CUNA Regulatory Comment Call
November 5, 2010
Interim Final Rule: PCA Amended Definition of Low-Risk Assets
Summary of Interim Final Rule
- A major component of the National Credit Union Administrations (NCUAs) corporate credit union stabilization plan is the securitization of the conserved corporate credit unions legacy assets. As part of the plan, the distressed assets are securitized in the form of senior debt instruments denominated NCUA Guaranteed Notes (NGNs) that have been offered to public investors, including credit unions and other financial institutions.
- In order to instill investor confidence in the NGNs, NCUA has guaranteed to investors the timely payment of principal and interest. As a result of the NCUA guaranty, the NGNs are legally permissible investments for federal credit unions.
- The NCUA Board recently approved an interim final rule to amend the definition of low-risk assets to include investments in the NGNs and the Board is accepting public comments on the rule through November 29, 2010. Assets in the low-risk category, including now the NGNs, are considered to be riskless, and therefore receive a risk-weighting of zero. The amendment expands the definition of low-risk assets to include debt instruments on which the payment of principal and interest is guaranteed by NCUA.
- Without this amendment, the NGNs held by a natural person credit union would fall within the investments risk portfolio, consisting of investments [a]s defined by federal regulation or applicable State law. 12 CFR 702.104(c). The minimum risk-weighting applied to assets in that portfolio, based on their weighted average life, is 3%. The investments portfolio does not permit a risk-weighting of zero to be applied to an investment even when it carries no credit risk. The low-risk assets risk portfolio, in contrast, does apply a risk-weighting of zero.
- Recognizing that an obligation supported by the full faith and credit of the U.S. carries no credit risk, the four other federal financial institution regulators jointly confirmed that their respective institutions may apply a 0% risk-weighting to the NGNs.
- CUNA had urged NCUA to make this change to the definition of low-risk assets.
- The interim final rule is effective as of October 28, 2010. However, NCUA is accepting comments through November 29, 2010; please submit your comments to CUNA by November 22.
Questions to Consider Regarding the Interim Final Rule
- The interim final rule expands the PCA definition of low-risk assets to include NCUA-guaranteed
debt instruments, such as the NGNs. Do you agree with NCUA that this change was necessary?
- Do you have any specific concerns related to the expanded definition of low-risk assets?
- Do you have any other comments or questions regarding the interim final rule?
Eric Richard General Counsel (202) 508-6742 email@example.com |
Mary Mitchell Dunn SVP & Deputy General Counsel (202) 508-6736 firstname.lastname@example.org
Luke Martone Senior Regulatory Counsel (202) 508-6743 email@example.com