigation benefits of the financial 

collateral, the credit union would use 

the approach for collateralized 

transactions as described in § 702.105(c) 

of the proposed rule, which is discussed 

in more detail below. 

Cleared derivatives risk weight. As 

discussed above, under the Original 

Proposal, the Board did not include a 

discussion of cleared derivatives 

contracts, but generally tried to mirror 

the Other Banking Agencies’ approach 

to derivatives, which treats derivatives 

transactions covered under clearing 

arrangements differently than noncleared transactions. NCUA’s Original 

Proposal, however, proposed a single 

regulatory capital approach regardless of 

the credit union’s derivatives 

transaction clearing status, because most 

credit unions would qualify for an 

exemption or exception from clearing 


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280 78 FR 52285 (Aug. 22, 2013); see also 17 CFR 

50.51. 

281 Id. 

282 DCO has the meaning as defined by the 

Commodity Futures Trading Commission in 17 CFR 

1.3(d) 

283See 78 FR 55339 (Sept. 10, 2013). 

284See, e.g., 12 CFR 324.35. 

285See, e.g., 12 CFR 324.35. 

under CFTC’s regulations. The 

exemption and exception applicable to 

credit unions is discussed below. 

As noted above, the Board received 

only a few comments on the proposed 

derivatives section of the Original 

Proposal. However, the majority of the 

comments the Board did receive 

requested that NCUA’s rules align with 

the rules for banks. Specifically, 

commenters pointed out that the 

derivatives industry is migrating toward 

clearing and that clearing provides a 

valuable risk- reducing component to a 

derivatives transaction. 

Other commenters requested 

examples of calculations and 

clarification on the process by which a 

credit union can recognize the risk 

mitigation benefits of collateral and how 

derivatives in federally insured, statechartered credit unions would be 

treated under the Original Proposal. 

After carefully considering the 

comments and its recent final 

derivatives rule, the Board agrees that 

NCUA’s risk-based capital regulations 

should more closely align with the 

Other Banking Agencies’ capital 

regulations. To that end, the Board is 

now proposing to include provisions to 

address clearing, a more robust 

collateral process, and the treatment of 

derivatives outside of NCUA’s rule. The 

Board notes that this is consistent with 

its statement in the Original Proposal 

that it would amend any final rule 

regarding NCUA’s risk-based capital 

requirements to take into account 

changes made in the final derivatives 

rule. 

As noted above, the Board is now 

proposing to include a separate risk 

weight for cleared derivatives 

transactions. The approach in this 

section mirrors the approach taken by 

the Other Banking Agencies and will 

allow credit unions to account for the 

lower degree of risk for cleared 

transactions. 

In NCUA’s final derivatives rule, the 

Board discussed recent CFTC final 

rules 280 on cleared derivatives and 

included a section allowing FCUs to 

elect to clear under CFTC rules. The 

Board noted that CFTC’s final rules 

provide credit unions with an exception 

and an exemption from clearing. The 

CTFC exception and exemption are the 

End-User Exception, which applies to 

financial institutions with total assets of 

$10 billion or less and the Cooperative 

Exemption, which applies to entities 

with assets greater than $10 billion 

where the entity is a cooperative.281

CFTC’s definition scope includes credit 

unions. Therefore, all credit unions 

have the right, as cooperatives, to elect 

to either clear swaps or engage in a 

traditional bilateral agreement. The 

Board notes that the clearing structure 

only applies to swaps. 

For cleared derivatives transactions, 

each party to the swap submits the 

transaction to a DCO 282 for clearing. 

This reduces counterparty risk for the 

original swap participants in that they 

each bear the same risk attributable to 

facing the intermediary DCO as their 

counterparty. In addition, DCOs exist 

for the primary purpose of managing 

credit exposure from the swaps being 

cleared and therefore DCOs are effective 

at standardizing transactions and 

mitigating counterparty risk through the 

use of exchange-based risk management 

frameworks. Finally, swap clearing 

requires both counterparties to post 

collateral (i.e., initial margin) with the 

clearinghouse when they enter into a 

swap. The clearinghouse can use the 

posted collateral to cover defaults in the 

swap. As the valuation of the swap 

changes, the clearinghouse determines 

the fair market value of the swap and 

may collect additional collateral (i.e., 

variation margin) from the 

counterparties in response to 

fluctuations in market values. The 

clearinghouse can apply this collateral 

to cover defaults in payments under the 

swap. 

Proposed § 702.105 would adopt an 

approach to assign risk weights to 

derivatives that is generally consistent 

with the approach adopted by the Other 

Banking Agencies.283 Under this 

proposed rule, a credit union would be 

required to calculate a trade exposure 

amount, determine the risk mitigation of 

any financial collateral, and multiply 

that amount by the applicable risk 

weight. The Board notes that this 

approach allows credit unions to take 

into account the lower degree of risk 

associated with cleared derivatives 

transactions and the benefit of collateral 

associated with these transactions. In 

addition, this approach also accounts 

for the risk of loss associated with 

collateral posted by a credit union. 

Trade exposure amount. The trade 

exposure amount, in this proposal, 

would equal the amount of the 

derivative, calculated as if it were an 

OTC transaction under subsection (b) of 

this section, added to the fair value of 

the collateral posted by the credit union 

and held by a DCO, clearing member or 

custodian. This calculation would take 

into account the exposure amount of the 

derivatives transaction and the exposure 

associated with any collateral posted by 

the credit union. The Board notes that 

this is the same approach employed by 

the Other Banking Agencies.284

Cleared transaction risk weights. 

Under this proposal, after a credit union 

determines its trade exposure amount, it 

would be required to apply a risk weight 

that is based on agreements preventing 

risk of loss of the collateral posted by 

the counterparty to the transaction. The 

proposed rule would require credit 

unions to apply a two percent risk 

weight if the collateral posted by a 

counterparty is subject to an agreement 

that prevents any losses caused by the 

default, insolvency, liquidation, or 

receivership of the clearing member or 

any of its clients. To qualify for this risk 

weight, a credit union would also have 

conducted a sufficient legal review and 

determined that the agreement to 

prevent risk of loss is legal, valid, 

binding, and enforceable. If a credit 

union does not meet either or both of 

these requirements, the credit union 

would have to apply a four percent risk 

weight to the transaction. 

The differing risk weights for cleared 

transactions take into account the risk 

that collateral will not be there because 

of a default or other event, which 

further exposes the credit union to loss. 

However, cleared transactions pose very 

low probability that collateral will not 

be available in the event of a default, 

which is reflected in the low overall risk 

weights. Again, the Board notes that this 

is the same approach employed by the 

Other Banking Agencies.285

Collateralized transactions. Under the 

Original Proposal, NCUA proposed to 

permit a credit union to recognize riskmitigating effects of financial collateral 

in OTC transactions. The collateralized 

portion of the exposure would receive 

the risk weight applicable to the 

collateral. In all cases, (1) The collateral 

must be subject to a collateral agreement 

(for example, an ISDA Credit Support 

Annex) for at least the life of the 

exposure; (2) the credit union must 

revalue the collateral at least every three 

months; and (3) the collateral and the 

exposure must be denominated in U.S. 

dollars. 

Generally, the risk weight assigned to 

the collateralized portion of the 

exposure would be no less than 20 

percent. However, the collateralized 

portion of an exposure may be assigned 

a risk weight of less than 20 percent for 

the following exposures. Derivatives 


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contracts that are marked to fair value 

on a daily basis and subject to a daily 

margin maintenance agreement could 

receive: (1) A zero percent risk weight 

to the extent that contracts are 

collateralized by cash on deposit; or (2) 

a 10 percent risk weight to the extent 

that the contracts are collateralized by 

an exposure that qualifies for a zero 

percent risk weight under 

§ 702.104(c)(2)(i) of this proposed rule. 

In addition, a credit union could assign 

a zero percent risk weight to the 

collateralized portion of an exposure 

where the financial collateral is cash on 

deposit. It also could do so if the 

financial collateral is an exposure that 

qualifies for a zero percent risk weight 

under § 702.104(c)(2)(i) of this proposed 

rule, and the credit union has 

discounted the fair value of the 

collateral by 20 percent. The credit 

union would be required to use the 

same approach for similar exposures or 

transactions. 

Risk management guidance for 

recognizing collateral. The Board is 

proposing to include a new subsection 

in this section to address recognizing 

the risk mitigation of collateral. In the 

Original Proposal, this section was 

included in the discussion on assigning 

risk weights to OTC derivatives 

transactions. The Board recognizes, 

however, that derivative contracts are 

collateralized for risk mitigation 

purposes whether OTC or cleared. 

Collateralizing derivatives transactions 

is now industry practice and widely 

accepted to reduce and mitigate the 

credit risk and default impact of a 

counterparty to a transaction not being 

able to meet its obligations of the 

contract. A collateral agreement 

between two counterparties or exchange 

will stipulate the type of collateral that 

may be used, otherwise known as 

‘‘eligible collateral.’’ As such, this 

proposed subsection will be applicable 

to both types of transactions. 

Under this proposal, before a credit 

union recognizes collateral for credit 

risk mitigation purposes, it should: (1) 

Conduct sufficient legal review to 

ensure, at the inception of the 

collateralized transaction and on an 

ongoing basis, that all documentation 

used in the transaction is binding on all 

parties and legally enforceable in all 

relevant jurisdictions; (2) consider the 

correlation between risk of the 

underlying direct exposure and 

collateral in the transaction; and (3) 

fully take into account the time and cost 

needed to realize the liquidation 

proceeds and the potential for a decline 

in collateral value over this time period. 

A credit union should also ensure that 

the legal mechanism under which the 

collateral is pledged or transferred 

ensures that the credit union has the 

right to liquidate or take legal 

possession of the collateral in a timely 

manner in the event of the default, 

insolvency, or bankruptcy (or other 

defined credit event) of the counterparty 

and, where applicable, the custodian 

holding the collateral. 

Finally, a credit union should ensure 

that it: (1) Has taken all steps necessary 

to fulfill any legal requirements to 

secure its interest in the collateral so 

that it has, and maintains, an 

enforceable security interest; (2) has set 

up clear and robust procedures to 

ensure satisfaction of any legal 

conditions required for declaring the 

borrower’s default and prompt 

liquidation of the collateral in the event 

of default; (3) has established 

procedures and practices for 

conservatively estimating, on a regular 

ongoing basis, the fair value of the 

collateral, taking into account factors 

that could affect that value (for example, 

the liquidity of the market for the 

collateral and deterioration of the 

collateral); and (4) has in place systems 

for promptly requesting and receiving 

additional collateral for transactions 

with terms requiring maintenance of 

collateral values at specified thresholds. 

When collateral other than cash is 

used to satisfy a margin requirement, 

then a haircut is applied to incorporate 

the credit risk associated with collateral, 

such as securities. The Board is 

proposing to include this concept in the 

revised rule so that credit unions can 

accurately recognize the risk mitigation 

benefit of collateral. The Board notes 

that this is the same approach taken by 

the Other Banking Agencies. 

The table below illustrates an 

example of the calculations for Risk 

Weighted Asset Amounts for both OTC 

and clearing derivatives agreements. For 

this example both the OTC and clearing 

are considered to be a multiple contracts 

under a Qualified Master Netting 

Agreement. Credit unions can use this 

as a guide in confirming the calculations 

involved to produce a risk-weighted 

asset for derivatives. (See the number 

references below for each line number 

of the table example.) 

1. The Agreement Type indicates the 

transaction legal agreement between the 

credit union and the counterparty. 

2. The examples provide, but are not 

limited to the basis calculations 

required for various collateral and 

agreement approaches. 

3. Variation Margin (amount as basis 

for margin calls which are satisfied with 

collateral) collateral used for these 

examples. 

4. The Risk Weight of Collateral is 

applied when utilizing the Simple 

Approach in the recognition of credit 

risk of collateralized derivative 

contracts. 

5. To recognize the risk-mitigating 

effects of financial collateral, a credit 

union may use the ‘‘Simple Approach’’ 

or the ‘‘Collateral Haircut Approach’’. 

6. The Collateral Haircut is 

determined by using Table 2 to 

§ 702.105 in the rule text: ‘‘Standard 

Supervisor Market Price Volatility 

Haircuts.’’ 

7. Counterparty risk weights are 

determined in § 702.104 for OTC and 

§ 702.105 for clearing. 

8–16. Are calculations based on the 

approach and types of agreement, 

collateral, fair values and notional 

amounts of the credit union derivatives 

transactions. 


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4418 Federal Register / Vol. 80, No. 17 / Tuesday, January 27, 2015 / Proposed Rules 

Federally insured, state-chartered 

credit unions’ derivative transactions. 

As noted above, the Original Proposal 

did not specifically address derivatives 

transactions entered into by federally 

insured, state-chartered credit unions 

under state law that are impermissible 

under NCUA’s regulations for FCUs. In 

this proposal, the Board is proposing to 

include language that would require 

federally insured, state-chartered credit 

unions to calculate risk weights in 

accordance with FDIC’s rules for 

derivatives transactions that are not 

permissible under NCUA’s derivatives 

rule. 

The Board has also considered the 

following two approaches to addressing 

derivatives held by FISCUs that are not 

permissible under NCUA’s rules, and 

invites stakeholders to comment on 

each: 

• Additional risk weights. The Board 

has considered including an additional 

risk weight that would address any 

derivative entered into by a federally 

insured, state-chartered credit union 

that would be impermissible for an FCU 

to enter into. The Board notes that this 

risk weight would have to account for 

the added risk of additional types of 

transactions that are not permitted 

under its rules. 

• Adopting FDIC’s rules verbatim. 

Finally, the Board has considered 

incorporating FDIC’s risk weights and 

rules for derivatives verbatim and 

creating a separate appendix for 

derivatives transactions. Incorporating 

FDIC’s rules verbatim would add a high 

degree of complexity to a final riskbased capital rule and would likely 

address transactions into which 

federally insured, state chartered credit 

unions, while permitted to engage in, 

would likely not enter into. 

The Board is interested in the 

comments of stakeholders on the pros 

and cons of each of these approaches, as 

well as any other approaches that may 

adequately address derivatives 

transactions by federally insured, statechartered credit unions. 

Current Section 702.106 Standard 

Calculation of Risk-based Net Worth 

Requirement 

Consistent with the Original Proposal, 

this proposed rule would eliminate 

current § 702.106 regarding the standard 

RBNW requirement. The current rule is 

structured so that credit unions have a 

standard measure and optional 

alternatives for measuring a credit 

union’s RBNW. The proposed rule, on 

the other hand, would contain only a 

single measurement for calculating a 

credit union’s risk-based capital ratio. 

Accordingly, current § 702.106 would 

no longer be necessary and would be 

removed by this proposed rule. 

Current Section 702.107 Alternative 

Component for Standard Calculation 

Consistent with the Original Proposal, 

this proposed rule would eliminate 

current § 702.107 regarding the use of 


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286 12 U.S.C. 1790d(a)(2). 

287Credit unions defined as ‘‘new credit unions’’ 

under section 1790(d)(2) of the FCUA are subject to 

an alternative PCA system. 

288The requirements would be moved to 

proposed §§ 702.106 through 702.109. 

289 12 U.S.C. 1790d(a). 

alternative risk weight measures. The 

Board believes the current alternative 

risk weight measures add unnecessary 

complexity to the rule. The current 

alternative risk weights focus almost 

exclusively on IRR, which has resulted 

in some credit unions with higher risk 

operations reducing their regulatory 

minimum capital requirement to a level 

inconsistent with the risk of the credit 

union’s business model. The proposed 

risk weights would provide for lower 

risk-based capital requirements for those 

credit unions making good quality 

loans, investing prudently, and avoiding 

excessive concentrations of assets. 

Current Section 702.108 Risk 

Mitigation Credit 

The Original Proposal would have 

eliminated current § 702.108 regarding 

the risk mitigation credit. The risk 

mitigation credit provides a system for 

reducing a credit union’s risk-based 

capital requirement if it can 

demonstrate significant mitigation of 

credit risk or IRR. Credit unions have 

rarely taken advantage of risk mitigation 

credits; only one credit union has ever 

received a risk mitigation credit. 

The Board did receive a few 

comments regarding the elimination of 

the provision for risk mitigation credit 

in the current rule. Commenters 

suggested that there should continue to 

be a risk mitigation credit and that the 

agency has well-developed procedures 

for credit unions under current 

§ 701.108, as well as for examiners 

under its ‘‘Guidelines for Evaluation of 

an Application for a PCA Risk 

Mitigation Credit.’’ Commenters 

suggested that this authority could 

provide an important incentive for 

credit unions to manage certain risks 

more proactively—and receive an added 

benefit of seeing their risk-based capital 

requirements at least somewhat reduced 

as a result. Other commenters suggested 

that by not allowing for some method of 

recognizing credit unions’ ability to 

manage risks, the Board runs the risk of 

de-incentivizing credit unions to invest 

in the resources necessary to manage 

and mitigate risks, which could 

encourage a dangerous mind-set among 

credit unions to hold additional capital 

in place of a well-managed risk 

mitigation program. 

Consistent with the Original Proposal, 

this proposed rule would eliminate 

current § 702.108 regarding the risk 

mitigation credit. The review of a credit 

union’s application for a risk mitigation 

credit requires a substantial 

commitment of NCUA and credit union 

resources. In practice, it is very difficult 

to determine the validity of the credit 

union’s mitigation efforts and how 

much mitigation credit to allow. The 

Board appreciates the issues raised by 

commenters, but continues to believe 

that maintaining the risk mitigation 

credit option is unjustified given the 

burden it imposes on NCUA and credit 

unions, its limited use in the past, and 

its improbable use in the future. 

Mandatory and Discretionary 

Supervisory Actions 

Section 216(a)(2) of the FCUA directs 

the Board to take ‘‘prompt corrective 

action to resolve the problems of 

insured credit unions.’’ 286 To facilitate 

this purpose, the FCUA defined five 

regulatory capital categories that 

include capital thresholds for a defined 

net worth ratio and risk-based capital 

measure for ‘‘complex’’ credit unions. 

These five PCA categories are: Well 

capitalized, adequately capitalized, 

undercapitalized, significantly 

undercapitalized, and critically 

undercapitalized. Credit unions that fail 

to meet these capital measures are 

subject to increasingly strict limits on 

their activities.287

This proposal would generally 

maintain the existing mandatory and 

discretionary supervisory actions (PCA 

actions) currently contained in 

§§ 702.201 through 702.204,288 with 

certain additions that are discussed in 

more detail below. The PCA actions 

assist the Board in accomplishing the 

statutory purpose of section 219 289 of 

the FCUA and provide a transparent 

guide to the supervisory actions that a 

credit union can expect as capital 

measures decline. 

Section 702.106 Prompt Corrective 

Action for Adequately Capitalized 

Credit Unions 

Generally consistent with the Original 

Proposal, this proposed rule would 

renumber current § 702.201 as proposed 

§ 702.106, and would make only minor 

conforming amendments to the text of 

the section. Consistent with the 

proposed elimination of the regular 

reserve requirement in current 

§ 702.401(b), proposed § 702.106(a) 

would be amended to remove the 

requirement that adequately capitalized 

credit unions transfer the earnings 

retention amount from undivided 

earnings to their regular reserve 

account. 

Section 702.107 Prompt Corrective 

Action for Undercapitalized Credit 

Unions 

Generally consistent with the Original 

Proposal, this proposed rule would 

renumber current § 702.202 as proposed 

§ 702.107, and would make only minor 

conforming amendments to the text of 

the section. Consistent with the 

proposed elimination of the regular 

reserve requirement in current 

§ 702.401(b), proposed § 702.107(a)(1) 

would be amended to remove the 

requirement that undercapitalized credit 

unions transfer the earnings retention 

amount from undivided earnings to 

their regular reserve account. 

Section 702.108 Prompt Corrective 

Action for Significantly 

Undercapitalized Credit Unions 

Generally consistent with the Original 

Proposal, this proposed rule would 

renumber current § 702.203 as proposed 

§ 702.108, and would make only minor 

conforming amendments to the text of 

the section. Consistent with the 

proposed elimination of the regular 

reserve requirement in current 

§ 702.401(b), proposed § 702.108(a)(1) 

would be amended to remove the 

requirement that significantly 

undercapitalized credit unions transfer 

the earnings retention amount from 

undivided earnings to their regular 

reserve account. 

Section 702.109 Prompt Corrective 

Action for Critically Undercapitalized 

Credit Unions 

Generally consistent with the Original 

Proposal, this proposed rule would 

renumber current § 702.204 as proposed 

§ 702.109, and would make only minor 

conforming amendments to the text of 

the section. Consistent with the 

proposed elimination of the regular 

reserve requirement in current 

§ 702.401(b), proposed § 702.109(a)(1) 

would be amended to remove the 

requirement that critically 

undercapitalized credit unions transfer 

the earnings retention amount from 

undivided earnings to their regular 

reserve account. 

Section 702.110 Consultation with 

State Official on Proposed Prompt 

Corrective Action 

Generally consistent with the Original 

Proposal, this proposed rule would 

renumber current § 702.205 as proposed 

§ 702.110, and would make only minor 

conforming amendments to the text of 

the section. 


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290 12 U.S.C. 1786 and 1790d. 

291 12 U.S.C. 1790(e)(1). 

292 12 U.S.C. 1762. 

Section 702.111 Net Worth Restoration 

Plans (NWRPs) 

Generally consistent with the Original 

Proposal, this proposed rule would 

renumber current § 702.206 as proposed 

§ 702.111, and would make only minor 

conforming amendments to the text of 

most of the subsections, with a few 

exceptions discussed in more detail 

below. 

111(c) Contents of NWRP 

Consistent with the Original Proposal, 

proposed § 702.111(c)(1)(i) would 

provide that the contents of an NWRP 

must specify a quarterly timetable of 

steps the credit union will take to 

increase its net worth ratio and riskbased capital ratio, if applicable, so that 

it becomes adequately capitalized by the 

end of the term of the NWRP, and will 

remain so for four consecutive calendar 

quarters. The italicized words above 

‘‘and risk-based capital ratio, if 

applicable’’ would be added to clarify 

that an NWRP prepared by a complex 

credit union must specify the steps the 

credit union will take to increase its 

risk-based capital ratio. This proposal 

would remove the sentence ‘‘If complex, 

the credit union is subject to a riskbased net worth requirement that may 

require a net worth ratio higher than six 

percent to be adequately capitalized.’’ 

This statement would be removed as 

repetitive and unnecessary because 

proposed § 702.102(a)(2)(i) already 

states clearly that a complex credit 

union must also attain a net worth ratio 

of higher than six percent to be 

adequately capitalized. No substantive 

changes to the requirements of this 

paragraph are intended by these 

revisions. 

In addition, consistent with the 

proposed elimination of the regular 

reserve requirement in current 

§ 702.401(b), proposed 

§ 702.111(c)(1)(ii) would be amended by 

removing the requirement that credit 

unions transfer the earnings retention 

amount from undivided earnings to 

their regular reserve account. 

111(g)(4) Submission of Multiple 

Unapproved NWRPs 

Consistent with the Original Proposal, 

proposed § 702.111(g)(4) would provide 

that the submission of more than two 

NWRPs that are not approved is 

considered an unsafe and unsound 

condition and may subject the credit 

union to administrative enforcement 

actions under section 206 of the 

FCUA.290 NCUA regional directors have 

expressed concerns that some credit 

unions have in the past submitted 

multiple NWRPs that could not be 

approved due to non-compliance with 

the requirements of the current rule, 

resulting in delayed implementation of 

actions to improve the credit union’s net 

worth. The proposed amendments are 

intended to clarify that submitting 

multiple NWRPs that are rejected by 

NCUA, or the applicable state official, 

because of the inability of the credit 

union to produce an acceptable NWRP 

is an unsafe and unsound practice and 

may subject the credit union to further 

actions as permitted under the FCUA. 

111(j) Termination of NWRP 

Consistent with the Original Proposal, 

proposed § 702.111(j) would provide 

that, for purposes of part 702, an NWRP 

terminates once the credit union has 

been classified as adequately capitalized 

or well capitalized and for four 

consecutive quarters. The proposed 

paragraph would also provide as an 

example that if a credit union with an 

active NWRP attains the classification as 

adequately capitalized on December 31, 

2015, this would be quarter one and the 

fourth consecutive quarter would end 

September 30, 2016. The proposed 

paragraph is intended to provide 

clarification for credit unions on the 

timing of an NWRP’s termination. 

Section 702.112 Reserves 

Generally consistent with the Original 

Proposal, this proposed rule would 

renumber current § 702.401 as proposed 

§ 702.112. Consistent with the text of 

current § 702.401(a), this proposal also 

would require that each credit union 

shall establish and maintain such 

reserves as may be required by the 

FCUA, by state law, by regulation, or, in 

special cases, by the Board or 

appropriate state official. 

Regular Reserve Account 

As mentioned above, this proposed 

rule would eliminate current 

§ 702.401(b) regarding the regular 

reserve account from the earnings 

retention process. The process and 

substance of requesting permission for 

charges to the regular reserve would be 

eliminated upon the effective date of a 

final rule. Upon the effective date of a 

final rule, a federal credit union would 

close out the regular reserve balance 

into undivided earnings. A statechartered, federally insured credit union 

may, however, still be required to 

maintain a regular reserve account by its 

respective state supervisory authority. 

In the past, the Board initially 

included the regular reserve in part 702 

for purposes of continuity from past 

regulatory expectations that involved 

this account to ease credit unions’ 

transition to the then-new PCA rules. 

The regular reserve account is not 

necessary to satisfying the statutory 

‘‘earnings retention requirement’’ and is 

not required under GAAP. CUMAA 

requires credit unions that are not well 

capitalized to ‘‘annually set aside as net 

worth an amount equal to not less than 

0.4 percent of its total assets.’’ 291 The 

earnings retention requirement in 

current § 702.201(a) requires a credit 

union that is not well capitalized to 

increase the ‘‘dollar amount of its net 

worth either in the current quarter, or 

on average over the current and three 

preceding quarters by an amount 

equivalent to at least 1/10th percent of 

total assets.’’ Under the same section of 

the current rule, the credit union must 

then ‘‘quarterly transfer that amount’’ 

from undivided earnings to the regular 

reserve account. Increasing net worth 

alone satisfies the statutory earnings 

retention requirement. The additional 

step of transferring earnings from the 

undivided earnings account to the 

regular reserve account is not necessary 

to meet the PCA statutory requirement. 

The regular reserve was initially 

incorporated into the earnings retention 

process because of familiarity. Prior to 

PCA, credit unions used the regular 

reserve account under the former 

reserving process prescribed by the 

now-repealed section 116 of the 

FCUA.292 However, NCUA examiner 

experience indicates that, since PCA 

was first implemented, the regular 

reserve account in part 702 has been a 

source of unnecessary confusion. Some 

credit unions have continued to make 

transfers as if the repealed section 116 

were still in force. Other credit unions 

have confused the purpose of the 

regular reserve in the current PCA 

process. Thus, some credit unions have 

made earnings transfers that are not 

required and others have done so 

without first increasing net worth. 

For these reasons, the Board considers 

the regular reserve account requirement 

to be obsolete and is proposing to 

eliminate it upon the effective date of a 

final rule. The proposed rule would also 

eliminate the cross references to the 

regular reserve requirement as discussed 

in more detail in each corresponding 

part of the section-by-section analysis. 

Section 702.113 Full and Fair 

Disclosure of Financial Condition 

Generally consistent with the Original 

Proposal, this proposed rule would 

renumber current § 702.402 as proposed 

§ 702.113, and would make only minor 

conforming amendments to the text of 


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Federal Register / Vol. 80, No. 17 / Tuesday, January 27, 2015 / Proposed Rules 4421 

293Pre-codification reference: Statement of 

Financial Accounting Standards No. 141(R), 

Business Combinations. 

the section with the exception of the 

changes to proposed § 702.113(d) that 

are discussed in more detail below. 

113(d) Charges for Loan and Lease 

Losses 

Consistent with the proposed 

elimination of the regular reserve 

requirement which is discussed above, 

proposed § 702.113(d) would remove 

paragraph (d)(4) of the current rule, 

which provides that the maintenance of 

an ALLL shall not affect the requirement 

to transfer earnings to a credit union’s 

regular reserve when required under 

subparts B or C of part 702. 

In addition, the proposed rule would 

remove paragraph (d)(3) of the current 

rule, which provides that adjustments to 

the valuation ALLL will be recorded in 

the expense account ‘‘Provision for Loan 

and Lease Losses.’’ This is to clarify that 

the ALLL is to be maintained in 

accordance with GAAP, as discussed 

above. 

The remaining provisions in 

paragraph (d) of the current rule would 

be amended as follows: 

(d)(1) 

Proposed § 702.113(d)(1) would 

amend current § 702.401(d)(1) to 

provide that charges for loan and lease 

losses shall be made timely and in 

accordance with GAAP. The proposal 

would add the italicized words ‘‘and 

lease’’ and ‘‘timely and’’ to the language 

in the current rule to clarify that the 

requirement also applies to lease losses 

and to require that credit unions make 

charges for loan and lease losses in a 

timely manner. As with the section 

above, this section was changed to 

clarify that charges for potential lease 

losses are to be recorded in accordance 

with GAAP through the same allowance 

account as loan losses. In addition, 

timely recording is critical to maintain 

full and fair disclosure as required 

under this section. 

(d)(2) 

Proposed § 702.113(d)(2) would 

amend current § 702.401(d)(2) to 

eliminate the detailed requirement and 

simply provide that the ALLL must be 

maintained in accordance with GAAP. 

This is necessary to provide full and fair 

disclosure to a credit union member, 

NCUA, or, at the discretion of a credit 

union’s board of directors, to creditors 

to fairly inform them of the credit 

union’s financial condition and 

operations. 

(d)(3) 

Proposed § 702.113(d)(3) would retain 

the language in current § 702.401(d)(5) 

with no changes. 

Section 702.114 Payment of Dividends 

Generally consistent with the Original 

Proposal, this proposed rule would 

renumber current § 702.402 as proposed 

§ 702.114 and make a number of 

amendments to the text of paragraphs 

(a) and (b). 

The Board received several comments 

to the Original Proposal regarding the 

proposed restrictions on the payments 

of dividends. Commenters generally 

stated that the rule should not prohibit 

states from authorizing FISCUs to 

declare dividends. Other commenters 

suggested that NCUA should not be able 

to restrict dividend payments. 

The Board disagrees with commenters 

and continues to believe that reasonable 

restrictions on dividend payments for 

credit unions that are less than 

adequately capitalized are necessary to 

protect the NCUSIF. The restrictions in 

§ 702.402 of the current rule are prudent 

restrictions that were brought forward 

into the Original Proposal and now into 

this proposal. The changes would 

simply clarify what funds are available 

for dividends under GAAP. 

Accordingly, the Board is proposing the 

following amendments to the current 

rule. 

Since the implementation of PCA for 

credit unions, FASB has issued 

accounting standards that impact the 

accounting for credit union equity 

items. Most specifically in December 

2007, the FASB issued Accounting 

Standards Codification (ASC) Topic 

805, Business Combinations.293 Under 

ASC 805, all business combinations 

were to be accounted for by applying 

the acquisition method starting in late 

2008. 

In June of 2010, Interagency 

Supervisory Guidance on Bargain 

Purchases and FDIC- and NCUAAssisted Acquisitions was released and 

principally focused on bargain purchase 

gains and business combinations in 

general. The supervisory guidance 

addressed the special considerations to 

regulatory capital reporting for credit 

unions involved in combinations and 

specifically that acquired equity 

generated as a result of a business 

combination for credit unions is part of 

GAAP equity, but not part of net worth. 

Consistent with the statutory definition 

of net worth, a credit union includes an 

amount equal to the acquired credit 

unions retained earnings as measured in 

accordance with GAAP. This special 

consideration can result in a credit 

union reporting a negative balance in 

undivided earnings while reporting a 

much larger positive balance of acquired 

equity which produces a total positive 

GAAP equity position and different 

positive total net worth. The changes to 

this section seek to address this issue. 

114(a) Restriction on Dividends 

Current § 702.402(a) permits credit 

unions with a depleted undivided 

earnings balance to pay dividends out of 

the regular reserve account without 

regulatory approval, as long as the credit 

union will remain at least adequately 

capitalized. Under this proposal, 

§ 702.114(a), however, only credit 

unions that have substantial net worth, 

but no undivided earnings, would be 

allowed to pay dividends without 

regulatory approval. Due to the removal 

of the regular reserve account, as 

discussed above, and to conform with 

GAAP, this proposal would amend the 

language to further clarify that 

dividends may be paid when there is 

sufficient net worth. Net worth may 

incorporate accounts in addition to 

undivided earnings. Accordingly, 

§ 702.114(a) of this proposal would 

provide that dividends shall be 

available only from net worth, net of 

any special reserves established under 

§ 702.112, if any. 

114(b) Payment of Dividends and 

Interest Refunds 

This proposed rule would eliminate 

the language in current § 702.403(b) and 

§ 702.114(b) and (c) of the Original 

Proposal entirely and replace it with a 

new provision. Under this proposal, 

§ 702.114(b) would provide that the 

board of directors must not pay a 

dividend or interest refund that will 

cause the credit union’s capital 

classification to fall below adequately 

capitalized under subpart A of part 702 

unless the appropriate regional director 

and, if state-chartered, the appropriate 

state official, have given prior written 

approval (in an NWRP or otherwise). 

Paragraph (b) would provide further that 

the request for written approval must 

include the plan for eliminating any 

negative retained earnings balance. 

Historically, credit unions with a net 

worth ratio below adequately 

capitalized were restricted from making 

a dividend payment without regional 

director approval and, if state-chartered, 

approval of the appropriate state 

official. This proposed rule would not 

remove the existing regulatory 

requirement for credit unions to obtain 

prior approval from the regional director 

and, if state-chartered, the appropriate 

state official, to pay a dividend if the 

credit union’s net worth classification 

is, or if the dividend payment will cause 

the credit union’s net worth 


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294 12 U.S.C. 1790d(b)(2). 

295 12 U.S.C. 1790d(b)(2)(B)(iii). 

296 12 U.S.C. 1790d(b)(2)(B)(v). 

classification to fall below, adequately 

capitalized. 

However, as addressed above, special 

circumstances can result in a credit 

union reporting a negative balance in 

retained earnings while reporting a 

much larger positive balance of acquired 

equity which produces a total positive 

GAAP equity position and a different 

amount of positive total net worth. The 

Board believes it is prudent for credit 

unions with negative retained earnings 

to develop a plan to eliminate that 

negative balance to ensure long-term 

viability and sustainability. As such, 

this proposal would require a credit 

union that must request written 

approval to pay dividends because the 

payment would cause its net worth 

classification to fall below adequately 

capitalized to also include a plan for 

eliminating the negative retained 

earnings balance as part of the written 

request. This will ensure credit unions 

that are classified below adequately 

capitalized and have negative retained 

earnings have in place a plan to increase 

retained earnings and thereby increase 

net worth. 

B. Subpart B—Alternative Prompt 

Corrective Action for New Credit Unions 

Consistent with the Original Proposal, 

this proposed rule would add new 

subpart B, which would contain most of 

the capital adequacy rules that apply to 

‘‘new’’ credit unions. Section 216(b)(2) 

of the FCUA requires NCUA to prepare 

regulations that apply to new credit 

unions.294

The current net worth measures, net 

worth classification, and text of the PCA 

requirements applicable to new credit 

unions would be renumbered. They 

would remain mostly unchanged under 

the proposed rule, except for minor 

conforming changes and the following 

substantive amendments: 

(1) Clarification of the language in 

current § 702.301(b) regarding the 

ability of credit unions to become 

‘‘new’’ again due to a decrease in asset 

size after having exceed the $10 million 

threshold. 

(2) Elimination of the regular reserve 

account requirement in current 

§ 702.401(b) and all cross references to 

the requirement; 

(3) Addition of new § 701.206(f)(3) 

clarifying that the submission of more 

than two revised business plans would 

be considered and unsafe and unsound 

condition; and 

(4) Amendment of the language of 

current § 702.402 regarding the full and 

fair disclosure of financial condition. 

(5) Amendment of the requirements of 

current § 702.403 regarding the payment 

of dividends. 

Section 702.201 Scope 

Consistent with the Original Proposal, 

this proposed rule would renumber 

current § 702.301 as proposed § 702.201. 

The proposed rule would also clarify 

that a credit union may not regain a 

designation of ‘‘new’’ after reporting 

total assets in excess of $10 million. 

Section 216(b)(2)(B)(iii) of the FCUA 

defines a ‘‘new’’ credit union as one that 

has been in operation for 10 years or 

less, or has $10 million or less in total 

assets.295 Section 216(b)(2)(B)(v) of the 

FCUA further requires that rules for new 

credit unions prevent evasion of the 

purpose of § 216, which provides new 

credit unions a period of time to 

accumulate net worth.296 NCUA 

recently conducted a postmortem 

review of a credit union failure that 

caused a loss to the NCUSIF. The review 

revealed that the credit union 

intentionally reduced its total assets 

below $10 million to regain the 

designation as a ‘‘new’’ credit union 

under current part 702 and the 

associated lower net worth requirement. 

Shifting back and forth between the 

minimum capital requirement for 

‘‘new’’ and all other credit unions 

resulted in slowed capital 

accumulation, which contributed to the 

loss incurred by the NCUSIF. 

Accordingly, consistent with the current 

rule, proposed § 702.201(b) would 

amend the definition of ‘‘new’’ credit 

union in current § 702.301(b) to provide 

that a ‘‘new’’ credit union for purposes 

of subpart B is a credit union that both 

has been in operation for less than 10 

years and has total assets of not more 

than $10 million. In addition, consistent 

with section 216(b)(2) of the FCUA, 

proposed paragraph (b) would further 

provide that once a credit union reports 

total assets of more than $10 million on 

a Call Report, the credit union is no 

longer new, even if its assets 

subsequently decline below $10 million. 

In general, credit unions attaining an 

asset size of $10 million begin to offer 

a greater range of services and loans, 

which increase the credit union’s 

sophistication and risk to the NCUSIF. 

In the event a new credit union reports 

total assets of over $10 million and then 

subsequently declines to under $10 

million, the additional PCA regulatory 

requirements under the proposed rule 

would not be substantially increased. 

Both new credit unions and non-new 

credit unions with net worth ratios of 

less than 6 percent, but over 2 percent, 

are required under either § 702.206 or 

§ 702.111 of the proposal to operate 

under substantially similar plans to 

restore their net worth. For example, a 

new credit union with a net worth ratio 

of 5 percent is required to operate under 

a revised business plan, and a non-new 

credit union with a net worth ratio of 5 

percent is required to operate under a 

NWRP. Accordingly, the Board believes 

any burden associated with the 

proposed change to the requirements of 

part 702 would be minimal. 

Section 702.202 Net Worth Categories 

for New Credit Unions 

Consistent with the Original Proposal, 

this proposed rule would renumber 

current § 702.302 as proposed § 702.202, 

and would make only minor technical 

edits and conforming amendments to 

the text of the section. 

Section 702.203 Prompt Corrective 

Action for Adequately Capitalized New 

Credit Unions 

Consistent with the Original Proposal, 

this proposed rule would renumber 

current § 702.303 as proposed § 702.203, 

and would make only minor conforming 

amendments to the text of the section. 

Consistent with the proposed 

elimination of the regular reserve 

requirement in current § 702.401(b), 

proposed § 702.203 would also be 

amended to remove the requirement 

that adequately capitalized credit 

unions transfer the earnings retention 

amount from undivided earnings to 

their regular reserve account. 

Section 702.204 Prompt Corrective 

Action for Moderately Capitalized, 

Marginally Capitalized or Minimally 

Capitalized New Credit Unions 

Consistent with the Original Proposal, 

this proposed rule would renumber 

current § 702.304 as proposed § 702.204, 

and would make only minor conforming 

amendments to the text of the section. 

Consistent with the proposed 

elimination of the regular reserve 

requirement in current § 702.401(b), 

which is discussed in more detail 

below, proposed § 702.204(a)(1) would 

be amended to remove the requirement 

that such credit unions transfer the 

earnings retention amount from 

undivided earnings to their regular 

reserve account. 

Section 702.205 Prompt Corrective 

Action for Uncapitalized New Credit 

Unions 

Consistent with the Original Proposal, 

this proposed rule would renumber 

current § 702.305 as proposed § 702.205, 


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297 12 U.S.C. 1786 and 1790d. 

and would make only minor conforming 

amendments to the text of the section. 

Section 702.206 Revised Business 

Plans (RBP) for New Credit Unions 

Consistent with the Original Proposal, 

this proposed rule would renumber 

current § 702.306 as proposed § 702.206, 

would make mostly minor conforming 

amendments to the text of the section, 

and would add new § 702.206(g)(3). 

Consistent with the proposed 

elimination of the regular reserve 

requirement in current § 702.401(b), 

which is discussed in more detail 

below, proposed § 702.206(b)(3) would 

be amended to remove the requirement 

that new credit unions transfer the 

earnings retention amount from 

undivided earnings to their regular 

reserve account. 

206(g)(3) Submission of Multiple 

Unapproved Revised Business Plans 

Consistent with the Original Proposal, 

proposed § 702.206(g)(3) would provide 

that the submission of more than two 

RBPs that were not approved is 

considered an unsafe and unsound 

condition and may subject the credit 

union to administrative enforcement 

actions under section 206 of the 

FCUA.297 NCUA regional directors have 

expressed concerns that some credit 

unions have in the past submitted 

multiple RBPs that could not be 

approved due to non-compliance with 

the requirements of the current rule, 

resulting in delayed implementation of 

actions to improve the credit union’s net 

worth. The proposed amendment is 

intended clarify that submitting 

multiple RBPs that are rejected by 

NCUA, or the state official, because of 

the failure of the credit union to 

produce an acceptable RBP is an unsafe 

and unsound practice and may subject 

the credit union to further actions as 

permitted under the FCUA. 

Section 702.207 Incentives for New 

Credit Unions 

Consistent with the Original Proposal, 

this proposed rule would renumber 

current § 702.307 as proposed § 702.207, 

and would make only minor conforming 

amendments to the text of the section. 

Section 702.208 Reserves 

Consistent with the Original Proposal, 

this proposed rule would add new 

§ 702.208 regarding reserves for new 

credit unions to the rule and, consistent 

with the text of the current reserve 

requirement in § 702.401(a), would 

require that each new credit union 

establish and maintain such reserves as 

may be required by the FCUA, by state 

law, by regulation, or in special cases, 

by the Board or appropriate state 

official. 

As explained under § 702.112, the 

proposed rule would eliminate the 

regular reserve account under current 

§ 702.402(b) from the earnings retention 

requirement. Additionally, the process 

and substance of requesting permission 

for charges to the regular reserve would 

be eliminated upon the effective date of 

a final rule. Upon the effective date of 

a final rule, a federal credit union would 

close out the regular reserve balance 

into undivided earnings. A federally 

insured, state-chartered credit union 

would still be required to maintain a 

regular reserve account as per state law 

or its state supervisory authority. 

Section 702.209 Full and Fair 

Disclosure of Financial Condition 

Generally consistent with the Original 

Proposal, this proposed rule would 

renumber current § 702.402 as § 702.209 

and would make only minor conforming 

amendments to the text of this section 

with the exception of the changes to 

paragraph (d) that are discussed in more 

detail below. 

209(d) Charges for Loan and Lease 

Losses 

Consistent with the proposed 

elimination of the regular reserve 

requirement in current § 702.401(b), 

proposed § 702.209(d) would remove 

paragraph (d)(4) of the current rule, 

which provides that the maintenance of 

an ALLL shall not affect the requirement 

to transfer earnings to a credit union’s 

regular reserve when required under 

subparts B or C of part 702. In addition, 

this proposed rule would remove 

paragraph (d)(3) of the current rule, 

which provides that adjustments to the 

valuation ALLL will be recorded in the 

expense account ‘‘Provision for Loan 

and Lease Losses.’’ As discussed in 

§ 702.113, the changes in the section 

emphasize the need to record the ALLL 

in accordance with GAAP. 

The remaining provisions in 

paragraph (d) of the current rule would 

be amended as follows: 

(d)(1) 

Proposed § 702.209(d)(1) would 

amend current § 702.401(d)(1) to 

provide that charges for loan and lease 

losses shall be made timely and in 

accordance with GAAP. The proposal 

would add the italicized words ‘‘and 

lease’’ and ‘‘timely and’’ to the language 

in the current rule to clarify that the 

requirement also applies to lease losses 

and to require that credit unions make 

charges for loan and lease losses in a 

timely manner. As with the section 

above, this section was changed to 

clarify that charges for potential lease 

losses should be recorded in accordance 

with GAAP through the same allowance 

account as loan losses. In addition, 

timely recording is critical to maintain 

full and fair disclosure as required 

under this section. 

(d)(2) 

Proposed § 702.209(d)(2) would 

amend current § 702.401(d)(2) to 

eliminate the detailed requirement and 

simply provide that the ALLL must be 

maintained in accordance with GAAP. 

This is necessary to provide full and 

fair disclosure to a credit union 

member, NCUA, or, at the discretion of 

a credit union’s board of directors, to 

creditors to fairly inform them of the 

credit union’s financial condition and 

operations. 

(d)(3) 

Proposed § 702.209(d)(3) would retain 

the language in current § 702.401(d)(5) 

with no changes. 

Section 702.210 Payment of Dividends 

Generally consistent with the Original 

Proposal, this proposed rule would 

reorganize the rules regarding the 

payment of dividends contained in the 

current § 702.403, which also apply to 

new credit unions, to new § 702.210 of 

the proposed rule. The proposed rule 

also would make a number of 

amendments to the text of paragraphs 

(a) and (b) of the current rule. Each of 

these changes is discussed in more 

detail below. 

210(a) Restriction on Dividends 

Current § 702.402(a) permits small 

credit unions with a depleted undivided 

earnings balance to pay dividends out of 

the regular reserve account without 

regulatory approval, as long as the credit 

union will remain at least adequately 

capitalized. Proposed § 702.210(a), 

however, would provide that, for small 

credit unions, dividends shall be 

available only from net worth, net of 

any special reserves established under 

§ 702.208, if any. 

210(b) Payment of dividends if retained 

earnings depleted 

This proposed rule would eliminate 

the language in current § 702.403(b) and 

§ 702.210(b) and (c) of the Original 

Proposal entirely and replace it with a 

new provision. Under this proposal, 

§ 702.210 would provide that the board 

of directors must not pay a dividend or 

interest refund that will cause the credit 

union’s capital classification to fall 

below adequately capitalized under 


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298The Original Proposal applied to credit unions 

with total assets of more than $50 million. At the 

time, 2,237 credit unions had total assets greater 

than $50 million. Thus, the original proposal would 

have exempted over two-thirds of all credit unions. 

For those credit unions that would have been 

subject to the Original Proposal, over 90 percent 

would have remained well capitalized. 

299There are 1,975 FDIC-insured banks with 

assets less than $100 million as of June 2014. 

300Of the 1,455 impacted credit unions, only 27, 

or 1.86%, would have less than the 10 percent riskbased capital requirement to be well capitalized. Of 

these, eight have net worth ratios less than seven 

percent and therefore are already categorized as less 

than well capitalized. 

301One credit union declines to undercapitalized 

in the estimate. However, given the proposal’s 

provision to phase in supervisory goodwill over a 

longer period, which the estimation methodology 

could not separate out from total goodwill, this 

credit union’s capital category would not actually 

decline. 

302NCUA estimated the original proposal (based 

on June 2013 data) would cause 189 credit unions 

to experience a decline in their PCA classification 

from well capitalized to adequately capitalized, and 

10 well capitalized credit unions to experience a 

decline to undercapitalized. Assuming no other 

adjustments to the balance sheet structure, NCUA 

estimated that the 10 credit unions that would 

experience a decline to undercapitalized would 

have needed to retain an additional $63 million 

(total) in risk-based capital to become adequately 

capitalized; the 189 credit unions would have 

needed to add roughly $700 million in capital to be 

restored to well capitalized. 

303Based on June 2013 Call Report data, NCUA 

estimated that if risk-based capital requirements in 

the original Proposal were applied at that time, the 

aggregate risk-based capital ratio for credit unions 

subject to the proposed risk-based capital measure 

would be 14.6 percent and the average risk-based 

capital ratio would be 15.7 percent. By way of 

subpart B of part 702 unless the 

appropriate regional director and, if 

state-chartered, the appropriate state 

official, have given prior written 

approval (in an RBP or otherwise). 

Paragraph (b) would provide further that 

the request for written approval must 

include the plan for eliminating any 

negative retained earnings balance. 

As noted earlier in the section of this 

preamble associated with § 702.114(b), 

the changes in this section would retain 

the restrictions on payment of dividends 

included in the current rule. However, 

this proposal would require a credit 

union that must request written 

approval to pay dividends because the 

payment would cause its net worth 

classification to fall below adequately 

capitalized to also include a plan for 

eliminating the negative retained 

earnings balance as part of the written 

request. This will ensure credit unions 

that are classified below adequately 

capitalized and have negative retained 

earnings to have in place a plan to 

increase retained earnings and thereby 

increase net worth. 

C. Other Conforming Changes to the 

Regulations 

In addition to the amendments 

discussed above, and consistent with 

the Original Proposal, this proposed 

rule would make minor conforming 

amendments to §§ 700.2, 701.21, 701.23, 

701.34, 703.14, 713.6, 723.7, 747.2001, 

747.2002, and 747.2003. The 

conforming amendments would 

primarily involve updating terminology 

and cross citations to proposed part 702 

and proposed § 747.2006. No 

substantive changes are intended by 

these amendments. 

V. Effective Date 

How much time would credit unions 

have to implement these new 

requirements? 

The Original Proposal included an 

effective date of 18 months from the 

date of publication of a final rule. An 

overwhelming majority of commenters 

addressed this provision and nearly all 

disagreed with an 18-month effective 

date. They argued that 18 months would 

be insufficient to allow credit unions to 

make adjustments to internal systems, 

balance sheets, and operations in 

advance of the effective date. 

Some commenters cited the phased-in 

implementation period that the Other 

Banking Agencies’ rules provided in 

their final rules on risk-based capital for 

banks, and requested that the Board 

consider the same. Other commenters 

suggested implementation time frames 

from three years to nine years, with 

some suggesting each credit union have 

its own implementation period based on 

the complexity of its operations. The 

majority position, however, was that the 

effective date be three years from the 

date of publication of a final rule. 

The Board agrees with the comments 

that a longer implementation period is 

necessary. Therefore, the Board is 

proposing an implementation date of 

January 1, 2019 to provide both credit 

unions and NCUA sufficient time to 

make the necessary adjustments, such as 

systems, processes, and procedures, and 

to reduce the burden on affected credit 

unions in meeting the new 

requirements. 

In response to commenters who asked 

the Board to phase in the 

implementation, the Board has 

concluded that phasing in the new 

capital rules for credit unions would 

add additional complexity with 

minimal benefit, and therefore has 

provided for an extended 

implementation period. The Board 

believes this increase would provide 

credit unions with sufficient time to 

make the necessary adjustments to 

systems and operations before the 

effective date of this final rule. In 

addition, as noted above, an extended 

effective date would generally coincide 

with the full phase-in of FDIC’s. 

VI. Impact of the Proposed Regulation 

A substantial number of commenters 

on the Original Proposal suggested 

NCUA underestimated the adverse 

effect the proposal would have had on 

credit unions. A number of commenters 

stated that they believed that more 

credit unions than the Board indicated 

in the proposal would be impacted 

because their net worth would fall to 

just barely over well capitalized or 

adequately capitalized levels. The Board 

has considered the concerns that were 

raised by commenters and has made 

substantial modifications in this 

proposal, as summarized above, to 

refine the scope and improve the 

targeting of the proposed risk-based 

capital requirements. These changes 

would reduce the number of affected 

credit unions substantially. 

This proposal would apply to credit 

unions with $100 million or greater in 

total assets. As of December 31, 2013, 

there were 1,455 credit unions (21.5 

percent of all credit unions) with assets 

of $100 million or greater. This proposal 

would therefore exempt almost 80 

percent of all credit unions.298 The 

Board notes that the risk-based capital 

requirements in this proposed rule 

would apply only to credit unions with 

assets of $100 million or more, 

compared to the Other Banking 

Agencies’ rules that apply to banks of all 

sizes.299

Based on December 2013 Call Report 

data, NCUA estimates over 98 percent of 

credit unions with over $100 million in 

assets already have sufficient capital to 

remain well capitalized under this 

proposal.300 NCUA estimates this 

proposal (based on December 2013 data) 

would cause fewer than 20 credit 

unions (with total assets of $10.9 

billion) to experience a decline in their 

capital classification from well 

capitalized to adequately capitalized.301

NCUA estimates that these credit unions 

would need to retain an additional 

$53.6 million in eligible capital in total 

to be well capitalized, assuming no 

adjustments to asset distributions.302

Based on December 2013 Call Report 

data, NCUA estimates that if the riskbased capital requirements in the 

current proposal were applied today, 

the proposed risk weights would result 

in a ratio of total risk-weighted assets (in 

the aggregate) to total assets of 57.4 

percent. Further, the aggregate average 

risk-based capital ratio would be 18.2 

percent with an average risk-based 

capital ratio of 19.3 percent.303 As 


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comparison, the bank aggregate total risk-weighted 

assets to total assets is 67.8 percent, with an average 

total risk-based capital ratio of 18.4 percent. 

304This computation calculates the amount of 

capital required by multiplying the proposed risk 

weighted assets by 10 percent (the level to be well 

capitalized), and then dividing this result by total 

assets. This provides a measure comparable to the 

net worth ratio. Since the risk-based capital 

provisions provide for a broader definition of 

capital included in the risk-based capital ratio 

numerator, which on average benefits credit unions 

by approximately 50 basis points, the appropriate 

comparison point for the leverage equivalent is 7.5 

percent, not the 7 percent level for well capitalized 

for the net worth ratio. 

shown in the two tables below, almost 

all complex credit unions would operate 

well above the proposed 10 percent 

requirement for classification as well 

capitalized. 

DISTRIBUTION OF PROPOSED RISK BASED CAPITAL RATIO

Proposed RBC Ratio <10% 10–13% 13–16% 16–20% 20–30% 30–50% >50% 

# of CUs ............................................................................... 27 169 365 408 382 86 18 

DISTRIBUTION OF NET WORTH RATIO AND PROPOSED RISK BASED CAPITAL RATIO

# of CUs Less than well 

capitalized 

Well 

capitalized to 

well + 2% 

Well 

capitalized + 

2% to + 3.5% 

Well 

capitalized + 

3.5% to + 5% 

Greater than 

well 

capitalized + 

5% 

Net Worth Ratio ................................................................... 16 339 430 332 338 

Proposed RBC Ratio ........................................................... 27 99 118 181 1,030 

Various commenters suggested that as 

many as 1,000 credit unions would have 

been required to raise anywhere from $2 

billion to $7 billion in additional capital 

under the original proposal to retain the 

same ‘‘buffers’’ that exist today to be 

considered well capitalized. 

Commenters stated that credit unions 

cannot easily manage their capital to the 

exact dollar level that equates to 

NCUA’s proposed standards, and that 

the management of credit unions 

typically strives to maintain sufficient 

space or buffers between their actual net 

worth ratios and the minimum required 

levels to be well capitalized because the 

consequences of missing the net worth 

standards would be very serious. 

Commenters stated that to regain their 

buffer, credit unions would only have 

three choices: (1) Rebalance their assets, 

recognizing an opportunity cost when 

they forego higher earnings which 

would diminish their ability to grow; (2) 

ration services, stifling asset and 

membership growth; or (3) ask members 

to pay more, resulting in fewer member 

benefits and increased competition from 

banks. 

The Board believes sound capital 

levels are vital to the long-term health 

of all financial institutions. Further, 

provided it is not otherwise unsafe or 

unsound, it is a business decision on the 

part of a credit union to maintain capital 

levels above those required by 

regulation. Balancing proper capital 

accumulation with product offering and 

pricing strategies helps ensure credit 

unions are able to provide affordable 

member services over time. Credit 

unions are already expected to 

incorporate into their business models 

and strategic plans provisions for 

maintaining prudent levels of capital. 

This proposal is intended to ensure 

minimum regulatory capital levels are 

better correlated to risk. Regulatory 

capital levels correlated to risk help 

reduce the incentive for credit unions to 

hold levels of capital significantly 

higher than required, unless it is the 

credit union’s choice to do so to meet 

member service and strategic objectives. 

The Board does recognize that unduly 

high minimum regulatory capital 

requirements could lead to less than 

optimal outcomes. 

Some commenters suggested that for 

some credit unions the Original 

Proposal would have increased the 

amount of capital required to be wellcapitalized above the current level of 

seven percent of total assets depending 

on the ratio of risk assets to total assets. 

The commenter claimed that on net, 

across all potentially affected credit 

unions (those with more than $40 

million in assets), the total amount of 

capital necessary to be well capitalized 

would increase by $7.6 billion, or in 

other words, that the proposal would 

have increased the net worth ratio 

required to be well capitalized, on 

average, from seven percent to 7.76 

percent. It is not the Board’s intent to 

systematically increase capital 

requirements for all credit unions. 

Rather, the Board’s goals are to ensure 

capital is commensurate with risk, 

thereby aligning incentives for 

managing risk with required capital 

levels, and to increase regulatory tools 

for addressing outliers. The Board 

believes this proposal will be effective 

in achieving these goals. 

As shown in the table below, this 

proposal is estimated to raise minimum 

required capital levels above the current 

net worth ratio requirement for only 59 

complex credit unions (four percent of 

the credit unions subject to the 

proposal). The proposed risk-based 

capital rule achieves a reasonable 

balance between requiring credit unions 

posing an elevated risk of failure to hold 

more capital while not over burdening 

lower-risk credit unions. 

DISTRIBUTION OF RISK-BASED LEVERAGE EQUIVALENT RATIO 304

Proposed RBC ratio—leverage equivalent < 6% 6–7.5% 7.5–8.5% 8.5–9.5% 9.5–11% > 11% Average 

# of CUs ............................................................................... 878 518 42 11 6 0 5.74% 


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305Using MBL data as the current Call Report 

does not capture commercial loan data as defined 

in this proposal. 306 44 U.S.C. 3507(d); 5 CFR part 1320. 

Unlike the Original Proposal, which 

was more closely tied to existing Call 

Report data, there are greater limitations 

in estimating the impact of this second 

proposal. Some of the key differences 

between the Original Proposal and the 

current proposal include: Assigning a 

risk weight to loans secured by nonowner-occupied residential property 

(First-Lien, 1–4 Family) of 50 percent 

rather than 100 percent; assigning a risk 

weight to insured and Federal Reserve 

deposits of zero percent; and assigning 

a risk weight to all loans with 

government guarantees or portions of 

commercial loans with compensating 

balances on deposit of 20 percent. These 

differences, among others, would 

benefit credit unions, as the lower riskweights would result in lower capital 

requirements than those measured 

under the Original Proposal. Thus, 

NCUA reasonably believes, based on its 

estimates using the Call Report data 

currently available, that this second 

proposal would have a lower impact 

than the Original Proposal. Further, 

these estimates are believed to be 

conservative, with the expected benefit 

to credit unions likely being larger than 

projected, potentially resulting in even 

fewer adversely impacted credit unions 

than estimated. 

As noted earlier, concentration risk is 

a material risk that NCUA addresses in 

this proposed rule. Based on December 

31, 2013 Call Report data, if this 

proposal were applied today, NCUA 

estimates that this additional capital 

requirement for concentration risk 

would have the following impact: 

Concentration threshold 

Number of credit unions 

with total assets greater 

than $100 million as of 

12/31/2013 

Percentage of 1,455 

credit unions with total 

assets greater than 

$100 million 

First Lien Residential Real Estate (≤ 35% of Total Assets) .................................................... 149 10.2% 

Junior Lien Residential Real Estate (≤ 20% of Total Assets) ................................................. 67 4.6% 

Commercial Loans (Used MBLs as a proxy) 305 > 50% of Total Assets) ............................... 12 0.8% 

VII. Regulatory Procedures 

Regulatory Flexibility Act 

The Regulatory Flexibility Act (RFA) 

generally requires that, in connection 

with a notice of proposed rulemaking, 

an agency prepare and make available 

for public comment an initial regulatory 

flexibility analysis that describes the 

impact of a proposed rule on small 

entities. A regulatory flexibility analysis 

is not required, however, if the agency 

certifies that the rule will not have a 

significant economic impact on a 

substantial number of small entities 

(defined for purposes of the RFA to 

include credit unions with assets less 

than $50 million) and publishes its 

certification and a short, explanatory 

statement in the Federal Register 

together with the rule. 

The proposed amendments to part 

702 would primarily affect complex 

credit unions, which are those with 

$100 million or more in assets. As a 

result, small credit unions with assets 

less than $50 million are much less 

affected by the proposed rule. NCUA 

recognizes, however, that even small 

credit unions will be affected by the 

proposed amendments to some minor 

extent in that credit unions may need to 

collect additional data for the NCUA 

Call Report. 

In particular, the proposed rule, if 

finalized as-is, would likely impose 

some one-time minimal costs on credit 

unions mostly related to training and 

updates to internal data systems. NCUA 

estimates that for any small credit union 

that does have to change its current 

practices to deal with the expanded 

reporting required, it would take, on 

average, less than an additional three 

hours per quarter per credit union. For 

many small credit unions, it would take 

even less time because they would not 

need to collect as much data because of 

the simplicity of their operations and 

products and services offered. The costs 

associated with this would also be 

minimal. The Call Report changes 

prompted by this proposed rule are the 

kind that would easily be handled as 

part of the normal and routine 

maintenance of a credit union’s data 

reporting system. Accordingly, the costs 

and other effects of this proposal on 

small credit unions are minor, and 

NCUA certifies that this proposal will 

not have a significant economic impact 

on a substantial number of small credit 

unions. 

Paperwork Reduction Act 

The Paperwork Reduction Act of 1995 

(PRA) applies to rulemakings in which 

an agency by rule creates a new 

paperwork burden on regulated entities 

or increases an existing burden.306 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 proposed 

changes to part 702 impose new 

information collection requirements. 

NCUA has determined that the 

proposed changes to part 702 will have 

costs associated with updating internal 

policies, and updating data collection 

and reporting systems for preparing Call 

Reports. Based on December 2013 Call 

Report data, NCUA estimates that all 

6,554 credit unions would have to 

amend their procedures and systems for 

preparing Call Reports. NCUA will 

address the costs and provide notice of 

these changes in other collections, such 

as the NCUA Call Report and Profile as 

part of its regular amendments separate 

from this proposed rule. 

Finally, NCUA estimates that 

approximately 21.5 percent, or 1,455 

credit unions, will be defined as 

‘‘complex’’ under the proposed rule and 

would have additional data collection 

requirements related to the new riskbased capital requirements. 

Title of Information Collection: RiskBased Capital policy implications for 

complex credit unions 

Affected Public: Complex Credit Unions 

Estimated Number of Respondents: 

1,455 

Estimated Burden Per Respondent: Onetime policy review and revision, 40 

hours 

Estimated Cost Per Respondent: $1,276 

Title of Information Collection: RiskBased Capital policy implications for 

non-complex credit unions 

Affected Public: Non-Complex Credit 

Unions 

Estimated Number of Respondents: 

5,099 

Estimated Burden Per Respondent: Onetime policy review and revision, 20 

hours 

Estimated Cost Per Respondent: $638 

Total Estimated One-Time: 

One-time burden for policy review 

and revision, (20 hours times 5,099 

credit unions (non-complex), or 40 

hours times 1,455 credit unions 

(complex)). The total one-time cost for 

non-complex credit unions totals 

101,980 hours or $3,252,142, an average 


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of $638 per credit union. The total onetime cost for complex credit unions 

totals 58,200 hours or $1,855,998, an 

average of $1,276 per credit union. 

Submission of comments. NCUA 

considers comments by the public on 

this proposed collection of information 

in: 

Evaluating whether the proposed 

collection of information is necessary 

for the proper performance of the 

functions of NCUA, including whether 

the information will have a practical 

use; 

Evaluating the accuracy of NCUA’s 

estimate of the burden of the proposed 

collection of information, including the 

validity of the methodology and 

assumptions used; 

Enhancing the quality, usefulness, 

and clarity of the information to be 

collected; and 

Minimizing the burden of collection 

of information on those who are to 

respond, including through the use of 

appropriate automated, electronic, 

mechanical, or other technological 

collection techniques or other forms of 

information technology; e.g., permitting 

electronic submission of responses. 

Executive Order 13132 

Executive Order 13132 encourages 

independent regulatory agencies to 

consider the impact of their actions on 

state and local interests. NCUA, an 

independent regulatory agency as 

defined in 44 U.S.C. 3502(5), voluntarily 

complies with the principles of the 

executive order to adhere to 

fundamental federalism principles. This 

proposed rule will apply to all federally 

insured natural-person credit unions, 

including federally insured, statechartered natural-person credit unions. 

Accordingly, it may have, to some 

degree, a direct effect on the states, on 

the relationship between the national 

government and the states, or on the 

distribution of power and 

responsibilities among the various 

levels of government. The Board 

believes this impact is minor, and it is 

an unavoidable consequence of carrying 

out the statutory mandate to adopt a 

system of PCA to apply to all federally 

insured, natural person credit unions. 

Throughout the rulemaking process, 

NCUA has consulted with 

representatives of state regulators 

regarding the impact of PCA on statechartered credit unions. Comments and 

suggestions of those state regulators are 

reflected in this proposed rule. 

Assessment of Federal Regulations and 

Policies on Families 

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 

12 CFR Part 700 

Credit unions. 

12 CFR Part 701 

Credit, Credit unions, Insurance, 

Reporting and recordkeeping 

requirements. 

12 CFR Part 702 

Credit unions, Reporting and 

recordkeeping requirements. 

12 CFR Part 703 

Credit unions, Investments, Reporting 

and recordkeeping requirements. 

12 CFR Part 713 

Bonds, Credit unions, Insurance. 

12 CFR Part 723 

Credit unions, Loan programsbusiness, Reporting and recordkeeping 

requirements. 

12 CFR Part 747 

Administrative practice and 

procedure, Bank deposit insurance, 

Claims, Credit unions, Crime, Equal 

access to justice, Investigations, 

Lawyers, Penalties. 

By the National Credit Union 

Administration Board on January 15, 2015. 

Gerard Poliquin, 

Secretary of the Board. 

For the reasons discussed above, the 

Board proposes to amend 12 CFR parts 

700, 701, 702, 703, 713, 723, and 747 as 

follows: 

PART 700—DEFINITIONS 

■ 1. The authority citation for part 700 

continues to read as follows: 

Authority: 12 U.S.C. 1752, 1757(6), 1766. 

§ 700.2 [Amended] 

■ 2. Amend the definition of ‘‘net 

worth’’ in § 700.2 by removing 

‘‘§ 702.2(f)’’ and adding in its place 

‘‘§ 702.2’’. 

PART 701—ORGANIZATION AND 

OPERATION OF FEDERAL CREDIT 

UNIONS 

■ 3. The authority citation for part 701 

continues to read as follows: 

Authority: 12 U.S.C. 1752(5), 1755, 1756, 

1757, 1758, 1759, 1761a, 1761b, 1766, 1767, 

1782, 1784, 1786, 1787, 1789. Section 701.6 

is also authorized by 15 U.S.C. 3717. Section 

701.31 is also authorized by 15 U.S.C. 1601 

et seq.; 42 U.S.C. 1981 and 3601–3610. 

Section 701.35 is also authorized by 42 

U.S.C. 4311–4312. 

§ 701.21 [Amended] 

■ 4. Amend § 701.21(h)(4)(iv) by 

removing ‘‘§ 702.2(f)’’ and adding in its 

place ‘‘§ 702.2’’. 

§ 701.23 [Amended] 

■ 5. Amend § 701.23(b)(2) introductory 

text by removing the words ‘‘net worth’’ 

and adding in their place the word 

‘‘capital’’, and removing the words ‘‘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’’. 

§ 701.34 [Amended] 

■ 5. Amend § 701.34 as follows: 

■ a. In paragraph (b)(12) remove the 

words ‘‘§§ 702.204(b)(11), 702.304(b) 

and 702.305(b)’’ and add in their place 

the words ‘‘part 702’’. 

■ b. In paragraph (d)(1)(i) remove the 

words ‘‘net worth’’ and add in their 

place the word ‘‘capital’’. 

Appendix to § 701.34 [Amended] 

■ 6. In the appendix to § 701.34, amend 

the paragraph beginning ‘‘8. Prompt 

Corrective Action’’ by removing the 

words ‘‘net worth classifications (see 12 

CFR 702.204(b)(11), 702.304(b) and 

702.305(b), as the case may be)’’ and 

adding in their place the words ‘‘capital 

classifications (see 12 CFR part 702)’’. 

PART 702—CAPITAL ADEQUACY 

■ 7. The authority citation for part 702 

continues to read as follows: 

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

■ 8. Revise § 702.1 to read as follows: 

§ 702.1 Authority, purpose, scope, and 

other supervisory authority. 

(a) Authority. Subparts A and B of this 

part and subpart L of part 747 of this 

chapter are issued by the National 

Credit Union Administration (NCUA) 

pursuant to sections 120 and 216 of the 

Federal Credit Union Act (FCUA), 12 

U.S.C. 1776 and 1790d (section 1790d), 

as revised by section 301 of the Credit 

Union Membership Access Act, Public 

Law 105–219, 112 Stat. 913 (1998). 

(b) Purpose. The express purpose of 

prompt corrective action under section 

1790d is to resolve the problems of 

federally insured credit unions at the 

least possible long-term loss to the 

National Credit Union Share Insurance 

Fund. Subparts A and B of this part 

carry out the purpose of prompt 

corrective action by establishing a 

framework of minimum capital 


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requirements, and mandatory and 

discretionary supervisory actions 

applicable according to a credit union’s 

capital classification, designed 

primarily to restore and improve the 

capital adequacy of federally insured 

credit unions. 

(c) Scope. Subparts A and B of this 

part implement the provisions of section 

1790d as they apply to federally insured 

credit unions, whether federally- or 

state-chartered; to such credit unions 

defined as ‘‘new’’ pursuant to section 

1790d(b)(2); and to such credit unions 

defined as ‘‘complex’’ pursuant to 

section 1790d(d). Certain of these 

provisions also apply to officers and 

directors of federally insured credit 

unions. Subpart C applies capital 

planning and stress testing to credit 

unions with $10 billion or more in total 

assets. This part does not apply to 

corporate credit unions. Unless 

otherwise provided, procedures for 

issuing, reviewing and enforcing orders 

and directives issued under this part are 

set forth in subpart L of part 747 of this 

chapter. 

(d) Other supervisory authority. 

Neither section 1790d nor this part in 

any way limits the authority of the 

NCUA Board or appropriate state 

official under any other provision of law 

to take additional supervisory actions to 

address unsafe or unsound practices or 

conditions, or violations of applicable 

law or regulations. Action taken under 

this part may be taken independently of, 

in conjunction with, or in addition to 

any other enforcement action available 

to the NCUA Board or appropriate state 

official, including issuance of cease and 

desist orders, orders of prohibition, 

suspension and removal, or assessment 

of civil money penalties, or any other 

actions authorized by law. 

■ 9. Revise § 702.2 to read as follows: 

§ 702.2 Definitions. 

Unless otherwise provided in this 

part, the terms used in this part have the 

same meanings as set forth in FCUA 

sections 101 and 216, 12 U.S.C. 1752, 

1790d. The following definitions apply 

to this part: 

Allowances for loan and lease losses 

(ALLL) means valuation allowances that 

have been established through a charge 

against earnings to cover estimated 

credit losses on loans, lease financing 

receivables or other extensions of credit 

as determined in accordance with 

GAAP. 

Amortized cost means the purchase 

price of a security adjusted for 

amortizations of premium or accretion 

of discount if the security was 

purchased at other than par or face 

value. 

Appropriate state official means the 

state commission, board or other 

supervisory authority having 

jurisdiction over the credit union. 

Call Report means the Call Report 

required to be filed by all credit unions 

under § 741.6(a)(2) of this chapter. 

Carrying value means, with respect to 

an asset, the value of the asset on the 

statement of financial condition of the 

credit union, determined in accordance 

with GAAP. 

Central counterparty (CCP) means a 

counterparty (for example, a clearing 

house) that facilitates trades between 

counterparties in one or more financial 

markets by either guaranteeing trades or 

novating contracts. 

Commercial loan means any loan, line 

of credit, or letter of credit (including 

any unfunded commitments) to 

individuals, sole proprietorships, 

partnerships, corporations, or other 

business enterprises for commercial, 

industrial, and professional purposes, 

but not for investment or personal 

expenditure purposes. Commercial loan 

excludes loans to CUSOs, first- or 

junior-lien residential real estate loans, 

and consumer loans. 

Commitment means any legally 

binding arrangement that obligates the 

credit union to extend credit, to 

purchase or sell assets, or enter into a 

financial transaction. 

Consumer loan means a loan to one or 

more individuals for household, family, 

or other personal expenditures, 

including any loans secured by vehicles 

generally manufactured for personal, 

family, or household use regardless of 

the purpose of the loan. Consumer loan 

excludes commercial loans, loans to 

CUSOs, first- and junior-lien residential 

real estate loans, and loans for the 

purchase of fleet vehicles. 

Contractual compensating balance 

means the funds a commercial loan 

borrower must maintain on deposit at 

the lender credit union as security for 

the loan in accordance with the loan 

agreement, subject to a proper account 

hold and on deposit as of the 

measurement date. 

Credit conversion factor (CCF) means 

the percentage used to assign a credit 

exposure equivalent amount for selected 

off-balance sheet accounts. 

Credit union means a federally 

insured, natural person credit union, 

whether federally- or state-chartered. 

Current means, with respect to any 

loan, that the loan is less than 90 days 

past due, not placed on non-accrual 

status, and not restructured. 

CUSO means a credit union service 

organization as defined in part 712 and 

741 of this chapter. 

Custodian means a financial 

institution that has legal custody of 

collateral as part of a qualifying master 

netting agreement, clearing agreement, 

or other financial agreement. 

Depository institution means a 

financial institution that engages in the 

business of providing financial services; 

that is recognized as a bank or a credit 

union by the supervisory or monetary 

authorities of the country of its 

incorporation and the country of its 

principal banking operations; that 

receives deposits to a substantial extent 

in the regular course of business; and 

that has the power to accept demand 

deposits. Depository institution 

includes all federally insured offices of 

commercial banks, mutual and stock 

savings banks, savings or building and 

loan associations (stock and mutual), 

cooperative banks, credit unions and 

international banking facilities of 

domestic depository institutions, and all 

privately insured state chartered credit 

unions. 

Derivatives Clearing Organization 

(DCO) means the same as defined by the 

Commodity Futures Trading 

Commission in 17 CFR 1.3(d). 

Derivative contract means 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. 

Equity investment means investments 

in equity securities and any other 

ownership interests, including, for 

example, investments in partnerships 

and limited liability companies. 

Equity investment in CUSOs means 

the unimpaired value of the credit 

union’s equity investments in a CUSO 

as recorded on the statement of financial 

condition in accordance with GAAP. 

Exchange means a central financial 

clearing market where end users can 

trade derivatives. 

Excluded goodwill means the 

outstanding balance, maintained in 

accordance with GAAP, of any goodwill 

originating from a supervisory merger or 

combination that was completed no 

more than 29 days after publication of 

this rule in final form in the Federal 

Register. This term and definition will 

expire on January 1, 2025. 


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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 no more than 29 days 

after publication of this rule in final 

form in the Federal Register. This term 

and definition will expire on January 1, 

2025. 

Exposure amount means: 

(1) The amortized cost for investments 

classified as held-to-maturity and 

available-for-sale, and the fair value for 

trading securities. 

(2) The outstanding balance for 

Federal Reserve Bank Stock, Central 

Liquidity Facility Stock, Federal Home 

Loan Bank Stock, nonperpetual capital 

and perpetual contributed capital at 

corporate credit unions, and equity 

investments in CUSOs. 

(3) The carrying value for non-CUSO 

equity investments, and investment 

funds. 

(4) The carrying value for the credit 

union’s holdings of general account 

permanent insurance, and separate 

account insurance. 

(5) The amount calculated under 

§ 702.105 of this part for derivative 

contracts. 

Fair value has the same meaning as 

provided in GAAP. 

Financial collateral means collateral 

approved by both the credit union and 

the counterparty as part of the collateral 

agreement in recognition of credit risk 

mitigation for derivative contracts. 

First-lien residential real estate loan 

means a loan or line of credit primarily 

secured by a first-lien on a one-to-four 

family residential property where: 

(1) The credit union made a 

reasonable and good faith determination 

at or before consummation of the loan 

that the member will have a reasonable 

ability to repay the loan according to its 

terms; and 

(2) In transactions where the credit 

union holds the first-lien and junior 

lien(s), and no other party holds an 

intervening lien, for purposes of this 

part the combined balance will be 

treated as a single first-lien residential 

real estate loan. 

GAAP means generally accepted 

accounting principles in the United 

States as set forth in the Financial 

Accounting Standards Board’s (FASB) 

Accounting Standards Codification 

(ASC). 

General account permanent insurance 

means an account into which all 

premiums, except those designated for 

separate accounts are deposited, 

including premiums for life insurance 

and fixed annuities and the fixed 

portfolio of variable annuities, whereby 

the general assets of the insurance 

company support the policy. 

General obligation means a bond or 

similar obligation that is backed by the 

full faith and credit of a public sector 

entity. 

Goodwill means an intangible asset, 

maintained in accordance with GAAP, 

representing the future economic 

benefits arising from other assets 

acquired in a business combination 

(e.g., merger) that are not individually 

identified and separately recognized. 

Goodwill does not include excluded 

goodwill. 

Government guarantee means a 

guarantee provided by the U.S. 

Government, FDIC, NCUA or other U.S. 

Government agency, or a public sector 

entity. 

Government-sponsored enterprise 

(GSE) means an entity established or 

chartered by the U.S. Government to 

serve public purposes specified by the 

U.S. Congress, but whose debt 

obligations are not explicitly guaranteed 

by the full faith and credit of the U.S. 

Government. 

Guarantee means a financial 

guarantee, letter of credit, insurance, or 

similar financial instrument that allows 

one party to transfer the credit risk of 

one or more specific exposures to 

another party. 

Identified losses means those items 

that have been determined by an 

evaluation made by NCUA, or in the 

case of a state chartered credit union the 

appropriate state official, as measured 

on the date of examination in 

accordance with GAAP, to be chargeable 

against income, equity or valuation 

allowances such as the allowances for 

loan and lease losses. Examples of 

identified losses would be assets 

classified as losses, off-balance sheet 

items classified as losses, any provision 

expenses that are necessary to replenish 

valuation allowances to an adequate 

level, liabilities not shown on the books, 

estimated losses in contingent 

liabilities, and differences in accounts 

that represent shortages. 

Industrial development bond means a 

security issued under the auspices of a 

state or other political subdivision for 

the benefit of a private party or 

enterprise where that party or 

enterprise, rather than the government 

entity, is obligated to pay the principal 

and interest on the obligation. 

Intangible assets mean assets, 

maintained in accordance with GAAP, 

other than financial assets, that lack 

physical substance. 

Investment fund means an investment 

with a pool of underlying investment 

assets. Investment fund includes an 

investment company that is registered 

under section 8 of the Investment 

Company Act of 1940, and collective 

investment funds or common trust 

investments that are unregistered 

investment products that pool fiduciary 

client assets to invest in a diversified 

pool of investments. 

Junior-lien residential real estate loan 

means a loan or line of credit secured 

by a subordinate lien on a one-to-four 

family residential property. 

Loan to a CUSO means the 

outstanding balance of any loan from a 

credit union to a CUSO as recorded on 

the statement of financial condition in 

accordance with GAAP. 

Loan secured by real estate means a 

loan that, at origination, is secured 

wholly or substantially by a lien(s) on 

real property for which the lien(s) is 

central to the extension of the credit. A 

lien is ‘‘central’’ to the extension of 

credit if the borrowers would not have 

been extended credit in the same 

amount or on terms as favorable without 

the liens on real property. For a loan to 

be ‘‘secured wholly or substantially by 

a lien(s) on real property,’’ the estimated 

value of the real estate collateral at 

origination (after deducting any more 

senior liens held by others) must be 

greater than 50 percent of the principal 

amount of the loan at origination. 

Loans transferred with limited 

recourse means the total principal 

balance outstanding of loans transferred, 

including participations, for which the 

transfer qualified for true sale 

accounting treatment under GAAP, and 

for which the transferor credit union 

retained some limited recourse (i.e., 

insufficient recourse to preclude true 

sale accounting treatment). Loans 

transferred with limited recourse 

excludes transfers that qualify for true 

sale accounting treatment but contain 

only routine representation and 

warranty clauses that are standard for 

sales on the secondary market, provided 

the credit union is in compliance with 

all other related requirements, such as 

capital requirements. 

Mortgage-backed security (MBS) 

means a security backed by first- or 

junior-lien mortgages secured by real 

estate upon which is located a dwelling, 

mixed residential and commercial 

structure, residential manufactured 

home, or commercial structure. 

Mortgage partnership finance 

program means a Federal Home Loan 

Bank program through which loans are 

originated by a depository institution 

that are purchased or funded by the 

Federal Home Loan Banks, where the 


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depository institutions receive fees for 

managing the credit risk of the loans 

and servicing them. The credit risk must 

be shared between the depository 

institutions and the Federal Home Loan 

Banks. 

Mortgage servicing assets mean those 

assets, maintained in accordance with 

GAAP, resulting from contracts to 

service loans secured by real estate (that 

have been securitized or owned by 

others) for which the benefits of 

servicing are expected to more than 

adequately compensate the servicer for 

performing the servicing. 

NCUSIF means the National Credit 

Union Share Insurance Fund as defined 

by 12 U.S.C. 1783. 

Net worth means: 

(1) The retained earnings balance of 

the credit union at quarter-end as 

determined under GAAP, subject to 

paragraph (3) of this definition. 

(2) For a low income-designated 

credit union, net worth also includes 

secondary capital accounts that are 

uninsured and subordinate to all other 

claims, including claims of creditors, 

shareholders, and the NCUSIF. 

(3) For a credit union that acquires 

another credit union in a mutual 

combination, net worth also includes 

the retained earnings of the acquired 

credit union, or of an integrated set of 

activities and assets, less any bargain 

purchase gain recognized in either case 

to the extent the difference between the 

two is greater than zero. The acquired 

retained earnings must be determined at 

the point of acquisition under GAAP. A 

mutual combination, including a 

supervisory combination, is a 

transaction in which a credit union 

acquires another credit union or 

acquires an integrated set of activities 

and assets that is capable of being 

conducted and managed as a credit 

union. 

(4) The term ‘‘net worth’’ also 

includes loans to and accounts in an 

insured credit union, established 

pursuant to section 208 of the Act [12 

U.S.C. 1788], provided such loans and 

accounts: 

(i) Have a remaining maturity of more 

than 5 years; 

(ii) Are subordinate to all other claims 

including those of shareholders, 

creditors, and the NCUSIF; 

(iii) Are not pledged as security on a 

loan to, or other obligation of, any party; 

(iv) Are not insured by the NCUSIF; 

(v) Have non-cumulative dividends; 

(vi) Are transferable; and 

(vii) Are available to cover operating 

losses realized by the insured credit 

union that exceed its available retained 

earnings. 

Net worth ratio means the ratio of the 

net worth of the credit union to the total 

assets of the credit union rounded to 

two decimal places. 

New credit union has the same 

meaning as in § 702.201. 

Nonperpetual capital has the same 

meaning as in § 704.2 of this chapter. 

Off-balance sheet items means 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. 

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. 

(3) For unfunded commitments, the 

remaining unfunded portion of the 

contractual agreement. 

On-balance sheet means a credit 

union’s assets, liabilities, and equity, as 

disclosed on the statement of financial 

condition at a specific point in time. 

Other intangible assets means 

intangible assets, other than servicing 

assets and goodwill, maintained in 

accordance with GAAP. Other 

intangible assets does not include 

excluded other intangible assets. 

Over-the-counter (OTC) interest rate 

derivative contract means a derivative 

contract that is not cleared on an 

exchange. 

Perpetual contributed capital has the 

same meaning as in § 704.2 of this 

chapter. 

Public sector entity (PSE) means a 

state, local authority, or other 

governmental subdivision of the United 

States below the sovereign level. 

Qualifying master netting agreement 

means a written, legally enforceable 

agreement, provided that: 

(1) The agreement creates a single 

legal obligation for all individual 

transactions covered by the agreement 

upon an event of default, including 

upon an event of conservatorship, 

receivership, insolvency, liquidation, or 

similar proceeding, of the counterparty; 

(2) The agreement provides the credit 

union the right to accelerate, terminate, 

and close out on a net basis all 

transactions under the agreement and to 

liquidate or set off collateral promptly 

upon an event of default, including 

upon an event of conservatorship, 

receivership, insolvency, liquidation, or 

similar proceeding, of the counterparty, 

provided that, in any such case, any 

exercise of rights under the agreement 

will not be stayed or avoided under 

applicable law in the relevant 

jurisdictions, other than in receivership, 

conservatorship, resolution under the 

Federal Deposit Insurance Act, Title II 

of the Dodd-Frank Wall Street Reform 

and Consumer Protection Act, or under 

any similar insolvency law applicable to 

GSEs; 

(3) The agreement does not contain a 

walkaway clause (that is, a provision 

that permits a non-defaulting 

counterparty to make a lower payment 

than it otherwise would make under the 

agreement, or no payment at all, to a 

defaulter or the estate of a defaulter, 

even if the defaulter or the estate is a net 

creditor under the agreement); and 

(4) In order to recognize an agreement 

as a qualifying master netting agreement 

for purposes of this part, a credit union 

must conduct sufficient legal review, at 

origination and in response to any 

changes in applicable law, to conclude 

with a well-founded basis (and maintain 

sufficient written documentation of that 

legal review) that: 

(i) The agreement meets the 

requirements of paragraph (2) of this 

definition; and 

(ii) In the event of a legal challenge 

(including one resulting from default or 

from conservatorship, receivership, 

insolvency, liquidation, or similar 

proceeding), the relevant court and 

administrative authorities would find 

the agreement to be legal, valid, binding, 

and enforceable under the law of 

relevant jurisdictions. 

Recourse means a credit union’s 

retention, in form or in substance, of 

any credit risk directly or indirectly 

associated with an asset it has 

transferred that exceeds a pro rata share 

of that credit union’s claim on the asset 

and disclosed in accordance with 

GAAP. If a credit union has no claim on 

an asset it has transferred, then the 

retention of any credit risk is recourse. 

A recourse obligation typically arises 

when a credit union transfers assets in 

a sale and retains an explicit obligation 

to repurchase assets or to absorb losses 

due to a default on the payment of 

principal or interest or any other 

deficiency in the performance of the 

underlying obligor or some other party. 

Recourse may also exist implicitly if the 

credit union provides credit 

enhancement beyond any contractual 

obligation to support assets it has 

transferred. 


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1For each quarter, a credit union must elect one 

of the measures of total assets listed in paragraph 

(2) of this definition to apply for all purposes under 

this part except §§ 702.103 through 702.106 (riskbased capital requirement). 

Residential mortgage-backed security 

means a mortgage-backed security 

backed by loans secured by a first-lien 

on residential property. 

Residential property means a house, 

condominium unit, cooperative unit, 

manufactured home, or the construction 

thereof, and unimproved land zoned for 

one-to-four family residential use. 

Residential property excludes boats or 

motor homes, even if used as a primary 

residence, or timeshare property. 

Restructured means, with respect to 

any loan, a restructuring of the loan in 

which a credit union, for economic or 

legal reasons related to a borrower’s 

financial difficulties, grants a 

concession to the borrower that it would 

not otherwise consider. Restructured 

excludes loans modified or restructured 

solely pursuant to the U.S. Treasury’s 

Home Affordable Mortgage Program. 

Revenue obligation means a bond or 

similar obligation that is an obligation of 

a PSE, but which the PSE is committed 

to repay with revenues from the specific 

project financed rather than general tax 

funds. 

Risk-based capital ratio means the 

percentage, rounded to two decimal 

places, of the risk-based capital ratio 

numerator to risk-weighted assets, as 

calculated in accordance with 

§ 702.104(a). 

Risk-weighted assets means the total 

risk-weighted assets as calculated in 

accordance with § 702.104(c). 

Secured consumer loan means a 

consumer loan associated with 

collateral or other item of value to 

protect against loss where the creditor 

has a perfected security interest in the 

collateral or other item of value. 

Senior executive officer means a 

senior executive officer as defined by 

§ 701.14(b)(2) of this chapter. 

Separate account insurance means an 

account into which a policyholder’s 

cash surrender value is supported by 

assets segregated from the general assets 

of the carrier. 

Shares means deposits, shares, share 

certificates, share drafts, or any other 

depository account authorized by 

federal or state law. 

Share-secured loan means a loan fully 

secured by shares on deposit at the 

credit union making the loan, and does 

not include the imposition of a statutory 

lien under § 701.39 of this chapter. 

STRIPS means a separately traded 

registered interest and principal 

security. 

Structured product means an 

investment that is linked, via return or 

loss allocation, to another investment or 

reference pool. 

Subordinated means, with respect to 

an investment, that the investment has 

a junior claim on the underlying 

collateral or assets to other investments 

in the same issuance. Subordinated does 

not apply to securities that are junior 

only to money market fund eligible 

securities in the same issuance. 

Supervisory merger or combination 

means 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 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 of this chapter; 

or 

(3) A merger or purchase and 

assumption that included NCUA’s or 

the appropriate state official’s 

identification and selection of the 

continuing credit union. 

Swap dealer has the meaning as 

defined by the Commodity Futures 

Trading Commission in 17 CFT 1.3(ggg). 

Total assets means a credit union’s 

total assets as measured 1 by either: 

(1) 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; 

(2) 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; 

(3) Average daily balance. The credit 

union’s total assets measured by the 

average daily balance over the 

applicable calendar quarter; or 

(4) 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. 

Tranche means one of a number of 

related securities offered as part of the 

same transaction. Tranche includes a 

structured product if it has a loss 

allocation based off of an investment or 

reference pool. 

Unsecured consumer loan means a 

consumer loan not secured by collateral. 

U.S. Government agency means an 

instrumentality of the U.S. Government 

whose obligations are fully and 

explicitly guaranteed as to the timely 

payment of principal and interest by the 

full faith and credit of the U.S. 

Government. 

■ 10. Revise subpart A to read as 

follows: 

Subpart A—Prompt Corrective Action 

Sec. 

702.101 Capital measures, capital adequacy, 

effective date of classification, and notice 

to NCUA. 

702.102 Capital classifications. 

702.103 Applicability of the risk-based 

capital ratio measure. 

702.104 Risk-based capital ratio. 

702.105 Derivative contracts. 

702.106 Prompt corrective action for 

adequately capitalized credit unions. 

702.107 Prompt corrective action for 

undercapitalized credit unions. 

702.108 Prompt corrective action for 

significantly undercapitalized credit 

unions. 

702.109 Prompt corrective action for 

critically undercapitalized credit unions. 

702.110 Consultation with state officials on 

proposed prompt corrective action. 

702.111 Net worth restoration plans 

(NWRP). 

702.112 Reserves. 

702.113 Full and fair disclosure of financial 

condition. 

702.114 Payment of dividends. 

Subpart A—Prompt Corrective Action 

§ 702.101 Capital measures, capital 

adequacy, effective date of classification, 

and notice to NCUA. 

(a) Capital measures. For purposes of 

this part, a credit union must determine 

its capital classification at the end of 

each calendar quarter using the 

following measures: 

(1) The net worth ratio; and 

(2) If determined to be applicable 

under § 702.103, the risk-based capital 

ratio. 

(b) Capital adequacy. (1) 

Notwithstanding the minimum 

requirements in this part, a credit union 

defined as complex must maintain 

capital commensurate with the level 

and nature of all risks to which the 

institution is exposed. 

(2) A credit union defined as complex 

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. 

(c) Effective date of capital 

classification. For purposes of this part, 

the effective date of a federally insured 

credit union’s capital classification shall 

be the most recent to occur of: 

(1) Quarter-end effective date. The 

last day of the calendar month following 

the end of the calendar quarter; 

(2) Corrected capital classification. 

The date the credit union received 

subsequent written notice from NCUA 

or, if state-chartered, from the 

appropriate state official, of a decline in 

capital classification due to correction 


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of an error or misstatement in the credit 

union’s most recent Call Report; or 

(3) Reclassification to lower category. 

The date the credit union received 

written notice from NCUA or, if statechartered, the appropriate state official, 

of reclassification on safety and 

soundness grounds as provided under 

§§ 702.102(b) or 702. 202(d). 

(d) Notice to NCUA by filing Call 

Report. (1) Other than by filing a Call 

Report, a federally insured credit union 

need not notify the NCUA Board of a 

change in its capital measures that 

places the credit union in a lower 

capital category; 

(2) Failure to timely file a Call Report 

as required under this section in no way 

alters the effective date of a change in 

capital classification under paragraph 

(b) of this section, or the affected credit 

union’s corresponding legal obligations 

under this part. 

§ 702.102 Capital classification. 

(a) Capital categories. Except for 

credit unions defined as ‘‘new’’ under 

subpart B of this part, a credit union 

shall be deemed to be classified (Table 

1 of this section)— 

(1) Well capitalized if: 

(i) Net worth ratio. The credit union 

has a net worth ratio of 7.0 percent or 

greater; and 

(ii) Risk-based capital ratio. The 

credit union, if complex, has a riskbased capital ratio of 10 percent or 

greater. 

(2) Adequately capitalized if: 

(i) Net worth ratio. The credit union 

has a net worth ratio of 6.0 percent or 

greater; and 

(ii) Risk-based capital ratio. The 

credit union, if complex, has a riskbased capital ratio of 8.0 percent or 

greater; and 

(iii) Does not meet the definition of a 

well capitalized credit union. 

(3) Undercapitalized if: 

(i) Net worth ratio. The credit union 

has a net worth ratio of 4.0 percent or 

more but less than 6.0 percent; or 

(ii) Risk-based capital ratio. The 

credit union, if complex, has a riskbased capital ratio of less than 8.0 

percent. 

(4) Significantly undercapitalized if: 

(i) The credit union has a net worth 

ratio of 2.0 percent or more but less than 

4.0 percent; or 

(ii) The credit union has a net worth 

ratio of 4.0 percent or more but less than 

5.0 percent, and either— 

(A) Fails to submit an acceptable net 

worth restoration plan within the time 

prescribed in § 702.110; 

(B) Materially fails to implement a net 

worth restoration plan approved by the 

NCUA Board; or 

(C) Receives notice that a submitted 

net worth restoration plan has not been 

approved. 

(5) Critically undercapitalized if it has 

a net worth ratio of less than 2.0 

percent. 

TABLE 1 TO § 702.102—CAPITAL CATEGORIES

A credit union’s capital classification 

is . . . Net worth ratio Risk-based capital ratio also applicable if complex 

And subject to following condition(s) . . . 

Well Capitalized ................................ 7% or greater .......... And ............... 10.0% or greater.

Adequately Capitalized ..................... 6% or greater .......... And ............... 8% or greater ...................... And does not meet the criteria to 

be classified as well capitalized. 

Undercapitalized ................................ 4% to 5.99% ............ Or ................. Less than 8%.

Significantly Undercapitalized ........... 2% to 3.99% ............ ...................... 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.

(b) Reclassification based on 

supervisory criteria other than net 

worth. The NCUA Board may reclassify 

a well capitalized credit union as 

adequately capitalized and may require 

an adequately capitalized or 

undercapitalized credit union to comply 

with certain mandatory or discretionary 

supervisory actions as if it were 

classified in the next lower capital 

category (each of such actions 

hereinafter referred to generally as 

‘‘reclassification’’) in the following 

circumstances: 

(1) Unsafe or unsound condition. The 

NCUA Board has determined, after 

providing the credit union with notice 

and opportunity for hearing pursuant to 

§ 747.2003 of this chapter, that the 

credit union is in an unsafe or unsound 

condition; or 

(2) Unsafe or unsound practice. The 

NCUA Board has determined, after 

providing the credit union with notice 

and opportunity for hearing pursuant to 

§ 747.2003 of this chapter, that the 

credit union has not corrected a material 

unsafe or unsound practice of which it 

was, or should have been, aware. 

(c) Non-delegation. The NCUA Board 

may not delegate its authority to 

reclassify a credit union under 

paragraph (b) of this section. 

(d) Consultation with state officials. 

The NCUA Board shall consult and seek 

to work cooperatively with the 

appropriate state official before 

reclassifying a federally insured statechartered credit union under paragraph 

(b) of this section, and shall promptly 

notify the appropriate state official of its 

decision to reclassify. 

§ 702.103 Applicability of the risk-based 

capital ratio measure. 

For purposes of § 702.102, a credit 

union is defined as ‘‘complex’’ and the 

risk-based capital ratio measure is 

applicable only if the credit union’s 

quarter-end total assets exceed one 

hundred million dollars ($100,000,000), 

as reflected in its most recent Call 

Report. 

§ 702.104 Risk-based capital ratio. 

A complex credit union must 

calculate its risk-based capital ratio in 

accordance with this section. 

(a) Calculation of the risk-based 

capital ratio. To determine its risk-based 

capital ratio, a complex credit union 

must calculate the percentage, rounded 

to two decimal places, of its risk-based 

capital ratio numerator as described in 

paragraph (b) of this section, to its total 

risk-weighted assets as described in 

paragraph (c) of this section. 

(b) Risk-based capital ratio 

numerator. The risk-based capital ratio 

numerator is the sum of the specific 

capital elements in paragraph (b)(1) of 

this section, minus the regulatory 

adjustments in paragraph (b)(2) of this 

section. 


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(1) Capital elements of the risk-based 

capital ratio numerator. The capital 

elements of the risk-based capital 

numerator are: 

(i) Undivided earnings; 

(ii) Appropriation for non-conforming 

investments; 

(iii) Other reserves; 

(iv) Equity acquired in merger; 

(v) Net income 

(vi) ALLL, maintained in accordance 

with GAAP; 

(vii) Secondary capital accounts 

included in net worth (as defined in 

§ 702.2); and 

(viii) Section 208 assistance included 

in net worth (as defined in § 702.2). 

(2) Risk-based capital ratio numerator 

deductions. The elements deducted 

from the sum of the capital elements of 

the risk-based capital ratio numerator 

are: 

(i) NCUSIF Capitalization Deposit; 

(ii) Goodwill; 

(iii) Other intangible assets; and 

(iv) Identified losses not reflected in 

the risk-based capital ratio numerator. 

(c) Risk-weighted assets. (1) General. 

Risk-weighted assets includes riskweighted on-balance sheet assets as 

described in paragraphs (c)(2) and (3) of 

this section, plus the risk-weighted offbalance sheet assets in paragraph (c)(4) 

of this section, plus the risk-weighted 

derivatives in paragraph (c)(5) of this 

section, less the risk-based capital ratio 

numerator deductions in paragraph 

(b)(2) of this section. If a particular 

asset, derivative contract, or off balance 

sheet item has features or characteristics 

that suggest it could potentially fit into 

more than one risk weight category, 

then a credit union shall assign the 

asset, derivative contract, or off balance 

sheet item to the risk weight category 

that most accurately and appropriately 

reflects its associated credit risk. 

(2) Risk weights for on-balance sheet 

assets. The risk categories and weights 

for assets of a complex credit union are 

as follows: 

(i) Category 1—zero percent risk 

weight. A credit union must assign a 

zero percent risk weight to: 

(A) The balance of cash, currency and 

coin, including vault, automatic teller 

machine, and teller cash. 

(B) The exposure amount of: 

(1) An obligation of the U.S. 

Government, its central bank, or a U.S. 

Government agency that is directly and 

unconditionally guaranteed, excluding 

detached security coupons, ex-coupon 

securities, and principal- and interestonly mortgage-backed STRIPS. 

(2) Federal Reserve Bank stock and 

Central Liquidity Facility stock. 

(C) Insured balances due from FDICinsured depositories or federally 

insured credit unions. 

(ii) Category 2—20 percent risk 

weight. A credit union must assign a 20 

percent risk weight to: 

(A) The uninsured balances due from 

FDIC-insured depositories, federally 

insured credit unions, and all balances 

due from privately-insured credit 

unions. 

(B) The exposure amount of: 

(1) A non-subordinated obligation of 

the U.S. Government, its central bank, 

or a U.S. Government agency that is 

conditionally guaranteed, excluding 

principal- and interest-only mortgagebacked STRIPS. 

(2) A non-subordinated obligation of a 

GSE other than an equity exposure or 

preferred stock, excluding principaland interest-only GSE obligation 

STRIPS. 

(3) Securities issued by PSEs in the 

U.S. that represent general obligation 

securities. 

(4) Investment funds whose portfolios 

are permitted to hold only part 703 

permissible investments that qualify for 

the zero or 20 percent risk categories. 

(5) Federal Home Loan Bank stock. 

(C) The balances due from Federal 

Home Loan Banks. 

(D) The balance of share-secured 

loans. 

(E) The portions of outstanding loans 

with a government guarantee. 

(F) The portions of commercial loans 

secured with contractual compensating 

balances. 

(iii) Category 3—50 percent risk 

weight. A credit union must assign a 50 

percent risk weight to: 

(A) The outstanding balance (net of 

government guarantees), including loans 

held for sale, of current first-lien 

residential real estate loans less than or 

equal to 35 percent of assets. 

(B) The exposure amount of: 

(1) Securities issued by PSEs in the 

U.S. that represent non-subordinated 

revenue obligation securities. 

(2) Other non-subordinated, non-U.S. 

Government agency or non-GSE 

guaranteed, residential mortgage-backed 

security, excluding principal- and 

interest-only STRIPS. 

(iv) Category 4—75 percent risk 

weight. A credit union must assign a 75 

percent risk weight to the outstanding 

balance (net of government guarantees), 

including loans held for sale, of: 

(A) Current first-lien residential real 

estate loans greater than 35 percent of 

assets. 

(B) Current secured consumer loans. 

(v) Category 5—100 percent risk 

weight. A credit union must assign a 100 

percent risk weight to: 

(A) The outstanding balance (net of 

government guarantees), including loans 

held for sale, of: 

(1) First-lien residential real estate 

loans that are not current. 

(2) Current junior-lien residential real 

estate loans less than or equal to 20 

percent of assets. 

(3) Current unsecured consumer 

loans. 

(4) Current commercial loans, less 

contractual compensating balances that 

comprise less than 50 percent of assets. 

(5) Loans to CUSOs. 

(B) The exposure amount of: 

(1) Industrial development bonds. 

(2) All stripped mortgage-backed 

securities (principal- and interest-only 

STRIPS). 

(3) Part 703 compliant investment 

funds, with the option to use the lookthrough approaches in paragraph 

(c)(3)(ii) of this section. 

(4) Corporate debentures and 

commercial paper. 

(5) Nonperpetual capital at corporate 

credit unions. 

(6) General account permanent 

insurance. 

(7) GSE equity exposure or preferred 

stock. 

(C) All other assets listed on the 

statement of financial condition not 

specifically assigned a different risk 

weight under this subpart. 

(vi) Category 6—150 percent risk 

weight. A credit union must assign a 150 

percent risk weight to: 

(A) The outstanding balance, net of 

government guarantees and including 

loans held for sale, of: 

(1) Current junior-lien residential real 

estate loans that comprise more than 20 

percent of assets. 

(2) Junior-lien residential real estate 

loans that are not current. 

(3) Consumer loans that are not 

current. 

(4) Current commercial loans (net of 

contractual compensating balances), 

which comprise more than 50 percent of 

assets. 

(5) Commercial loans (net of 

contractual compensating balances), 

which are not current. 

(B) The exposure amount of: 

(1) Perpetual contributed capital at 

corporate credit unions. 

(2) Equity investments in CUSOs. 

(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. 

(viii) Category 8—300 percent risk 

weight. A credit union must assign a 300 

percent risk weight to the exposure 

amount of: 

(A) Publicly traded equity investment, 

other than a CUSO investment. 

(B) Investment funds that are not in 

compliance with part 703 of this 

Chapter, with the option to use the lookVerDate Sep<11>2014 09:20 Jan 26, 2015 Jkt 235001 PO 00000 Frm 00095 Fmt 4701 Sfmt 4702 E:\FR\FM\27JAP2.SGM 27JAP2

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2Non-interest rate derivative contracts are 

addressed in paragraph (d) of this section. 

through approaches in paragraph 

(c)(3)(ii) of this section. 

(C) Separate account insurance, with 

the option to use the look-through 

approaches in paragraph (c)(3)(ii) of this 

section. 

(ix) Category 9—400 percent risk 

weight. A credit union must assign a 400 

percent risk weight to the exposure 

amount of non-publicly traded equity 

investments, other than equity 

investments in CUSOs. 

(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)(i) of this section. 

(3) Alternative risk weights for certain 

on-balance sheet assets. Instead of using 

the risk weights assigned in paragraph 

(c)(2) of this section, a credit union may 

determine the risk weight of investment 

funds and subordinated tranches of any 

investment as follows: 

(i) Gross-up approach. A credit union 

may use the gross-up approach under 

§ 324.43(e) of this title to determine the 

risk weight of the carrying value of any 

subordinated tranche of any investment. 

(ii) Look-through approaches. A credit 

union may use one of the look-through 

approaches under § 324.53 of this title 

to determine the risk weight of the 

exposure amount of investment funds 

that are not in compliance with part 703 

of this chapter, the holdings of separate 

account insurance; or part 703 

compliant investment funds. 

(4) Risk weights for off-balance sheet 

activities. The risk weighted amounts 

for all off-balance sheet items are 

determined by multiplying the offbalance sheet exposure amount by the 

appropriate CCF and the assigned risk 

weight as follows: 

(i) For the outstanding balance of 

loans transferred to a Federal Home 

Loan Bank under the mortgage 

partnership finance program, a 20 

percent CCF and a 50 percent risk 

weight. 

(ii) For other loans transferred with 

limited recourse, a 100 percent CCF 

applied to the off-balance sheet 

exposure and: 

(A) For commercial loans, a 100 

percent risk weight. 

(B) For first-lien residential real estate 

loans, a 50 percent risk weight. 

(C) For junior-lien residential real 

estate loans, a 100 percent risk weight. 

(D) For all secured consumer loans, a 

75 percent risk weight. 

(E) For all unsecured consumer loans, 

a 100 percent risk weight. 

(iii) For unfunded commitments: 

(A) For commercial loans, a 50 

percent CCF with a 100 percent risk 

weight. 

(B) For first-lien residential real estate 

loans, a 10 percent CCF with a 50 

percent risk weight. 

(C) For junior-lien residential real 

estate loans, a 10 percent CCF with a 

100 percent risk weight. 

(D) For all secured consumer loans, a 

10 percent CCF with a 75 percent risk 

weight. 

(E) For all unsecured consumer loans, 

a 10 percent CCF with a 100 percent risk 

weight. 

(5) Derivative contracts. A complex 

credit union must assign a risk-weighted 

amount to any derivative contracts as 

determined under § 702.105 of this part. 

§ 702.105 Derivative contracts. 

(a) OTC interest rate derivative 

contracts. 

(1) Exposure amount—(i) Single OTC 

interest rate derivative contract. Except 

as modified by paragraph (a)(2) of this 

section, the exposure amount for a 

single OTC interest rate derivative 

contract that is not subject to a 

qualifying master netting agreement is 

equal to the sum of the credit union’s 

current credit exposure and potential 

future credit exposure (PFE) on the OTC 

interest rate derivative contract. 

(A) Current credit exposure. The 

current credit exposure for a single OTC 

interest rate derivative contract is the 

greater of the fair value of the OTC 

interest rate derivative contract or zero. 

(B) PFE. (1) The PFE for a single OTC 

interest rate derivative contract, 

including an OTC interest rate 

derivative contract with a negative fair 

value, is calculated by multiplying the 

notional principal amount of the OTC 

interest rate derivative contract by the 

appropriate conversion factor in Table 1 

of this section. 

(2) A credit union must use an OTC 

interest rate derivative contract’s 

effective notional principal amount (that 

is, the apparent or stated notional 

principal amount multiplied by any 

multiplier in the OTC interest rate 

derivative contract) rather than the 

apparent or stated notional principal 

amount in calculating PFE. 

TABLE 1 TO § 702.105—CONVERSION

FACTOR MATRIX FOR INTEREST

RATE DERIVATIVE CONTRACTS 2

Remaining maturity Conversion 

factor 

One year or less ................... 0.00 

TABLE 1 TO § 702.105—CONVERSION

FACTOR MATRIX FOR INTEREST

RATE DERIVATIVE CONTRACTS 2— 

Continued 

Remaining maturity Conversion 

factor 

Greater than one year and 

less than or equal to five 

years ................................. 0.005 

Greater than five years ......... 0.015 

(ii) Multiple OTC interest rate 

derivative contracts subject to a 

qualifying master netting agreement. 

Except as modified by paragraph (a)(2) 

of this section, the exposure amount for 

multiple OTC interest rate derivative 

contracts subject to a qualifying master 

netting agreement is equal to the sum of 

the net current credit exposure and the 

adjusted sum of the PFE amounts for all 

OTC interest rate derivative contracts 

subject to the qualifying master netting 

agreement. 

(A) Net current credit exposure. The 

net current credit exposure is the greater 

of the net sum of all positive and 

negative fair value of the individual 

OTC interest rate derivative contracts 

subject to the qualifying master netting 

agreement or zero. 

(B) Adjusted sum of the PFE amounts 

(Anet). The adjusted sum of the PFE 

amounts is calculated as Anet = (0.4 × 

Agross) + (0.6 × NGR × Agross), where: 

(1) Agross equals the gross PFE (that 

is, the sum of the PFE amounts as 

determined under paragraph (a)(1)(i)(B) 

of this section for each individual 

derivative contract subject to the 

qualifying master netting agreement); 

and 

(2) Net-to-gross Ratio (NGR) equals 

the ratio of the net current credit 

exposure to the gross current credit 

exposure. In calculating the NGR, the 

gross current credit exposure equals the 

sum of the positive current credit 

exposures (as determined under 

paragraph (a)(1)(i) of this section) of all 

individual derivative contracts subject 

to the qualifying master netting 

agreement. 

(3) Recognition of credit risk 

mitigation of collateralized OTC 

derivative contracts. A credit union may 

recognize credit risk mitigation benefits 

of financial collateral that secures an 

OTC derivative contract or multiple 

OTC derivative contracts subject to a 

qualifying master netting agreement 

(netting set) by following the 

requirements of paragraph (c) of this 

section. 

(b) Cleared transactions for interest 

rate derivatives—(1) General 

requirements. A credit union must use 


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the methodologies described in 

paragraph (b) of this section to calculate 

risk-weighted assets for a cleared 

transaction. 

(2) Risk-weighted assets for cleared 

transactions. (i) To determine the risk 

weighted asset amount for a cleared 

transaction, a credit union must 

multiply the trade exposure amount for 

the cleared transaction, calculated in 

accordance with paragraph (b)(3) of this 

section, by the risk weight appropriate 

for the cleared transaction, determined 

in accordance with paragraph (b)(4) of 

this section. 

(ii) A credit union’s total riskweighted assets for cleared transactions 

is the sum of the risk-weighted asset 

amounts for all its cleared transactions. 

(3) Trade exposure amount. For a 

cleared transaction the trade exposure 

amount equals: 

(i) The exposure amount for the 

derivative contract or netting set of 

derivative contracts, calculated using 

the methodology used to calculate 

exposure amount for OTC interest rate 

derivative contracts under paragraph (a) 

of this section; plus 

(ii) The fair value of the collateral 

posted by the credit union and held by 

the, clearing member, or custodian. 

(4) Cleared transaction risk weights. A 

credit union must apply a risk weight 

of: 

(i) Two percent if the collateral posted 

by the credit union to the DCO or 

clearing member is subject to an 

arrangement that prevents any losses to 

the credit union due to the joint default 

or a concurrent insolvency, liquidation, 

or receivership proceeding of the 

clearing member and any other clearing 

member clients of the clearing member; 

and the clearing member credit union 

has conducted sufficient legal review to 

conclude with a well-founded basis 

(and maintains sufficient written 

documentation of that legal review) that 

in the event of a legal challenge 

(including one resulting from an event 

of default or from liquidation, 

insolvency, or receivership proceedings) 

the relevant court and administrative 

authorities would find the arrangements 

to be legal, valid, binding and 

enforceable under the law of the 

relevant jurisdictions; or 

(ii) Four percent if the requirements of 

paragraph (b)(4)(i) are not met. 

(5) Recognition of credit risk 

mitigation of collateralized OTC 

derivative contracts. A credit union may 

recognize the credit risk mitigation 

benefits of financial collateral that 

secures a cleared derivative contract by 

following the requirements of paragraph 

(c) of this section. 

(c) Recognition of credit risk 

mitigation of collateralized interest rate 

derivative contracts. (1) A credit union 

may recognize the credit risk mitigation 

benefits of financial collateral that 

secures an OTC interest rate derivative 

contract or multiple interest rate 

derivative contracts subject to a 

qualifying master netting agreement 

(netting set) or clearing arrangement by 

using the simple approach in paragraph 

(c)(3) of this section. 

(2) As an alternative to the simple 

approach, a credit union may recognize 

the credit risk mitigation benefits of 

financial collateral that secures such a 

contract or netting set if the financial 

collateral is marked-to-fair value on a 

daily basis and subject to a daily margin 

maintenance requirement by applying a 

risk weight to the exposure as if it were 

uncollateralized and adjusting the 

exposure amount calculated under 

paragraph (a) or (b) of this section using 

the collateral approach in paragraph 

(c)(3) of this section. The credit union 

must substitute the exposure amount 

calculated under paragraphs (b) or (c) of 

this section in the equation in paragraph 

(c)(3) of this section. 

(3) Collateralized transactions. (i) 

General. A credit union may use the 

approach in paragraph (c)(3)(ii) of this 

section to recognize the risk-mitigating 

effects of financial collateral. 

(ii) Simple collateralized derivatives 

approach. To qualify for the simple 

approach, the financial collateral must 

meet the following requirements: 

(A) The collateral must be subject to 

a collateral agreement for at least the life 

of the exposure; 

(B) The collateral must be revalued at 

least every six months; and 

(C) The collateral and the exposure 

must be denominated in the same 

currency. 

(iii) Risk weight substitution. (A) A 

credit union may apply a risk weight to 

the portion of an exposure that is 

secured by the fair value of financial 

collateral (that meets the requirements 

for the simple collateralized approach of 

this section) based on the risk weight 

assigned to the collateral as established 

under § 702.104(c). 

(B) A credit union must apply a risk 

weight to the unsecured portion of the 

exposure based on the risk weight 

applicable to the exposure under this 

subpart. 

(iv) Exceptions to the 20 percent risk 

weight floor and other requirements. 

Notwithstanding the simple 

collateralized derivatives approach in 

paragraph (c)(3)(ii) of this section: 

(A) A credit union may assign a zero 

percent risk weight to an exposure to a 

derivatives contract that is marked-tomarket on a daily basis and subject to 

a daily margin maintenance 

requirement, to the extent the contract 

is collateralized by cash on deposit. 

(B) A credit union may assign a 10 

percent risk weight to an exposure to an 

derivatives contract that is marked-tomarket daily and subject to a daily 

margin maintenance requirement, to the 

extent that the contract is collateralized 

by an exposure that qualifies for a zero 

percent risk weight under 

§ 702.104(c)(2)(i). 

(v) A credit union may assign a zero 

percent risk weight to the collateralized 

portion of an exposure where: 

(A) The financial collateral is cash on 

deposit; or 

(B) The financial collateral is an 

exposure that qualifies for a zero 

percent risk weight under 

§ 702.104(c)(2)(i), and the credit union 

has discounted the fair value of the 

collateral by 20 percent. 

(4) Collateral haircut approach. (i) A 

credit union may recognize the credit 

risk mitigation benefits of financial 

collateral that secures a collateralized 

derivative contract by using the 

standard supervisory haircuts in 

paragraph (c)(3) of this section. 

(ii) The collateral haircut approach 

applies to both OTC and cleared interest 

rate derivatives contracts discussed in 

this section. 

(iii) A credit union must determine 

the exposure amount for a collateralized 

derivative contracts by setting the 

exposure amount equal to the 

max{0,[(exposure amount—value of 

collateral)+(sum of current fair value of 

collateral instruments * market price 

volatility haircut of the collateral 

instruments)]}, where: 

(A) The value of the exposure equals 

the exposure amount for OTC interest 

rate derivative contracts (or netting set) 

calculated under paragraphs (a)(1)(i) 

and (ii) of this section. 

(B) The value of the exposure equals 

the exposure amount for cleared interest 

rate derivative contracts (or netting set) 

calculated under paragraph (b)(3) of this 

section. 

(C) The value of the collateral is the 

sum of cash and all instruments under 

the transaction (or netting set). 

(D) The sum of current fair value of 

collateral instruments as of the 

measurement date. 

(E) A credit union must use the 

standard supervisory haircuts for market 

price volatility in Table 2 to § 702.105 

of this section. 


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TABLE 2 TO § 702.105—STANDARD SUPERVISORY MARKET PRICE VOLATILITY HAIRCUTS

[based on a 10 business-day holding period] 

Residual maturity 

Haircut (in percent) assigned 

based on: 

Collateral risk weight 

(in percent) 

Zero 20 or 50 

Less than or equal to 1 year ................................................................................................................................... 0.5 1.0 

Greater than 1 year and less than or equal to 5 years .......................................................................................... 2.0 3.0 

Greater than 5 years ............................................................................................................................................... 4.0 6.0 

Cash collateral held ................................................................................................................................................. Zero 

Other exposure types .............................................................................................................................................. 25.0 

(d) All other derivative contracts and 

transactions. Credit unions must follow 

the requirements of the applicable 

provisions of Part 324, Title 12, Chapter 

3, when assigning risk weights to 

exposure amounts for derivatives 

contracts not addressed in paragraphs 

(a) or (b) of this section. 

§ 702.106 Prompt corrective action for 

adequately capitalized credit unions. 

(a) Earnings retention. Beginning on 

the effective date of classification as 

adequately capitalized or lower, a 

federally insured credit union must 

increase the dollar amount of its net 

worth quarterly either in the current 

quarter, or on average over the current 

and three preceding quarters, by an 

amount equivalent to at least 1/10th 

percent (0.1%) of its total assets (or 

more by choice), until it is well 

capitalized. 

(b) Decrease in retention. Upon 

written application received no later 

than 14 days before the quarter end, the 

NCUA Board, on a case-by-case basis, 

may permit a credit union to increase 

the dollar amount of its net worth by an 

amount that is less than the amount 

required under paragraph (a) of this 

section, to the extent the NCUA Board 

determines that such lesser amount: 

(1) Is necessary to avoid a significant 

redemption of shares; and 

(2) Would further the purpose of this 

part. 

(c) Decrease by FISCU. The NCUA 

Board shall consult and seek to work 

cooperatively with the appropriate state 

official before permitting a federally 

insured state-chartered credit union to 

decrease its earnings retention under 

paragraph (b) of this section. 

(d) Periodic review. A decision under 

paragraph (b) of this section to permit a 

credit union to decrease its earnings 

retention is subject to quarterly review 

and revocation except when the credit 

union is operating under an approved 

net worth restoration plan that provides 

for decreasing its earnings retention as 

provided under paragraph (b) of this 

section. 

§ 702.107 Prompt corrective action for 

undercapitalized credit unions. 

(a) Mandatory supervisory actions by 

credit union. A credit union which is 

undercapitalized must— 

(1) Earnings retention. Increase net 

worth in accordance with § 702.106; 

(2) Submit net worth restoration plan. 

Submit a net worth restoration plan 

pursuant to § 702.111, provided 

however, that a credit union in this 

category having a net worth ratio of less 

than five percent (5%) which fails to 

timely submit such a plan, or which 

materially fails to implement an 

approved plan, is classified significantly 

undercapitalized pursuant to 

§ 702.102(a)(4)(i); 

(3) Restrict increase in assets. 

Beginning the effective date of 

classification as undercapitalized or 

lower, not permit the credit union’s 

assets to increase beyond its total assets 

for the preceding quarter unless— 

(i) Plan approved. The NCUA Board 

has approved a net worth restoration 

plan which provides for an increase in 

total assets and— 

(A) The assets of the credit union are 

increasing consistent with the approved 

plan; and 

(B) The credit union is implementing 

steps to increase the net worth ratio 

consistent with the approved plan; 

(ii) Plan not approved. The NCUA 

Board has not approved a net worth 

restoration plan and total assets of the 

credit union are increasing because of 

increases since quarter-end in balances 

of: 

(A) Total accounts receivable and 

accrued income on loans and 

investments; or 

(B) Total cash and cash equivalents; 

or 

(C) Total loans outstanding, not to 

exceed the sum of total assets plus the 

quarter-end balance of unused 

commitments to lend and unused lines 

of credit provided however that a credit 

union which increases a balance as 

permitted under paragraphs (a)(3)(ii)(A), 

(B) or (C) of this section cannot offer 

rates on shares in excess of prevailing 

rates on shares in its relevant market 

area, and cannot open new branches; 

(4) Restrict member business loans. 

Beginning the effective date of 

classification as undercapitalized or 

lower, not increase the total dollar 

amount of member business loans 

(defined as loans outstanding and 

unused commitments to lend) as of the 

preceding quarter-end unless it is 

granted an exception under 12 U.S.C. 

1757a(b). 

(b) Second tier discretionary 

supervisory actions by NCUA. Subject to 

the applicable procedures for issuing, 

reviewing and enforcing directives set 

forth in subpart L of part 747 of this 

chapter, the NCUA Board may, by 

directive, take one or more of the 

following actions with respect to an 

undercapitalized credit union having a 

net worth ratio of less than five percent 

(5%), or a director, officer or employee 

of such a credit union, if it determines 

that those actions are necessary to carry 

out the purpose of this part: 

(1) Requiring prior approval for 

acquisitions, branching, new lines of 

business. Prohibit a credit union from, 

directly or indirectly, acquiring any 

interest in any business entity or 

financial institution, establishing or 

acquiring any additional branch office, 

or engaging in any new line of business, 

unless the NCUA Board has approved 

the credit union’s net worth restoration 

plan, the credit union is implementing 

its plan, and the NCUA Board 

determines that the proposed action is 

consistent with and will further the 

objectives of that plan; 

(2) Restricting transactions with and 

ownership of a CUSO. Restrict the credit 

union’s transactions with a CUSO, or 


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require the credit union to reduce or 

divest its ownership interest in a CUSO; 

(3) Restricting dividends paid. Restrict 

the dividend rates the credit union pays 

on shares to the prevailing rates paid on 

comparable accounts and maturities in 

the relevant market area, as determined 

by the NCUA Board, except that 

dividend rates already declared on 

shares acquired before imposing a 

restriction under this paragraph may not 

be retroactively restricted; 

(4) Prohibiting or reducing asset 

growth. Prohibit any growth in the 

credit union’s assets or in a category of 

assets, or require the credit union to 

reduce its assets or a category of assets; 

(5) Alter, reduce or terminate activity. 

Require the credit union or its CUSO to 

alter, reduce, or terminate any activity 

which poses excessive risk to the credit 

union; 

(6) Prohibiting nonmember deposits. 

Prohibit the credit union from accepting 

all or certain nonmember deposits; 

(7) Dismissing director or senior 

executive officer. Require the credit 

union to dismiss from office any 

director or senior executive officer, 

provided however, that a dismissal 

under this clause shall not be construed 

to be a formal administrative action for 

removal under 12 U.S.C. 1786(g); 

(8) Employing qualified senior 

executive officer. Require the credit 

union to employ qualified senior 

executive officers (who, if the NCUA 

Board so specifies, shall be subject to its 

approval); and 

(9) Other action to carry out prompt 

corrective action. Restrict or require 

such other action by the credit union as 

the NCUA Board determines will carry 

out the purpose of this part better than 

any of the actions prescribed in 

paragraphs (b)(1) through (8) of this 

section. 

(c) First tier application of 

discretionary supervisory actions. An 

undercapitalized credit union having a 

net worth ratio of five percent (5%) or 

more, or which is classified 

undercapitalized by reason of failing to 

maintain a risk-based capital ratio equal 

to or greater than 8 percent under 

§ 702.104, is subject to the discretionary 

supervisory actions in paragraph (b) of 

this section if it fails to comply with any 

mandatory supervisory action in 

paragraph (a) of this section or fails to 

timely implement an approved net 

worth restoration plan under § 702.111, 

including meeting its prescribed steps to 

increase its net worth ratio. 

§ 702.108 Prompt corrective action for 

significantly undercapitalized credit unions. 

(a) Mandatory supervisory actions by 

credit union. A credit union which is 

significantly undercapitalized must— 

(1) Earnings retention. Increase net 

worth in accordance with § 702.106; 

(2) Submit net worth restoration plan. 

Submit a net worth restoration plan 

pursuant to § 702.111; 

(3) Restrict increase in assets. Not 

permit the credit union’s total assets to 

increase except as provided in 

§ 702.107(a)(3); and 

(4) Restrict member business loans. 

Not increase the total dollar amount of 

member business loans (defined as 

loans outstanding and unused 

commitments to lend) as provided in 

§ 702.107(a)(4). 

(b) Discretionary supervisory actions 

by NCUA. Subject to the applicable 

procedures for issuing, reviewing and 

enforcing directives set forth in subpart 

L of part 747 of this chapter, the NCUA 

Board may, by directive, take one or 

more of the following actions with 

respect to any significantly 

undercapitalized credit union, or a 

director, officer or employee of such 

credit union, if it determines that those 

actions are necessary to carry out the 

purpose of this part: 

(1) Requiring prior approval for 

acquisitions, branching, new lines of 

business. Prohibit a credit union from, 

directly or indirectly, acquiring any 

interest in any business entity or 

financial institution, establishing or 

acquiring any additional branch office, 

or engaging in any new line of business, 

except as provided in § 702.107(b)(1); 

(2) Restricting transactions with and 

ownership of CUSO. Restrict the credit 

union’s transactions with a CUSO, or 

require the credit union to divest or 

reduce its ownership interest in a 

CUSO; 

(3) Restricting dividends paid. Restrict 

the dividend rates that the credit union 

pays on shares as provided in 

§ 702.107(b)(3); 

(4) Prohibiting or reducing asset 

growth. Prohibit any growth in the 

credit union’s assets or in a category of 

assets, or require the credit union to 

reduce assets or a category of assets; 

(5) Alter, reduce or terminate activity. 

Require the credit union or its CUSO(s) 

to alter, reduce, or terminate any 

activity which poses excessive risk to 

the credit union; 

(6) Prohibiting nonmember deposits. 

Prohibit the credit union from accepting 

all or certain nonmember deposits; 

(7) New election of directors. Order a 

new election of the credit union’s board 

of directors; 

(8) Dismissing director or senior 

executive officer. Require the credit 

union to dismiss from office any 

director or senior executive officer, 

provided however, that a dismissal 

under this clause shall not be construed 

to be a formal administrative action for 

removal under 12 U.S.C. 1786(g); 

(9) Employing qualified senior 

executive officer. Require the credit 

union to employ qualified senior 

executive officers (who, if the NCUA 

Board so specifies, shall be subject to its 

approval); 

(10) Restricting senior executive 

officers’ compensation. Except with the 

prior written approval of the NCUA 

Board, limit compensation to any senior 

executive officer to that officer’s average 

rate of compensation (excluding 

bonuses and profit sharing) during the 

four (4) calendar quarters preceding the 

effective date of classification of the 

credit union as significantly 

undercapitalized, and prohibit payment 

of a bonus or profit share to such officer; 

(11) Other actions to carry out prompt 

corrective action. Restrict or require 

such other action by the credit union as 

the NCUA Board determines will carry 

out the purpose of this part better than 

any of the actions prescribed in 

paragraphs (b)(1) through (10) of this 

section; and 

(12) Requiring merger. Require the 

credit union to merge with another 

financial institution if one or more 

grounds exist for placing the credit 

union into conservatorship pursuant to 

12 U.S.C. 1786(h)(1)(F), or into 

liquidation pursuant to 12 U.S.C. 

1787(a)(3)(A)(i). 

(c) Discretionary conservatorship or 

liquidation if no prospect of becoming 

adequately capitalized. 

Notwithstanding any other actions 

required or permitted to be taken under 

this section, when a credit union 

becomes significantly undercapitalized 

(including by reclassification under 

§ 702.102(b)), the NCUA Board may 

place the credit union into 

conservatorship pursuant to 12 U.S.C. 

1786(h)(1)(F), or into liquidation 

pursuant to 12 U.S.C. 1787(a)(3)(A)(i), 

provided that the credit union has no 

reasonable prospect of becoming 

adequately capitalized. 

§ 702.109 Prompt corrective action for 

critically undercapitalized credit unions. 

(a) Mandatory supervisory actions by 

credit union. A credit union which is 

critically undercapitalized must— 

(1) Earnings retention. Increase net 

worth in accordance with § 702.106; 

(2) Submit net worth restoration plan. 

Submit a net worth restoration plan 

pursuant to § 702.111; 


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(3) Restrict increase in assets. Not 

permit the credit union’s total assets to 

increase except as provided in 

§ 702.107(a)(3); and 

(4) Restrict member business loans. 

Not increase the total dollar amount of 

member business loans (defined as 

loans outstanding and unused 

commitments to lend) as provided in 

§ 702.107(a)(4). 

(b) Discretionary supervisory actions 

by NCUA. Subject to the applicable 

procedures for issuing, reviewing and 

enforcing directives set forth in subpart 

L of part 747 of this chapter, the NCUA 

Board may, by directive, take one or 

more of the following actions with 

respect to any critically 

undercapitalized credit union, or a 

director, officer or employee of such 

credit union, if it determines that those 

actions are necessary to carry out the 

purpose of this part: 

(1) Requiring prior approval for 

acquisitions, branching, new lines of 

business. Prohibit a credit union from, 

directly or indirectly, acquiring any 

interest in any business entity or 

financial institution, establishing or 

acquiring any additional branch office, 

or engaging in any new line of business, 

except as provided by § 702.107(b)(1); 

(2) Restricting transactions with and 

ownership of CUSO. Restrict the credit 

union’s transactions with a CUSO, or 

require the credit union to divest or 

reduce its ownership interest in a 

CUSO; 

(3) Restricting dividends paid. Restrict 

the dividend rates that the credit union 

pays on shares as provided in 

§ 702.107(b)(3); 

(4) Prohibiting or reducing asset 

growth. Prohibit any growth in the 

credit union’s assets or in a category of 

assets, or require the credit union to 

reduce assets or a category of assets; 

(5) Alter, reduce or terminate activity. 

Require the credit union or its CUSO(s) 

to alter, reduce, or terminate any 

activity which poses excessive risk to 

the credit union; 

(6) Prohibiting nonmember deposits. 

Prohibit the credit union from accepting 

all or certain nonmember deposits; 

(7) New election of directors. Order a 

new election of the credit union’s board 

of directors; 

(8) Dismissing director or senior 

executive officer. Require the credit 

union to dismiss from office any 

director or senior executive officer, 

provided however, that a dismissal 

under this clause shall not be construed 

to be a formal administrative action for 

removal under 12 U.S.C. 1786(g); 

(9) Employing qualified senior 

executive officer. Require the credit 

union to employ qualified senior 

executive officers (who, if the NCUA 

Board so specifies, shall be subject to its 

approval); 

(10) Restricting senior executive 

officers’ compensation. Reduce or, with 

the prior written approval of the NCUA 

Board, limit compensation to any senior 

executive officer to that officer’s average 

rate of compensation (excluding 

bonuses and profit sharing) during the 

four (4) calendar quarters preceding the 

effective date of classification of the 

credit union as critically 

undercapitalized, and prohibit payment 

of a bonus or profit share to such officer; 

(11) Restrictions on payments on 

uninsured secondary capital. Beginning 

60 days after the effective date of 

classification of a credit union as 

critically undercapitalized, prohibit 

payments of principal, dividends or 

interest on the credit union’s uninsured 

secondary capital accounts established 

after August 7, 2000, except that unpaid 

dividends or interest shall continue to 

accrue under the terms of the account to 

the extent permitted by law; 

(12) Requiring prior approval. Require 

a critically undercapitalized credit 

union to obtain the NCUA Board’s prior 

written approval before doing any of the 

following: 

(i) Entering into any material 

transaction not within the scope of an 

approved net worth restoration plan (or 

approved revised business plan under 

subpart C of this part); 

(ii) Extending credit for transactions 

deemed highly leveraged by the NCUA 

Board or, if state-chartered, by the 

appropriate state official; 

(iii) Amending the credit union’s 

charter or bylaws, except to the extent 

necessary to comply with any law, 

regulation, or order; 

(iv) Making any material change in 

accounting methods; and 

(v) Paying dividends or interest on 

new share accounts at a rate exceeding 

the prevailing rates of interest on 

insured deposits in its relevant market 

area; 

(13) Other action to carry out prompt 

corrective action. Restrict or require 

such other action by the credit union as 

the NCUA Board determines will carry 

out the purpose of this part better than 

any of the actions prescribed in 

paragraphs (b)(1) through (12) of this 

section; and 

(14) Requiring merger. Require the 

credit union to merge with another 

financial institution if one or more 

grounds exist for placing the credit 

union into conservatorship pursuant to 

12 U.S.C. 1786(h)(1)(F), or into 

liquidation pursuant to 12 U.S.C. 

1787(a)(3)(A)(i). 

(c) Mandatory conservatorship, 

liquidation or action in lieu thereof—(1) 

Action within 90 days. Notwithstanding 

any other actions required or permitted 

to be taken under this section (and 

regardless of a credit union’s prospect of 

becoming adequately capitalized), the 

NCUA Board must, within 90 calendar 

days after the effective date of 

classification of a credit union as 

critically undercapitalized— 

(i) Conservatorship. Place the credit 

union into conservatorship pursuant to 

12 U.S.C. 1786(h)(1)(G); or 

(ii) Liquidation. Liquidate the credit 

union pursuant to 12 U.S.C. 

1787(a)(3)(A)(ii); or 

(iii) Other corrective action. Take 

other corrective action, in lieu of 

conservatorship or liquidation, to better 

achieve the purpose of this part, 

provided that the NCUA Board 

documents why such action in lieu of 

conservatorship or liquidation would do 

so, provided however, that other 

corrective action may consist, in whole 

or in part, of complying with the 

quarterly timetable of steps and meeting 

the quarterly net worth targets 

prescribed in an approved net worth 

restoration plan. 

(2) Renewal of other corrective action. 

A determination by the NCUA Board to 

take other corrective action in lieu of 

conservatorship or liquidation under 

paragraph (c)(1)(iii) of this section shall 

expire after an effective period ending 

no later than 180 calendar days after the 

determination is made, and the credit 

union shall be immediately placed into 

conservatorship or liquidation under 

paragraphs (c)(1)(i) and (ii) of this 

section, unless the NCUA Board makes 

a new determination under paragraph 

(c)(1)(iii) of this section before the end 

of the effective period of the prior 

determination; 

(3) Mandatory liquidation after 18 

months—(i) Generally. Notwithstanding 

paragraphs (c)(1) and (2) of this section, 

the NCUA Board must place a credit 

union into liquidation if it remains 

critically undercapitalized for a full 

calendar quarter, on a monthly average 

basis, following a period of 18 months 

from the effective date the credit union 

was first classified critically 

undercapitalized. 

(ii) Exception. Notwithstanding 

paragraph (c)(3)(i) of this section, the 

NCUA Board may continue to take other 

corrective action in lieu of liquidation if 

it certifies that the credit union— 

(A) Has been in substantial 

compliance with an approved net worth 

restoration plan requiring consistent 

improvement in net worth since the 

date the net worth restoration plan was 

approved; 


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(B) Has positive net income or has an 

upward trend in earnings that the 

NCUA Board projects as sustainable; 

and 

(C) Is viable and not expected to fail. 

(iii) Review of exception. The NCUA 

Board shall, at least quarterly, review 

the certification of an exception to 

liquidation under paragraph (c)(3)(ii) of 

this section and shall either— 

(A) Recertify the credit union if it 

continues to satisfy the criteria of 

paragraph (c)(3)(ii) of this section; or 

(B) Promptly place the credit union 

into liquidation, pursuant to 12 U.S.C. 

1787(a)(3)(A)(ii), if it fails to satisfy the 

criteria of paragraph (c)(3)(ii) of this 

section. 

(4) Nondelegation. The NCUA Board 

may not delegate its authority under 

paragraph (c) of this section, unless the 

credit union has less than $5,000,000 in 

total assets. A credit union shall have a 

right of direct appeal to the NCUA 

Board of any decision made by 

delegated authority under this section 

within ten (10) calendar days of the date 

of that decision. 

(d) Mandatory liquidation of insolvent 

federal credit union. In lieu of 

paragraph (c) of this section, a critically 

undercapitalized federal credit union 

that has a net worth ratio of less than 

zero percent (0%) may be placed into 

liquidation on grounds of insolvency 

pursuant to 12 U.S.C. 1787(a)(1)(A). 

§ 702.110 Consultation with state officials 

on proposed prompt corrective action. 

(a) Consultation on proposed 

conservatorship or liquidation. Before 

placing a federally insured statechartered credit union into 

conservatorship (pursuant to 12 U.S.C. 

1786(h)(1)(F) or (G)) or liquidation 

(pursuant to 12 U.S.C. 1787(a)(3)) as 

permitted or required under subparts A 

or B of this part to facilitate prompt 

corrective action— 

(1) The NCUA Board shall seek the 

views of the appropriate state official (as 

defined in § 702.2), and give him or her 

an opportunity to take the proposed 

action; 

(2) The NCUA Board shall, upon 

timely request of the appropriate state 

official, promptly provide him or her 

with a written statement of the reasons 

for the proposed conservatorship or 

liquidation, and reasonable time to 

respond to that statement; and 

(3) If the appropriate state official 

makes a timely written response that 

disagrees with the proposed 

conservatorship or liquidation and gives 

reasons for that disagreement, the 

NCUA Board shall not place the credit 

union into conservatorship or 

liquidation unless it first considers the 

views of the appropriate state official 

and determines that— 

(i) The NCUSIF faces a significant risk 

of loss if the credit union is not placed 

into conservatorship or liquidation; and 

(ii) Conservatorship or liquidation is 

necessary either to reduce the risk of 

loss, or to reduce the expected loss, to 

the NCUSIF with respect to the credit 

union. 

(b) Nondelegation. The NCUA Board 

may not delegate any determination 

under paragraph (a)(3) of this section. 

(c) Consultation on proposed 

discretionary action. The NCUA Board 

shall consult and seek to work 

cooperatively with the appropriate state 

official before taking any discretionary 

supervisory action under §§ 702.107(b), 

702.108(b), 702.109(b), 702.204(b) and 

702.205(b) with respect to a federally 

insured state-chartered credit union; 

shall provide prompt notice of its 

decision to the appropriate state official; 

and shall allow the appropriate state 

official to take the proposed action 

independently or jointly with NCUA. 

§ 702.111 Net worth restoration plans 

(NWRP). 

(a) Schedule for filing—(1) Generally. 

A credit union shall file a written net 

worth restoration plan (NWRP) with the 

appropriate Regional Director and, if 

state-chartered, the appropriate state 

official, within 45 calendar days of the 

effective date of classification as either 

undercapitalized, significantly 

undercapitalized or critically 

undercapitalized, unless the NCUA 

Board notifies the credit union in 

writing that its NWRP is to be filed 

within a different period. 

(2) Exception. An otherwise 

adequately capitalized credit union that 

is reclassified undercapitalized on 

safety and soundness grounds under 

§ 702.102(b) is not required to submit a 

NWRP solely due to the reclassification, 

unless the NCUA Board notifies the 

credit union that it must submit an 

NWRP. 

(3) Filing of additional plan. 

Notwithstanding paragraph (a)(1) of this 

section, a credit union that has already 

submitted and is operating under a 

NWRP approved under this section is 

not required to submit an additional 

NWRP due to a change in net worth 

category (including by reclassification 

under § 702.102(b)), unless the NCUA 

Board notifies the credit union that it 

must submit a new NWRP. A credit 

union that is notified to submit a new 

or revised NWRP shall file the NWRP in 

writing with the appropriate Regional 

Director within 30 calendar days of 

receiving such notice, unless the NCUA 

Board notifies the credit union in 

writing that the NWRP is to be filed 

within a different period. 

(4) Failure to timely file plan. When 

a credit union fails to timely file an 

NWRP pursuant to this paragraph, the 

NCUA Board shall promptly notify the 

credit union that it has failed to file an 

NWRP and that it has 15 calendar days 

from receipt of that notice within which 

to file an NWRP. 

(b) Assistance to small credit unions. 

Upon timely request by a credit union 

having total assets of less than $10 

million (regardless how long it has been 

in operation), the NCUA Board shall 

provide assistance in preparing an 

NWRP required to be filed under 

paragraph (a) of this section. 

(c) Contents of NWRP. An NWRP 

must— 

(1) Specify— 

(i) A quarterly timetable of steps the 

credit union will take to increase its net 

worth ratio, and risk-based capital ratio 

if applicable, so that it becomes 

adequately capitalized by the end of the 

term of the NWRP, and to remain so for 

four (4) consecutive calendar quarters; 

(ii) The projected amount of net worth 

increases in each quarter of the term of 

the NWRP as required under 

§ 702.106(a), or as permitted under 

§ 702.106(b); 

(iii) How the credit union will comply 

with the mandatory and any 

discretionary supervisory actions 

imposed on it by the NCUA Board 

under this subpart; 

(iv) The types and levels of activities 

in which the credit union will engage; 

and 

(v) If reclassified to a lower category 

under § 702.102(b), the steps the credit 

union will take to correct the unsafe or 

unsound practice(s) or condition(s); 

(2) Include pro forma financial 

statements, including any off-balance 

sheet items, covering a minimum of the 

next two years; and 

(3) Contain such other information as 

the NCUA Board has required. 

(d) Criteria for approval of NWRP. 

The NCUA Board shall not accept a 

NWRP plan unless it— 

(1) Complies with paragraph (c) of 

this section; 

(2) Is based on realistic assumptions, 

and is likely to succeed in restoring the 

credit union’s net worth; and 

(3) Would not unreasonably increase 

the credit union’s exposure to risk 

(including credit risk, interest-rate risk, 

and other types of risk). 

(e) Consideration of regulatory 

capital. To minimize possible long-term 

losses to the NCUSIF while the credit 

union takes steps to become adequately 

capitalized, the NCUA Board shall, in 

evaluating an NWRP under this section, 


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consider the type and amount of any 

form of regulatory capital which may 

become established by NCUA 

regulation, or authorized by state law 

and recognized by NCUA, which the 

credit union holds, but which is not 

included in its net worth. 

(f) Review of NWRP—(1) Notice of 

decision. Within 45 calendar days after 

receiving an NWRP under this part, the 

NCUA Board shall notify the credit 

union in writing whether the NWRP has 

been approved, and shall provide 

reasons for its decision in the event of 

disapproval. 

(2) Delayed decision. If no decision is 

made within the time prescribed in 

paragraph (f)(1) of this section, the 

NWRP is deemed approved. 

(3) Consultation with state officials. In 

the case of an NWRP submitted by a 

federally insured state-chartered credit 

union (whether an original, new, 

additional, revised or amended NWRP), 

the NCUA Board shall, when evaluating 

the NWRP, seek and consider the views 

of the appropriate state official, and 

provide prompt notice of its decision to 

the appropriate state official. 

(g) NWRP not approved—(1) 

Submission of revised NWRP. If an 

NWRP is rejected by the NCUA Board, 

the credit union shall submit a revised 

NWRP within 30 calendar days of 

receiving notice of disapproval, unless it 

is notified in writing by the NCUA 

Board that the revised NWRP is to be 

filed within a different period. 

(2) Notice of decision on revised 

NWRP. Within 30 calendar days after 

receiving a revised NWRP under 

paragraph (g)(1) of this section, the 

NCUA Board shall notify the credit 

union in writing whether the revised 

NWRP is approved. The Board may 

extend the time within which notice of 

its decision shall be provided. 

(3) Disapproval of reclassified credit 

union’s NWRP. A credit union which 

has been classified significantly 

undercapitalized shall remain so 

classified pending NCUA Board 

approval of a new or revised NWRP. 

(4) Submission of multiple 

unapproved NWRPs. The submission of 

more than two NWRPs that are not 

approved is considered an unsafe and 

unsound condition and may subject the 

credit union to administrative 

enforcement actions under section 206 

of the FCUA, 12 U.S.C. 1786 and 1790d. 

(h) Amendment of NWRP. A credit 

union that is operating under an 

approved NWRP may, after prior written 

notice to, and approval by the NCUA 

Board, amend its NWRP to reflect a 

change in circumstance. Pending 

approval of an amended NWRP, the 

credit union shall implement the NWRP 

as originally approved. 

(i) Publication. An NWRP need not be 

published to be enforceable because 

publication would be contrary to the 

public interest. 

(j) Termination of NWRP. For 

purposes of this part, an NWRP 

terminates once the credit union is 

classified as adequately capitalized and 

remains so for four consecutive quarters. 

For example, if a credit union with an 

active NWRP attains the classification as 

adequately classified on December 31, 

2015 this would be quarter one and the 

fourth consecutive quarter would end 

September 30, 2016. 

§ 702.112 Reserves. 

Each credit union shall establish and 

maintain such reserves as may be 

required by the FCUA, by state law, by 

regulation, or in special cases by the 

NCUA Board or appropriate state 

official. 

§ 702.113 Full and fair disclosure of 

financial condition. 

(a) Full and fair disclosure defined. 

‘‘Full and fair disclosure’’ is the level of 

disclosure which a prudent person 

would provide to a member of a credit 

union, to NCUA, or, at the discretion of 

the board of directors, to creditors to 

fairly inform them of the financial 

condition and the results of operations 

of the credit union. 

(b) Full and fair disclosure 

implemented. The financial statements 

of a credit union shall provide for full 

and fair disclosure of all assets, 

liabilities, and members’ equity, 

including such valuation (allowance) 

accounts as may be necessary to present 

fairly the financial condition; and all 

income and expenses necessary to 

present fairly the statement of income 

for the reporting period. 

(c) Declaration of officials. The 

Statement of Financial Condition, when 

presented to members, to creditors or to 

NCUA, shall contain a dual declaration 

by the treasurer and the chief executive 

officer, or in the latter’s absence, by any 

other officer designated by the board of 

directors of the reporting credit union to 

make such declaration, that the report 

and related financial statements are true 

and correct to the best of their 

knowledge and belief and present fairly 

the financial condition and the 

statement of income for the period 

covered. 

(d) Charges for loan and lease losses. 

Full and fair disclosure demands that a 

credit union properly address charges 

for loan losses as follows: 

(1) Charges for loan and lease losses 

shall be made timely and in accordance 

with GAAP; 

(2) The ALLL must be maintained in 

accordance with GAAP; and 

(3) At a minimum, adjustments to the 

ALLL shall be made prior to the 

distribution or posting of any dividend 

to the accounts of members. 

§ 702.114 Payment of dividends. 

(a) Restriction on dividends. 

Dividends shall be available only from 

net worth, net of any special reserves 

established under § 702.112, if any. 

(b) Payment of dividends and interest 

refunds. The board of directors must not 

pay a dividend or interest refund that 

will cause the credit union’s capital 

classification to fall below adequately 

capitalized under this subpart unless 

the appropriate Regional Director and, if 

state-chartered, the appropriate state 

official, have given prior written 

approval (in an NWRP or otherwise). 

The request for written approval must 

include the plan for eliminating any 

negative retained earnings balance. 

■ 11. Revise subpart B to read as 

follows: 

Subpart B—Alternative Prompt Corrective 

Action for New Credit Unions 

Sec. 

702.201 Scope and definition. 

702.202 Net worth categories for new credit 

unions. 

702.203 Prompt corrective action for 

adequately capitalized new credit 

unions. 

702.204 Prompt corrective action for 

moderately capitalized, marginally 

capitalized, or minimally capitalized 

new credit unions. 

702.205 Prompt corrective action for 

uncapitalized new credit unions. 

702.206 Revised business plans (RBP) for 

new credit unions. 

702.207 Incentives for new credit unions. 

702.208 Reserves. 

702.209 Full and fair disclosure of financial 

condition. 

702.210 Payment of dividends. 

Subpart B—Alternative Prompt 

Corrective Action for New Credit 

Unions 

§ 702.201 Scope and definition. 

(a) Scope. This subpart B applies in 

lieu of subpart A of this part exclusively 

to credit unions defined in paragraph (b) 

of this section as ‘‘new’’ pursuant to 

section 216(b)(2) of the FCUA, 12 U.S.C. 

1790d(b)(2). 

(b) New credit union defined. A 

‘‘new’’ credit union for purposes of this 

subpart is a credit union that both has 

been in operation for less than ten (10) 

years and has total assets of not more 

than $10 million. Once a credit union 


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reports total assets of more than $10 

million on a Call Report, the credit 

union is no longer new, even if its assets 

subsequently decline below $10 million. 

(c) Effect of spin-offs. A credit union 

formed as the result of a ‘‘spin-off’’ of 

a group from the field of membership of 

an existing credit union is deemed to be 

in operation since the effective date of 

the spin-off. A credit union whose total 

assets decline below $10 million 

because a group within its field of 

membership has been spun-off is 

deemed ‘‘new’’ if it has been in 

operation less than 10 years. 

(d) Actions to evade prompt corrective 

action. If the NCUA Board determines 

that a credit union was formed, or was 

reduced in asset size as a result of a 

spin-off, or was merged, primarily to 

qualify as ‘‘new’’ under this subpart, the 

credit union shall be deemed subject to 

prompt corrective action under subpart 

A of this part. 

§ 702.202 Net worth categories for new 

credit unions. 

(a) Net worth measures. For purposes 

of this part, a new credit union must 

determine its capital classification 

quarterly according to its net worth 

ratio. 

(b) Effective date of net worth 

classification of new credit union. For 

purposes of subpart B of this part, the 

effective date of a new credit union’s 

classification within a capital category 

in paragraph (c) of this section shall be 

determined as provided in § 702.101(c); 

and written notice of a decline in net 

worth classification in paragraph (c) of 

this section shall be given as required by 

§ 702.101(c). 

(c) Net worth categories. A credit 

union defined as ‘‘new’’ under this 

section shall be classified— 

(1) Well capitalized if it has a net 

worth ratio of seven percent (7%) or 

greater; 

(2) Adequately capitalized if it has a 

net worth ratio of six percent (6%) or 

more but less than seven percent (7%); 

(3) Moderately capitalized if it has a 

net worth ratio of three and one-half 

percent (3.5%) or more but less than six 

percent (6%); 

(4) Marginally capitalized if it has a 

net worth ratio of two percent (2%) or 

more but less than three and one-half 

percent (3.5%); 

(5) Minimally capitalized if it has a 

net worth ratio of zero percent (0%) or 

greater but less than two percent (2%); 

and 

(6) Uncapitalized if it has a net worth 

ratio of less than zero percent (0%). 

TABLE 1 TO § 702.202—CAPITAL

CATEGORIES FOR NEW CREDIT UNIONS

A new credit union’s capital classification is If it’s net worth 

ratio is 

Well Capitalized .............. 7% or above. 

Adequately Capitalized ... 6 to 7%. 

Moderately Capitalized ... 3.5% to 5.99%. 

Marginally Capitalized .... 2% to 3.49%. 

Minimally Capitalized ...... 0% to 1.99%. 

Uncapitalized .................. Less than 0%. 

(d) Reclassification based on 

supervisory criteria other than net 

worth. Subject to § 702.102(b), the 

NCUA Board may reclassify a well 

capitalized, adequately capitalized or 

moderately capitalized new credit union 

to the next lower capital category (each 

of such actions is hereinafter referred to 

generally as ‘‘reclassification’’) in either 

of the circumstances prescribed in 

§ 702.102(b). 

(e) Consultation with state officials. 

The NCUA Board shall consult and seek 

to work cooperatively with the 

appropriate state official before 

reclassifying a federally insured statechartered credit union under paragraph 

(d) of this section, and shall promptly 

notify the appropriate state official of its 

decision to reclassify. 

§ 702.203 Prompt corrective action for 

adequately capitalized new credit unions. 

Beginning on the effective date of 

classification, an adequately capitalized 

new credit union must increase the 

dollar amount of its net worth by the 

amount reflected in its approved initial 

or revised business plan in accordance 

with § 702.204(a)(2), or in the absence of 

such a plan, in accordance with 

§ 702.106 until it is well capitalized. 

§ 702.204 Prompt corrective action for 

moderately capitalized, marginally 

capitalized, or minimally capitalized new 

credit unions. 

(a) Mandatory supervisory actions by 

new credit union. Beginning on the date 

of classification as moderately 

capitalized, marginally capitalized or 

minimally capitalized (including by 

reclassification under § 702.202(d)), a 

new credit union must— 

(1) Earnings retention. Increase the 

dollar amount of its net worth by the 

amount reflected in its approved initial 

or revised business plan; 

(2) Submit revised business plan. 

Submit a revised business plan within 

the time provided by § 702.206 if the 

credit union either: 

(i) Has not increased its net worth 

ratio consistent with its then-present 

approved business plan; 

(ii) Has no then-present approved 

business plan; or 

(iii) Has failed to comply with 

paragraph (a)(3) of this section; and 

(3) Restrict member business loans. 

Not increase the total dollar amount of 

member business loans (defined as 

loans outstanding and unused 

commitments to lend) as of the 

preceding quarter-end unless it is 

granted an exception under 12 U.S.C. 

1757a(b). 

(b) Discretionary supervisory actions 

by NCUA. Subject to the applicable 

procedures set forth in subpart L of part 

747 of this chapter for issuing, 

reviewing and enforcing directives, the 

NCUA Board may, by directive, take one 

or more of the actions prescribed in 

§ 702.109(b) if the credit union’s net 

worth ratio has not increased consistent 

with its then-present business plan, or 

the credit union has failed to undertake 

any mandatory supervisory action 

prescribed in paragraph (a) of this 

section. 

(c) Discretionary conservatorship or 

liquidation. Notwithstanding any other 

actions required or permitted to be 

taken under this section, the NCUA 

Board may place a new credit union 

which is moderately capitalized, 

marginally capitalized or minimally 

capitalized (including by 

reclassification under § 702.202(d)) into 

conservatorship pursuant to 12 U.S.C. 

1786(h)(1)(F), or into liquidation 

pursuant to 12 U.S.C. 1787(a)(3)(A)(i), 

provided that the credit union has no 

reasonable prospect of becoming 

adequately capitalized. 

§ 702.205 Prompt corrective action for 

uncapitalized new credit unions. 

(a) Mandatory supervisory actions by 

new credit union. Beginning on the 

effective date of classification as 

uncapitalized, a new credit union 

must— 

(1) Earnings retention. Increase the 

dollar amount of its net worth by the 

amount reflected in the credit union’s 

approved initial or revised business 

plan; 

(2) Submit revised business plan. 

Submit a revised business plan within 

the time provided by § 702.206, 

providing for alternative means of 

funding the credit union’s earnings 

deficit, if the credit union either: 

(i) Has not increased its net worth 

ratio consistent with its then-present 

approved business plan; 

(ii) Has no then-present approved 

business plan; or 

(iii) Has failed to comply with 

paragraph (a)(3) of this section; and 

(3) Restrict member business loans. 

Not increase the total dollar amount of 

member business loans as provided in 

§ 702.204(a)(3). 


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(b) Discretionary supervisory actions 

by NCUA. Subject to the procedures set 

forth in subpart L of part 747 of this 

chapter for issuing, reviewing and 

enforcing directives, the NCUA Board 

may, by directive, take one or more of 

the actions prescribed in § 702.109(b) if 

the credit union’s net worth ratio has 

not increased consistent with its thenpresent business plan, or the credit 

union has failed to undertake any 

mandatory supervisory action 

prescribed in paragraph (a) of this 

section. 

(c) Mandatory liquidation or 

conservatorship. Notwithstanding any 

other actions required or permitted to be 

taken under this section, the NCUA 

Board— 

(1) Plan not submitted. May place into 

liquidation pursuant to 12 U.S.C. 

1787(a)(3)(A)(ii), or conservatorship 

pursuant to 12 U.S.C. 1786(h)(1)(F), an 

uncapitalized new credit union which 

fails to submit a revised business plan 

within the time provided under 

paragraph (a)(2) of this section; or 

(2) Plan rejected, approved, 

implemented. Except as provided in 

paragraph (c)(3) of this section, must 

place into liquidation pursuant to 12 

U.S.C. 1787(a)(3)(A)(ii), or 

conservatorship pursuant to 12 U.S.C. 

1786(h)(1)(F), an uncapitalized new 

credit union that remains uncapitalized 

one hundred twenty (120) calendar days 

after the later of: 

(i) The effective date of classification 

as uncapitalized; or 

(ii) The last day of the calendar month 

following expiration of the time period 

provided in the credit union’s initial 

business plan (approved at the time its 

charter was granted) to remain 

uncapitalized, regardless whether a 

revised business plan was rejected, 

approved or implemented. 

(3) Exception. The NCUA Board may 

decline to place a new credit union into 

liquidation or conservatorship as 

provided in paragraph (c)(2) of this 

section if the credit union documents to 

the NCUA Board why it is viable and 

has a reasonable prospect of becoming 

adequately capitalized. 

(d) Mandatory liquidation of 

uncapitalized federal credit union. In 

lieu of paragraph (c) of this section, an 

uncapitalized federal credit union may 

be placed into liquidation on grounds of 

insolvency pursuant to 12 U.S.C. 

1787(a)(1)(A). 

§ 702.206 Revised business plans (RBP) 

for new credit unions. 

(a) Schedule for filing —(1) Generally. 

Except as provided in paragraph (a)(2) 

of this section, a new credit union 

classified moderately capitalized or 

lower must file a written revised 

business plan (RBP) with the 

appropriate Regional Director and, if 

state-chartered, with the appropriate 

state official, within 30 calendar days of 

either: 

(i) The last of the calendar month 

following the end of the calendar 

quarter that the credit union’s net worth 

ratio has not increased consistent with 

the-present approved business plan; 

(ii) The effective date of classification 

as less than adequately capitalized if the 

credit union has no then-present 

approved business plan; or 

(iii) The effective date of classification 

as less than adequately capitalized if the 

credit union has increased the total 

amount of member business loans in 

violation of § 702.204(a)(3). 

(2) Exception. The NCUA Board may 

notify the credit union in writing that its 

RBP is to be filed within a different 

period or that it is not necessary to file 

an RBP. 

(3) Failure to timely file plan. When 

a new credit union fails to file an RBP 

as provided under paragraphs (a)(1) or 

(2) of this section, the NCUA Board 

shall promptly notify the credit union 

that it has failed to file an RBP and that 

it has 15 calendar days from receipt of 

that notice within which to do so. 

(b) Contents of revised business plan. 

A new credit union’s RBP must, at a 

minimum— 

(1) Address changes, since the new 

credit union’s current business plan was 

approved, in any of the business plan 

elements required for charter approval 

under chapter 1, section IV.D. of 

appendix B to part 701 of this chapter, 

or for state-chartered credit unions 

under applicable state law; 

(2) Establish a timetable of quarterly 

targets for net worth during each year in 

which the RBP is in effect so that the 

credit union becomes adequately 

capitalized by the time it no longer 

qualifies as ‘‘new’’ per § 702.201; 

(3) Specify the projected amount of 

earnings of net worth increases as 

provided under § 702.204(a)(1) or 

§ 702.205(a)(1); 

(4) Explain how the new credit union 

will comply with the mandatory and 

discretionary supervisory actions 

imposed on it by the NCUA Board 

under this subpart; 

(5) Specify the types and levels of 

activities in which the new credit union 

will engage; 

(6) In the case of a new credit union 

reclassified to a lower category under 

§ 702.202(d), specify the steps the credit 

union will take to correct the unsafe or 

unsound condition or practice; and 

(7) Include such other information as 

the NCUA Board may require. 

(c) Criteria for approval. The NCUA 

Board shall not approve a new credit 

union’s RBP unless it— 

(1) Addresses the items enumerated in 

paragraph (b) of this section; 

(2) Is based on realistic assumptions, 

and is likely to succeed in building the 

credit union’s net worth; and 

(3) Would not unreasonably increase 

the credit union’s exposure to risk 

(including credit risk, interest-rate risk, 

and other types of risk). 

(d) Consideration of regulatory 

capital. To minimize possible long-term 

losses to the NCUSIF while the credit 

union takes steps to become adequately 

capitalized, the NCUA Board shall, in 

evaluating an RBP under this section, 

consider the type and amount of any 

form of regulatory capital which may 

become established by NCUA 

regulation, or authorized by state law 

and recognized by NCUA, which the 

credit union holds, but which is not 

included in its net worth. 

(e) Review of revised business plan 

—(1) Notice of decision. Within 30 

calendar days after receiving an RBP 

under this section, the NCUA Board 

shall notify the credit union in writing 

whether its RBP is approved, and shall 

provide reasons for its decision in the 

event of disapproval. The NCUA Board 

may extend the time within which 

notice of its decision shall be provided. 

(2) Delayed decision. If no decision is 

made within the time prescribed in 

paragraph (e)(1) of this section, the RBP 

is deemed approved. 

(3) Consultation with state officials. 

When evaluating an RBP submitted by 

a federally insured state-chartered new 

credit union (whether an original, new 

or additional RBP), the NCUA Board 

shall seek and consider the views of the 

appropriate state official, and provide 

prompt notice of its decision to the 

appropriate state official. 

(f) Plan not approved —(1) 

Submission of new revised plan. If an 

RBP is rejected by the NCUA Board, the 

new credit union shall submit a new 

RBP within 30 calendar days of 

receiving notice of disapproval of its 

initial RBP, unless it is notified in 

writing by the NCUA Board that the 

new RBP is to be filed within a different 

period. 

(2) Notice of decision on revised plan. 

Within 30 calendar days after receiving 

an RBP under paragraph (f)(1) of this 

section, the NCUA Board shall notify 

the credit union in writing whether the 

new RBP is approved. The Board may 

extend the time within which notice of 

its decision shall be provided. 

(3) Submission of multiple 

unapproved RBPs. The submission of 

more than two RBPs that are not 


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approved is considered an unsafe and 

unsound condition and may subject the 

credit union to administrative 

enforcement action pursuant to section 

206 of the FCUA, 12 U.S.C. 1786 and 

1790d. 

(g) Amendment of plan. A credit 

union that has filed an approved RBP 

may, after prior written notice to and 

approval by the NCUA Board, amend it 

to reflect a change in circumstance. 

Pending approval of an amended RBP, 

the new credit union shall implement 

its existing RBP as originally approved. 

(h) Publication. An RBP need not be 

published to be enforceable because 

publication would be contrary to the 

public interest. 

§ 702.207 Incentives for new credit unions. 

(a) Assistance in revising business 

plans. Upon timely request by a credit 

union having total assets of less than 

$10 million (regardless how long it has 

been in operation), the NCUA Board 

shall provide assistance in preparing a 

revised business plan required to be 

filed under § 702.206. 

(b) Assistance. Management training 

and other assistance to new credit 

unions will be provided in accordance 

with policies approved by the NCUA 

Board. 

(c) Small credit union program. A 

new credit union is eligible to join and 

receive comprehensive benefits and 

assistance under NCUA’s Small Credit 

Union Program. 

§ 702.208 Reserves. 

Each new credit union shall establish 

and maintain such reserves as may be 

required by the FCUA, by state law, by 

regulation, or in special cases by the 

NCUA Board or appropriate state 

official. 

§ 702.209 Full and fair disclosure of 

financial condition. 

(a) Full and fair disclosure defined. 

‘‘Full and fair disclosure’’ is the level of 

disclosure which a prudent person 

would provide to a member of a new 

credit union, to NCUA, or, at the 

discretion of the board of directors, to 

creditors to fairly inform them of the 

financial condition and the results of 

operations of the credit union. 

(b) Full and fair disclosure 

implemented. The financial statements 

of a new credit union shall provide for 

full and fair disclosure of all assets, 

liabilities, and members’ equity, 

including such valuation (allowance) 

accounts as may be necessary to present 

fairly the financial condition; and all 

income and expenses necessary to 

present fairly the statement of income 

for the reporting period. 

(c) Declaration of officials. The 

Statement of Financial Condition, when 

presented to members, to creditors or to 

NCUA, shall contain a dual declaration 

by the treasurer and the chief executive 

officer, or in the latter’s absence, by any 

other officer designated by the board of 

directors of the reporting credit union to 

make such declaration, that the report 

and related financial statements are true 

and correct to the best of their 

knowledge and belief and present fairly 

the financial condition and the 

statement of income for the period 

covered. 

(d) Charges for loan and lease losses. 

Full and fair disclosure demands that a 

new credit union properly address 

charges for loan losses as follows: 

(1) Charges for loan and lease losses 

shall be made timely in accordance with 

generally accepted accounting 

principles (GAAP); 

(2) The ALLL must be maintained in 

accordance with GAAP; and 

(3) At a minimum, adjustments to the 

ALLL shall be made prior to the 

distribution or posting of any dividend 

to the accounts of members. 

§ 702.210 Payment of dividends. 

(a) Restriction on dividends. 

Dividends shall be available only from 

net worth, net of any special reserves 

established under § 702.208, if any. 

(b) Payment of dividends and interest 

refunds. The board of directors may not 

pay a dividend or interest refund that 

will cause the credit union’s capital 

classification to fall below adequately 

capitalized under subpart A of this Part 

unless the appropriate regional director 

and, if state-chartered, the appropriate 

state official, have given prior written 

approval (in an RBP or otherwise). The 

request for written approval must 

include the plan for eliminating any 

negative retained earnings balance. 

Subpart C—[Removed] 

■ 12. Remove subpart C. 

Subpart E [Redesignated as Subpart C] 

■ 13. Redesignate subpart E as subpart 

C and redesignate §§ 702.501 through 

702.506 as §§ 702.301 through 702.306 

respectively. 

§ 702.304 Capital planning. 

■ 14. Amend the newly redesignated 

§ 702.304(b)(4) by replacing the citation 

‘‘§ 702.506(c)’’ with ‘‘§ 702.306(c)’’. 

§ 702.305 NCUA action on capital plans. 

■ 15. Amend the newly redesignated 

§ 702.305(b)(4) by replacing the citation 

‘‘§ 702.504’’ with ‘‘§ 702.304’’. 

§ 702.306 Annual supervisory stress 

testing. 

■ 16. Amend the newly redesignated 

§ 702.306(c) by replacing the citation 

‘‘§ 702.504’’ with ‘‘§ 702.304’’. 

PART 703—INVESTMENT AND 

DEPOSIT ACTIVITIES 

■ 17. The authority citation for part 703 

continues to read as follows: 

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

1757(15). 

§ 703.14 [Amended] 

■ 18. Amend § 703.14 as follows: 

■ a. In paragraph (i) remove the words 

‘‘net worth classification’’ and add in 

their place the words ‘‘capital 

classification’’, and remove the words 

‘‘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,’’. 

■ b. In paragraph (j)(4) remove the 

words ‘‘net worth classification’’ and 

add in their place the words ‘‘capital 

classification’’, and remove the words 

‘‘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,’’. 

PART 713—FIDELITY BOND AND 

INSURANCE COVERAGE FOR 

FEDERAL CREDIT UNIONS 

■ 19. The authority citation for part 713 

continues to read as follows: 

Authority: 12 U.S.C. 1761a, 1761b, 1766(a), 

1766(h), 1789(a)(11). 

■ 20. Amend § 713.6 as follows: 

■ a. In paragraph (a)(1), revise the table; 

and 

■ b. In paragraph (c) remove the words 

‘‘net worth’’ each place they appear and 

add in their place the word ‘‘capital’’, 

and remove the words ‘‘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,’’. 

The revision reads as follows: 

§ 713.6 What is the permissible 

deductible? 

(a)(1) * * * 


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Assets Maximum deductible 

$0 to $100,000 ................................................................... No deductible allowed. 

$100,001 to $250,000 ........................................................ $1,000 

$250,000 to $1,000,000 ..................................................... $2,000 

Over $1,000,000 ................................................................ $2,000 plus 1/1000 of total assets up to a maximum of $200,000; for credit unions 

that have received a composite CAMEL rating of ‘‘1’’ or ‘‘2’’ for the last two (2) full 

examinations and maintained a capital classification of ‘‘well capitalized’’ under 

part 702 of this chapter for the six (6) immediately preceding quarters the maximum deductible is $1,000,000. 

* * * * * 

PART 723—MEMBER BUSINESS 

LOANS 

■ 21. The authority citation for part 723 

continues to read as follows: 

Authority: 12 U.S.C. 1756, 1757, 1757A, 

1766, 1785, 1789. 

§ 723.7 [Amended] 

■ 22. In § 723.7 amend paragraph (c)(1) 

by removing the words ‘‘as defined by 

§ 702.102(a)(1)’’ and adding in their 

place the words ‘‘under part 702’’. 

PART 747—ADMINSTRATIVE 

ACTIONS, ADJUDICATIVE HEARINGS, 

RULES OF PRACTICE AND 

PROCEDURE, AND INVESTIGATIONS 

■ 23. The authority citation for part 747 

continues to read as follows: 

Authority: 12 U.S.C. 1766, 1782, 1784, 

1785, 1786, 1787, 1790a, 1790d; 42 U.S.C. 

4012a; Pub. L. 101–410; Pub. L. 104–134; 

Pub. L. 109–351; 120 Stat. 1966. 

§ 747.2001 [Amended] 

■ 24. In § 747.2001, amend paragraph 

(a) by removing the citation 

‘‘702.302(d)’’ and adding in its place the 

citation ‘‘702.202(d)’’. 

§ 747.2002 [Amended] 

■ 25. In § 747.2002, amend paragraph 

(a)(1) by removing the words 

‘‘§§ 702.202(b), 702.203(b) and 

702.204(b)’’ and adding in their place 

the words ‘‘§§ 702.107 (b), 702.108(b) or 

702.109(b)’’, and by removing the words 

‘‘§§ 702.304(b), or 702.305(b)’’ and 

adding in their place the words 

‘‘§§ 702.204(b) or 702.205(b)’’. 

§ 747.2003 [Amended] 

■ 26. In § 747.2003, amend paragraph 

(a) by removing the citation 

‘‘702.302(d)’’ and adding in its place the 

citation ‘‘702.202(d)’’. 

[FR Doc. 2015–00947 Filed 1–26–15; 8:45 am] 

BILLING CODE 7535–01–P 


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