110th CONGRESS, LEGISLATIVE ISSUES A - Z

I. Problems with Current PCA System

• Credit unions have higher basic capital requirements than banks, even though by theory and practice credit unions tend to be more risk-averse than banks. Historical experience shows that credit unions have the lowest default/delinquency rates in virtually all categories of loans; weathered even the Great Depression, every recession, and the savings & loan crisis with extremely low failure rates; are the only category of insured depository institutions that have never needed a federal bailout; and have the only deposit insurance system that has a “call” on the capital of all member institutions before taxpayer funds are required. These experiences over seven decades reflect the lack of incentives at credit unions for excessive risk-taking. Indeed, even before they were subject to PCA, credit unions maintained average net worth ratios well in excess of those held by banks.
• Credit unions lack access to capital markets. Without such access, in times of rapid savings growth (such as when members are concerned about the economy or financial markets) the ratio of net worth to assets can fall substantially even for healthy, well-managed credit unions.

II. How PCA Affects Credit Union Behavior

• Virtually all credit unions (99.0%) are at least adequately capitalized under PCA. However, of these, about 15% operate with a significant degree of concern about potential PCA requirements because of the limited size of their cushions above the requirements to be adequately- or well-capitalized.
• Because of the risk-averse structure of credit unions and lack of access to capital markets, PCA rules induce credit unions to maintain capital levels higher than those necessary to protect the share insurance fund.
• Credit union response to these pressures is to limit growth, which requires limiting service to members.
• This reduces the amount of funds that credit unions can devote to member loans that support the economy.

III. Risk-Based PCA Addresses the Problems

• Based on ratio of net worth to risk-assets rather than total assets. The more risky a credit union’s assets, the more binding the capital requirement.
• Preserves requirement that regulators must take prompt and forceful supervisory actions whenever a credit union becomes seriously undercapitalized.
• Does not weaken safety and soundness or protection of the share insurance fund.
• Reduces the incentives for well-capitalized credit unions to feel compelled to become excessively well capitalized for purposes of PCA.
• Permits credit unions to provide more of the loan and savings services that benefit members.
• It could incorporate a basic leverage ratio in addition to the ratio of net worth to risk assets.

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