Sunday, January 16, 2011

NCUA Renews Call for Net Worth Reform

NCUA Chairman Debbie Matz renewed her call to reform prompt corrective action (PCA) and net worth standards for credit unions.

In a January 14 letter to Sen. Tim Johnson (D - SD), Chairman of the Senate Committee on Banking, Housing and Urban Affairs, NCUA Chairman Matz justifies the need to change the net worth standards for credit unions by stating: “Some financially healthy, well-capitalized credit unions that offer desirable products and services are discouraged from marketing them out of concern that attracting share deposits from new and existing members will inflate the credit union‘s asset base, thus diluting its net worth for purposes of PCA.”

The letter recommends two changes to the net worth standards for credit unions.

First, she proposes to allow qualifying credit unions to exclude assets that carry zero risk, such as short-term U.S. Treasury securities, from the definition of total assets, when calculating the credit union’s leverage net worth ratio. This accounting gimmick of allowing credit unions to deduct zero risk-weighted assets from total assets would inflate the net worth leverage ratio of credit unions. The leverage ratio does not just address credit risk; but also protects credit unions from other factors that can affect their financial conditions, such as interest-rate exposure, liquidity risks, and management’s overall ability to monitor and control financial and operating risks.

Second, she is seeking authority to allow qualifying credit unions to issue supplemental capital. The form of supplemental capital would be subject to regulatory prescriptions that address safety and soundness, protect investors, and preserve the cooperative credit union governance model.

However, legislation (S. 4036) signed into law at the end of the last Congress directed the Government Accountability Office (GAO) to examine how NCUA implements prompt corrective action. We should at least wait to see what the GAO study finds.

To read NCUA's letter, click here.

1 comment:

  1. Another bogus study of credit unions designed to find out what is already known. If these reports are such great things, then why hasn't the for-profit banking industry undergone such review? How much government money was used to keep the banks afloat? Was it put to good use? Did it achieve the desired goals?

    And hopefully, the banking lobby will keep its nose out of this review. But since past performance IS and indication of future performance, that is unlikely to happen.



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