Proposed Rule 12 CFR 702-E

50094

Proposed Rules

Federal Register
Vol. 82, No. 208
Monday, October 30, 2017

This section of the FEDERAL REGISTER
contains notices to the public of the proposed
issuance of rules and regulations. The
purpose of these notices is to give interested
persons an opportunity to participate in the
rule making prior to the adoption of the final
rules.

NATIONAL CREDIT UNION
ADMINISTRATION
12 CFR Part 702
RIN 3133–AE80

Capital Planning and Supervisory
Stress Testing
National Credit Union
Administration (NCUA).
ACTION: Proposed rule.
AGENCY:

The NCUA Board (‘‘Board’’)
proposes to amend its regulations
regarding capital planning and stress
testing for federally insured credit
unions with $10 billion or more in
assets (covered credit unions). The
proposal would reduce regulatory
burden by removing some of the capital
planning and stress testing requirements
currently applicable to certain covered
credit unions. The proposal would also
make the NCUA’s capital planning and
stress testing requirements more
efficient for covered credit unions and
the NCUA by, among other things,
authorizing credit unions to conduct
their own stress tests in accordance with
the NCUA’s requirements and allowing
those credit unions to incorporate the
stress test results into their capital plan
submissions.
DATES: Comments must be received on
or before December 29, 2017.
ADDRESSES: You may submit comments
by any of the following methods, but
please send comments by one method
only:
• Federal eRulemaking Portal:
https://www.regulations.gov/. Follow
the instructions for submitting
comments.
• NCUA Web site: https://
www.ncua.gov/regulation-supervision/
Pages/rules/proposed.aspx. Follow the
instructions for submitting comments.
• Email: Address to regcomments@
ncua.gov. Include ‘‘[Your name]—
Comments on Proposed Rule—Capital
Planning and Supervisory Stress
Testing’’ in the email subject line.

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SUMMARY:

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• Fax: (703) 518–6319. Use the
subject line described above for email.
• Mail: Address to Gerard Poliquin,
Secretary of the Board, National Credit
Union Administration, 1775 Duke
Street, Alexandria, Virginia 22314–
3428.
• Hand Delivery/Courier: Same as
mail address.
FOR FURTHER INFORMATION CONTACT:
Technical information: Dale Klein,
Senior Financial Analyst—CPST, Office
of National Examinations and
Supervision, at the above address or
telephone (703) 518–6629; or legal
information: John H. Brolin, Senior Staff
Attorney, Office of General Counsel, at
the above address or telephone (703)
518–6540.
SUPPLEMENTARY INFORMATION:
I. Background
In April 2014, the Board issued a final
rule requiring capital planning and
stress testing for FICUs with assets of
$10 billion or more (covered credit
unions).1 The NCUA recognizes that
covered credit unions present a
systemic risk to the National Credit
Union Share Insurance Fund (NCUSIF)
thereby necessitating that they be
subject to more stringent prudential
standards than apply to other federally
insured credit unions. This approach is
consistent with that taken by the Board
of Governors of the Federal Reserve
System, the Federal Deposit Insurance
Corporation, and the Office of the
Comptroller of the Currency (the other
banking agencies). Capital planning
requires covered credit unions to assess
their financial condition and risks over
the planning horizon under both
expected and more adverse conditions.
Annual supervisory stress testing has
allowed the NCUA to obtain an
independent test of these credit unions
under stress scenarios. By setting a
regulatory minimum stress test capital
ratio, the April 2014 final rule requires
a covered credit union to take corrective
action before it becomes
undercapitalized to an extent that it may
cause a risk of loss to the NCUSIF.
In July 2015, the Board amended the
NCUA’s capital planning and stress
testing regulation to align its annual
planning and testing schedule with the
timelines being adopted by the other
1 12 CFR part 702, subpart E; 79 FR 24311 (Apr.
30, 2014).

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banking agencies. Among the reasons
for this schedule change was that the
NCUA’s stress test scenarios are based
on the supervisory stress test scenarios
developed by the other banking agencies
for their regulated institutions. The
other banking agencies changed their
schedule for publishing scenarios,
which precipitated the modification of
the NCUA’s supervisory stress testing
schedule.
Based on the other banking agencies’
experiences implementing the annual
Dodd-Frank Act stress tests (DFAST),
the NCUA tiered its own capital
planning expectations for covered credit
unions during the first three years of its
program. By ‘‘tiered,’’ we mean that the
NCUA aligned its capital planning and
analysis expectations based on the size,
complexity, and financial condition of
each covered credit union. As the Board
expected, credit union capital planning
practices have evolved over the threeyear period since 2014. Covered credit
unions, consistent with their size,
complexity, financial condition, have
operated under the NCUA’s tiered
supervisory expectations. The Board
believes that taking a graduated
supervisory approach to capital
planning has been beneficial for credit
unions, and is consistent with the
NCUA’s overall supervisory objectives.
When the NCUA’s current capital
planning and stress testing rule was
adopted in April 2014, the Board
believed it was important for the agency
to initially conduct all stress tests to
ensure the NCUA had an independent
assessment of risk for covered credit
unions.2 Current § 702.506(c) provides,
however, that after the NCUA has
completed three consecutive
supervisory stress tests of a covered
credit union, the covered credit union
may, with the NCUA’s approval,
conduct the tests described in subpart E
of part 702. The preamble to the April
2014 final rule also states that the April
2014 final rule was not the end of the
process on stress testing, but just the
beginning.3 Accordingly, after three
productive and informative years of
practical experience implementing the
current capital planning and stress
testing regulations, the Board now
believes it is appropriate for the NCUA
to revisit those regulations.
2 79

FR 24311, 24312 (Apr. 30, 2014).

3 Id.

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Federal Register / Vol. 82, No. 208 / Monday, October 30, 2017 / Proposed Rules
II. Summary of the Proposed Rule
The Board is proposing to amend the
NCUA’s capital planning and stress
testing regulations. The proposed
changes reflect the NCUA’s experiences
in implementing the current rule’s
requirements, while also taking into
consideration the systemic risk that
covered credit unions pose to the
NCUSIF. As explained in more detail
below, these proposed changes are
intended to reduce regulatory burdens
by removing some of the more onerous
capital planning and stress testing
requirements currently applicable to
covered credit unions.
The proposed changes to the NCUA’s
capital planning requirements would
more closely align the agency’s
regulatory requirements with its current
supervisory expectations for covered
credit unions. Under the proposal,
covered credit unions would be subject
to new tiered regulatory requirements
that would further ensure their capital
plans are tailored to reflect their size,
complexity, and financial condition. For
a tier I credit union, which is a covered
credit union that has completed fewer
than three capital planning cycles and
has less than $20 billion in total assets,
review of its capital plan would be
incorporated into the NCUA’s
supervisory oversight of that covered
credit union. For a tier II credit union,
which is a covered credit union that has
completed three or more capital
planning cycles and has less than $20
billion in total assets, or is otherwise
designated as a tier II credit union by
the NCUA, review of its capital plan
also would be incorporated into its
supervisory oversight from the NCUA.
For a tier III credit union, which is a
covered credit union that has $20
billion or more in total assets, or is
otherwise designated as a tier III credit
union by the NCUA, review of its
capital plan would continue to be
subject to the current requirement that
the NCUA formally approve or reject it.
Stress testing requirements under the
proposal also would be tiered. Tier I
credit unions would not be subject to
any stress testing requirements. Once a
tier I credit union satisfies the criteria
for becoming a tier II credit union,
which generally would be three years
after it reaches total assets of $10 billion
or more, that covered credit union
would be required to conduct stress
testing. Unlike their larger counterparts
in tier III, however, tier II credit unions
would not be subject to a 5% minimum
stress test capital threshold. Further,
under the proposal, the NCUA would no
longer conduct the annual supervisory
stress tests on applicable covered credit

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unions. Rather, the covered credit
unions themselves would conduct the
stress tests. Since stress testing
standards were first adopted in 2014,
the NCUA has conducted annual
supervisory stress tests on all covered
credit unions.
While the Board recognizes that all
covered credit unions are of systemic
importance to the NCUSIF, the Board it
is appropriate to differentiate the capital
planning requirements applicable to
such institutions based on their
individual characteristics. Specifically,
size, complexity, and financial
condition are significant determinants
regarding each covered credit union’s
risk to the NCUSIF, as well as to each
covered credit union’s ability to support
sound capital planning and supervisory
stress testing expectations. The
application of the NCUA’s capital
planning and stress testing requirements
defined by size, complexity, and
financial condition would provide
certain covered credit unions with a
more reasonable period of time over
which they can develop the policies and
processes necessary to develop sound
capital plans and analyses. However,
the Board seeks comments on whether
these characteristics are the appropriate
factors, or whether other considerations
should also be taken into account in
assessing risk for purposes of
differentiating capital planning and
stress testing requirements.
As noted above, all covered credit
unions pose a degree of systemic risk to
the NCUSIF and the credit union
industry. This proposal, however, seeks
to balance the higher risk that the larger,
more complex covered credit unions
may pose to the NCUSIF, with the time
and resources these institutions need to
prepare themselves to meet the NCUA’s
capital planning and supervisory stress
testing expectations. The Board also
seeks to tailor the NCUA’s capital
planning and stress testing requirements
in such a manner as to reduce the
regulatory burden imposed on those
smaller covered credit unions which
pose less risk to the NCUSIF.
Proposed Tiers of Covered Credit
Unions
The proposal identifies three tiers of
covered credit unions and would
impose varying levels of regulatory
requirements based on those tiers. In
brief, the tier comprised of the smallest
covered credit unions would have the
least regulatory requirements, with a
concomitant increase in requirements
for each tier as the size and complexity
of those covered credit unions increases.
The three tiers are as follows:

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• A tier I credit union would be a
covered credit union that has completed
fewer than three capital planning cycles
and has less than $20 billion in total
assets;
• A tier II credit union would be a
covered credit union that has completed
three or more capital planning cycles
and has less than $20 billion in total
assets, or is otherwise designated as a
tier II credit union by the NCUA; and
• A tier III credit union would be a
covered credit union that has $20
billion or more in total assets, or is
otherwise designated as a tier III credit
union by the NCUA.
Under the proposal, the level of the
NCUA’s capital planning requirements
for tier I and tier II credit unions would
generally decrease from the current
regulatory requirements, but would
generally remain the same for tier III
credit unions. This proposed approach
would reduce regulatory burdens on tier
I and tier II credit unions while allowing
them to focus on establishing sound
capital planning and capital adequacy
assessment processes. The tier III credit
unions, on the other hand, which may
pose the greatest systemic risk to the
NCUSIF and which are most capable of
complying with the current
requirements, would remain subject to
most of the current requirements. The
Board seeks specific comments on
whether this approach is appropriate
and whether it sufficiently balances
regulatory relief for covered credit
unions with the NCUA’s objective of
managing risk to the NCUSIF.
Under the proposal, the NCUA’s
capital planning and stress testing rule
would distinguish between a tier II and
a tier III credit union at the threshold
level of $20 billion in total assets.
Setting the threshold level at $20 billion
would mean that a covered credit union
would generally not be subject to the
regulation’s most rigorous requirements
until it had doubled in size from the
time it was first classified as a covered
credit union. Setting the threshold at
this level should help ensure that
covered credit unions have adequate
time to plan and prepare for
compliance. The Board specifically
requests comment, however, on whether
the threshold level should be set higher,
at $25 billion in total assets, to provide
covered credit unions with even more
time to plan and prepare for
compliance. In addition, the Board
requests comment on whether setting
the threshold at this higher level would
be reasonable and why.

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Proposed Revisions to the NCUA’s
Capital Planning Requirements
This proposal would retain the
current requirement that all covered
credit unions submit capital plans to the
NCUA no later than May 31st of each
year. Tier 1 and tier II credit unions,
however, would no longer be required
to have their capital plans formally
approved by the NCUA. Capital plan
reviews for tier I and tier II credit
unions would be conducted as part of
the NCUA’s supervision of the credit
union, with any deficiencies addressed
as part of the supervisory process. This
approach would provide the NCUA
greater latitude when reviewing capital
plan submissions. This proposed change
is also intended to provide the NCUA
with additional flexibility to use the
supervisory process to address plan
deficiencies, especially for credit unions
newly covered by the NCUA’s capital
planning requirements. The Board
believes that any increased risk to the
NCUSIF that may occur as a result of
providing regulatory relief can be
addressed through the supervisory
process.
This proposal would retain the
current requirement for the NCUA to
formally approve or reject a tier III
credit union’s capital plan. Because the
failure of a tier III credit union poses the
most significant risk to the NCUSIF, the
Board believes it is prudent to retain the
current, more formal requirements for
tier III credit unions.
The NCUA’s formal rejection of a
capital plan would be subject to the
Supervisory Review Committee process.

The Board specifically requests
comment on this aspect of the proposal.
Proposed Revisions to the NCUA’s
Supervisory Stress Testing
Requirements
Credit Union-Conducted Stress Tests.
Under the current rule, the NCUA is
required to conduct supervisory stress
tests for all covered credit unions. When
the Board approved the current
regulation in 2014, it believed the
agency should initially conduct all
stress tests to ensure the NCUA had an
independent assessment of risk for
covered credit unions. The preamble to
the final rule acknowledged, however,
that it might be appropriate in the future
for certain covered credit unions to
conduct their own supervisory stress
tests, and the Board adopted a provision
in the final rule to allow for that. In
particular, current § 702.506(c) provides
that after the NCUA has completed three
consecutive supervisory stress tests of a
covered credit union, the covered credit
union may, with the NCUA’s approval,
conduct the tests described in subpart E
of part 702 on its own. Having now
completed three annual stress testing
cycles, the Board believes that changing
the NCUA’s regulations to have covered
credit unions conduct their own
supervisory stress tests, without needing
to obtain approval from the NCUA, is
appropriate. Accordingly, under the
proposal, the requirement that the
NCUA conduct supervisory stress tests
would be eliminated.
The Board believes that credit unions
are better informed of risk when they

perform their own capital analyses.
Having covered credit unions conduct
their own supervisory stress tests also
eliminates any unintentional, negative
consequences that could result from the
NCUA conducting those tests, namely
concerns that a covered credit union
might abdicate its responsibility to
perform rigorous capital analyses to the
NCUA. As a safeguard, however, the
proposal would retain the provision in
the current rule that reserves the
NCUA’s right to conduct the stress tests
on any covered credit union at any time,
and to request qualitative and
quantitative information from the
covered credit unions that pertains to
supervisory stress testing.
Incremental Approach. Running a
supervisory stress test requires internal
controls that enable the credit union to
effectively challenge all material aspects
of its capital planning and analysis. For
a covered credit union to develop the
ability to obtain, cleanse, and manage
internal and external data, and perform
adequate capital analyses, it must
possess a level of experience and
operational scale that is unlikely to be
in place or quickly developed by a
credit union when it first reaches the
$10 billion threshold. Accordingly, the
Board is proposing to adopt an
incremental regulatory approach to
supervisory stress testing that would
gradually increase regulatory
requirements on a covered credit union
over time without making the
requirements too burdensome too soon.

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TABLE 1—INCREMENTAL APPROACH
Tier

Description

Stress test

Capital plan review

I ......................

First three years .............................

Not required ................................................................

II .....................

3 years or more, but less than $20
billion in total assets.

III ....................

$20 billion or more in total assets

Credit unions run stress tests using the NCUA
stress-test scenarios and NCUA guidance, but are
not subject to the 5% minimum stress-test ratio.
Credit unions run stress tests using the NCUA
stress-test scenarios and NCUA guidance, and
are subject to the 5% minimum stress-test ratio.

Incorporated as part of the
NCUA’s supervisory oversight.
Incorporated as part of the
NCUA’s supervisory oversight.

Tier I. Under the proposal, a tier I
credit union would not be subject to any
supervisory stress testing requirements,
nor would it be required to incorporate
the NCUA’s stress test scenarios within
its capital plan. This proposed approach
would allow a tier I credit union time
after it reaches the $10 billion threshold
level to obtain the policies and
processes necessary to develop sound
capital plans and analyses prior to
incorporating supervisory stress testing.
Once the tier I credit union satisfies the

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tier II criteria, which generally would be
three years after reaching the $10 billion
threshold, it would then be required to
comply with all tier II requirements
described below.
Tier II. This proposal would require a
tier II credit union to incorporate the
NCUA’s annual stress test scenarios into
its capital plan submissions. The Board
does not believe this particular
requirement imposes additional
regulatory burden on a tier II credit
union because, as the NCUA has

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The NCUA accepts or rejects credit union capital plans—qualitative
and quantitative assessment.

observed over the last three years of
implementing the stress testing
regulations, covered credit unions
already incorporate the NCUA’s
supervisory stress testing scenarios into
their capital plans even though they are
not required to do so under the current
rule.
Tier III. The proposal would require a
tier III credit union to incorporate the
NCUA’s stress test scenarios into its
capital plan. Because a tier III credit
union poses the greatest level of

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systemic risk to the NCUSIF, it must
also submit a plan to build capital or
mitigate the risk if the credit union
shows that its stress test capital ratio
would fall below the 5% minimum
stress test capital threshold. This is
consistent with the supervisory stress
testing requirements in current
§ 702.506(c).
The proposal would apply the tier III
threshold of $20 billion as of the March
31 measurement date of each year, and
the threshold would be effective at the
beginning of the next capital planning
cycle. The capital planning cycle would
begin on June 1 of that year and run
through the capital plan submission
date of May 31 of the following year.
Web site Instructions. If the Board
adopts a final rule on this matter, the
NCUA will publish on its Web site
instructions for tier II and tier III credit
unions on how to administer their own
supervisory stress tests. The Board
believes that a covered credit union’s
ability to maintain independence and
flexibility is essential to the overall
success of the NCUA’s supervisory
stress testing program. Accordingly,
under the proposal, tier II and tier III
credit unions would be required to
conduct their own stress tests in
accordance with the instructions
provided by the NCUA. The standards
for conducting the tests would differ for
tier II and tier III credit unions and
would be commensurate with their level
of systemic risk to the NCUSIF.
Conforming and Clarifying
Amendments. Finally, the proposal
would also make a number of minor
conforming and clarifying amendments
to the current rule. These conforming
and clarifying amendments would
include removing, changing, and adding
certain definitions, and making other
small amendments to various provisions
in subpart E to part 702.
The proposed changes outlined above
are discussed in more detail in the
Section-by-Section Analysis below.
III. Legal Authority
The NCUA is issuing this proposal
pursuant to its authority under the
Federal Credit Union Act (FCUA).4
Section 120(a) of the FCUA authorizes
the Board to ‘‘prescribe rules and
regulations for the administration of’’
the FCUA.5 Section 204 of the FCUA
authorizes the Board, through its
examiners, ‘‘to examine any [federally]
insured credit union . . . to determine
the condition of any such credit union
for insurance purposes.’’ 6 Section
4 12

U.S.C. 1751 et seq.
U.S.C. 1766(a).
6 12 U.S.C. 1784(a).

206(e) of the FCUA authorizes the Board
to take certain actions against a federally
insured credit union, if, in the opinion
of the Board, the credit union ‘‘is
engaging or has engaged, or the Board
has reasonable cause to believe that the
credit union or any institution affiliated
party is about to engage, in any unsafe
or unsound practice in conducting the
business of such credit union.’’ 7
IV. Section-by-Section Analysis
This proposed rule would retain most
of the current language in subpart E of
part 702. In particular, current
§§ 702.501, and 702.503 would remain
unchanged under this proposal. The
proposed changes to §§ 702. 502,
702.504, 702.505, and 702.506 are
described and explained in more detail
below.
Section 702.502 Definitions
The proposal would retain most of the
definitions from current § 702.502,
without change, with the following
exceptions.
Adverse Scenario
The proposal would remove the
definition of ‘‘adverse scenario’’ from
§ 702.502 and replace this term
throughout subpart E with terms more
commonly used within the financial
services industry. This change is
intended to reduce confusion for
covered credit unions. No substantive
changes to the requirements of subpart
E are intended by this change.
Capital Planning Cycle
The proposal would add a definition
for the new term ‘‘capital planning
cycle’’ to § 702.502. The proposal would
provide that ‘‘capital planning cycle’’
means a complete round of capital
planning over a one year period. The
definition would provide further that
the capital planning cycle begins on
June 1st of a given year and ends on
May 31st of the following year when the
capital plan submission is due. This
change is intended to reduce confusion
for covered credit unions regarding
when they would be subject to certain
stress testing and other requirements,
which are discussed in more detail
below.
Covered Credit Union
The proposal would make conforming
amendments to the current definition of
‘‘covered credit union’’ in § 702.502. In
particular, the proposed definition
would remove the words ‘‘capital
planning and stress testing’’ from the
second sentence in the definition and

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add in their place the word
‘‘applicable.’’ The proposed definition
would provide that ‘‘covered credit
union’’ means a federally insured credit
union whose assets are $10 billion or
more. The definition would provide
further that a credit union that crosses
that asset threshold as of March 31st of
a given calendar year is subject to the
applicable requirements of subpart E in
the capital planning cycle that begins on
June 1st of that calendar year. As
explained in more detail below, this
change would help clarify that a
covered credit union is only subject to
the applicable requirements of subpart
E.
Scenarios
The proposal would make conforming
amendments to the current definition of
‘‘scenarios’’ in § 702.502. In particular,
the proposal would remove the words
‘‘adverse, and severely adverse’’ from
the current definition and add in their
place the words ‘‘scenarios, and stress.’’
The revised definition would provide
that ‘‘scenarios’’ are those sets of
conditions that affect the U.S. economy
or the financial condition of a covered
credit union that serve as the basis for
stress testing, including, but not limited
to, NCUA-established baseline
scenarios, and stress scenarios.
Severely Adverse Scenario
The proposal would delete the
definition of ‘‘severely adverse
scenario’’ from § 702.502 and replace
this term throughout subpart E with
terms more commonly used within the
financial services industry. This change
is intended to reduce confusion for
covered credit unions. No substantive
changes to the requirements of subpart
E are intended by this change.
Stress Scenario
The proposal would add the
definition ‘‘stress scenario’’ to § 702.502.
The definition would provide that
‘‘stress scenario’’ means a scenario that
is more adverse than that associated
with the baseline scenario.
Tier I Credit Union
The proposal would add the
definition of ‘‘tier I credit union’’ to
§ 702.502. The definition would provide
that ‘‘tier I credit union’’ means a
covered credit union that has completed
fewer than three capital planning cycles
and has less than $20 billion in total
assets. Generally, a covered credit union
would be categorized as a tier I credit
union for the first three years after its
total assets reached $10 billion or more.
After three years, a tier I credit union

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would become a tier II credit union with
the corresponding requirements.
The definition of a tier I credit union
would provide regulatory relief for
qualifying covered credit unions. The
Board believes it is appropriate to adjust
the expectations for credit unions that
newly meet the criteria for covered
credit unions. As noted earlier, the
NCUA has conducted the review and
assessment of covered credit union
capital planning activities in a phased
manner since inception of the final rule
in 2014. The proposed creation of the
tier I distinction would allow the NCUA
to better align regulatory expectations
based on the size, complexity, and
financial condition of each covered
credit union.
Tier II Credit Union
The proposal would add the
definition of ‘‘tier II credit union’’ to
§ 702.502. The definition would provide
that ‘‘tier II credit union’’ means a
covered credit union that has completed
three or more capital planning cycles
and has less than $20 billion in total
assets, or is otherwise designated as a
tier II credit union by NCUA. The tier
II credit union definition would
recognize the iterative nature of the
NCUA’s capital planning and stress
testing processes, and acknowledge that
covered credit unions get better at
developing and implementing their
capital plans over time and through
repetition. The Board believes these
proposed changes would provide
regulatory relief for tier II credit unions.

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Tier III Credit Union
The proposal would add the
definition of ‘‘tier III credit union’’ to
§ 702.502. The definition would provide
that ‘‘tier III credit union’’ means a
covered credit union that has $20
billion or more in total assets, or is
otherwise designated as a tier III credit
union by NCUA. The proposal identifies
credit unions with total assets of $20
billion or more as posing the highest
degree of risk to the NCUSIF. While the
Board considers qualitative and
quantitative capital plan supervision
and credit union-run stress test review
to be appropriate for covered credit
unions with less than $20 billion in
total assets, it does not for larger
covered credit unions. For covered
credit unions with total assets of $20
billion or more, the Board believes it is
prudent, given the size of the NCUSIF
and the potential loss associated with
the failure of a credit union that large,
to establish formal triggers requiring the
NCUA and credit union actions to
further mitigate NCUSIF risk exposure.

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Unless otherwise delegated to the
NCUA’s staff, the Board would retain
the authority to designate a covered
credit union as a tier II credit union or
tier III credit union, respectively. The
Board invites comment on what criteria
would be appropriate to apply when
considering such a designation.
Section 702.504

Capital Planning

(a) Annual Capital Planning
(a)(1)
The proposal would retain most of
current § 702.504 without change, with
the following exceptions. Proposed
§ 702.504(a)(1) would no longer include
the last sentence in current
§ 702.504(a)(1), which provides that the
NCUA will assess whether the capital
planning and analysis process is
sufficiently robust in determining
whether to accept a credit union’s
capital plan. Given the other changes in
this proposal, this sentence would no
longer be necessary. Proposed
§ 702.504(a)(1) would provide that a
covered credit union must develop and
maintain a capital plan. It also would
provide that a covered credit union
must submit this plan and its capital
policy to the NCUA by May 31 each
year, or such later date as directed by
the NCUA. It also would provide that
the plan must be based on the covered
credit union’s financial data as of
December 31 of the preceding calendar
year, or such other date as directed by
the NCUA.
(b) Mandatory Elements
(b)(4)
The proposal would delete current
§ 702.504(b)(4) from the regulation.
Current § 702.504(b)(4) provides that if
a credit union conducts its own stress
test under § 702.506(c), its capital plan
must include a discussion of how the
credit union will maintain a stress test
capital ratio of 5 percent or more under
baseline, adverse, and severely adverse
conditions in each quarter of the 9quarter horizon. This sentence would no
longer be necessary in this section
because it would be fully addressed in
proposed § 702.506(f).
Section 702.505
Capital Plans

NCUA Action on

(a) Timing
The proposal would amend current
§ 702.505(a) by dividing paragraph (a)
into two subparts. Proposed
§ 702.505(a)(1) would provide that the
NCUA will address any deficiencies in
the capital plans submitted by tier I and
tier II credit unions through the
supervisory process. The intent of this

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change is to provide regulatory relief to
tier I and tier II credit unions by
removing the regulatory review and
regulatory ‘‘accept or reject’’ assessment
of their capital plans. It also provides
the NCUA with additional flexibility in
addressing plan deficiencies.
Proposed § 702.505(a)(2) would
continue to require that the NCUA
accept or reject tier III credit unions’
capital plans. The Board is not
proposing to remove this requirement
for Tier III credit unions at this time for
the reasons discussed above.
Accordingly, proposed § 702.505(a)(2)
would provide that the NCUA will
notify tier III credit unions of the
acceptance or rejection of their capital
plans by August 31 of the year in which
their plan is submitted.
The proposal also would make
additional conforming changes
throughout § 702.505 to clarify that only
tier III credit unions would be required
to operate under a capital plan formally
accepted by the NCUA. No substantive
changes, other than those discussed
above, are intended.
Section 702.506 Annual Supervisory
Stress Testing
Much of the substance of current
§ 702.506 would remain unchanged
under the proposal. Each of the
proposed substantive amendments are
discussed in detail below. The proposal
also would make a number of nonsubstantive conforming amendments to
address certain changes in terminology.
(a) General Requirements
The proposal would amend current
§ 702.506(a) by adding a new clarifying
sentence to the beginning of proposed
paragraph (a). The new sentence would
provide that only tier II and tier III
credit unions are required to conduct
supervisory stress tests. The Board
believes that exempting tier I credit
unions from supervisory stress testing
provides prudent regulatory relief and
enables tier I credit union time to
develop their own capital adequacy
assessments. The Board considers the
supervisory stress testing exemption for
tier I credit unions, which generally
would be three years, after which the
tier I credit union becomes a tier II
credit union, to be sufficient time to
develop internal capabilities to perform
credit union-run supervisory stress
tests.
NCUA-Run Tests
The proposal would delete current
§ 702.506(b), which, because of the
other changes being proposed to part
702, would be overridden. The NCUA
already reserves, in proposed

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Federal Register / Vol. 82, No. 208 / Monday, October 30, 2017 / Proposed Rules
§ 702.506(b)(3), the right to conduct
stress tests on covered credit unions if
it deems such action necessary.
(b) Credit Union-Run Supervisory Stress
Tests
The proposal would make significant
revisions to current § 702.506(c) to
require tier II and tier III credit unions
to conduct their own stress tests instead
of first having to get approval from the
NCUA. Proposal § 702.506(b) would be
split into three new subparagraphs, each
of which is described in more detail
below.
(b)(1) General
Proposed § 702.506(b)(1) would
provide that all supervisory stress tests
must be conducted according to the
NCUA’s instructions. The Board is
proposing to add this requirement to
ensure that supervisory stress tests
performed by tier II and tier III credit
unions are conducted in a manner that
promotes consistency and
comparability. Credit union-run stress
tests must adhere to these principles in
order for the NCUA to assess inherent
risk in the portfolios of covered credit
unions and establish supervisory
benchmarks. The NCUA will publish
credit union-run supervisory stress test
instructions each year on its Web site.
The instructions will contain general
directives, and where appropriate,
differentiate between tier II and tier III
requirements.
(b)(2) Tier III Credit Unions
Proposed § 702.506(b)(2) would
provide that when conducting its stress
test, a tier III credit union must apply
the minimum stress test capital ratio to
all time periods in the planning horizon.
The Board believes this requirement of
the current remains pertinent, but only
for tier III credit unions.

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(b)(3) NCUA Tests
Proposed § 702.506(b)(3) would retain
the last two sentences in current
§ 702.506(c), without change. Proposed
§ 702.506(b)(3) would provide that the
NCUA reserves the right to conduct the
tests described in this section on any
covered credit union at any time.
Proposed paragraph (b)(3) would
provide further that where both the
NCUA and a covered credit union have
conducted the tests, the results of the
NCUA’s tests will determine whether
the covered credit union has met the
requirements of part 702. No substantive
changes are being proposed with regard
to these two sentences.

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(f) Supervisory Actions
The proposal would retain much of
the language in current § 702.506(g), but
would insert some additional language.
The section would also be broken into
three subsections, each of which is
discussed in more detail below.
(f)(1)
Proposed § 702.506(f)(1) would
provide that if a credit union-run stress
test shows a tier III credit union does
not have the ability to maintain a stress
test capital ratio of 5 percent or more
under expected and stressed conditions
in each quarter of the planning horizon,
the credit union must incorporate into
its capital plan a stress test capital
enhancement plan showing how it will
meet that target.
(f)(2)
This section of the proposal would
retain the language from the first
sentence in current § 702.506(g) and
limit the application of paragraph (f)(2)
to tier III credit unions. Proposed
paragraph (f)(2) would provide that if an
NCUA-run stress test shows that a tier
III credit union does not have the ability
to maintain a stress test capital ratio of
5 percent or more under expected and
stressed conditions in each quarter of
the planning horizon, the credit union
must provide the NCUA, by November
30 of the calendar year in which the
NCUA conducted the tests, a stress test
capital enhancement plan showing how
it will meet that target. As explained
above, the NCUSIF risk exposure to a
tier I and tier II credit union is
sufficiently mitigated through
qualitative and quantitative supervision
of the credit union’s capital planning
and capital adequacy analysis.
Accordingly, the proposed rule offers
regulatory relief as tier 1 and tier II
credit unions would no longer be
subject to the minimum stress test
capital ratio.
(f)(3)
This section of the proposal would
retain the language in the last sentence
in current § 702.506(g) and move it to
proposed § 702.506(f)(3). The proposal
also would limit the application of this
section to only tier III credit unions.
Proposed § 702.506(f)(3) would provide
that a tier III credit union operating
without an NCUA-approved stress test
capital enhancement plan required
under this section may be subject to
supervisory action. A tier III credit
union operating without an accepted
capital plan or an approved stress test
capital enhancement plan will be
considered poorly managed and/or
operating with insufficient capital to

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50099

support the credit union’s risk profile.
The Board believes it is prudent to
subject a tier III credit union to
heightened regulatory scrutiny under
such circumstances.
IV. Regulatory Procedures
1. Regulatory Flexibility Act
The Regulatory Flexibility Act
requires the NCUA to prepare an
analysis of any significant economic
impact any proposed regulation may
have on a substantial number of small
entities (primarily those under $100
million in assets).8 The proposed rule
and its requirements will apply to only
the largest credit unions, those with $10
billion or more in total assets.
Accordingly, the Board certifies that it
will not have a significant economic
impact on a substantial number of small
entities.
2. 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 modifies an existing burden (44
U.S.C. 3507(d)). For purposes of the
PRA, a paperwork burden may take the
form of a reporting, recordkeeping, or a
third-party disclosure requirement,
referred to as information collections.
The NCUA is seeking comments on
proposed revisions to the information
collection requirements contained in
Subpart E of part 702, which has been
submitted to the Office of Management
and Budget (OMB) for review and
approval OMB control number 3133–
0199. The information collection
requirements are found in § 702.504,
that requires FICUs with assets of at
least $10 billion (covered credit unions)
to develop, maintain, and submit capital
plans annually to NCUA. Proposed
change amend § 702.506 to require tier
2 and 3 credit unions to conduct stress
tests in a manner prescribed by NCUA.
This reporting requirement will have an
effect on five credit unions by
increasing the information collection
burden by an estimated 100 hours for
each.
Estimated number of respondents: 7.
Estimated number of responses per
respondent: 1.
Estimated total annual responses: 7.
Estimated burden per response: 393
hours.
Total annual burden: 2,750 hours.
Comments are invited on: (1) Whether
the proposed collection of information
is necessary for the proper performance
of the functions of the agency, including
85

U.S.C. 603(a); 12 U.S.C. 1787(c)(1).

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Federal Register / Vol. 82, No. 208 / Monday, October 30, 2017 / Proposed Rules

whether the information will have
practical utility; (2) the accuracy of the
agency’s estimate of the burden of the
proposed collection of information,
including the validity of the
methodology and assumptions used; (3)
ways to enhance the quality, utility and
clarity of the information to be
collected; and (4) ways to minimize the
burden of the collection of information
on those who are to respond, including
through the use of appropriate
automated, electronic, mechanical, or
other technological collection
techniques or other forms of information
technology.
Comments on the proposed
information collection requirements
may be sent to the 1. Office of
Information and Regulatory Affairs,
Office of Management and Budget,
Attention: Desk Officer for NCUA, New
Executive Office Building, Room 10235,
Washington, DC 20503, or email at
OIRA_Submission@OMB.EOP.gov and
2. NCUA PRA Clearance Officer, 1775
Duke Street, Alexandria, VA 22314,
Suite 5067, or email at PRAComments@
ncua.gov.
3. Executive Order 13132
Executive Order 13132 encourages
independent regulatory agencies to
consider the impact of their actions on
state and local interests. 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 does not
have substantial direct effects 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 has,
therefore, determined that this proposal
does not constitute a policy that has
federalism implications for purposes of
the executive order.

nlaroche on DSK9F9SC42PROD with PROPOSALS

4. Assessment of Federal Regulations
and Policies on Families
The Board has determined that this
proposed rule will not affect family
well-being within the meaning of § 654
of the Treasury and General
Government Appropriations Act, 1999,
Public Law 105–277, 112 Stat. 2681
(1998).
List of Subjects in 12 CFR Part 702
Credit unions, Reporting and record
keeping requirements.

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By the National Credit Union
Administration Board, on October 19, 2017.
Gerard Poliquin,
Secretary of the Board.

For the reasons discussed above, the
National Credit Union Administration
proposes to amend 12 CFR part 702 as
follows:
PART 702—CAPITAL ADEQUACY
1. Revise the authority citation for part
702 to read as follows:

■

Authority: 12 U.S.C. 1766(a), 1784(a),
1786(e), 1790d.

Subpart E—Capital Planning and
Stress Testing
2. Amend § 702.502 as follows:
a. Remove the definition of ‘‘adverse
scenario’’;
■ b. Add the definition of ‘‘capital
planning cycle’’;
■ c. Remove from the definition of
‘‘covered credit union’’ the words
‘‘capital planning and stress testing’’
and add in their place the word
‘‘applicable’’;
■ d. Remove from the definition of
‘‘scenarios’’ the words ‘‘adverse and
severely adverse’’ and add in their place
the words ‘‘scenarios and stress’’;
■ e. Remove the definition of ‘‘severely
adverse scenario’’;
■ f. Add the definition of ‘‘stress
scenario’’; and
■ g. Add the definitions of ‘‘tier I credit
union’’, ‘‘tier II credit union’’, and ‘‘tier
III credit union’’.
The additions and revisions read as
follows:
■
■

§ 702.502

Definitions.

*

*
*
*
*
Capital planning cycle means a
complete round of capital planning over
a one year period. The capital planning
cycle begins on June 1 of a calendar year
and ends on May 31, the capital plan
submission date, of the following
calendar year.
*
*
*
*
*
Stress scenario means a scenario that
is more adverse than that associated
with the baseline scenario.
*
*
*
*
*
Tier I credit union means a covered
credit union that has completed fewer
than three capital planning cycles and
has less than $20 billion in total assets.
Tier II credit union means a covered
credit union that has completed three or
more capital planning cycles and has
less than $20 billion in total assets, or
is otherwise designated as a tier II credit
union by NCUA.
Tier III credit union means a covered
credit union that has $20 billion or more

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in total assets, or is otherwise
designated as a tier III credit union by
NCUA.
§ 702.504

[Amended]

3. Amend § 702.504 as follows:
a. Remove the last sentence in
paragraph (a)(1);
■ b. Remove paragraph (b)(4); and
■ c. Redesignate paragraphs (b)(5) and
(6) as paragraphs (b)(4) and (5),
respectively.
■ 4. Amend § 702.505 as follows:
■ a. Revise paragraph (a);
■ b. In paragraph (d) introductory text,
add the words ‘‘tier III’’ before the
words ‘‘credit union’s capital plan,’’;
and
■ c. In paragraph (e), remove the word
‘‘covered’’ and add in its place the
words ‘‘tier III’’.
The revision reads as follows:
■
■

§ 702.505

NCUA action on capital gains.

(a) Timing—(1) Tier I & tier II credit
unions. NCUA will address any
deficiencies in the capital plans
submitted by tier I and tier II credit
unions through the supervisory process.
(2) Tier III credit unions. NCUA will
notify tier III credit unions of the
acceptance or rejection of their capital
plans by August 31 of the year in which
their plan is submitted.
*
*
*
*
*
■ 5. Section 702.506 is revised to read
as follows:
§ 702.506
testing.

Annual supervisory stress

(a) General requirements. Only tier II
and tier III credit unions are required to
conduct supervisory stress tests. The
supervisory stress tests consist of a
baseline scenario, and stress scenarios,
which NCUA will provide by February
28 of each year. The tests will be based
on the credit union’s financial data as of
December 31 of the preceding calendar
year, or such other date as directed by
NCUA. The tests will take into account
all relevant exposures and activities of
the credit union to evaluate its ability to
absorb losses in specified scenarios over
a planning horizon. The minimum
stress test capital ratio is 5 percent.
(b) Credit union-run supervisory stress
tests—(1) General. All supervisory stress
tests must be conducted according to
NCUA’s instructions.
(2) Tier III Credit Unions. When
conducting its stress test, a tier III credit
union must apply the minimum stress
test capital ratio to all time periods in
the planning horizon.
(3) NCUA tests. NCUA reserves the
right to conduct the tests described in
this section on any covered credit union
at any time. Where both NCUA and a

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Federal Register / Vol. 82, No. 208 / Monday, October 30, 2017 / Proposed Rules
covered credit union have conducted
the tests, the results of NCUA’s tests
will determine whether the covered
credit union has met the requirements
of this subpart.
(c) Potential impact on capital. In
conducting stress tests under this
subpart, NCUA or the credit union will
estimate the following for each scenario
during each quarter of the planning
horizon:
(1) Losses, pre-provision net revenues,
loan and lease loss provisions, and net
income; and
(2) The potential impact on the stress
test capital ratio, incorporating the
effects of any capital action over the
planning horizon and maintenance of an
allowance for loan losses appropriate for
credit exposures throughout the
horizon. NCUA or the credit union will
conduct the stress tests without
assuming any risk mitigation actions on
the part of the credit union, except those
existing and identified as part of the
credit union’s balance sheet, or offbalance sheet positions, such as
derivative positions, on the date of the
stress test.
(d) Information collection. Upon
request, the credit union must provide
NCUA with any relevant qualitative or
quantitative information requested by
NCUA pertinent to the stress tests under
this subpart.
(e) Stress test results. A credit union
required to conduct stress tests under
this section must incorporate the results
of its tests in its capital plan.
(f) Supervisory actions. (1) If a credit
union-run stress test shows a tier III
credit union does not have the ability to
maintain a stress test capital ratio of 5
percent or more under expected and
stressed conditions in each quarter of
the planning horizon, the credit union
must incorporate, into its capital plan,
a stress test capital enhancement plan
that shows how it will meet that target.
(2) If an NCUA-run stress test shows
that a tier III credit union does not have
the ability to maintain a stress test
capital ratio of 5 percent or more under
expected and stressed conditions in
each quarter of the planning horizon,
the credit union must provide NCUA,
by November 30 of the calendar year in
which NCUA conducted the tests, a
stress test capital enhancement plan
showing how it will meet that target.
(3) A tier III credit union operating
without an NCUA approved stress test
capital enhancement plan required
under this section may be subject to
supervisory actions.
(g) Consultation on proposed action.
Before taking any action under this
section against a federally insured, statechartered credit union, NCUA will

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consult and work cooperatively with the
appropriate State official.
[FR Doc. 2017–23212 Filed 10–27–17; 8:45 am]
BILLING CODE 7535–01–P

DEPARTMENT OF COMMERCE
National Oceanic and Atmospheric
Administration
50 CFR Part 622
[Docket No. 170828813–7813–01]
RIN 0648–BH15

Snapper-Grouper Fishery of the South
Atlantic Region; Temporary Measures
To Reduce Overfishing of Golden
Tilefish
National Marine Fisheries
Service (NMFS), National Oceanic and
Atmospheric Administration (NOAA),
Commerce.
ACTION: Proposed temporary rule;
request for comments.
AGENCY:

This proposed temporary rule
would implement interim measures to
reduce overfishing of golden tilefish in
Federal waters of the South Atlantic.
Beginning in 2018, this temporary rule
would reduce the total annual catch
limit (ACL), the commercial and
recreational sector ACLs, and the quotas
for the hook-and-line and longline
components of the commercial sector.
This proposed temporary rule would be
effective for 180 days, although NMFS
may extend the temporary rule’s
effectiveness for a maximum of an
additional 186 days. The intended effect
of this proposed temporary rule is to
reduce overfishing of golden tilefish
while the South Atlantic Fishery
Management Council develops longterm management measures.
DATES: Written comments must be
received by November 14, 2017.
ADDRESSES: You may submit comments
on the proposed temporary rule,
identified by ‘‘NOAA–NMFS–2017–
0111,’’ by either of the following
methods:
• Electronic submission: Submit all
electronic public comments via the
Federal e-Rulemaking Portal: http://
www.regulations.gov. Go to
www.regulations.gov/
#!docketDetail;D=NOAA-NMFS-20170111 click the ‘‘Comment Now!’’ icon,
complete the required fields, and enter
or attach your comments.
• Mail: Submit written comments to
Karla Gore, NMFS Southeast Regional
Office, 263 13th Avenue South, St.
Petersburg, FL 33701.
SUMMARY:

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50101

Instructions: Comments sent by any
other method, to any other address or
individual, or received after the end of
the comment period, may not be
considered by NMFS. All comments
received are a part of the public record
and will generally be posted for public
viewing on www.regulations.gov
without change. All personal identifying
information (e.g., name, address, etc.),
confidential business information, or
otherwise sensitive information
submitted voluntarily by the sender will
be publicly accessible. NMFS will
accept anonymous comments (enter
‘‘N/A’’ in required fields if you wish to
remain anonymous).
Electronic copies of an environmental
assessment (EA) supporting these
interim measures may be obtained from
the Southeast Regional Office Web site
at http://sero.nmfs.noaa.gov/
sustainable_fisheries/s_atl/sg/2017/
golden_tilefish_interim/index.html. The
EA includes a Regulatory Flexibility Act
(RFA) analysis.
FOR FURTHER INFORMATION CONTACT:
Karla Gore, NMFS Southeast Regional
Office, telephone: 727–551–5753, or
email: karla.gore@noaa.gov.
SUPPLEMENTARY INFORMATION: The
snapper-grouper fishery in the South
Atlantic region is managed under the
Fishery Management Plan for SnapperGrouper Fishery of the South Atlantic
Region (FMP) and includes golden
tilefish, along with other snappergrouper species. The FMP was prepared
by the South Atlantic Fishery
Management Council (Council) and is
implemented by NMFS through
regulations at 50 CFR part 622 under
authority of the Magnuson-Stevens
Fishery Conservation and Management
Act (Magnuson-Stevens Act).
Background
The Magnuson-Stevens Act requires
that NMFS and regional fishery
management councils prevent
overfishing and achieve, on a
continuing basis, the optimum yield
from federally managed fish stocks.
These mandates are intended to ensure
that fishery resources are managed for
the greatest overall benefit to the nation,
particularly with respect to providing
food production and recreational
opportunities, and protecting marine
ecosystems.
Golden tilefish are harvested by both
commercial and recreational fishermen
throughout the South Atlantic, although
total landings are dominated by the
commercial sector using bottom
longline gear. Golden tilefish are also
harvested commercially using hookand-line gear, while the recreational

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