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Federal Register / Vol. 86, No. 155 / Monday, August 16, 2021 / Proposed Rules This form provides an indication of the potential reporting format and reporting burden relative to the regulatory requirements associated with the proposed off-balance sheet exposures for the CCULR framework and the risk-based capital framework under the 2015 Final Rule.
M. Amendments to the 2015 Final Rule The Board stated its intent to holistically and comprehensively reevaluate the NCUAs capital standards for credit unions in the 2019 Final Rule.
A principal component of this review is the proposed CCULR framework. The Board also stated it would consider whether to make more substantive revisions to the 2015 Final Rule.94 The Board has completed this analysis and is proposing several changes to the 2015
Final Rule. Each change is discussed below.
1. Off-Balance Sheet Exposure Risk Weights The 2015 Final Rule states that the risk-weighted amounts for all offbalance sheet items 95 are determined by multiplying the off-balance sheet exposure amount 96 by the appropriate credit conversion factor and the assigned risk weight. However, the definition of off-balance sheet items is not aligned with the definition of offbalance sheet exposure. Under the 2015
Final Rule, only commitments, loans transferred with limited recourse, and loans transferred under the FHLB
mortgage partnership finance program are provided explicit exposure amounts.
The rule is silent on the appropriate treatment for the remaining items included in the definition of off-balance sheet items contingent items, guarantees, certain repo-style transactions, financial standby letters of credit, and forward agreements. In addition, the 2015 Final Rule does not 94 84

FR 68781, 68783 Dec. 17, 2019.
sheet items are defined as items such as commitments, contingent items, guarantees, certain repo-style transactions, financial standby letters of credit, and forward agreements that are not included on the statement of financial condition, but are normally reported in the financial statement footnotes. 12 CFR 702.2
effective Jan. 1, 2022.
96 Off-balance sheet exposure means: 1 For loans transferred under the Federal Home Loan Bank mortgage partnership finance program, the outstanding loan balance as of the reporting date, net of any related valuation allowance. 2 For all other loans transferred with limited recourse or other seller-provided credit enhancements and that qualify for true sales accounting, the maximum contractual amount the credit union is exposed to according to the agreement, net of any related valuation allowance. 3 For unfunded commitments, the remaining unfunded portion of the contractual agreement. 12 CFR 702.2 effective Jan. 1, 2022.

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include a credit conversion factor or risk weight for the off-balance sheet items that are not provided a specific exposure amount in the definition of off-balance sheet exposure.
The proposed rule would make several changes to clarify the treatment of off-balance sheet items. First, as discussed previously, the proposed rule would amend the definition of offbalance sheet exposures. This definition is used as one of the CCULR eligibility criteria and is proposed to be amended to more closely align with the other banking agencies CBLR framework. As a consequence of amending the definition of off-balance sheet exposure for the CCULR framework, the proposed off-balance sheet exposure definition would also more closely align with the existing definition of off-balance sheet items.97 Therefore, under the proposed rule, several items currently defined as an off-balance sheet item, but not included in the current definition of offbalance sheet exposure, would be provided an exposure amount. This change reduces ambiguity in the 2015
Final Rule. In addition, in the proposed rule, each item included in the definition of off-balance sheet exposure would be provided an explicit credit conversion factor and risk weight for purposes of the risk-based capital rule.
Each proposed change to the risk-based capital rule is discussed in detail below.
The proposed rule would state that unconditionally cancellable commitments have a zero percent credit conversion factor. Therefore, any unconditionally cancellable commitment would be excluded from a credit unions risk-based capital calculation. Under the 2015 Final Rule, these exposures would receive a minimum of a 10 percent credit conversion factor and could receive up to a 50 percent credit conversion factor.
The Board believes that many of credit unions commitments would qualify as unconditionally cancellable and that credit unions are currently subject to a more conservative treatment for unfunded commitments than banking organizations. Therefore, the Board believes providing a zero percent conversion factor will not only make the 2015 Final Rule more comparable to the other banking agencies 2013 capital rule but will also provide a significant burden reduction for credit unions 97 The only item included in the current definition of off-balance sheet item that would not be provided an explicit exposure amount would be contingent items. However, as discussed below, the Board is proposing to amend the definition of offbalance sheet item and would no longer include contingent items.

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calculating their capital adequacy under the 2015 Final Rule.
The proposed rule would provide that financial standby letters of credit are given a 100 percent credit conversion factor. The 2015 Final Rule does not provide a credit conversion factor for financial standby letters of credit.
Including an explicit 100 percent conversion factor would provide parity between the other banking agencies and the NCUA. The risk weight would be 100 percent.
For forward agreements that are not derivative contracts, the proposed rule would provide for a 100 percent credit conversion factor. The 2015 Final Rule does not provide a credit conversion factor for forward agreements that are not derivative contracts. Including an explicit 100 percent conversion factor would provide parity between the other banking agencies and the NCUA. The risk weight would be 100 percent.
For sold credit protection through guarantees and credit derivatives, the proposed rule would provide for a 100
percent credit conversion factor. The 2015 Final Rule does not provide a credit conversion factor for sold credit protection through guarantees or credit derivatives. The proposed rule would provide different risk weights for guarantees and credit derivatives.
Guarantees would receive a 100 percent risk weight. For credit derivatives, the risk weight would be determined through the applicable provisions of FDICs capital rules. A credit union offering credit protection through a credit derivative would risk weight the exposure according to 12 CFR 324.34
for derivatives that are not cleared or 324.35 for derivatives that are cleared exposures.
The Board understands the proposed treatment of credit derivatives is complex and compliance with these requirements increases the regulatory burden for credit unions that offer credit protection through credit derivatives.
However, credit derivatives are complex instruments. Furthermore, credit derivatives are not a permissible activity for FCUs and the Board believes that state-chartered credit unions should only offer credit derivatives if the credit union has the appropriate resources and capabilities to manage the complexity associated with them. The Board believes any credit union that has offered credit protection through credit derivatives should also be capable of complying with the complexity in the FDICs capital rules. Therefore, the Board believes it is appropriate to reference the other banking agencies 2013 capital rules when determining the
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