ALEXANDRIA, Va. -- The NCUA Board last week exhibited its unanimous support for the Prompt Corrective Action proposal currently included in the Credit Union Regulatory Improvements Act (H.R. 1537).
At its June 21 meeting, the board approved its proposal to establish a risk-based capital framework for credit unions that is presently making its way through the legislative process in CURIA. The proposal would eliminate the current "one-size-fits-all" approach to PCA.
The 2007 version of the risk-based capital proposal bumped the leverage ratios up 25basis points from the previous proposal in the last Congress. This change was made to account for differences between the credit union and banking system but NCUA's proposal closely mirrors the Basel 1a proposal.
"NCUA's proposed system is rigorous and appropriately flexible," NCUA Chairman JoAnn Johnson stated. "It institutes a practical, risk-based capital standard that reflects the varied requirements inherent in 21st Century balance sheets. It enhances the ability to identify and deal with thinly capitalized institutions and it provides additional supervisory tools to address capital adequacy. The proposal empowers healthy credit unions to utilize capital more efficiently and operate in a safe and sound manner while protecting the National Credit Union Share Insurance Fund."
According to NCUA, under the current method 90.6% (7,521) of credit unions would still be "very well capitalized"--2% over the "well capitalized" level--compared to 96% (8,017) estimated under the proposed calculation method. Nearly all, 99.2%, of credit unions would be well capitalized. However, on the lower end, the "critically undercapitalized" credit unions would increase from 10 (0.1%) to 18 (0.2%).
NCUA Loss/Risk Analysis Officer Steve Farrar noted, "The requirement at the lowest level is actually higher" so NCUA can take action while there is still a bit more capital in the troubled institution.
"This proposal truly aligns the risk an institution takes with the appropriate capital level," NCUA Board Member Gigi Hyland commented.
The NCUA Board also issued a proposed regulation to insert a conflict of interest clause into its eligible obligations rule. There are currently such provisions in the agency's general lending rule and elsewhere so the change would bring them all in line.
The proposal states that an official, employee or immediate family member could not directly or indirectly receive any commission, fee or other compensation in connection with an eligible obligation transaction. Eligible obligations are loans purchased to complete a pool of loans to sell on the secondary market, NCUA Staff Attorney Frank Kressman explained.
NCUA Board Vice Chairman Rodney Hood pointed to the current student loan debacle where some lenders and some colleges allegedly extended quid pro quo arrangements that were ethically questionable. He noted that credit unions were not involved in those types of dealings but Hood drew a parallel and said, "This keeps our credit unions sort of above board."