Corporate Credit Unions

NATIONAL CREDIT UNION ADMINISTRATION

12 CFR Part 704

Corporate Credit Unions

AGENCY: National Credit Union Administration (NCUA).

ACTION: Proposed rule.

-----------------------------------------------------------------------

SUMMARY: NCUA recently issued a proposed rule to revise the regulations

governing corporate credit unions. At the time the proposal was

released, NCUA indicated that special consideration would have to be

provided for wholesale corporate credit unions, due to their unique

role in the credit union system. NCUA and the one wholesale corporate

credit union that currently exists have worked together to develop this

proposal, which provides for such consideration. This proposal would

amend the regulations on corporate credit unions by adding a new

section, to follow the numbering of the recent proposal, governing

wholesale corporate credit unions. Final provisions governing wholesale

corporate credit unions, as well as other corporate credit unions, will

be adopted after consideration of public comments.

DATES: Comments must be received on or before September 3, 1996.

ADDRESSES: Comments should be directed to Becky Baker, Secretary of the

Board. Mail or hand-deliver comments to: National Credit Union

Administration, 1775 Duke Street, Alexandria, Virginia 22314-3428. Fax

comments to (703) 518-6319. Post comments on NCUA's electronic bulletin

board by dialing (703) 518-6480. E-mail comments to [email protected].

Please send comments by one method only.

FOR FURTHER INFORMATION CONTACT: Robert F. Schafer, Acting Director,

Office of Corporate Credit Unions, at the above address, telephone:

(703) 518-6640, or E-mail: [email protected]; or Edward Dupcak,

Director, Office of Investment Services, at the above address,

telephone: (703) 518-6620, or E-mail: [email protected].

SUPPLEMENTARY INFORMATION:

Background

On May 22, 1996, NCUA issued a proposed rule to revise the

regulations for corporate credit unions. 61 FR 28085 (June 4, 1996).

The comment period expires on September 3, 1996. The proposal sets

forth requirements and authorities that would apply to all corporate

credit unions, and then provides, through appendices, additional

requirements and authorities for those corporate credit unions that

have more developed infrastructures and more experienced staffs.

Currently, the credit union system supports one ``wholesale'' corporate

credit union, which is a corporate credit union that serves corporate

credit unions. It was expected that this wholesale corporate credit

union would seek to obtain the authorities available under Appendix B

of the proposed rule. It was also expected that certain adjustments to

the general requirements and the requirements of Appendix B would have

to be made to allow the wholesale corporate credit union to fulfill its

role as an ultimate liquidity provider to the system.

NCUA and the wholesale corporate credit union have worked closely

on these adjustments, pending adoption of final revised rules governing

corporate credit unions. For several reasons, NCUA has determined to

incorporate these adjustments into the proposed revisions to Part 704.

First, the wholesale corporate credit union should have the assurance

that, once these adjustments are made final, it will remain entitled to

them, unless the regulation is changed. Second, the importance of the

wholesale corporate credit union to the entire credit union system

warrants public comment on the adjustments. Further, the adjustments

should be standardized in the event other corporate credit unions wish

to become wholesale corporate credit unions. Accordingly, this proposed

rule adds a new Section 704.19 governing wholesale corporate credit

unions. Public comment is requested. Final action on this proposal will

coincide with final action on the broader proposed Part 704.

Analysis

-Proposed Section 704.19(a) provides that wholesale corporate

credit unions must comply with Part 704, unless there is a specific

provision to the contrary in Section 704.19. Thus, a wholesale

corporate credit union that wishes to have access to the broader

investment powers of Appendix B of the May proposal must meet the

general requirements of that proposal, except as modified by Appendices

B and C and proposed Section 704.19. For a wholesale corporate credit

union, where Section 704.19 conflicts with Appendices B or C, Section

704.19 prevails.

-For example, Section 704.3(b)(1) of the May proposal contains a

general requirement that a corporate credit union maintain a capital

ratio of 4 percent. To engage in Part II authorities, though, a 6

percent ratio is required. For a wholesale corporate credit union,

however, proposed Section 704.19(b)(1) requires only a 5 percent ratio.

This is partly justified by proposed Section 704.19(c), which

establishes a narrower limit for risk taking than is available to other

corporate credit unions with Part II authority. It is also justified

because of the membership of a wholesale corporate credit union. Senior

managers of corporate credit unions have specialized expertise in the

areas of investments and asset and liability management. NCUA believes

that corporate credit union managers, as members and board

representatives, will analyze and question the balance sheet strength

and financial activities of the wholesale corporate credit union,

keeping its risk-taking in check. Finally, the lower ratio is justified

because a wholesale corporate credit union has a greater capacity to

raise paid-in capital from non-credit union sources if the need arises.

-Section 704.3(b)(2) of the May proposal provides that a corporate

credit union's monthly reserve transfers are based upon the level of

its reserve ratio, which is calculated by dividing the institution's

moving daily average net assets into the total of its reserves and

undivided earnings plus paid-in capital. Where the reserve ratio is

greater than or equal to 3 percent but less than 4 percent, the

corporate credit union must transfer .10 percent of its moving daily

average net assets. Where the reserve ratio is less than 3 percent, the

corporate credit union must transfer .15 percent of its moving daily

average net assets. The amount to be transferred must be calculated

monthly, but the funds may come out of earnings for the quarter. This

formula is maintained even for a corporate credit union operating with

Part II authorities.

-Proposed Section 704.19(b)(2), however, allows a wholesale

corporate

[[Page 38118]]

credit union to make reserve transfers at the lesser of .10 percent of

its moving daily average net assets or the amount, depending on its

reserve ratio, that would be required under Section 704.3(c). A lower

requirement is appropriate to provide competitive wholesale corporate

credit union services. Proposed 704.19(b)(2) also provides that reserve

transfers may be made from earnings in either the prior calendar month

or prior twelve- month period. It may be necessary for a wholesale

corporate credit union to utilize the earnings accumulated over a year,

rather than just a quarter, to balance occasional short-term losses

with overall long-term gain.

-Section 704.8(e)(1) of the May proposal requires a corporate

credit union to evaluate the risk in its balance sheet by measuring, at

least quarterly, the impact of a 300 basis point interest rate shock. A

corporate credit union must structure its balance sheet so that its

after-shock MVPE ratio does not fall below 1 percent. If the ratio

falls below 2 percent, the corporate credit union must conduct the

tests monthly. Section 704.8(e)(2) of the May proposal provides that a

corporate credit union must limit its risk exposure to levels that do

not result in an after-shock decline in MVPE of more than 18 percent.

Pursuant to Appendix B, a corporate credit union with Part II

authorities may structure its balance sheet so that its MVPE declines

as much as 50 percent after a 300 basis point shock.

-Proposed Section 704.19(c) permits a wholesale corporate credit

union's after- shock MVPE ratio to go as low as .75 percent and

restricts the absolute decline in MVPE to 35 percent. The MVPE floor

was lowered in the belief that the 1 percent level could unduly

restrict a wholesale corporate credit union and prevent it from

providing essential services to members. Since the MVPE floor serves,

in part, as a cushion for MVPE modeling errors, lowering the floor

requires greater assurance that the modeling system is reliable.

Accordingly, proposed Section 704.19(c)(2) requires a wholesale

corporate credit union to obtain, at its expense, an annual third-party

review of its asset and liability management modeling system. --

-In light of the forbearance provided in the capital and MVPE

requirements, NCUA believes that a wholesale corporate credit union

should operate with a lower limit on the permitted decline in MVPE than

provided in Appendix B, Part II. The proposed limit is consistent with

the level of risk a wholesale corporate credit union should undertake

in light of its mission to provide liquidity to the credit union

system.

Regulatory Procedures

Regulatory Flexibility Act

-The NCUA Board certifies that the proposed rule, if made final,

will not have a significant economic impact on small credit unions

(those under $1 million in assets).

Paperwork Reduction Act

-The paperwork requirements of this proposed rule are incorporated

in the requirements set forth in a proposed rule issued by NCUA on May

22, 1996. 61 FR 28085 (June 4, 1996). NCUA invites comment on: (1)

whether the collection of the information is necessary for the proper

performance of the functions of NCUA, including whether the information

will have practical utility; (2) the accuracy of NCUA's estimate of the

burden of the collection of information; (3) ways to enhance the

quality, utility, and clarity of the information to be collected; and

(4) ways to minimize the burden of collection of information. Comments

on the collection of information should be directed to Ms. Beauchesne,

at the National Credit Union Administration, 1775 Duke Street,

Alexandria, Virginia 22314-3428; Fax No. (703) 518-6433; E-Mail

Address: [email protected], by September 3, 1996. Comments should also be

sent to the OMB Desk Officer at the following address: Mr. Milo

Sunderhauf, OMB Reports Management Branch, New Executive Office

Building, Rm. 10202, Washington, DC 20530.

Executive Order 12612

-Executive Order 12612 requires NCUA to consider the effect of its

actions on state interests. It states that: ``Federal action limiting

the policy-making discretion of the states should be taken only where

constitutional authority for the action is clear and certain, and the

national activity is necessitated by the presence of a problem of

national scope.'' The risk of loss to federally insured credit unions

and the NCUSIF caused by actions of corporate credit unions are

concerns of national scope. The proposed rule would help assure that

proper safeguards are in place to ensure the safety and soundness of

corporate credit unions.

-Proposed Part 704 applies to all corporate credit unions that

accept funds from federally insured credit unions. NCUA believes that

the protection of such credit unions, and ultimately, the NCUSIF,

warrants application of the proposed rule to non federally insured

corporate credit unions. NCUA, pursuant to Executive Order 12612, has

determined that this rule may have an occasional 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 and the states, or on the distribution of

power and responsibilities among the various levels of government.

However, the potential risk to the NCUSIF without these changes

justifies them.

List of Subjects in 12 CFR Part 704

Credit unions, Reporting and recordkeeping requirements.

By the National Credit Union Administration Board on July 16,

1996.

Becky Baker,

Secretary of the Board.

For the reasons set forth in the preamble, NCUA proposes to amend

12 CFR Part 704, as proposed to be revised at 61 FR 28098, June 4,

1996, as follows:

PART 704--CORPORATE CREDIT UNIONS

1. The authority citation for part 704 continues to read as

follows:

Authority: 12 U.S.C. 1762, 1766(a), 1781, and 1789.

-2. Section 704.19 is added to read as follows:

Sec. 704.19 Wholesale corporate credit unions.

-(a) General. Wholesale corporate credit unions are subject to the

requirements of this part, except as set forth in this section.

-(b) Capital. (1) A wholesale corporate credit union will maintain

a minimum capital ratio of 5 percent.

-(2) A wholesale corporate credit union shall make reserve

transfers at the lower of .10 percent of its moving daily average net

assets or the amount that would be required under Sec. 704.3(c).

-(i) Required transfers are to be made from earnings in either the

prior calendar month or prior twelve-month period. Transfers made

during the prior twelve-month period must be greater than or equal to

the aggregate amount of required reserve transfers for each of the

months in that twelve-month period.

-(ii) NCUA and, in the case of state-chartered wholesale corporate

credit unions, the state supervisory authority, must be notified within

15 business days of the close of any calendar month in which a

wholesale corporate credit union's required reserve transfer exceeds

earnings for that month. The notice must include the dollar amounts

[[Page 38119]]

of the required reserve transfer and earnings for that month and for

the prior twelve-month period. The notice must also provide an

explanation of why the current month's required reserve transfer

exceeded earnings for that month.

-(c) Asset and liability management. (1) In conducting the interest

rate sensitivity analysis set forth in Sec. 704.8(e)(1)(i), a wholesale

corporate credit union must limit its risk exposure to levels that do

not result, at any time, in an MVPE ratio below .75 percent or a

decline in MVPE of more than 35 percent.

-(2) A wholesale corporate credit union must obtain, at its

expense, an annual third-party review of its asset and liability

management modeling system. -

[FR Doc. 96-18453 Filed 7-22-96; 8:45 am]

BILLING CODE 7535-01-P