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.”