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Letters to Shelby and Sarbanes Regarding Basel Capital Accords

Letters to Congress

Letters to Shelby and Sarbanes Regarding Basel Capital Accords

November 9, 2005

The Honorable Richard C. Shelby
United States Senate
Washington, D.C. 20510

Dear Senator Shelby:

First, I want to commend you and the Committee for holding a hearing on the important issue of financial institution capital standards, particularly as they relate to the Basel Capital Accords currently under development. Capital adequacy is perhaps at the center of any discussion of financial institution enhancements or refinements, for the obvious reason that capital is the primary element of safe and sound operation of the institution. And, capital standards for both banks and credit unions have been in place for some time and are in need of refinement. It is both prudent and essential that the Committee act deliberately in this area.

As you move forward in this process, I would strongly urge you to include reforms to the current credit union capital standards since those reforms are directly tied to the new Basel Capital Accords. Credit union net worth requirements are part of our system of Prompt Corrective Action enacted in the Credit Union Membership Access Act of 1998. Now that credit unions and the National Credit Union Administration have several years of experience with these requirements, it is time for some modest and reasonable adjustments. In particular, I believe it would be appropriate for the credit union leverage requirement, currently a full two percentage points higher than bank requirements, to be modified to be more comparable to the bank level, while still dealing with the accounting treatment of credit unions' share insurance fund deposits. This change in the basic leverage requirement should be accompanied by an improvement in the determination of risk-based net worth requirements, consistent with the new Basel Capital Accords.

The National Credit Union Administration has developed a reform proposal that has been introduced as part of H.R. 2317, the Credit Union Regulatory Improvements Act. That legislation would change credit union leverage requirements to be consistent with those applied to banks while also instructing the NCUA to develop risk-based net worth requirements consistent with the risk- based capital standards applicable to FDIC insured institutions. Since your Committee is dealing with the new Basel Capital Accords as they apply to banks, I believe it would be timely and appropriate for you to consider modifications to the credit union standards as well.

These new standards, contemplated in the above-referenced legislation, would provide credit unions with additional capital flexibility, while enhancing safety and soundness by more accurately reflecting credit union risk. At the same time, the new standards would enhance the ability of credit unions to continue to fulfill their mission of serving America's consumers, including those of modest means.

Thank you, again, for your leadership in this important area. Please contact me with any questions or suggestions.

Sincerely.
Daniel A. Mica
President & CEO


November 9, 2005

The Honorable Paul S. Sarbanes
United States Senate
Washington, D.C. 20510

Dear Senator Sarbanes:

First, I want to commend you and the Committee for holding a hearing on the important issue of financial institution capital standards, particularly as they relate to the Basel Capital Accords currently under development. Capital adequacy is perhaps at the center of any discussion of financial institution enhancements or refinements, for the obvious reason that capital is the primary element of safe and sound operation of the institution. And, capital standards for both banks and credit unions have been in place for some time and are in need of refinement. It is both prudent and essential that the Committee act deliberately in this area.

As you move forward in this process, I would strongly urge you to include reforms to the current credit union capital standards since those reforms are directly tied to the new Basel Capital Accords. Credit union net worth requirements are part of our system of Prompt Corrective Action enacted in the Credit Union Membership Access Act of 1998. Now that credit unions and the National Credit Union Administration have several years of experience with these requirements, it is time for some modest and reasonable adjustments. In particular, I believe it would be appropriate for the credit union leverage requirement, currently a full two percentage points higher than bank requirements, to be modified to be more comparable to the bank level, while still dealing with the accounting treatment of credit unions' share insurance fund deposits. This change in the basic leverage requirement should be accompanied by an improvement in the determination of risk-based net worth requirements, consistent with the new Basel Capital Accords.

The National Credit Union Administration has developed a reform proposal that has been introduced as part of H.R. 2317, the Credit Union Regulatory Improvements Act. That legislation would change credit union leverage requirements to be consistent with those applied to banks while also instructing the NCUA to develop risk-based net worth requirements consistent with the risk- based capital standards applicable to FDIC insured institutions. Since your Committee is dealing with the new Basel Capital Accords as they apply to banks, I believe it would be timely and appropriate for you to consider modifications to the credit union standards as well.

These new standards, contemplated in the above-referenced legislation, would provide credit unions with additional capital flexibility, while enhancing safety and soundness by more accurately reflecting credit union risk. At the same time, the new standards would enhance the ability of credit unions to continue to fulfill their mission of serving America's consumers, including those of modest means.

Thank you, again, for your leadership in this important area. Please contact me with any questions or suggestions.

Sincerely.
Daniel A. Mica
President & CEO

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