Proposed Rule Summary

Corporate Credit Unions

Prepared by NASCUS Legislative & Regulatory Affairs Department
July 2017

NCUA is proposing to amend Part 704, Corporate Credit Unions to modify approaching capital framework benchmarks established in 2010 as part of the regulatory restructuring of the corporate system. The 2010 corporate rule was published in response to grave failures in some corporate credit unions that exposed the overall credit union system to substantial losses. NCUA’s stated goal for the 2010 corporate rule was to encourage corporate credit unions to:

  • Deliver services to the corporates’ natural person credit union members, such as payment systems and liquidity; and
  • build and attract sufficient capital

The proposed rule would apply to both federal corporate credit unions and state chartered corporate credit unions.

NCUA’s proposed rule may be read here. The proposed rule is open for comment until September 1, 2017.

Summary

NCUA’s 2010 regulatory restructuring of the corporate credit union system established investment concentration limits, limited asset maturities, prohibited investments in subordinated and private label mortgage-backed securities, and implemented a prompt corrective action (PCA) regime stipulating capital adequacy for corporates. Since the 2010 rulemaking, the corporate system has consolidated from 26 corporates to 11 (6 state chartered) and assets of $24.9b (down from $81.7b). NCUA now proposes several changes to the corporate credit union rule.

Definition of Tier 1 Capital

Since 2015, the corporate credit union rule has included in the definition of ‘‘Tier 1 capital’’ the retained earnings acquired through a merger. However, retained earnings acquired through a merger are currently not recorded on the continuing corporate’s financial statements, a practice inconsistent with Generally Accepted Accounting Principles (GAAP).

To improve transparency NCUA proposes incorporating ‘‘GAAP equity acquired in a merger’’ as a component of retained earnings. This amendment to the definition of ‘‘retained earnings’’ will, in turn, affect the definition of ‘‘Tier 1 capital,’’ which includes retained earnings as one of the components. NCUA¬† also proposes to delete the phrase ‘‘the retained earnings of any acquired credit union, or an integrated set of activities and assets, calculated at the point of acquisition, if the acquisition is a mutual combination’’ from the current definition of ‘‘Tier 1 capital.’’

Retained Earnings Ratio

Under the current rule, corporate credit unions were “incentivized” to build retained earnings by regulatory limitations placed on the amount of the corporate’s contributed capital that could be counted in calculating its leverage ratio.

The limitations on contributed capital allowed to be counted toward the leverage ratio was phased-in over a 10 year period. Starting in October 2016, corporate credit unions had to deduct the amount of contributed capital exceeding retained earnings by 200 basis points. Effective October 2020, corporate credit unions may not count any contributed capital exceeding retained earnings.

NCUA now believes that the 2010 corporate credit union rule has worked as intended and resulted in a healthier corporate system. As such, NCUA proposes:

  • Eliminating the year 2020 prohibition on counting any contributed capital in excess of retained earnings toward the leverage ratio. This would leave in place the 200 basis point deduction.
  • Allowing corporate credit unions to count as Tier 1 capital all contributed capital from a source not covered by federal share insurance

NCUA asserts that making these changes recognizes that contributed capital does stand to absorb losses and provides for more consistent treatment between credit unions and other types of financial institutions.

However, NCUA also proposes requiring all corporates to achieve an eventual retained earnings ratio of 250 basis points. NCUA would do this by adding a definition of ‘‘retained earnings ratio’’ that would be the corporate credit union’s retained earnings divided by its moving daily average net assets. Once a corporate achieved the proposed retained earnings benchmark, the corporate could include all contributed capital in its Tier 1 capital.

Expanded Investment Authorities

Part 704 Appendix B details the procedures for corporates seeking expanded authorities, including expanded investment authority. NCUA proposes amending the requirements for expanded investment authority to add a ‘‘retained earnings ratio’’ requirement. Existing Appendix B allows an expanded investment authority corporate credit union’s NEV to decline during stress testing to 28% NCUA proposes adding a requirement for the corporate to maintain a 2.5% retained earnings ratio. Likewise, to the provision that allows an NEV decline to 35%, NCUA proposes adding a 3% retained earnings requirement,