[House Hearing, 108 Congress]
[From the U.S. Government Publishing Office]
CREDIT UNION REGULATORY IMPROVEMENTS
=======================================================================
HEARING
BEFORE THE
SUBCOMMITTEE ON
FINANCIAL INSTITUTIONS AND CONSUMER CREDIT
OF THE
COMMITTEE ON FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED EIGHTH CONGRESS
SECOND SESSION
__________
JULY 20, 2004
__________
Printed for the use of the Committee on Financial Services
Serial No. 108-103
U.S. GOVERNMENT PRINTING OFFICE
96-548 WASHINGTON : 2004
____________________________________________________________________________
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HOUSE COMMITTEE ON FINANCIAL SERVICES
MICHAEL G. OXLEY, Ohio, Chairman
JAMES A. LEACH, Iowa BARNEY FRANK, Massachusetts
DOUG BEREUTER, Nebraska PAUL E. KANJORSKI, Pennsylvania
RICHARD H. BAKER, Louisiana MAXINE WATERS, California
SPENCER BACHUS, Alabama CAROLYN B. MALONEY, New York
MICHAEL N. CASTLE, Delaware LUIS V. GUTIERREZ, Illinois
PETER T. KING, New York NYDIA M. VELAZQUEZ, New York
EDWARD R. ROYCE, California MELVIN L. WATT, North Carolina
FRANK D. LUCAS, Oklahoma GARY L. ACKERMAN, New York
ROBERT W. NEY, Ohio DARLENE HOOLEY, Oregon
SUE W. KELLY, New York, Vice Chair JULIA CARSON, Indiana
RON PAUL, Texas BRAD SHERMAN, California
PAUL E. GILLMOR, Ohio GREGORY W. MEEKS, New York
JIM RYUN, Kansas BARBARA LEE, California
STEVEN C. LaTOURETTE, Ohio JAY INSLEE, Washington
DONALD A. MANZULLO, Illinois DENNIS MOORE, Kansas
WALTER B. JONES, Jr., North MICHAEL E. CAPUANO, Massachusetts
Carolina HAROLD E. FORD, Jr., Tennessee
DOUG OSE, California RUBEN HINOJOSA, Texas
JUDY BIGGERT, Illinois KEN LUCAS, Kentucky
MARK GREEN, Wisconsin JOSEPH CROWLEY, New York
PATRICK J. TOOMEY, Pennsylvania WM. LACY CLAY, Missouri
CHRISTOPHER SHAYS, Connecticut STEVE ISRAEL, New York
JOHN B. SHADEGG, Arizona MIKE ROSS, Arkansas
VITO FOSSELLA, New York CAROLYN McCARTHY, New York
GARY G. MILLER, California JOE BACA, California
MELISSA A. HART, Pennsylvania JIM MATHESON, Utah
SHELLEY MOORE CAPITO, West Virginia STEPHEN F. LYNCH, Massachusetts
PATRICK J. TIBERI, Ohio BRAD MILLER, North Carolina
MARK R. KENNEDY, Minnesota RAHM EMANUEL, Illinois
TOM FEENEY, Florida DAVID SCOTT, Georgia
JEB HENSARLING, Texas ARTUR DAVIS, Alabama
SCOTT GARRETT, New Jersey CHRIS BELL, Texas
TIM MURPHY, Pennsylvania
GINNY BROWN-WAITE, Florida BERNARD SANDERS, Vermont
J. GRESHAM BARRETT, South Carolina
KATHERINE HARRIS, Florida
RICK RENZI, Arizona
Robert U. Foster, III, Staff Director
Subcommittee on Financial Institutions and Consumer Credit
SPENCER BACHUS, Alabama, Chairman
STEVEN C. LaTOURETTE, Ohio, Vice BERNARD SANDERS, Vermont
Chairman CAROLYN B. MALONEY, New York
DOUG BEREUTER, Nebraska MELVIN L. WATT, North Carolina
RICHARD H. BAKER, Louisiana GARY L. ACKERMAN, New York
MICHAEL N. CASTLE, Delaware BRAD SHERMAN, California
EDWARD R. ROYCE, California GREGORY W. MEEKS, New York
FRANK D. LUCAS, Oklahoma LUIS V. GUTIERREZ, Illinois
SUE W. KELLY, New York DENNIS MOORE, Kansas
PAUL E. GILLMOR, Ohio PAUL E. KANJORSKI, Pennsylvania
JIM RYUN, Kansas MAXINE WATERS, California
WALTER B. JONES, Jr, North Carolina DARLENE HOOLEY, Oregon
JUDY BIGGERT, Illinois JULIA CARSON, Indiana
PATRICK J. TOOMEY, Pennsylvania HAROLD E. FORD, Jr., Tennessee
VITO FOSSELLA, New York RUBEN HINOJOSA, Texas
MELISSA A. HART, Pennsylvania KEN LUCAS, Kentucky
SHELLEY MOORE CAPITO, West Virginia JOSEPH CROWLEY, New York
PATRICK J. TIBERI, Ohio STEVE ISRAEL, New York
MARK R. KENNEDY, Minnesota MIKE ROSS, Arkansas
TOM FEENEY, Florida CAROLYN McCARTHY, New York
JEB HENSARLING, Texas ARTUR DAVIS, Alabama
SCOTT GARRETT, New Jersey JOE BACA, California
TIM MURPHY, Pennsylvania CHRIS BELL, Texas
GINNY BROWN-WAITE, Florida
J. GRESHAM BARRETT, South Carolina
RICK RENZI, Arizona
C O N T E N T S
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Page
Hearing held on:
July 20, 2004................................................ 1
Appendix:
July 20, 2004................................................ 31
WITNESSES
Tuesday, July 20, 2004
Cheney, Bill, President and CEO, Xerox Federal Credit Union (CA)
on behalf of the National Association of Federal Credit Unions. 19
Custer, Sharon, President and CEO, BMI Federal Credit Union (OH),
on behalf of the Credit Union National Association............. 17
Jackson, William E. III, Associate Professor of Finance and
Economics Kenan-Flager Business School, University of North
Carolina, Chapel Hill.......................................... 21
Johnson, Hon. JoAnn, Chairman, National Credit Union
Administration................................................. 5
Little, Roger W., Deputy Commissioner of Credit Unions, Michigan
Office of Financial and Insurance Services, on behalf of the
National Association of State Credit Union Supervisors......... 8
APPENDIX
Prepared statements:
Bachus, Hon. Spencer......................................... 32
Oxley, Hon. Michael G........................................ 35
Gillmor, Hon. Paul E.,....................................... 36
Hinojosa, Hon. Ruben......................................... 38
Paul, Hon. Ron............................................... 39
Sanders, Hon. Bernard........................................ 40
Cheney, Bill................................................. 44
Custer, Sharon............................................... 63
Jackson, William E. III...................................... 120
Johnson, Hon. JoAnn.......................................... 139
Little, Roger W.............................................. 160
Additional Material Submitted for the Record
Cheney, Bill:
Financial Accounting Standards Board letter, April 27, 2004.. 171
Custer, Sharon:
Written response to questions from Hon. Spencer Bachus....... 174
Johnson, Hon. JoAnn:
Written response to questions from Hon. Judy Biggert......... 179
American Bankers Association, letter July 15, 2004............... 182
America's Community Bankers, prepared statement.................. 185
Independent Community Bankers of America, prepared statement..... 189
CREDIT UNION REGULATORY IMPROVEMENTS
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Tuesday, July 20, 2004
U.S. House of Representatives,
Subcommittee on Financial Institutions
and Consumer Credit,
Committee on Financial Services,
Washington, D.C.
The subcommittee met, pursuant to call, at 2:05 p.m., in
Room 2128, Rayburn House Office Building, Hon. Spencer Bachus
[chairman of the subcommittee] Presiding.
Present: Representatives Bachus, Royce, Biggert, Kennedy,
Hensarling, Brown-Waite, Sanders, Maloney, Watt, Ackerman,
Lucas of Kentucky, Sherman and Davis.
Chairman Bachus. Good morning, I want to call the
Subcommittee on Financial Institutions to order.
We have a series of votes on the floor, but what hopefully
we can do to expedite things is to give opening statements;
then when we come back, we will go right to the testimony.
I want to start by thanking the witnesses for being here
today to discuss regulatory improvements to the credit union
system. I would like to extend a special welcome to NCUA
Administrator, Chairman Joann Johnson, who is making her first
appearance before this subcommittee after taking over
leadership at the NCUA earlier this year from Chairman Dennis
Dollar. And we are excited about your chairmanship.
Credit unions are a vital part of our Nation's financial
service infrastructure. As nonprofit cooperatives managed by
their members, credit unions excel at providing the services
families and small businesses need most.
I have got many constituents who tell me that it was very
important for them--their credit union was very important to
them in being able to afford a new home, a purchase that would
allow their children to attend college, or to obtain a loan for
various and sundry things.
Not surprisingly, the Nation's almost 100,000 credit unions
consistently rank high in customer satisfaction surveys and
play a particularly important role in expanding the financial
alternatives available in historically underserved urban and
rural areas. And a member of one of our panels, Bill Cheney's
credit union recently reached out to four underserved areas,
and I commend you for that, Mr. Cheney.
Under Chairman Oxley's leadership, this committee has been
at the forefront of efforts to improve the regulatory
environment in which credit unions operate, thereby enhancing
their availability to meet the needs of their more than 80
million members nationwide. In addition to passing a deposit
insurance reform bill out of the House that gives credit unions
full parity with their bank and thrift counterparts, the
committee developed bipartisan legislation affording
significant regulatory relief to credit unions, banks, and
thrifts. That legislation, H.R. 1375, was spearheaded by two
members of the subcommittee, Ms. Capito of West Virginia and
Mr. Ross of Arkansas.
It passed the House last March with over 400 votes, thanks
in no small part to the enthusiastic support and grass-roots
efforts of the credit union industry. Among other provisions,
H.R. 1375 expands credit unions' investment authority,
increases the general limit on the limit of credit union loans
from 12 to 15 years, authorizes credit unions to provide check
cashing and money transfer services to nonmembers so long as
they are within the credit union's field of membership, permits
privately insured credit unions to join the Federal Home Loan
Bank system, and excludes loans made to nonprofit religious
organizations from the limits that otherwise apply to credit
unions' commercial lending authority.
The bill also includes a provision that I first offered as
an amendment when the Judiciary Committee marked up the
regulatory relief bill in the 107th Congress granting the
credit unions the same exemptions from premerger notification
requirements that banks and thrifts already enjoy under Federal
antitrust laws.
Last November, Congressman Royce and Congressman Kanjorski,
two respected members of this subcommittee, introduced H.R.
3517, the Credit Union Regulatory Improvement Act, which
mirrors in many respects the credit union provisions of H.R.
1375 but also includes several additional regulatory reforms.
For example, H.R. 3579 would increase the aggregate level of
commercial loans that a credit union could make to its members
from approximately 12 percent of total assets to 20 percent, as
well as establish a risk-based approach for measuring credit
union capital.
While action this year on H.R. 3579 is unlikely, given the
limited amount of time remaining in the congressional calendar,
today's hearing will allow the subcommittee to hear the
perspectives of credit union regulators and industry
representatives on the legislation and other proposals for
improving credit union regulation.
Today's hearing is also an appropriate bookend to a hearing
that the subcommittee held in May focusing on the crippling
regulatory burdens faced by America's small community banks.
Taken together, these hearings demonstrate this committee's
continued commitment to identifying and eliminating outdated or
unnecessary regulatory requirements which will serve ultimately
to benefit American consumers in the form of more innovative
financial products and services offered at more competitive
prices.
At this time, we are going to recess the committee for the
floor vote. When we get back, we will either hear from the
Ranking Member of the subcommittee, Mr. Sanders, for any
opening statement he may have, or go directly to our first
panel. We ask for your patience and indulgence. This
subcommittee hearing is recessed. Thank you.
[Recess.]
[The prepared statement of Hon. Spencer Bachus can be found
on page 32 in the appendix.]
Chairman Bachus. The Subcommittee on Financial Institutions
will come to order. At this time, I would like to recognize--I
should have looked up right away. I would like to recognize Mr.
Sanders, the Ranking Member, for any opening statement he
wishes to make.
Mr. Sanders. Thank you very much, Mr. Chairman. And thank
you for holding this important hearing on one of the most
significant, I think, and successful and important institutions
in the United States, and that is our credit unions. And I am
proud to be a cosponsor of H.R. 3579, the Credit Union
Regulatory Improvement Act, and I applaud Congressman Ed Royce
and Paul Kanjorski for their leadership in introducing this
legislation.
Mr. Chairman, America's credit unions are one of the most
vital and most democratic institutions in a country which in
many ways is becoming less democratic. Without the need to
focus on having to make huge profits, without heavy advertising
costs, without huge bonus packages to corporate executives,
credit unions can and are providing loans at lower rates than
other financial institutions and in that way improving the
lives of millions of Americans.
Today I am pleased to report that credit unions are
stronger than ever and serving more people than ever. There are
over 9,000 credit unions in existence today, serving over 80
million Americans.
Now, I know, Mr. Chairman, and I am sure this is an issue
that will come before this committee, that some of our large
banking friends and their lobbyists here are saying, gee, $627
billion in assets for credit unions; we have got to tax them.
It ain't fair. We are paying taxes and these guys are not.
Well, you know, Mr. Chairman, the truth is that credit
unions pay property taxes, they pay sales taxes, they pay
payroll taxes. They are exempt from Federal income taxes for
good reasons and not because anyone is doing them a special
favor. Credit unions are tax exempt because they are
nonprofits, just like churches and hospitals and libraries and
universities and other nonprofit institutions. Federal law
exempts credit unions from Federal taxes, and in my view we
have to maintain that exemption.
You know, the big banks will then tell us, gee, it is not
fair, but somehow or another the big banks forget to tell us
that the Federal Government through the savings and loan
bailout, through the financial collapse in Asia, that the
taxpayers of this country have spent tens and tens of billions
of dollars bailing out big banks who are investing all over the
world, propping up dictatorships, giving their CEOs huge
compensation packages. I don't recall that we are spending
billions of dollars bailing out the Adamant Credit Union in
Adamant, Vermont. And I don't recall that we are bailing out
other credit unions.
The bottom line here is that credit unions serve the
community in a nonprofit way to provide inexpensive financial
services to the people who own the institution. Very different
from large banks.
So, Mr. Chairman, I don't know which side we are going to
be on, if we are going to be opposing each other on this issue,
but when this issue comes before this body, I am going to do
everything I can to make sure that the credit unions of this
country are not taxed. And with that, I just ask unanimous
consent to lay my full remarks into the record.
Chairman Bachus. Thank you. There is no objection to your
unambiguous remarks going into the record.
[The prepared statement of Hon. Bernard Sanders can be
found on page 40 in the appendix.]
Chairman Bachus. Mr. Royce, do you have an opening
statement?
Mr. Royce. I do, Chairman Bachus. I thank you. I thank you
for the hearing, too. And I appreciate Chairman Oxley, his
acquiescence in holding this timely hearing on regulatory
challenges that face credit unions. Credit unions now serve
over 85 million Americans, and this makes that particular
industry a very important part of our Nation's financial
system. They are an engine of economic activity, an engine of
growth for America. They help our constituents finance the
purchase of homes and cars and save for college and save for
retirement, and, I think, equally as important, help access
savings for small business investment. The capital they provide
there is very, very critical.
Last November, Mr. Kanjorski and I co-authored H.R. 3579,
the Credit Union Regulatory Improvements Act. They are calling
it CURIA. This would modernize Federal regulation of chartered
credit unions, and the legislation is needed to help credit
unions better serve their members.
I would like to point out two important provisions of this
bill. The first is that this would allow the National Credit
Union Administration to create a risk-based capital standard
for credit unions. The National Credit Union Administration
could then determine the relative risk of a credit union's
assets and improve the safety and soundness of credit unions
and the safety of the National Credit Union Share Insurance
Fund.
In addition to that, the bill would eliminate the current
asset limit on member business loans at a credit union from a
lesser of 1.75 times actual net worth or 1.75 times net worth
required for well-capitalized credit union, and it would
replace that with a flat rate of 20 percent of the total assets
of the credit union.
It was important to me that any changes made would satisfy
two conditions. First, the change would remove unnecessary
regulatory burdens that inhibit credit unions from serving
their members. And, two, any changes would not have the
potential to put the safety and soundness of the credit union
system at risk. Both industry and regulatory officials have
offered positive feedback on both counts, and I look forward to
further comments from our distinguished panels of witnesses
today.
And again, Chairman Bachus, thank you for having this
hearing, and I yield back.
Chairman Bachus. I appreciate that, Mr. Royce.
Mr. Sherman do you have an opening statement?
Mr. Sherman. I have a very brief opening statement, and
that is that, as other speakers have said, credit unions play a
critical role. We have to help them play that role more
efficiently and to meet some financial services needs that are
not currently being met. And that is why I want to commend Mr.
Royce and others for giving us an opportunity to sweep away
some of the regulatory problems so they can do that.
Mr. Sanders. Chairman, his remarks are too brief. Doesn't
he have to go on for 2 more minutes?
Chairman Bachus. Go on.
Mr. Sherman. I can prove that this is Brad Sherman and not
an impostor, although the length of my statement would argue.
Chairman Bachus. Are there other members who wish to make
opening statements? If not, we will go to the introduction of
our first panel.
Our first panelist is the Honorable JoAnn Johnson, Chairman
of the National Credit Union Administration. President George
W. Bush named Ms. Johnson appointee to the NCUA Board January
22nd, 2002. That appointment was confirmed by the U.S. Senate
on March 22, 2002. Senator Johnson was named NCUA Board vice
chairman in January of 2003 and the agency's chairman on May 3,
2004.
The Board consists of three members appointed by the
President and confirmed by the Senate. And they regulate all
federally chartered credit unions and administer the Federal
Insurance Fund for approximately 9,500 credit unions
nationwide.
Senator Johnson, elected to the Iowa Senate in 1994,
chaired both the Senate Ways and Means Committee and the Senate
Commerce Committee. As a former teacher, she taught physical
education and coached a number of sports, actively involved in
family farming, and served her community as a 4-H leader,
director of the local Food Pantry, Economic Development Board
member, school teacher, library board member, school board
member, university alumnae board member, received her
bachelor's degree from the University of Northern Illinois. She
has two adult children, Clint and Brooke, you and your husband.
So, we welcome you.
Our next panelist is Deputy Commissioner Roger W. Little,
Chairman of the National Association of State Credit Union
Supervisors. Mr. Little has worked for the Office of Financial
and Insurance Services since 1984. He is a Deputy Commissioner
and directs the Credit Union Division which regulates
Michigan's 268 State-chartered credit unions.
He began his OFIS career as a credit union examiner, later
serving as regional supervisor in both the Credit Union and
Bank And Trust divisions. He graduated with honors from Central
Michigan University, and is a CPA. He also completed a graduate
School of Banking program at Louisiana State University. He
currently serves as Chairman of the NASCUS Board of Directors.
He and his wife Linda have been married 32 years, they have
two daughters and reside in central Michigan.
Chairman Bachus. We welcome both of you. And, Chairman
Johnson, we will start with your testimony.
STATEMENT OF JOANN JOHNSON, CHAIRMAN, NATIONAL CREDIT UNION
ADMINISTRATION
Ms. Johnson. Chairman Bachus, Representative Sanders, and
members of the subcommittee, thank you for inviting me to
appear before you today.
On behalf of the National Credit Union Administration, I am
pleased to provide information on the condition of the credit
union industry and our agency's views on regulatory efficiency
recommendations and the Credit Union Regulatory Improvements
Act of 2003.
My written comments, previously provided to you, cover a
number of issues, some of which I will highlight for you today.
It is my strong belief that effective, not excessive,
regulation should be the underlying principle supporting NCUA's
critical mission of ensuring the safety and soundness of
federally insured credit unions.
In addition to participating with the other four financial
institution regulatory agencies in the review project mandated
by the Economic Growth and Regulatory Paperwork Reduction Act
of 1996, NCUA scrutinizes one-third of NCUA existing
regulations annually to find ways to simplify or improve any
rule that is outdated or in need of revision. To date, this
internal process has brought about important regulatory reform
for credit unions in many of NCUA's rules, including those on
lending, share accounts, and incidental powers.
I am pleased to report to the subcommittee the state of the
credit union industry remains strong and healthy. Our
indicators show that credit unions, which serve nearly 83
million Americans, are safe and sound and well positioned for
continued strength and vitality in our Nation's financial
marketplace.
The National Credit Unions Share Insurance fund also
remained strong as of December 31, 2003. The fund had a ratio
of 1.27 percent equity ratio. As of May 31, 2004, the equity
ratio grew to 1.29 percent.
CURIA addresses some of the most compelling issues being
discussed in the credit union industry today, including risk-
basing credit union net worth for purposes of prompt corrective
action.
Section 301 of CURIA would address inequities in the
operation of the current system of setting net worth standards
by establishing a risk-based system for PCA.
A well-designed risk-based system would alleviate
regulatory concerns by not penalizing low-risk activities and
by providing credit union management with the ability to manage
their compliance though adjustments to their assets and
activities.
While NCUA is continuing to develop its specific
recommendations, we suggest that the leverage ratio below which
a credit union is critically undercapitalized remain at its
current 2 percent and that the minimum leverage ratio for a
well-capitalized credit union be set at 5 percent.
Federal credit unions have been authorized since 1934 to
make member business loans and have had a successful record of
meeting the small business loan needs of their members. NCUA
has issued regulations establishing safety and soundness
standards for member business lending as a result of some
losses on business lending beginning in the early 1980s.
Those regulations have been successful in ensuring that
credit union business lending is carried out in a safe and
sound manner that does not present undue risk to the National
Share Insurance Fund. In fact, since the time that NCUA issued
its regulation, defaults for member business lending have
consistently been lower than the ratios for member loans
generally.
In 1998, the Credit Union Membership Access Act established
an aggregate cap on member business lending of 12.25 percent of
total assets for well-capitalized credit unions. NCUA continues
to believe, as it did in 1998, that a cap on business lending
is unwarranted and hampers the ability of individual credit
unions to meet the varying needs of their membership. However,
raising the cap to 20 percent of total assets and increasing
the threshold below which an individual loan is not treated as
a business loan for the purposes of the cap from the current
$50,000 level to that of $100,000, as proposed by CURIA, are
vast improvements.
The time-sensitive recommendation in my testimony today
stems from the Financial Accounting Standards Board proposed
change in the accounting treatment of credit union mergers.
This is a recent development; therefore, it has not previously
been included in recommendations NCUA has submitted for your
review.
FASB's change will in effect prevent credit unions from
moving forward with mergers which are clearly in the best
interest of their members. Specifically, the change will
provide that when two credit unions merge, their retained
earnings of the discontinuing credit union would not be
included in the postmerger net worth. FASB expects to implement
this change as early as January 2006. FASB has indicated it
supports a legislative solution and that such a solution will
not impact their standards-setting activities. NCUA has
suggested statutory language as well as report language
clarifying the limited purpose of this amendment to maintain
net worth as it is. That language is attached to and has been
made a part of my written testimony for the committee's
consideration.
An important area where NCUA does not have jurisdiction
comparable to the other financial regulators involves third-
party vendors. NCUA does not have direct authority to examine
third-party vendors that provide services to federally insured
credit unions. Statutory authority previously existed for NCUA,
but under a sunset provision expired in 2001, we are currently
required to work through credit unions to obtain vendor
information or seek voluntary cooperation from vendors. We
believe that in these times, privacy, money laundering, and
financing of terrorism are issues of paramount national
interest as well as general safety and soundness concerns.
NCUA should have direct examination authority over those
vendors providing services for federally insured credit unions.
A restoration of NCUA's examination authority would provide
parity with other financial regulators and would eliminate the
need for us to approach the matter indirectly through credit
unions, thus providing some measure of regulatory relief. This
is consistent with the October 2003 GOA report which states
that Congress may wish to consider granting this authority.
NCUA has reviewed all of the additional credit union
provisions included in the House-passed bill, and the agency
has no safety and soundness concerns with these provisions.
Mr. Chairman and members of the committee, thank you for
allowing me to testify today and address these important
regulatory reform issues. We hope to gain your support for
these recommendations, and I would be pleased to assist your
further deliberations on these in any way. Thank you very much.
Chairman Bachus. Thank you.
[The prepared statement of Hon. JoAnn W. Johnson can be
found on page 139 in the appendix.]
Chairman Bachus. Deputy Commissioner Little.
STATEMENT OF ROGER W. LITTLE, DEPUTY COMMISSIONER OF CREDIT
UNIONS, MICHIGAN OFFICE OF FINANCIAL AND INSURANCE SERVICES,
REPRESENTING THE NATIONAL ASSOCIATION OF STATE CREDIT
SUPERVISORS
Mr. Little. Good afternoon, Chairman Bachus and
distinguished members of the Financial Institutions and
Consumer Credit Subcommittee. Again, I am Roger Little, Deputy
Commissioner of Credit Unions for the Michigan Office of
Financial and Insurance Services. I appear today on behalf of
the National Association of State Credit Union Supervisors, or
NASCUS.
NASCUS applauds the introduction of the proactive credit
union legislation in H.R. 3579. My written testimony includes
our views in support of the provisions that affect State-
chartered credit unions contained in this bill. My comments
today focus specifically on the importance of capital reform
for credit unions.
NASCUS has studied the risk-based capital reform proposal
outlined in H.R. 3579, and NASCUS supports a risk-weighted
capital regime for credit unions. H.R. 3579 changes the term
``net worth'' in section 216 of the Federal Credit Union Act
from being the ratio of credit union net worth to total assets
of the institutions to being the ratio of net worth to risk
assets of the credit union. In effect, this establishes a risk-
based capital system for credit unions.
The existing PCA and net worth numerical categories in the
statute would remain unchanged; however, NCUA would establish
the new risk-weighting categories hopefully in a manner similar
to those used by banks and thrifts.
State regulators would assist the NCUA in crafting these
regulations. The existing Credit Union Membership Access Act
requires the NCUA to consult and cooperate with State
regulators in the crafting of PCA and member business lending
regulations. This cooperation between the NCUA and State
agencies, many of whom also regulate bank and thrift
institutions, will help ensure a safe and sound process for
determining the risk-weighting categories.
The proposed bill does not change the definition of net
worth to permit credit unions to count alternative types of
capital for PCA purposes, however, and NASCUS believes that it
should. NASCUS strongly supports alternative capital for credit
unions. We believe it is complementary to a risk-based capital
system and in no way conflicts with proposals outlined in H.R.
3579.
A combination of PCA requirements established by Congress
for credit unions in 1998 and significant deposit growth has
created a financial and regulatory dilemma for many State-
chartered credit unions. With the economic downturn and the
flight to safety from the stock market, credit union member
savings are growing rapidly and many credit unions are
reporting reduced net worth ratios as earnings retention lags
growth in assets. Many State-chartered credit unions will not
be able to rely solely on retained earnings to meet the capital
base required under the current PCA standards.
As a financial institution's regulator, it makes no
business sense to deny credit unions the use of other forms of
capital to improve their safety and soundness. We should take
every financially feasible step to strengthen the capital base
of this Nation's credit union system.
NASCUS also supports amending the definition of net worth
to cure the unintended consequences for credit unions of
business accounting rules the Financial Accounting Standards
Board will apply to combinations of mutual enterprises. I will
refer you to my written testimony for more information about
these unintended consequences of FASB's rules on credit union
mergers. I do note that FASB also supports such an amendment.
NASCUS firmly believes that nonfederally insured credit
unions should be eligible to join the Federal Home Loan Banks.
I note this is not a new precedent, since 86 insurance
companies, none of which are federally insured, are now members
of the Federal Home Loan Bank system. We would appreciate your
support by including this proposal in H.R. 3579.
Finally, recent preemptive actions of the Office of the
Comptroller of the Currency have a potentially significant
impact on the dual-chartering system for commercial banks. We
are concerned this could open the door to similar actions by
the Federal credit union regulator unless Congress intervenes.
Determining the extent to which such additional Federal
banking power should be granted by the OCC is an important
matter for all of those who support the dual-chartering system
for depository institutions. The importance of this matter
dictates that Congress should resolve these conflicts.
This concludes my remarks. NASCUS appreciates the
opportunity to testify today. We welcome further participation
and dialogue. We urge this subcommittee to protect and enhance
the viability of the dual-chartering system for America's
credit unions by acting favorably on the provisions we have
outlined in our written and oral testimony.
I will be happy to respond to any questions the committee
may have. Thank you.
Chairman Bachus. Thank you.
[The prepared statement of Roger W. Little can be found on
page 160 in the appendix.]
Chairman Bachus. I will start out by asking this question.
There has been quite a lot of discussion by some of the banking
organizations over credit unions eating into their market
share, taking over business. And the reason that I think they
have advanced those is in resistance to some of these proposals
and some of the proposals in the Royce bill.
In reading the testimony of Mr. Cheney about market share,
I would like to read something from his testimony and ask you
to comment on that and give me your response to whether you
think it is accurate or not.
According to data obtained from the Federal Reserve Board
during the 23-year period from 1980 to 2003, the percentage of
total household financial assets held by credit unions
increased from 1.4 to 1.6 percent, or merely 0.2 percent, over
the course of 23 years.
That at least, if that is accurate, that to me gives
indication that the credit unions are not capturing market
share from anyone. What is your comment? That is one--Mr.
Sanders mentioned the whole idea of tax exemptions and that the
tax exemption is giving an unfair advantage to the credit
unions.
Mr. Little. A couple of comments on that, Mr. Bachus. The
evidence as indicated by banks' continuing reporting of record
profits quarter after quarter would seem to indicate that they
are doing relatively well in the markets that they have. My
understanding of the Federal Tax Code is that the tax exemption
for credit unions is not based in any way on the products or
services or market share of credit unions. It is based on the
ownership structure and the fact that they are cooperatives of
a financial nature, rather than another nature. As a regulator,
we have a neutral position on tax policy, but I don't think the
argument is very persuasive in terms of market share.
Ms. Johnson. Mr. Chairman, I would like to add just a
little bit in the area of the member business lending, because
I know there has been some opposition to raising the limits in
the member business lending area in particular.
Member business loans granted by credit unions currently
amount to, based on loans to total assets, less than 3 percent.
For the banking industry, it currently stands at over 20
percent of their assets. The number of credit unions, or the
percentage of credit unions that are currently involved in
member business lending is approximately 17 percent, a little
over 1,600 credit unions. So it is actually----
Chairman Bachus. One in six.
Ms. Johnson. Right. It is a small part of the market.
Chairman Bachus. All right. Is your information pretty much
in keeping with this data and what it seems to indicate; that
credit unions don't appear at least to be expanding their
market share?
Ms. Johnson. Credit unions continually look for ways to
serve their members.
Chairman Bachus. I understand that.
Ms. Johnson. But the market share is still relatively small
compared to----
Chairman Bachus. It seems like it is almost the status quo.
Ms. Johnson. That's right.
Chairman Bachus. And I will say this, if someone says to me
we have a problem with credit unions taking our market share,
then the first response is to find out how much market share
they are taking. Not analytical information. I have checked
auto loans, and, actually, the percentage of auto loans by
credit unions has actually declined----
Mr. Little. Yes.
Chairman Bachus.--over the last 10 or 15 years. So I am
just raising that. I didn't know if you had any comment on
that.
Secondly, with 45 seconds, I am simply going to make a
comment. The accounting treatment for business combinations of
FASB 141, apparently there doesn't seem to be any dissent by
any of the witnesses that there needs to be some change of
definition of net worth in the Federal Credit Union Act.
Ms. Johnson. That's correct.
Chairman Bachus. Are you aware of any opposition to this
change, making that change in definition?
Ms. Johnson. No. We know of none. The Accounting Standards
Board is favorable to a legislative change.
Chairman Bachus. If they are for it, you all are for it.
Ms. Johnson. But it is actually language in the Federal
Credit Union Act that needs to be changed. It is not accounting
standards.
Chairman Bachus. That is right. It is a net worth, just
changing--but I am saying, do you know of any opposition in the
industry, regulators or anyone saying this isn't a good thing?
Ms. Johnson. No.
Chairman Bachus. No reason why that shouldn't be done?
Ms. Johnson. No reason.
Chairman Bachus. Actually, we are going by members who
arrived first. Mr. Davis is our first member.
Mr. Davis. Thank you, Mr. Chairman. Let me welcome the
witnesses this afternoon and let me try to frame my questions a
little bit more broadly than some of the previous comments that
you may have made may have been framed.
One of the things that is obvious is that we are going
through a period in our economy when a lot of the banks are
consolidating and we are having a lot of growth and
consolidation among our banks. Certainly looking over the next
5 to 10 years, that is likely to continue. A lot of our smaller
banks are likely to be continued to be merged than the larger
banks.
One of the things that I certainly wonder about is how
credit unions and the nature of credit unions are going to
change over that period of time. So let me get each of you to
comment very briefly on where you see the credit union industry
in the next 10 years, and how you see that being affected by
the bank consolidations we are witnessing right now.
Mr. Little. I think it is fair to predict that there will
be consolidation in the credit union movement as well. I think
that is a natural economic consequence. With regard to the
consolidation in the banking industry, I can give you a little
perspective on what is happening in our State back in Michigan.
Large banks are buying up small banks.
However, approximately 40 percent of our banks, State-
chartered banks, have been chartered in the last 10 years. As
banks are consolidated and purchased by larger banks, new
community banks arise to fill the need. And, really, the
consolidation just provides opportunities for capitalism to
work on a local level and new banks to arise.
Mr. Davis. Let me ask you this question. Obviously, one of
the things the chairman was alluding to and one of the things
the banks regularly raise is whether or not there has been a
change in market share. Certainly as you put it, Ms. Johnson,
credit unions are certainly being very aggressive in terms of
expanding the kinds of services they provide.
What I want to get a sense of is, are there any outer
limits that the industry envisions? Is there a certain growth
point that you would reach where you would think that beyond
this point, we are dramatically changing the nature of what
credit unions are? Have you looked at that question, whether
you have any upper limits to what the arc should be?
Ms. Johnson. When I look at the mission that credit unions
fulfill, I don't see any difference in their mission determined
by their size. They are still to serve the needs of their
members. We continue to see mergers and some consolidation as
well.
I believe last year, 2003, we chartered 11 new credit
unions. And I believe in the 2 years prior to that, combined,
there were 11 new credit unions chartered. We don't see many
new charters.
It is difficult to charter a credit union from the get-go,
getting members to pool their money and to start a credit union
from the very beginning. But the mission of credit unions
continues to be the same regardless of whether they are a $1
million credit union or a larger credit union.
Mr. Davis. Let me ask you a question that kind of flows out
of that assumption on your part, that the mission of credit
unions is not different from the mission of banks, other than
just being obviously a different scale of service. The banks'
response to that is that if credit unions are going to assume a
larger part of the mission and the space that banks have
historically occupied, should the credit unions come under some
of the burden, for example, of CRA compliance?
I know that is something that typically has been a subject
of controversy in your industry. I presume that you are opposed
to credit unions being covered by CRA. So let me ask a better
question than that. Are there any circumstances or any trade-
offs that the industry would be willing to accept to come under
the purview of CRA?
What would credit unions need to garner if you had to talk
to this body and treat us as a set of rulemakers or lawmakers
that could affect your industry? What would you want this
institution to do if it were ever going to provide CRA
compliance rules for credit unions?
Ms. Johnson. Well, Congress decided as late as 1998 that
the CRA requirements were not necessary for credit unions
because they were meeting the needs of their members within the
community. We have tried to facilitate that from a regulatory
standpoint by facilitating and easing restrictions for credit
unions to adopt underserved areas and to reach out to their
communities more easily.
So I think I would rather look at it from a positive
standpoint, of how can we facilitate reaching to the
underserved; of being able to serve those who are unbanked and
who are subject to predatory lending, et cetera.
So I think the focus is still the same, and I think we need
to look for ways that we can help facilitate that movement into
the neighborhoods.
Mr. Davis. I think my time has expired, but if the Chair
will give me an additional 20 seconds or so, let me try to get
a little more direct answer.
Is there anything that CRAs would be willing to accept or
anything that you would require, maybe looking at it from that
standpoint, if this body were ever to consider making credit
unions fall under the purview of CRA? What would you require if
that happened as a trade-off?
Mr. Little. From a regulatory standpoint, we would require
that the institutions follow whatever requirements were
imposed. My understanding of CRA is that it was put in place to
identify specifically identified problems in the banking
industry. Absent such specifically identified problems in the
credit union movement, I guess I would recommend that there not
be that burden placed on the credit unions, unless there is a
demonstrated need for it, which, to my knowledge, there is not.
Mr. Royce. [Presiding.] Thank you, Mr. Davis.
Chairman Johnson, one of the issues we have been discussing
on this committee is following the money in terms of fighting
terrorist financing and the efforts of credit unions and the
NCUA have not been widely discussed in this debate at all. I
would ask if you could elaborate today on efforts being taken
in terms of implementing the Bank Secrecy Act and
implementation of the PATRIOT Act. Can you tell us about your
enforcement efforts on that front?
Ms. Johnson. Yes, sir. I had the opportunity to testify
before the Senate Banking Committee on the Bank Secrecy Act
hearings, and I was pleased to report at that time that we are
working very hard with the other agencies to comply with all of
the requirements.
At that time I did mention, however, there is one tool
which we believe would help assist us further in this area, and
that would be the ability to examine third-party vendors that
serve federally insured credit unions. Currently, if a problem
with a vendor is identified, we have to work through the credit
union or voluntarily with the vendor in order to work through
any problems. And we believe that, especially with money
laundering, terrorism, other things that are foremost in the
minds of those when we think about the Bank Secrecy Act, we
believe this ability to go in and examine these third-party
vendors, who may hold all of members' information, would be
very helpful.
Mr. Royce. It is helpful for us to know that, and I thank
you, and we will look into trying to provide you with that
ability.
Ms. Johnson. Thank you.
Mr. Royce. I think most of us would agree that capital is a
very good thing. At the same time, too much capital at times
can be a detriment to economic growth. There certainly needs to
be balance. So, in your view, is the credit union industry well
capitalized and, perhaps, is it over capitalized?
Ms. Johnson. Well, the credit union community is well
capitalized, and I believe the current average figure is 10.64
percent, which is indeed commendable. But it speaks to the
conservative nature of credit unions and their risk-averse
management style.
We believe that the risk basing the capital for PCA
purposes really deserves a good hard look, and action,
hopefully. We believe that the 7 percent minimum that is
currently in place could be reduced to 5 percent. The excess
capital could be put to better use to funding new services or
reducing rates or fees on existing services.
It is time consuming to build capital, and so for most
credit unions we believe they maintain a level higher than that
7 percent in order to have that cushion against unexpected
growth.
Mr. Royce. Another question I have is, as you are aware,
the legislation I co-authored would slightly increase credit
unions' ability to make member business loans, and I was going
to ask you if you can assure this committee that the NCUA has
the expertise and has the resources at its disposal that would
be necessary to oversee business lending at credit unions?
Ms. Johnson. Indeed, I can assure you of that. I believe we
have a very good track record. Prior to, I believe, 1998, there
was no top limit. Through the regulations that have been put
into place, we know that credit unions are doing a very good
job with their member business lending.
As I mentioned earlier, actually the percentage on defaults
is less than for other member loans. We are proud of our member
business lending regulation. We updated it this last year to
better accommodate credit unions so they could better serve the
business needs of their members, and we are working very hard
to make sure it is done appropriately and with safety and
soundness foremost.
Mr. Royce. Thank you for that response.
I think is it Mr. Sherman next, I believe.
Mr. Sherman. Thank you. Obviously, with regulatory relief,
credit unions will be able to serve communities better. One of
those areas is in the area of check cashing and remittances,
where right now people in usually poorer communities have to
turn to very expensive financial services. We really need much
more competition in the area of check cashing, and especially
in international remittances, particularly in the greater
Pacoima area, I might add.
If we authorize Federal credit unions to engage in those
two activities for anyone eligible to join the credit union,
what can we expect of credit unions? Will they step forward and
provide competition, particularly in lower-income communities?
Ms. Johnson. Absolutely. We feel having the opportunity to
offer those services to anyone that is eligible will be that
first opportunity to have individuals work with a financial
institution and begin building a relationship. So I think this
is the first way to get them in the door and begin building--
most of these folks are unbanked with a Federally insured or
with an insured institution. And we believe getting them in the
door and beginning the relationship is very key. They will
become, hopefully, good members and seek other services as
well.
Mr. Sherman. Obviously, the bill we are focused on would
redefine the net worth ratio to focus on risk assets and risk-
based capital, so we would have a better calculation of the
amount of capital that a particular credit union needs.
I am part of an entity called the U.S. Government, that got
stung just a little bit when the thrifts didn't have enough
capital. So I have become a real fan of capital. So in addition
to calculating the amount of capital that a credit union should
have, I am in favor of giving them all the tools to get as much
capital as possible. It makes me sleep better at night.
What do you think of alternative capital, and what would
that do both to allow credit unions to serve more financial
services needs and also just to provide more capital to stand
between the risks of their business and the U.S. taxpayer?
I might add, and this is unique to credit unions, it is not
just the capital of that institution. If that institution goes
under, all the other credit unions in the country also have to
ante up to the full extent of their capital. So it is probably
more likely that an undercapitalized credit union costs some of
the folks in this room something rather than the Federal
Government.
But either way, capital insulates other credit unions and,
ultimately, the Federal Government, from risk, and what do we
do to get more of it?
Ms. Johnson. Well, Congressman, I think the question on
secondary capital has certainly been floating out there for
about the last year and a half now. The discussions have
stepped to the forefront. The jury is still out in a lot of
people's minds. We at the agency continue to study the issue.
So I don't have a definitive answer for you today.
Mr. Sherman. Can you think of a disadvantage to having more
capital in the system?
Ms. Johnson. Well, I think the questions that arise in
people's minds are more towards the structure of how to do it.
Mr. Sherman. Yes. I think it is obvious we cannot assign
votes to those who provide alternative capital. It is one
member, one vote. And we have to make sure alternative capital
is sold in such a way so that there is not a single person who
thinks they are getting a Federally insured deposit, when in
fact they are getting a subordinated note.
Ms. Johnson. Yes. But I assume the discussions will
continue.
Mr. Sherman. I look forward to hearing about those
discussions and look forward to ending this one.
I yield back.
Mr. Royce. Mrs. Maloney of New York.
Mrs. Maloney. Very briefly, because we have been called to
a vote.
I would like to ask Mr. Little, because he thought that
credit unions should be allowed to join home loan banks. Would
you elaborate? What would be the advantage to members of the
credit union and to the community?
Mr. Little. Okay. What I specifically commented on was non-
Federally insured credit unions. There are approximately 400
credit unions in the country that have a form of member deposit
insurance other than that provided by the NCUA.
Federally insured credit unions can be and are members of
the Federal Home Loan Bank. Privately insured credit unions
cannot. The advantage to allowing that would be to provide the
members of those credit unions the same access to affordable
housing lending and the other types of services that the
Federal Home Loan Bank system offers that are currently not
available to that relatively small population of non-Federally
insured credit unions.
As I mentioned, it certainly would not be a new precedent,
as there are currently 86 insurance companies, none of which
are federally insured, that are members of the home loan bank
system.
Mrs. Maloney. And I would like to ask both of the
panelists, and I thank you for your testimony today, what are
the two main things we could do on the Committee on Financial
Services to improve the loan and savings services that credit
unions provide to their members?
Ms. Johnson. Well, I believe you are taking a step forward
with your Regulatory Improvements Act and reducing unnecessary
burdensome regulation.
A couple of the things in this particular bill with the
risk-based capital and the improvements to the member business
lending are things that will really step forward to help
members.
Mr. Little. Yes. I would certainly agree on the member
business lending. Removing the cap on business lending would be
ideal. Certainly increasing it from the current level would be
a good interim step.
As to what could be done on the savings side? Providing
forms of alternative capital would be one way that members
could invest in a different manner in their credit union. So I
think we would be in harmony with the NCUA on those issues.
Mr. Royce. Well, thank you, Mr. Little.
At this point, we have a series of votes. Two votes on.
After those votes, Chairman Bachus will be back from his
meeting with Chairman Oxley and will reconvene this committee.
I want to thank our two witnesses for their testimony here
today.
Before we recess here, I would just like to recognize and
welcome a constituent of ours from California, Bill Cheney, to
the committee this afternoon. Not only is he the President and
CEO of Xerox Federal Credit Union, but equally importantly he
is very involved in the financial services industry as an
active voice on credit union issues at the State and national
level. He serves as the Legislative Committee Chairman and an
at-large director and Board Secretary for the National
Association of Federal Credit Unions. He is a member of the
Board of Directors of Western Corporate Federal Credit Union,
WesCorp. He is a member of the Diversity Committee for the
California Credit Union League, and, as I mentioned, he serves
as Chairman of the Board of Xerox Federal Credit Union's
Capital Corporation, a broker-dealer owned and controlled by 17
credit unions.
This is his second appearance here before this committee,
and we look forward to his testimony.
We will stand in recess until after these votes are over.
[recess.]
Chairman Bachus. Good afternoon. It is my understanding,
Mr. Cheney, that Mr. Royce introduced you previously, so I
would like to introduce and welcome Ms. Sharon Custer,
President and CEO, BMI Federal Credit Union of Ohio, and
representing the Credit Union National Association.
We also welcome Dr. William A. Jackson, III, Associate
Professor of Finance and Economics at the University of North
Carolina at Chapel Hill.
Ms. Custer has served as President and CEO of BMI Federal
Credit Union in Columbus, Ohio, since 1986. Ms. Custer is a
graduate of Franklin University, Columbus, Ohio, where she
majored in business management and received her bachelor's in
business administration. She is a member of the Credit Union
National Association and a certified credit union executive.
Past activities include serving as a board member of the
Credit Union Executive Society, the Credit Union Service
Corporation, the Corporate One Federal Credit Union, the Member
Mortgage Corporation, the World Computer Credit Union
Association, and the Ohio Central Credit Union. And you are
presently the Committee Chair of the Ohio Credit Union League.
Dr. Jackson is an associate professor of finance and
economics at Kenan-Flagler Business School, University of North
Carolina, Chapel Hill. He is a recognized expert in the area of
financial intermediation and industrial economics. He earned
his B.A. In economics and mathematics at Centre College, his
MBA at Stanford University, and PhD at the University of
Chicago.
He is the author of numerous articles, with the most recent
publishing focused on issues related to small firms' access to
credit markets, corporate governance, bank mergers, and risk
management. He has published in many journals, held positions
with the Board of Governors of the Federal Reserve System, the
Federal Reserve Bank of Chicago, the Federal Reserve Bank of
Cleveland, the Federal Reserve Bank of Atlanta, Boston
University, Jackson and Company, which is his consulting firm;
is that right?
Mr. Jackson. Yes, Mr. Chairman
Chairman Bachus. Ernst & Young and your alma mater.
We welcome both of you to today's hearing.
Chairman Bachus. And as is our custom, we will start from
my left. Ms. Custer, welcome.
STATEMENT OF SHARON CUSTER, PRESIDENT AND CEO, BMI FEDERAL
CREDIT UNION, REPRESENTING THE CREDIT UNION NATIONAL
ASSOCIATION
Ms. Custer. Chairman Bachus, Ranking Member Sanders, and
members of the subcommittee, on behalf of the Credit Union
National Association, I appreciate the opportunity to express
the Association's views on legislation to improve the
regulatory environment in which credit unions operate. I also
want to express our gratitude to Representatives Royce and
Kanjorski, as well as LaTourette and Maloney, and all the other
cosponsors of H.R. 3579, the Credit Union Regulatory
Improvements Act.
I am Sharon Custer, President and CEO of BMI Federal Credit
Union in Columbus, Ohio.
According to the U.S. Treasury, credit unions are clearly
distinguishable from other depository institutions in their
structure and operational characteristics. And despite the
relative small size and restricted fields of membership,
Federal credit unions operate under bank statutes and rules
virtually identical to those of banks and thrifts. However,
Federal credit unions have more limited powers than national
banks and Federal savings associations.
My written statement catalogs and describes the more than
135 laws and regulations that apply to credit unions, including
many unique restrictions that are far more stringent and
limiting than laws applicable to other depository institutions.
Given the limited time available this afternoon, however, I
will devote the rest of my statement to describing a few
exceptionally important issues for credit unions.
As part of our mission, credit unions are devoted to
providing affordable services to all our members, including
those of modest means. One provision pending in both the House
and the Senate would better enable us to meet that goal. I am
referring to legislation to permit credit unions to provide
broader check cashing and remittance services.
Many of the individuals who would benefit from this change
live from paycheck to paycheck and do not have established
accounts. We know of members who join a credit union one day,
deposit their necessary share balance, and come in the very
next day and withdraw because they need the money. Sometimes a
$5 withdrawal means the difference between eating or not.
Accomplishing our mission can also be greatly enhanced by
revisiting two major components of the 1998-passed Credit Union
Membership Access Act. With 6 years of experience, we have
learned that what was thought to be good policy at the time
actually created new problems that need to be resolved to
assure that credit unions can continue to meet their mission.
The first of these issues is the current cap on member
business loans. There was no safety and soundness reason to
impose these limits, as the historical record is clear that
such loans are not only safer than those in the banking
industry, but also safer than other types over credit union
loans. In fact, public policy argues strongly in favor of
eliminating or increasing the limits from the current 12.25
percent to the 20 percent suggested in H.R. 3579, the Credit
Union Regulatory Improvements Act.
Small business is the backbone of our economy and
responsible for the vast majority of new jobs in America. Yet a
February SBA study reveals that small businesses are having
greater difficulty in getting loans in areas where bank
consolidation has taken hold. The 1998 law severely restricts
small business access to credit and impedes economic growth in
America. Although few credit unions are currently bumping up
against the cap, in a few years that is likely to change.
Then there is the case of many small credit unions.
Investing in the expertise needed to run a member business
lending operation is a very expensive proposition. With a 12.25
percent cap, they could not make up the cost needed to run such
an operation. If the cap were increased to 20 percent, they
could seriously consider entering into this line of lending.
Furthermore, the NCUA should be given the authority to
increase the current $50,000 threshold, as proposed in CURIA,
to $100,000. This would be especially helpful to smaller credit
unions, as they would then be able to provide the smallest of
these business loans without the expense of setting up a formal
program.
Another critical issue is the prompt corrective action
regulations governing credit unions. Credit unions have a
higher statutory capital requirement than banks. But credit
unions' cooperative structure creates a systemic incentive
against excessive risk taking, so they may actually require
less capital to meet potential losses than do other depository
institutions.
Because of their conservative management style, credit
unions generally seek to always be classified as ``well''
rather than ``adequately'' capitalized. To do that, they must
maintain a significant cushion above the 7 percent level. PCA
requirements provide a powerful incentive for credit unions to
operate at ``overcapitalized'' levels.
CUNA believes that the best way to reform PCA would be to
transform the system into one that is much more explicitly
based on risk management. It would place much greater emphasis
on ensuring that there is adequate net worth in relation to the
risk a particular credit union undertakes.
Reforming PCA along the lines of a risk-based approach
would preserve and strengthen the National Credit Union Share
Insurance Fund. It would more closely tie a credit union's net
worth requirements to exposure to risk. It would also free up
more capital for making loans to members and putting resources
into the economy.
Finally, I call your attention to two pending issues before
the Financial Accounting Standards Board that raise serious
concerns for credit unions. One involves the issue of the
accounting treatment of credit union mergers. FASB's proposed
change from the pooling method would have the unintended
consequence of discouraging, if not eliminating, voluntary
mergers that would be advantageous to credit union members.
The other issue relates to the accounting treatment of loan
participations. They are used increasingly by credit unions to
control interest rate risk, credit risk, balance sheet growth,
and maintain net worth ratios.
In summary, Mr. Chairman, we strongly urge the subcommittee
to act on this very important issue this year. Credit unions
would benefit greatly from reducing unnecessary and costly
regulatory burdens, especially those addressed in CURIA. And,
more importantly, so would American consumers benefit from the
savings that credit unions would pass along to their 85 million
members.
Thank you.
[The prepared statement of Sharon Custer can be found on
page 63 in the appendix.]
Chairman Bachus. Mr. Cheney. Thank you, Ms. Custer.
STATEMENT OF BILL CHENEY, PRESIDENT AND CEO, XEROX FEDERAL
CREDIT UNION, REPRESENTING NATIONAL ASSOCIATION OF FEDERAL
CREDIT UNIONS
Mr. Cheney. Good afternoon, Chairman Bachus, Ranking Member
Sanders, and members of the subcommittee. My name is Bill
Cheney. I am the President and CEO of Xerox Federal Credit
Union located in El Segundo, California. I am here today on
behalf of the National Association of Federal Credit Unions to
express our views on the need for regulatory relief and reform
for credit unions.
As with all credit unions, Xerox Federal Credit Union is a
not-for-profit financial cooperative governed by a volunteer
board of directors who are elected by our member-owners.
America's credit unions have always remained true to their
original mission of promoting thrift and providing a source of
credit for provident or productive purposes. A 2004 Filene
Research Institute study entitled ``Who Uses Credit Unions?''
found that the average household income of those who hold
accounts solely at a credit union was less than $43,000, while
the average household income for those who solely hold accounts
at a bank was almost $77,000.
NAFCU is pleased to report to you today that America's
credit unions are vibrant and healthy and that membership in
credit unions continues to grow, with credit unions serving
over 85 million Americans. At the same time, it is important to
note that while credit union membership is growing, over the
past 23 years, credit unions have increased their market share
only minimally. And, as a consequence, provide little
competitive threat to other financial institutions. In fact,
according to data obtained from the Federal Reserve Board,
during the 23-year period from 1980 to 2003, the percentage of
total household financial assets held by credit unions
increased from 1.4 percent to only 1.6 percent.
Mr. Chairman, as your subcommittee considers regulatory
relief issues for credit unions, we hope that you will consider
supporting the Credit Union Regulatory Improvements Act. I
would like to thank Mr. Royce and Mr. Kanjorski for introducing
this vital legislation. The facts confirm that credit unions
are more heavily regulated than other consumer financial
services providers. Restrictions on the operations of credit
unions limit not only who can avail themselves of credit union
services, but also how credit unions can raise capital, an
issue I know that has been of concern to certain members of
this subcommittee, particularly Mr. Sherman.
As members over this subcommittee realize, neither NAFCU
nor the credit union community at large hesitated from
embracing the increased regulatory burden imposed upon us with
the passage of the U.S.A. PATRIOT Act. We willingly and
faithfully accepted those burdens necessary for our national
security. The provisions of CURIA, while leaving in place the
burdens imposed by the U.S.A. PATRIOT Act, would be a positive
step in reducing the number of unnecessary or outdated
regulatory burdens and restrictions currently imposed on
Federal credit unions, some of which date to the very early
days of the Federal Credit Union Act.
NAFCU is pleased to see the growing support in the House
for CURIA. This legislation addresses additional key issues for
credit unions not addressed in the House-passed Financial
Services Regulatory Relief Act. As outlined in my written
testimony, NAFCU supports the 12 credit union regulatory relief
provisions included in both bills. There are additional
provisions in CURIA not included in the regulatory relief bill
I would like to highlight, as they are needed in the credit
union community.
NAFCU urges you to modernize credit union capital
requirements by redefining the net worth ratio to include risk
assets. This would result in a new more appropriate measurement
to determine the relative risk of a credit union's balance
sheet, and improvement the safety and soundness of credit
unions and our share insurance fund.
NAFCU also supports the provisions in CURIA to refine the
member business loan cap established as part of the Credit
Union Membership Access Act in 1998, replacing the current
formula with a flat rate of 20 percent of the total assets of a
credit union. We support revising the definition of a member
business loan by giving NCUA the authority to exclude loans of
$100,000 or less from counting against the cap. These
provisions would facilitate member business lending without
jeopardizing the safety and soundness of credit unions.
There is a lot of rhetoric on this issue, but I must note
that a 2001 Treasury Department study entitled ``Credit Union
Member Business Lending'' concluded that credit unions'
business lending currently has no effect on the viability and
profitability of other insured depository institutions.
Finally, if the subcommittee were to act on credit union
regulatory relief legislation, we would urge you to include
language that would address the strain that could be placed on
merging credit unions when the Financial Accounting Standards
Board changes merger accounting rules from the pooling method
of accounting to the purchase method.
This can be done through a simple modification of the
statutory definition of net worth in the Federal Credit Union
Act to mean equity rather than the retained earnings balance of
the credit union, as determined under GAAP. FASB has reviewed
this proposed change and stated in an April 27 letter to NAFCU
that, ``While our primary concerns are not regulatory issues,
we do have an interest in supporting an expedited resolution of
this matter. The attached proposed amendment proposes a way to
resolve this matter.''
Mr. Chairman, I have a copy of the letter from FASB with me
and would ask that it be included in the record with my
testimony at this time.
[The following information can be found on page 171 in the
appendix.]
In conclusion, the state of the credit union community is
strong, and the safety and soundness of credit unions is
unquestionable. Nevertheless, there is a clear need to ease the
regulatory burden on credit unions as we move forward into the
21st century. NAFCU urges this subcommittee to support and pass
the CURIA bill and the important credit union provisions we
have outlined in this testimony. We look forward to working
with you on this important matter and would welcome your
comments or questions. Thank you.
[The prepared statement of Bill Cheney can be found on page
44 in the appendix.]
Chairman Bachus. Thank you. Dr. Jackson.
STATEMENT OF WILLIAM E. JACKSON III, ASSOCIATE PROFESSOR OF
FINANCE AND ECONOMICS, UNIVERSITY OF NORTH CAROLINA
Mr. Jackson. Good afternoon, Chairman Bachus and other
members of this subcommittee. I count it a great honor to have
been invited to present a few ideas on the important topic of
credit union regulation improvements before this distinguished
subcommittee.
Chairman Bachus. Mr. Jackson, if you could pull that mike a
little closer, I think that will help.
Mr. Jackson. Is that a little better?
Chairman Bachus. Yes. I'm just a little worried about my
hearing and the court reporter's.
I guess we're not actually in a court, though, are we?
Mr. Jackson. I hope not, Mr. Chairman.
My name is William Jackson, and I am Associate Professor of
Finance and Economics at the University of North Carolina at
Chapel Hill, and this year I am a visiting research scholar at
the Federal Reserve Bank of Atlanta where I conduct research on
financial institutions and financial markets.
Also, let me mention that my views or my comments today do
not represent or necessarily reflect the views of the Federal
Reserve Bank of Atlanta or the Federal Reserve System. They are
my views and my views only. I am not sure if anyone is going to
take credit for them beyond myself today after I present them.
Last year, a study that I authored was published by the
Filene Research Institute. The title of that study was ``The
Future of Credit Unions: Public Policy Issues.'' It was a very
broad-based study, but the major research question in the study
was: Based on sound economic evidence, can we draw any
conclusions about whether credit unions should receive some
form of regulatory relief?
For my testimony here today, I would like to summarize the
conclusions from that study and relate them to the proposed
Credit Union Regulatory Improvements Act under consideration by
this subcommittee.
The four main conclusions from my Filene study were that
deregulation of banks, thrifts, and credit unions by Congress
over the last 15, 20 years was the right thing to do. And today
the U.S. financial system is much stronger because of that
deregulation and other factors. Today, if you look at the U.S.
financial system, by any reasonable measure it is the biggest
and the best in the world. And I attribute a lot of the
improvements in the financial system over the last 20 years to
an active reevaluation of regulatory policy, and I am a fan of
what Congress has done in that area.
My second conclusion was that credit unions received less
deregulation than either banks or thrifts.
Thirdly, I concluded that more deregulation for credit
unions would very likely have positive effects on our economy.
And fourth, and last, that the appropriate level of
deregulation of credit unions is probably similar to that
received by banks, adjusted for the special characteristics of
credit unions.
Now, most of the specific areas of deregulation that I
covered in my Filene study are addressed in the proposed Credit
Union Regulatory Improvements Act. In general, I agree with
those areas, especially the areas of member business lending
and capital requirements, and my written testimony goes into
more detail on those particular topics and other areas. But let
me just speak for a moment or two about member business loans
and about capital requirements.
To a large extent, credit union member business loans,
looking at them from the outside as an economist, I see them
more as personal loans for business purposes. And that appears
to be the way that they should be categorized as opposed to the
traditional small business loans that you would think of held
in the loan portfolio of a commercial bank. Because of that,
they have different risk characteristics. To a large extent, I
think these loans are less risky than a typical commercial loan
held in the portfolio of a commercial bank. And the idea of
expanding the possibilities for credit unions to make more
member business loans, I think, could possibly even reduce the
overall riskiness of the credit union's loan portfolio through
diversification effects. At worst, I would think it would not
have a significant increase in the overall risk of the credit
union industry.
Another issue that is obviously very important in terms of
thinking about what happens when you expand the possibilities
for more member business loans, is who receives these member
business loans. The loans tend to be very, very small loans,
very small businesses, and they tend to go to help improve the
credit supply to very, very small businesses. Also, it appears
from a recent Treasury study in the year 2001, that about one-
fourth of member business loans made by credit unions actually
go to low- and moderate-income individuals.
So the supply of very small business loans to very small
businesses and the availability of credit to low- and moderate-
income individuals could be improved by this particular
relaxation of the current regulations, by allowing credit
unions to increase the proportion of member business loans that
they are currently making.
In terms of capital regulations, the idea of instituting a
risk-based capital program makes a lot of sense. We have a good
prototype from what has been developed in the banking industry.
Obviously, that would have to be tweaked in certain ways to
make it appropriate for credit unions, but I think that it
allows for a good starting point.
One thing I would mention is that I think there is good
theoretical and empirical evidence that would suggest that
credit unions are probably less risky for given size and
management profile than other types of depository institutions.
So we might want to keep that in mind as we go through and
think about how to develop the proper capital requirements,
minimum net worth requirements, and the appropriate weighting
system for credit union assets.
One of the other issues covered in CURIA that I would like
to mention is nonmember services. I am really, really excited
about allowing credit unions to get involved in the business of
check cashing for nonmembers. And, hopefully, at some point,
maybe getting more credit unions involved in payday lending. I
like the idea of getting credit unions involved in those areas.
One of the major credit unions in my State, the State Employees
Credit Union of North Carolina, has been actively involved in
those areas, and I can see that it is making a difference. I
have some close friends that work with the credit unions and
close friends that work with the banks too, and they tell me
that programs like these are starting to make a difference.
To just wrap this up, I really think, looking at it from an
economic theory standpoint, that what is being done in the
proposed Credit Union Regulatory Improvements Act allows for
the right approach to thinking about the optimal regulation of
credit unions. And one thing that I will sum up and point to
that I really think is appropriate is the idea of reducing
legislative mandates and allowing the fine regulatory
institution that oversees credit unions, the NCUA to have more
authority and more flexibility to change its regulations in
response to market changes as credit unions obviously have to
respond to market changes.
Thank you very much.
[The prepared statement of William E. Jackson III can be
found on page 120 in the appendix.]
Chairman Bachus. Thank you, Dr. Jackson. I think my first
question, I will actually pick up on what you have just talked
about, and that is check cashing and what we might call payday
lending. And I will ask any of the panelists.
Ms. Custer, you mentioned in your testimony, CUNA's support
for the ability of credit unions to offer check cashing and, I
think, remittance services to their members?
Ms. Custer. Yes.
Chairman Bachus. How do credit unions use these basic
banking services as an opportunity to educate the unbanked and
the underserved members of the community of the services that
are available to them in a credit union, including financial
literacy programs sponsored by the credit unions?
That will be my first question. My follow up is: What are
the statutory and regulatory impediments that prevent you from
doing even more to serve the underserved or to make these
payday loans or check cashing services or remittance services?
And I will just start with Ms. Custer and go down the line.
Ms. Custer. The statutory impediment that gives us the
restrictions today is that we are limited to providing services
to credit union members. This expands the ability to credit
unions to provide these services to individuals who are in our
field of membership, not just those individuals who have
account relationships with us today.
This is important, because, for whatever reason, many
people do not have banking accounts; they do not have
relationships with financial institutions. By giving us the
ability to provide these services to them, hopefully we can,
along with the service, provide the incentive to have an
account at the credit union and to educate them on financial
literacy.
At BMI, I can speak to my own credit union, we have a
program we call Second Chance Checking. And this is for
individuals who have had checking accounts, and because they
have had difficulty handling them in the past, we give them
that second chance, and have a specific program for them to
help them become acclimated to handling their personal
finances.
I think credit unions have always been out in the forefront
of providing financial education to their members and to
nonmembers. We have in Columbus, Ohio, I think it is the second
largest Somali population in the United States. We participate
in the Somali Outreach Program. These are individuals who don't
have account relationships at all and are just learning about
the American financial system.
So giving us this ability helps us to provide even more
services to those individuals that are learning to handle their
own finances.
Chairman Bachus. Okay, thank you.
Mr. Cheney, I mentioned, and I think you mentioned in your
testimony too, that your institution has gone into four or five
underserved areas?
Mr. Cheney. Yes.
Chairman Bachus. But I would invite your comment.
Mr. Cheney. Sure. We have added underserved communities in
four different locations where we had existing branches. We
have not entered new markets, but we happened to have branches
in those underserved areas, and allowing us to serve our entire
field of membership in those areas would allow us, as Sharon
was saying, to reach out to people who don't currently have
accounts.
Often, that is an issue of trust. They have an issue of
trust with a financial institution. So if we can bring them in
and offer them services and offer them education on financial
literacy, then it is an opportunity, as she said, to welcome
them into our membership and to provide them with the full
range of products and services. And today we are not allowed to
serve nonmembers in any fashion.
Chairman Bachus. All right. Mr. Jackson, or Dr. Jackson.
Mr. Jackson. I think one of the impediments is the cost of
actually making loans. There is a certain fixed cost associated
with making any loan. And if the loan is too small, it is very
difficult to institute a strategic plan that allows you to make
the loan at any profit at all.
With payday lending, that is one of the issues that you run
into in terms of the very small loans. And in some cases, I
guess usury laws and regulations also prevent charging a rate
or a fixed amount that will actually cover the cost of the
loan. And kind of tweaking those things to allow for a small
fee to be associated with making the loan, I think, would be
very helpful.
Chairman Bachus. Okay, thank you.
Ms. Custer, your testimony touched on the importance to
many on this subcommittee and goes to the essence of what many
of us feel is the mission of credit unions, the idea of
providing services to members of modest means.
To many of us, modest means is another term for those who
are poor and those who are underserved. We are aware of a
recent GAO study--well, I tell you what, I am not going to ask
that question.
In the interest of time, Mr. Cheney, NAFCU has been
supportive in the past of a provision that is included in both
H.R. 1375 and H.R. 3579 which gives federally insured credit
unions the same exemption from premerger notification
requirements imposed by antitrust laws that banks and thrifts
already enjoy.
For those members who might question the wisdom of limiting
the reach of these antitrust laws, can you explain why it is,
in your view, that credit unions should be entitled to the same
treatment as banks and thrifts in this instance? And I am a
sponsor of that legislation and promoter of it, so I agree with
you.
Mr. Cheney. I am aware of that. Thank you very much.
Well, other insured financial institutions have been exempt
for some time, and I can't prove it, but I wonder whether
credit unions were left off merely as an oversight. I don't
think that mergers of credit unions present consolidation
issues in any markets.
Typically, as we said, credit unions as an industry hold
1.6 percent of all household assets. So I think it is just,
more than anything, a technical correction, which would help
with not only the cost of mergers, but also the paperwork and
regulatory hurdles that credit unions have to go through when
their members and boards members decide they want to merge. So
we appreciate your leadership on that issue.
Chairman Bachus. Okay. Let me go back to this question,
which I have decided I will ask. I keep switching back and
forth.
Ms. Custer, you are aware of the GAO study that suggested
that you all might not be doing as good a job in the area of
people of modest means as you could do?
Ms. Custer. Yes.
Chairman Bachus. And in your testimony, you provide some
interesting reasons for that. For the sake of just hitting that
again and reemphasizing that, could you repeat those reasons?
Ms. Custer. In serving the individuals of modest means, or
giving more data on supporting the fact that those are members
of modest means, I do have some figures here that may be
helpful to you, and this goes back to a study done by the
Filene Research Institute. They show that the average credit
union member is less affluent than the average bank customer.
By race and ethnicity, African-American households are more
likely to use a credit union than any other ethnic group and
are more likely to do so as households overall.
It also shows that minority applicants and low-income
households have a substantially higher likelihood of obtaining
a first mortgage with a credit union. So I think these are all
very consistent with the cooperative spirit and the fundamental
philosophy of credit unions in helping all of our members.
Chairman Bachus. Okay. Well, I applaud the credit unions
for their outreach and successful efforts in serving those of
modest means, which is something that I think members on both
sides have urged all our financial institutions to do. And in
that regard, credit unions have an enviable record of
accomplishment.
I am going to ask this question. I really was going to talk
to Ms. Johnson, but she, in her testimony, recommended that
NCUA be given statutory authority to examine third-party
vendors that provide data processing and other related services
to insured credit unions. And I think this is actually probably
a reversal of their position in the past. I will have to say
that I am kind of skeptical of giving them this statutory
authority.
Has the absence of that authority or the absence of their
ability to do that created any problems that you all know of?
Ms. Custer. Not that I am aware of. I know that NCUA had
the ability to look at third-party vendors in anticipation of
Y2K. I think at this point, there would have to be more
consideration to look at the whole issue, because I could not
address it any more than that.
Chairman Bachus. Yes, and that is the reason they were
given that limited authority, and at that time, they assured us
that would sunset and they would not ask that that be extended.
I am curious to see what the reason is.
I didn't know if you all knew of some reason why they
should have this authority; why maybe not having the authority
has created a problem of safety and soundness; or is it
something that the member institutions are asking them to do?
Chairman Bachus. Do you have an opinion on that Mr. Cheney.
Mr. Cheney. I am not aware of any credit unions that are
asking NCUA for this authority, and I am not aware of any
existing problems. Although I must say that this is an issue we
haven't addressed--the NAFCU board has not addressed in some
time, as we were certainly involved in support of the
sunsetting of the authority, as you know, some time ago.
Chairman Bachus. Right. And at least as chairman of the
subcommittee I would--without seeing something substantial, I
certainly wouldn't be in favor of granting them that authority.
I think that basically concludes--I want to ask Dr. Jackson
one final question, and then we will conclude the hearing. In
your testimony you express the view that excessive regulatory
burdens are not just a minor nuisance for credit unions but
have a significant impact on credit union customers and local
economies. We have heard testimony that affirms that compliance
burdens divert resources from customer service and community
development. Can you elaborate on the impact that regulatory
burdens on the credit unions have on the local economy?
Mr. Jackson. In general, when I think about this, the
notion of regulatory burdens, I usually think of it in a basic
cost-benefit framework where, when you think of the benefits of
regulation, for example, in capital regulation, the benefits
would be reducing the risk of an event that might lead to
taxpayers having to inject funds into the insurance system. But
the whole idea of being able to maintain a safe and sound
industry and having the regulations in place that focus on that
issue and allow for that issue would definitely be a benefit in
terms of regulation.
But in my way of thinking, in terms of credit unions, the
regulations, the cost side of it in terms of restricting the
credit union from providing products and services--financial
products and services that the customers, their members,
demand, it would outweigh the benefits from having a slight
reduction in the risk of the adverse event for the deposit
insurer.
So that was kind of my framework for thinking about the
cost and benefits of regulation, and I think that the credit
unions are basically--their insurance system over time has
demonstrated that it is in good shape. It is very safe; and the
idea of restricting innovation, restricting goods and services
flowing to credit union members and not allowing them to have
the same types of opportunities to utilize modern financial
products is a very heavy cost.
That was kind of the general framework I was thinking of.
Chairman Bachus. Thank you.
I think I do have one other question. Ms. Custer, you
mentioned in your testimony you endorsed Mr. Royce's risk-based
approach for determining capital; and I think, Mr. Cheney, you
endorse that as well. And I actually think Dr. Jackson
favorably endorsed that.
I know, Ms. Custer, do you--if my recollection serves me
correct, you also talked about ability to raise secondary
capital as maybe an appropriate way of addressing problems with
a prompt, you know, corrective action. Are you--could you
elaborate on that? Am I making myself clear?
Ms. Custer. I understand. As NCUA Chairman Johnson stated,
NCUA had looked at the possibility of secondary capital for
credit unions. It has been discussed within the industry. At
this point in time, I think the general attitude is, at least
with CUNA, who I represent at this hearing, is that the
secondary capital was considered an option that was looked at.
It was considered, still is being considered, still is being
researched.
The reason that we have looked at risk-based capital as
being a possibly more appropriate way of addressing the capital
situation is because it is very fair and it walks or goes hand
in hand with risk-based examination. NCUA went to risk-based
examination a couple of years ago, putting more emphasis on the
examination process where there are riskier elements within the
credit union operation.
Risk-based capital does the same thing. If a credit union
chooses to have more risk, allowable risk within their
operation, then it is appropriate to have more capital required
to cover that risk. Conversely, if a credit union has a more
simplistic or less risky operation, then it would require less
risk. So it simply seems to be a more appropriate way of
addressing capital for credit unions.
Chairman Bachus. Okay. Miss Custer or Dr. Jackson--I mean,
I am sorry, Mr. Cheney or Dr. Jackson, do you have any comments
on that?
You know, I certainly personally would prefer a risk-based
approach; and I am wondering if there are any--I am not seeing
any objection to that on the merits. I think that everyone
agrees, at least I think your regulators, the institutions
would say that a risk-based approach is really the--it is
almost a nondebatable issue, that that is--is that a fair
assumption?
Mr. Cheney. Yes, I agree. NAFCU supports and I do, too,
risk-based capital for credit unions. It makes a lot more sense
than the current one-size-fits-all program that we have for the
reasons that were just mentioned. NAFCU is looking at
alternative sources of capital, and we support the concept,
although we think there is more work that needs to be done on
that issue before we would propose anything to this
subcommittee.
Chairman Bachus. And, Dr. Jackson, has there been any--in
the academic world, or regulatory--among the regulatory bodies,
is there a general consensus that risk-based approach makes
more sense?
Mr. Jackson. Mr. Chairman, I think the general consensus in
the academic community is that it makes more sense, that if you
think of capital as any other product that has a price and that
it should be priced appropriately and if the insurance fund's
purpose is to price risk and charge those who are imposing more
risk on the insurance fund the appropriate fee, then there has
to be some metric that allows you to assess the individual
riskiness of each institution. So I think that is the way to
go.
Most people would say that it is better than the
alternative of a flat fee, that there are still problems even
with the risk-based system. These problems are being worked on.
But, we know much more about it now than we did before from
banking research. A lot of that, I think, can be utilized for
developing an appropriate system for credit unions.
Chairman Bachus. All right. Thank you.
This concludes our hearing. I have to read some more words
just for the record.
First of all, to both panels of witnesses, without
objection, written statements will be made a part of the record
and each of you will--your record will--I mean, your full
statement will be put in the record.
The Chair notes that there may be some members that have
additional questions to this panel. They may actually have just
questions, as opposed to additional questions, for the panel,
which they may wish to submit in writing; and, without
objection, the hearing record will remain open for 30 days for
members to submit written questions to these witnesses and to
place their responses in the record.
The Chair asks unanimous consent that Mr. Paul, a member of
the full committee who does not serve on this subcommittee, be
permitted to submit a statement for inclusion in the hearing
record. And without objection, hearing none, that is so
ordered.
[The prepared statement of Hon. Ron Paul can be found on
page 39 in the appendix.]
Chairman Bachus. With that, this hearing will be concluded.
So you witnesses are dismissed; and, again, I compliment the
credit unions of this country for their service to the American
public and meeting their financial needs. Thank you.
[Whereupon, at 4:55 p.m., the subcommittee was adjourned.]
A P P E N D I X
July 20, 2004
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