CUNA Regulatory Comment Call
November 17, 2000
Proposed Capital and Investment Requirements for Corporate Credit Unions(Major Rule Applies to Corporate Credit Unions)
- The NCUA Board has issued an Advance Notice of Proposed Rulemaking (ANPR) on the capital and investment requirements for corporate credit unions, with a comment period that expires on February 20, 2001. The ANPR was published on November 22, 2001 in the Federal Register.
- NCUA considers changes to the capital requirements for corporate credit unions in the following ways. The ANPR would amend the definition of reserve ratio; revise the definition of capital ratio; establish a minimum reserves and undivided earnings (RUDE) ratio; change the measure for capital concentration limits and lower them; and change the net economic value and raise its minimum and the minimum value necessary to avoid monthly testing.
- NCUA also considers changes to investment requirements for corporate credit unions by lowering certain minimum credit ratings and exempting corporate credit union from credit concentration limits when they invest in other corporate credit unions.
- NCUA may also set a specific definition for corporate credit union service organizations (CUSOs) so that the Board may amend the definition to require that a CUSO be considered a corporate CUSO only if any corporate credit union owns a minimum 25 percent or the aggregate interest by all corporate credit unions exceeds 50 percent.
- Comments are due on February 20, 2001. Please submit your comments to CUNA by February 2, 2000. Please feel free to fax your responses to CUNA at 202-371-8240; e-mail them to Associate General Counsel Mary Dunn at email@example.com or to Assistant General Counsel Michelle Profit at firstname.lastname@example.org; or mail them to Mary or Michelle c/o CUNAs Regulatory Advocacy Department, 805 15th Street, NW, Suite 300, Washington, DC 20005. Please contact us if you need more information. You may also contact us if you would like a copy of the ANPR.
1)The comments from this ANPR and a previous ANPR on corporate credit unions issued in July 1999 may be combined to form a proposed rule. This ANPR states that NCUA is considering the following changes:
a) Presently, capital includes reserves and undivided earnings (RUDE), paid-in capital (PIC) and membership capital (MC). MC is not included in capital to establish credit concentration limits. NCUA is considering changes in capital concentration that would permit a portion or possibly all PIC and MC to be included.
b) The Board could amend the definition of reserve ratio to include only PIC that would qualify as capital under Generally Accepted Accounting Principles (GAAP), that is, non-cumulative dividend, perpetual maturing PIC. Existing PIC, for example, term PIC, could be "grandfathered" into the reserve ratio computation, subject to a reduction for term PIC of 20 percent per year for each year within 5 years of maturity.
c) The Board could revise the definition of capital ratio, so that, MC and PIC not qualifying as capital under GAAP would be subject to a reduction of 20 percent per year.
d) NCUA intends to retain the current capital ratio requirement of at least 4- percent and to remove the current restriction that eligible PIC not exceed RUDE.
e) The Board may create a minimum RUDE ratio, which is RUDE divided by moving daily average net assets (DANA). The minimum RUDE ratio would be 2 percent for all corporate credit unions. The Board may base credit concentration limits on a percentage of capital instead of on percentages of RUDE and PIC.
f) NCUA may lower the minimum credit rating requirements for investments to permit corporate credit unions to be more competitive with other depository institutions that are permitted to invest in the full range of investment grade securities. According to NCUA, this change would necessitate reducing current credit concentration limits and reorganizing these limits into categories of long-term and short-term investment. Please see chart below.
LIMITS BY OBLIGOR
Credit rating Long-term Inv.(LIV) AAA- and higher AA- and higher A- and higher BBB (flat) and higher Concentration Limits (LIV) 25% 20% 15% 10% Credit rating Short-term Inv. (SIV) A-1 A-2, with a minimum long term rating of the obligor of A- A-2, with a minimum long term rating of the obligor of A- Concentration Limits (SIV) 25% 15% 10% Repurchase (SIV) Transaction Concentration 50% 30% 20%
g) Currently, the rule provides that an adjusted balance MC account may be adjusted in relation to an independent figure and gives as an example one percent of member credit union's assets as a possible measuring standard. Depending on the measuring standard used, there is the potential for dramatic increases or decreases in the adjusted balance MC account. To avoid this result, the Board is considering requiring that the adjustment be based on a percentage of the measuring standard's average balance for the preceding 12 months.
h) NCUA may establish a limit on the aggregate credit exposure to a single obligor that has issued debt obligations across multiple rating categories.
i) NCUA would extend exemptions from credit concentration limits to corporate credit unions that invest in any other corporate credit union. Currently, the exemption only applies to investments in a wholesale corporate credit union. NCUA may consider a de minimis exemption from credit concentration limits (such as $5 million) to permit smaller corporate credit unions to execute institutional block size transactions, such as Fed Funds.
j) NCUA may change the definition of net economic value, which equates to assets minus liabilities, so that it excludes eligible MC and PIC from liabilities. The minimum NEV ratio may be raised to 2 percent. The Board may raise the minimum NEV ratio that triggers monthly testing from its current 2 percent to 3 percent
k) NCUA may amend its rule to increase the limit on the aggregate purchase of member PIC and MC in one corporate credit union from one percent to two percent. In conjunction with this change, the Board is considering adding a new provision that imposes a four percent limit on the aggregate purchase of member PIC and MC in all corporate credit unions.
l) NCUA may change the definition of a corporate CUSO. Currently, the rule defines a corporate CUSO as an entity that is "at least partly owned by a corporate credit union" but does not specify a minimum ownership requirement. The Board may amend the definition to require that a CUSO be considered a corporate CUSO only if any corporate credit union owns a minimum 25 percent interest or the aggregate interest by all corporate credit unions exceeds 50 percent.
QUESTIONS TO CONSIDER REGARDING NCUAs
ANPR on Corporate Credit Unions
- (1) Would a change of NCUA's capital definition so that they are analogous to those used by other financial regulators
provide benefits to corporate credit unions and their members?
- (2) Should the rule require that the measure for adjusted balance MC accounts be based on a 12-month average, rather
than a measure based on a particular point in time? Further, is there a need for adjusted balance MC accounts?
- (3) Should there be a minimum RUDE ratio (defined as RUDE divided by DANA) of 2 percent for all corporate credit unions?
Eric Richard General Counsel (202) 508-6742 email@example.com |
Mary Mitchell Dunn SVP & Associate General Counsel (202) 508-6736 firstname.lastname@example.org
Jeffrey Bloch Assistant General Counsel (202) 508-6732 email@example.com
Catherine Orr Senior Regulatory Counsel (202) 508-6743 firstname.lastname@example.org