Qualifying credit unions will need to demonstrate that the decline in net worth was due to share growth – what the agency has sometimes referred to as “induced growth” – and not due to poor management or material unsafe and unsound practices.
Credit union officials have argued that rapid inflows of deposits due to “flight to safety” might lower net worth ratios and trigger PCA restrictions. These industry officials have suggested that the capital constraints PCA imposes will force credit unions to turn away deposits and reduce services so as not to dilute or decrease their net worth ratios.
We need to remember that the purpose of PCA is to curb aggressive growth. Rapid growth is a common attribute of depository institutions that failed.
Furthermore, the Government Accountability Office in 2004 wrote:
“[A]ctive asset management is a major component of the operations of any financial institution. Credit union managers are expected to manage the growth of their institutions so that an influx of member deposits would not cause the credit union to become subject to PCA.”
Moreover, ABA wrote in 2003:
“ABA finds the NCUA’s concept of “induced growth” somewhat illogical. Surely one of the few things truly controllable by a financial institution is the ability to limit too rapid growth.“
Therefore, the decline in the net worth ratio – whether it is from inflow of deposits or poor management – should not have any bearing on net worth requirements for prompt corrective action.
For once I agree with the ABA comment. Profitability, growth and net worth are the function of credit union management and congress doesn't need to be involved. However, there are occasions when, through no fault of its own a credit union may experience large inflows of deposits which negatively impact net worth. When that happens, the NCUA just needs to accept that time and good management is the appropriate form of PCA. Oh, the ABA should also support risk based capital in the analysis of credit union capital sufficiency.
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