[Federal Register Volume 86, Number 155 (Monday, August 16, 2021)]
[Proposed Rules]
[Pages 45824-45854]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2021-15965]



[[Page 45823]]

Vol. 86

Monday,

No. 155

August 16, 2021

Part II





National Credit Union Administration





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12 CFR Parts 702 and 703





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

Federal Register / Vol. 86, No. 155 / Monday, August 16, 2021 / 
Proposed Rules

[[Page 45824]]


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NATIONAL CREDIT UNION ADMINISTRATION

12 CFR Parts 702 and 703

[NCUA-2021-0072]
RIN 3133-AF12


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

AGENCY: National Credit Union Administration (NCUA).

ACTION: Proposed rule.

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SUMMARY: The NCUA is seeking comment on a proposed rule that would 
provide a simplified measure of capital adequacy for federally insured, 
natural-person credit unions (credit unions) classified as complex 
(those with total assets greater than $500 million). Under the proposed 
rule, a complex credit union that maintains a minimum net worth ratio, 
and that meets other qualifying criteria, will be eligible to opt into 
the complex credit union leverage ratio (CCULR) framework. The minimum 
net worth ratio would initially be established at 9 percent on January 
1, 2022, and be gradually increased to 10 percent by January 1, 2024. A 
complex credit union that opts into the CCULR framework would not be 
required to calculate a risk-based capital ratio under the Board's 
October 29, 2015, risk-based capital final rule, as amended on October 
18, 2018. A qualifying complex credit union that opts into the CCULR 
framework and that maintains the minimum net worth ratio would be 
considered well capitalized. The proposed rule would also make several 
amendments to update the NCUA's October 29, 2015, risk-based capital 
final rule, including addressing asset securitizations issued by credit 
unions, clarifying the treatment of off-balance sheet exposures, 
deducting certain mortgage servicing assets from a complex credit 
union's risk-based capital numerator, updating several derivative-
related definitions, and clarifying the definition of a consumer loan.

DATES: Comments must be received on or before October 15, 2021.

ADDRESSES: You may submit comments using one of the following methods 
(please do not send the same comments via two or more methods):
    <bullet> Federal eRulemaking Portal: http://www.regulations.gov. 
The docket number for this proposed rule is NCUA-2021-0072. Follow the 
instructions for submitting comments.
    <bullet> Fax: (703) 518-6319. Include ``[Your name] Comments on 
``Capital Adequacy: The Complex Credit Union Leverage Ratio, Amendments 
to Risk-Based Capital, and other Technical Amendments'' in the 
transmittal.
    <bullet> Mail: Address to Melane Conyers-Ausbrooks, Secretary of 
the Board, National Credit Union Administration, 1775 Duke Street, 
Alexandria, Virginia 22314-3428.
    <bullet> Hand Delivery/Courier: Same as mail address.
    Public Inspection: All public comments are available on the Federal 
eRulemaking Portal at: http://www.regulations.gov as submitted, except 
where technical limitations make posting the comments on the portal 
impossible. Public comments will not be edited to remove any 
identifying or contact information. Due to social distancing measures 
in effect, the usual opportunity to inspect paper copies of comments in 
the NCUA's law library is not currently available. After social 
distancing measures are relaxed, visitors may make an appointment to 
review paper copies by calling (703) 518-6540 or emailing 
<a href="/cdn-cgi/l/email-protection#8ac5cdc9c7ebe3e6cae4e9ffeba4ede5fc"><span class="__cf_email__" data-cfemail="da959d9997bbb3b69ab4b9afbbf4bdb5ac">[email protected]</span></a>.

FOR FURTHER INFORMATION CONTACT: 
    Policy and Accounting: Thomas Fay, Director, Division of Capital 
Markets, Office of Examination and Insurance, at (703) 518-1179;
    Legal: Rachel Ackmann, at (703) 623-9363 or Ariel Pereira, at (703) 
548-2778; or by mail at National Credit Union Administration, 1775 Duke 
Street, Alexandria, Virginia 22314.

SUPPLEMENTARY INFORMATION:

Table of Contents

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

I. Background

A. The NCUA'S Risk-Based Capital Requirements

    The NCUA's mission is to ensure the safety and soundness of 
federally insured credit unions (FICUs), in addition to carrying out 
other statutory responsibilities. The NCUA performs this function by 
examining and supervising federally chartered credit unions (FCUs), 
participating in the examination and supervision of federally insured, 
state-chartered credit unions (FISCUs) in coordination with state 
regulators, and insuring members' accounts at all FICUs up to the 
limits prescribed by statute.
    Capital adequacy standards are an important prudential tool to 
ensure the safety and soundness of individual credit unions and the 
credit union system as a whole. Capital serves as a buffer for credit 
unions to prevent institutional failure and dramatic deleveraging 
during times of stress. During a financial crisis, a buffer can mean 
the difference between the survival or failure of a financial 
institution. Higher levels of capital insulate credit unions from the 
effects of unexpected adverse developments in their financial 
condition, reduce the probability of a systemic crisis, allow credit 
unions to continue to serve as credit providers during times of stress 
without government intervention, and produce benefits that outweigh the 
associated costs.
    Following the 2007-2009 recession, the NCUA substantially 
reevaluated its capital adequacy standards, which are codified in 12 
CFR part 702 (part 702). On October 29, 2015, as amended on October 18, 
2018, the Board published a final rule restructuring its capital 
adequacy regulations (2015 Final Rule).\1\ The effective date of the 
2015 Final Rule was originally January 1, 2019. The overarching intent 
of the 2015 Final Rule was to reduce the likelihood that a relatively 
small number of high-risk credit unions would exhaust their capital and 
cause large losses to the National Credit Union Share Insurance Fund 
(NCUSIF). Under the Federal Credit Union Act (FCUA), FICUs are 
collectively responsible for replenishing losses to and capitalizing 
the NCUSIF.\2\
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    \1\ 80 FR 66626 (Oct. 29, 2015). See also, 83 FR 55467 (Oct. 18, 
2018).
    \2\ See 12 U.S.C. 1782(c). At the times the Board prescribes, 
subject to statutory parameters, the FCUA requires each insured 
credit union to pay an insurance premium equal to a percentage of 
the credit union's insured shares. The FCUA also requires each 
insured credit union to pay and maintain a deposit with the NCUSIF 
equaling one percent of the credit union's insured shares. The 
NCUSIF's reserves are available to pay potential share insurance 
claims, to provide assistance in connection with the liquidation or 
threatened liquidation of credit unions, and for administrative and 
other expenses the Board incurs in carrying out the purposes of the 
share insurance subchapter of the FCUA. See 12 U.S.C. 1783(a).

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[[Page 45825]]

    The 2015 Final Rule restructured the NCUA's current capital 
adequacy regulations and made various revisions, including amending the 
agency's risk-based net worth requirement by replacing a credit union's 
risk-based net worth ratio with a risk-based capital ratio. The risk-
based capital requirements in the 2015 Final Rule are more consistent 
with the NCUA's risk-based capital ratio measure for corporate credit 
unions, are more comparable to the risk-based capital measures 
implemented by the Federal Deposit Insurance Corporation (FDIC), Board 
of Governors of the Federal Reserve System (Federal Reserve Board), and 
Office of the Comptroller of Currency (OCC) (collectively, the other 
banking agencies) in 2013, and consistent with the FCUA.\3\
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    \3\ The Federal Reserve Board and OCC issued a joint final rule 
on October 11, 2013 (78 FR 62018), and the FDIC issued a 
substantially identical interim final rule on September 10, 2013 (78 
FR 55340). On April 14, 2014 (79 FR 20754), the FDIC adopted the 
interim final rule as a final rule with no substantive changes.
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    The risk-based capital provisions of the 2015 Final Rule apply only 
to credit unions that are complex, which the rule defined as those with 
total assets over $100 million.\4\ On November 6, 2018, the Board 
published a supplemental final rule that raised the threshold level for 
a complex credit union to $500 million (2018 Supplemental Rule).\5\ 
Therefore, only credit unions with over $500 million in assets are now 
subject to the risk-based capital requirements of the 2015 Final Rule. 
The 2018 Supplemental Rule also delayed the effective date of the 2015 
Final Rule for one year (from January 1, 2019, to January 1, 2020).
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    \4\ See, supra note 1.
    \5\ 83 FR 55467 (Nov. 6, 2018).
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    The effective date was delayed a second time through a final rule 
published on December 17, 2019 (2019 Supplemental Rule).\6\ The 2015 
Final Rule is now scheduled to become effective on January 1, 2022. The 
delay has provided credit unions and the NCUA with additional time to 
implement the 2015 Final Rule. Further, as explained in the 2019 
Supplemental Rule, the delay provided the Board additional time to 
holistically and comprehensively evaluate the NCUA's capital standards 
for credit unions.\7\ Among a few items that the Board made reference 
to, the rule highlighted a community bank leverage ratio (CBLR) 
analogue and the treatment of asset securitizations issued by credit 
unions as items for possible consideration by the Board during the 
delay.\8\
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    \6\ 84 FR 68781 (Dec. 17, 2019).
    \7\ Id. at 68782.
    \8\ Id.
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B. The Other Banking Agencies' Risk-Based Capital and CBLR Framework

    As discussed previously, the other banking agencies adopted a 
revised risk-based capital rule in 2013, which was designed to 
strengthen their capital requirements and improve risk sensitivity. 
These rules, along with subsequent amendments, were intended to address 
weaknesses that became apparent during the financial crisis of 2007-08 
(the other banking agencies' 2013 capital rule).\9\ The other banking 
agencies' 2013 capital rule provides two methodologies for determining 
risk-weighted assets: (i) A standardized approach; and (ii) a more 
complex, models-based approach, which includes both the internal 
ratings-based approach for measuring credit risk exposure and the 
advanced measurement approach for measuring operational risk 
exposure.\10\ The standardized approach applied to all banking 
organizations, whereas the internal ratings-based approach applied only 
to certain large or internationally active banking organizations.
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    \9\ See, 84 FR 35234, 35235 (July 22, 2019). The other banking 
agencies' 2013 capital rule also reflected agreements reached by the 
Basel Committee on Banking Supervision (BCBS) in ``Basel III: A 
Global Regulatory Framework for More Resilient Banks and Banking 
Systems'' (Basel III), including subsequent changes to the BCBS's 
capital standards and recent BCBS consultative papers. Their rule 
also included changes consistent with the Dodd-Frank Wall Street 
Reform and Consumer Protection Act (the Dodd-Frank Act).
    \10\ 12 CFR part 3, subparts D & E (OCC); 12 CFR part 217, 
subparts D & E (Federal Reserve Board); 12 CFR part 324, subparts D 
& E (FDIC).
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    In 2018, section 201 of the Economic Growth, Regulatory Relief, and 
Consumer Protection Act (EGRRCPA), directed the other banking agencies 
to propose a simplified, alternative measure of capital adequacy for 
certain federally insured banks.\11\ On November 13, 2019, the other 
banking agencies issued a final rule implementing this statutory 
directive (CBLR Final Rule).\12\
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    \11\ Public Law 115-174 (May 24, 2018). Section 201 is codified 
at 12 U.S.C. 5371 note.
    \12\ 84 FR 61776 (Nov. 13, 2019).
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    Under the CBLR Final Rule, the CBLR framework is optional for 
depository institutions and depository institution holding companies 
that meet the following criteria:
    (1) A leverage ratio (equal to tier 1 capital divided by average 
total consolidated assets) of greater than nine percent; \13\
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    \13\ Under section 4012 of the Coronavirus Aid, Relief, and 
Economic Security Act (CARES Act), Public Law 116-136, 134 Stat. 281 
(Mar. 27, 2020), the CBLR was temporarily set to eight percent. See, 
85 FR 22924 (Apr. 23, 2020). Under the statute, the temporary CBLR 
of eight percent ended on December 31, 2020. The CBLR transitions 
back to nine percent during calendar year 2021. See, 85 FR 22930 
(Apr. 23, 2020).
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    (2) Total consolidated assets of less than $10 billion; \14\
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    \14\ See, 85 FR 77345 (Dec. 2, 2020), providing temporary relief 
from December 2, 2020, through December 31, 2021, for purposes of 
determining the asset size of an institution.
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    (3) Total off-balance sheet exposures of 25 percent or less of its 
total consolidated assets;
    (4) Trading assets plus trading liabilities of five percent or less 
of its total consolidated assets; and
    (5) Not an advanced approaches banking organization (advanced 
approaches banking organizations are generally those with at least $250 
billion in total consolidated assets or at least $10 billion in total 
on-balance sheet foreign exposure, and depository institution 
subsidiaries of those firms).
    The CBLR Final Rule refers to the depository institutions and 
depository institution holding companies that meet these criteria as 
``qualifying community banking organizations.'' Qualifying community 
banking organizations that opt into the CBLR framework are considered 
to be in compliance with the other banking agencies' generally 
applicable risk-based and leverage capital requirements. Further, these 
qualifying banking organizations will be considered to have met the 
well-capitalized ratio requirements for purposes of section 38 of the 
Federal Deposit Insurance Act (FDI Act), which applies prompt 
corrective action to federally insured depository institutions.\15\ 
Qualifying community banking organizations may opt into or out of the 
CBLR framework at any time.
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    \15\ 12 U.S.C. 1831o.
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    The CBLR Final Rule includes a two-quarter grace period during 
which a qualifying community banking organization that temporarily 
fails to meet any of the qualifying criteria, including the greater 
than nine percent leverage ratio requirement, generally will still be 
deemed well-capitalized so long as the qualifying community banking 
organization maintains a leverage ratio greater than eight percent. At 
the end of the grace period, the banking organization must meet all

[[Page 45826]]

qualifying criteria to remain in the CBLR framework or otherwise must 
comply with and report under the generally applicable risk-based and 
leverage capital requirements. Similarly, a banking organization that 
fails to maintain a leverage ratio greater than eight percent will not 
be permitted to use the grace period and must comply with the generally 
applicable capital requirements and file the appropriate regulatory 
reports.
    In March 2020, the CBLR was temporarily set to eight percent by 
statute.\16\ Accordingly, effective the second quarter of 2020, the 
CBLR requirement was eight percent or greater.\17\ At the start of 
2021, the CBLR requirement was increased to 8.5 percent or greater and 
the minimum requirement during the grace period is 7.5 percent.\18\ 
Beginning on January 1, 2022, the CBLR requirement will return to nine 
percent and the minimum requirement during the grace period will return 
to eight percent.
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    \16\ Public Law 116-136.
    \17\ See, 85 FR 22924 (Apr. 23, 2020).
    \18\ See, 85 FR 22930 (Apr. 23, 2020).
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C. The NCUA'S Advance Notice of Proposed Rulemaking

    At its January 14, 2021, meeting the Board issued an advance notice 
of proposed rulemaking (ANPR) to solicit comments on two approaches to 
simplify the 2015 Final Rule.\19\ The risk-based leverage ratio (RBLR) 
is the first alternative to the 2015 Final Rule included in the ANPR, 
which would replace the 2015 Final Rule with a new capital framework. 
The RBLR would use relevant risk-attribute thresholds to determine 
which complex credit unions would be required to hold additional 
capital buffers above the statutory leverage ratio. The second 
alternative contemplated in the ANPR is to retain the 2015 Final Rule 
but enable eligible complex credit unions to opt-in to the CCULR 
framework.
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    \19\ 86 FR 13498 (Mar. 9, 2021).
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    The ANPR provided for a 60-day comment period that closed on May 
10, 2021. The Board received 19 comments. Almost all commenters 
supported the stated goal of simplifying the 2015 Final Rule. In 
general, commenters favored the NCUA developing a CCULR complement to 
risk-based capital rather than adopting a RBLR system of capital 
adequacy.
    Several commenters were opposed to the RBLR framework because it 
would likely call for higher capital requirements for credit unions 
holding certain assets compared to the current RBC requirements. 
Several commenters also stated that introducing a RBLR regime at this 
point would increase regulatory burden and negate the substantial work 
complex credit unions have undertaken to achieve compliance with the 
2015 Final Rule. Commenters also generally stated that the RBLR would 
increase transaction costs for complex credit unions as they would be 
required to invest additional resources to redevelop the processes that 
have been put in place in anticipation of the RBC requirements. A few 
commenters also stated that a RBLR framework could result in a capital 
cliff. These commenters were concerned that a small change in assets 
could move a credit union to a new buffer, thereby causing a large 
increase in minimum capital requirements.
    Almost all commenters that favored the CCULR framework noted that 
it is a more flexible framework than the RBLR because complex credit 
unions have the option of calculating the more complex risk-based 
capital measure for a more precise and generally lower overall capital 
requirement. A few commenters noted that a benefit of the CCULR 
framework, as compared to a RBLR framework, is its similarity to the 
capital framework of the other banking agencies.
    After reviewing the comments received in response to the ANPR, the 
Board decided to issue this proposed rule to provide a simple measure 
of capital adequacy for complex credit unions that would serve as a 
complement to the 2015 Final Rule.

II. Legal Authority

    This proposed rule would primarily provide a simple measure of 
capital adequacy for credit unions classified as complex based on the 
principles of the CBLR framework. The CCULR would relieve complex 
credit unions that satisfy specified qualifying criteria from having to 
calculate the risk-based capital ratio. In exchange, the credit union 
would be required to maintain a higher net worth ratio than is 
otherwise required for the well-capitalized classification for risk-
based capital purposes. This is a similar trade-off to the decision 
qualifying community banks make under the CBLR. After the initial phase 
in period, a qualifying complex credit union that has a net worth ratio 
of 10 percent or greater will be eligible to opt into the CCULR 
framework.
    A qualifying complex credit union that opts into the CCULR 
framework and maintains the minimum net worth ratio (both during and 
after the threshold transition) will be considered well capitalized 
under the 2015 Final Rule.\20\ The proposed rule would also make 
several amendments to update the NCUA's 2015 Final Rule, including 
addressing asset securitizations issued by credit unions, clarifying 
the treatment of off-balance sheet exposures, deducting certain 
mortgage servicing assets from a complex credit union's risk-based 
capital numerator, updating certain derivative-related definitions and 
clarifying the definition of a consumer loan.
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    \20\ 12 CFR 702.102(a)(1) (effective Jan. 1, 2022).
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    The Board is issuing this proposed rule pursuant to its authority 
under the FCUA. Under the FCUA, the NCUA is the chartering and 
supervisory authority for FCUs and the federal supervisory authority 
for FICUs.\21\ The FCUA grants the NCUA a broad mandate to issue 
regulations governing both FCUs and all FICUs. Section 120 of the FCUA 
is a general grant of regulatory authority and authorizes the Board to 
prescribe rules and regulations for the administration of the FCUA.\22\ 
Section 207 of the FCUA is a specific grant of authority over share 
insurance coverage, conservatorships, and liquidations.\23\ Section 209 
of the FCUA is a plenary grant of regulatory authority to the Board to 
issue rules and regulations necessary or appropriate to carry out its 
role as share insurer for all FICUs.\24\ Accordingly, the FCUA grants 
the Board broad rulemaking authority to ensure that the credit union 
industry and the NCUSIF remain safe and sound.
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    \21\ 12 U.S.C. 1752-1775.
    \22\ 12 U.S.C. 1766(a).
    \23\ 12 U.S.C. 1787(b)(1).
    \24\ 12 U.S.C. 1789(a)(11).
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    The FCUA also includes an express grant of authority for the Board 
to develop capital adequacy standards for credit unions. In 1998, 
Congress enacted the Credit Union Membership Access Act (CUMAA).\25\ 
Section 301 of CUMAA added section 216 to the FCUA,\26\ which required 
the Board to adopt by regulation a system of prompt corrective action 
(PCA) to restore the net worth of credit unions that become 
inadequately capitalized.\27\ Section

[[Page 45827]]

216(b)(1)(A) requires the Board to adopt by regulation a system of PCA 
for credit unions consistent with section 216 of the FCUA and 
comparable to section 38 of the FDI Act.\28\ Section 216(b)(1)(B) 
requires that the Board, in designing the PCA system, also take into 
account the ``cooperative character of credit unions'' (that is, credit 
unions are not-for-profit cooperatives that do not issue capital stock, 
must rely on retained earnings to build net worth, and have boards of 
directors that consist primarily of volunteers).\29\ The Board 
initially implemented the required system of PCA in 2000,\30\ primarily 
in part 702, and, as discussed previously, most recently made 
substantial updates to the regulation in the 2015 Final Rule.
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    \25\ Public Law 105-219, 112 Stat. 913 (1998).
    \26\ 12 U.S.C. 1790d.
    \27\ The risk-based net worth requirement for credit unions 
meeting the definition of complex was first applied on the basis of 
data in the Call Report reflecting activity in the first quarter of 
2001. 65 FR 44950 (July 20, 2000). The NCUA's risk-based net worth 
requirement has been largely unchanged since its implementation, 
with the following limited exceptions: Revisions were made to the 
rule in 2003 to amend the risk-based net worth requirement for 
member business loans, 68 FR 56537 (Oct. 1, 2003); revisions were 
made to the rule in 2008 to incorporate a change in the statutory 
definition of ``net worth,'' 73 FR 72688 (Dec. 1, 2008); revisions 
were made to the rule in 2011 to expand the definition of ``low-risk 
assets'' to include debt instruments on which the payment of 
principal and interest is unconditionally guaranteed by NCUA, 76 FR 
16234 (Mar. 23, 2011); revisions were made in 2013 to exclude credit 
unions with total assets of $50 million or less from the definition 
of complex credit union, 78 FR 4033 (Jan. 18, 2013); and revisions 
were made in 2020 to reflect loans issued under the Paycheck 
Protection Program, 85 FR 23212 (Apr. 27, 2020).
    \28\ 12 U.S.C. 1790d(b)(1)(A); see also 12 U.S.C. 1831o (section 
38 of the FDI Act setting forth the PCA requirements for insured 
banks). In discussing the statutory requirement for comparability, 
the 2019 Supplemental Rule stated that ``the FCU Act requires the 
Board to adopt a PCA framework comparable to the PCA framework in 
the FDI Act. The FCU Act, however, does not require the Board to 
adopt a system of risk-based capital identical to the risk-based 
capital framework for federally insured banking organizations.''
    \29\ 12 U.S.C. 1790d(b)(1)(B).
    \30\ 12 CFR part 702; see also 65 FR 8584 (Feb. 18, 2000) and 65 
FR 44950 (July 20, 2000).
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    Among other things, section 216(c) of the FCUA requires the NCUA to 
use a credit union's net worth ratio to determine its classification 
among five net worth categories set forth in the FCUA.\31\ Section 
216(o) generally defines a credit union's net worth as its retained 
earnings balance as determined under generally accepted accounting 
principles (GAAP),\32\ and a credit union's net worth ratio, as the 
ratio of its net worth to its total assets.\33\ 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.\34\
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    \31\ 12 U.S.C. 1790d(c).
    \32\ 12 U.S.C. 1790d(o)(2).
    \33\ 12 U.S.C. 1790d(o)(3).
    \34\ 12 U.S.C. 1790d(c)-(g); 12 CFR 702.204(a)-(b).
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    Section 216(d)(1) of the FCUA requires that the NCUA's system of 
PCA include, in addition to the statutorily defined net worth ratio 
requirement, ``a risk-based net worth \35\ requirement for credit 
unions that are complex, as defined by the Board.'' \36\ The FCUA 
directs the NCUA to base its definition of complex credit unions ``on 
the portfolios of assets and liabilities of credit unions.'' \37\ If a 
credit union is not classified as complex, as defined by the NCUA, it 
is not subject to a risk-based net worth requirement. In addition to 
granting the NCUA broad authority to determine which credit unions are 
complex, and therefore subject to a risk-based net worth requirement, 
the FCUA also grants the NCUA broad authority to design a risk-based 
net worth requirement to apply to such complex credit unions.\38\ 
Specifically, unlike the terms net worth and net worth ratio, the term 
risk-based net worth is not defined in the FCUA. Accordingly, section 
216 grants the Board the authority to design risk-based net worth 
requirements, so long as the regulations are comparable to those 
applicable to other federally insured depository institutions and 
consistent with the requirements of the FCUA.
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    \35\ 12 U.S.C. 1790d(d)(2). For purposes of this rulemaking, the 
term risk-based net worth requirement is used in reference to the 
statutory requirement for the Board to design a risk-based net worth 
requirement to take account of any material risks against which the 
net worth ratio required for an insured credit union to be 
adequately capitalized may not provide adequate protection. The term 
risk-based capital ratio is used to refer to the specific standards 
established in the 2015 Final Rule to function as criteria for the 
statutory risk-based net worth requirement. The term risk-based 
capital ratio is also used by the other banking agencies and the 
international banking community when referring to the types of risk-
based requirements that are addressed in the 2015 Final Rule. This 
change in terminology throughout the proposed rule would have no 
substantive effect on the requirements of the FCUA, and is intended 
only to reduce confusion for the reader.
    \36\ 12 U.S.C. 1790d(d)(1).
    \37\ 12 U.S.C. 1790d(d).
    \38\ Id.
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    The proposed CCULR framework is comparable to section 38 of the FDI 
Act, as implemented by CBLR Final Rule.\39\ As discussed previously, 
section 201 of the EGRRCPA amended part of the other banking agencies' 
capital adequacy framework to direct the other banking agencies to 
propose a simplified, alternative measure of capital adequacy for 
certain federally insured banks.\40\ The other banking agencies 
implemented this requirement, including amendments to their PCA 
regulations under section 38 of the FDI Act, in the CBLR Final Rule. 
The Board also notes that the proposed amendments to the NCUA's 2015 
Final Rule would make the rule more comparable to the other banking 
agencies' 2013 capital rules.
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    \39\ 12 CFR part 3 (OCC), 12 CFR part 217 (Federal Reserve 
Board), and 12 CFR part 324 (FDIC).
    \40\ 12 U.S.C. 5371.
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    In addition to satisfying the comparability requirement in section 
216, the proposed CCULR framework also meets the requirements in 
section 216 for the NCUA's risk-based net worth framework. Section 216 
has two express provisions that authorize an NCUA analogue to the 
CBLR--the definition of complex credit unions and the mandate for the 
Board to design a risk-based net worth requirement. In designing its 
CCULR framework, the Board considered both its legal authority to 
exclude credit unions from risk-based net worth requirements under the 
definition of complex, and its authority to design a system of risk-
based net worth that includes a higher net worth ratio in place of 
calculating a ratio based on risk-adjusted assets.\41\
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    \41\ The Board also briefly considered an additional independent 
legal basis for the proposed CCULR framework. As discussed in the 
section III.D. Calibration of the CCULR, the proposed CCULR 
framework would result in complex credit unions generally holding 
more capital than under the 2015 Final Rule. Because of the higher 
capital requirements under the proposed CCULR framework, the Board 
also considered whether the proposal could be considered an 
alternative method to demonstrate compliance with the 2015 Final 
Rule, instead of an alternative measure of risk-based net worth. 
This approach would be within the Board's general discretion to 
determine the means and manner by which it measures compliance with 
its regulations, including the risk-based net worth requirement. 
However, in light of the express statutory authority to define 
complex and design a risk-based net worth framework, the Board 
believes this alternative basis, while valid, is not necessary to 
support the proposed rule.
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    The Board considered its express authority under section 216 to 
define which credit unions are complex, and thus exclude noncomplex 
credit unions from the risk-based net worth requirement.\42\ The 
express delegation grants the Board significant discretion to determine 
which credit unions are considered complex. Under this legal basis, the 
Board would continue to limit the definition of complex to only those 
credit unions with quarter-end total assets that exceed $500 million 
dollars. In using asset size as a proxy for complexity, the Board 
complied with the statutory directive that the definition of complex be 
based on the portfolios of assets and liabilities of credit unions. 
Specifically, the Board relied on a complexity index that counted the 
number of complex

[[Page 45828]]

products and services provided by credit unions.\43\ The complexity 
index demonstrated that credit unions with greater than $500 million in 
total assets held complex assets and liabilities as larger share of 
their total assets than smaller credit unions.\44\
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    \42\ When Congress expressly authorizes or directs an agency to 
define a statutory term, it grants the agency broad discretion. 
Under these circumstances, an agency is permitted to interpret a 
term so long as its interpretation is not manifestly contrary to the 
statute. The interpretation need not conform to the ordinary meaning 
of the term. See Am. Bankers Ass'n v. Nat'l Credit Union Admin., 934 
F.3d 649, 663 (D.C. Cir. 2019) (``An express delegation of 
definitional power ``necessarily suggests that Congress did not 
intend the [terms] to be applied in [their] plain meaning sense,'' 
Women Involved in Farm Econ. v. U.S. Dep't of Agric., 876 F.2d 994, 
1000 (D.C. Cir. 1989), that they are not ``self-defining,'' id., and 
that the agency ``enjoy[s] broad discretion'' in how to define them, 
Lindeen v. SEC, 825 F.3d 646, 653 (D.C. Cir. 2016)).
    \43\ Supra note 5 at 55470.
    \44\ Id.
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    The Board, however, could also propose a definition of complex 
that, rather than looking at the assets and liabilities of credit 
unions in the aggregate, looks at the individual portfolios of credit 
unions with total assets greater than $500 million. This approach is 
also consistent with the statutory provision that the complex 
definition should be based on the portfolios of assets and liabilities 
of credit unions. The Board would use the same qualifying criteria as 
in the proposed rule, as measures of complexity. If a credit union 
would otherwise meet the proposed definition of a qualifying credit 
union, it would be considered not complex, and therefore not subject to 
risk-based capital, as implemented by the 2015 Final Rule. This 
alternative approach would create a functionally equivalent requirement 
to the one set forth in this proposed rule, with the only difference 
being the technical details of the implementing regulatory text in part 
702.
    The Board also considered its express authority and mandate to 
design the CCULR on the basis that the CCULR constitutes a risk-based 
net worth requirement, as required for complex credit unions in section 
216(d). As discussed previously, the FCUA does not define the term 
risk-based net worth requirement and only sets forth general guidelines 
for the design of the risk-based net worth requirement mandated under 
section 216(d)(1). Specifically, section 216(d)(2) requires that the 
Board ``design the risk-based net worth requirement to take account of 
any material risks against which the net worth ratio required for an 
insured credit union to be adequately capitalized may not provide 
adequate protection.'' Under section 216(c)(1)(B) of the FCUA, the net 
worth ratio required for a credit union to be adequately capitalized is 
six percent.
    The plain language of section 216(d)(2) supports the NCUA's 
interpretation that Congress intended for the NCUA to design the risk-
based net worth requirement to take into account any material risks 
beyond those already addressed through the statutory six percent net 
worth ratio required for a credit union to be adequately capitalized. 
In other words, the language in paragraph 216(d)(2) simply identifies 
the types of risks that the NCUA's risk-based net worth requirement 
must address, that is, those risks not already addressed by the 
statutory six percent net worth requirement. Notably, the FCUA does not 
require that the risk-based net worth requirement include risk-adjusted 
assets as part of its calculation.\45\ Instead, the Board interprets 
``risk-based'' to require an accounting for risks in some manner--that 
is, the measure must be based on a consideration of risks--but not any 
particular manner of doing so.\46\ Therefore, provided the Board 
determines that the proposed CCULR considers all material risks against 
which the six percent net worth ratio does not provide protection, then 
the Board has satisfied the statutory requirements for a risk-based net 
worth ratio.\47\
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    \45\ Case law research revealed no decisions discussing the 
meaning of ``risk-based'' under the FCUA or other statutes that 
impose risk-based capital requirements on financial institutions.
    \46\ By contrast, in 2010, Congress specifically elaborated on 
the risk-based measures applicable to banks by providing that the 
generally applicable risk-based capital requirements for those 
institutions must include risk-weighted assets in the denominator of 
the ratio. Public Law 111-203, codified at 12 U.S.C. 5371. Congress 
did not elect to amend the FCUA to add a similar elaboration on the 
risk-based net worth requirement applicable to complex credit 
unions, which is consistent with the Board's interpretation that the 
term risk-based by itself does not necessarily entail risk-weighted 
assets. This reading is consistent with judicial interpretations of 
the closely related phrase ``based on,'' which the Supreme Court has 
held to indicate a causal or but-for causation relationship between 
the phrase ``based on'' and the term it modifies. Babb v. Wilkie, 
140 S.Ct. 1168, 2020 WL 1668281, at *4 (Apr. 6. 2020). Similarly, a 
``risk-based'' requirement can be understood as a requirement that 
bears a causal relationship to the relevant risks but does not 
require a specific form for the calculation of this requirement.
    \47\ In a similar manner, the Board initially explored a non-
risk-adjusted approach in the advance notice of proposed rulemaking 
that the Board issued following CUMAA's enactment in 1998, in which 
it requested comments on addressing this provision through increased 
net worth requirements as well as through risk-adjusted measures. 63 
FR 57938 (Oct. 29, 1998). This approach is also consistent with the 
Senate report accompanying CUMAA, which stated: ``The NCUA must 
design the risk-based net worth requirement to take into account any 
material risks against which the 6 percent net worth ratio required 
for an insured credit union to be adequately capitalized may not 
provide adequate protection. Thus the NCUA should, for example, 
consider whether the six percent requirement provides adequate 
protection against interest-rate risk and other market risks, credit 
risk, and the risks posed by contingent liabilities, as well as 
other relevant risks. The design of the risk-based net worth 
requirement should reflect a reasoned judgment about the actual 
risks involved.'' S. Rep. No. 105-193 at 14 (May 21, 1998) (emphasis 
added). The report indicates that Congress did not intend to 
prescribe the manner in which the Board accounts for any relevant 
risks that the six percent net worth ratio does not adequately 
address.
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    The Board believes that both approaches to designing the CCULR 
framework are supported by the FCUA. The Board, however, has chosen to 
draft the proposed rule under its authority to design a risk-based net 
worth requirement. The Board believes that considering the CCULR as an 
alternative way to calculate a risk-based net worth requirement is more 
straightforward, consistent with the structure of section 216, and 
simpler for complex credit unions to implement.

III. Proposed Rule

A. Overview of the CCULR Framework

    This proposed rule would provide a simplified measure of capital 
adequacy for credit unions classified as complex (credit unions with 
total assets greater than $500 million). Under the proposed rule, a 
qualifying complex credit union that meets the minimum CCULR, which is 
equal to its net worth ratio, would be eligible to opt into the CCULR 
framework and would be considered well capitalized. The proposed CCULR 
framework is based on the principles of the CBLR framework. It would 
relieve complex credit unions that meet specified qualifying criteria 
and have opted into the CCULR framework from having to calculate a 
risk-based capital ratio, as implemented by the 2015 Final Rule. In 
exchange, the qualifying complex credit union would be required to 
maintain a higher net worth ratio than is otherwise required for the 
well-capitalized classification. This is a similar trade-off to the one 
qualifying community banking organizations are able to make under the 
CBLR. The CCULR would further the goal of the FCUA's PCA requirements 
by ensuring that complex credit unions continue to hold sufficient 
capital, while minimizing the burden associated with complying with the 
NCUA's risk-based capital requirement.
    As noted previously, the 2015 Final Rule is scheduled to take 
effect on January 1, 2022. Accordingly, the regulatory amendments 
contained in this proposed rule, if finalized, would not take effect 
until January 1, 2022, and qualifying complex credit unions would not 
be able to opt into the proposed CCULR framework prior to this 
effective date.

B. Qualifying Complex Credit Unions

    Under the proposal, a qualifying complex credit union would be 
defined as a complex credit union under Sec.  702.103 that meets the 
following criteria (qualifying criteria), each as described further 
below:

[[Page 45829]]

    (1) Has a CCULR (net worth) of 10 percent or greater, subject to an 
initial transition period; \48\
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    \48\ For an additional discussion on why the Board set the ratio 
to 10 percent, see Section D. Calibration of the CCULR. For 
additional information on the transition period, see Section I. 
Transition Provision.
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    (2) Has total off-balance sheet exposures of 25 percent or less of 
its total assets;
    (3) Has the sum of total trading assets and total trading 
liabilities of five percent or less of its total assets; and
    (4) Has the sum of total goodwill, including goodwill that meets 
the definition of excluded goodwill, and total other intangible assets, 
including intangible assets that meet the definition of excluded other 
intangible assets, of two percent or less of its total assets.
    The Board believes that complex credit unions that do not meet any 
one of the qualifying criteria should remain subject to risk-based 
capital to ensure that such credit unions hold capital commensurate 
with the risk profile of their activities. The Board would continue to 
evaluate the qualifying criteria over time to ensure that they continue 
to be appropriate.
    Question 1: The Board invites comment on the qualifying criteria. 
What are the advantages and disadvantages of each qualifying criterion? 
What is the burden associated with determining whether a complex credit 
union meets the proposed qualifying criteria? What other criteria, if 
any, should the Board consider in the proposed definition? What are 
commenters' views on the tradeoffs between simplicity and having 
additional qualifying criteria? In specifying any alternative 
qualifying criteria regarding a credit union's risk profile, please 
provide information on how alternative qualifying criteria should be 
considered in conjunction with the calibration of the CCULR level and 
why the Board should consider such alternative criteria. For example, 
if the Board were to consider a CCULR of less than 10 percent to be 
well capitalized, should additional qualifying criteria be 
incorporated? The Board may consider qualifying criteria related to 
mortgage servicing assets, investments in credit union service 
organizations (CUSOs), or investments in corporate credit unions if a 
permanent CCULR of less than 10 percent is considered.
1. CCULR of 10 Percent or Greater
    After the transition period, the proposed rule would require a 
complex credit union to have a CCULR of at least 10 percent to be 
classified as a qualifying complex credit union. An otherwise 
qualifying complex credit union could not opt into the CCULR framework 
unless its CCULR was at least 10 percent.
Transition Provision
    Under the proposed rule, there is a transition provision to phase 
in the 10 percent CCULR over two years to give complex credit unions 
time to adjust and adapt to the new requirements. The transition 
provision provides for full effectiveness of the 10 percent CCULR on 
January 1, 2024. From January 1, 2022, to December 31, 2022, a complex 
credit union may opt into the CCULR framework if it has a CCULR of nine 
percent or greater. Therefore, a qualifying complex credit union that 
opts into the CCULR framework and that maintains a CCULR of nine 
percent would be considered well capitalized. Beginning January 1, 
2023, a complex credit union that has opted into the CCULR framework 
must have a CCULR of 9.5 percent or greater to meet the eligibility 
criteria and be considered well-capitalized. After January 1, 2024, a 
complex credit union would need to maintain a CCULR of 10 percent to be 
considered well-capitalized. Accordingly, the proposed rule provides a 
complex credit union two years to meet a CCULR of 10 percent or 
greater. See, Section I. Transition Provision for additional 
information.
2. Off-Balance Sheet Exposures
    Under the proposal, a qualifying complex credit union would be 
required to have total off-balance sheet exposures of 25 percent or 
less of its total assets, as of the end of the most recent calendar 
quarter. The Board is including these qualifying criteria in the CCULR 
framework because the CCULR includes only on-balance sheet assets in 
its denominator and thus would not require a qualifying complex credit 
union to hold capital against its off-balance sheet exposures. This 
qualifying criterion is intended to reduce the likelihood that a 
qualifying complex credit union with significant off-balance sheet 
exposures would be required to hold less capital under the CCULR 
framework than under the risk-based capital ratio.\49\
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    \49\ The proposed amendments to Sec.  702.104, Risk-based 
capital ratio, include credit conversion factors and risk-weights 
for off-balance sheet exposures.
---------------------------------------------------------------------------

    The other banking agencies' CBLR framework also excludes banking 
organizations with significant off-balance sheet exposures. The CBLR 
Final Rule excludes banking organizations that have more than 25 
percent of total consolidated assets in off-balance sheet exposures. 
The other banking agencies' definition of off-balance sheet exposures, 
however, has several differences from the current definition of off-
balance sheet exposures in the 2015 Final Rule. Therefore, to make the 
CCULR framework more comparable to the CBLR and to improve on the 
effectiveness of the 2015 Final Rule, the proposed rule would amend the 
NCUA's definition of off-balance sheet exposures. The proposed 
amendments to the definition of off-balance sheet exposure would apply 
to both the proposed CCULR framework and the risk-based capital 
framework.\50\
---------------------------------------------------------------------------

    \50\ The proposed rule would also include risk weights for each 
new exposure in the definition of off-balance sheet exposure. See, 
Section M. Amendments to the 2015 Final Rule.
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    Under the proposed CCULR framework, off-balance sheet exposures 
would mean:
    (1) For unfunded commitments, excluding unconditionally cancellable 
commitments, the remaining unfunded portion of the contractual 
agreement.
    (2) For loans transferred with limited recourse, or other seller-
provided credit enhancements, and that qualify for true sale 
accounting, the maximum contractual amount the credit union is exposed 
to according to the agreement, net of any related valuation allowance.
    (3) For loans transferred under the Federal Home Loan Bank (FHLB) 
mortgage partnership finance program, the outstanding loan balance as 
of the reporting date, net of any related valuation allowance.
    (4) For financial standby letters of credit, the total potential 
exposure of the credit union under the contractual agreement.
    (5) For forward agreements that are not derivative contracts, the 
future contractual obligation amount.
    (6) For sold credit protection through guarantees and credit 
derivatives, the total potential exposure of the credit union under the 
contractual agreement.
    (7) For off-balance sheet securitization exposures, the notional 
amount of the off-balance sheet credit exposure (including any credit 
enhancements, representations, or warranties that obligate a credit 
union to protect another party from losses arising from the credit risk 
of the underlying exposures) that arises from a securitization.
    (8) For securities borrowing or lending transactions, the amount of 
all securities borrowed or lent against

[[Page 45830]]

collateral or on an uncollateralized basis.\51\
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    \51\ New exposure categories may require changes to the Call 
Report. For example, unconditionally cancellable commitments, off-
balance sheet securitization exposures, forward agreements, sold 
credit protection through guarantees and credit derivatives, and 
securities borrowing and lending transactions may require additional 
Call Report fields.
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    Each element of the off-balance sheet definition is discussed in 
more detail below.
Unfunded Commitments
    The current definition of off-balance sheet exposures in the 2015 
Final Rule includes all unfunded commitments. The proposed definition, 
however, would not include commitments that are unconditionally 
cancellable. Under the proposed rule, an unconditionally cancellable 
commitment would mean a commitment that a credit union may, at any 
time, with or without cause, refuse to extend credit under (to the 
extent permitted under applicable law). The Board notes that for an 
exposure to be treated as unconditionally cancellable, the contractual 
agreement must explicitly state that the credit union can 
unconditionally refuse to extend credit under the commitment. A 
provision stating the credit union can cancel the commitment for good 
cause would be insufficient.
Loans Transferred With Limited Recourse
    The current definition of off-balance sheet exposures in the 2015 
Final Rule includes all other loans transferred with limited recourse 
or other seller-provided credit enhancements and that qualify for true 
sales accounting. The proposed rule would make no substantive changes 
to this prong of the off-balance sheet exposure definition. The 
exposure amount for loans transferred with limited recourse is the 
maximum contractual amount the credit union is exposed to according to 
the agreement, net of any related valuation allowance.
Loans Transferred Under the Federal Home Loan Bank (FHLB) Mortgage 
Partnership Finance Program Loans
    The current definition of off-balance sheet exposures in the 2015 
Final Rule includes loans transferred under the FHLB mortgage 
partnership finance program. The proposed rule would clarify the 
language of this item in the off-balance sheet exposure definition but 
would make no other substantive change. The exposure amount for loans 
that meet the definition of mortgage partnership finance program and 
are transferred under the FHLB mortgage partnership finance program is 
the outstanding loan balance as of the reporting date, net of any 
related valuation allowance.
Financial Standby Letters of Credit
    The proposed rule would include financial standby letters of credit 
in the definition of off-balance sheet exposures. These exposures are 
not explicitly included in the current definition of off-balance sheet 
exposure in the 2015 Final Rule; however, they are included as off-
balance sheet items. Under the proposed rule, the exposure amount for 
financial standby letters of credit would be the total potential 
exposure of the credit union under the contractual agreement.
Forward Agreements
    The proposed definition of off-balance exposures would also include 
forward agreements that are not derivative contracts. Forward 
agreements are not explicitly included in the current definition of 
off-balance sheet exposure in the 2015 Final Rule; however, forward 
agreements are included as off-balance sheet items. A forward agreement 
would mean a legally binding contractual obligation to purchase assets 
with certain drawdown at a specified future date, not including 
commitments to make residential mortgage loans or forward foreign 
exchange contracts. The exposure amount of a forward agreement that is 
not a derivative contract would be the future contractual obligation 
amount.
    Similar to the other banking agencies, the Board is also clarifying 
that typical mortgage lending activities such as forward loan delivery 
commitments between credit unions and investors are typically 
derivative contracts, and therefore, would be excluded from the off-
balance sheet exposure definition.\52\ The Board also notes that put 
and call options on mortgage-backed securities are also typically 
derivatives and would be excluded from the definition of off-balance 
sheet exposure. A contractual obligation for the future purchase of a 
``to be announced'' (that is, when-issued) mortgage securities contract 
that does not meet the definition of a derivative contract, however, 
would be captured by the off-balance sheet exposure definition as it 
would be considered a forward agreement. In contrast, a contractual 
obligation for the future sale (rather than purchase) of a ``to be 
announced'' mortgage securities contract that does not meet the 
definition of a derivative contract would not be captured in the off-
balance sheet qualifying criterion, as it would not be considered a 
forward agreement.
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    \52\ 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 or five business days. 12 CFR 702.2 
(effective Jan. 1, 2022).
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Sold Credit Protection Through Guarantees and Credit Derivatives
    The proposed definition of off-balance sheet exposure would also 
include sold credit protection through guarantees \53\ and credit 
derivatives. These exposures are not explicitly included in the 
definition of off-balance sheet exposure in the 2015 Final Rule; 
however, guarantees are included as off-balance sheet items. Credit 
derivatives are included in the other banking agencies' CBLR framework 
as part of the off-balance sheet threshold. Under the proposed 
definition, the exposure amount for sold credit protection through 
guarantees and credit derivatives would be the total potential exposure 
of the credit union under the contractual agreement. A credit 
derivative would mean a financial contract executed under standard 
industry credit derivative documentation that allows one party (the 
protection purchaser) to transfer the credit risk of one or more 
exposures (reference exposure[s]) to another party (the protection 
provider) for a certain period of time. At this time, FCUs are not 
permitted to have credit derivatives and the Board is unaware of any 
state-chartered credit unions engaging in credit derivatives. The Board 
is including this provision for consistency with the other banking 
agencies and to ensure that the proposed rule is flexible should credit 
unions hold credit derivatives in the future.
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    \53\ A 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. 12 CFR 702.2 (effective Jan. 1, 2022).
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Off-Balance Sheet Securitizations
    Additionally, compared to the current definition of off-balance 
sheet exposure, the proposed definition would include off-balance sheet 
securitizations, including any credit enhancements, representations, or 
warranties that obligate a credit union to protect another party from 
losses arising from the credit risk of the underlying

[[Page 45831]]

exposures.\54\ Off-balance sheet securitizations are not included in 
the current definition of off-balance sheet exposure or off-balance 
sheet items, but are included in the other banking agencies' CBLR 
framework as part of the off-balance sheet threshold. An off-balance 
sheet securitization exposure could arise in a number of circumstances. 
For example, if an originating credit union provides liquidity or 
credit support for an issued securitization, the credit union may 
report an off-balance sheet securitization exposure. The exposure 
amount of an off-balance sheet securitization exposure would be the 
notional amount of the exposure.
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    \54\ The other banking agencies define the term ``credit 
enhancements, representations, or warranties.'' The Board believes 
the definition used by the other banking agencies introduces 
additional complexity and therefore is not adopting it at this time 
and, instead, will rely on the plain meaning of these terms.
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Securities Borrowing or Lending Transactions
    Finally, the proposed rule would explicitly include securities 
borrowing or lending transactions. Securities borrowing or lending 
transactions are not included in the current definition of off-balance 
sheet exposure or off-balance sheet items, but are included in the 
other banking agencies' CBLR framework as part of the off-balance sheet 
qualifying criterion. These types of transactions are permissible for 
FCUs under part 703 of NCUA regulations and may be permissible for 
FISCUs as well.\55\ For these transactions, the exposure amount would 
be the amount of all securities borrowed or lent against collateral or 
on an uncollateralized basis.
---------------------------------------------------------------------------

    \55\ 12 CFR 703.13. 12 CFR 703.2 defines securities lending as 
lending a security to a counterparty, either directly or through an 
agent, and accepting collateral in return.
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    Collectively, the above eight elements comprise the proposed 
definition of off-balance sheet exposures that would apply to both the 
proposed CCULR framework and the risk-based capital framework under the 
2015 Final Rule. Section M. Amendments to the 2015 Final Rule, which 
addresses two additional off-balance sheet exposures, that are not part 
of the off-balance exposure definition because they are not included as 
an off-balance sheet exposure in either the CCULR or the other banking 
agencies' CBLR off-balance sheet thresholds. However, they are 
considered in the other banking agencies' 2013 capital rule and are 
proposed amendments to the NCUA's 2015 risk-based capital rule. By 
applying the proposed changes to both frameworks, the Board would 
establish consistency between the 2015 Final Rule and the proposed 
CCULR framework. Without these conforming amendments to the definition 
of off-balance sheet exposures, a credit union might be required to 
hold less capital under the CCULR framework than under the risk-based 
capital framework of the 2015 Final Rule.
    The Board proposes a 25 percent threshold for off-balance sheet 
exposures, as this threshold is similar to the CBLR framework and it 
would provide enough flexibility for complex credit unions to engage in 
normal lending practices. The Board does not believe that traditional 
banking activities, such as extending loan commitments to members, 
should necessarily preclude a complex credit union from qualifying to 
use the CCULR framework. The 25 percent threshold will also ensure that 
complex credit unions engaging in substantial off-balance sheet 
activity will also have the commensurate regulatory capital 
requirement. Therefore, the Board proposes a 25 percent threshold for 
off-balance sheet exposures, consistent with the CBLR Final Rule.
    Question 2: The Board invites comment on the proposed off-balance 
sheet exposures qualifying criterion. What aspects of the off-balance 
sheet exposures qualifying criterion, including the related definition, 
requires further clarity? What other alternatives should the Board 
consider for purposes of defining the proposed qualifying criterion? 
What impact would the proposed qualifying criterion have on a complex 
credit union's business strategies and lending decisions? Is a 25 
percent threshold appropriate? If commenters believe an alternative 
threshold is more appropriate, please provide data.
3. Trading Assets and Liabilities
    Under the proposal, a qualifying complex credit union would be 
required to have the sum of its total trading assets and total trading 
liabilities be five percent or less of its total assets, each measured 
as of the end of the most recent calendar quarter.\56\ The proposed 
rule would include new definitions for the terms trading assets and 
trading liabilities. Trading assets would be defined as securities or 
other assets acquired, not including loans originated by the credit 
union, for the purpose of selling in the near term or otherwise with 
the intent to resell to profit from short-term price movements. Trading 
assets would not include shares of a registered investment company or a 
collective investment fund used for liquidity purposes. Trading assets, 
however, would include derivatives recorded as assets on a credit 
union's balance sheet that are used for trading purposes. The Board 
notes that FCUs do not currently have the authority under part 703 to 
enter into derivative transactions for trading.
---------------------------------------------------------------------------

    \56\ Currently, the Call Report does not include a reporting 
requirement for trading assets and trading liabilities. As discussed 
in Section III. L. Illustrative Reporting Forms to Support the 
CCULR, if the proposed rule is finalized, the NCUA would update the 
Call Report before January 1, 2022. The revised Call Report would 
include reporting requirements for trading assets and trading 
liabilities.
---------------------------------------------------------------------------

    The Board is proposing to define trading assets similarly to the 
other banking agencies' definition with the exception of including 
securities or investments acquired through underwriting or dealing, or 
securities acquired as an accommodation to a customer. The Board does 
not believe these are activities that credit unions currently engage in 
and, additionally, they would still likely be captured in the 
definition of trading assets. The Board notes that any loan originated 
by a credit union would not be considered a trading asset. However, 
under the proposed definition, loans purchased with the intent to sell 
in the short-term would be considered trading assets.
    Trading liabilities would be defined as the total liability for 
short positions of securities or other liabilities held for trading 
purposes. A short position is established when an investor sells an 
investment that the investor does not own. The following is an example 
of a short position that would not be included within the definition of 
trading liability because it is used to manage interest rate risk. In 
managing interest rate risk, an investor might sell a 10-year Treasury 
Note to decrease the price volatility of the investor's bond/loan 
portfolio. The value of the 10-year Treasury Note, which is a liability 
for the investor, would change in the same direction as the bond/loan 
portfolio, reducing interest rate risk if the price change of assets 
minus liabilities is less than it would have been without shorting the 
10-year Treasury Note. If a credit union engaged in such a transaction, 
it would not be included in the trading liabilities definition. The 
Board also notes that FCUs do not currently have the authority to short 
securities.\57\ Additionally, trading liabilities would include 
derivatives recorded as liabilities on a credit union's balance sheet 
that are used for trading purposes. The Board notes that FCUs do not 
currently have the

[[Page 45832]]

authority to enter into derivative transactions for trading.
---------------------------------------------------------------------------

    \57\ 12 CFR 703.15.
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    These qualifying criteria would be calculated in accordance with 
the reporting instructions in the Call Report and the complex 
qualifying credit union would divide the sum of its total trading 
assets and total trading liabilities by its total assets.
    The other banking agencies limited a qualifying community banking 
organization to having total trading assets and trading liabilities of 
five percent or less of its total consolidated assets. In the CBLR 
Final Rule, the other banking agencies discussed the potential elevated 
levels of risk and complexity that can be associated with certain 
trading activities and, therefore, required banking organizations with 
significant trading assets and liabilities to be subject to risk-based 
capital requirements. The other banking agencies noted that elevated 
levels of trading activity can produce a heightened level of earnings 
volatility, which has implications for capital adequacy. The other 
banking agencies also expressed concerns about making the CBLR 
framework available to banking organizations with material market risk 
exposure. For similar reasons, the Board believes it is important to 
have a qualifying criterion based on the sum of total trading assets 
and trading liabilities.
    Based on the Board's analysis of currently available Call Report 
data and permissible activities for FCUs, the Board believes the vast 
majority of complex credit unions do not have material amounts of 
trading assets and trading liabilities.\58\ The Board has included a 
trading activity criterion, despite the general lack of credit union 
trading activity, because the Board recognizes the potential elevated 
levels of risk and complexity that can be associated with certain 
trading activities even if is not applicable to most complex credit 
unions. In addition, the Board recognizes that the level of credit 
union trading activity could increase in the future.
---------------------------------------------------------------------------

    \58\ Even though it is permissible for FCUs to trade securities, 
Call Report data shows FCUs do not hold substantial trading assets. 
See, 12 CFR 703.13(f). Depending on state law, FISCUs also may be 
permitted to hold trading assets, however, again, the Board's 
analysis shows that FISCUs do not hold material amounts of trading 
assets. As of December 2020, the largest concentration in trading 
debt securities at a complex credit union was 2.3 percent of assets. 
Furthermore, only four complex credit unions had over one percent of 
assets in trading debt securities.
---------------------------------------------------------------------------

    Question 3: The Board invites comment on the proposed trading 
activity criterion. What other alternative measures of trading activity 
should the Board consider for purposes of defining a qualifying complex 
credit union and why?
4. Goodwill and Other Intangible Assets
    Under the proposal, a qualifying complex credit union would be 
required to have the sum of total goodwill and other intangible assets 
of two percent or less of its total assets. Qualifying complex credit 
unions would be required to include excluded goodwill and excluded 
other intangible assets in this calculation.\59\ Goodwill is defined as 
an intangible asset, maintained in accordance with GAAP, representing 
the future economic benefits arising from other assets acquired in a 
business combination (for example, a merger) that are not individually 
identified and separately recognized. Other intangible assets mean 
intangible assets, other than servicing assets and goodwill, maintained 
in accordance with GAAP. Other intangible assets do not include 
excluded other intangible assets. These are the same definitions as in 
the 2015 Final Rule. However, as discussed previously, for purposes of 
the CCULR, complex credit unions would be required to include in the 
proposed threshold excluded goodwill and excluded other intangible 
assets, even though excluded goodwill and excluded other intangible 
assets are not included in the goodwill deduction under the 2015 Final 
Rule. The 2015 Final Rule established an implementation period for 
deducting goodwill and other intangible assets acquired by certain 
supervisory mergers prior to the publication of the 2015 Final Rule. 
This approach ensured credit unions were not treated punitively for 
goodwill and other intangible assets acquired before the publication of 
the 2015 Final Rule. However, the CCULR framework is voluntary and the 
same fairness concerns are not present. Therefore, the Board has chosen 
to include the full amount of goodwill and other intangible assets for 
this criterion.
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    \59\ Excluded goodwill means the outstanding balance, maintained 
in accordance with GAAP, of any goodwill originating from a 
supervisory merger or combination that was completed on or before 
December 28, 2015. This term and definition expire on January 1, 
2029. Excluded other intangible assets means the outstanding 
balance, maintained in accordance with GAAP, of any other intangible 
assets such as core deposit intangible, member relationship 
intangible, or trade name intangible originating from a supervisory 
merger or combination that was completed on or before December 28, 
2015. This term and definition expire on January 1, 2029. 12 CFR 
702.2 (effective Jan. 1, 2022).
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    The Board is proposing a qualifying criterion related to goodwill 
and other intangible assets because 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. Due to the uncertainty of recognizing value from 
goodwill and other intangible assets, the other banking agencies 
require insured banks to deduct goodwill and intangible assets from 
tier 1 capital.\60\ The Board believes it is prudent to assess the 
credit union's balance of goodwill and other intangible assets to 
ensure comparability with the banking industry. Without this proposed 
criterion, a qualifying credit union could use the CCULR despite 
substantial goodwill and intangible assets, which would be inconsistent 
with the principles of the CBLR framework. The Board also notes that 
under the 2015 Final Rule, goodwill and other intangible assets are 
deducted from both the risk-based capital ratio numerator and 
denominator.
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    \60\ See e.g., 12 CFR 324.22.
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    As stated previously, the proposed rule includes a two percent 
threshold on goodwill and other intangibles assets. The Board believes 
that complex credit unions with two percent or less of their assets in 
goodwill and other intangibles assets would not hold less capital under 
the CCULR framework than under the risk-based capital ratio. In 
addition, a two percent threshold only would exclude a small portion of 
otherwise qualifying complex credit unions, an estimated four credit 
unions as of December 31, 2020, from the CCULR framework. Therefore, 
the Board believes a two percent threshold balances regulatory relief 
for most qualifying complex credit unions, while still recognizing the 
uncertainty and volatility of goodwill and other intangible assets. The 
Board believes that complex credit unions with substantial goodwill and 
other intangible assets should calculate their capital adequacy using 
the risk-based capital ratio, as their portfolios may require higher 
capital levels.
    Question 4: The Board invites comment on the proposed qualifying 
criterion for the sum of total goodwill and other intangible assets. 
What are commenters' views on the inclusion of such a qualifying 
criterion? Should qualifying complex credit unions be required to 
include excluded goodwill and excluded other intangible assets that 
would have been excluded under the 2015 Final Rule?
    Question 5: As discussed previously, under the 2015 Final Rule, 
goodwill and other intangible assets are deducted from both the risk-
based capital ratio numerator and denominator in order to

[[Page 45833]]

achieve a risk-based capital ratio numerator reflecting equity 
available to cover losses in the event of liquidation. The Board, 
however, recognized that requiring the exclusion of goodwill and other 
intangibles associated with supervisory mergers and combinations of 
credit unions that occurred prior to the 2015 Final Rule could directly 
reduce a credit union's risk-based capital ratio. Accordingly, under 
the 2015 Final Rule, the Board also permitted credit unions to exclude 
certain goodwill and other intangible assets from the deduction in the 
risk-based capital ratio numerator. In particular, the 2015 Final Rule 
excluded from the definition of goodwill, which must be deducted from 
the risk-based capital ratio numerator, certain goodwill or other 
intangible assets acquired by a credit union in a supervisory merger or 
consolidation.
    Under the 2015 Final Rule, excluded goodwill is defined as the 
outstanding balance, maintained in accordance with GAAP, of any 
goodwill originating from a supervisory merger or combination that was 
completed on or before December 28, 2015. This term and definition 
expire on January 1, 2029. Excluded other intangible assets is defined 
as the outstanding balance, maintained in accordance with GAAP, of any 
other intangible assets such as core deposit intangible, member 
relationship intangible, or trade name intangible originating from a 
supervisory merger or combination that was completed on or before 
December 28, 2015. This term and definition expire on January 1, 2029. 
The Board added these two definitions to take into account the impact 
goodwill or other intangible assets recorded from transactions defined 
as supervisory mergers or combinations have on the calculation of the 
risk-based capital ratio upon implementation. Both definitions apply to 
supervisory mergers or combinations that occurred before December 28, 
2015. The date, December 28, 2015, was 60 days after the 2015 Final 
Rule was published in the Federal Register, which provided sufficient 
notice to complex credit unions contemplating supervisory mergers at 
the time the 2015 Final Rule was issued. The Board understands, 
however, that there is some confusion as to whether the dates were 
amended after the subsequent delays to the 2015 Final Rule in the 2018 
Supplemental Rule and the 2019 Supplemental Rule. The Board notes that 
as currently written, the delays to the effective date of the 2015 
Final Rule do not amend the December 28, 2015, date for excluded 
goodwill and other intangible assets. Any supervisory mergers that 
included goodwill and other intangible assets after December 28, 2015, 
are required deductions once the 2015 Final Rule becomes effective on 
January 1, 2022. The Board, however, is open to considering an 
amendment to the 2015 Final Rule. Should the Board amend the December 
28, 2015, date to alleviate any potential confusion in the date caused 
by the delayed effective date of the 2015 Final Rule? The Board also 
notes that the CCULR framework, as proposed, would not require a 
deduction, so any potential amendment would only be relevant for 
complex credit unions that are not qualifying complex credit unions or 
that have not opted to calculate their risk-based capital measure under 
the CCULR framework. What are the advantages and disadvantages of 
deducting goodwill from regulatory capital under the 2015 Final Rule? 
As goodwill is not a tangible asset, how would not deducting goodwill 
from regulatory capital adequately protect the NCUSIF in the event of a 
failure and liquidation?
    Question 6: Please comment on whether the Board should consider 
qualifying criteria for other categories of exposures that are subject 
to heightened risk weights under the 2015 Final Rule. Should the Board 
combine several categories of higher risk-weighted exposures to ensure 
a complex credit union's aggregate exposure is under a certain 
threshold?
5. Other CBLR Eligibility Criteria
Total Assets of Less Than $10 Billion
    Under the other banking agencies' CBLR framework, only depository 
institutions or depository institution holding companies with total 
consolidated assets of less than $10 billion are eligible to use the 
CBLR. The $10 billion limitation was included in the EGRRCPA.\61\ The 
other banking agencies also stated that a risk-based capital ratio is 
more appropriate for larger banking organizations because such banking 
organizations may present risks that are not appropriately captured by 
the CBLR framework.\62\ Commenters to the ANPR that addressed the scope 
of eligible institutions generally favored not using the CBLR threshold 
of $10 billion. One commenter stated that because credit unions are 
generally subject to more stringent portfolio shaping regulations than 
banks, a $10 billion cap was not appropriate. One commenter stated that 
the NCUA could set a higher threshold of $15 billion or $20 billion to 
harmonize the CCULR with the more granular stress testing tiers. Other 
non-credit union commenters favored a $10 billion limit on eligibility 
to opt into the CCULR framework.
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    \61\ Supra note 11.
    \62\ Supra note 12.
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    The Board is not proposing to include this qualifying criterion in 
the proposed rule. The Board believes that the CCULR framework would 
appropriately capture the risk for all complex credit unions regardless 
of asset size. The FCUA limits the types of assets a Federal credit 
union can hold compared to banking organizations. Consequently, larger 
banking organizations may be more likely to include assets that cannot 
be adequately risk weighted with a leverage ratio than a complex credit 
union. Therefore, the Board believes permitting all complex credit 
unions regardless of asset size to opt into the CCULR framework is 
prudent and does not present a risk to the NCUSIF. Permitting credit 
unions with total assets over $10 billion would only include 18 
additional credit unions, with total assets of over $438 billion, or 27 
percent of all complex credit union assets as of March 31, 2021. In 
addition, these credit unions are highly capitalized and have an 
average net worth ratio of just under 10 percent. Twelve of the 
eighteen credit unions have net worth ratios over nine percent. The 
remaining six credit unions with total assets over $10 billion as of 
March 2021 have an average net worth ratio of 8.32 percent.
    The Board notes that $10 billion is the threshold for credit unions 
to begin capital planning under part 702. In addition, complex credit 
unions with $20 billion or more in total assets are subject to stress 
testing requirements.\63\ These requirements are independent of the 
complex credit union's CCULR selection. Therefore, a complex credit 
union that meets the applicable thresholds for capital planning and 
stress testing requirements will be subject to such requirements 
regardless of its CCULR opt in election.
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    \63\ 12 CFR 702.502.
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    Question 7: Should the Board consider limiting eligibility to the 
CCULR framework to only complex credit unions with less than $10 
billion in total assets? The Board seeks comments on a potential $10 
billion asset limitation and whether it is appropriate for the CCULR 
framework.
    Question 8: In contrast to the other banking agencies' CBLR statute 
and regulation, the Board is not proposing to include a qualifying 
criterion for mortgage servicing assets (MSAs). As

[[Page 45834]]

discussed subsequently in this preamble, the Board is proposing changes 
to the risk-weighting of MSAs under the 2015 Final Rule consistent with 
the other banking agencies' risk-based capital regulations. Currently, 
MSA balances are insignificant enough relative to total assets that the 
Board believes a qualifying criterion would be unnecessary and would 
not have much, or any, effect. However, as discussed in the section on 
risk-based capital, revisions to the other banking agencies' capital 
rules on this subject and potential increases in future activity 
warrant at least some adjustment to the risk-based capital treatment of 
MSAs. But the Board does not currently find that even that potential 
increase, which is not certain and would depend on a separate, pending 
rulemaking, would warrant including MSAs as a qualifying criterion for 
the CCULR framework. The Board invites comment on this issue. What are 
commenters' views on the exclusion of such a qualifying criterion?

C. The CCULR Ratio

    Under the proposal, the CCULR would be the net worth ratio, which 
is defined under the 2015 Final Rule as the ratio of the credit union's 
net worth to its total assets rounded to two decimal places.\64\ 
Therefore, any amendments to the definition of the net worth ratio 
would also be applicable to the calculation of CCULR. For example, the 
Board finalized changes to the net worth ratio to provide that, for 
purposes of the prompt corrective action regulations, credit unions may 
phase-in the day-one impact of transitioning to the Current Expected 
Credit Loss (CECL) methodology over a three-year period.\65\ This 
change would be part of a credit union's net worth ratio, and 
therefore, its CCULR. The 2015 Final Rule, as amended, defines net 
worth as:
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    \64\ 12 CFR 702.2 (effective Jan. 1, 2022).
    \65\ 86 FR 34924 (July. 1, 2021).
---------------------------------------------------------------------------

    (1) The retained earnings balance of the credit union at quarter-
end as determined under GAAP, subject to paragraph (3) of this 
definition.
    (2) With respect to a low-income designated credit union, the 
outstanding principal amount of Subordinated Debt treated as Regulatory 
Capital in accordance with Sec.  702.407, and the outstanding principal 
amount of Grandfathered Secondary Capital treated as Regulatory Capital 
in accordance with Sec.  702.414, in each case that is:
    (i) Uninsured; and
    (ii) Subordinate to all other claims against the credit union, 
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.
    The proposed denominator of the CCULR would be a complex credit 
union's total assets, consistent with the net worth ratio. Total 
assets, as defined under the 2015 Final Rule, means:
    (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.\66\
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    \66\ 12 CFR 702.2 (effective Jan. 1, 2022).
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    The Board is proposing to use the net worth ratio for the CCULR for 
its simplicity. Complex credit unions are required to calculate their 
net worth ratio regardless of whether they opt into the CCULR 
framework. Therefore, complex credit unions would not be required to 
calculate a unique ratio for purposes of opting into the CCULR 
framework. Additionally, complex credit unions are already familiar 
with the net worth ratio, which would reduce compliance costs compared 
to a unique ratio designed for the CCULR. The Board intends for the 
CCULR to be a simple alternative to the risk-based capital ratio and is 
concerned that the burden imposed by a unique CCULR would exceed its 
possible utility as a capital reporting measure.
    The Board notes that the other banking agencies originally proposed 
a new ratio for purposes of the CBLR, but declined to adopt the 
definition due to the complexities that would be created by adopting a 
new measure of capital.\67\ Instead, the other banking agencies based 
the CBLR on the existing tier 1 capital definition, which is also the 
basis of the other banking agencies' leverage ratio.\68\ Similarly, the 
Board is proposing to use the established and well understood net worth 
ratio rather than proposing a new definition of capital for purposes of 
the CCULR.
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    \67\ Supra note 12, at 61783.
    \68\ See, 12 CFR 324.10(b)(4).
---------------------------------------------------------------------------

    The Board considered using the risk-based capital ratio numerator 
from the 2015 Final Rule.\69\ The Board believes that the numerator to 
the 2015 Final Rule is a more conservative measure of capital compared 
to the net worth ratio because it includes several deductions, 
including deductions for the NCUSIF capitalization deposit, goodwill, 
other intangible assets, and identified losses not reflected in the 
risk-based capital ratio numerator. The 2015 Final Rule, however, is 
not yet effective, and complex credit unions are not familiar with 
calculating and implementing the definition of capital.\70\ Therefore, 
the Board believes it is preferable to base the CCULR on the net worth 
ratio.
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    \69\ 12 CFR 702.104(b) (effective Jan. 1, 2022).
    \70\ As proposed, both the 2015 Final Rule and this CCULR 
framework would be effective January 1, 2022.
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    Several commenters to the ANPR requested that all complex credit 
unions be permitted to use Subordinated Debt under any proposed CCULR 
framework. Under the proposed rule, however, the CCULR is defined as 
net worth; therefore, Subordinated Debt would not eligible for 
inclusion as capital under the CCULR framework unless the complex 
credit union is also a low-income designated credit union. As

[[Page 45835]]

raised in Question 9, the Board could consider alternative definitions 
of capital, for example, the risk-based capital numerator, such that 
Subordinated Debt is included as capital for purposes of the CCULR 
framework. However, the Board notes that the risk-based capital 
numerator also includes deductions that are not included in the 
definition of net worth.
    Question 9: What are the advantages and disadvantages of using the 
net worth ratio as the measure of capital adequacy under the CCULR? 
Should the Board consider alternative measures for the CCULR? Instead 
of the existing net worth definition, the proposed rule could use the 
risk-based capital ratio numerator from the 2015 Final Rule. The Board 
could also consider drafting a new numerator for purposes of the CCULR. 
For example, the Board could use net worth as the basic framework for 
the CCULR numerator, but then make additional deductions.

D. Calibration of the CCULR

    Under the proposal, a qualifying complex credit union may opt into 
the CCULR framework if it meets the minimum CCULR at the time of opting 
into the CCULR framework. A qualifying complex credit union opting into 
the CCULR framework that maintains the minimum ratio or higher would be 
considered well capitalized.
    Commenters to the ANPR, recommended a wide range for the minimum 
amount of capital necessary for the CCULR framework. Some commenters 
stated the CCULR should be no greater than eight percent. One commenter 
supported eight percent by referring to a 2020 Federal Deposit 
Insurance Corporation (FDIC) survey. The commenter stated that the 
FDIC's 2020 study of the CBLR found that under the nine percent 
leverage ratio, only three percent of banks would see their capital 
buffers shrink by taking the CBLR option. The commenter stated that for 
credit unions, a comparable measure of capital relief would be 
accomplished with a leverage ratio set between eight and 8.5 percent. 
Other commenters, including a banking trade organization, said nine 
percent should be the minimum (the CBLR is set at nine percent). One 
commenter recommended 11 percent, which is 400 basis points above the 
well capitalized leverage ratio (the CBLR is set 400 basis points above 
the other banking agencies' well-capitalized leverage ratio). A 
commenter also recommended a reduced calibration due to accelerated 
asset growth in the last year.
    In proposing 10 percent as the fully phased-in well-capitalized 
ratio requirement for qualifying complex credit unions, the Board 
considered several factors. The proposed calibration of the CCULR, in 
conjunction with the qualifying criteria, seeks to strike a balance 
among several objectives, including maintaining strong capital levels 
in the credit union system, ensuring safety and soundness, and 
providing appropriate regulatory burden relief to as many credit unions 
as possible. The CCULR framework is designed to generally require 
credit unions to hold more capital than would be required for a credit 
union under the 2015 Final Rule. The Board also considered aggregate 
levels of capital among complex credit unions. The CCULR framework 
would not result in a reduction of the minimum amount of capital held 
by complex credit unions and would likely result in an overall increase 
in minimum amount of required capital held by complex credit unions. 
Additional data on capital levels under the proposed rule are discussed 
below.
    The Board also considered comparability to the other banking 
agencies' CBLR framework, which established a CBLR of nine percent 
(that is, if an insured bank has a CBLR of nine percent it is 
considered well capitalized). As discussed previously, the EGRRCPA 
mandates a higher capital requirement to qualify for the CBLR framework 
than the five percent leverage ratio required for well-capitalized 
status under the other banking agencies' capital regulations.\71\ 
Specifically, the EGRRCPA requires that the CBLR be not less than eight 
percent and not more than 10 percent for qualifying community 
banks.\72\ This statutory requirement calibrates the CBLR to maintain 
the overall amount of capital currently held by qualifying community 
banking organizations.\73\ The NCUA is not subject to the statutory 
requirement of not less than eight percent and not more than 10 
percent; however, the Board considers the congressional directive as an 
important reference point in considering a comparable CCULR framework.
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    \71\ 12 CFR 6.4 (OCC), 12 CFR 208.43 (Federal Reserve Board), 
and 12 CFR 324.403 (FDIC).
    \72\ Supra note 11.
    \73\ Supra note 12, at 61778.
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    The 8 to 10 percent range established by Congress for the CBLR is 
300 to 500 basis points higher than the five percent leverage ratio 
required for well-capitalized status under the other banking agencies' 
PCA framework. Insured banks and credit unions, however, have different 
minimum requirements under their PCA frameworks. Insured banks must 
maintain a leverage ratio of five percent to be considered well 
capitalized, whereas insured credit unions are statutorily required to 
have a seven percent net worth ratio to be considered well capitalized. 
Therefore, a similar 300 to 500 basis points range would equate to a 
CCULR of 10 to 12 percent for credit unions.
    The Board notes that one of the underlying reasons for the higher 
statutory net worth requirement may no longer be as relevant given 
changes in the credit union industry since CUMAA was enacted over 20 
years ago. When CUMAA was enacted in 1998, Congress determined that a 
higher net worth ratio was appropriate because credit unions cannot 
quickly issue capital stock to raise their net worth as soon as a 
financial need arises.\74\ Instead, credit unions must rely on retained 
earnings to build net worth, which necessarily takes time. In addition, 
according to the 2001 Treasury Report, issued pursuant to CUMAA on the 
NCUA's compliance with the statute, Congress established a capital 
level two percentage points higher because one percent of a credit 
union's capital is dedicated to the NCUSIF and another one percent of a 
typical credit union's capital is dedicated to its corporate credit 
union.\75\ In 1998, most credit unions had at least .5 percent of their 
assets in corporate credit unions.\76\ That is no longer true. Today, a 
significant amount of complex credit unions have less than 0.25 percent 
of their capital invested in corporate credit unions.\77\ Furthermore, 
the aggregate total capital complex credit unions have dedicated to 
corporate credit unions, through nonperpetual capital and perpetual 
contributed capital, is just under 0.04 percent of complex credit union 
assets. Due to the reduction of concentration in corporate credit union 
capital, the Board

[[Page 45836]]

initially considered a potential ratio for the CCULR of 9 to 11 
percent.
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    \74\ The Department of the Treasury, Comparing Credit Unions 
With Other Depository Institutions, p. 11 (Jan. 2001) (2001 Treasury 
Report).
    \75\ Id.
    \76\ Note, 6,874 of 10,972 credit unions had more than 0.5 
percent of assets in Membership Capital Share Deposit and Paid-In 
Capital of Corporate Credit Unions as of December 1998. The Board 
also notes that an FCU is permitted to invest up to two percent of 
its assets in the perpetual and nonperpetual capital in one 
corporate credit union. An FCU's aggregate amount of contributed 
capital in all corporate credit unions is limited to four percent of 
assets. Therefore, it is possible that in the future credit union 
investments in corporate credit unions exceeds the current 
investment amounts. See 12 CFR 703.14(b).
    \77\ 616 of 649 complex credit unions have less than 0.25 
percent of assets in nonperpetual capital and perpetual contributed 
capital as of December 2020.
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    When considering the appropriate calibration for the proposed 
CCULR, the Board intended to strike a balance between strong capital 
levels and providing appropriate regulatory burden relief. To that end, 
the Board analyzed the potential impact in terms of safety and 
soundness and burden reduction for potential CCULRs of 9 and 10 
percent.
    <bullet> The Board estimates that as, of December 31, 2020, the 
majority of complex credit unions would constitute qualifying complex 
credit unions and would meet a proposed CCULR well capitalized standard 
of nine percent. Based on reported data, approximately 73 percent of 
complex credit unions would qualify to use the CCULR framework and be 
well capitalized under a nine percent calibration. Of the 649 complex 
credit unions, 472 have net worth greater than nine percent as of 
December 31, 2020, and would be well capitalized under a nine percent 
CCULR standard. Of those 472 credit unions, it is estimated that two 
credit unions would not meet the proposed qualifying criteria, and thus 
would not be eligible to opt into the CCULR. The total minimum capital 
required for these 470 credit unions under the 2015 Final Rule to be 
well capitalized is estimated at $82 billion. Under the proposed CCULR, 
if all estimated 470 credit unions opted into the CCULR and held the 
minimum nine percent to be well capitalized, the total minimum net 
worth required would be estimated at $104.6 billion, an increased 
capital requirement of $22 billion.
    <bullet> Based on reported data as of December 31, 2020, 
approximately 48 percent of complex credit unions would qualify to use 
the CCULR framework and be well capitalized under a 10 percent 
calibration. Of the 649 complex credit unions, 313 have net worth 
greater than 10 percent as of December 31, 2020, and would be well 
capitalized under a 10 percent CCULR standard. Of those 313 credit 
unions, it is estimated that one credit union would not meet the 
proposed qualifying criteria, and thus would not be eligible to opt 
into the CCULR framework. The total minimum capital required for those 
312 credit unions under the 2015 Final Rule to be well capitalized is 
estimated at $57.5 billion. Under the proposed CCULR, if all estimated 
312 credit unions opted into the CCULR and held the minimum 10 percent 
net worth required to be well capitalized, the total minimum net worth 
required would be estimated at $81.7 billion, and increased capital 
requirement of $24 billion.
    A nine percent CCULR would allow more credit unions to opt into the 
CCULR framework but could incentivize some qualifying complex credit 
unions to hold less regulatory capital than they do today. In contrast, 
a 10 percent well-capitalized standard would ensure strong capital 
levels and more certainty that qualifying complex credit unions are 
holding greater levels of capital than under the 2015 Final Rule. The 
Board has proposed a 10 percent well-capitalized threshold for the 
CCULR framework. A 10 percent well-capitalized standard for the CCULR 
would be 300 basis points above the well-capitalized threshold for the 
net worth ratio, and 400 basis points above a six percent well-
capitalized standard for the net worth ratio when considering credit 
unions decreased holdings in corporate credit unions. In addition, a 10 
percent well-capitalized threshold for the CCULR would be 100 basis 
points higher than the nine percent threshold established by the other 
banking agencies for the CBLR. As discussed previously, the total 
minimum capital required to be well capitalized under the 2015 Final 
Rule is $57.5 billion for credit unions that also meet the CCULR 
qualifying criteria and would be well capitalized under a 10 percent 
calibration for the CCULR. If all those credit unions meeting the 
qualifying criteria opted into the CCULR and held the minimum 10 
percent net worth required to be well capitalized, the total minimum 
net worth required would be estimated at $81.6 billion. This figure is 
approximately $24.2 billion in excess of the risk-based capital 
requirement under the 2015 Final Rule. The Board believes that the 
proposed 10 percent CCULR requirement strikes the right balance between 
maintaining strong capital levels and providing a simpler option to 
comply with risk-based capital requirements.
    Question 10: The Board invites comment on the proposed CCULR 
calibration. What are the advantages and disadvantages to the Board 
considering a CCULR of 8, 9 or 10 percent? Should the Board consider 
further modifications to its methodology in calibrating the CCULR? What 
other factors should the Board consider in calibrating the CCULR and 
why? The Board requests that commenters include a discussion of how the 
proposed CCULR level should be affected by potential changes to other 
aspects of the proposed framework, such as the definition of CCULR and 
the definition of a qualifying complex credit union.
    Question 11: One factor in the Board's calibration of the CCULR is 
the recent trend in credit unions investing in fewer corporate credit 
union capital instruments. The Board is soliciting comment on whether 
the trend is likely to continue or whether it is likely that the trend 
is temporary and in response to the 2007-2009 recession.

E. Opting Into the CCULR Framework

    Under the proposal, a qualifying complex credit union with a CCULR 
of 10 percent or greater, subject to the transition provisions, may opt 
into the CCULR framework at the end of each calendar quarter. Similar 
to the other banking agencies' CBLR framework, a qualifying complex 
credit union may only opt into the CCULR framework if it would be well 
capitalized. Requiring credit unions to be at least be well capitalized 
when they opt into the framework would ensure that complex credit 
unions that do not meet the minimum CCULR are reporting capital under 
the 2015 Final Rule, which is a more risk-sensitive measure of capital 
adequacy. A qualifying complex credit union choosing to opt into the 
CCULR would indicate its decision by completing a CCULR reporting 
schedule in its Call Report.
    Question 12: The Board invites comment on the proposed procedure a 
qualifying complex credit union would use to opt into the CCULR 
framework. What are commenters' views on the frequency with which a 
qualifying complex credit union may opt into the CCULR framework? What 
other alternatives should the Board consider for purposes of qualifying 
complex credit unions' opt in elections to use and report the CCULR and 
why?

F. Voluntarily Opting Out of the CCULR Framework

    Under the proposal, after a qualifying complex credit union has 
adopted the CCULR framework, it may voluntarily opt out of the 
framework by providing written notice to the appropriate Regional 
Director or the Director of the Office of National Examinations and 
Supervision (ONES). The notice must be provided at least 30 days before 
the end of the calendar quarter that the credit union will begin 
reporting its risk-based capital ratio.
    The notice must include several items:
    <bullet> A statement of intent explaining why the qualifying 
complex credit union is opting out of the CCULR framework.
    <bullet> A copy of board meeting minutes showing that the credit 
union's board of directors was notified of the opt out election.

[[Page 45837]]

    <bullet> The calendar quarter that the qualifying complex credit 
union will begin calculating its risk-based capital ratio. The earliest 
a complex credit union may begin calculating its risk-based capital 
ratio is the calendar quarter that the credit union submits its 
notification.
    <bullet> A completed Call Report schedule as if the complex credit 
union had calculated its risk-based capital ratio the prior quarter. 
For example, if a credit union seeks to begin using a risk-based 
capital ratio in the second quarter, it would have to provide notice to 
the appropriate Regional Director or the Director of the ONES by June 
1st and would have to include a Call Report with data as of March 31st.
    Under the other banking agencies' CBLR framework, qualifying 
complex credit unions that have opted into the CBLR may opt out of the 
framework at any time. In addition, commenters to the ANPR generally 
favored allowing credit unions to liberally opt into and out of the 
CCULR framework. The Board believes, however, that qualifying complex 
credit unions should not opt out of the CCULR framework at any time 
because, in contrast to qualifying community banking organizations, 
qualifying complex credit unions are not currently calculating risk-
based capital under the 2015 Final Rule.
    The Board notes that qualifying community banking organizations had 
been complying with their revised risk-based capital requirements for 
several years when the CBLR was implemented.\78\ Banking organizations 
had systems and processes in place to implement risk-based capital, 
staff had acquired experience calculating their capital ratios under 
risk-based capital, and qualifying complex banking organizations had 
been examined for compliance with risk-based capital standards. In 
contrast, complex credit unions will be subject to the risk-based 
capital ratio requirement established in the 2015 Final Rule for the 
first time when they are eligible to opt into the CCULR framework. It 
is likely that a qualifying complex credit union opting out of the 
CCULR framework would not have any experience calculating a risk-based 
capital ratio under the 2015 Final Rule.
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    \78\ Supra note 3.
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    The Board does not believe it is prudent to allow qualifying 
complex credit unions opting out of the CCULR framework the same 
flexibility as provided to qualifying community banking organizations 
under the CBLR. Instead, the Board believes a qualifying complex credit 
union opting out of the CCULR framework should notify the NCUA of its 
intentions to begin calculating a risk-based capital ratio. Following 
notification to the NCUA, the NCUA may, through the supervisory 
process, monitor whether the credit union has acquired the necessary 
systems and processes to be capable of calculating and reporting its 
risk-based capital ratio accurately.
    Question 13: The Board invites comment on the proposed procedure a 
complex credit union would use to opt out of the CCULR framework. What 
are commenters' views on the frequency with which qualifying complex 
credit unions may opt out of the CCULR framework? Do qualifying complex 
credit unions anticipate frequent switching between the CCULR framework 
and the risk-based capital requirements, and if so, why? What are the 
operational or other challenges associated with switching between 
frameworks?

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

    Under the proposal, after a qualifying complex credit union has 
adopted the CCULR framework and then no longer meets the proposed 
qualifying criteria, it would be required, within a limited grace 
period of two calendar quarters, either to once again meet the 
qualifying criteria or comply with the risk-based capital ratio 
requirements. The grace period would begin at the end of the calendar 
quarter in which the credit union ceases to satisfy the criteria to be 
a qualifying complex credit union and would end after two consecutive 
calendar quarters. For example, if the complex credit union exceeded 
one of the qualifying criteria after December 31st (and still does not 
meet the criteria as of the end of that quarter), the grace period for 
such a credit union would begin at the quarter ending March 31st and 
would end at the quarter ending September 30th. The complex credit 
union could continue to use the CCULR framework as of June 30th, but 
would need to fully comply with the risk-based capital ratio (including 
the associated reporting requirements) as of September 30th, unless at 
that time the qualifying complex credit once again met the qualifying 
criteria of the CCULR framework. The Board believes that this limited 
grace period is appropriate to mitigate potential volatility in capital 
and associated regulatory reporting requirements based on temporary 
changes in a credit union's risk profile from quarter to quarter, while 
capturing more permanent changes in risk profile.
    During the grace period, the credit union continues to be treated 
as a qualifying complex credit union and must continue calculating and 
reporting its CCULR, unless it has opted out of using the CCULR 
framework. Additionally, during the grace period, the qualifying 
complex credit union continues to be considered to have met the capital 
ratio requirements for the well-capitalized capital category. However, 
if the qualifying complex credit union has a CCULR of less than seven 
percent, it would not be considered well capitalized. Instead, its 
capital classification would be determined by its net worth ratio. For 
additional discussion on the treatment of a qualifying complex credit 
union when its CCULR falls below 10 percent, see Section H--Treatment 
of a Qualifying Complex Credit Union That Falls Below the CCULR 
Requirement.
    The two-quarter grace period is similar to the other banking 
agencies' CBLR framework. However, unlike the CBLR framework, under the 
proposed rule, a qualifying complex credit union that is likely to not 
meet the requirements to be a qualifying complex credit union by the 
end of the grace period must submit written notification to the 
appropriate Regional Director or the Director of the ONES. The 
notification must be submitted at least 30 days before the end of the 
grace period and state that the credit union may cease to meet the 
requirements to be a qualifying complex credit union. The Board 
believes it is necessary to receive notice in case the complex credit 
union begins calculating a risk-based capital ratio. As discussed 
previously, qualifying complex credit unions initially opting into the 
CCULR would not likely have calculated a risk-based capital ratio under 
the 2015 Final Rule. Therefore, the notice would provide the NCUA the 
option, through the supervisory process, to monitor whether the 
appropriate systems and processes are being developed to calculate a 
risk-based capital ratio.
    The Board acknowledges that a credit union may believe it is 
reasonably likely to meet the qualifying criteria, and not submit a 
notice, and then be subject to risk-based capital requirements at the 
end of the quarter for failure to comply with qualifying criteria. The 
Board is providing credit unions flexibility with notice requirements 
as a form of burden reduction. It would be unnecessary for every credit 
union to file notice during the grace period, as some credit unions 
will be certain of their compliance with the qualifying criteria. For 
such credit unions, completing the required notification would be an 
unnecessary

[[Page 45838]]

burden. The Board believes that it would be rare for a credit union to 
not provide the notice when required. The notice would be submitted 
only 30 days before the end of the grace period and a credit union that 
is being prudently managed should be able to accurately predict whether 
it would be likely to meet the qualifying criteria. The Board believes 
that if a credit union does not provide the required notice, it raises 
supervisory concerns and the credit union may be subject to a lower 
management rating as a result.
    The notification would be similar to the notification required for 
credit unions voluntarily opting out of the CCULR framework. First, the 
notification must provide the reason for the potential 
disqualification. The notification would also be required to include a 
copy of the board meeting minutes showing that the credit union's board 
of directors was notified that the credit union might cease to meet the 
qualifying complex credit union requirements. Finally, the notification 
also would be required to include a Call Report schedule completed as 
if the credit union calculated its risk-based capital ratio the 
previous calendar quarter.
    Under the CBLR Final Rule, a qualifying community banking 
organization that ceases to meet the qualifying criteria as a result of 
a business combination is not provided a grace period. The proposed 
rule would include a similar limitation. Therefore, under the proposed 
rule a qualifying complex credit union that has opted into the CCULR 
framework and that ceases to meet the qualifying criteria as a result 
of a business combination would receive no grace period and would be 
required to revert to a risk-based capital framework immediately. The 
Board believes this approach is appropriate, as complex credit unions 
should consider the regulatory capital implications of a planned 
business combination and be prepared to comply with the applicable 
requirements. Therefore, a qualifying complex credit union that would 
not meet the qualifying criteria as a result of a business combination 
must fully comply with the 2015 Final Rule for the regulatory reporting 
period during which the transaction is completed.
    Question 14: The Board invites comment on the proposed treatment 
for a complex credit union that no longer meets the definition of a 
qualifying complex credit union after opting into the CCULR framework. 
Specifically, what are the advantages and disadvantages of the proposed 
grace period? What other alternatives should the Board consider with 
respect to a complex credit union that no longer meets the definition 
of a qualifying complex credit union and why? Should the Board consider 
requiring complex credit unions that no longer meet the qualifying 
criteria to begin to immediately calculate their assets according to 
the risk-based capital ratio? Is notification that a credit union will 
not meet the qualifying criteria necessary? Should the Board consider a 
grace period for previously qualified credit unions that have opted 
into the CCULR framework if after a business combination the credit 
union no longer qualified as of the next reporting period? Should the 
Board consider alternative notification requirements or consider not 
requiring any notification at all?

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

    As discussed previously, under the proposal, a qualifying complex 
credit union that has opted into the CCULR framework and has a CCULR of 
10 percent or greater, subject to the transition provisions, would be 
considered well capitalized. A qualifying complex credit union's CCULR 
may deteriorate due to a decline in its level of retained earnings, 
growth in its total assets, or a combination of both. In such a case, a 
credit union may choose to stop using the CCULR framework and instead 
become subject to the risk-based capital ratio. However, the Board 
recognizes that some qualifying complex credit unions may find it 
unduly burdensome to begin complying with the more complex risk-based 
capital ratio reporting requirements at the same time that the credit 
union is experiencing a decline in its CCULR.
    Under the proposed rule, a minimum CCULR (10 percent after the 
transition period) is one of the qualifying criteria. Therefore, if a 
qualifying complex credit union has a CCULR that falls below the 
minimum requirement, it would receive the same grace period of two 
calendar quarters, as applicable when a credit union ceases to meet the 
other qualifying criteria. After the two-quarter grace period, the 
qualifying complex credit union would either have to once again meet 
the minimum CCULR ratio or comply with the risk-based capital ratio 
requirements. During the grace period, the credit union would be deemed 
to have met the well-capitalized capital ratio requirements for PCA 
purposes, provided that its net worth ratio remains seven percent or 
greater.
    If a credit union's net worth ratio falls below seven percent, it 
will not be considered to have met the capital ratio requirements for 
the well-capitalized capital category and its capital classification is 
determined by its net worth ratio. A credit union that becomes less 
than well capitalized during the two-quarter grace period would not be 
required to begin calculating its capital under the 2015 Final Rule 
immediately. Instead, the credit union would still be eligible for the 
full two-quarter grace period; however, it would be subject to any 
applicable PCA requirements for its capital category.
    Under the other banking agencies' CBLR framework, an electing 
banking organization with a leverage ratio of eight percent or less is 
not eligible for the grace period and must comply with the generally 
applicable rule, that is, for the quarter in which the banking 
organization reports a leverage ratio of eight percent or less. An 
electing banking organization experiencing or anticipating such an 
event would be expected to notify its primary federal supervisory 
agency, which would respond as appropriate to the circumstances of the 
banking organization.\79\ The Board believes that it would be unduly 
burdensome to require complex credit unions to immediately begin 
calculating their capital under the 2015 Final Rule.
---------------------------------------------------------------------------

    \79\ Supra note 12.
---------------------------------------------------------------------------

    As discussed previously, credit unions have not previously been 
subject to the 2015 Final Rule. The Board believes it is reasonable to 
provide complex credit unions the full two-quarter grace period 
regardless of their CCULR as the 2015 Final Rule would be a new system 
of capital adequacy and would require an adjustment for the complex 
credit union. The Board does not believe permitting two quarters to 
comply with the qualifying criteria or to begin calculating capital 
under the 2015 Final Rule presents unreasonable risk to the NCUSIF.
    Question 15: What are the advantages and disadvantages of 
permitting a two-quarter grace period? Should the Board consider 
including the CCULR in the PCA framework similar to the other banking 
agencies' CBLR proposed rule? To what extent does the calibration of 
the CCULR relate to the Board's choice between including the CCULR into 
the PCA framework versus relying on a grace period when a credit 
union's CCULR falls below 10 percent?

I. Transition Provision

    In light of strains in economic conditions related to the COVID-19

[[Page 45839]]

pandemic and stress in U.S. financial markets, the NCUA has taken a 
number of actions intended to: (i) Restore market functioning and 
support the flow of credit to households, businesses, and Communities; 
and (ii) increase flexibility and tailor regulations.
    Among those actions, the NCUA has communicated a number of rules 
and supervisory guidance designed to mitigate the economic consequences 
of the COVID-19 pandemic, facilitate the safe and effective operations 
of credit unions, and protect credit union members.\80\ Credit unions 
have played an instrumental role in the nation's financial response to 
the COVID-19 pandemic, and many have experienced significant balance 
sheet growth because of the COVID-19 pandemic and the policy response 
to the event.
---------------------------------------------------------------------------

    \80\ See, e.g., 86 FR 15397 (Mar. 23, 2021).
---------------------------------------------------------------------------

    The unprecedented and significant balance sheet growth is largely a 
result of individual member response to actions taken by monetary and 
fiscal authorities. At the start of the COVID-19 pandemic, consumer 
spending decreased as individual states or major metropolitan areas 
ordered millions of Americans to stay home. Additionally, market 
volatility pushed savers with money in financial markets to safer 
assets, including insured shares. Fiscal stimulus applied additional 
upward pressure on credit union total assets.
    The Board is aware that the unprecedented balance sheet growth has 
resulted in declining net worth ratios for most complex credit unions. 
To help mitigate the impact of this unprecedented balance sheet growth, 
the Board is proposing a two-year transition provision to delay the 
introduction of a 10 percent CCULR. This two-year phase would permit 
complex credit unions time to increase their net worth ratios.
    Under the proposed rule, from January 1, 2022, to December 31, 
2022, a complex credit union may opt into the CCULR framework if it has 
a net worth ratio of nine percent or greater. Therefore, a qualifying 
complex credit union that opts into the CCULR framework and that 
maintains a nine percent CCULR would be considered well capitalized. 
Beginning January 1, 2023, a complex credit union that has opted into 
the CCULR framework must have a CCULR of 9.5 percent or greater to meet 
the eligibility criteria. Finally, beginning January 1, 2024, a complex 
credit union must have a CCULR of 10 percent or greater to be eligible 
to determine their capital adequacy under the CCULR framework. Once an 
eligible credit union opts into the CCULR framework it would be 
eligible to use the two-quarter grace period, as discussed in section 
G. Compliance With the Proposed Criteria To Be a Qualifying Complex 
Credit Union. Therefore, if a credit union has a CCULR of nine percent 
when it opts into the CCULR framework on March 31, 2022, but does not 
have a CCULR of 9.5 percent on March 31, 2023, the credit union would 
have until September 30th to either have a CCULR of 9.5 percent or 
determine their capital adequacy under the risk-based capital 
framework.
    As discussed previously, the temporary changes to the CBLR 
framework implemented through the CARES Act expired December 31, 
2021.\81\ Therefore, the temporary reduction in the CBLR to eight 
percent (and 8.5 percent in calendar year 2021) will not be in effect 
when the 2015 Final Rule becomes effective. The Board, however, 
believes that due to credit unions' unique structure and dependence on 
retained earnings to accumulate capital, additional time to accumulate 
capital will be beneficial to complex credit unions. The Board believes 
that the CCULR framework is beneficial to complex credit unions due to 
the reduced compliance costs for managing and documenting risk-based 
capital standards, and to the NCUSIF as complex credit unions that opt 
into the CCULR framework will be required to hold higher capital levels 
under the CCULR framework than the risk-based capital framework. The 
Board does not want complex credit unions that would have otherwise 
been eligible to opt into a CCULR framework calibrated at 10 percent to 
be temporarily ineligible due to unexpected asset growth following the 
COVID-19 pandemic. The Board believes two years is sufficient time for 
complex credit unions that want to opt into the CCULR framework to 
build the necessary capital.
---------------------------------------------------------------------------

    \81\ Coronavirus Aid, Relief, and Economic Security Act, Public 
Law 116-136, 134 Stat. 281.
---------------------------------------------------------------------------

    Question 16: What are the advantages and disadvantages of the 
transition provision starting at nine percent and permitting a 
transition period to a CCULR of 10 percent? Should the Board consider a 
transition period longer or shorter than two years? If suggesting a 
longer transition period, such as four years, discuss the merits of a 
longer phase-in and why the additional time over two years would be 
needed. Please provide specific data.

J. Reservation of Authority

    In general, a complex credit union that meets the eligibility 
criteria may opt into the CCULR framework. However, there may be 
limited instances in which the CCULR framework would be inappropriate 
and not require sufficient capital to adequately protect the NCUSIF. To 
address such situations, the proposed rule includes a reservation of 
authority. Under the reservation of authority, the Board can require a 
complex credit union that has opted into the CCULR framework to use the 
risk-based capital framework to calculate its capital adequacy if the 
Board determines that the complex credit union's capital requirements 
are not commensurate with its credit or other risks. When making any 
such determination, the Board would consider all relevant factors 
affecting the complex credit union's safety and soundness.
    The Board expects to apply the reservation of authority only in 
limited circumstances. Under the reservation of authority, credit 
unions would be entitled to a two-quarter grace period before being 
required to comply with the risk-based capital framework. The other 
banking agencies also have reserved the authority to disallow the use 
of the CBLR framework by a depository institution or depository 
institution holding company, based on the risk profile of the banking 
organization.
    Question 17: The Board invites general comment on the reservation 
of authority in the proposed rule. Should the Board consider a 
reservation of authority that applies to the risk-based capital rule? 
Should the Board consider a general waiver provision or consider 
including a statement that assets can be provided a more conservative 
risk weight than provided in the proposed rule? Should the Board 
consider adopting notice and response procedures to be used in 
determining whether the reservation of authority should be used?

K. Effect of the CCULR on Other Regulations

1. Member Business Loan Cap
    Section 107A of the FCUA generally limits the aggregate amount of 
member business loans (MBLs) that an insured credit union may make, 
subject to exceptions for some categories of loans, such as loans 
granted by a corporate credit union to another credit union.\82\ In 
addition, the FCUA exempts certain credit unions from compliance with 
the aggregate MBL limit. Specifically, an insured credit union 
chartered for the purpose of making MBLs, or that has a history of 
making MBLs to its members,

[[Page 45840]]

as determined by the Board, is not subject to the aggregate MBL 
limit.\83\ Also, an insured credit union that serves predominantly low-
income members, as defined by the Board, or is a community development 
financial institution, as defined in 12 U.S.C. 4702, is also not 
subject to the aggregate MBL limit.\84\
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    \82\ 12 U.S.C. 1757a(c)(1)(B).
    \83\ 12 U.S.C. 1757a(b)(1).
    \84\ 12 U.S.C. 1575a(b)(2).
---------------------------------------------------------------------------

    An insured credit union that is subject to the aggregate MBL limit 
may not make an MBL that would result in the total amount of 
outstanding MBLs at the credit union being more than the lesser of 1.75 
times the actual net worth of the credit union or 1.75 times the 
minimum net worth required for a credit union to be well capitalized 
under section 216(c)(1)(A) of the FCUA.\85\ Section 107A defines net 
worth for purposes of that section, providing that it includes the 
retained earnings balance, as determined under GAAP. Net worth under 
this section also includes, for credit unions that serve predominantly 
low-income members (which the Board defines as low-income designated 
credit unions), secondary capital accounts that are uninsured and 
subordinate to all other claims against the credit union, including the 
claims of creditors, shareholders, and the NCUSIF.\86\
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    \85\ 12 U.S.C. 1757a(a).
    \86\ This definition does not expressly cover two elements that 
were added to the definition of net worth in section 216(o)(2) for 
PCA purposes in a 2011 enactment: (1) Amounts that were previously 
retained earnings of any other credit union with which the insured 
credit union has combined; and (2) assistance that the Board has 
provided under Section 208. Public Law 111-382, 124 Stat. 4135 (Jan. 
4, 2011). In the 2016 MBL final rule, the Board included these 
elements in net worth for purposes of the MBL limitation by defining 
net worth in the MBL regulation through a cross-reference to the 
current part 702 definition of net worth, which includes all the 
elements in section 216(o)(2). The 2015 Final Rule amended the 
definition of net worth in part 702 effective January 1, 2022, but 
did not add or remove any of the components of net worth in the 
current regulation.
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    For credit unions that are not complex and therefore are not 
subject to a risk-based net worth requirement under section 216(d) of 
the FCUA, MBLs are limited to 1.75 times the net worth required for the 
credit union to meet the seven percent net worth ratio under section 
216(c)(1)(A)(i) (assuming the credit union's actual net worth is 
greater than the minimum required to be well capitalized). To determine 
its maximum allowable outstanding balance of MBLs, a credit union 
multiplies 1.75 by seven percent of its total assets.
    Until 2016, the Board calculated the MBL limitation in the same 
manner for complex credit unions that are subject to a risk-based net 
worth requirement under section 216(d) without considering any greater 
amount of net worth that a complex credit union might need to hold to 
be well capitalized under a risk-based net worth requirement.\87\ 
However, in the 2015 proposed rule on MBLs, the Board proposed to amend 
the MBL regulation to incorporate section 107A more faithfully and 
noted that complex credit unions could have a different limitation 
caused by the need to hold more net worth under a risk-based 
requirement.\88\ The preamble to the 2016 final rule on MBLs and 
commercial loans analyzed this issue in response to comments on the 
rule and explained that under the 2015 Final Rule on risk-based 
capital, the MBL limitation would be calculated in the following 
manner. The preamble to the 2016 final rule stated that where actual 
net worth is greater than the minimum to be well capitalized, the limit 
on MBLs is 1.75 times the greater of the following calculations: (i) 
The minimum amount of capital (in dollars) required by the net worth 
ratio, which is seven percent times total assets; and (ii) the minimum 
amount of capital (in dollars) required by the risk based capital 
ratio, which is 10 percent times total risk-weighted assets. Then, the 
credit union must solve for the minimum amount of net worth needed 
after accounting for other forms of qualifying capital allowed under 
the 2015 Final Rule.\89\
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    \87\ Prior to amendments that the Board adopted in the 2016, the 
MBL regulation limited MBLs to 12.25 percent of an insured credit 
union's total assets--1.75 times the seven percent net worth ratio.
    \88\ 80 FR 37898, 37909 (July 1, 2015).
    \89\ 81 FR 13530, 13548 (Mar. 14, 2016).
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    Therefore, a complex credit union subject to a risk-based capital 
requirement under the 2015 Final Rule would have to calculate the 
minimum amount of net worth required by both its net worth ratio and 
risk-based capital requirement. First, the net worth ratio requires a 
complex credit union to hold net worth (in dollars) equal to seven 
percent of its total assets. Second, for purposes of computing the MBL 
cap,\90\ the risk-based capital ratio requires a complex credit union 
to hold net worth (in dollars) equal to 10 percent of the credit 
union's risk-weighted assets, as calculated under Sec.  702.104. The 
complex credit union would then compare the two net worth amounts as 
calculated in the preceding discussion. The credit union would take the 
larger of the two net worth amounts, which is the minimum amount of net 
worth necessary to be well capitalized under either the net worth ratio 
or the risk-based capital ratio, and compare that to actual net worth. 
The lesser of these two net worth amounts is used to compute the 
complex credit union's MBL cap, which would be 1.75 times the lesser of 
these two net worth amounts. While the 2015 Final Rule is not yet 
effective, the agency currently implements this approach for the small 
number of complex credit unions that are required to hold more net 
worth under the current risk-based net worth requirement than the net 
worth ratio.
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    \90\ The Board notes that the amount of capital a complex credit 
union needs to be well capitalized under the 2015 Final Rule for PCA 
purposes is a different calculation than the amount of net worth 
required to be well capitalized for purposes of the MBL cap. The 
reason is the 2015 Final Rule permits complex credit unions to 
include several forms of capital for purposes of determining its PCA 
status that do not meet the statutory definition of net worth. The 
MBL cap, however, is limited by statute to net worth.
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    The Board continues to find that this approach reflects the correct 
reading of sections 107A and 216 and re-affirms this interpretation 
over any prior interpretation that disregarded the risk-based net worth 
requirement for this purpose.\91\ For complex credit unions, the amount 
to be well capitalized under section 216(c)(1)(A) is seven percent of 
total assets (the net worth ratio) or the amount required by the risk-
based net worth requirement (which could be either the risk-based 
capital ratio under the 2015 Final Rule or the proposed CCULR 
framework). A complex credit union must satisfy both of these 
requirements to be well capitalized under section 216(c)(1)(A), which 
means that, in section 107A's terms, the minimum net worth required to 
be well capitalized is the higher of the amount required by the net 
worth ratio or the risk-based net worth requirement. The Board finds 
this is a clear, plain language reading of both provisions. Section 
107A(a) points to section 216(c)(1)(A) to determine the minimum net 
worth required, and in turn, section 216(c)(1)(A) includes both the 
seven percent net worth ratio and the net worth required by any 
applicable risk-based net worth requirement, for complex credit unions. 
Reading section 107A(a) to exclude the net worth required for complex 
credit unions under section 216(c)(1)(A)(ii) would ignore a key 
component of the plain language of section 216(c)(1)(A) and 
inappropriately treat it as surplusage.
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    \91\ Therefore, the current language in part 723 remains valid, 
and the Board is not proposing any changes to part 723 at this time.
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    The Board also finds that even if sections 107A and 216(c)(1)(A) 
were considered ambiguous or unclear, it would interpret them in the 
same way. For instance, the Board observes two key textual indicators 
that Congress did

[[Page 45841]]

not intend to limit this calculation to the seven percent net worth 
ratio. First, section 107A was enacted in the same legislation as 
section 216. Thus, Congress was aware that section 216(c)(1)(A) set a 
seven percent net worth ratio to be well capitalized. Yet in section 
107A(a), rather than specifying that the MBL limitation is determined 
by the amount of net worth required to achieve a seven percent net 
worth ratio, Congress provided more broadly that the limitation is 
determined by reference to the minimum net worth required under section 
216(c)(1)(A). Second, Congress could have limited this calculation to 
the seven percent net worth ratio by providing that the MBL limitation 
is determined by reference only to the minimum net worth required under 
section 216(c)(1)(A)(i), which would have excluded the risk-based net 
worth requirement. Instead, section 107A points to section 
216(c)(1)(A), which encompasses both applicable net worth requirements 
for complex credit unions.
    The Board acknowledges that the Senate Report associated with the 
legislation that enacted sections 107A and 216 refers to the MBL 
limitation as being based on the seven percent net worth ratio in a 
parenthetical statement. A statement by an individual Senator also 
refers to the limitation as being determined by the seven percent net 
worth ratio.\92\ But this discussion in the Senate Report is brief and 
does not touch upon the risk-based net worth requirement or explain how 
the Senate believed the MBL limitation should work for complex credit 
unions, which are subject to additional net worth requirements. In any 
event, this general discussion does not expressly contradict the 
language and structure of sections 107A and 216, which the Board finds 
to be better indicators of the meaning and purpose of these provisions.
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    \92\ S. Rep. No. 105-193 (May 21, 1998), at 5, 10, 29.
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    Applying this approach to the proposed CCULR framework, the Board 
proposes that for qualifying complex credit unions opting into the 
CCULR framework, such credit unions may calculate a different 
limitation on MBLs from what they do currently under the seven percent 
net worth ratio. This is because, as discussed previously in the Legal 
Authority section, the CCULR is considered a risk-based net worth 
requirement, and thus falls under section 216(c)(1)(A)(ii) as a measure 
of the minimum net worth required to be well capitalized. Accordingly, 
under the proposed rule, a qualifying complex credit union that opts 
into the CCULR would determine its MBL limitation by reference to the 
amount of net worth required to be well capitalized under the CCULR. 
Complex credit unions that do not qualify or do not opt into the CCULR 
would determine their MBL limitation by reference to the 10 percent 
risk-based capital ratio, as described in the 2016 MBL final rule, 
quoted previously. In either scenario, if a complex credit union has 
actual net worth below those measures, its actual net worth would 
determine its MBL limitation.
2. Capital Adequacy
    Under the 2015 Final Rule, a complex credit union must have a 
process for assessing its overall capital adequacy in relation to its 
risk profile and a comprehensive written strategy for maintaining an 
appropriate level of capital.\93\ While a qualifying complex credit 
union opting into the CCULR framework, is required to have a 
comprehensive written strategy for maintaining an appropriate level of 
capital, such strategy may be straightforward and minimally state how 
the credit union intends to comply with the CCULR framework, including 
minimum capital requirements and qualifying criteria. In contrast, 
complex credit unions that do not opt into the CCULR framework will be 
required to have a more detailed written strategy. The NCUA intends to 
review the written strategies during the supervisory process.
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    \93\ 12 CFR 702.101(b)(2) (effective Jan. 1, 2022).
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L. Illustrative Reporting Forms To Support the CCULR

    The NCUA intends to separately seek comment on the proposed changes 
to the Call Report for complex, qualifying credit unions that elect to 
use the CCULR framework. Chart 1, provided below, is an example of what 
the CCULR election form may look like in the Call report. Details 
supporting lines 2 through 6 can be found in section B of this proposed 
rule.

[[Page 45842]]

[GRAPHIC] [TIFF OMITTED] TP16AU21.000

    This form provides an indication of the potential reporting format 
and potential reporting burden relative to the regulatory requirements 
associated with electing to use the CCULR framework.
    Similarly, in support of the off-balance sheet exposures qualifying 
criteria, Chart 2 provides an example of what an off-balance sheet 
exposures Call Report form may look like. Details supporting this 
schedule are in section B and M of this proposed rule.
[GRAPHIC] [TIFF OMITTED] TP16AU21.001


[[Page 45843]]


    This form provides an indication of the potential reporting format 
and reporting burden relative to the regulatory requirements associated 
with the proposed off-balance sheet exposures for the CCULR framework 
and the risk-based capital framework under the 2015 Final Rule.

M. Amendments to the 2015 Final Rule

    The Board stated its intent to holistically and comprehensively 
reevaluate the NCUA's capital standards for credit unions in the 2019 
Final Rule. A principal component of this review is the proposed CCULR 
framework. The Board also stated it would consider whether to make more 
substantive revisions to the 2015 Final Rule.\94\ The Board has 
completed this analysis and is proposing several changes to the 2015 
Final Rule. Each change is discussed below.
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    \94\ 84 FR 68781, 68783 (Dec. 17, 2019).
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1. Off-Balance Sheet Exposure Risk Weights
    The 2015 Final Rule states that the risk-weighted amounts for all 
off-balance sheet items \95\ are determined by multiplying the off-
balance sheet exposure amount \96\ by the appropriate credit conversion 
factor and the assigned risk weight. However, the definition of off-
balance sheet items is not aligned with the definition of off-balance 
sheet exposure. Under the 2015 Final Rule, only commitments, loans 
transferred with limited recourse, and loans transferred under the FHLB 
mortgage partnership finance program are provided explicit exposure 
amounts. The rule is silent on the appropriate treatment for the 
remaining items included in the definition of off-balance sheet items 
(contingent items, guarantees, certain repo-style transactions, 
financial standby letters of credit, and forward agreements). In 
addition, the 2015 Final Rule does not include a credit conversion 
factor or risk weight for the off-balance sheet items that are not 
provided a specific exposure amount in the definition of off-balance 
sheet exposure.
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    \95\ Off-balance sheet items are defined as items such as 
commitments, contingent items, guarantees, certain repo-style 
transactions, financial standby letters of credit, and forward 
agreements that are not included on the statement of financial 
condition, but are normally reported in the financial statement 
footnotes. 12 CFR 702.2 (effective Jan. 1, 2022).
    \96\ 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. 12 CFR 702.2 (effective Jan. 1, 2022).
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    The proposed rule would make several changes to clarify the 
treatment of off-balance sheet items. First, as discussed previously, 
the proposed rule would amend the definition of off-balance sheet 
exposures. This definition is used as one of the CCULR eligibility 
criteria and is proposed to be amended to more closely align with the 
other banking agencies' CBLR framework. As a consequence of amending 
the definition of off-balance sheet exposure for the CCULR framework, 
the proposed off-balance sheet exposure definition would also more 
closely align with the existing definition of off-balance sheet 
items.\97\ Therefore, under the proposed rule, several items currently 
defined as an off-balance sheet item, but not included in the current 
definition of off-balance sheet exposure, would be provided an exposure 
amount. This change reduces ambiguity in the 2015 Final Rule. In 
addition, in the proposed rule, each item included in the definition of 
off-balance sheet exposure would be provided an explicit credit 
conversion factor and risk weight for purposes of the risk-based 
capital rule. Each proposed change to the risk-based capital rule is 
discussed in detail below.
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    \97\ The only item included in the current definition of off-
balance sheet item that would not be provided an explicit exposure 
amount would be contingent items. However, as discussed below, the 
Board is proposing to amend the definition of off-balance sheet item 
and would no longer include contingent items.
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    The proposed rule would state that unconditionally cancellable 
commitments have a zero percent credit conversion factor. Therefore, 
any unconditionally cancellable commitment would be excluded from a 
credit union's risk-based capital calculation. Under the 2015 Final 
Rule, these exposures would receive a minimum of a 10 percent credit 
conversion factor and could receive up to a 50 percent credit 
conversion factor. The Board believes that many of credit unions' 
commitments would qualify as unconditionally cancellable and that 
credit unions are currently subject to a more conservative treatment 
for unfunded commitments than banking organizations. Therefore, the 
Board believes providing a zero percent conversion factor will not only 
make the 2015 Final Rule more comparable to the other banking agencies' 
2013 capital rule but will also provide a significant burden reduction 
for credit unions calculating their capital adequacy under the 2015 
Final Rule.
    The proposed rule would provide that financial standby letters of 
credit are given a 100 percent credit conversion factor. The 2015 Final 
Rule does not provide a credit conversion factor for financial standby 
letters of credit. Including an explicit 100 percent conversion factor 
would provide parity between the other banking agencies and the NCUA. 
The risk weight would be 100 percent.
    For forward agreements that are not derivative contracts, the 
proposed rule would provide for a 100 percent credit conversion factor. 
The 2015 Final Rule does not provide a credit conversion factor for 
forward agreements that are not derivative contracts. Including an 
explicit 100 percent conversion factor would provide parity between the 
other banking agencies and the NCUA. The risk weight would be 100 
percent.
    For sold credit protection through guarantees and credit 
derivatives, the proposed rule would provide for a 100 percent credit 
conversion factor. The 2015 Final Rule does not provide a credit 
conversion factor for sold credit protection through guarantees or 
credit derivatives. The proposed rule would provide different risk 
weights for guarantees and credit derivatives. Guarantees would receive 
a 100 percent risk weight. For credit derivatives, the risk weight 
would be determined through the applicable provisions of FDIC's capital 
rules. A credit union offering credit protection through a credit 
derivative would risk weight the exposure according to 12 CFR 324.34 
(for derivatives that are not cleared) or 324.35 (for derivatives that 
are cleared exposures).
    The Board understands the proposed treatment of credit derivatives 
is complex and compliance with these requirements increases the 
regulatory burden for credit unions that offer credit protection 
through credit derivatives. However, credit derivatives are complex 
instruments. Furthermore, credit derivatives are not a permissible 
activity for FCUs and the Board believes that state-chartered credit 
unions should only offer credit derivatives if the credit union has the 
appropriate resources and capabilities to manage the complexity 
associated with them. The Board believes any credit union that has 
offered credit protection through credit derivatives should also be 
capable of complying with the complexity in the FDIC's capital rules. 
Therefore, the Board believes it is appropriate to reference the other 
banking agencies' 2013 capital rules when determining the

[[Page 45844]]

appropriate risk weights for credit derivatives.
    For off-balance sheet securitization exposures, the credit 
conversion factor would be 100 percent. The 2015 Final Rule does not 
currently provide a credit conversion factor for the off-balance sheet 
portion of securitization exposures. The risk weight would be 
determined as if the exposure is an on-balance sheet securitization 
exposure. Under the 2015 Final Rule, the risk weight for securitization 
exposures is dependent upon whether the exposure is a subordinated or 
non-subordinated tranche. Non-subordinated tranches can receive a 100 
percent risk weight (credit unions also have the option to use the 
gross up approach).\98\ In contrast, a subordinated tranche would 
receive a 1,250 percent risk weight (credit unions also have the option 
to use the gross-up approach).\99\
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    \98\ 12 CFR 702.104(c)(2)(v)(B)(8) (effective Jan. 1, 2022).
    \99\ 12 CFR 702.104(c)(2)(x) (effective Jan. 1, 2022).
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    For securities borrowing or lending transactions, the proposed 
credit conversion factor would be 100 percent. The 2015 Final Rule does 
not provide a credit conversion factor for securities borrowing or 
lending transactions. Including an explicit 100 percent credit 
conversion factor would provide parity between the other banking 
agencies and the NCUA. Unlike the other banking agencies' rules, the 
proposed rule would include a risk weight of 100 percent for these 
transactions. The Board is aware this may be a more conservative risk 
weight than for securities borrowing and lending transactions under the 
other banking agencies' 2013 capital rule.
    The Board is proposing a 100 percent risk weight for simplicity. 
However, a credit union may recognize the credit risk mitigation 
benefits of financial collateral by risk weighting the collateralized 
portion of the exposure under the applicable provisions of 12 CFR 
324.35 or 324.37. Any collateral recognized would have to meet the 
definition of financial collateral under the other banking agencies 
2013 capital rules.\100\ The Board solicits comments on whether 
referencing the other banking agencies' risk mitigation provisions 
introduces undue complexity. The Board understands that some credit 
unions engaged in securities lending and borrowing transactions would 
benefit from a lower risk weight, as provided by the other banking 
agencies' rules; however, the Board believes most credit unions do not 
engage in a substantial amount of securities lending and borrowing 
activities and therefore would benefit from a simple, although 
conservative, 100 percent risk weight.
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    \100\ See 12 CFR 324.2. Financial collateral means collateral: 
(1) In the form of: (i) Cash on deposit with the FDIC-supervised 
institution (including cash held for the FDIC-supervised institution 
by a third-party custodian or trustee); (ii) Gold bullion; (iii) 
Long-term debt securities that are not resecuritization exposures 
and that are investment grade; (iv) Short-term debt instruments that 
are not resecuritization exposures and that are investment grade; 
(v) Equity securities that are publicly traded; (vi) Convertible 
bonds that are publicly traded; or (vii) Money market fund shares 
and other mutual fund shares if a price for the shares is publicly 
quoted daily; and (2) In which the FDIC-supervised institution has a 
perfected, first-priority security interest or, outside of the 
United States, the legal equivalent thereof (with the exception of 
cash on deposit; and notwithstanding the prior security interest of 
any custodial agent or any priority security interest granted to a 
CCP in connection with collateral posted to that CCP).
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    The proposed rule would also include a specific credit conversion 
factor and risk weight for the off-balance sheet exposure amount of 
repurchase transactions.\101\ Under the proposed rule, the off-balance 
sheet exposure amount for a repurchase transaction would equal all of 
the positions the credit union has sold or bought subject to repurchase 
or resale, which equals the sum of the current fair values of all such 
positions. The off-balance sheet exposure amounts of repurchase 
transactions are not provided a credit conversion factor under the 2015 
Final Rule. The proposed rule would provide a 100 percent risk weight 
for the off-balance sheet exposure amounts of repurchase transactions. 
A credit union may recognize the credit risk mitigation benefits of 
financial collateral, as defined by 12 CFR 324.2, by risk weighting the 
collateralized portion of the exposure under the applicable provisions 
of 12 CFR 324.35 or 324.37.
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    \101\ Repurchase transactions would mean either a transaction in 
which a credit union agrees to sell a security to a counterparty and 
to repurchase the same or an identical security from that 
counterparty at a specified future date and at a specified price or 
a transaction in which an investor agrees to purchase a security 
from a counterparty and to resell the same or an identical security 
to that counterparty at a specified future date and at a specified 
price.
---------------------------------------------------------------------------

    The Board notes that repurchase transactions are not included in 
the definition of off-balance sheet exposure. This exclusion of 
repurchase transactions from the definition of off-balance sheet 
exposure is because the other banking agencies did not include 
repurchase transactions in their related measure of CBLR and the 
definition of off-balance sheet exposure is used for purposes of the 
CCULR eligibility criteria.\102\
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    \102\ 12 CFR 324.12(a)(2)(iii).
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    Even though, for purposes of the CCULR framework, repurchase 
transactions are excluded from the off-balance sheet criterion, the 
Board believes that the off-balance sheet portion of repurchase 
transactions should be risk-weighted under the risk-based capital 
ratio. First, repurchase transactions are included in the current 
definition of off-balance sheet items. Second, the other banking 
agencies risk-weight the off-balance sheet portion of repurchase 
transactions in their risk-based capital framework.\103\
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    \103\ 12 CFR 324.33(b)(4)(ii).
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    The Board, however, does not believe that repurchase transactions 
are a material exposure for credit unions. As of December 31, 2020, 
there are only 31 complex credit unions with repurchase transactions on 
their balance sheets. Therefore, the proposed rule would include the 
off-balance sheet portion of repurchase transactions for purposes of 
risk-based capital, even though such transactions are not included as 
part of the off-balance sheet eligibility criteria under the CCULR 
framework.\104\
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    \104\ The proposed rule would also revise the definition of off-
balance sheet items. The proposed definition of off-balance sheet 
items would include off-balance sheet exposures and the off-balance 
sheet exposure amount of repurchase transactions. This change is 
necessary to ensure repurchase transactions are not included as part 
of the off-balance sheet criteria for eligibility in the CCULR 
framework.
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    Finally, the proposed rule would include a ``catchall'' category. 
Under the proposed rule, all other off-balance sheet exposures not 
explicitly provided a credit conversion factor or risk weight that meet 
the definition of a commitment would be given a credit conversion 
factor of 100 percent and a risk weight of 100 percent. The Board 
believes a catchall category is necessary given that the definition of 
commitment is broad. Commitments include any legally binding 
arrangement that obligates the credit union to extend credit, purchase 
or sell assets, enter into a borrowing agreement, or enter into a 
financial transaction.\105\ To ensure all off-balance sheet exposures 
that met the definition of commitment are provided a credit conversion 
factor and risk weight, the proposed rule would include a new catchall 
category for such exposures.
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    \105\ 12 CFR 702.2 (effective Jan. 1, 2022).
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2. Asset Securitizations Issued by Complex Credit Unions
    The 2019 Supplemental Rule included asset securitizations as one of 
the reasons the Board sought a holistic reevaluation of the 2015 Final 
Rule. The Board has further considered asset securitizations issued by 
credit unions and has decided to propose to amend the 2015 Final Rule 
to explicitly address credit union issued securitizations.

[[Page 45845]]

    The proposed rule would require credit unions that issue 
securitizations to use the other banking agencies' 2013 capital rules 
when determining whether assets transferred in connection with a 
securitization are excluded from risk-based capital. The Board has 
reviewed these standards and finds they would be appropriate as applied 
to credit union securitizations, with the minor differences noted 
below. Specifically, under the proposed rule, a credit union must 
follow the requirements of the applicable provisions of 12 CFR 324.41 
when it transfers exposures in connection with a securitization. A 
credit union may only exclude the transferred exposures from the 
calculation of its risk-weighted assets if each condition in 12 CFR 
324.41 is satisfied. The conditions for traditional securitizations in 
12 CFR 324.41 are as follows (adapted for credit unions):
    (1) The exposures are not reported on the credit union's 
consolidated balance sheet under GAAP;
    (2) The credit union has transferred to one or more third parties 
credit risk associated with the underlying exposures;
    (3) Any clean-up calls relating to the securitization are eligible 
clean-up calls (a defined term under the other banking agencies' 2013 
capital rules); \106\ and
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    \106\ Under the other banking agencies' 2013 capital rules, 
eligible clean-up call means a clean-up call that: (1) Is 
exercisable solely at the discretion of the originating institution 
or servicer; (2) is not structured to avoid allocating losses to 
securitization exposures held by investors or otherwise structured 
to provide credit enhancement to the securitization; and (3)(i) for 
a traditional securitization, is only exercisable when 10 percent or 
less of the principal amount of the underlying exposures or 
securitization exposures (determined as of the inception of the 
securitization) is outstanding; or (ii) for a synthetic 
securitization, is only exercisable when 10 percent or less of the 
principal amount of the reference portfolio of underlying exposures 
(determined as of the inception of the securitization) is 
outstanding.
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    (4) The securitization does not:
    (i) Include one or more underlying exposures in which the borrower 
is permitted to vary the drawn amount within an agreed limit under a 
line of credit; and
    (ii) Contain an early amortization provision.
    A credit union that meets the conditions, but retains any credit 
risk for the transferred exposures, must hold risk-based capital 
against the credit risk it retains in connection with the 
securitization.
    The other banking agencies' 2013 rule includes conditions for both 
traditional securitizations and synthetic securitizations.\107\ The 
Board believes almost all securitizations issued by credit unions would 
be traditional securitizations and subject to the conditions in 12 CFR 
324.41(a). The Board does not believe that credit unions are likely to 
engage in synthetic securitizations, however, if a credit union issues 
a synthetic securitization, it would be subject to the conditions in 12 
CFR 324.41(b).
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    \107\ Under the other banking agencies' 2013 capital rule, a 
synthetic securitization means a transaction in which: (1) All or a 
portion of the credit risk of one or more underlying exposures is 
retained or transferred to one or more third parties through the use 
of one or more credit derivatives or guarantees (other than a 
guarantee that transfers only the credit risk of an individual 
retail exposure); (2) The credit risk associated with the underlying 
exposures has been separated into at least two tranches reflecting 
different levels of seniority; (3) Performance of the securitization 
exposures depends upon the performance of the underlying exposures; 
and (4) All or substantially all of the underlying exposures are 
financial exposures (such as loans, commitments, credit derivatives, 
guarantees, receivables, asset-backed securities, mortgage-backed 
securities, other debt securities, or equity securities). See, 12 
CFR 324.2.
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    The Board also notes that 12 CFR 324.41(c) includes explicit due 
diligence requirements for banking organizations' investments in 
securitizations. The Board is not proposing to adopt these requirements 
at this time. The proposed rule only references 12 CFR 324.41 to 
incorporate the factors a credit union must consider when excluding 
assets transferred in connection with a securitization from risk-
weighted assets. The Board intends to use its supervisory authority to 
monitor securitizations for safety and soundness purposes and is not 
currently proposing to adopt any new regulatory requirements for such 
transactions.
    The other banking agencies' 2013 capital rule has an explicit 
treatment for any gain-on-sale in connection with a securitization 
exposure and any credit-enhancing interest only strips (CEIOs) retained 
by a banking organization that do not qualify as a gain-on-sale. Any 
gain-on-sale in connection with a securitization exposure is deducted 
from a banking organization's common equity tier 1 capital.\108\ CEIOs 
that do not qualify as a gain-on-sale are given a 1,250 percent risk 
weight.\109\ The other banking agencies provided punitive treatments 
for these exposures because of historical supervisory concerns with the 
subjectivity involved in valuations of gains-on-sale and CEIOs. 
Furthermore, although the treatments for gains-on-sale and CEIOs can 
increase an originating banking organization's risk-based capital 
requirement following a securitization, the other banking agencies 
believe that such anomalies are rare where a securitization transfers 
significant credit risk to third parties.
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    \108\ See, 12 CFR 324.22(a)(4) and 12 CFR 324.42(a)(1).
    \109\ See, 12 CFR 324.42(a)(1).
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    The 2015 Final Rule does not include specific treatments for gain-
on-sales or CEIOs because, as discussed previously, in 2015 credit 
unions had not issued any securitizations. Under the 2015 Final Rule, 
however, most CEIOs would still receive a 1,250 percent risk weight 
because they constitute a subordinated tranche. However, the 2015 Final 
Rule permits a credit union to use the gross-up approach as an 
alternative. The Board believes that credit union-issued 
securitizations should be given a similar capital treatment under the 
2015 Final Rule as under the other banking agencies' risk-based capital 
rule.
    Therefore, the proposed rule would include a specific risk weight 
for certain exposures associated with securitization activities. While 
the Board believes the capital treatment for credit union-issued 
securitizations should be similar to bank-issued securitizations, for 
simplicity, the proposed rule is slightly different than the other 
banking agencies' 2013 risk-based capital rule. Under the proposed 
rule, the gain-on-sale amount from a securitization transaction, 
generally the CEIO, will be included the numerator in calculating a 
credit union's net worth. This is a different approach than the other 
banking agencies' rule, which excludes gains-on-sale in calculating a 
bank's common equity tier 1 capital. Instead, the Board has chosen to 
address the risks associated with a gain-on-sale amount by requiring 
that a 1,250 percent risk weighting be applied to retained non-security 
beneficial interests. The Board believes the proposed approach is 
simpler and that it provides a more conservative risk weight overall 
than the other banking agencies' approach. The Board believes this 
approach is warranted given the limited securitizations issued by 
credit unions at this time.
    Under the proposed rule, a non-security beneficial interest is 
defined as the residual equity interest in the special purpose entity 
that represents a right to receive possible future payments after 
specified payment amounts are made to third-party investors in the 
securitized receivables. Therefore, under the proposed rule, if a 
credit union has a non-security beneficial interest, such as a CEIO or 
cash collateral account, it cannot be risk-weighted with the gross-up 
approach and, instead, would be given a 1,250 risk weight. The Board 
believes this treatment is similar to the treatment provided by the 
other banking agencies in their 2013 risk-based capital rule.

[[Page 45846]]

    The Board notes that subordinate tranches, either retained by the 
securitization sponsor or offered to investors as securities, that are 
also senior in payment priority to the non-security beneficial 
interest, are allowed to be risk weighted using the gross-up approach.
    Question 18: What are the advantages and disadvantages of relying 
on the other banking agencies' risk-based capital rule for determining 
whether a credit union has transferred the credit risk associated with 
a securitization? Should credit union-issued securitizations be subject 
to the same capital treatment as bank-issued securitizations? Should 
there be an option for complex credit unions to use the gross-up 
approach for risk weighting non-security beneficial interest of a 
securitization? If so, please provide examples where the gross-up 
approach would sufficiently capture the risks of a non-security 
beneficial interest of a securitization.
3. Mortgage Servicing Assets
    The Board is proposing to amend Sec.  702.104(b), risk-based 
capital numerator, to deduct mortgage servicing assets that exceed 25 
percent of the sum of the capital elements in Sec.  702.104(b)(1), less 
deductions required under Sec.  702.104(b)(2)(i) through (iv) of this 
section. Under the 2015 Final Rule, MSAs are 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.\110\
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    \110\ 12 CFR 702.2 (effective Jan. 1, 2022).
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    To determine if a complex credit union would be subject to the MSA 
deduction from the risk-based capital numerator in this proposal, the 
complex credit union would first need to calculate the risk-based 
capital numerator before the MSA deduction. This calculation is in the 
current rule and requires that the complex credit union add all the 
capital elements of the risk-based capital numerator and subtract all 
risk-based capital numerator deductions, not including the MSA 
deduction. The complex credit union would then determine if its MSA 
exposure exceeds 25 percent of the previous calculation. If its MSAs do 
not exceed 25 percent, then the previous calculation is the risk-based 
capital numerator. If its MSAs exceed 25 percent, the complex credit 
union will need to deduct the amount of MSAs that exceed 25 percent of 
the previous calculation. All MSA exposures that are not deducted from 
the risk-based capital numerator are risk weighted at 250 percent.
    The current rule does not include a deduction to the risk-based 
capital numerator for MSAs. The Board chose not to include a deduction 
for MSA exposures because, when the 2015 Final Rule was issued, the 
other banking agencies' risk-based capital rule included a complex 
deduction for MSAs that included other items that were not comparable 
to the credit union structure. In 2015, the other banking agencies made 
numerator adjustment based on the collective exposure to MSAs, deferred 
tax assets arising from temporary differences that could not be 
realized through net operating loss carrybacks, and significant 
investments in capital of nonconsolidated financial institutions in the 
form of common stock. As the other banking agencies' 2015 approach was 
not comparable to the credit union capital structure and added 
significant complexity to their rule, the Board did not include a 
similar deduction to the 2015 Final Rule.
    The Board is now proposing a deduction to the risk-based capital 
numerator for MSAs that exceed 25 percent of the risk-based capital 
numerator for two primary reasons. First, this change will make the 
NCUA's risk-based capital calculation more consistent with the other 
banking agencies' revised risk-based capital rules as the other banking 
agencies simplified their MSA calculation post-issuance of the 2015 
Final Rule.\111\ Under the other banking agencies' revised risk-based 
capital rule, banking organizations deduct MSAs that exceed 25 percent 
of the banking organization's common equity tier 1 capital.\112\ The 
Board believes the simplification of the other banking agencies' 
approach easily allows the NCUA to be consistent with the other banking 
agencies' risk-based capital rule. Also, the Board believes it would be 
important to implement prudential conditions around MSAs if the Board 
adopts the recent proposed rule to amend parts 703 and 721 to allow 
FCUs to purchase mortgage servicing rights \113\ from other FICUs.\114\ 
If adopted, this rule could increase MSA holdings for complex credit 
unions. But even if the Board does not adopt the proposed rule on 
mortgage servicing rights, the other considerations in this section 
support the proposed amendment to the 2015 Final Rule.
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    \111\ 84 FR 35234 (July 22, 2019).
    \112\ 12 CFR 324.22(d).
    \113\ The terms mortgage servicing rights and MSAs are used 
interchangeably.
    \114\ 85 FR 86867 (Dec. 31, 2020).
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    The Board believes that by including a deduction to the risk-based 
capital numerator for MSAs in risk-based capital, complex credit unions 
will be encouraged to avoid excessive exposures in MSAs relative the 
other risks on their balance sheets. As mentioned in the preamble of 
the 2015 Final Rule, the Board believes the risks of MSAs contribute to 
a high level of uncertainty regarding the ability of credit unions to 
realize value from these assets. Therefore, the Board believes it is 
appropriate to add the proposed risk-based numerator deduction to 
address the potential of complex credit unions purchasing MSAs from 
other FICUs.
    The Board does not believe the proposed treatment would have an 
immediate effect on complex credit unions. As of December 31, 2020, the 
largest concentration in MSAs held by complex credit unions was just 
under 15 percent of the credit union's net worth. While net worth and 
the risk-based capital numerator are different calculations, the Board 
believes the two calculations are similar enough to state, with a high 
degree of certainty, there are no complex credit unions that would be 
required to deduct MSAs from the risk-based capital numerator were 
risk-based capital currently in effect.
    Finally, the Board is aware that complex credit unions may believe 
that deducting exposures of MSAs over 25 percent of their risk-based 
capital numerator is punitive. However, the Board notes that both the 
Board and other banking agencies have stated that MSAs have a 
relatively high level of uncertainty regarding the ability to both 
value and realize value from these assets.\115\ The Board also believes 
including the proposed MSA deduction from the risk-based capital 
numerator is prudential for potential balance sheets complex credit 
union may have in the future.
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    \115\ Report to Congress on the Effect of Capital Rules on 
Mortgage Servicing Assets, Report to the Congress on the Effect of 
Capital Rules on Mortgage Servicing Assets, June 2016, available at 
https://www.federalreserve.gov/publications/other-reports/files/effect-capital-rules-mortgage-servicing-assets-201606.pdf.
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    Question 19: What are the advantages and disadvantages of deducting 
MSAs from the risk-based capital numerator? Should the Board consider a 
higher or lower deduction threshold? Why or why not?
4. Supranational Organizations and Multilateral Development Banks
    The Board is proposing to amend the risk-based capital rule to 
assign a risk

[[Page 45847]]

weighting of zero percent to an obligation of the Bank for 
International Settlements, the European Central Bank, the European 
Commission, the International Monetary Fund, the European Stability 
Mechanism, the European Financial Stability Facility, and multilateral 
development banks (MDBs). The 2015 Final Rule did not specifically 
discuss MDBs, which would have a risk weight of 100 percent under the 
catchall category for all other assets not specifically assigned a risk 
weight.\116\ Assigning a risk-weight of zero percent is consistent with 
the other banking agencies' risk-based capital rule and the Board 
believes the zero percent risk weight is appropriate due to the 
generally high-credit quality of the issuers. This proposed change to 
the risk-based capital risk weighting was also requested in a comment 
letter in the ANPR. As part of this change, the Board would add a 
definition listing MDBs and criteria for non-listed multilateral 
lending institutions or regional development banks to be included in 
the MDB category. The MDBs listed in the definition are:
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    \116\ 12 CFR 702.104(c)(2)(v)(C) (effective Jan. 1, 2022).
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    <bullet> International Bank for Reconstruction and Development;
    <bullet> Multilateral Investment Guarantee Agency;
    <bullet> International Finance Corporation;
    <bullet> Inter-American Development Bank;
    <bullet> Asian Development Bank;
    <bullet> African Development Bank;
    <bullet> European Bank for Reconstruction and Development;
    <bullet> European Investment Bank;
    <bullet> European Investment Fund;
    <bullet> Nordic Investment Bank;
    <bullet> Caribbean Development Bank;
    <bullet> Islamic Development Bank; and
    <bullet> Council of Europe Development Bank.
    <bullet> Multilateral lending institution or regional development 
bank in which the U.S. government is a shareholder or contributing 
member are also included in the definition of MDBs.
    Furthermore, the Board notes that MDBs are not permissible 
investments for FCUs under the general investment authorities. However, 
FCUs may invest in MDBs under Sec.  701.19 and under Sec.  721.3(b), 
subject to some conditions.
    Question 20: Are there any supranational entities that should be 
included in the zero percent risk weight category? Specifically, the 
Board is requesting whether this proposed change sufficiently aligns 
NCUA's risk-weightings with the other banking agencies' risk weights 
for supranational organizations and MDBs.
5. Paycheck Protection Program Loans
    As discussed previously in connection with the other banking 
agencies' CBLR regulation, the CARES Act was enacted in 2020 to provide 
aid to the U.S. economy during the COVID-19 pandemic.\117\ The CARES 
Act authorized the Small Business Administration (SBA) to create a loan 
guarantee program, the Paycheck Protection Program (PPP), to help 
certain affected businesses meet payroll needs and utilities (including 
employee salaries, sick leave, other paid leave, and health insurance 
expenses) as a result of the COVID-19 pandemic. Provided credit union 
lenders comply with the applicable lender obligations set forth in the 
SBA's interim final rule, the SBA fully guaranteed loans issued under 
the PPP. Most FICUs were eligible to make PPP loans to members. Under 
the CARES Act, PPP loans must receive a zero percent risk weighting 
under the NCUA's risk-based capital requirements.\118\ The NCUA issued 
a 2020 interim final rule to explicitly state that PPP loans under the 
risk-based net worth requirement receive a zero percent risk-
weight.\119\ The 2020 interim final rule stated that the NCUA's risk-
based capital regulations would be amended in the future. The Board is 
now proposing to update the 2015 Final Rule to reflect that PPP loans 
receive a zero percent risk weight.
---------------------------------------------------------------------------

    \117\ Public Law 116-136 (Mar. 27, 2020).
    \118\ Public Law 116-136, 134 Stat. 281 (Mar. 27, 2020).
    \119\ 85 FR 23212 (Apr. 27, 2020).
---------------------------------------------------------------------------

6. Updates to Derivative-Related Definitions
    The Board recently amended its rule on derivatives to modernize the 
rule and make it more principles-based, while retaining key safety and 
soundness components.\120\ The rulemaking amended several defined 
terms. A few of those defined terms are also included in the 2015 Final 
Rule. For consistency, the proposed rule would update those definitions 
that are also included in the 2015 Final Rule. First, under the 
proposed rule, the term derivative would be defined as ``a financial 
contract that derives its value from the value and performance of some 
other underlying financial instrument or variable, such as an index or 
interest rate.'' \121\ Second the proposed rule would make minor 
changes to the definitions of a derivative clearing organization and 
swap dealer by including a more general reference to the Commodity 
Futures Trading Commission (CFTC)'s regulations (for both definitions, 
the 2015 Final Rule references the definitions used by the CFTC).\122\
---------------------------------------------------------------------------

    \120\ 85 FR 23212 (Apr. 27, 2020).
    \121\ The 2015 Final Rule defines a derivative contract as ``a 
financial contract whose value is derived from the values of one or 
more underlying assets, reference rates, or indices of asset values 
or reference rates. Derivative contracts include interest rate 
derivative contracts, exchange rate derivative contracts, equity 
derivative contracts, commodity derivative contracts, and credit 
derivative contracts. Derivative contracts also include unsettled 
securities, commodities, and foreign exchange transactions with a 
contractual settlement or delivery lag that is longer than the 
lesser of the market standard for the particular instrument or five 
business days.'' 12 CFR 702.2 (effective Jan. 1, 2022).
    \122\ The 2015 Final Rule states a derivative clearing 
organization is ``as defined by the Commodity Futures Trading 
Commission in 17 CFR 1.3(d).'' The proposed rule would state that a 
derivative clearing organization ``as defined by the Commodity 
Futures Trading Commission (CFTC) in 17 CFR 1.3.'' Essentially the 
proposed rule would remove the ``(d)''. Similarly, the more specific 
reference in the 2015 Final Rule would be updated with the more 
general reference included in the recent derivative rule.
---------------------------------------------------------------------------

7. Definitions of Consumer Loan and Current
    The Board is proposing to amend the definitions for Consumer Loan 
and Current in Sec.  702.2. The Board is proposing these changes as a 
clarification to the 2015 Final Rule. The 2015 Final Rule does not 
include leases in the definition in Consumer Loan, despite the fact 
that the 2014 Risk-Based Capital NPR stated ``[c]onsumer loans 
(unsecured credit card loans, lines of credit, automobile loans, and 
leases) are generally highly desired credit union assets and a key 
element of providing basic financial services.'' \123\ The Board is 
providing this proposed change for clarity. Without this proposed 
change the treatment of consumer leases is unclear and, therefore, may 
be risk weighted in the catchall category of 100 percent. The change 
makes clear that consumer leases receive a 75 percent risk weight. Due 
to the proposed change in the definition of a consumer loan, the 
definition of current will also be amended for consistency and would 
include the term leases.
---------------------------------------------------------------------------

    \123\ 79 FR 11184, 11198 (Feb. 27, 2014).
---------------------------------------------------------------------------

N. Technical Amendments

    The proposed rule would also include two technical amendments to 12 
CFR part 703. Both amendments would make minor corrections related to 
the 2015 Final Rule.

O. Illustrative Reporting Forms for Risk-Based Capital

    In January 2018, the Board issued a Request for Comment (RFI) 
seeking comments on all proposed changes to the Call Report form 5300, 
the Profile

[[Page 45848]]

form 4501A, and the accompanying instructions. The proposed forms and 
instructions are available on the NCUA's Call Report Modernization web 
page.\124\ The proposed Call Report form included six risk-based 
capital schedules (FC-T-1 through FC-T-6) designed to collect 
information consistent with the 2015 Final Risk-based Capital Rule. The 
Board also provided other risk-based capital tools detailed on the 
Risk-based Capital Rule Resources Page on the NCUA's website.\125\
---------------------------------------------------------------------------

    \124\ https://www.ncua.gov/regulation-supervision/examination-modernization-initiatives/call-report-modernization.
    \125\ https://www.ncua.gov/regulation-supervision/regulatory-compliance-resources/risk-based-capital-rule-resources.
---------------------------------------------------------------------------

    The Board is illustrating as part of this proposal the draft forms 
that may be used as the risk-based capital Call Report schedules. Any 
new Call Report forms to support risk-based capital will be accompanied 
with detailed instructions. The NCUA intends to separately seek comment 
on the proposed changes to the Call Report for complex credit unions 
that use the risk-based capital framework. The examples below 
illustrate what the risk-based capital form for the numerator and 
denominator may look like. The illustration consists of three sections: 
Part I--Numerator, Part II--Denominator for on-balance sheet assets, 
and Part III--Denominator for off-balance sheet exposures and 
derivatives.
    The illustration of the capital elements for the risk-based capital 
numerator are consistent with the 2015 Final rule in Sec.  
702.104(b)(1) with the addition of the proposed MSA deduction as 
proposed in the Amendments to the 2015 Final Rule, section M.
[GRAPHIC] [TIFF OMITTED] TP16AU21.002

    The illustration for Part II--Denominator form for on-balance sheet 
assets may auto-populate the totals from other schedules in the Call 
Report (see table below for ``Totals from Schedules'' column with 
greyed out boxes). The Board will also provide a detailed instruction 
guide consistent with the 2015 Final Rule Sec.  702.104(c)(2) for risk 
weighting the on-balance sheet assets into their respective risk weight 
categories. An empty box underneath each risk-weight category indicates 
a possible asset amount for each line item in accordance with the 2015 
Final Rule.

[[Page 45849]]

[GRAPHIC] [TIFF OMITTED] TP16AU21.003

    The Board is proposing to improve the clarity and completeness of 
off-balance sheet and derivative exposures with the Part III--
Denominator form example below. Similar to Part II, a detailed 
instruction guide consistent with the 2015 Final Rule Sec.  702.104(4) 
and Sec.  702.105 will supplement the schedule for risk weighting the 
off-balance sheet and derivative exposures into their respective risk 
weight categories. Both the Credit Conversion Factor (CCF) and the 
Credit Equivalent Amount (CEA) assist in calculating the amount to be 
risk weighted.
[GRAPHIC] [TIFF OMITTED] TP16AU21.004


[[Page 45850]]



IV. Regulatory Procedures

A. Regulatory Flexibility Act

    The Regulatory Flexibility Act \126\ requires the NCUA to prepare 
an analysis to describe any significant economic impact a regulation 
may have on a substantial number of small entities (primarily those 
under $100 million in assets).\127\ This proposed rule would affect 
only credit unions with over $500 million in assets, which are subject 
to the 2015 Final Rule and the 2018 Supplemental Rule when they go into 
effect in January 2022. As a result, credit unions with $100 million or 
less in total assets would not be affected by this proposed rule. 
Accordingly, the NCUA certifies that this proposed rule would not have 
a significant economic impact on substantial number of small credit 
unions.
---------------------------------------------------------------------------

    \126\ 5 U.S.C. 601 et seq.
    \127\ 5 U.S.C. 603(a).
---------------------------------------------------------------------------

B. Paperwork Reduction Act

    The Paperwork Reduction Act of 1995 (PRA) applies to rulemakings in 
which an agency by rule creates a new paperwork burden on regulated 
entities or amends an existing burden. For purposes of the PRA, a 
paperwork burden may take the form of a reporting, disclosure or 
recordkeeping requirement, each referred to as an information 
collection. The proposed changes to part 702 may revise existing 
information collection requirements to the Call Report. Should changes 
be made to the Call Report, they will be addressed in a separate 
Federal Register notice. The revisions to the Call Report will be 
submitted for approval by the Office of Information and Regulatory 
Affairs at the Office of Management and Budget prior to their effective 
date.

C. Executive Order 13132 on Federalism

    Executive Order 13132 encourages independent regulatory agencies to 
consider the impact of their actions on state and local interests.\128\ 
The NCUA, an independent regulatory agency, as defined in 44 U.S.C. 
3502(5), voluntarily complies with the executive order to adhere to 
fundamental federalism principles. The proposed rule will apply to all 
federally insured natural-person credit unions, including federally 
insured, state-chartered 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, however, NCUA has 
consulted with representatives of state regulators regarding the impact 
of the proposed rule.
---------------------------------------------------------------------------

    \128\ 64 FR 43255 (Aug. 4, 1999).
---------------------------------------------------------------------------

D. Assessment of Federal Regulations and Policies on Families

    The NCUA has determined that this proposed rule would not affect 
family well-being within the meaning of section 654 of the Treasury and 
General Government Appropriations Act, 1999, Public Law 105-277, 112 
Stat. 2681 (1998).

List of Subjects

12 CFR Part 702

    Credit unions, Reporting and recordkeeping requirements.

12 CFR Part 703

    Credit unions, Investments, Reporting and recordkeeping 
requirements.

    By the National Credit Union Administration Board on July 22, 
2021.
Melane Conyers-Ausbrooks,
Secretary of the Board.

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

PART 702--CAPITAL ADEQUACY

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

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

0
2. In Sec.  702.2, revise the definitions of ``Consumer Loan'', 
``Current'', ``Derivative contract'', ``Derivatives Clearing 
Organization'', ``Off-balance sheet exposure'', ``Off-balance sheet 
items'', and ``Swap dealer'' and add definitions of ``CCULR'', ``Credit 
derivative'', ``Forward agreement'', ``Multilateral development bank'', 
``Non-security beneficial interest'' ``Repurchase transaction,'' 
``Trading assets'', ``Trading liabilities'', and ``Unconditionally 
cancelable'', in alphabetical order, to read as follows:


Sec.  702.2  Definitions.

* * * * *
    CCULR means the complex credit union leverage ratio. It is 
calculated in the same manner as the net worth ratio under Sec.  702.2.
* * * * *
    Consumer loan means a loan or lease for household, family, or other 
personal expenditures, including any loans or leases that, at 
origination, are wholly or substantially secured by vehicles generally 
manufactured for personal, family, or household use regardless of the 
purpose of the loan or lease. Consumer loan excludes commercial loans, 
loans to CUSOs, first- and junior-lien residential real estate loans, 
and loans for the purchase of one or more vehicles to be part of a 
fleet of vehicles.
* * * * *
    Credit derivative means a financial contract executed under 
standard industry credit derivative documentation that allows one party 
(the protection purchaser) to transfer the credit risk of one or more 
exposures (reference exposure(s)) to another party (the protection 
provider) for a certain period of time.
* * * * *
    Current means, with respect to any loan or lease, that the loan or 
lease is less than 90 days past due, not placed on non-accrual status, 
and not restructured.
* * * * *
    Derivative contract means a financial contract that derives its 
value from the value and performance of some other underlying financial 
instrument or variable, such as an index or interest rate.
    Derivatives Clearing Organization has the meaning as defined by the 
Commodity Futures Trading Commission (CFTC) in 17 CFR 1.3.
* * * * *
    Forward agreement means a legally binding contractual obligation to 
purchase assets with certain drawdown at a specified future date, not 
including commitments to make residential mortgage loans or forward 
foreign exchange contracts.
* * * * *
    Multilateral development bank (MDB) means the International Bank 
for Reconstruction and Development, the Multilateral Investment 
Guarantee Agency, the International Finance Corporation, the Inter-
American Development Bank, the Asian Development Bank, the African 
Development Bank, the European Bank for Reconstruction and Development, 
the European Investment Bank, the European Investment Fund, the Nordic 
Investment Bank, the Caribbean Development Bank, the Islamic 
Development Bank, the Council of Europe Development Bank, and any other 
multilateral lending institution or regional development bank in which 
the U.S. government is a shareholder or contributing member.
* * * * *

[[Page 45851]]

    Non-security beneficial interest is defined as the residual equity 
interest in the Special Purpose Entity (SPE) that represents a right to 
receive possible future payments after specified payment amounts are 
made to third-party investors in the securitized receivables. For 
purposes of this definition, a SPE means a trust, bankruptcy remote 
entity or other special purpose entity which is wholly owned, directly 
or indirectly, by the credit union and which is formed for the purpose 
of, and engages in no material business other than, acting as an issuer 
or a depositor in a securitization.
* * * * *
    Off-balance sheet exposure mean:
    (1) For unfunded commitments, excluding unconditionally cancellable 
commitments, the remaining unfunded portion of the contractual 
agreement.
    (2) For loans transferred with limited recourse, or other seller-
provided credit enhancements, and that qualify for true sales 
accounting, the maximum contractual amount the credit union is exposed 
to according to the agreement, net of any related valuation allowance.
    (3) For loans transferred under the Federal Home Loan Bank (FHLB) 
mortgage partnership finance program, the outstanding loan balance as 
of the reporting date, net of any related valuation allowance.
    (4) For financial standby letters of credit, the total potential 
exposure of the credit union under the contractual agreement.
    (5) For forward agreements that are not derivative contracts, the 
future contractual obligation amount.
    (6) For sold credit protection through guarantees and credit 
derivatives, the total potential exposure of the credit union under the 
contractual agreement.
    (7) For off-balance sheet securitization exposures, the notional 
amount of the off-balance sheet credit exposure (including any credit 
enhancements, representations, or warranties that obligate a credit 
union to protect another party from losses arising from the credit risk 
of the underlying exposures) that arises from a securitization.
    (8) For securities borrowing or lending transactions, the amount of 
all securities borrowed or lent against collateral or on an 
uncollateralized basis.
    Off-balance sheet items mean off-balance sheet exposures and the 
off-balance sheet exposure amount of repurchase transactions.
* * * * *
    Repurchase transactions mean either a transaction in which a credit 
union agrees to sell a security to a counterparty and to repurchase the 
same or an identical security from that counterparty at a specified 
future date and at a specified price or a transaction in which an 
investor agrees to purchase a security from a counterparty and to 
resell the same or an identical security to that counterparty at a 
specified future date and at a specified price. The off-balance sheet 
exposure amount for a repurchase transaction equals all of the 
positions the credit union has sold or bought subject to repurchase or 
resale, which equals the sum of the current fair values of all such 
positions.
* * * * *
    Swap Dealer has the meaning as defined by the CFTC in 17 CFR 1.3.
* * * * *
    Trading assets means securities or other assets acquired, not 
including loans originated by the credit union, for the purpose of 
selling in the near term or otherwise with the intent to resell in 
order to profit from short-term price movements. Trading assets would 
not include shares of a registered investment company or a collective 
investment fund used for liquidity purposes.
    Trading liabilities means the total liability for short positions 
of securities or other liabilities held for trading purposes.
* * * * *
    Unconditionally cancelable means with respect to a commitment, that 
a credit union may, at any time, with or without cause, refuse to 
extend credit under the commitment (to the extent permitted under 
applicable law).
* * * * *
0
3. In Sec.  702.101, revise paragraph (a)(2) to read as follows:


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

    (a) * * *
    (2) If determined to be applicable under Sec.  702.103, either the 
risk-based capital ratio under Sec.  702.104(a) through (c) or the 
CCULR framework under Sec.  702.104(d).
* * * * *
0
4. In Sec.  702.102, revise paragraph (a)(1)(i) and (ii), and Table 1 
to read as follows:


Sec.  702.102  Capital classification.

    (a) * * *
    (1) * * *
    (i)(A) Net worth ratio. The credit union has a net worth ratio of 
7.0 percent or greater; and
    (B) Risk-based capital ratio. The credit union, if complex, has a 
risk-based capital ratio of 10 percent or greater; or
    (ii) Complex credit union leverage ratio. (A) The complex credit 
union is a qualifying complex credit union that has opted into the 
CCULR framework under Sec.  702.104(d) and it has a CCULR of 10 percent 
or greater, subject to any applicable transition provisions in Sec.  
702.104(d)(8); or
    (B) The complex credit union is a qualifying complex credit union 
that has opted into the CCULR framework under Sec.  702.104(d), is in 
the grace period, as defined in Sec.  702.104(d)(7), and has a CCULR of 
7 percent or greater.
* * * * *

                                                     Table 1 to Sec.   702.102--Capital Catergories
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                         Risk-based capital                                     And subject to following
      Capital classification          Net worth ratio                        ratio, if                          CCULR, if          condition(s) . . .
                                                                             applicable                         applicable
--------------------------------------------------------------------------------------------------------------------------------------------------------
Well Capitalized.................  7% or greater.......  And..........  10% or greater.....  Or..........  10% or greater *...
Adequately Capitalized...........  6% or greater.......  And..........  8% or greater......  Or..........  N/A................  And does not meet the
                                                                                                                                 criteria to be
                                                                                                                                 classified as well
                                                                                                                                 capitalized.
Undercapitalized.................  4% to 5.99%.........  Or...........  Less than 8%.......  Or..........  N/A
Significantly Undercapitalized...  2% to 3.99%.........  .............  N/A................  ............  N/A................  Or if ``undercapitalized
                                                                                                                                 at <5% net worth and
                                                                                                                                 (a) fails to timely
                                                                                                                                 submit, (b) fails to
                                                                                                                                 materially implement,
                                                                                                                                 or (c) receives notice
                                                                                                                                 of the rejection of a
                                                                                                                                 net worth restoration
                                                                                                                                 plan.

[[Page 45852]]

 
Critically Undercapitalized......  Less than 2%........  .............  N/A................  ............  N/A
--------------------------------------------------------------------------------------------------------------------------------------------------------
* A qualifying complex credit union opting into the CCULR framework should refer to 12 CFR 702.104(d)(7) if its CCULR falls below 10 percent and 12 CFR
  702.104(d)(8) if the transition provisions are applicable.

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


Sec.  702.103  Applicability of risk-based capital measures.

    For purposes of Sec.  702.102, a credit union is defined as 
``complex'' and a risk-based capital measure is applicable only if the 
credit union's quarter-end total assets exceed five hundred million 
dollars ($500,000,000), as reflected in its most recent Call Report. A 
complex credit union may calculate its risk-based capital measure 
either by using the risk-based capital ratio under Sec.  702.104(a) 
through (c), or, for a qualifying complex credit union opting into the 
CCULR framework, by using the CCULR framework under Sec.  702.104(d).
0
6. In Sec.  702.104:
0
a. Revise the introductory text;
0
b. Remove ``; and'' in paragraph (b)(2)(iii) and add in its place a 
semicolon, remove the period at the end of paragraph (b)(2)(iv) and add 
in its place ``; and'', and add paragraph (b)(2)(v);
0
c. Add paragraphs (c)(2)(i)(B)(3) and (c)(2)(i)(D);
0
d. Revise paragraphs (c)(2)(vii) and (x);
0
e. Revise paragraph (c)(4) introductory text;
0
f. Redesignate paragraphs (c)(4)(iii)(A) through (E) as (c)(4)(iii)(B) 
through (F) and add new paragraph (c)(4)(iii)(A);
0
g. Add paragraphs (c)(4)(iv) through (x); and
0
h. Add paragraphs (c)(6), (d), and (e).
    The revisions and additions read as follows:


Sec.  702.104  Risk-based capital ratio.

    A complex credit union must calculate its risk-based capital 
measure in accordance with this section. A complex credit union may 
calculate its risk-based capital measure either by using the risk-based 
capital ratio under paragraphs (a) through (c) of this section, or, for 
a qualifying complex credit union opting into the CCULR framework, by 
using the CCULR framework under paragraph (d) of this section.
* * * * *
    (b) * * *
    (2) * * *
    (v) Mortgage servicing assets that exceed 25 percent of the sum of 
the capital elements in paragraph (b)(1) of this section, less 
deductions required under paragraphs (b)(2)(i) thorough (iv) of this 
section.
    (c) * * *
    (2) * * *
    (i) * * *
    (B) * * *
    (3) An obligation of the Bank for International Settlements, the 
European Central Bank, the European Commission, the International 
Monetary Fund, the European Stability Mechanism, the European Financial 
Stability Facility, or an MDB.
* * * * *
    (D) Covered loans issued under the Small Business Administration's 
Paycheck Protection Program, 15 U.S.C. 636(a)(36).
* * * * *
    (vii) Category 7--250 percent risk weight. A credit union must 
assign a 250 percent risk weight to the carrying value of mortgage 
servicing assets not deducted from the risk-based capital numerator 
pursuant to Sec.  702.104(b).
* * * * *
    (x) Category 10--1,250 percent risk weight. A credit union must 
assign a 1,250 percent risk weight to the exposure amount of any 
subordinated tranche of any investment, with the option to use the 
gross-up approach in paragraph (c)(3)(iii)(A) of this section. However, 
a credit union may not use the gross-up approach for non-security 
beneficial interests.
* * * * *
    (4) Risk weights for off-balance sheet items. The risk weighted 
amounts for all off-balance sheet items are determined by multiplying 
the off-balance sheet exposure amount by the appropriate CCF and the 
assigned risk weight as follows:
* * * * *
    (iii) * * *
    (A) For a commitment that is unconditionally cancelable, a 0 
percent CCF.
* * * * *
    (iv) For financial standby letter of credits, a 100 percent CCF and 
a 100 percent risk weight.
    (v) For forward agreements that are not derivative contracts, a 100 
percent CCF and a 100 percent risk weight.
    (vi) For sold credit protection through guarantees and credit 
derivatives, a 100 percent CCF and a 100 percent risk weight for 
guarantees; for credit derivatives the risk weight is determined by the 
applicable provisions of 12 CFR 324.34 or 324.35.
    (vii) For off-balance sheet securitization exposures, a 100 percent 
CCF, and the risk weight is determined as if the exposure is an on-
balance sheet securitization exposure.
    (viii) For securities borrowing or lending transactions, a 100 
percent CCF and a 100 percent risk weight. A credit union may recognize 
the credit risk mitigation benefits of financial collateral, as defined 
under 12 CFR 324.2, by risk weighting the collateralized portion of the 
exposure under the applicable provisions of 12 CFR 324.35 or 324.37.
    (ix) For the off-balance sheet portion of repurchase transactions, 
a 100 percent CCF and a 100 percent risk weight. A credit union may 
recognize the credit risk mitigation benefits of financial collateral, 
as defined by 12 CFR 324.2, by risk weighting the collateralized 
portion of the exposure under the applicable provisions of 12 CFR 
324.35 or 324.37.
    (x) For all other off-balance sheet exposures not explicitly 
provided a CCF or risk weight in this paragraph (c) that meet the 
definition of a commitment, a 100 percent CCF and a 100 percent risk 
weight.
* * * * *
    (6) Asset Securitizations Issued by Complex Credit Unions. A credit 
union must follow the requirements of the applicable provisions of 12 
CFR 324.41 when it transfers exposures in connection with a 
securitization. A credit union may only exclude the transferred 
exposures from the calculation of its risk-weighted assets if each 
condition in 12 CFR 324.41 is satisfied. A credit union that meets 
these conditions, but retains any credit risk for the transferred 
exposures, must hold risk-based capital against the credit risk it 
retains in connection with the securitization.

[[Page 45853]]

    (d) Complex Credit Union Leverage Ratio (CCULR) Framework. (1) 
General. A qualifying complex credit union that has opted into the 
CCULR framework under paragraph (d)(5) of this section is considered to 
have met the capital ratio requirements for the well capitalized 
capital category under Sec.  702.102(a)(1) if it has a CCULR of 10 
percent or greater, subject to the transition provisions in paragraph 
(d)(8) of this section.
    (2) Qualifying Complex Credit Union. For purposes of this part, a 
qualifying complex credit union means a complex credit union under 
Sec.  702.103 that satisfies all of the following criteria:
    (i) Has a CCULR of 10 percent or greater, subject to the transition 
provisions in paragraph (d)(8) of this section;
    (ii) Has total off-balance sheet exposures of 25 percent or less of 
its total assets;
    (iii) Has the sum of total trading assets and total trading 
liabilities of 5 percent or less of its total assets; and
    (iv) Has the sum of total goodwill, including goodwill that meets 
the definition of excluded goodwill, and total other intangible assets, 
including intangible assets that meet the definition of excluded other 
intangible assets, of 2 percent or less of its total assets.
    (3) Calculation of Qualifying Criteria. Each of the qualifying 
criteria in paragraph (d)(2) of this section is calculated based on 
data reported in the Call Report as of the end of the most recent 
calendar quarter.
    (4) Calculation of the CCULR. A qualifying complex credit union 
opting into the CCULR framework under this paragraph (d) calculates its 
CCULR in the same manner as its net worth ratio under Sec.  702.2.
    (5) Opting into the CCULR Framework. (i) A qualifying complex 
credit union may opt into the CCULR framework by completing the 
applicable reporting requirements of its Call Report.
    (ii) A qualifying complex credit union can opt into the CCULR 
framework at the end of each calendar quarter.
    (6) Opting Out of the CCULR Framework. (i) A qualifying complex 
credit union may voluntarily opt out of the framework with prior 
written notification to the appropriate Regional Director or the 
Director of the Office of National Examinations and Supervision.
    (ii) The notification must be submitted at least 30 days before the 
end of the calendar quarter that the credit union will report its risk-
based capital ratio under paragraphs (a) through (c) of this section.
    (iii) The notification must include:
    (A) A statement of intent explaining why the qualifying complex 
credit union is opting out of the CCULR framework.
    (B) A copy of board meeting minutes showing that the credit union's 
board of directors was notified of the CCULR framework opt out 
election.
    (C) The calendar quarter that the qualifying complex credit union 
will begin calculating its risk-based capital ratio under paragraphs 
(a) through (c) of this section. The earliest a complex credit union 
may begin calculating a risk-based capital ratio is the calendar 
quarter it submits its notification.
    (D) A risk-based capital ratio calculation Call Report schedule 
that includes the required information for a complex credit union 
calculating its risk-based capital ratio under paragraphs (a) through 
(c) of this section. The data must be as of the end of the most recent 
calendar quarter.
    (7) Treatment when ceasing to meet the qualifying complex credit 
union requirements. (i) If a qualifying complex credit union that has 
opted into the CCULR framework ceases to meet the qualifying criteria 
in paragraph (d)(2) of this section, the credit union has two calendar 
quarters (grace period) either to satisfy the requirements to be a 
qualifying complex credit union or to calculate its risk-based capital 
ratio under paragraphs (a) through (c) of this section.
    (ii) The grace period begins at the end of the calendar quarter in 
which the credit union no longer satisfies the criteria to be a 
qualifying complex credit union. The grace period ends on the last day 
of the second consecutive calendar quarter following the beginning of 
the grace period.
    (iii) During the grace period, the credit union continues to be 
treated as a qualifying complex credit union for the purpose of this 
part and must continue calculating and reporting its CCULR, unless the 
qualifying complex credit union has opted out of using the CCULR 
framework under paragraph (d)(6) of this section. The qualifying 
complex credit union also continues to be considered to have met the 
capital ratio requirements for the well capitalized capital category 
under Sec.  702.102(a)(1). However, if the qualifying complex credit 
union has a CCULR of less than seven percent it will not be considered 
to have met the capital ratio requirements for the well capitalized 
capital category under Sec.  702.102(a)(1) and its capital 
classification is determined by its net worth ratio.
    (iv)(A) A qualifying complex credit union that is likely to not 
meet the requirements to be a qualifying complex credit union by the 
end of the grace period must submit written notification to the 
appropriate Regional Director or the Director of the Office of National 
Examinations and Supervision. The notification must be submitted at 
least 30 days before the end of the grace period and state that the 
credit union may cease to meet the requirements to be a qualifying 
complex credit union.
    (B) The notification must provide the reason for the potential 
disqualification.
    (C) The notification must include a copy of the board meeting 
minutes showing that the credit union's board of directors was notified 
that the credit union might cease to meet the qualifying complex credit 
union requirements.
    (D) The notification must include a risk-based capital ratio 
calculation Call Report schedule that includes the required information 
for a credit union calculating its risk-based capital ratio under 
paragraphs (a) through (c) of this section. The data must be as of the 
end of the most recent calendar quarter.
    (v) A qualifying complex credit union that ceases to meet the 
qualifying criteria in paragraph (d)(2) of this section as a result of 
a merger or acquisition has no grace period and must comply with the 
risk-based capital ratio under paragraphs (a) through (c) of this 
section in the quarter it ceases to be a qualifying complex credit 
union.
    (8) Transition Provisions. (i) From January 1, 2022, to December 
31, 2022, a complex credit union that has opted into the CCULR 
framework under paragraph (d)(5) of this section, must have a CCULR of 
9 percent or greater.
    (ii) From January 1, 2023, to December 31, 2023, a complex credit 
union that has opted into the CCULR framework under paragraph (d)(5) of 
this section, must have a CCULR of 9.5 percent or greater.
    (iii) After January 1, 2024, a complex credit union that has opted 
into the CCULR framework under paragraph (d)(5) of this section, must 
have a CCULR of 10 percent or greater.
    (e) Reservation of Authority. The NCUA may require a complex credit 
union that otherwise would meet the definition of a qualifying complex 
credit union to comply with the risk-based capital ratio under 
paragraphs (a) through (c) of this section if the NCUA determines that 
the complex credit union's capital requirements under paragraph (d) of 
this section are not commensurate with its risks. Any credit union 
required to comply with the risk-based capital ratio under this 
paragraph (e), would be permitted a minimum of a two-quarter grace 
period before being

[[Page 45854]]

subject to risk-based capital requirements.


Sec.  702.111  [Amended]

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

PART 703--INVESTMENT AND DEPOSIT ACTIVITIES

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

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


Sec.  703.2  [Amended]

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


Sec.  703.13  [Amended]

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

[FR Doc. 2021-15965 Filed 8-13-21; 8:45 am]
BILLING CODE 7535-01-P


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