Grand Rapids, MI (May 29, 2003) – National Credit Union Administration Board Chairman Chairman Dennis Dollar told a group of credit union leaders here today that legislation is needed to “improve the one-size-fits-all PCA law” that he says inhibits proper credit union business planning because it “fails to properly reward solid risk management decisions and penalizes planned and balanced credit union growth.”

Speaking before over 600 attendees at the 69th Annual Meeting of the Michigan Credit Union League, Dollar said that a recommendation he has made to base the federal Prompt Corrective Action (PCA) law for credit unions on risk-based assets is an “idea worthy of serious consideration.”

“I believe strongly in a regulator taking prompt corrective action any time a financial institution has net worth problems and any regulatory actions should certainly be taken before the problem becomes severe and may jeopardize the institutions,” said Dollar. “However, any trigger for taking such action requires the evaluation of the risk in the institution. Every credit union with 7% net worth does not have the same risk profile, but yet PCA says that any credit union with at least 7% net worth is well capitalized. This one-size-fits-all approach is just not reasonable in what is inherently a risk-based process.”

Dollar has proposed that the PCA standards of 7% to be well capitalized and 6% to be adequately capitalized be maintained but be based upon a denominator of risk assets, rather than total assets as specified in the present law.

“I do not wish to see Congress lower the standards,” said Dollar. “In fact, I would strongly oppose lowering the bar. It just seems to me that the PCA standards, to be most effective in encouraging better risk management by credit unions, should be based on a percentage of at-risk assets, not total assets. Why do we need credit unions reserving a full 7% against the cash in their vaults, overnight cash accounts, federally guaranteed loans like student loans and SBA loans? The net worth reserve should be based upon their assets which have the potential to cause a loss. Then, and only then in my opinion, would PCA work like it was intended by providing credit unions with an incentive for managing their risk more effectively.”

Dollar said that congressional action would be required to amend the PCA law to make it risk-based. He indicated that it may not happen immediately as “Congress needs time to digest the pluses and minuses of the present PCA law;” however, he predicted that some inclusion of a risk-based component would eventually be necessary or “well planned and diligently managed credit union growth may suffer.”

Dollar suggested that a starting point for any NCUA regulation to implement a risk-based PCA law, should such legislation be enacted by Congress, would be the pre-1998 statutory reserve formula for federally-insured credit unions which excluded cash on hand, deposits in federally-insured institutions, loans guaranteed by governmental agencies, CLF investments and a credit union’s 1% NCUSIF deposit from the asset definition.

“A risk-based formula is not foreign to NCUA or credit unions,” said Dollar. “Prior to 1998 each credit union’s statutory reserve requirement was based on risk assets, not total assets. Credit unions grew and managed risk extremely well during that period, including building capital significantly through retained earnings. I personally believe the integrity of PCA will be enhanced long term if we can take the best of the pre-1998 risk-based asset definition and couple it with the regulatory discipline of the PCA statute.”

The National Credit Union Administration, governed by a three-member board appointed by the President and confirmed by the Senate, is the independent federal agency that regulates, charters and supervises federal credit unions. NCUA, with the backing of the full faith and credit of the U.S. government, operates and manages the National Credit Union Share Insurance Fund, insuring the deposits of more than 80 million account holders in all federal credit unions and the overwhelming majority of state-chartered credit unions.