NCUA Releases Draft Report:
“Prompt Corrective Action Proposal for Reform”
NCUA Chairman Johnson says report represents “sound public policy and
a risk-based capital standard necessary for the nation’s credit unions”
San Dimas, CA, February 23, 2005 – National Credit Union Administration (NCUA) Chairman JoAnn Johnson announced today that after extensive review and study, the NCUA is releasing its January 2005 draft report entitled Prompt Corrective Action Proposal for Reform.
The report discusses recommended statutory changes and provides details as to how NCUA would design a new risk-based system for federally insured credit unions. In remarks at a forum for credit union officials in California, Chairman Johnson said she recognizes the importance of the recommendations.
“I am very pleased that NCUA is able to provide the credit union community with a copy of our draft report of proposed reforms for prompt corrective action (PCA) for credit unions,” said Chairman Johnson. “This reform proposal is consistent with NCUA’s steadfast support of PCA as sound public policy.”
The report is the culmination of over a year’s worth of diligent work reviewing and analyzing various alternatives to the current mandated statutory PCA structure. After considering the views of the credit union industry, General Accountability Office, and the Department of Treasury, NCUA is recommending a more risk-based PCA system for federally-insured credit unions. If adopted, she said, “it would result in a balanced and credible approach to making credit unions’ PCA system aptly robust, yet not unduly burdensome or constraining.”
“Meaningful capital standards are important in protecting the federal insurance fund, taxpayers, and the stability of America’s credit union system,” stated Chairman Johnson.
NCUA also recognizes the importance for institutions in managing capital levels to ensure the efficient use of capital in the economy, to optimize the performance of an institution with appropriate leveraging, and to achieve strategic objectives in providing affordable services for members.”
“I look forward to working with Congress to make needed reforms to the PCA system for credit unions,” said Chairman Johnson. The proposed changes are designed to achieve comparability with the capital standards for FDIC-insured institutions by eliminating disparate differences in the standards. This would also allow greater flexibility for federally insured credit unions to manage their balance sheets.
Highlights of the report include the following:
- A recognition of the inherent limitations in any risk-based capital system. Consequently, the report advocates a system involving complementary leverage and risk-based standards working in tandem;
- For the leverage requirement, NCUA advocates a reduction in the standard net worth (i.e., leverage) ratio requirements for credit unions to a level comparable to what is required of FDIC insured institutions. In order to achieve comparability between the federal insurance funds, it is necessary to factor in the NCUSIF’s deposit-based funding mechanism. However, the NCUSIF deposit’s treatment for purposes of regulatory capital standards in no way alters its treatment as an asset under generally accepted accounting principles, or NCUA’s steadfast support of the mutual, deposit-based nature of the NCUSIF; and
- The draft risk-based proposal tailors the risk-asset categories and weights of BASEL II, as well as related aspects of the FDIC’s PCA system, to the operation of credit unions. This approach and the timing of the proposal is consistent with the federal banking regulators’ recent announcement to issue proposed rules this year incorporating BASEL II into their capital standards. The draft proposal is consistent with BASEL II and the FDIC’s PCA system, addressing credit and operational risks under the risk-based requirement and acknowledging other forms of risk, like interest rate risk. NCUA’s reform proposal includes recommendations to address these other forms of risk under the second pillar of the supervisory framework, a robust supervisory review process. Through the examination and supervision process, NCUA will continue to analyze each credit union’s capital position in relation to the overall risk of the institution, which may at times reflect a need for capital levels higher than regulatory minimums.
The draft PCA reform proposal is available via the Internet: http://www.ncua.gov/ReportsAndPlans/special/special.html
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