More on PCA

A recently released Government Accountability Office (GAO) study provided some interesting insights into NCUA's implementation of prompt corrective action (PCA).

According to the GAO, 560 credit unions between January 1, 2006 and June 30, 2011 triggered PCA with the vast majority (452) occurring after the beginning of 2008.

In general, most credit unions subjected to PCA do not fail; but also a sizable number were no longer independent. GAO tracked the performance of a sample of 275 credit unions subject to PCA from January 1, 2008 through June 30, 2009. It found that 61 percent of these credit unions were no longer independent as of June 30, 2011. Forty percent were merged into stronger credit unions, 19 percent failed, and 2 percent voluntarily liquidated.

Among the remaining 39 percent still in business, slightly more than one-third were still subject to PCA.

The report further found that NCUA's application of PCA became more timely. For credit unions triggering PCA from January 2006 to December 2007, approximately 43 percent were significantly or critically undercapitalized. For credit unions entering PCA after January 1, 2008, less than a quarter (23 percent) were significantly or critically undercapitalized.

While GAO acknowledged an improvement in NCUA's application of PCA, it also found inconsistencies with regard to its implementation. Specifically, GAO noted that almost 19 percent of the credit unions that failed between the beginning of 2008 and the middle of 2011 were not subject to PCA. The report further noted that of the 69 failed credit unions that triggered PCA, many did so at lower capital levels than credit unions that triggered PCA as a whole. In fact, 55 percent of failed credit unions initially triggered PCA at the significantly or critically undercapitalized level. Furthermore, in most cases, PCA was not initiated until less than 180 days prior to failure -- limiting its effectiveness.

The study concluded that tying mandatory corrective actions to only capital-based indicators has drawbacks, as capital-based indicators lag behind other indicators of financial distress.