WASHINGTON, DC (February 24, 2003) – NCUA Chairman Dennis Dollar told a national conference of 3000 credit union leaders here today that the federal “prompt corrective action” (PCA) law should be considered for possible modification to reflect the individual risk factors in credit unions, rather than the “one size fits all” approach presently in the statute.

“There is a significant difference in risk between a credit union with net worth of 7% that is invested heavily in short-term treasury securities and one that has a portfolio full of long-term higher risk loans,” said Dollar in remarks presented to the 2003 Governmental Affairs Conference sponsored by the Credit Union National Association (CUNA). “We examine and supervise those individual credit unions differently because of their differences in risk. Still, the same 7% PCA standard to be well-capitalized is applied to both. We need to extend our risk-based approach to the issue of capital adequacy.”

Dollar asked CUNA and other credit union trade associations to evaluate the concept and consider raising the issue with Congress as a part of the regulatory relief legislation presently under consideration in the House of Representatives.

“I have strongly supported the implementation of PCA as passed by Congress in 1998 and certainly am committed to doing everything possible to see its integrity maintained,” said Dollar, “but the law and our PCA regulations should take into consideration the differing risk profiles in individual credit unions. As regulators, we want to see credit unions have incentive to manage their risk with greater diligence. To base a credit union’s net worth ratio on risk assets rather than total assets would bring a needed risk management factor into the PCA equation.”

Dollar said that a minimum capital ratio would still be needed, similar to the leverage ratio required of banks and the core capital requirement of corporate credit unions. He said that the international Basel accords which set worldwide capital standards for banks could be a basic template for incorporating a risk-based model into credit union net worth calculations under PCA; however, he emphasized that any effective risk-based PCA proposal should also incorporate an interest rate risk component as well as one based largely on credit risk such as Basle. He also said any decision to revisit PCA by Congress, and ultimately by NCUA if authorized by Congress, should recognize the inherent structural differences between credit unions and banks.

“A risk-based PCA would require a change in the statute, just as would the controversial concept of secondary capital which has both its supporters and detractors in credit unions and Congress,” said Dollar. “My hope is that the policy makers, both in credit unions and in Congress, would consider whether basing PCA on risk assets rather than total assets may actually result in better credit union risk management over the long run than the one-size-fits-all approach presently employed under PCA, even if Congress were to amend PCA to authorize alternative sources of capital.”

“A risk-based PCA would provide an incentive for better managing risk,” said Dollar. “For example, credit unions who take the initiative to offer shorter-term and adjustable rate mortgages should get some credit for these risk management decisions. Right now, under PCA those mortgages carry the same risk weighting as do 30-year fixed rate mortgages. There needs to be different weighting for different risk factors. The challenge is not to avoid risk but to manage risk.”

Admitting that the “devil is in the details,” Dollar said that PCA is a “valid and valuable tool which should be retained and can be made even more effective if it can be more risk based.” He indicated that, if there is interest which develops in the risk-based PCA concept, NCUA would be willing to work with the Congress, the Treasury Department and credit unions to develop legislation and regulations to “ensure the integrity and fulfill the purposes of PCA even as we work with them to improve it where appropriate.”