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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 Administration’s (NCUA’s) 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

1. 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?
   
   

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2. Do you have any specific concerns related to the expanded definition of “low-risk assets?”
   
   

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3. Do you have any other comments or questions regarding the interim final rule?
   
   

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