[House Hearing, 109 Congress]
[From the U.S. Government Publishing Office]





                        H.R. 1042--THE NET WORTH
                    AMENDMENT FOR CREDIT UNIONS ACT

=======================================================================

                                HEARING

                               BEFORE THE

                            SUBCOMMITTEE ON
               FINANCIAL INSTITUTIONS AND CONSUMER CREDIT

                                 OF THE

                    COMMITTEE ON FINANCIAL SERVICES

                     U.S. HOUSE OF REPRESENTATIVES

                       ONE HUNDRED NINTH CONGRESS

                             SECOND SESSION

                               __________

                             APRIL 13, 2005

                               __________

       Printed for the use of the Committee on Financial Services

                           Serial No. 109-16



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                 HOUSE COMMITTEE ON FINANCIAL SERVICES

                    MICHAEL G. OXLEY, Ohio, Chairman

JAMES A. LEACH, Iowa                 BARNEY FRANK, Massachusetts
RICHARD H. BAKER, Louisiana          PAUL E. KANJORSKI, Pennsylvania
DEBORAH PRYCE, Ohio                  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           DENNIS MOORE, Kansas
DONALD A. MANZULLO, Illinois         MICHAEL E. CAPUANO, Massachusetts
WALTER B. JONES, Jr., North          HAROLD E. FORD, Jr., Tennessee
    Carolina                         RUBEN HINOJOSA, Texas
JUDY BIGGERT, Illinois               JOSEPH CROWLEY, New York
CHRISTOPHER SHAYS, Connecticut       WM. LACY CLAY, Missouri
VITO FOSSELLA, New York              STEVE ISRAEL, New York
GARY G. MILLER, California           CAROLYN McCARTHY, New York
PATRICK J. TIBERI, Ohio              JOE BACA, California
MARK R. KENNEDY, Minnesota           JIM MATHESON, Utah
TOM FEENEY, Florida                  STEPHEN F. LYNCH, Massachusetts
JEB HENSARLING, Texas                BRAD MILLER, North Carolina
SCOTT GARRETT, New Jersey            DAVID SCOTT, Georgia
GINNY BROWN-WAITE, Florida           ARTUR DAVIS, Alabama
J. GRESHAM BARRETT, South Carolina   AL GREEN, Texas
KATHERINE HARRIS, Florida            EMANUEL CLEAVER, Missouri
RICK RENZI, Arizona                  MELISSA L. BEAN, Illinois
JIM GERLACH, Pennsylvania            DEBBIE WASSERMAN SCHULTZ, Florida
STEVAN PEARCE, New Mexico            GWEN MOORE, Wisconsin,
RANDY NEUGEBAUER, Texas               
TOM PRICE, Georgia                   BERNARD SANDERS, Vermont
MICHAEL G. FITZPATRICK, 
    Pennsylvania
GEOFF DAVIS, Kentucky
PATRICK T. McHENRY, North Carolina

                 Robert U. Foster, III, Staff Director
       Subcommittee on Financial Institutions and Consumer Credit

                   SPENCER BACHUS, Alabama, Chairman

WALTER B. JONES, Jr., North          BERNARD SANDERS, Vermont
    Carolina, Vice Chairman          CAROLYN B. MALONEY, New York
RICHARD H. BAKER, Louisiana          MELVIN L. WATT, North Carolina
MICHAEL N. CASTLE, Delaware          GARY L. ACKERMAN, New York
EDWARD R. ROYCE, California          BRAD SHERMAN, California
FRANK D. LUCAS, Oklahoma             GREGORY W. MEEKS, New York
SUE W. KELLY, New York               LUIS V. GUTIERREZ, Illinois
RON PAUL, Texas                      DENNIS MOORE, Kansas
PAUL E. GILLMOR, Ohio                PAUL E. KANJORSKI, Pennsylvania
JIM RYUN, Kansas                     MAXINE WATERS, California
STEVEN C. LaTOURETTE, Ohio           DARLENE HOOLEY, Oregon
JUDY BIGGERT, Illinois               JULIA CARSON, Indiana
VITO FOSSELLA, New York              HAROLD E. FORD, Jr., Tennessee
GARY G. MILLER, California           RUBEN HINOJOSA, Texas
PATRICK J. TIBERI, Ohio              JOSEPH CROWLEY, New York
TOM FEENEY, Florida                  STEVE ISRAEL, New York
JEB HENSARLING, Texas                CAROLYN McCARTHY, New York
SCOTT GARRETT, New Jersey            JOE BACA, California
GINNY BROWN-WAITE, Florida           AL GREEN, Texas
J. GRESHAM BARRETT, South Carolina   GWEN MOORE, Wisconsin
RICK RENZI, Arizona                  WM. LACY CLAY, Missouri
STEVAN PEARCE, New Mexico            JIM MATHESON, Utah
RANDY NEUGEBAUER, Texas              BARNEY FRANK, Massachusetts
TOM PRICE, Georgia
PATRICK T. McHENRY, North Carolina
MICHAEL G. OXLEY, Ohio


                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on:
    April 13, 2005...............................................     1
Appendix:
    April 13, 2005...............................................    13

                               WITNESSES
                       Wednesday, April 13, 2005

Herz, Robert H., Chairman, Financial Accounting Standards Board..     3
Johnson, Hon. JoAnn, Chairman, National Credit Union 
  Administration.................................................     1
Reynolds, George A., Senior Deputy Commissioner, Georgia 
  Department of Banking and Finance, representing the National 
  Association of State Credit Union Supervisors..................     5

                                APPENDIX

Prepared statements:
    Oxley, Hon. Michael G........................................    14
    Bachus, Hon. Spencer.........................................    16
    Royce, Hon. Edward R.........................................    19
    Herz, Robert H...............................................    20
    Johnson, Hon. JoAnn..........................................    66
    Reynolds, George A...........................................    71

              Additional Material Submitted for the Record

National Association of Federal Credit Unions, prepared statement    75

 
                        H.R. 1042--THE NET WORTH
                    AMENDMENT FOR CREDIT UNIONS ACT

                              ----------                              


                       Wednesday, April 13, 2005

             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 2:28 p.m., in 
Room 2128, Rayburn House Office Building, Hon. Spencer Bachus 
[chairman of the subcommittee] presiding.
    Present: Representatives Bachus, Feeney, Hensarling, 
Sanders, Sherman, Meeks, and Green.
    Chairman Bachus. [Presiding.] The committee will come to 
order.
    Today we are here to have a hearing on H.R. 1042, the Net 
Worth Amendment for Credit Unions Act.
    I am going to go ahead and depart with opening statements 
and move right to our panel because of the time.
    At this time, Ms. Johnson, we will just hear from you, and 
we will go from you to Mr. Herz and then Mr. Reynolds.
    So, welcome to the committee.

  STATEMENT OF HON. JOANN JOHNSON, CHAIRMAN, NATIONAL CREDIT 
                      UNION ADMINISTRATION

    Ms. Johnson. Chairman Bachus and Ranking Member Sanders and 
members of the subcommittee, I appreciate your invitation to 
appear here today to speak on behalf of the National Credit 
Union Administration to support the important legislation you 
have introduce: the Net Worth Amendment for Credit Unions Act.
    NCUA anticipates that the Financial Accounting Standards 
Board will act in 2005 to lift the current deferral of the 
acquisition method of accounting for mergers by credit unions, 
thereby eliminating the pooling method and requiring the 
acquisition method beginning in 2006.
    When this change to accounting rules is implemented, it 
will require that in a merger, net assets on a fair value basis 
of the merging credit union as a whole, rather than retained 
earnings, be carried over as acquired equity, a term not 
recognized by the Federal Credit Union Act.
    This FASB policy has been in place since mid-2001 for most 
business combinations, and the delay by FASB in implementing it 
for credit unions has allowed all of us to explore how credit 
unions could conform to the new financial reporting standards. 
H.R. 1042 is a good solution.
    Without the changes to the Federal Credit Union Act 
proposed by H.R. 1042, only retained earnings of the continuing 
credit union will count as net worth after a merger.
    This result would seriously reduce the post-merger net 
worth ratio of a federally insured credit union, because this 
ratio is the retained earnings of only the continuing credit 
union stated as a percentage of the combined assets of the two 
institutions.
    A lower net worth ratio has adverse implications under the 
statutory Prompt Corrective Action regulation. This result will 
discourage voluntary mergers, and on occasion make NCUA-
assisted mergers more difficult and costly to the National 
Credit Union Share Insurance Fund.
    Without a remedy, an important NCUA tool for reducing costs 
and managing the fund in the public interest will be lost.
    This agency, and the credit unions we serve, are grateful 
for the analysis and time you are devoting to this matter and 
for bringing us quickly to the point of advancing the narrow 
and specific changes to the Federal Credit Union Act needed to 
preserve credit union capital in mergers that take place after 
FASB fully implements its policy for credit unions.
    FASB's proposed change to accounting rules, along with an 
amendment to the Federal Credit Union Act, that allows NCUA to 
recognize ``any amounts that were previously retained earnings 
of any other credit union'' will, I believe, produce results 
consistent with the goal of FASB and comparable to results 
achieved for other business combinations.
    The result preserves the capital accumulated by both 
institutions and, importantly, is less likely to place the 
combined institution into a lower PCA category.
    My written statement describes the consequences for 
federally insured credit unions, were they to fall into lower 
PCA categories as a result of a merger, that does not recognize 
the retained earnings of the merger credit union.
    A merger normally has a necessary or beneficial impact, but 
it may cause adverse consequences if the retained earnings of 
the merged credit union are lost--an unexpected and undesirable 
consequence for credit unions, their members and NCUA.
    The management and board of directors of the continuing 
credit union considering a merger will give pause when faced 
with this result, as will NCUA.
    The number of mergers--around 300 a year--has been 
relatively constant for a number of years, so the significance 
of both the potential problem and the significance of the 
solution offered by H.R. 1042 is quite real.
    If FASB's statement of financial accounting standard 141 
had been applied to federally insured credit unions in 2004, 
without the statutory adjustment provided by H.R. 1042, some 
$300 million in credit union capital might have been lost for 
PCA purposes.
    The Net Worth Amendment for Credit Unions Act clearly and 
appropriately preserves the only source of hard earned credit 
union capital when mergers of institutions are accomplished: 
retained earnings.
    Thank you, Mr. Chairman, Ranking Member Sanders and the 
many co-sponsors for introducing H.R. 1042, for holding this 
hearing today and acting to preserve the capital of federally 
insured credit union.
    [The prepared statement of Hon. JoAnn Johnson can be found 
on page 66 in the appendix.]
    Chairman Bachus. Thank you.
    Mr. Herz, we welcome you.

   STATEMENT OF ROBERT HERZ, CHAIRMAN, FINANCIAL ACCOUNTING 
                        STANDARDS BOARD

    Mr. Herz. Thank you, Chairman Bachus, Ranking Member 
Sanders and all the members of the subcommittee.
    I am Bob Herz, chairman of the Financial Accounting 
Standards Board, and I am very pleased to appear here today. 
And I want to thank you for inviting me to participate at an 
important and I think timely hearing.
    I have brief prepared remarks and would respectfully 
request that the full text of my testimony and all supporting 
materials be entered into the public record.
    Chairman Bachus. Without objection.
    Mr. Herz. Thank you.
    Chairman Bachus. And that will be for all our panelists, if 
you have prepared remarks.
    Mr. Herz. The FSAB is an independent, private-sector 
organization. Our ability to conduct our work in a systematic, 
thorough and unbiased manner is fundamental to achieving our 
mission, that is, to establish and improve general-purpose 
standards of financial accounting and reporting for both public 
and private enterprises.
    Those standards are essential to the growth and stability 
of the U.S. economy, because creditors, investors and other 
users of financial reports rely heavily on credible, 
transparent, comparable and unbiased financial information to 
make economic decisions.
    And because the actions of the FASB affect so many 
organizations, our decision-making process must be open, it 
must be thorough, and it must be as objective as possible.
    Therefore, our rules of procedure require an extensive and 
public due process.
    That process involves public meetings, public roundtables, 
field visits to affected parties, liaison meetings with 
interested parties, consultation with many advisory councils, 
and exposure of our proposed standards to external scrutiny and 
public comment.
    In June of 2001, after several years of extensive public 
due process, the FASB issued a standard to improve the 
accounting and financial reporting for business combinations.
    That standard, supported by many users, auditors and 
preparers of financial reports, provides that all business 
combinations be accounted for by a signal method: the purchase 
method.
    The standard thus eliminated an existing alternative method 
of accounting for business combinations, the so-called pooling-
of-interest method.
    But in developing the standard, the board decided to defer 
its effective date for combinations between credit unions and 
other mutual enterprises.
    The board concluded that a deferral was appropriate so that 
we could consider further the need for additional interpretive 
guidance explaining such things as how the purchase method 
might be applied by those enterprises.
    Since the issuance of the standard, the board has continued 
to specifically discuss combinations between mutual 
enterprises, including credit unions, at eight public board 
meetings.
    In connection with those meetings, individual board members 
and staff sought input on the issue from many representatives 
of credit unions and other mutual enterprises at public and 
private meetings and at a number of conferences across the 
country.
    The board has tentatively reaffirmed the conclusion reached 
in our 2001 standard on business combinations that unions 
between credit unions and other mutual enterprises should be 
accounted for as acquisitions of businesses under the purchase 
method, consistent with the accounting for such transactions 
applied by all other types of business enterprises, including 
all other depository and lending institutions.
    In addition, the board has developed proposed changes to 
improve the procedures for applying the purchase method, which 
includes additional interpretive guidance to assist credit 
unions and other mutual enterprises in applying the purchase 
method.
    The board plans to include these tentative decisions for 
mutual enterprises and credit unions, together with some other 
tentative decisions on applying the purchase method, in a 
proposal for public comment.
    Right now we expect that proposal to be issued for comment 
by the end of June this year.
    Following the comment period, the board will, at public 
meetings over a number of months, carefully consider the 
comments received and all other input from credit unions and 
other enterprises in response to the proposal.
    As with virtually all of our projects, these public 
redeliberations will most likely result in a number of changes 
to clarify and hopefully improve the proposal.
    And only after carefully evaluating the key issues raised 
and carefully considering the input received in response to a 
proposal will our board consider whether or not to issue a 
final standard.
    We have reviewed the provisions of H.R. 1042, the Net Worth 
Amendment For Credit Unions Act. Consistent with our mission 
and expertise, we do not take positions on proposed legislation 
or other public policy initiatives, except in those limited 
circumstances when those initiatives would impair the mission 
and independence of the FASB.
    However, we do have a couple of observations.
    First, we would observe that the provisions of H.R. 1042 
appear to revise the definition of net worth as defined under 
the Federal Credit Union Act.
    The proposed revision of that definition appears to resolve 
a potential regulatory issue that many in the credit union 
industry have said if not resolved would have adverse 
consequences for mergers of credit unions.
    Secondly, we also observe that the provisions of H.R. 1042 
do not appear to establish or change general-purpose standards 
of financial accounting and reporting, i.e., what we are 
responsible for.
    We therefore very much appreciate, Mr. Chairman, your 
leadership in addressing this important matter in such a 
thoughtful and appropriate way.
    Thank you.
    [The prepared statement of Robert H. Herz can be found on 
page 20 in the appendix.]
    Chairman Bachus. Thank you.
    Mr. Reynolds?

   STATEMENT OF GEORGE REYNOLDS, SENIOR DEPUTY COMMISSIONER, 
  GEORGIA DEPARTMENT OF BANKING AND FINANCE, REPRESENTING THE 
     NATIONAL ASSOCIATION OF STATE CREDIT UNION SUPERVISORS

    Mr. Reynolds. Thank you, Chairman Bachus and members of the 
subcommittee.
    I am George Reynolds, Senior Deputy Commissioner for the 
Georgia Department of Banking and Finance. I appear today on 
behalf of the National Association of State Credit Union 
Supervisors, NASCUS, the professional state credit union 
regulators association.
    In addition to being a state regulator, I am a certified 
public accountant, allowing me to study and understand the 
financial standard board, FASB's recommendations and their 
impact on mutuals.
    My testimony today is to urge your support of H.R. 1042, 
the Net Worth Amendment for Credit Unions Act. This act amends 
the Federal Credit Union Act to clarify the definition of net 
worth for purposes of corrective action.
    While this bill is extremely brief, I cannot overemphasize 
the criticality of this change to the safety and soundness of 
credit unions.
    The Financial Accounting Standards Board is making changes 
to accounting standards for business combinations between 
mutual enterprises, which includes credit unions.
    The result of these changes is two-fold: First, the 
pooling-accounting method will no longer be an acceptable 
method of accounting for business combinations; second, 
purchase accounting will now be used almost exclusively for 
business combinations.
    My brief time before the subcommittee does not permit a 
detailed explanation of purchase accounting versus pooling 
accounting. I do, however, want to outline the serious, 
unintended consequences of this change.
    Without the proposed statutory amendment, a merger 
transaction between two credit unions would not allow the 
capital of the merging credit union to be added to the retained 
earnings of the surviving credit union. This will discourage 
mergers recommended by state regulators.
    Mergers are a safety and soundness tool regulators use to 
protect funds deposited by American consumers and to preserve 
the National Credit Union Share Insurance Fund.
    Our department and other state departments regularly use 
mergers to combine weak or troubled financial institutions with 
larger and stronger financial institutions, providing a win-win 
for both American consumers and the insurance fund.
    Without the ability to combine the capital of the two 
institutions, in addition to the assets and liabilities 
acquired on the balance sheet, there would be a serious 
disincentive to effect such mergers. This is particularly 
important in purchase accounting, which provides for reflecting 
assets and liabilities acquired at their fair market value.
    Marking the balance sheet to market, while not being able 
to include acquired capital, is a recipe for capital dilution. 
After a merger, such credit unions might find themselves in a 
prompt corrective action, PCA, category which would result in 
unintended mandatory regulatory actions.
    If a credit union could not be merged due to PCA concerns 
caused by the inability to add the capital of the merged credit 
union, then credit unions in weakened condition would be more 
likely to face liquidation or requests for NCUA financial 
assistance in merger transactions.
    An increase in liquidations would cause greater reputation 
risk, a severe loss of confidence for the credit union 
industry, greater losses to the deposit insurance fund, and 
increased costs to the industry and ultimately to consumers.
    Additionally, most credit unions have some deposits that 
exceed the deposit insurance limit. These members could face 
the prospect of losing these funds in a liquidation.
    Stated simply, this is a recipe for disaster. I never want 
credit unions that I regulate in Georgia, or the credit unions 
in any other state, to be confronted with this possibility.
    In addition to problem institutions, sound credit unions 
have sought merger partners in order to provide for greater 
efficiencies of scale, management succession and improved 
member services.
    We have been in a period of industry consolidation in 
credit unions during the past several years. Without these 
changes, credit unions that might otherwise be operating in a 
safe fashion might not be able to execute optimal business 
decisions which would benefit the credit union and its members.
    The impact of H.R. 1042 would be to revise the definition 
of net worth to include both the retained earnings of the 
surviving credit union and the capital of any other credit 
union with which the surviving credit union is combined.
    This would permit capital to be added across in a merger 
transaction and would serve to augment the capital position of 
the surviving credit union. This makes sound business sense and 
increases the safety and soundness of the credit union 
industry.
    In closing, this bill proactively addresses the safety and 
soundness concerns of state regulators.
    Chairman Bachus, on behalf of NASCUS, please accept our 
appreciation for your foresight and steadfastness in your 
commitment to introduce H.R. 1042.
    This concludes my remarks. NASCUS appreciates the 
opportunity to testify today. We welcome further participation 
and dialogue. And I will respond to any questions the 
subcommittee may have.
    Thank you.
    [The prepared statement of George A. Reynolds can be found 
on page 71 in the appendix.]
    Chairman Bachus. I thank you.
    Mr. Hensarling?
    Mr. Hensarling. Thank you, Mr. Chairman.
    This seems like a fairly straightforward matter, so I will 
be brief.
    Mr. Reynolds, you had some pretty strong language in your 
testimony, if I heard you correctly: ``recipe for disaster'' if 
we do not pass this, you ``cannot overemphasize the criticality 
of this change.''
    So can you go into a little bit more detail as far as what 
you see what is going to happen in the state of Georgia if we 
do not pass this with respect to the safety and soundness of 
the credit unions that you help oversee, and ultimately what 
could happen to the members of credit unions in Georgia as far 
as the fees and services that are offered?
    Mr. Reynolds. Well, Congressman, we have been very 
successful in using merger as a tool to resolve problem credit 
unions without cost to the taxpayer and without disruption of 
services to members.
    I am concerned that without this change that the number of 
credit unions that are going to be willing to merge with 
troubled credit unions is going to be reduced significantly, 
that the credit unions that otherwise might be interested in 
acquiring or merging with a credit union to get their field of 
membership would have a serious disincentive without this 
change, because they could find themselves potentially in a PCA 
situation.
    So I do think it is a very serious issue.
    Mr. Hensarling. Mr. Herz, just for a point of 
clarification, I think I heard you correctly, but is it your 
opinion that H.R. 1042 does not dictate any general accounting 
standards or undermines FASB's role? Is that what I think I 
heard you say?
    Mr. Herz. Yes. I mean, from our perspective--I am certainly 
not an expert in what constitutes appropriate regulatory 
capital or capital adequacy. That is up to the regulators. But 
this would, as I understand it, just affect the regulatory 
capital computation rather than prescribing different GAAP.
    Mr. Hensarling. Mr. Chairman, I think I have heard enough 
and I yield back.
    Chairman Bachus. Thank you, I appreciate your 
participation. I think you asked the right questions.
    At this time I am going to recognize Mr. Sanders to not 
only--I am going to have five minutes for questions, but an 
additional time for an opening statement.
    Mr. Sanders. Well, thank you very much, Mr. Chairman. I 
will not take all of that time. I apologize for not being here 
earlier, but you know how it is sometimes on Capitol Hill.
    So I want to welcome all of our guests.
    And thank you, Mr. Chairman, for holding this important 
hearing.
    And as you know, Mr. Chairman, I am pleased to be an 
original co-sponsor of your Net Worth Amendment for Credit 
Unions Act, and I applaud you for doing what you are doing.
    This legislation I think, as we all know, is necessary to 
conform to new accounting practices for mergers of credit 
unions that the Financial Accounting Standards Board is 
scheduled to put into effect early next year.
    And I want to thank the National Association of Federal 
Credit Unions for bringing this issue to our attention, and I 
am glad that we could work together in crafting a bill with 
wide support.
    What I would just like to do is ask a few questions of our 
guests, if I might, Mr. Chairman.
    Let me start off with Chairwoman Johnson: My understanding 
is that NCUA has recently shared with some members a proposal 
to move to a risk-based PCA system for credit unions.
    Is this amendment also part of that proposal? Or would that 
proposal, if enacted, eliminate the need for this amendment?
    Ms. Johnson. Thank you, Congressman, for the question.
    No, they are two separate issues. The risk-based capital is 
a separate proposal. Both of the issues we are talking about do 
deal with prompt, corrective action but from different 
standpoints, so they are totally separate.
    Under the Federal Credit Union Act, there is only one way 
for insured credit unions to build capital, and that is through 
net worth. And a risk-based system would more accurately 
measure the correct levels of net worth based on a risk 
profile.
    What we are talking about here today is actually just 
concerning the merger of credit unions and how the capital is 
accumulated.
    Mr. Sanders. Thank you very much.
    If I could ask Mr. Herz a question--and I just wanted to be 
sure that the record is clear: Is it your understanding that 
this bill would not in any way legislate accounting standards?
    Mr. Herz. Yes.
    Mr. Sanders. Now, I like that man.
    [Laughter.]
    That man is going to go far in Washington. You will be very 
popular.
    And, Mr. Herz, let me ask you another question: Do you have 
any update on when FASB will be issuing the proposed rule and/
or when the rule will become effective? Has there been any 
consideration to delaying the effective date so that this issue 
can be addressed by Congress?
    That will take more than one word, right?
    Mr. Herz. Yes.
    We are due to issue the proposal, the exposure draft, the 
end of June. It will probably be out for comments for 90 to 100 
days, that kind of period. We will probably hold some public 
roundtables.
    After that we will get in comment letters. And then, 
depending on the input we get, we go into what is called 
redeliberation: We go through the issues again based upon all 
the comments.
    Depending on how long that takes and what we hear, we may 
get out a final standard this year. It may take longer.
    This project, the larger project of which this is part--by 
the way, we have been doing the mutual part of this with the 
Canadians. They have had a big interest in this subject as 
well.
    And other parts of this are being done with the 
International Accounting Standards Board, whose standards are 
recognized in about 100 countries in the world.
    So if any of you have been involved in international 
logistics, you understand that sometimes getting everybody to 
agree on things can take some time. But it is worth it.
    If I had to hazard a guess--and this is just an absolute 
guess; it really depends on the input we get--I am not sure 
this will be effective at the beginning of January 2006. But I 
still support, very much support, this action, this bill, as I 
understand it, because it is kind of a win-win from my 
perspective. It allows the regulators to get on with their 
mission; it allows us to get on with our job.
    Mr. Sanders. Okay, thank you very much.
    Thank you, Mr. Chairman.
    Chairman Bachus. Thank you.
    Mr. Sherman?
    Mr. Sherman. Thank you.
    I believe most of the questions have been answered, but 
that will not get me to be overly brief.
    [Laughter.]
    It is good to know that this does not involve legislating 
accounting standards. I believe that you have indicated that 
this bill has nothing to do with secondary or alternative 
capital.
    Ms. Johnson. That is correct.
    Mr. Sherman. And it has nothing to do with risk-based 
capital.
    Ms. Johnson. That is correct.
    Mr. Sherman. You know, when I studied accounting, the net 
worth portion of the balance sheet was a combination of 
retained earnings, paid-in capital, donated capital and 
whatever capital or net worth one would acquire through the 
purchase-method merger.
    And if you are a creditor, if you are looking at the safety 
and soundness of an institution, it does not matter what flavor 
of net worth is there.
    And this bill solves that problem by indicating that 
retained earnings from the predecessor institution and retained 
earnings from the continuing institution are both capital 
available to meet needs.
    Can anybody think of a reason someone would advance to 
oppose this bill?
    Ms. Johnson. No, sir.
    Mr. Sherman. Next? You are shaking your head, but that will 
not make the record.
    Mr. Reynolds. No, absolutely not.
    Mr. Sherman. And third?
    Mr. Herz. I am not a regulatory capital expert, but, again, 
from our point of view, since it does not interfere with our 
setting of generally accepted accounting principles, it seems 
like a good idea to me.
    Mr. Sherman. For the first time ever, I yield back before 
my time is completed.
    Chairman Bachus. Thank you.
    We kind of want to set a record for the shortest hearing, 
and we have had absolutely nothing negative said about this 
legislation.
    I will just make two more points, and that is acquired 
equity--and Chairman Herz, you said acquired equity is counted 
as net worth for generally accepted accounting practices.
    So what we are proposing doing is really bringing the 
credit union board, national credit union board, and the act 
that gives the definitions in line, as far as I am concerned, 
with generally accepted accounting principles and will actually 
allow them to follow that method.
    The second thing I will say is that I think this is 
particularly important in that, Ms. Johnson, Chairman Johnson, 
one of your duties, when you have an institution that for 
safety or soundness reasons needs to be acquired by a stronger 
institution, you have to go out and try to find a white knight. 
And unless we make this change, that is going to be much 
harder.
    Ms. Johnson. That is right. We perceive it could be much 
more difficult to find that necessary merger partner.
    Chairman Bachus. And I am not sure that that has been said 
yet. But I think that from a standpoint of allowing you to 
fulfill your mission, this will make it, when we do have an 
institution that needs to be taken over by a stronger 
institution, this will make it easier to do that.
    Ms. Johnson. That is correct.
    Mr. Green? I am sorry, and I----
    Mr. Green. Thank you, Mr. Chairman and Mr. Ranking Member.
    When you are a neophyte at the very end of the line, I 
understand.
    [Laughter.]
    I understand, and is it an----
    Chairman Bachus. And I apologize to you. I did not 
realize----
    Mr. Green. Mr. Chairman, no apology necessary, thank you 
very much.
    And thank you to the members of the panel, because you have 
truly made this issue transpiculously clear for me. And I want 
to be as terse and laconic as possible, given that we are 
setting the record.
    But I do want you to know that I appreciate the comment 
that you made about the troubled credit unions, because I am 
concerned about the shareholders in those troubled credit 
unions.
    And if they cannot find a suitable partner, ultimately 
people pay the price, and these are people that have faces and 
families.
    We really appreciate the opportunity to eliminate what 
could be an injustice as it relates to the families that will 
suffer.
    So I thank you for the information that has been imparted.
    And I yield back the rest, remainder and balance of my 
time, Mr. Chairman.
    Chairman Bachus. Thank you.
    This will conclude the hearing.
    We do have one or two things.
    First of all, I want to thank all the co-sponsors of this 
bill, including my Ranking Member, Mr. Sanders. I think this is 
a great example of a noncontroversial legislation that has 
bipartisan support and apparently no opposition.
    So I would hope that we can get this bill on the floor very 
quickly and pass it over to the Senate.
    Co-sponsors include Ms. Brown-Waite, Gutierrez, Kanjorski, 
LaTourette, McCarthy, Ney, Renzi, Sanders, Feeney, Hooley, 
Kelly, Maloney, Moore, Ron Paul, Mr. Royce and Mr. Sherman.
    It is not often that we have Mr. Sherman and Mr. Sanders 
and Mr. Paul on the same bill.
    [Laughter.]
    So this gives you an idea of exactly how much support there 
is for this legislation.
    I want to introduce, without objection, a letter from the 
National Association of Federal Credit Unions signed by Mr. 
Becker--I saw him earlier. I would like to submit this for the 
record, without objection.
    So at this time the hearing is closed.
    We appreciate your testimony.
    We are adjourned.
    [Whereupon, at 2:59 p.m., the subcommittee was adjourned.]


                            A P P E N D I X



                             April 13, 2005

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