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Impact From NCUA Chairman’s PCA Proposal Generally Favorable for Credit Unions, CUNA Finds. WASHINGTON-Though CUNA generally supports NCUA Chairman JoAnn Johnson’s proposal for Prompt Corrective Action reform, the trade association pointed out a few items of concern in a recent letter. On Feb. 26, CUNA’s Board met and approved a resolution that “generally supports the Prompt Corrective Action proposal from NCUA” but directs CUNA staff to continue to work with NCUA to address concerns. CUNA President and CEO Dan Mica followed up in a March 7 letter that some changes should be made “in an effort to refine the proposal in the best interests of credit unions, while adequately guarding safety and soundness. I believe these are your objectives as well.” The proposal is intended for inclusion in the Credit Union Regulatory Improvements Act. CUNA objected to regional directors being delegated authority to downgrade a credit union’s net worth category. Mica said CUNA has already discussed this issue with NCUA staff and is awaiting changes. At the very least, he suggested that regional directors be limited to only lowering a net worth category after formal consultation with the agency’s executive director. CUNA Chief Economist Bill Hampel added, “Our credit unions have some severe concerns about that. They think that’s so significant an action, that the authority to do that-which the NCUA has-should stay at the board level here in Washington.” Additionally, Mica’s letter stated the proposal should assure that state regulators will be consulted where state charters are concerned. Interest rate risk must also be clearly defined. Mica also noted CUNA’s concern about the proposal addressing credit unions’ 1% deposit in the National Credit Union Share Insurance Fund. “Quite frankly,” he wrote, “I believe you are well aware that many of our members would have preferred that NCUA not have dealt with the 1% deposit in the context of the PCA proposal. At this stage of the process, however, we recognize that there is not much flexibility to eliminate those provisions relating to the 1% deposit.” Steps should be taken to avoid a `slippery slope’ that could lead to a `write-down’ of the funds, Mica advised. In addition, he asked that NCUA lay out a plan to handle BASEL II-like provisions from the proposal as applied to credit unions if CURIA becomes law before BASEL II is adopted or if it is modified. In that same category, CUNA asked that NCUA clarify operational risk measurements and “insure it accurately reflects credit unions’ risk in this area.” Finally, Mica wrote that the agency should ensure that secondary capital for low-income credit unions may be used without limitations unrelated to safety and soundness. While CUNA staff is busy meeting with NCUA and Treasury staff to iron out details of possible amendments to the proposal, CUNA’s Hampel has put together data for member credit unions to look at how the proposal would affect their net worth. “Virtually every credit union that today is well-capitalized, would become more well-capitalized by this system,” he explained. “And, the significant one there is that there are around 1,400 to 1,500 credit unions under the current system who are well capitalized but by less than two percentage points-so they’re within striking distance of not being well-capitalized-that number would drop to around five or six hundred under the proposal. So two-thirds of the credit unions who are currently merely well-capitalized would become very well-capitalized and, therefore, out of the clutches of Prompt Corrective Action.” However, Hampel added, “There is a handful of credit unions who are inadequately capitalized who the proposal would designate as even less capitalized than they currently are, but that’s a fairly small number.” Two key pieces of the proposed framework could lead to this scenario, according to Hampel. First, for comparability with the banks, the agency would subtract the 1% NCUSIF deposit from both net worth and assets strictly for PCA purposes. The other reason is that while the top capitalization categories of the current PCA system would be lowered from 7% to 5% and from 6% to 4%, while the lower 3% and 2% net worth cut offs would not be changed. For most credit unions, this is more than made up for under the proposed system, Hampel said. “Any credit union with a net worth ratio down around 3%, no matter what PCA or any other rule says, needs to be so seriously devoted to increasing its net worth that it’s not really that much of a change,” he stated. Hampel stressed that this impacts a very small number of credit unions. [email protected]

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