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Federal Register / Vol. 86, No. 244 / Thursday, December 23, 2021 / Rules and Regulations the minimum requirements, depending on the nature of the credit unions activities and risk profile. The FCUA
grants NCUA broad authority to take action to ensure the safety and soundness of credit unions and the NCUSIF and to carry out the powers granted to the Board. Requiring credit unions to maintain capital adequacy is part of ensuring safety and soundness and is not a new concept. This provision is focused on the credit unions own process and strategy for assessing and maintaining its overall capital adequacy in relation to its risk profile and does not affect credit unions PCA capital category. The provision is only intended to support the assessment of capital adequacy in the supervisory process, for example when assigning CAMELS and risk ratings.70
L. 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 CCULR framework. The Board also stated it would consider whether to make more substantive revisions to the 2015 Final Rule.71 The Board has completed this analysis and is including several changes to the 2015 Final Rule.
Each change is discussed in the following sections. The proposed changes are generally adopted as final without change.

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1. Off-Balance Sheet Exposure Risk Weights The 2015 Final Rule states that the risk-weighted amounts for all offbalance sheet items 72 are determined by multiplying the off-balance sheet exposure amount 73 by the appropriate credit conversion factor and the 70 86 FR 59282 Oct. 27, 2021. The final rule updating the CAMEL system to CAMELS becomes effective April 1, 2022.
71 84 FR 68781, 68783 Dec. 17, 2019.
72 Off-balance 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.
73 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; and 3 For unfunded commitments, the remaining unfunded portion of the contractual agreement. 12 CFR 702.2 effective Jan. 1, 2022.

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assigned risk weight. But the definition of off-balance sheet items is not aligned with the definition of off-balance 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, for example contingent items, guarantees, certain repo-style transactions, financial standby letters of credit, and forward agreements. In addition, the 2015 Final Rule does not 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 final rule makes several changes to clarify the treatment of off-balance sheet items. First, as discussed previously, the final rule amends the definition of off-balance sheet exposures. This definition is used as one of the CCULR eligibility criteria and is 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 off-balance sheet exposure definition also more closely aligns with the existing definition of offbalance sheet items.74 Thus, several items currently defined as an offbalance sheet item, but not included in the current definition of off-balance sheet exposure, are now provided an exposure amount. This change reduces ambiguity in the 2015 Final Rule.
Further, each item included in the definition of off-balance sheet exposure in the final rule is provided an explicit credit conversion factor and risk weight for purposes of the risk-based capital rule. The Board did not receive any comments on the proposed off-balance sheet risk weights and is adopting them as final without change. Each change to the risk-based capital rule is discussed in detail in the following paragraphs.
The final rule states that unconditionally cancellable commitments have a zero percent credit conversion factor. Thus, any unconditionally cancellable commitment is excluded from a credit unions risk-based capital calculation.
74 The only item included in the current definition of off-balance sheet item that is not provided an explicit exposure amount is contingent items. As discussed subsequently in this preamble, however, the Board is amending the definition of off-balance sheet item and no longer includes contingent items.

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Under the 2015 Final Rule, these exposures 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 qualify as unconditionally cancellable and that credit unions are currently subject to a more conservative treatment for unfunded commitments than banking organizations. Thus, 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 calculating their capital adequacy under the 2015 Final Rule.
The 2015 Final Rule does not provide a credit conversion factor for financial standby letters of credit. Including an explicit 100 percent conversion factor provides parity between the other banking agencies and the NCUA. The final rule provides 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 forward agreements that are not derivative contracts. Including an explicit 100
percent conversion factor provides parity between the other banking agencies and the NCUA. For forward agreements that are not derivative contracts, the final rule provides 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 final rule provides different risk weights for guarantees and credit derivatives. Guarantees would receive a 100 percent risk weight. For credit derivatives, the risk weight is determined through the applicable provisions of the FDICs capital rules. A
credit union offering credit protection through a credit derivative risk weights the exposure according to 12 CFR
324.34 for derivatives that are not cleared or 12 CFR 324.35 for derivatives that are cleared exposures.
For sold credit protection through guarantees and credit derivatives, the final rule provides for a 100 percent credit conversion factor.
The Board understands the 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. But credit derivatives are complex instruments.
And, credit derivatives are not a permissible activity for FCUs, and the Board believes that state-chartered credit unions should only offer credit
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