NCUA Finalizes Prompt Corrective Action Rule

The National Credit Union Administration Board last week finalized its Prompt Corrective Action (PCA) regulation, and the credit union movement should heave a collective sigh of relief at the outcome.

 
 

The National Credit Union Administration Board last week finalized its Prompt Corrective Action (PCA) regulation, and the credit union movement should heave a collective sigh of relief at the outcome.

PCA, which was mandated by Congress in the Credit Union Membership Access Act, has been a source of apprehension since that law was passed nearly two years ago. Credit unions were particularly worried about which of them would end up defined as "complex" and thus be subject to new risk-based capital requirements.

As initially proposed, the rule would have applicable to all "complex" credit unions regardless of asset size. It would also have assigned significant "risk weight" to things such as money market mutual funds and CUSO investments.

However, the final rule as passed is substantially different than the proposal. Rather than a "one-size-fits-all" approach, the rule more realistically takes into account the differences between credit unions. To begin with, all credit unions with assets of $10 million or less are exempted. Only those above that asset size with a risk-based net worth calculation above 6% will be subject to the risk-based net worth (RBNW) requirement.

According to Herb Yolles, NCUA's Deputy Director of Examination & Insurance and leader of the Agency's PCA Task Force, only 452 credit unions will be defined as "complex" under the new rule. That number is less than a third of those who would have been defined as "complex" under the proposed rule. Yolles also said that only 17 of those 452 are likely to be subject to PCA.

The final rule uses a three-step process to determine if the RBNW requirement is applicable (Step One); to calculate the risk to yield a "standard component" (Step Two); and to substitute any of three specific standard components with a corresponding "alternative component" if that reduces the RBNW requirement (Step Three).

Assets will be assigned weight according to which of eight "buckets" they belong to. These "buckets" represent risks ranging from zero (for example cash and the 1% NCUSIF deposit) to "above average" (for example equity securities).

The rule will kick in with the first quarter 2001 Call Reports (for quarterly filers; for semiannual filers the date will be mid-2001). As NCUA Board member Dennis Dollar noted, the rule is subject to a one-year review process. "At that time we will be able to address any unanticipated implications of the rule," said Dollar. "We will be particularly interested in revisiting the issue of regulatory burden."

 

 

 

July 17, 2000


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