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SAN DIMAS, Calif.-Sharing the stage at the Credit Union Summit hosted by WesCorp and the California Credit Union League, Congressman Ed Royce (R-Calif.) and NCUA Chairman JoAnn Johnson shared their visions for CURIA in the coming year, focusing much attention on capital reform. Royce noted his authorship of the Credit Union Regulatory Improvements Act in the 108th Congress and said he plans to have a bill to introduce shortly in this Congress. “From the perspective of a member of the congressional committee that has responsibility for oversight, I believe that the modernization of capital regulation was the most significant component of this legislation,” he told the audience of more than 100 Southern California credit union CEOs. “I want credit unions to continue to thrive. In order for this to occur, I think we need to make sure that credit unions and the insurance fund are properly overseen. Internationally, the regulatory trend is toward risk-based capital standards.” Following Royce’s remarks, Johnson took the stage, stating that for credit unions CURIA is “the most major piece of legislation since 1998″ when the Credit Union Membership Access Act was signed into law. She agreed with the congressman on the need for capital reform. “Most significantly, I believe, is establishing a risk-based system for PCA,” Johnson stated. “It’s the one feature within CURIA which I believe can have the most long-lasting and the most impact for credit unions for years to come.” The chairman also announced that she was releasing the agency’s proposal for the updated capital modernization language for the bill. The draft report advocates a system with leverage and risk-based standards working together (See chart). NCUA recommends reducing the standard net worth ratio requirement for credit unions to a level comparable to that for FDIC insured institutions. Johnson noted that NCUA’s proposal is consistent with the risk-asset categories and weights of BASEL II and the related aspects of the FDIC’s Prompt Corrective Action system. The proposed system would maintain five capitalization categories. To meet a capital category, credit unions must meet the net worth and risk based standards, but not a combination of both, NCUA Executive Director Len Skiles explained. An example for easy figuring would be if a credit union has $1,000 in assets it should hold $50 for its net worth ratio to stand at 5%, or `well capitalized.’ If that same credit union has $500 of those assets in items that are 100% risk-weighted and $500 at 0% risk-weighted, it would also meet the risk-based component for that category with a 10% risk-based capital ratio. In other words, $50 in capital is in excess of the capital needed to support $500 in risk-based assets. The proposed minimum risk-weighted ratio to be well capitalized is 8%. If the credit union’s risk-weighted net worth ratio came out below that, Skiles explained, the institution would have to adjust its balance sheet or increase its reserves. “Meaningful capital standards are important in protecting the federal insurance fund, taxpayers, and the stability of America’s financial institution system,” stated Chairman Johnson. “We also recognize the importance for institutions in managing capital levels to ensure the efficient use of capital in the economy, to optimize the performance of an institution with appropriate leveraging, and to achieve strategic objectives in providing affordable services for members.” The proposal stated, “A PCA system comparable to that employed in the banking system will provide sufficient protection for the insurance fund. Such a system for credit unions would also remove charter bias and level the playing field by eliminating differing capital standards unrelated to risk. While credit unions are not able to raise capital as quickly in some cases as other financial institutions, the majority of credit unions have a relatively conservative risk profile (driven by the restrictions of powers relative to other institutions and their cooperative, member-owned structure) and a comparatively low loss history. Thus, credit unions should not be required to hold excessive levels of capital.” The proposal also notes that BASEL and FDIC handle interest rate risk through “a robust supervisory review process.To complement this approach and bolster the supervisory review process in relation to interest rate risk, we are recommending adding more flexibility for reclassification authority to lower net worth categories for concerns involving inadequate net worth levels relative to interest rate risk based on institution specific model results.” The agency also plans to look into adding an `S’ component to the CAMEL ratings specifically targeting interest rate risk. “If we want to get this bill through, we’re going to have to focus our energies and efforts like never before,” Congressman Royce said to rally the troops. He encouraged the conference attendees to contact and visit congressmen as a show of support. Royce added that he thinks the bill can achieve a majority of the Congress as cosponsors in the 109th Congress. NCUA’s draft PCA reform proposal is available at http://www.ncua.gov/ReportsAndPlans/special/ special.html. [email protected]

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