REPORT TO THE CONGRESS ON ACTIONS TAKEN IN RESPONSE TO THE U.S.

GOVERNMENT ACCOUNTABILITY OFFICE’S REPORT ENTITLED,“NATIONAL 

CREDIT UNION ADMINISTRATION: EARLIER ACTIONS ARE NEEDED TO BETTER 

ADDRESS TROUBLED CREDIT UNIONS”

FINANCIAL STABILITY OVERSIGHT COUNCIL

Completed pursuant to Section 4(d) of the National Credit Union Authority Clarification Act 

June 2012
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Table of Contents

I. Introduction ........................................................................................................................... 3

II. GAO Study and Findings/Recommendations..................................................................... 3

III. NCUA Activities Relating to the GAO’s Recommendations............................................. 4

IV. Requirement for the Council to Report on Actions Taken................................................ 7
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I. Introduction 

The National Credit Union Authority Clarification Act (the Act) requires the Comptroller 

General of the United States (GAO) to conduct a study of the National Credit Union 

Administration’s (NCUA) supervision of corporate credit unions and implementation of prompt 

corrective action (PCA). The Act further requires that the Financial Stability Oversight Council 

(the Council) submit a report to Congress on actions taken in response to the GAO report,

including any recommendations issued to the NCUA under section 120 of the Dodd-Frank Wall 

Street Reform and Consumer Protection Act (the Dodd-Frank Act).

This report discusses the findings and recommendations of the GAO study, and outlines NCUA 

activities that relate to the GAO’s recommendations, including the NCUA’s: (1) continued

evaluation of alternative approaches to PCA and the early identification of potentially troubled 

credit unions, and (2) maintenance of a robust process for the accurate and transparent valuation 

of the securities underlying the NCUA guaranteed notes backed by legacy assets of the failed 

corporate credit unions, and of the range of total potential corporate resolution costs.

II. GAO Study and Findings/Recommendations

In January 2012, the GAO issued its study titled, ―National Credit Union Administration: Earlier 

Actions Are Needed to Better Address Troubled Credit Unions.‖ 

In its study, the GAO found that:

 Poor investment and business strategies contributed to the failures of five large 

corporate credit unions. Specifically, the five failed corporate credit unions

concentrated their investments in private-label, mortgage-backed securities (MBS) 

and invested substantially more in private-label MBS than corporates that did not fail.

 NCUA took multiple actions to stabilize, resolve, and reform the corporate credit 

union system. These steps included placing failing corporates into conservatorship, 

reducing losses from the corporates’ failures by the establishment of a securitization 

program to provide long-term funding for the distressed assets, and addressing 

weaknesses in corporate credit union regulations. 

 NCUA’s responses to the failures of the five large corporate credit unions included 

measures to reduce moral hazard, minimize the cost of resolving the corporates, and 

protect taxpayers. 

 Poor management was the primary cause in 85 natural person or consumer credit 

unions failures studied by GAO.

 Credit unions that did not fail were more likely subject to earlier PCA action than 

failed credit unions. For many of the failed credit unions, other enforcement actions 

were initiated either too late or not at all. 
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 Extending the GAO research on the effectiveness of PCA for banks to the credit 

union industry, the GAO found PCA effectiveness is limited because of its reliance 

on capital, which can lag behind other indicators of financial health. GAO examined 

other potential financial indicators for credit unions, including measures of asset 

quality and liquidity, and found a number of indicators that could provide early 

warning of credit union distress. GAO states that incorporating such indicators into 

the PCA framework could improve its effectiveness.

The GAO report included two recommendations for executive action:

 To better ensure that NCUA determines accurate losses incurred from January 1, 

2008, to June 30, 2011, GAO recommended that the Chairman of NCUA provide its 

Office of Inspector General (OIG) the necessary supporting documentation to enable 

the OIG to verify the total losses incurred as soon as practicable. 

 To improve the effectiveness of the PCA framework, GAO recommended that the 

Chairman of NCUA consider additional triggers that would require early and forceful 

regulatory actions, including the indicators identified in the GAO’s report. The GAO 

stated that in considering these actions, the Chairman should make recommendations 

to Congress on how to modify PCA for credit unions, and if appropriate, for 

corporates.

III. NCUA Activities Relating to the GAO’s Recommendations 

This section describes ongoing and planned NCUA activities that relate to the GAO’s

recommendations. 

Supporting Documentation regarding Corporate Resolution Costs

As noted above, the GAO recommended that NCUA provide its OIG supporting documentation 

regarding the total losses incurred, i.e. audited financial statements and supporting materials for

the Temporary Corporate Credit Union Stabilization Fund (Stabilization Fund), which was 

formed to absorb losses of the failed corporate credit unions. The Stabilization Fund was used as 

a part of the resolution of the five failed corporate credit unions. To resolve these credit unions, 

NCUA created a re-securitization program to provide long-term funding for the legacy assets 

inherited from the institutions. As a part of this program, NCUA Guaranteed Notes (NGNs) 

were issued. The NGNs are backed by over 2,000 investment securities that are legacy assets of 

the failed corporate credit unions, and are secured by approximately 1.6 million mortgages. 

NCUA issued approximately $28.3 billion of NGNs. 

Although the audited financial statements were not available during the period when GAO was 

performing its review, NCUA auditors completed their work and NCUA provided fully 

documented loss estimates prior to the release of the report. Subsequent to the report, the GAO 

affirmed that the report’s findings and recommendation on the loss estimates for the Stabilization 

Fund should not be construed as a determination on the quality of the audited financial 
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statements. GAO has subsequently reviewed the audited financial statements and has 

determined that NCUA has fully addressed the recommendation.

More broadly, NCUA has taken actions to promote the accurate and transparent valuations of the 

legacy securities from the five failed corporate credit unions and the range of total potential 

corporate resolution costs. For example, NCUA has established a valuation process around the 

NGNs and the projection of the corporate resolution costs. In addition, the NCUA Board created 

the NGN Securities Management and Oversight Committee to ensure that NCUA meets all its 

statutory and legal obligations under the NGN Program. 

On a quarterly basis, NCUA prepares updated loss estimates which include valuations of the 

underlying legacy assets and projections of legacy asset cash flows, NGN guaranty fees, 

guaranty payments required by NGNs, and legacy asset residual values, which together yield the 

net economic values associated with NGN program. To ensure the most accurate valuations and 

projections of the legacy assets NCUA has contracted with BlackRock Solutions to assist with 

the process of preparing the loss estimates and related valuations. The loss estimates that NCUA 

prepares for securitized assets are joined with valuations of the legacy assets that were not 

securitized to generate an updated evaluation of total costs and cash flows associated with the 

resolution of the corporate credit unions. In sum, this analysis provides an updated view of the 

range of losses, and ultimately assessments to credit unions to cover the cost of the losses, 

associated with the resolution of the failed corporate credit unions. 

The performance of the assets underlying the NGNs will in large measure determine the ultimate 

resolution costs associated with the five failed corporate credit unions. The most recent estimate 

of total losses related to the resolution of the corporate credit union system is $10.8 to $15.1 

billion. After accounting for $5.6 billion in liquidated capital in corporates and $3.3 billion in 

assessments collected to date, the remaining assessments are estimated to be between $1.9 and 

$6.2 billion. 

The analyses discussed above will be made available to the public on a semi-annual basis.

The GAO report states that without well-documented cost information, NCUA faces questions 

about its ability to effectively estimate the total costs of the failures of five large corporate credit 

unions and the ability of the credit union industry to pay for these losses. As noted above, the

NCUA has taken actions, including creating the NGN Securities Management and Oversight 

Committee and contracting with BlackRock Solutions to provide well-documented cost 

estimates and to put in place a process to track and evaluate costs going forward. While there is 

significant uncertainty about asset performance, the credit union system’s combined net worth 

and ability to pay assessments far exceeds even the extreme upper bound of potential losses from 

the corporate failures. Therefore losses to taxpayers as a result of the resolution of the corporate 

failures are extremely unlikely.

Prompt Corrective Action

The PCA framework for credit unions was established by the Credit Union Membership Act in 

1998 and is described in Part 702 of NCUA’s Rules and Regulations. The NCUA’s PCA 
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framework establishes five net worth ratios categories (see Table 1 below) with associated

mandatory supervisory actions. As described in the GAO report, the PCA framework provides 

more stringent mandatory and discretionary actions to be taken by the NCUA in addressing the 

problems of a credit union as it falls into lower PCA categories. Table 1 sets out the PCA 

categories and associated triggers.1

Table 1

PCA Category Net Worth Ratio

Well-capitalized 7% or greater

Adequately-capitalized 6 to 6.99%

Undercapitalized 4 to 5.99%

Significantly undercapitalized 2 to 3.99%2

Critically undercapitalized Less than 2%

The GAO study of PCA in the context of credit unions built on a previous study of PCA in the 

context of banks.

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 Both studies concluded that the main weakness of the PCA framework is the 

reliance on measures of capital adequacy. The GAO report notes that, ―capital based indicators 

have weaknesses, notably that they can lag behind other indicators of financial distress.‖4 The

GAO report notes that other financial indicators could help identify troubled credit unions earlier 

than capital. Some of the indicators identified by GAO in the report include asset quality (such 

as loans as a percentage of total assets; payment-option, adjustable rate mortgage, and interestonly mortgage loans as a percentage of total assets; participation loans as a percentage of total 

assets; and member business loans as a percentage of total assets), management (such as 

operating expenses as a percentage of average total assets), and earnings (such as net income as a 

percentage of assets).

NCUA agreed with this recommendation and supports research into indicators that may be able 

to better assist in identifying troubled institutions earlier and with more precision. Compared 

with a capital- based PCA framework, alternative measures are attractive, because they have the 

potential to be more forward looking. However, a significant downside associated with 

alternative measures is the difficulty in precisely identifying credit unions before they become 

troubled. For example, while the alternative measures cited in the GAO report were correlated 

 

1 A alternative set of categories and triggers apply to ―new‖ credit unions. A ―new‖ credit union is a federallyinsured credit union that both has been in operation for less than ten years and has total assets of not more than $10 

million. A credit union which is not ―new‖ because its total assets exceed $10 million may become ―new‖ if its total 

assets subsequently decline below $10 million while it is still in operation for less than 10 years. For purposes of 

PCA, new credit unions are classified as well capitalized, adequately capitalized, moderately capitalized, marginally 

capitalized, minimally capitalized, or undercapitalized based on the net worth ratio.

2 A credit union (other than a ―new‖ credit union) is significantly undercapitalized if it has a net worth ratio of 

between 2 percent and 3.99 percent, or if it has a net worth ratio between 4 percent and 4.99 percent and either fails 

to timely submit an acceptable net worth restoration plan or materially fails to implement a net worth restoration 

plan approved by the NCUA Board.

3 Government Accountability Office, Bank Regulation: Modified Prompt Corrective Action Framework Would 

Improve Effectiveness, GAO-11-612, June 2011.

4 GAO Report at 43.
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with higher rates of credit union failure, the vast majority of credit unions that would have 

triggered PCA due to those alternative measures did not fail or experience severe distress.

NCUA is committed to a review of its PCA regulations, in particular the risk-based net-worth 

component. NCUA has established a task force comprised of NCUA and State supervisors to 

undertake the review. NCUA staff will produce any suggestions for legislative improvements 

for NCUA Board consideration as recommendations to Congress. NCUA also will continue to 

research approaches to early identification of troubled credit unions and will track related 

developments as the federal banking agencies consider enhancements to their PCA framework.

IV. Requirement for the Council to Report on Actions Taken

The Act also requires the Council to report on actions taken in response to the GAO report, 

including any recommendations made by the Council under section 120 of the Dodd-Frank Act. 

As of the date of this report, the Council has not made any such recommendations. 
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Notes 

PUBLIC LAW 111–382—JAN. 4, 2011

SEC. 4. STUDY OF NATIONAL CREDIT UNION ADMINISTRATION.

(a) STUDY.—The Comptroller General of the United States shall conduct a study of the National Credit 

Union Administration’s supervision of corporate credit unions and implementation of prompt

corrective action.

(b) ISSUES TO BE STUDIED.—In conducting the study required under subsection (a), the Comptroller General 

shall— (1) determine the reasons for the failure of any corporate credit union since 2008; (2) evaluate the 

adequacy of the National Credit Union Administration’s response to the failures of corporate credit

unions, including with respect to protecting taxpayers, avoiding moral hazard, minimizing the costs of 

resolving such corporate credit unions, and the ability of insured credit unions to bear any assessments 

levied to cover such costs; (3) evaluate the effectiveness of implementation of prompt

corrective action by the National Credit Union Administration for both insured credit unions and corporate 

credit unions; and (4) examine whether the National Credit Union Administration has effectively 

implemented each of the recommendations by the Inspector General of the National Credit Union

Administration in its Material Loss Review Reports, and, if not, the adequacy of the National Credit Union 

Administration’s reasons for not implementing such recommendation.

(c) REPORT TO COUNCIL.—Not later than 1 year after the date of enactment of this Act, the Comptroller 

General shall submit a report on the results of the study required under this section to— (1) the Committee 

on Banking, Housing, and Urban Affairs of the Senate; (2) the Committee on Financial Services of the 

House of Representatives; and (3) the Financial Stability Oversight Council.

(d) COUNCIL REPORT OF ACTION.—Not later than 6 months after the date of receipt of the report from the 

Comptroller General under subsection (c), the Financial Stability Oversight Council shall submit a report to 

the Committee on Banking, Housing, and Urban Affairs of the Senate and the Committee on Financial 

Services of the House of Representatives on actions taken in response to the report, including any 

recommendations issued to the National Credit Union Administration under section 120 of the Dodd-Frank 

Wall Street Reform and Consumer Protection Act (12 U.S.C. 5330).