ALEXANDRIA, Va.-NCUA Chairman JoAnn Johnson's final proposal toreform credit unions' system of Prompt Corrective Action wasdelivered to Capitol Hill last week amidst cheers from the creditunion community. The revision to a proposal floated last monthseeking public comment has many of the same elements. However, afew suggestions from NCUA Board Member Debbie Matz and the creditunion trade associations were incorporated in the final versionshared with lawmakers for inclusion in the Credit Union RegulatoryImprovements Act. Bill sponsors Ed Royce (R-Calif.) and PaulKanjorski (D-Pa.), as well as Senator Mike Crapo (R-Idaho) who isworking on general financial services regulatory relieflegislation, received advance copies April 1, while the finalversion was delivered to the remaining lawmakers Monday, April 4.National Journal's CongressDaily quoted Congressman Kanjorski inits April 5 edition stating, "We've been waiting for this change.Now that we have the capital requirements, we can get thatdiscussion started." Kanjorski and Royce hope to introduce thelegislation in May, the report said. "I am pleased that NCUA hasprovided Congress with a comprehensive prompt corrective actionreform proposal for consideration as regulatory improvements arepursued for the nation's credit unions," Johnson said. "This reformproposal is consistent with NCUA's steadfast support of PCA assound public policy. We are working closely with Congress and lookforward to continuing to provide guidance on this important issueto credit unions." The revision emphasizes NCUA's support of thecurrent accounting for credit unions' 1% NCUSIF deposit; limits networth category reductions by regional directors to one downgradeand requires consultation with the central office; and requires arulemaking, which would include a public comment period, forlimitations on use of secondary capital for low-income creditunions in net worth calculations. The definitions section wouldalso change `net worth' to jibe with anticipated changes from theFinancial Accounting Standards Board to switch from the poolingmethod of accounting to the purchase method. If adopted, she said,"it would result in a balanced and credible approach to makingcredit unions' PCA system aptly robust, yet not unduly burdensomeor constraining." "I appreciate Board Member Debbie Matz and theNCUA staff for their thorough study and innovative efforts inbringing this proposal to fruition," the chairman said. "This newPCA reform proposal incorporates changes which I requested inresponse to concerns I heard from the credit union community," NCUABoard Member Debbie Matz noted. "These changes are intended toensure that NCUA's capital evaluation process will be fair andobjective for all credit unions, and will permit low-income creditunions to count secondary capital appropriately in the context oftheir overall risk profiles." She continued, "Rather than givingthe NCUA Board carte blanche to discount all secondary capital -and potentially impose PCA upon healthy low-income credit unions -the new proposal maintains that any write-down of secondary capitalmust be according to a specific maturity schedule established byregulation." Specifically, Matz explained, "For all federallyinsured credit unions, NCUA regional offices could use delegatedauthority to reduce their net worth category by only one level,which would be appealable. And for low-income credit unions,specific standards would protect the secondary capital which thecurrent law authorizes them to raise." She concluded, "I feel it isa good proposal and I commend [Chairman Johnson] for pushing itforward." Following a qualified statement of support of Johnson'sinitial proposal for PCA reform, CUNA President and CEO Dan Micastated unequivocal support for the revised version. "This proposal,we believe, supports safety and soundness, and offers reasonableassurances of protecting - to the fullest extent permitted underthe Federal Credit Union Act - the ability of credit unions to growand meet the ever-changing financial needs of their members," hesaid. NAFCU President and CEO Fred Becker also threw hisorganization's support behind Chairman Johnson's revised proposal."The formulation of this risk-based proposal is the product of agreat deal of work by many within the credit union community," hewrote in a letter to Johnson. "We certainly would not have arrivedat this point without your leadership and that of your predecessoras Chairman of the NCUA Board, Dennis Dollar, or without theimportant contributions of your Board colleague, Deborah Matz.NAFCU also recognizes the invaluable contributions made by so manymembers of the NCUA staff." Key areas of concern for the tradeassociations included the delegation of authority to downgrade networth ratings to regional directors, treatment of the 1% NCUSIFdeposit, uncertainties surrounding BASEL II in gauging risk-basednet worth requirements, and safeguarding the use of secondarycapital by low-income credit unions. "We do believe that all of ourconcerns were addressed," CUNA Associate General Counsel Mary Dunnstated. Regarding the addressing of the 1% NCUSIF deposit, shesaid, "Initially, our take was that we would have preferred it notbe." However, NCUA expressed concerns that Treasury may not supportthe proposal without accounting for it with regard to PCA. Beckeragreed, "[S]ince the purpose of PCA is to ensure the safety andsoundness of the industry, and the specific purpose of the 1%deposit is the same, we understand NCUA's desire to ensure thatcredit union's have sufficient net worth independent of the assetthat is already on deposit at NCUSIF for this purpose." CUNA ChiefEconomist Bill Hampel pointed out that it is important todistinguish that the net worth ratio without the 1% included in itwas "only for PCA purposes." For everything else, net worth wouldbe calculated according to generally accepted accountingprinciples. CUNA Senior Vice President of Governmental Affairs JohnMcKechnie explained that Royce and Kanjorski wanted a "bulletproof"PCA proposal, after they "felt the bankers made some headway" inopposition to the provision last congressional session. This "finalpiece to the puzzle" is currently being worked into legislativelanguage for CURIA, he added. Regarding Senator Crapo's interest,CUNA Vice President of Legislative Affairs and Senior LegislativeCounsel Gary Kohn said, "In terms of the Senate reg relief bill,they have made no decision yet on what will be in that bill butthis is certainly among those things being considered." The PCAreform proposal is available via the Internet:http://www.ncua.gov/ReportsAndPlans/special/special.html -

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