[Federal Register Volume 76, Number 56 (Wednesday, March 23, 2011)]
[Rules and Regulations]
[Pages 16234-16235]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2011-6754]
[[Page 16234]]
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NATIONAL CREDIT UNION ADMINISTRATION
12 CFR Part 702
RIN 3133-AD81
Prompt Corrective Action; Amended Definition of Low-Risk Assets
AGENCY: National Credit Union Administration (NCUA).
ACTION: Final rule.
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SUMMARY: In 2010, NCUA issued an Interim Final Rule expanding the
definition of ``low-risk assets'' to include debt instruments on which
the payment of principal and interest is unconditionally guaranteed by
NCUA. Assets in this category receive a risk-weighting of zero for
regulatory capital purposes to reflect the absence of credit risk.
Having considered the public comments addressing the Interim Final
Rule, NCUA is issuing this Final Rule permanently adopting the expanded
definition of ``low risk assets'' without alteration.
DATES: This rule is effective March 23, 2011.
FOR FURTHER INFORMATION CONTACT: Steven W. Widerman, Trial Attorney, at
the above address, or telephone: (703) 518-6557.
SUPPLEMENTARY INFORMATION:
Background
1. Prompt Corrective Action. In 1998, the Credit Union Membership
Access Act, Public Law 105-219, 112 Stat. 913, mandated a system of
regulatory capital standards for ``natural person'' credit unions
entitled ``Prompt Corrective Action'' (``PCA''), 12 U.S.C. 1790d et
seq. The NCUA Board adopted a comprehensive system of PCA, primarily in
Part 702,\1\ that imposes minimum capital standards and corresponding
remedies to improve a credit union's net worth. 12 CFR 702 et seq.
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\1\ Part 702 has been amended five times since it was originally
adopted in 2000: First, to incorporate limited technical
corrections. 65 FR 55439 (Sept. 14, 2000). Second, to delete
sections made obsolete by adoption of a uniform quarterly schedule
for filing Call Reports. 67 FR 12459 (March 19, 2002). Third, to
incorporate a series of revisions and adjustments to improve and
simplify PCA implementation. 67 FR 71078 (Nov. 29, 2002). A proposal
to modify the criteria for filing a net worth restoration plan, 67
FR 7113 (Nov. 29, 2002), was never adopted. Fourth, to add a third
risk-weighting tier to the standard risk-based net worth component
for member business loans. 68 FR 56537, 56546 (Oct. 1, 2003). Fifth,
to implement a statutory amendment allowing the acquirer in a credit
union merger to combine the merging credit union's retained earnings
with its own to determine the acquirer's post-merger ``net worth.''
73 FR 72688 (Dec. 1, 2008). A proposed rule to expand the definition
of ``net worth'' to include assistance provided under section 208 of
the Federal Credit Union Act, 12 U.S.C. 1788, was issued by the NCUA
Board on March 17, 2011.
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Under PCA, a ``natural person'' credit union's ``net worth ratio''
determines its classification among five statutory net worth
categories. 12 U.S.C. 1790d(c); 12 CFR 702.102. As a credit union's
``net worth ratio'' declines, so does its classification among the five
net worth categories, thus subjecting it to an expanding range of
mandatory and discretionary supervisory actions. 12 U.S.C. 1790d(e),
(f) and (g); 12 CFR 702.204(a)-(b). For a credit union that is subject
to an additional Risk-Based Net Worth Requirement, id. Sec. 702.103,
its minimum required ``net worth ratio'' depends upon a risk-weighting
applied to each of eight different portfolios of credit union
assets.\2\ Id. Sec. 702.104.
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\2\ ``Long-term real estate loans,'' ``Member Business Loans
(``MBL'') outstanding,'' ``Investments,'' ``Low-risk assets,''
``Average-risk assets,'' ``Loans sold with recourse,'' ``Unused MBL
commitments'' and ``Allowance.'' 12 CFR 702.104.
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2. NCUA Guaranteed Notes. Chief among the problems experienced by
corporate credit unions (``CCUs'') during the Nation's recent economic
downturn is the substantial devaluation of the mortgage-backed and
asset-backed securities (``the distressed assets'') held in their
investment portfolios. In five such cases, the realization of losses on
these distressed assets has driven the CCU into insolvency, requiring
NCUA to place the CCU into liquidation.
To monetize the distressed assets held by the liquidated CCUs, NCUA
embarked on a program in 2010 to securitize and sell those assets in a
series of public offerings of senior debt instruments denominated
``NCUA Guaranteed Notes'' (``NGNs''). Under the NGN program, the Asset
Management Estate of each liquidated CCU sells its distressed assets to
a trust established by NCUA, which then resecuritizes the distressed
assets in the form of NGNs. The trust then passes through to the NGN-
holders the monthly cash flows produced by the underlying distressed
assets. The NGNs benefit from the credit enhancement provided by the
overcollateralization and excess interest generated by the underlying
distressed assets.
To reinforce investor confidence in the NGNs, NCUA, as an agency of
the Executive Branch of the United States, fully and unconditionally
guarantees to investors the timely payment of principal and interest
(``the NCUA Guaranty''). The NCUA Guaranty is backed by the full faith
and credit of the United States. As a result of the NCUA Guaranty, the
NGNs are legally permissible investments for federal ``natural person''
and CCUs, 12 U.S.C. 1757(7)(B); 12 CFR 704.5(c)(1) (2011), and for
state-chartered ``natural person'' credit unions to the extent
permitted by state law at the time of purchase.
3. Risk-Weighting of ``Low-Risk Assets''. Under PCA as it existed
prior to this rulemaking, the NGNs held by a natural person credit
union would fall within the ``investments'' risk portfolio. Id. Sec.
702.104(c). The minimum risk-weighting applied to assets in that
portfolio, based on their weighted average life, is 3 percent. Id.
Sec. 702.106(c)(1). The ``investments'' portfolio does not apply a
risk-weighting of zero even when an investment carries no credit risk.
The ``Low-risk assets'' risk portfolio, in contrast, does apply a risk-
weighting of zero, but the NGNs did not fall within its scope. Id.
Sec. 702.106(d). Its scope was limited to ``Cash on hand * * * and the
NCUSIF deposit.'' Id. Sec. 702.104(d).
Recognizing that an obligation supported by the full faith and
credit of the United States carries no credit risk, the four other
federal financial institution regulators jointly permit their
respective institutions to apply a zero percent risk-weighting to the
NGNs those institutions purchase because of the unconditional NCUA
Guaranty.\3\ The purpose of this rulemaking is to accord the same zero
percent risk-weighting to NGNs purchased by ``natural person'' credit
unions. Otherwise, potential credit union investors in the NGNs would
face a disincentive to invest: A minimum 3 percent risk-weighting--and
the adverse effect on PCA net worth--even though the NGNs are free of
credit risk.
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\3\ See joint letter dated October 13, 2010, from the Federal
Reserve Board, Office of Comptroller of the Currency, the Federal
Deposit Insurance Corporation and the Office of Thrift Supervision
to Director, Division of Supervision, NCUA Office of Examination and
Insurance.
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4. Comments on Interim Final Rule. To accord the NGNs a risk-
weighting of zero for regulatory capital purposes, the NCUA Board
issued an ``Interim final rule with request for comments,'' expanding
the definition ``low risk assets'' to include ``debt instruments
unconditionally guaranteed by the National Credit Union
Administration,'' and thus backed by the full faith and credit of the
United States.\4\ 75 FR 66298 (October 28, 2010). NCUA
[[Page 16235]]
received two comment letters in response to the Interim Final Rule,
both from national credit union industry trade associations.
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\4\ To maximize the opportunity for credit union participation
in the NGN offerings, the NCUA Board issued the Interim Final Rule
and made it effective immediately under the good cause exception to
the Administrative Procedure Act's requirement of a public comment
period preceding the adoption of a final rule, and of a waiting
period of at least 30 days between publication of a final rule and
its effective date. 75 FR at 66299.
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Both commenters supported the Interim Final Rule without
reservation, addressing collateral matters as well. One commenter
advocated a separate rulemaking to consider further broadening the
definition of ``low risk assets'' to add other ``similar low-risk
assets such as credit union investments in Federal Home Loan Bank
securities.'' This final rule leaves open to the NCUA Board the option
of adding debt instruments guaranteed by other Government entities to
the ``low risk assets'' portfolio once NCUA has had an opportunity to
assess its experience with the NGN offerings in retrospect (including
whether the NCUA Guaranty was tapped), and to consider other risks
associated with those instruments.
In regard to the NGN offerings, the other commenter encouraged
maximum transparency and disclosure of information about the NGNs in
order to help those credit unions that lack the expertise and resources
to independently asses the NGNs and to make informed business decisions
about whether to invest. To ensure comprehensive transparency and
disclosure of information about each NGN offering, the offerings are
being conducted for NCUA by a Wall Street investment banking firm that
specializes in the issuance of structured debt products by governmental
entities. Further, as reflected primarily in the Offering Memorandum
for each NGN offering, NCUA is relying on the advice of two law firms
that have substantial expertise in the legal disclosure requirements
that apply to these transactions.
In view of the commenters' support of the Interim Final Rule, there
is no reason to revise the amendatory language. Accordingly, the NCUA
Board adopts in final the language of the Interim Final Rule without
alteration.
Regulatory Procedures
Regulatory Flexibility Act
The Regulatory Flexibility Act requires NCUA to prepare an analysis
to describe any significant economic impact a rule may have on a
substantial number of small entities (primarily those under ten million
dollars in assets). This rule will not have a significant economic
impact on a substantial number of small credit unions. Thus, a
Regulatory Flexibility Analysis is not required.
Paperwork Reduction Act
NCUA has determined that this rule will not increase paperwork
requirements under the Paperwork Reduction Act of 1995 and regulations
of the Office of Management and Budget. Control number 3133-0129 has
been issued for Part 702 and will be displayed at the table at 12 CFR
part 795.
Executive Order 13132
Executive Order 13132 encourages independent regulatory agencies to
consider the impact of their regulatory actions on State and local
interests. NCUA, an independent regulatory agency as defined in 44
U.S.C. 3502(5), voluntarily adheres to the fundamental federalism
principles addressed by the Executive Order. This rule would not have a
substantial 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.
Accordingly, this rule does not constitute a policy that has federalism
implications for purposes of the Executive Order.
Treasury and General Government Appropriations Act, 1999
NCUA has determined that the rule will not affect family well-being
within the meaning of section 654 of the Treasury and General
Government Appropriations Act, 1999, Public Law 105-277, 112 Stat. 2681
(1998).
Small Business Regulatory Enforcement Fairness Act
The Small Business Regulatory Enforcement Fairness Act of 1996
(Pub. L. 104-121) (SBREFA) provides generally for congressional review
of agency rules. A reporting requirement is triggered in instances
where NCUA issues a final rule as defined by Section 551 of the APA. 5
U.S.C. 551. NCUA does not believe this rule is a ``major rule'' within
the meaning of the relevant sections of SBREFA. The Office of
Management and Budget has determined that the Interim Final Rule is not
a ``major rule'' for purposes of SBREFA. As required by SBREFA, NCUA
will file appropriate reports with Congress and the General
Accountability Office so this rule may be reviewed.
List of Subjects in 12 CFR Part 702
Credit unions, Reporting and recordkeeping requirements.
By the National Credit Union Administration Board on March 17,
2011.
Mary F. Rupp,
Secretary of the Board.
Accordingly, the Interim Final Rule amending 12 CFR part 702, which
was published at 75 FR 66298 on October 28, 2010, is adopted as a Final
Rule without change.
[FR Doc. 2011-6754 Filed 3-22-11; 8:45 am]
BILLING CODE 7535-01-P