OLYMPIA, Wash. - Here in the state capital, where credit union executives, Washington Credit Union League representatives, industry consultants and regulators gathered for the league's fourth annual Governmental Affairs Committee conference on Jan. 26-27, signs of sharks were everywhere. The NCUA's rule on Prompt Corrective Action (PCA) may have sharper teeth than many people think, they said, using words like "harsh" or "bitter pill" to describe the rule. For most credit unions, the term PCA is a yawner. The threat of severe regulatory penalties for credit unions with capital ratios that fall below 7% seems distant, and therefore, small. Reassured by the chorus of auditors and regulators who told attendees that only a few credit unions lack the required capital ratio, relieved by how harmless the dreaded Y2K bug was, and sharing the high confidence in the economy that the rest of the country does, most credit unions see nothing but smooth seas ahead. But perhaps because credit unions are growing so fast on the West Coast, or perhaps because Parker Cann, Washington state director of Credit Unions at the Department of Financial Institutions, also chairs the NASCUS H.B. 1151 Task Force, the attention level is high here. Stacy Augustine, general counsel for the League, and RoxAnne Kruger-Monahan, VP of association services for the League, said their phones have been ringing off the hook since the New Year began, as the implications NCUA's rules on PCA credit unions have begun to sink in. Extra tables were set up for the full house gathering for the PCA Clinic at the conference. Many executives said they had already begun to rein in their growth due to the regulation. Their credit unions are growing faster than their earnings can contribute to capital in the required amount. Don Larsen, president of the League Board of Directors, noted that had happened in his own Supply CU and asked, "With the penalty on these strong aggressive growing credit unions, where will they go? ASI (private share insurance)? Elsewhere (bank or thrift charter)?" One of the scariest aspects of the rule is that it echos regulations in place for savings and loan institutions not so long ago-regulations that didn't work then and won't work now, said conference speaker Sally Myers, president of the C. Myers Corp in Phoenix, Arizona. While ignoring real potential for capital destroying losses, the NCUA rule is promoting a measure of interest rate risk they call Net Economic Value (NEV), she said, a dangerously inadequate model. Another part of the picture that rankles is that banks and thrifts are considered "well-capitalized" with a 5% capital ratio, Cann noted. Risk measurements will make major demands on credit union managers and board members. Interest rate risk, credit risk and growth risks all can dilute the net worth ratio. Cann recommended instituting a new management regime that would measure, monitor, modify and mitigate those risks. "We are continually told we are in a transitioning phase," relating to regulations on PCA, said one audience member. "My question is, `what are we transitioning to?' " Cann said he didn't know, but the ultimate goal of the regulation is to make sure credit unions and regulators understand long term risks to capital. In the afternoon session, when regulators sat at a table up front and fielded questions, Rick Ravine, NCUA supervisor from Region VI, noted that in his 20 years of experience, the notion of when a credit union is in danger of failing had changed. In the early days, credit unions that failed were insolvent, he said, and had a negative net worth. When state regulators forced the Washington credit unions private share insurance association to shut down, credit unions moving to federal government insurance were allowed to have a capital ratio of 3%. Now, federal legislation and regulations are aimed at limiting losses to the federal insurance fund, he said, "The benchmarks have changed." To fears about PCA's effect on healthy, fast-growing credit unions, Ravine suggested that federal regulators in Region VI would look carefully at earnings and capital ratios and differentiate between those ratios that declined due to growth, rather than fundamental weakness. Alternative capital sources Although League officers took pains to separate the issue of secondary, or alternative capital sources, the subject seems to come up at the same time. "Secondary capital transcends PCA," said John Annaloro, president of the Washington CU League. Roger Bulger, Barbara Hoag, Mitchell Lucas, John Annaloro and Stacy Augustine were among the members of Washington's Task Force that visited Washington, D.C. recently to discuss the issue with NCUA board members (CU Times, Jan. 5, 2000). Bulger, president and CEO of Woodstone CU, said the group was very encouraged after working with both state and federal regulators. "We were wondering how to compete while limited by earnings and capital ratios," he said. "We looked for opportunities to raise capital in other ways." They investigated low income credit unions and corporate credit unions as well as other non-profit cooperatives for examples. Corporate credit unions and low-income credit unions are the only forms that currently can obtain alternative capital at this time. The present NCUA threshold requires a credit union to have "50% plus one" of its total membership to be low-income members to qualify for low-income credit unions status. Cann agreed 30% was a more reasonable level. However, he didn't hold out much hope for such a change in federal regulations. Although members of the task force unanimously agreed that the response from NCUA board members had been positive, state and federal staff regulators may throw up roadblocks. For example, Cann cited a daunting list of regulatory hurdles that stand in the way: * the League would need an NCUA rule (adopted by the NCUA Board) even for state charters, or an agency interpretation (legal opinion written by NCUA attorneys), to define alternative capital sources for regular credit unions, * regulators would have to determine who credit unions could sell capital shares or bonds to and how those instruments would be sold, * each credit union would have to put out a prospectus listing risks to the newly invested capital. And, of course, bankers will again raise the issue of taxation, if credit unions get serious about getting approval to raise alternative capital, said John Bley, head of the Washington Department of Financial Institutions. "I see it as a legislative issue, not a regulatory issue," Bley added, but he was noncommittal on whether his department would testify in favor. Annaloro reiterated the Task Force's position that the issue transcends PCA. "The committee decided it was much broader," he said. The NCUA board did not want to appear to be trying to circumvent Congressional legislation and regulation. Board members are looking for political cover and would like to see more comments from credit unions on the subject. So far, eight other credit union leagues have weighed in, including California. However, with the passage of the Financial Modernization Bill, credit unions don't have the same tools available to them that other financial institutions do, he said. At the least, alternative capital sources could come from existing credit union members, an approach that would be less controversial than some other ideas the Task Force has considered. -
mcintyre@viclink.com
