[Senate Hearing 111-159]
[From the U.S. Government Publishing Office]


                                                        S. Hrg. 111-159
 
                  CURRENT ISSUES IN DEPOSIT INSURANCE 

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

                                HEARING

                               before the

                 SUBCOMMITTE ON FINANCIAL INSTITUTIONS

                                 OF THE

                              COMMITTEE ON
                   BANKING,HOUSING,AND URBAN AFFAIRS
                          UNITED STATES SENATE

                     ONE HUNDRED ELEVENTH CONGRESS

                             FIRST SESSION

                                   ON

 STRENGTHENING DEPOSIT INSURANCE AND REVIEWING INCREASING THE FDIC AND 
                NCUA'S BORROWING AUTHORITY FROM TREASURY

                               __________

                             MARCH 19, 2009

                               __________

  Printed for the use of the Committee on Banking, Housing, and Urban 
                                Affairs


Available at: http://www.access.gpo.gov/congress/senate/senate05sh.html

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            COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS

               CHRISTOPHER J. DODD, Connecticut, Chairman

TIM JOHNSON, South Dakota            RICHARD C. SHELBY, Alabama
JACK REED, Rhode Island              ROBERT F. BENNETT, Utah
CHARLES E. SCHUMER, New York         JIM BUNNING, Kentucky
EVAN BAYH, Indiana                   MIKE CRAPO, Idaho
ROBERT MENENDEZ, New Jersey          MEL MARTINEZ, Florida
DANIEL K. AKAKA, Hawaii              BOB CORKER, Tennessee
SHERROD BROWN, Ohio                  JIM DeMINT, South Carolina
JON TESTER, Montana                  DAVID VITTER, Louisiana
HERB KOHL, Wisconsin                 MIKE JOHANNS, Nebraska
MARK R. WARNER, Virginia             KAY BAILEY HUTCHISON, Texas
JEFF MERKLEY, Oregon
MICHAEL F. BENNET, Colorado

                 Colin McGinnis, Acting Staff Director

        William D. Duhnke, Republican Staff Director and Counsel

                       Dawn Ratliff, Chief Clerk

                      Devin Hartley, Hearing Clerk

                      Shelvin Simmons, IT Director

                          Jim Crowell, Editor

                                 ______

                 Subcommittee on Financial Institutions

                  TIM JOHNSON, South Dakota, Chairman

                   MIKE CRAPO, Idaho, Ranking Member

JACK REED, Rhode Island              ROBERT F. BENNETT, Utah
CHARLES E. SCHUMER, New York         KAY BAILEY HUTCHISON, Texas
EVAN BAYH, Indiana                   JIM BUNNING, Kentucky
ROBERT MENENDEZ, New Jersey          MEL MARTINEZ, Florida
DANIEL K. AKAKA, Hawaii              BOB CORKER, Tennessee
JON TESTER, Montana                  JIM DeMINT, South Carolina
HERB KOHL, Wisconsin
JEFF MERKLEY, Oregon
MICHAEL F. BENNET, Colorado

                     Laura Swanson, Staff Director

                Gregg Richard, Republican Staff Director

                                  (ii)













                            C O N T E N T S

                              ----------                              

                        THURSDAY, MARCH 19, 2009

                                                                   Page

Opening statement of Senator Johnson.............................     1
    Prepared statement...........................................    26
Opening statements, comments, or prepared statements of:
    Senator Crapo................................................     1

                               WITNESSES

Art Murton, Director, Division of Insurance and Research, Federal 
  Deposit Insurance Corporation..................................     2
    Prepared statement...........................................    26
David M. Marquis, Executive Director, National Credit Union 
  Administration.................................................     4
    Prepared statement...........................................    30
William Grant, Chairman and CEO, First United Bank and Trust, on 
  behalf of the American Bankers Association.....................    13
    Prepared statement...........................................    38
Terry West, President and CEO, Vystar Credit Union, on behalf of 
  the Credit Union National Association..........................    14
    Prepared statement...........................................    42
Stephen J. Verdier, Senior Vice President and Director, 
  Congressional Relations Group, on behalf of the Independent 
  Community Bankers of America...................................    16
    Prepared statement...........................................    46
David J. Wright, CEO, Services Center Federal Credit Union, on 
  behalf of the National Association of Federal Credit Unions....    18
    Prepared statement...........................................    51

                                 (iii)


                  CURRENT ISSUES IN DEPOSIT INSURANCE

                              ----------                              


                        THURSDAY, MARCH 19, 2009

                                       U.S. Senate,
                    Subcommittee on Financial Institutions,
          Committee on Banking, Housing, and Urban Affairs,
                                                    Washington, DC.
    The Subcommittee met at 2:05 p.m., in room SD-538, Dirksen 
Senate Office Building, Senator Tim Johnson (Chairman of the 
Subcommittee) presiding.

            OPENING STATEMENT OF SENATOR TIM JOHNSON

    Senator Johnson. As we all know, the economic landscape has 
undergone significant change since the Committee last looked at 
deposit insurance. In these times of economic instability, it 
is increasingly important that we have a strong and stable 
deposit insurance fund and that our regulators have the tools 
they need to wind down failed institutions while at the same 
time guaranteeing that Americans' savings and retirement remain 
safe. I am pleased to hold this hearing today to take a closer 
look at deposit insurance issues that the FDIC, the National 
Credit Union Administration, and our Nation's banks and credit 
unions currently face. I would also like to welcome our panel 
of witnesses, and thank them for their time and for their 
thoughtful testimony.
    We are waiting for Ranking Member Senator Crapo to show up. 
I have some urgency in that Harry Reid has announced that we 
will have a vote around 4 o'clock, and so we intend to wrap up 
about then.
    I would like to welcome our first panel of witnesses. Our 
first witness is Mr. Art Murton, Director of the Division of 
Insurance and Research at the Federal Deposit Insurance 
Corporation. Welcome.
    Our second witness is Mr. David Marquis. Mr. Marquis is the 
Executive Director of the National Credit Union Administration 
and the former head of NCUA's Examination and Insurance 
Division. Welcome.
    I will ask that the witnesses please limit their testimony 
to as close to 5 minutes as possible. Your full statement and 
any additional materials you may have will be entered into the 
record.
    Mr. Crapo, do you have any comments?

                STATEMENT OF SENATOR MIKE CRAPO

    Senator Crapo. Thank you very much, Mr. Chairman. Sorry for 
being late. I am out of breath from running to get here.
    First of all, I want to welcome our witnesses and everyone 
here today. Thank you, Mr. Chairman, for holding this hearing.
    Looking at today's economic climate and the threats that 
face us in the financial industry, we have to consider the 
possibility that we could have one or more major financial 
institution failures. This is not an acknowledgment that it 
will happen, but it is an acknowledgment that there is a threat 
or a risk present.
    The FDIC and the NCUA protect against the loss of insured 
deposits if a Federal insured bank, savings association, or a 
credit union fails. It is important to note that the depositors 
who have accounts at failed banks or credit unions are made 
whole by the insurance fund at either FDIC or NCUA that banks 
and credit unions pay into. It is essential that this remains 
the case, and I am going to oppose any efforts to change that.
    In order to make sure that the FDIC and the NCUA can 
immediately access the necessary resources to resolve failing 
banks and credit unions and provide timely protection to insure 
depositors, I support increasing the borrowing authority of 
both the FDIC and the NCUA.
    I am a cosponsor of S. 541 with Senator Dodd and others 
that would permanently increase the FDIC authority to borrow 
from the Treasury, increase that authority from $30 billion to 
$100 billion. I note that it has been a long time since that 
borrowing level has been increased.
    In addition, the bill would temporarily authorize an 
increase in borrowing authority of about $100 billion, but not 
to exceed $500 billion, based on a process that would require 
the concurrence of the FDIC, the Federal Reserve Board, and the 
Treasury Department, in consultation with the President.
    I look forward to hearing today from our witnesses about 
what would be the appropriate parallel authority to provide to 
NCUA. It is my hope that we will decide not to try to add 
controversial items like the bankruptcy cram-down provisions or 
others into this effort, which will only delay our ability to 
provide the additional necessary resources to address future 
contingencies.
    Again, Mr. Chairman, I appreciate your holding this 
hearing. I look forward to working with you and hearing from 
our witnesses.
    Senator Johnson. Mr. Murton, please begin.

 STATEMENT OF ART MURTON, DIRECTOR, DIVISION OF INSURANCE AND 
        RESEARCH, FEDERAL DEPOSIT INSURANCE CORPORATION

    Mr. Murton. Thank you. Chairman Johnson and Ranking Member 
Crapo, I appreciate the opportunity to testify today on behalf 
of the FDIC.
    By protecting deposits, the FDIC protects the most 
important source of funding available to banks--funds that can 
be used to provide credit to communities and the broader 
economy.
    While many sources of bank funding have pulled back during 
the past 6 months, deposits have not. They remain a stable 
source of funding because depositors know that insured deposits 
are absolutely safe.
    My testimony will discuss the condition of the Deposit 
Insurance Fund and the need for an increase in the FDIC's 
borrowing authority. I will also comment on other current and 
potential changes to the deposit insurance system.
    At the beginning of 2008, the Deposit Insurance Fund had a 
balance of $52 billion. By the end of the year, the balance had 
declined to $19 billion. The decline was caused by the costs of 
protecting depositors of banks that failed last year and by the 
reserves that we set aside to cover the expected costs of bank 
failures this year.
    Last October, the FDIC Board, as required by law, put in 
place a plan to restore the insurance fund to a target range 
within 5 years. Based on projections at that time, the 
restoration plan called for banks to pay higher premiums. 
Recently, the FDIC updated those projections, and because of 
continued deterioration in the financial system, our estimated 
losses are significantly higher. As a result, the FDIC's Board 
of Directors made a series of difficult decisions to ensure 
that our deposit insurance system remains sound. Most 
importantly, the Board adopted an interim rule setting a 
special assessment of 20 basis points.
    These increases in assessments are necessary to ensure the 
adequacy of the FDIC's industry-funded resources. The FDIC's 
guarantee--for 75 years--has always been funded by the 
industry. Deposit insurance has been an important source of 
stability during our current financial crisis, and it has not 
relied on taxpayer funding.
    The FDIC realizes that these assessments are a significant 
expense, particularly during a financial crisis and recession 
when bank earnings are under pressure. And we recognize that 
banks face tremendous challenges right now, even without having 
to pay higher assessments.
    So let me turn now to our borrowing authority. While the 
FDIC is an industry-funded program, the FDIC guarantee is 
backed by the full faith and credit of the U.S. Government. In 
light of this, Congress has always provided the FDIC with a 
line of credit with the U.S. Treasury.
    The FDIC's borrowing authority was last raised by Congress 
in 1991 to $30 billion and has not been raised since then. 
Meanwhile, in the banking industry, assets have grown. They 
have tripled from $4.5 trillion to close to $14 trillion, and 
the FDIC believes it is necessary to adjust the line of credit 
to reflect that growth.
    The Depositor Protection Act of 2009, S. 541, would 
increase the FDIC's authority to borrow from Treasury from $30 
billion to $100 billion. As Senator Crapo mentioned, it would 
also allow a temporary increase above $100 billion, but not to 
exceed $500 billion, based on a process that requires the FDIC 
Board, the Federal Reserve Board, and the Secretary of 
Treasury, in consultation with the President, to make a finding 
that the additional borrowing is necessary. It is important to 
note that any use of that borrowing authority is required by 
statute to be repaid by the banking industry.
    The recent decision to impose a special assessment 
reflected the FDIC's responsibility to maintain resources 
sufficient to cover unforeseen losses, and the size of the 
borrowing limit is critical to this decision. Chairman Bair has 
stated that an increase in our borrowing authority would give 
the FDIC the flexibility to reduce the size of the special 
assessment.
    The events of the past year have demonstrated the 
importance of contingency planning to make sure the FDIC can 
seamlessly fulfill its commitment to protect insured 
depositors. The Depositor Protection Act would ensure that the 
FDIC will continue to have the resources necessary to address 
future contingencies. The FDIC strongly supports this 
legislation and looks forward to working with the sponsors to 
enact it into law.
    Now let me just turn briefly to the FDIC's systemic risk 
exception and how the costs of it are paid.
    As you know, current law authorizes the FDIC to take 
extraordinary actions in certain circumstances to protect the 
financial system and the economy from systemic risk and to 
recover the costs of that action through a systemic risk 
assessment on banks.
    The FDIC's recent experience suggests that we do not have 
sufficient flexibility to allocate any such assessment fairly 
among the parties who benefit. For example, recent actions 
taken under the systemic risk authority have benefited parties 
who are not subject to any assessment by the FDIC.
    The statutory language in H.R. 1106 would address this by 
allowing the FDIC to impose systemic risk assessments on 
parties that benefit from the systemic risk exception, 
including bank holding companies.
    The last area that I will comment on is the level of 
deposit insurance coverage. With regard to proposals to make 
permanent the current temporary increase in deposit insurance 
coverage to $250,000, the FDIC believes that the level of 
deposit insurance coverage is a policy determination that 
appropriately should be made by Congress. However, because any 
increase in the level of deposit insurance coverage increases 
exposure of the fund, such a change must also permit the FDIC 
to account for the newly insured deposits when setting premiums 
necessary to maintain the fund.
    In conclusion, the events of recent months have clearly 
demonstrated the benefits of deposit insurance. Assured by this 
guarantee, consumers have continued to maintain deposits in 
insured financial institutions that have provided vital credit 
for communities across the country. With additional 
modifications to the deposit insurance system, such as the 
increase in the FDIC's borrowing authority, we can maintain a 
system that continues the FDIC's mission of providing stability 
to the financial system.
    Thank you, and I look forward to your questions.
    Senator Johnson. Mr. Marquis.

  STATEMENT OF DAVID M. MARQUIS, EXECUTIVE DIRECTOR, NATIONAL 
                  CREDIT UNION ADMINISTRATION

    Mr. Marquis. Thank you, Chairman Johnson, Ranking Member 
Crapo. Good afternoon. The National Credit Union Administration 
appreciates this opportunity to provide the agency's position 
on ``Current Issues in Deposit Insurance.'' Federally insured 
credit unions comprise a small but important part of the 
financial institution community, and hopefully NCUA's 
perspective will add to the understanding of issues relating to 
Federal insurance at this critical juncture.
    Recent events underscore how important Federal insurance is 
to consumers, and the National Credit Union Share Insurance 
Fund has played a valuable role in reassuring credit union 
members that their federally insured funds are safe to 
$250,000. I would like to confine my oral statement to a few 
key points.
    First, NCUA supports the permanent increase in Federal 
deposit insurance to $250,000. Reverting to the pre-2008 level 
of $100,000 would likely have a negative effect on consumer 
confidence at this time when federally insured depositories 
such as credit unions are appropriately seen as a port in the 
storm.
    Second, NCUA supports the extension of the period of time 
the agency has to assess a premium to restore the NCUSIF to its 
statutory minimum. Currently, the Federal Credit Union Act 
requires credit unions to pay a premium in the event the NCUSIF 
equity ratio falls below the 1.2 percent. That premium to 
restore the level must be collected in the same year as the 
decline. NCUA believes that extending the time the agency has 
to restore the equity level from 1 year to 5 years would 
provide important flexibility for credit unions. A premium 
assessment would occur during a period of economic difficulty 
when credit unions could least afford it. This in turn reduces 
the amount of dollars credit unions can lend to their members, 
which stimulates and supports the economy in a very direct way. 
A 5-year period is a sensible way to address this strain on 
credit unions without sacrificing the financial soundness of 
the insurance fund.
    Third, the authority of NCUSIF to borrow from the Treasury 
has remained at $100 million since the inception in 1970--this 
despite significant growth in industry assets and insured 
funds. Borrowing authority is vital because the insurance 
fund's cash needs could far exceed expected losses during 
difficult periods. In the event of a failure of a large 
institution, NCUA might need to properly pay out all the 
insured shares, which would exceed available liquidity 
resources. The maintenance of public confidence in this kind of 
extraordinary event strongly suggests that Congress update the 
NCUSIF figure to a more realistic and useful number, given the 
size of the industry today versus what it was in 1970.
    A recently passed House bill has a provision that would 
increase the NCUSIF borrowing authority to $6 billion. This 
figure is an appropriate reflection of the growth in the 
industry today. Furthermore, emergency borrowing authority, 
such as the one that Chairman Crapo recently put into 
legislation for the FDIC in a multiple of 5 times ordinary 
borrowing authority, would be an important contingency tool in 
the event of further dislocations in the market. NCUA views 
these increases as a vital step in our effort to maintain a 
stable insurance fund for credit union members.
    Finally, Congress should consider providing NCUA with 
systemic risk authority similar to the FDIC. This enables FDIC 
to provide assistance to banks in emergency situations subject 
to concurrence by the Treasury and the Fed. NCUA has certain 
tools available to it, but these tools are very limited by 
statute and too narrow in focus in the event of a broad, large-
scale financial dislocation like the one we are now 
experiencing.
    NCUA does not have sufficient ability to respond when 
certain extraordinary circumstances threaten to undermine 
confidence in the credit union system as a whole. During some 
of the recent disruptions in the corporate credit union system, 
for example, NCUA was forced to resort to makeshift, burdensome 
share guarantee programs that, while workable, required a 
complicated execution of agreements between the NCUA Board and 
the corporate credit unions. Given the size and complexity of 
the adverse events that can occur, broader, more direct 
remedies available through a systemic risk authority are 
needed.
    The problem facing our financial markets and the 
institutions that serve them are real, but so is the safety and 
stability provided by a sound and well-functioning Deposit 
Insurance Fund. NCUA is working to give consumers a significant 
measure of reassurance during these troubled times. NCUA's 
hearing and legislative process before you represent an 
appropriate opportunity for Congress to identify and act on 
important improvements that will make a good system even better 
for the Nation's consumers.
    Thank you, and I will be glad to answer any questions.
    Senator Johnson. Thank you, Mr. Marquis.
    Mr. Murton, in addition to the potential increase in costs 
because of increased coverage, FDIC has increased premiums to 
restore the DIF as part of the restoration plan and announced a 
special assessment. How does the FDIC intend to address the 
concern that the special assessment and other costs will 
unfairly affect small banks, particularly those that played by 
the rules and did not contribute to our current economic 
crisis?
    Mr. Murton. Yes, thank you. The FDIC has proposed higher 
premiums. As you know, and as I said in my statement, the 
insurance fund that we administer has been declining over the 
last year or so and falling well below the target range.
    We have always been an industry-funded deposit insurance 
system, and we think it is important to maintain that status, 
and the banks that we talked to agree with that.
    We feel that it is important now to maintain a cushion for 
any contingencies, and that is why we are asking for increased 
borrowing authority.
    We recognize that the higher premiums that we are asking 
banks to pay come at a difficult time, and the FDIC Board has 
always struggled at times like this with the tradeoff between 
maintaining a sound deposit insurance fund, on the one hand, 
and allowing banks to have the funds necessary to meet the 
credit needs of their community.
    What the board has proposed has tried to strike that 
balance, but we have also indicated that if our special 
borrowing authority were increased, we think we would have 
enough of a cushion so that we could lower the special 
assessment. So that is one thing that we are trying to do.
    We have also recently, as part of our guarantee, our 
temporary guarantee program, we recently changed the fee 
structure of that, so we are shifting more of the fees toward 
the larger users of this guarantee program, and those 
additional funds will be placed into the DIF, and that will 
allow us to offset some of the special assessment.
    In terms of the community banks that have played by the 
rules, we have made some changes to our risk-based premium 
system, which was part of the legislation in 2006. We have 
asked as part of our risk-based pricing system for the banks 
that are taking on more risk to pay more of the burden, and for 
those traditional banks that have basically stuck to their 
knitting to pay less of the burden. So we are trying to address 
those very legitimate concerns.
    Senator Johnson. Mr. Marquis, does the NCUA have a concern 
about the equity levels in credit unions that they need 
emergency borrowing authority? The Treasury Department has said 
that it supports an increase in FDIC's emergency borrowing 
authority. Does the Treasury feel the same way about increasing 
NCUA's emergency borrowing authority?
    Mr. Marquis. Our borrowing authority right now is limited 
to $100 million, and at the time when that was enacted in 1970, 
the credit union industry had total deposits of $13 billion. 
Today, the credit union industry has assets of a little bit 
greater than $800 billion, so that is 62 times the asset size. 
In order to get the equivalent ability of NCUA and the 
insurance fund to act on issues of need in terms of payouts, we 
would have to go to $6 billion in order to equal that 
equivalent. I do not know if the Treasury supports that. To my 
knowledge, we are not sure. I am not sure that is the case. But 
as we wrote this for this hearing, we did talk to some of the 
members, at least a pack of folks did, members of the Committee 
on the House side, and tried to come up with a reasonable 
number that kind of mimicked or matched what the FDIC was and 
kind of where we were in relationship to what the size of the 
industry was back in the 1970s.
    Senator Johnson. Do you both agree that the temporary 
increase in deposit insurance to $250,000 should be extended 
beyond 2009? Should the increase be made permanent?
    Mr. Marquis. Yes, we believe it should be made permanent. 
Again, the last time this issue was looked at was in 1980 when 
the $100,000 was established. Looking on it on an inflation-
adjusted basis, that would bring us to about 243. Prior to 
that, in the 1970s, the insurance limit was $40,000. We think 
this would allow some of the small credit unions, medium-sized 
community credit unions to be able to generate more deposits in 
the smaller institutions in the home towns and hopefully keep 
the money for credit available in those locations as opposed to 
spreading it out in the branches in the real large 
institutions.
    We think this is helpful to especially the community credit 
unions and smaller credit unions and helping them to--
basically, it would help us from insurance and spread out the 
systemic risk in that it would more be--it would have the 
opportunity to let folks that start out in credit unions in 
their 20s, and then by the time they get into their 70s, they 
do not want to keep $100,000, so they turn in their home town 
and have to go put it somewhere else, and this would allow them 
to stay with their institution and keep a little more money 
there.
    Senator Johnson. Mr. Murton?
    Mr. Murton. Yes, the FDIC has always taken the position 
that the level of deposit insurance coverage is an important 
policy call for Congress to make, and the FDIC understands that 
there are tradeoffs on both sides of that issue.
    If the increase in the guarantee is made permanent to 
$250,000, we would ask that the FDIC be able to take that into 
account in setting our reserves or our premiums in order to 
maintain the fund.
    Senator Johnson. Mr. Crapo.
    Senator Crapo. Thank you very much, Mr. Chairman.
    For both of you, right now both the banks and the credit 
unions are facing the impact of special assessments as a result 
of FDIC's and NCUA's efforts to maintain adequate resources. As 
we are all painfully aware, these special assessments are 
creating a concern about the financial impact on our financial 
institutions at a time when they really need to have as much 
bang for the buck in terms of providing credit as possible.
    The question I have is--well, further in that context, it 
is my understanding that the increased borrowing authority that 
both of you are talking about would be able to provide both the 
FDIC and the NCUA some pathways to relieving that pressure. And 
the question I have is: First, how does the increased borrowing 
authority really help you relieve that pressure on the 
assessments? And, second, what would be some of the unintended 
consequences if Congress delays action on this borrowing 
authority issue? Mr. Murton or Mr. Marquis, whoever wants to go 
first.
    Mr. Murton. Yes, I will take it. We are asking for the 
increased borrowing authority, and we do think that will help 
to allow us to set a lower special assessment. Basically, our 
insurance fund has been declining, and as a result, the cushion 
that we have for contingencies, for unforeseen circumstances, 
has been getting smaller. And the borrowing authority is part 
of that cushion for the contingency.
    So if Congress sees fit to increase our borrowing authority 
to keep pace with the growth in the industry over the last 25 
years, then the board can take more comfort in allowing the 
lower special assessment and allowing the fund to go somewhat 
lower.
    If we do not, if Congress does not act quickly, the board 
does have to make a decision soon on the special assessment. We 
are planning to go to the board in mid- to late May, and the 
board will have to decide whether to keep the 20-basis-point 
special assessment in place. And so action soon enough to allow 
that decision to be affected would be welcome.
    And then, as I say, the line of credit is for 
contingencies, and given the circumstances that we are facing, 
there are a number of contingencies that we may face.
    Senator Crapo. Thank you.
    Mr. Marquis.
    Mr. Marquis. Thank you. As you know, the insurance fund for 
NCUSIF is structured in a way where the first 1 percent that 
credit unions are required to deposit is an asset on their 
balance sheet and it is not a premium. The other part of the 
Share Insurance Fund is equity that we built up over time and 
allowed us to go to 1.3 over time, over the past several years.
    The borrowing authority gives us the ability to have cash 
needs for payout priorities or payout issues should those 
issues arise, which we are not anticipating at this point. But 
the 1 percent, if we have an issue that causes us to reserve or 
to fund for anticipated losses, still does impact the Share 
Insurance Fund 1 percent because it is an impaired asset, 
because it was never collected as a premium. So accounting-
wise, that does cause an impairment, and currently, at our 
January 28th meeting, we did have to reserve a significant 
amount of money for some issues, and that caused our Share 
Insurance Fund to go down to about 0.51, and that is going to 
trigger a premium later on in this year.
    Senator Crapo. So if I understand both of you correctly, 
decisions have to be made relatively soon with regard to the 
special assessments, and the failure to be able to rely on the 
increased borrowing authority could cause higher assessments, 
and that in turn would reduce our ability to get more cash into 
credit markets than into these types of assessment funds. 
Correct?
    Mr. Murton. That is correct.
    Senator Crapo. The point I am trying to get at here is the 
longer Congress takes to act, the greater the threat to our 
system, or maybe to put it a different way, the less likelihood 
we will--or the less opportunity we will have to be able to 
free up more credit in the banks and credit unions for the 
public sector--the private sector.
    Mr. Murton. That is absolutely right.
    Senator Crapo. All right. Could you each just quickly go 
through with me the process that would be followed if there 
were a failure of a credit union or a failure of a bank? And 
what I am getting at is this: I think it is very important for 
the public to understand that these dollars are--even if the 
loans have to be accessed, ultimately the funds that would be 
used for the insurance protection here are going to come from 
the industry itself, and that is the point that I wanted to get 
at from both of you.
    Mr. Marquis. Yes. The process of putting a credit union 
into receivership and liquidation is one that we take over the 
institution and pay it out, all the share deposits, within a 
couple days in order to maintain confidence in the system. That 
is a cash drain, of course, on the Share Insurance Fund.
    Then a process takes place in terms of recovery of assets 
on the other side of the balance sheet, which is a long, drawn-
out process at times as you try to liquidate the assets, or 
sell them or merge them or what have you. So that does take--
and the loss ultimately takes capital out of the system which 
reduces the premium charge, which reduce the ability of a 
credit union to extend more credit in the market because they 
have to contract their balance sheets in order to meet their 
capital requirements.
    Senator Crapo. Thank you.
    Mr. Murton. Yes. When an FDIC-insured bank fails, we are 
able to resolve it quickly without interruption to the funds 
for depositors.
    Senator Crapo. So the depositors in both cases get their 
funds protected within days?
    Mr. Murton. Absolutely. Usually the next business day. In 
virtually all cases, there is no interruption to their funds.
    Senator Crapo. All right. Continue.
    Mr. Murton. And so in order to be able to do that, we need 
cash, we need to have the cash available to do that. And this 
borrowing authority helps us to make sure that we have the cash 
for whatever contingencies. To pay back that borrowing, we pay 
it back through the collection from the assets that we get from 
the failed bank, but also through the premiums that we assess 
on the banks. And we have always been able to pay--we have only 
borrowed from the Treasury once, and that was for short-term 
liquidity needs, and we paid that back within 2 years.
    But any resources that we use and any losses that we incur 
as a result of a bank failure are paid for through assessments 
on the banking industry.
    Senator Crapo. So the bottom line is in both cases the 
depositors are protected immediately, the taxpayers ultimately 
do not end up holding the bill for the protection that is 
provide.
    Mr. Murton. That is right.
    Mr. Marquis. Correct.
    Senator Crapo. Thank you.
    Senator Johnson. Chairman Dodd.
    Chairman Dodd. Well, first of all, Senator Johnson, let me 
thank you and Senator Crapo for doing this. I appreciate it 
very much. We almost ran into each other. The hearing this 
morning went a little long because of votes. I thought we would 
be done much earlier. So we were leaving the room as you were 
coming in the room. So I want to thank you very much for 
holding this very important hearing, because we have got to in 
the coming days here now--we are trying to resolve some matters 
which I--we will either resolve or we will not. One way or the 
other, we will move forward. But Senator Johnson and Senator 
Crapo have been tremendously supportive of the idea of a need 
for doing what we need to be doing. I guess it goes back some 
time. Actually, we have been living with the $30 billion 
ceiling since 1991, so for the last almost--you know, number of 
years here, 20 years we have had people talking about the need 
to move up. And obviously the situation we are in I think makes 
that point very loudly to us. And dealing, obviously, with 
raising statutorily to the 250 also makes a great deal of sense 
as well. And then the issues related with it I think are 
important.
    And let me just--I just have a couple of quick ones for 
you. There have been some concerns raised about our current 
system of collecting premiums for deposit insurance, that is, 
it is procyclical, that is, banks are charged more for deposit 
insurance during economic downturns, which is exactly when they 
can least afford to pay them. And so I wonder what we can to 
minimize this procyclical impact of deposit insurance 
assessments, because obviously we heard it again today. Senator 
Bunning was talking about assessments in his State. I do not 
know if you heard his comments, but talked about a 1,000-
percent increase in premium costs. Sheila Bair was willing to 
sit down and talk about that particular case. But, nonetheless, 
that assessment, according to Senator Bunning, would make it 
impossible for that lending institution in his home State of 
Kentucky to make a profit based on that cost.
    So I wonder if you might respond to this issue of how we 
can maybe think about a more creative way. Mr. Murton, we will 
start with you.
    Mr. Murton. The issue of procyclicality----
    Chairman Dodd. Is that microphone on?
    Mr. Murton. Sorry. Yes, sorry. The issue of procyclicality 
has been one that the FDIC has dealt with for a number of 
years, and, in fact, for a number of years we had a system that 
was more procyclical. It required us to charge whatever it took 
to get the fund back up to a target of 1.25 within a year.
    The legislation that passed in 2006, which Senator Johnson 
was a strong advocate for, helped with that situation, and 
because that law was passed, we have not had to charge the high 
premiums for the last 2 years. We have been able to allow 
premiums to be lower than they otherwise would.
    But we are at a time where the fund has declined, and it 
has declined so that the cushion that we have is getting 
uncomfortably small, and that is why the borrowing authority, 
the increase in the borrowing authority will help to alleviate 
some of that pressure and allow the board to lower the special 
assessment.
    We are looking at other ways to try to address the special 
assessment. We have, as I indicated, changed the fee structure 
for the guarantee program that we have put in place, and we 
have raised some of the fees for that, and we are going to put 
them in the deposit insurance fund, so that will help lower the 
special assessment. And we have also put in place a risk-based 
pricing system where riskier banks are asked to pay more than 
the safer banks. So we are trying to take steps to lower the 
impact on the industry at what is probably one of the worst 
times for them to be facing.
    Having said that, it is important to maintain an industry-
funded program. We feel it is very important, and the banks 
that we have talked to feel that is an important feature of 
deposit insurance.
    Chairman Dodd. I appreciate that. One more question. I will 
ask you, Mr. Marquis, for the answer. On the second panel, Mr. 
Wright, who is from the National Association of Federal Credit 
Unions, and Mr. West from the Credit Union National Association 
expressed concerns over the increased assessments resulting 
from the National Credit Union Association's Corporate 
Stabilization Plan announced earlier this year to mitigate the 
cost to credit unions. Both witnesses propose allowing 
corporate credit unions to access the central lending facility 
and making the central lending facility available for capital 
as well as liquidity.
    I wonder if you could share what your organization's 
position is on this proposal. And if you are not for it, why? 
And what alternatives would you suggest?
    Mr. Marquis. NCUA supports the concept of trying to find a 
way for credit unions to mitigate the cost of having to 
recapitalize the 1-percent deposit all at one time. However, we 
also are mindful that we want a program that is not going to 
create further problems. Credit unions built their insurance 
fund--or built their portfolios up of capital from 1992, the 
last time we charged a premium, from about 6.4 percent to 11.5 
percent. So their balance sheets are very healthy during the 
good times.
    The Share Insurance Fund at that time was maintaining a 
rate of about 1.3, and it cannot charge a premium beyond that 
point. We have to give it back once it goes--or we do not have 
to give it back, but we cannot charge a premium.
    On the CLF issue, the CLF is established for liquidity 
purposes, and it is funded through--its borrowing authority is 
set out in a multiple of its capital. It can borrow 12 times 
its subscribed and paid-in capital. So today that is $41 
billion.
    If we were allowed to put in capital instead of liquidity 
into an institution that would be at risk or the capital would 
be subject to covering an insolvent institution, that capital 
would be impaired, and impaired on the CLF books as well, on 
its capital. That in turn would reduce the borrowing authority 
from the CLF, and if you had an insolvency or a capital 
position that got impaired to the tune of about $3.4 billion, 
it would wipe out the borrowing authority altogether.
    On the other hand, the additional would be the capital for 
the most part is subscribed for credit unions on behalf of them 
through our largest corporate, U.S. Central, and if that 
issue--or if that capital was impaired, it would further impair 
the capital of that institution and further put that 
institution in harm's way.
    So those issues make it somewhat problematic, at least the 
way the structure of the CLF is currently written, not that 
that could not be adjusted, but you have to make some 
significant changes on how the CLF authority is established in 
terms of how its borrowing authority is set out.
    I know our Chairman is working with staff, and we are due 
to give him something to present to our board on Tuesday as a 
possible way that this could be done to mitigate that issue, a 
proposal that might work through a stabilization fund on top of 
the Share Insurance Fund. But he has to vet that with his other 
board members before he is ready to present it to Congress.
    Chairman Dodd. Thank you very much.
    Thank you, Mr. Chairman.
    Senator Johnson. I would like to thank our first panel of 
witnesses for taking the time the time to testify today on this 
important issue. You may be excused for the second panel.
    Now I would like to welcome our second panel of witnesses 
to the table. Thank you for being here today to discuss such a 
timely and important matter.
    [Pause.]
    Senator Johnson. Our first witness is Mr. William Grant. 
Mr. Grant is Chairman and CEO of First United Bank and Trust in 
Oakland, Maryland. He is here today on behalf of the American 
Bankers Association. Welcome.
    Our second witness is Mr. Terry West, President and CEO of 
VyStar Credit Union in Jacksonville, Florida. He is here today 
on behalf of the Credit Union National Association. Welcome.
    Our third witness is Mr. Steve Verdier, Senior Vice 
President, Independent Community Bankers of America. Welcome.
    And last, Mr. David Wright. I have known Mr. Wright for 
many years. He is CEO of Services Center Federal Credit Union, 
which serves the communities of Yankton, Parkson, and 
Springfield in South Dakota. Thank you for being here today on 
behalf of the National Association of Federal Credit Unions, 
and thank you for traveling all this way.
    Mr. Grant, please begin.

STATEMENT OF WILLIAM GRANT, CHAIRMAN AND CEO, FIRST UNITED BANK 
    AND TRUST, ON BEHALF OF THE AMERICAN BANKERS ASSOCIATION

    Mr. Grant. Chairman Johnson, Ranking Member Crapo, and 
other members of the Subcommittee, First United Bank and Trust 
is a 108-year-old community bank headquartered in Oakland, 
Maryland, a rural town in Appalachia with a population of about 
2,000. We have assets of about $1.6 billion and serve four 
counties in Maryland and four counties in West Virginia.
    The ABA strongly supports, with the sponsorship of Chairman 
Dodd, the Depositor Protection Act of 2009, S. 541. It would 
provide the FDIC with the needed funds to manage the cash-flows 
in handling bank failures, and more importantly, this added 
flexibility would allow the FDIC to significantly reduce the 
special assessment on the industry that has been proposed for 
June 30, 2009.
    Let me be very clear. The banking industry fully supports a 
strong FDIC Fund. We know how important deposit insurance is to 
our customers, and banks have always paid the full cost of the 
FDIC since its inception in 1933 and we will honor the 
obligations to support it today. How this is done, however, is 
very important to every bank in all communities across the 
country.
    The special assessment, as currently proposed, would pull 
$15 billion from banks in the second quarter of this year. This 
would be on top of the regular quarterly payments of about $4 
billion. Even at half of that cost, and that is what the FDIC 
has suggested is likely if S. 541 were enacted, there would 
still be a substantial burden on banks at the very time we are 
making every effort to get credit into our local communities.
    The money to pay such high assessments cannot come out of 
thin air. It is very important, therefore, to lower the up-
front costs and to spread the obligation to FDIC over time. 
Happily, S. 541 helps to accomplish this.
    For my bank, First United, the proposed special assessment 
would cost $2.5 million, to be paid all in the second quarter 
of 2009. This will reduce our bank's capital, which is 
necessary to support lending, by about $1.6 million. This very 
high and unexpected cost is in addition to the regular risk-
based premium, which will total about $1.7 million in 2009. 
First United is not alone. All banks face similar challenges.
    I do want to be very clear in saying that First United Bank 
and Trust will meet its obligations to the FDIC regardless of 
whether S. 541 is enacted. In doing this, however, we would 
encounter limits on our ability to lend in our communities, 
support local functions and charities, and to provide jobs. In 
fact, the special assessment is completely at odds with our 
bank's efforts to help our communities rebuild from this 
terrible economic downturn.
    This assessment would also make it more expensive to raise 
new deposits, and fewer deposits means less lending. The 
subsequent reduction in earnings will make it harder to build 
capital when it is needed the very most.
    In places where the economic conditions are even more 
severe, this added burden will make new lending practically 
impossible. Some banks have reported that they may have to 
consider reducing bank staff in order to pay this new 
additional assessment.
    It is critical to consider alternatives that would reduce 
this burden. S. 541 does this by enhancing the FDIC's ability 
to draw on its line of credit. Importantly, the FDIC does not 
intend to use this line of credit at all unless the economy 
deteriorates even more dramatically than is anticipated. And if 
it does draw on the line, it is a borrowing that will be repaid 
by the banking industry with interest.
    This obligation of our industry is often lost in the 
discussions about government support and is frequently confused 
with taxpayer losses. America's banks are prepared to do our 
part and pay for 100 percent of the cost of FDIC insurance. The 
only issue is one of timing. S. 541 will be very helpful in 
providing the industry with the time needed to fund the FDIC 
Insurance Fund while enabling the industry to meet its needs 
within the communities.
    Therefore, the ABA fully supports S. 541 and urges quick 
action to enact it into law.
    Mr. Chairman, I would be happy to answer any questions that 
you or the Subcommittee might have. Thank you.
    Senator Johnson. Mr. West?

   STATEMENT OF TERRY WEST, PRESIDENT AND CEO, VySTAR CREDIT 
   UNION, ON BEHALF OF THE CREDIT UNION NATIONAL ASSOCIATION

    Mr. West. Thank you, Chairman Johnson and Ranking Member 
Crapo. I appreciate the opportunity to be before you this 
afternoon and represent the Credit Union National Association. 
I am President and CEO of VyStar Credit Union, headquartered in 
Jacksonville, Florida. We were founded in 1952 with 12 people 
and $60 to serve members, provide them a place to borrow money 
and save money. I am proud that 57 years later, we still do 
that every day.
    We today serve 350,000 members and they have $3.8 billion 
in assets in their credit union. We provide a full range of 
services to those members. Last year alone, we loaned out over 
$300 million in mortgage loans for them. And Senator Crapo, I 
heard your comments about lending. We think it is important. 
Today, we have over $200 million in our mortgage loan pipeline 
that we are hoping to close in the next couple of months. Most 
of that are members refinancing mortgages from other 
institutions at lower rates to our institution. We also pay up 
to $5,000 in closing costs for those members so that they will 
have a better opportunity to get into those loans.
    We also serve about 9,000 businesses in the area. Many of 
them have their deposit accounts with us because we charge them 
less fees. They also have small business loans with us.
    I also Chair CUNA's Task Force on Corporate Credit Unions 
that Mr. Marquis referenced earlier, and our charge on that 
task force has been to look at the corporate credit union 
structure and advise NCUA, and hopefully Congress, and 
hopefully the Treasury, on how to properly restructure them in 
the future.
    A couple of things I would like to mention as we talk 
today, and as we said, this is a very important and timely 
meeting. The banks currently have some pending bills to 
increase the deposit coverage up to $250,000. They have pending 
bills to rebuild their FDIC Insurance Fund, which we very much 
agree. At present, they have 5 years to rebuild their fund, and 
as Mr. Marquis said, we have 1 year to rebuild our fund. 
According to what we have read, FDIC recently has extended that 
to 7 years and they are asking for 8 years. We would ask that 
the credit union movement have at least 8 years to rebuild our 
fund, as well. And Mr. Marquis had mentioned five. Five would 
help, eight would be better.
    We also recognize that FDIC has asked for increased 
borrowing authority. We as credit unions are asking for 
assistance, as well. In general, we are operating well. I am 
proud to say we had net income last year, and we are in 
Florida, one of the toughest States in the Nation economically 
right now. We are asking that we also have $250,000 in 
insurance coverage. I talked with members, and it may be a 
surprise, we have 350,000. I talk with them daily and weekly. 
That is how I run our credit union.
    They are constantly asking us, will this coverage be 
permanent, and they think it needs to be permanent and I think 
it needs to be permanent, because every day, they are wanting 
to feel more secure in this economic environment. They come in 
not worried about their credit union, but worried about the 
money they have been working hard to save. Anything we can do 
to give them a comfort during this environment, I think is 
important.
    Mr. Marquis talked about the Central Liquidity Fund, or 
Central Lending Fund. We also believe that natural person 
credit unions and corporate credit unions should be able to 
borrow from that and use it as a source of capital, and Mr. 
Marquis talked about the structuring that would need to occur 
in how it is set up. We think that would provide considerable 
relief to the credit union movement.
    We also support NCUA having the ability to increase their 
borrowing from $100 million to $6 billion during this, and we 
also support them having the same authority that FDIC has today 
in systemic risk issues. Today, NCUA does not have that 
authority. We also support them having the authority during 
systemic risk issues to borrow up to $30 billion.
    Mr. Marquis touched on the corporate credit union issue, 
and as chairing that committee, I will give you a little more 
insight into that. U.S. Central is the largest corporate credit 
union in the nation. Earlier this year, late 2008, they had to 
experience an other than temporarily impaired write-down of 
$1.2 billion for investments that they purchased that were AAA-
rated because of mark-to-market issues. The resulting issue in 
that is, as Mr. Marquis addressed, brought the Share Insurance 
Fund down to 0.49 percent to write down that amount of money to 
boost their capital with $1 billion and also to cover with a 
guarantee the uninsured deposits at corporate credit unions.
    The impact to credit unions, on average, will be 81 basis 
points of the insured shares, 58 basis points in their net 
worth, and as Mr. Marquis said, we have lots of net worth. Ours 
at VyStar ended the year at about 9.23 percent. When we 
subtract 58 basis points from that--and I have 56 and 58 in 
spaces, we aren't exactly sure--it will bring it down to about 
8.5 percent. We still have plenty of net worth, but as we all 
address, that is what we need during this environment.
    What that will do, to put it more specifically, when this 
fee is assessed this year, about 75 percent of the credit 
unions in the Nation will be operating in the red. That is 
going to cause undue concern for our members, even though we 
can afford to take it out of our net worth.
    So we are asking for any way that the Senate and NCUA could 
have the authority to spread this assessment out for a longer 
period of time. We actually believe that NCUA, under the 
Federal Credit Union Act, has some implied authorities to 
spread a portion of this assessment out over a longer than 1-
year period of time, but it is not explicit, so we are asking 
for two things. Could we have explicit authority in the Federal 
Credit Union Act to spread it out over 5 years if the banks 
have that, or 8 years if the banks get that, and also to 
encourage NCUA to take any actions they can under the implied 
authority today to go ahead and take actions.
    Senator Crapo, you talked about the sense of urgency. We 
think it is there.
    Also, we would ask that the Central Liquidity Fund be 
expanded to corporate credit unions so that they could borrow 
and use it as capital.
    And finally, we would ask--we would hope to never use it--
there are no funds allocated for credit unions in the Troubled 
Asset Relief Program, and we would ask that at least some funds 
be set aside as a backstop measure if the economy continues to 
worsen. We would hope to never use them, but at least to know 
that the funds are there if we ever need them.
    And finally, we would ask any pressure that the Senate 
could put on FASB to work on mark-to-market issues. That seems 
to be part of what we are all dealing with today. I know if I 
sell my house tomorrow, it is worth whatever it is purchased 
for. If I sell it in 5 years, it is worth what it is purchased 
for.
    So I appreciate greatly the opportunity to talk with you. I 
will be happy to answer any questions you have.
    Senator Johnson. Mr. Verdier?

  STATEMENT OF STEPHEN J. VERDIER, SENIOR VICE PRESIDENT, ON 
     BEHALF OF THE INDEPENDENT COMMUNITY BANKERS OF AMERICA

    Mr. Verdier. Chairman Johnson, Ranking Member Crapo, I am 
Stephen Verdier, the Senior Vice President and Director of 
Congressional Relations for the Independent Community Bankers 
of America. I am pleased to represent ICBA and its 5,000 
community bank members at this important hearing.
    Federal Deposit Insurance has helped stabilize our nation's 
banking system for 75 years. It promotes public confidence by 
providing safe and secure depositories for both businesses and 
consumers. The deposit insurance system also protects the 
funding base for community banks.
    Despite the challenges that they face, the community bank 
segment of the financial system is working and working well. 
ICBA members are open for business, making loans, and are ready 
to help all Americans weather these difficult times.
    But I must also report that community bankers are angry. 
Almost every Monday morning, they wake up to news that the 
government has bailed out yet another ``too big to fail'' 
institution. On Saturdays, they hear that the FDIC has 
summarily closed one or two ``too small to save'' institutions. 
And now the FDIC has proposed a huge special premium to pay for 
losses imposed by large institutions. This assessment and the 
other inequities in the deposit insurance system will damage 
community banks and the customers and small businesses that our 
members serve.
    ICBA believes it is urgent that Congress act quickly on 
several critical deposit insurance reforms. Congress should 
require the FDIC to impose a systemic risk premium against the 
``too big to fail'' institutions to compensate the taxpayers 
and the FDIC for the risks they impose. The depositors of the 
``too big to fail'' banks have unlimited deposit insurance 
coverage, giving those banks an unfair advantage.
    Congress should also direct the FDIC to make the assessment 
base more equitable. Community banks pay approximately 30 
percent of FDIC premiums, although they hold only about 20 
percent of bank assets. They fund themselves 85 to 90 percent 
with domestic deposits, while banks with more than $10 billion 
in assets use domestic deposits for only 52 percent of their 
funding. So while community banks pay assessments on nearly 
their entire balance sheet, large banks pay on only half. It 
would be fairer if the FDIC were to use assets minus capital as 
its assessment base.
    Congress should immediately increase the FDIC's borrowing 
authority, as provided in S. 541. According to FDIC Chairman 
Bair, the increased borrowing authority would allow the FDIC to 
reduce the special assessment to as much one-half the proposed 
rate. ICBA opposes the special assessment, and my written 
statement suggests viable alternatives. But unless Congress 
quickly increases its borrowing authority, the FDIC will likely 
vote to impose the full special assessment, perhaps within 
weeks. The special assessment will have real effects on our 
members' communities because community bank earnings will fall 
drastically.
    A recent ICBA survey reveals the FDIC's estimate of this 
effect is much too low. Thirty-two percent of community banks 
tell us the special assessment will consume 16 to 25 percent of 
their 2009 earnings. Seventeen percent estimate it will consume 
26 to 40 percent. This means that a small bank with $100 
million in deposits will pay $200,000. This is unfair. 
Community banks did not participate in the risky practices 
engaged in by large Wall Street institutions that led to the 
economic crisis, yet they are being assessed to pay for them. 
Their employees, customers, and communities will all suffer.
    ICBA remains committed to the principle of an industry-
funded FDIC. Under S. 541 or the other proposals we suggest, 
the FDIC will still be industry-funded, but we could spread the 
cost over time. The proposal to make permanent the increase in 
deposit insurance coverage from $100,000 to $200,000 [sic] is 
also urgent. The clock is already ticking on the CD market. 
Without Congressional action, coverage on a long-term CD will 
revert to $100,000 as of December 31.
    ICBA also urges Congress to make permanent the unlimited 
coverage for transaction accounts, which is now temporarily 
provided by the FDIC. Both this program and the increase to 
$250,000 have not only bolstered depositor confidence, but have 
also helped community banks compete for deposits against the 
``too big to fail'' banks and the money market mutual funds. 
The additional coverage has helped community banks be part of 
the solution to the credit crisis.
    In conclusion, the ICBA urges Congress to act quickly to 
shore up the FDIC and address the inequities in the deposit 
insurance system. The ``too big to fail'' banks should finally 
pay their fair share and community bank depositors should 
continue to have the coverage they are depending on in this 
troubled time.
    Thank you, Mr. Chairman.
    Senator Johnson. Mr. Wright?

  STATEMENT OF DAVID J. WRIGHT, CEO, SERVICES CENTER FEDERAL 
CREDIT UNION, ON BEHALF OF THE NATIONAL ASSOCIATION OF FEDERAL 
                         CREDIT UNIONS

    Mr. Wright. Good afternoon, Chairman Johnson, Ranking 
Member Crapo, and members of the Subcommittee. My name is Dave 
Wright and I am testifying today on behalf of the National 
Association of Federal Credit Unions, NAFCU.
    For the last 33 years, I have been the CEO of Services 
Center Federal Credit Union, headquartered in Yankton, South 
Dakota. Services Center is a low-income-designated credit union 
operating in six counties, four counties in South Dakota and 
two in Nebraska. Services Center has some 6,200 members and 
assets of $37.5 million.
    I am pleased to share with the Subcommittee NAFCU's 
assessment of how the National Credit Union Share Insurance 
Fund, the fund, is structured and our thoughts on current 
issues in deposit insurance. NAFCU believes it is imperative 
that there be parity in the coverage levels between the FDIC 
and the Share Insurance Fund. We believe that an aspect of this 
parity has to include the ability of NCUA to have the authority 
it needs to take actions to maintain the stability of the fund. 
As part of the Emergency Economic Stabilization Act, Congress 
increased the coverage on FDIC and NCUSIF insured accounts to 
$250,000 through December 31 of 2009. NAFCU urges the Senate to 
enact legislation to permanently extend this increase.
    While credit unions have fared better than most financial 
institutions in these turbulent economic times, many have been 
impacted through no fault of their own by the current economic 
environment. In particular, the corporate credit union system 
has felt the biggest impact.
    On January 28, the NCUA Board announced a corporate credit 
union stabilization plan that would have the fund provide a 
guarantee to uninsured shares at corporate credit unions. The 
resulting impact on the fund will be approximately $4.7 
billion, dropping the fund's equity ratio from the current 1.28 
percent to an estimated 0.49 percent. Because credit unions 
follow GAAP, there was an immediate impairment to the 1 percent 
deposit. Federally insured credit unions had to recognize this 
impairment by setting aside enough money in a contingent 
liability account to bring the deposit at the fund back to a 1-
percent level.
    The Federal Credit Union Act requires NCUA to assess a 
premium when the fund's equity ratio drops below 1.2 percent. 
That premium assessment must occur before the end of 2009, and 
NCUA intends to bring the fund's equity ratio up to 1.3 percent 
by assessing a premium of 0.3 percent later this year. The 
consequence is that over 5,350 federally insured credit unions 
will be in the red in 2009, and a number of them could face 
potential additional prompt corrective action concerns.
    NAFCU urges the Senate to enact a change to the Federal 
Credit Union Act to establish a restoration plan period for the 
fund. H.R. 1106 included such an amendment that would extend 
the repayment period over 5 years. NAFCU also urges the Senate 
to provide the fund an increase in borrowing authority from the 
Treasury Department. This change is long overdue, since the 
current level of $100 million was established in 1971 and has 
not been modified for the growth of credit unions and their 
members' savings over time. H.R. 1106 would increase the 
borrowing authority to $6 billion and we support NCUA's request 
for emergency authority up to $30 billion.
    NAFCU believes that NCUA and Congress should work to find 
additional ways to help stabilize the corporate credit union 
system outside of using the fund. In particular, NAFCU supports 
an amendment to the Federal Credit Union Act which would allow 
NCUA to use funds from the Central Liquidity Facility directly 
to help the liquidity and capital needs of all credit unions, 
including corporate credit unions. This change, if coupled with 
some form of flexibility on OTTI accounting, would go a long 
way toward helping credit unions. We would welcome the 
opportunity to work with the committee to address this issue.
    In conclusion, NAFCU continues to support an independent 
fund. Furthermore, we believe Congress must make the temporary 
increase in deposit insurance coverage permanent. Actions by 
the NCUA to help stabilize the corporate credit union system 
using the fund threaten to put a strain on natural person 
credit unions. We believe legislative relief in the form of 
extending the repayment time, increasing the borrowing 
authority of the fund, and modification of the Federal Credit 
Union Act as it relates to the CLF are all steps that will help 
the continued stability of the fund.
    Thank you for the opportunity to appear before the 
Subcommittee today. I welcome any questions you may have.
    Senator Johnson. Thank you.
    Mr. Wright, in your testimony, you propose allowing 
corporate credit unions access to the Central Lending Facility 
and making the Central Lending Facility available for capital 
as well as liquidity. How does this benefit the natural person 
credit unions you represent? Are there risks associated with 
giving corporate credit unions this authority?
    Mr. Wright. I believe that the corporate credit unions need 
the access to the fund to be able to borrow for capital 
purposes. Their capital has been severely affected by the 
economic turbulence that we are currently experiencing, and 
without the ability to borrow, we have had to kind of patch 
together, if you will, a system whereby NCUA loaned money to 
natural person credit unions, my credit union included. Then we 
turned around and we invested this in the corporate credit 
unions. Again, I think that there is a better way to do this 
and I think the better way is to be able to have the funds go 
directly from the CLF to the corporate credit unions.
    Senator Johnson. Mr. West, in your testimony, you asked for 
the systemic risk authority on a similar basis as that provided 
to FDIC. Can you expand on why you believe the credit union 
regulator needs this authority?
    Mr. West. As we shared earlier, the credit union 
environment in general is OK right now. What we are concerned 
about is if the economy continues to worsen, and we certainly 
see one or two credit unions here or there that may propose 
systemic risk to the credit union industry and we feel like our 
regulators should have whatever authority it needs to take care 
of those situations, which would be on a limited basis. And the 
concern we have is they just do not have that authority at 
present.
    Senator Johnson. Mr. Grant and Mr. Verdier, both of you 
indicated that you opposed the special assessment announced by 
the FDIC on February 27. As a member from a State with many 
community banks, what impact will it have on institutions you 
represent? Do you have alternative proposals to increase the 
DIF while not negatively affecting your institutions? And do 
you think the FDIC coverage should be applied differently to 
banks that engage in more risky activities? Should the size of 
the institution determine the cost and type of insurance 
coverage?
    Mr. Grant?
    Mr. Grant. Again, Mr. Chairman, we firmly support a bank 
industry-funded FDIC program. There are already steps under the 
most recent legislation that vary the premiums based upon the 
risk that the institution undertakes. We believe those to be 
adequate.
    And again, with the special assessment, we certainly 
recognize the need to restore the fund to its appropriate 
levels. Our concern is, again, as we mentioned in the 
testimony, with the timing, bringing all that special 
assessment into 1 year. We would much prefer, Mr. Chairman, to 
see that spread out over a longer period of time, and S. 541 
allows the flexibility to the FDIC to make that a reality.
    Senator Johnson. Do you think the FDIC coverage is adequate 
to apply to banks that engage in more risky activities? Is that 
adequate?
    Mr. Grant. I believe, Mr. Chairman, that the risk-rated 
premium system that they have put together is adequate.
    Senator Johnson. Mr. Verdier?
    Mr. Verdier. No, we don't think that the premium system as 
it exists now is adequate to adjust for risk, and so we are 
advocating a broader assessment base to cover the larger banks, 
as I indicated in our testimony, and that furthermore, we have 
recommended and earlier this week recommended that any bank 
that is affiliated with a ``too big to fail'' financial 
services company should also pay a special systemic risk fee 
into the Deposit Insurance Fund. So those two additions, we 
think, would go a long way to leveling that disparity that we 
already see.
    And you asked earlier about the potential effects on a 
community bank and its community and customers of the special 
assessment. I gave the one example of the $200,000 that would 
not--that would be going out of a community bank. I think you 
just have to look at it as a small business owner and say, 
well, if a small business, in effect, has a tax increase of 
$200,000, what does that mean? Well, maybe they don't hire 
people. Maybe they don't open up another branch if the bank is 
large enough to be thinking of another branch. Maybe they don't 
make as many loans as they were going to make. Maybe the 
tellers don't get the same kind of pay increase that they were 
hoping for. And maybe local investors don't receive dividends, 
and that means that money is again taken out of the local 
community.
    And so the effects would differ from bank to bank, but I 
think they would be substantial when you take it throughout the 
country, the $15 billion that would be taken out. It is, in 
effect, a tax increase on small towns and communities in your 
State and around the country.
    Senator Johnson. Mr. Crapo?
    Senator Crapo. Thank you very much, Mr. Chairman.
    My first question, I am just going to ask generally to the 
panel and I really don't need anything more than an expression 
of assent or disagreement. I have already heard from most of 
you in your testimony and I think I know where you are headed 
on this, but in the last panel, I focused on the question of 
whether we face a sense of urgency here in terms of the 
legislation that has been proposed, both the House and the 
Senate legislation, to deal with increasing the borrowing 
authority for banks and credit unions and for the funds.
    Do you all agree that we face an urgency there in the 
context of needing to get as much credit availability to the 
private sector as possible?
    Mr. West. Yes.
    Mr. Verdier. Absolutely.
    Mr. Grant. Yes.
    Mr. Wright.
    [Nodding yes.]
    Senator Crapo. Let the record reflect that everyone did 
indicate that they agreed with that.
    The reason I am pushing this point is here in the Senate, 
we are facing a battle, I will call it, over whether we should 
move this legislation on its own and move it quickly, or 
whether we should add to it some other more controversial 
provisions, and I think you know the most controversial of 
those provisions that we are debating here in the Senate is 
what has become the cram down legislation for bankruptcy and 
which the House legislation contains.
    As I indicated in my opening statement, I strongly oppose 
putting the cram down legislation with this legislation and 
with S. 541. I am just interested in, again, if you can, brief 
responses, as to whether you would support the cram down 
legislation, and if not, would you agree that we should not 
make this issue, the issue of increasing the loan limits for 
the banks and the credit unions, the battleground where we 
fight that issue out.
    Mr. Grant?
    Mr. Grant. I would agree with your assessment, Senator 
Crapo. There are two very important issues, and you have 
identified them very clearly. One is allowing the flexibility 
to the FDIC that S. 541 provides in order to deal with the 
issue of making sure that the fund is whole.
    The mortgage cram-down, as it has become called, is an 
entirely different issue. We remain opposed to it because it is 
going to limit credit. It is going to increase the cost of 
credit. And we believe that that is an issue that should be 
debated separately from the very important matters covered 
under S. 541.
    Senator Crapo. Thank you.
    Mr. West?
    Mr. West. We, as far as CUNA is represented, we would be 
better off if we didn't have to include the cram down part of 
this in there. There is a tremendous sense of urgency on the 
other side of it. I think Mr. Grant has made some very positive 
comments in this area and I agree with him.
    Senator Crapo. Thank you very much.
    Mr. Verdier?
    Mr. Verdier. Yes, Senator. We oppose the cram down 
provisions and we do share your sense of urgency on the deposit 
insurance provisions, all the ones I have mentioned. So we 
would very much like the Senate and the entire Congress to move 
very quickly on the deposit insurance provisions, and as I say, 
we oppose the cram down provisions for the reasons we have been 
discussing. So I leave it to the Senators to decide exactly how 
to achieve the result that we are hoping for.
    Senator Crapo. Thank you.
    Mr. Wright?
    Mr. Wright. I will make it unanimous. We do not support 
having the cram down integrated with the things that you have 
before you today. We do not support cram down and we think that 
it should be kept separate. Don't muddy the waters. Keep it 
separate.
    Senator Crapo. All right. Thank you very much.
    And back to you, Mr. Verdier. You had indicated the anger 
that you were feeling from your members. I noted you mentioned 
the ``too big to fail'' issue and then you also noted the ``too 
small to save'' issue that seems to be bubbling up out there in 
the communities. You made the point that we need a more 
equitable distribution of the burden of the assessments and a 
broader assessment base.
    Could you tell me, is that something that would require 
legislative action or could that be done administratively, do 
you know?
    Mr. Verdier. The FDIC, for its general assessment 
authority, does have the flexibility to broaden the assessment 
base except in the one instance of the systemic risk authority. 
They do need some additional flexibility, as Art Murton 
indicated in the earlier panel. They are covering some bank 
holding company debt that is exempt from assessments, and so 
that needs to be fixed. H.R. 1106 does make that change. But, 
of course, any directive from the Congress to the FDIC in terms 
of using its existing authority or firming up their resolve in 
that regard would be most helpful.
    Senator Crapo. Thank you very much.
    And I do note, Mr. West, I agree with your comments about 
the mark-to-market issue and we are encouraging our regulators 
to act with all due speed in terms of helping us put that part 
of the solution in place.
    The last question I have, I am running out of time here, 
but you probably all noticed that when we debated the Omnibus 
Appropriations Act of 2009, the big omnibus bill just recently, 
there was language in there that gave the Federal Trade 
Commission authority to expedite rulemaking over mortgage 
loans, and many of us were very concerned that that extended 
the regulatory authority of yet another agency, the FTC, into 
the arenas of banking and financial institutions that were 
federally insured unnecessarily and improperly.
    We had a colloquy on the floor at that time among Senator 
Dodd, Senator Dorgan, Senator Inouye, and myself in which we 
agreed that that was not intended by the language and that we 
would reg--or statutorily correct that as quickly as possible 
and explained to the FTC that they should not try to assert new 
jurisdictional regulatory authority over federally insured 
depository institutions.
    The question I have to you is, and maybe rather than having 
all four of you answer this, if there is one of you who would 
like to volunteer and jump out first, I really only have time 
to probably take one answer here, but could one of you take 
just a moment to explain the consequences of adding yet another 
Federal regulator into the system here?
    I see two hands on a tie, so we will take Mr. Verdier and 
then Mr. Grant.
    Mr. Verdier. Thank you. Our community bankers report that 
they have plenty of regulators, thank you very much. On a 
serious note, the Truth in Lending Act is very carefully 
enforced by the banking regulators and the Federal Trade 
Commission probably has plenty to do without adding more to do 
on that issue.
    The colloquy was excellent. We congratulate you on that. I 
am sure that the FTC has been reading that and we encourage 
them to maybe read it every morning.
    Senator Crapo. We will be sure they do.
    Mr. Grant?
    Mr. Grant. And I can just really echo those remarks again. 
Thank you very much for your leadership in bringing together 
that issue. I can certainly say that there is more than enough 
regulation right now. We recently had the FDIC in our bank, and 
we are a very good bank, but they were still there for 7 weeks 
in the examination process. And the concern would be with 
another regulator, not only the additional regulatory burden, 
but also the whole issue of possible confusion, as I understand 
this, might also bring in the attorney generals of various 
States and things like that. There could be a lot of confusion 
in addition to the regulatory burden.
    Senator Crapo. Well, thank you all very much.
    Mr. Chairman, I went over badly. I apologize.
    Senator Johnson. Senator Vitter?
    Senator Vitter. Thank you, Mr. Chairman, and thanks to all 
of the witnesses.
    First, Mr. Chairman, I would just like to publicly 
underscore a request I made of our committee Chairman today to 
have a hearing as quickly as possible, hopefully next week, 
about the AIG bonus issue and related issues. I think this is 
absolutely necessary for two reasons. First of all, because of 
the understandable outrage Americans are expressing over this 
and the issue itself. Second, because the House has already 
passed retroactive legislation to address this. And I take a 
novel view that I actually think we should know the facts, what 
bonuses were exempted, what weren't, what the universe is, who 
participated in that decision, when the administration 
understood this, particularly before we act on legislation. So 
I want to re-urge that request to Chairman Dodd publicly.
    I am also preparing an amendment to that House legislation 
that would say we are stopping the TARP program, and 
administration, you can come back to us with that program or 
another program once you get your act together and understand 
how we are going to avoid these horrible problems in the 
future, and this is just but one example. But as of now, we are 
stopping the TARP program.
    On this issue, thank you again for your testimony. I have a 
big general concern that as we work to shore up the insurance 
fund, and everybody agrees that we need to make sure it is 
sound, that we are going to be really penalizing and hurting 
sound, stable community banks and other banks that had 
absolutely nothing to do with the mess with subprime mortgages, 
with exotic mortgage-backed securities, or anything else. And 
so my big concern goes to that.
    Specifically, as we all work together to shore up the fund 
for the insurance program, and we have no disagreement about 
that, shouldn't we change how assessments are made so that it 
more appropriately reflects the enormous risk the bigger banks 
have brought to the system, which in my opinion is not 
adequately reflected now in the rating of risk in terms of how 
that goes into FDIC insurance assessments. I would love 
anybody's opinion about that.
    Mr. Verdier. Senator, I totally agree with you. The point 
we would like to make is that there should be a broadening of 
the assessment base so that the banks that fund themselves with 
unassessed liabilities will begin to pay assessments on those, 
and also that any bank that is affiliated with a systemic risk 
institution should pay an additional systemic risk fee, and in 
testimony that will come before this committee next week, we 
will also talk about a possible Systemic Risk Fund that would 
be funded by those institutions so that those kinds of costs 
that are now being paid by the TARP program could be somewhat, 
at least, pre-funded by the systemic risk segment of the 
financial services industry.
    So I think there is--it is interesting that the FDIC is the 
only pre-funded part of this whole effort. Everything else has 
been funded by the taxpayers. And so I think we really need to 
take a close look and say, who is imposing the costs and who is 
paying the bills?
    Senator Vitter. All right. Does anyone else have opinions 
about that or input?
    OK. Well, I hope we take a hard look at that, because I 
think it is necessary. Basically, the institutions that created 
the problem are, of course, getting enormous bailout relief, 
and meanwhile, the smaller institutions that had nothing to do 
with the problem are getting an enormous bill because of the 
problem that the bigger institutions created. And in some 
cases, it is threatening their profitability and their ability 
to continue to be out in the real world making loans, and that 
is just crazy.
    So I think, moving forward, we need to look at changing the 
way FDIC insurance premiums are calculated, because there are 
huge differences between a community bank whose whole universe 
is deposits and a Citigroup or other institutions which have 
big investment banking arms that are funded in fundamentally 
different ways, and as a result bring enormous risk to their 
deposits and to all deposits that community banks don't. And so 
I would hope the whole committee can look at that issue.
    I support Senator Crapo's proposal with others in terms of 
expanding lending authority. I just don't think that should be 
the end of the conversation.
    Thank you, Mr. Chairman.
    Senator Johnson. I would like to thank our second panel of 
witnesses for taking the time to testify today on this 
important issue.
    You are excused, and with that, this hearing is adjourned.
    [Whereupon, at 3:31 p.m., the hearing was adjourned.]
    [Prepared statements supplied for the record follow:]
               PREPARED STATEMENT OF SENATOR TIM JOHNSON
                             March 19, 2009
    As we all know, the economic landscape has undergone significant 
change since the Committee last looked at deposit insurance issues. In 
these times of economic instability, it is increasingly important that 
we have a strong and stable deposit insurance fund and that our 
regulators have the tools they need to wind down failed institutions 
while at the same time guaranteeing that Americans' savings and 
retirement remain safe. I am pleased to hold this hearing today to take 
a closer look at deposit insurance issues that the FDIC, National 
Credit Union Administration, and our nation's banks and credit unions 
currently face. I would also like to welcome our panel of witnesses, 
and thank them for their time and for their thoughtful testimony.
    As our nation's housing crisis has spread through the economy--
impacting banks, credit unions, secondary markets and millions of 
Americans, neither the FDIC's deposit insurance fund nor NCUA's share 
insurance fund have failed to make good on its promise to pay for the 
insured deposits when a institution fails. This protection is the 
bedrock of our financial system, but it has not come for free--the 
FDIC's Deposit Insurance Fund ratio has fallen to .4 percent, 
substantially lower than the 1.15 percent required ratio, and the 
NCUA's share insurance fund has struggled as corporate credit unions 
face losses on securities tied to home mortgages. These extraordinary 
times have warranted emergency and temporary actions to ensure 
continued stability and protection.
    There are currently two pieces of legislation pending before the 
Banking Committee that seek to address continued deposit insurance 
concerns. Senator Dodd has introduced the Depositor Protection Act, 
legislation to permanently increase the FDIC's borrowing authority to 
$100 billion, and temporarily increase the emergency borrowing 
authority to $500 billion until the end of 2010. In addition, the House 
of Representatives has passed H.R. 1106, the Helping Families Save 
Their Homes Act of 2009. This bill has been referred to the Senate 
Banking Committee, and I look forward to hearing more from today's 
witnesses about the potential benefits and disadvantages of each of 
these pieces of legislation.
    While we work to maintain stable insurance funds for our nation's 
financial institutions, there is no doubt in my mind that further 
action will be needed. I am sensitive to concerns that without 
increased borrowing authority, assessments could force financial 
institutions to raise consumer fees and curtail lending. This is the 
last thing we want as consumers across our nation struggle and frozen 
credit markets limit lending to consumers. I am also concerned that too 
high assessments could disproportionately affect small banks. I also 
believe that any money borrowed from the Treasury must be repaid, with 
interest, and that all actions must be temporary with an eye to the 
long term restoration of the insurance funds. In addition, this 
Committee must consider what is the appropriate level of deposit 
insurance coverage and whether the emergency increases should be 
extended or even made permanent.
    All that said, deposit insurance is a benefit to depository 
institutions, and institutions should not look to taxpayers to pay for 
deposit insurance. When the financial system recovers, Congress must do 
all it can to make sure that banks and credit unions do not resist 
efforts to build back up the deposit insurance fund (DIF) and the share 
insurance fund.
    I will now turn to Senator Crapo, the new ranking member of this 
Subcommittee, for his opening statement. Senator Crapo, I have valued 
our ability to work together on a number of issues in the past, and I 
look forward to working with you on this Subcommittee.
                                 ______
                                 
                 PREPARED STATEMENT OF ARTHUR J. MURTON
             Director, Division of Insurance and Research,
                 Federal Deposit Insurance Corporation
                             March 19, 2009
    Chairman Johnson, Ranking Member Crapo and members of the 
Subcommittee, I appreciate the opportunity to testify on behalf of the 
Federal Deposit Insurance Corporation (FDIC) on current issues in 
deposit insurance.
    Since the creation of the FDIC during the Great Depression, deposit 
insurance has played a crucial role in maintaining the stability of the 
banking system. By protecting deposits, the FDIC ensures the security 
of the most important source of funding available to insured depository 
institutions--funds that can be lent to businesses and consumers to 
support and promote economic activity.
    Under the current severe economic conditions, the FDIC's deposit 
insurance guarantee has proven to be more valuable than ever. While 
many sources of bank funding have disappeared during the past 6 months, 
deposits have not. They remain a stable source of funding because 
depositors know that insured deposits are absolutely safe. No one has 
ever lost a penny on an insured deposit.
    My testimony will discuss the current condition of the Deposit 
Insurance Fund (DIF) and the reasons for the recent decision by the 
FDIC Board of Directors (Board) to increase deposit insurance premiums 
and impose a special assessment on insured institutions. In addition, I 
will discuss the need for an increase in the FDIC's borrowing authority 
with the Treasury Department, which has not been permanently increased 
in almost 20 years. I will also comment on legislative proposals to 
make permanent the temporary increase in the deposit insurance 
coverage, to extend the time period for restoring the DIF to the 
statutorily mandated range for the reserve ratio and to improve the 
systemic risk provisions of the Federal Deposit Insurance Act. Finally, 
I will discuss whether we should reexamine the mandatory rebate 
provisions that were enacted as part of the Deposit Insurance Reform 
Act in 2006.
Condition of the Deposit Insurance Fund
    During 2008, 25 FDIC-insured institutions with assets of $372 
billion failed, the largest number of failures since 1993 when 41 
institutions with combined assets of $3.8 billion failed (excluding 
thrifts resolved by the RTC). So far this year, 17 FDIC-insured 
institutions with combined assets of $7.7 billion have failed. In 
addition, two banking organizations have received assistance under a 
systemic risk determination over the past 6 months. As part of its 
restoration plan and recent final rulemaking on assessments, the FDIC 
is estimating a range of possible failure cost estimates over the 2009-
2013 period, with $65 billion considered the most likely outcome.
    In 2008, the DIF balance fell by more than $33.5 billion (64 
percent), primarily because of over $40 billion in loss provisions.\1\ 
The industry funded Deposit Insurance Fund (DIF) decreased by almost 
$16 billion during the fourth quarter to $19 billion. This fund balance 
is net of loss reserves totaling $22 billion set aside for failures 
anticipated in 2009, which are subject to adjustments based on changing 
economic and financial conditions.
---------------------------------------------------------------------------
    \1\ The figure includes $18 billion in losses not previously 
reserved for failures in 2008 and $22 billion in estimated losses for 
anticipated failures in 2009.
---------------------------------------------------------------------------
    The DIF's reserve ratio equaled 0.40 percent on December 31, 2008, 
which was 36 basis points lower than the previous quarter. During 2008, 
the reserve ratio decreased by 82 basis points, from 1.22 percent at 
year-end 2007. The December figure is the lowest reserve ratio for a 
combined bank and thrift insurance fund since June 30, 1993, when the 
reserve ratio was 0.28 percent.
    Recently, the FDIC's Board of Directors made a series of very 
difficult decisions to ensure that our nation's deposit insurance 
system maintains the integrity of its industry funded assessment base. 
First, they extended the period in which the DIF reserve ratio must 
return to 1.15 percent from five to 7 years, due to the extraordinary 
circumstances facing the banking industry. Second, they set an 
assessment rate schedule under which most insured institutions would 
pay between 12 and 16 basis points before certain adjustments, 
effective the second quarter of 2009. These rates are in line with the 
rates we had signaled would be necessary last October to bring the 
reserve ratio back up to the statutorily mandated minimum of 1.15 
percent over the restoration plan horizon. Finally, and most 
importantly, the Board adopted an interim rule setting a special 
assessment of 20 basis points for June 30, to be collected September 
30. We welcome comments on the interim rule that will be considered in 
any final rulemaking.
    The FDIC realizes that these assessments are a significant expense, 
particularly during a financial crisis and recession when bank earnings 
are under pressure. Banks face tremendous challenges right now even 
without having to pay higher assessments. We also recognize that 
assessments reduce the funds that banks can lend in their communities 
to help revitalize the economy. However, the reality is that these 
increases in assessments are necessary to ensure the adequacy of the 
FDIC's industry funded resources to resolve projected bank failures. 
The FDIC's guarantee has always been funded by the industry. All banks 
benefit from the FDIC's industry funded status and deposit insurance 
has been one key component of addressing our current financial crisis 
that has not relied on taxpayer funding.
    Some have suggested that the assessment burden should fall more 
squarely on weaker, higher risk banks. In point of fact, the new risk-
based rules the FDIC finalized on February 27, 2009 assure that the 
regular assessment system will charge higher risk banks significantly 
more. But there is only so much burden that we can place on weaker 
banks without forcing them into insolvency, a self-defeating exercise 
which would end up costing the insurance fund even more. This is why a 
flat-rate special assessment was deemed the wiser course. Moreover, any 
system of insurance requires to some degree that premiums paid by well-
managed and healthier institutions cover the losses caused by their 
weaker counterparts.
    It also has been suggested that the assessment should target larger 
banks. The Board is seeking public comment on whether the base for the 
special assessment should be total assets or some other measure that 
would impose a greater share of the aggregate special assessment on 
larger institutions than the regular assessment base (domestic 
deposits). We are also seeking comment on whether the special 
assessments should take into account the assistance provided to 
systemically important institutions.
Borrowing Authority
    The FDIC strongly supports S. 541, the Depositor Protection Act of 
2009, legislation to increase the FDIC's borrowing authority with the 
Treasury Department if losses from failed financial institutions exceed 
the industry funded resources of the DIF.
    The FDIC's borrowing authority was statutorily set in 1991 at $30 
billion and has not been raised since that date. Assets in the banking 
industry have tripled since 1991, from $4.5 trillion to almost $14 
trillion, and the FDIC believes it is prudent to adjust the statutory 
line of credit proportionately to leave no doubt that the FDIC can 
immediately access the necessary resources to resolve failing banks and 
provide timely protection to insured depositors. Deposits insured by 
the FDIC are backed by the full faith and credit of the United States 
and the FDIC's borrowing authority ensures that this obligation to 
protect depositors is met seamlessly and without interruption.
    S. 541 would permanently increase the FDIC's authority to borrow 
from Treasury from $30 billion to $100 billion. In addition, the bill 
also would authorize a temporary increase in that borrowing authority 
above $100 billion (but not to exceed $500 billion) to address exigent 
circumstances, based on a process that would require the concurrence of 
the FDIC, the Federal Reserve Board and the Treasury Department, in 
consultation with the President. Any use of the borrowing authority is 
required by statute to be repaid by assessments on insured 
institutions. This temporary emergency authority is being requested as 
part of contingency planning. From a public confidence standpoint, we 
believe it is important to demonstrate the FDIC's ability to 
immediately access significant liquidity in even high stress scenarios. 
We want to make sure the funding mechanics are in place to meet all 
contingencies.
    The FDIC Board's decision regarding the size of the recently 
announced special assessment reflected the FDIC's responsibility to 
maintain adequate resources to cover unforeseen losses. Chairman Bair 
has stated that increased borrowing authority would give the FDIC 
flexibility to reduce the size of the recent special assessment, while 
still maintaining assessments at a level that supports the DIF with 
industry funding based on current loss projections. While the industry 
would still pay assessments to the DIF to cover projected losses and 
rebuild the Fund over time, a lower special assessment would mitigate 
the impact on banks at a time when their communities need them more 
than ever and they are called upon to revitalize the economy.
    The events of the past year have demonstrated the importance of 
contingency planning to cover unexpected developments in the financial 
services industry. Indeed, in temporarily increasing deposit insurance 
coverage from $100,000 to $250,000, Congress also temporarily lifted 
all limits on the FDIC's borrowing as necessary to carry out the 
increase in the maximum deposit insurance amount. The Depositor 
Protection Act would leave no doubt that the FDIC will continue to have 
the resources necessary to address future contingencies and seamlessly 
fulfill the government's commitment to protect insured depositors 
against loss. The FDIC strongly supports this legislation and looks 
forward to working with the sponsors to enact it into law.
Improving the Systemic Risk Special Assessment
    Section 13(c)(4)(G) to the Federal Deposit Insurance Act (FDI Act) 
authorizes action by the Federal Government in circumstances involving 
systemic risk to the banking industry. It permits the FDIC to take 
action or provide assistance as necessary to avoid or mitigate the 
effects of the perceived risks, following a recommendation of the 
existence of systemic risk by the FDIC's Board, with the written 
concurrence of the Board of Governors of the Federal Reserve System 
(FRB) and an eventual determination of systemic risk by the Secretary 
of the Treasury (after consultation with the President).
    The FDI Act also requires the FDIC to recover any loss to the DIF 
arising from any action taken or assistance provided pursuant to a 
systemic risk determination. Under current law, the FDIC must recover 
any loss expeditiously from one or more emergency special assessments 
on the insured depository institutions based on the amount of each 
insured depository institution's average total assets minus the sum of 
the institution's average total tangible equity and its average total 
subordinated debt.
    The Federal Government exercised the systemic risk authority for 
the first time in September 2008, and on three more occasions since 
then. In each of these cases, the FDIC took sound actions, such as 
charging fees, to offset its new risk exposure and minimize the 
likelihood that there will be a loss requiring a systemic risk special 
assessment. However, the FDIC's recent experience suggests that the 
current statutory provisions regarding a systemic risk special 
assessment may not provide sufficient flexibility to appropriately 
allocate any special assessment among the parties who benefit from 
government action to address challenges that pose a risk to the 
financial system.
    For example, the recent actions taken under the systemic risk 
authority have directly and indirectly benefited holding companies and 
non-bank affiliates of depository institutions, including shareholders 
and subordinated creditors of these organizations. Among the 
beneficiaries are large holding companies owning depository 
institutions that make up only a very small part of the consolidated 
organization. Such actions were necessary to stabilize financial 
markets and provide increased liquidity in the financial system. Yet, 
while holding companies and their non-bank affiliates, shareholders, 
and subordinated creditors stand to benefit from the government's 
actions, they would bear a cost under the current systemic risk 
assessment that is disproportionately small compared to the benefits. 
Instead, the assessment would disproportionately burden many 
traditional banking companies, particularly those with few or no non-
bank affiliations.
    The statutory language in H.R. 1106 would allow the FDIC to impose 
systemic risk special assessments, by rulemaking subject to the notice-
and-comment procedures of the Administrative Procedure Act, on insured 
depository institutions or depository institution holding companies, or 
both. When exercising the authority to assess holding companies, the 
FDIC would consult with the Secretary of the Treasury and the Board of 
Governors of the Federal Reserve System. This authority would not be 
used to pre-fund assessments to pay for losses that the FDIC 
contemplates may be incurred as a result of invoking the systemic risk 
authority; rather, it would be used to recover losses actually 
incurred.
    This approach would be more consistent with the statutory 
provisions governing the FDIC's other assessment authority, which set 
broad direction for the FDIC to implement through notice-and-comment 
rulemaking, and with the provisions governing systemic risk 
determinations. In prescribing systemic risk special assessment 
regulations, the FDIC would be required to consider certain factors, 
including economic conditions; the effects on the industry; and such 
other factors as the Corporation deems appropriate. In addition, the 
proposed amendment would enable the FDIC to establish the appropriate 
timing for recovering any loss in its assessment rulemaking in a manner 
that is not pro-cyclical and does not exacerbate problems in the 
financial industry. Depository institution holding companies also would 
be subject to the statutory requirements to pay assessments and 
penalties for late payment or nonpayment.
    In addition to the provisions in H.R. 1106 to broaden the base for 
a systemic risk special assessment, the FDIC would recommend a 
statutory change to provide a priority for the government over general 
creditors in cases where the bank defaults on debt that has been 
guaranteed by the FDIC and is placed in receivership. In October 2008, 
the FDIC Board of Directors approved the Temporary Liquidity Guaranty 
Program (TLGP) to free up funding for banks. Indications to date 
suggest the program has improved access to funding and lowered banks' 
borrowing costs.
    The purpose of this statutory change would be to put the FDIC and 
senior unsecured debt holders that are guaranteed by the TLGP 
immediately after depositors to recover from the assets of the estate 
of a failed insured depository institution. Debt guaranteed by the FDIC 
serves an important public policy purpose and should receive a priority 
in a bank receivership over general creditors. Without this amendment, 
the debt holders of insured depository institutions and the FDIC as 
subrogee of their rights will share pro rata with general creditors of 
the estate. This provision will increase the likely recovery to the 
FDIC for the costs of any guarantee of insured institution debt that it 
might be required to honor and could reduce the need for or amount of a 
systemic risk special assessment.
Permanently increasing coverage to $250,000
    With regard to proposals to make permanent the current temporary 
increase in deposit insurance coverage to $250,000, the FDIC believes 
that the level of deposit insurance coverage is a policy determination 
that appropriately should be made by Congress. However, because any 
increase in the level of deposit insurance coverage increases exposure 
to the DIF, such a change must also permit the FDIC to account for the 
newly insured deposits when setting premiums necessary to maintain the 
DIF.
    Permanently increasing the level of insurance coverage also will 
have the effect of immediately reducing the reserve ratio of the DIF. 
Since the DIF reserve ratio is currently below the statutorily mandated 
range for the reserve ratio, the FDIC is operating under a restoration 
plan to return the reserve ratio of the DIF to at least 1.15 percent of 
estimated insured deposits. The FDIC Board recently extended the length 
of that plan from five to 7 years due to the extraordinary 
circumstances facing the banking industry and instituted a combination 
of premium increases and special assessments necessary to implement the 
restoration plan. Because of the immediate dilutive effect on the DIF 
of permanently increasing coverage to $250,000, extending the statutory 
5-year time period for restoring the DIF reserve ratio to at least the 
bottom end of the statutorily mandated range would be appropriate.
Mandatory Rebates
    One of the most important goals of the reforms included in the 
Federal Deposit Insurance Reform Act was to make the deposit insurance 
assessment system less pro-cyclical. To achieve this result, in 2006, 
the FDIC was provided with greater flexibility to assess institutions 
based on risk and to buildup the DIF in good times. However, the 
legislation included restrictions on the growth of the DIF that may 
still contribute to higher assessments against financial institutions 
during times of economic stress.
    Under current law, the FDIC is required to rebate half the 
assessment revenue it collects when the DIF reserve ratio is above 1.35 
percent. In addition, the FDIC is required to rebate all amounts in the 
DIF that keep the reserve ratio above 1.5 percent. The result of these 
mandatory rebates is to limit the ability of the DIF to grow in good 
times and to effectively cap the size of the DIF.
     These restrictions on the size of the DIF will limit the ability 
of the FDIC to rebuild the Fund in the future to levels that can offset 
the pro-cyclical impact of assessment increases during times of 
economic stress. Limits on the size of the DIF of this nature will 
inevitably mean that the FDIC will have to charge higher premiums 
against the industry when conditions in the economy are causing 
significant numbers of bank failures. As part of the consideration of 
broader regulatory restructuring, Congress may want to consider the 
impact of the mandatory rebate requirement or the possibility of 
providing for greater flexibility to permit the DIF to grow to levels 
in good times that will establish a sufficient cushion against losses 
in the event of an economic downturn.
Conclusion
    The events of recent months have clearly demonstrated the benefits 
of deposit insurance to depositors and banks. During this difficult 
period, insured deposits have been fully protected in every bank 
failure. Assured by this guarantee, consumers have continued to 
maintain deposits in insured financial institutions that have provided 
vital liquidity for communities across the country. With additional 
modifications to the deposit insurance system, such as the increase in 
the FDIC's borrowing authority, we can maintain a system that continues 
the FDIC's mission of providing stability to the financial system.
                                 ______
                                 
                 PREPARED STATEMENT OF DAVID M. MARQUIS
        Executive Director, National Credit Union Administration
                             March 19, 2009
I. INTRODUCTION
    The National Credit Union Administration (NCUA) appreciates this 
opportunity to provide the agency's position on ``Current Issues in 
Deposit Insurance.'' Federally insured credit unions comprise a small 
but important part of the financial institution community, and the 
NCUA's perspective on this matter will add to the overall understanding 
of the needs of the credit union industry and the members they 
serve.\1\ Financial institutions play a critical role in the economy, 
and it is vital they remain safe and sound. The protection and security 
provided by Federal deposit insurance to depositors is a key foundation 
of the confidence in and stability of America's financial institutions. 
Therefore, it is important and timely to consider methods to improve 
the framework for deposit insurance coverage and the operational 
authorities available to the Federal deposit insurers.
---------------------------------------------------------------------------
    \1\ 12 U.S.C. Sec. 1759. Unlike other financial institutions, 
credit unions may only serve individuals within a restricted field of 
membership. Other financial institutions serve customers that generally 
have no membership interest.
---------------------------------------------------------------------------
    The NCUA's primary mission is to ensure the safety and soundness of 
federally insured credit unions. It performs this important public 
function by examining all Federal credit unions, participating in the 
examination and supervision of federally insured State-chartered credit 
unions in coordination with State regulators, and insuring federally 
insured credit union members' accounts. In its statutory role as the 
administrator of the National Credit Union Share Insurance Fund 
(NCUSIF), the NCUA insures and supervises 7,806 federally insured 
credit unions, representing 98 percent of all credit unions and 
approximately 88 million members.\2\
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    \2\ Approximately 162 State-chartered credit unions are privately 
insured. Based on December 31, 2008 Call Report (NCUA Form 5300) data.
---------------------------------------------------------------------------
    Overall, federally insured, natural person credit unions maintained 
satisfactory financial performance in 2008. As of December 31, 2008, 
federally insured credit unions maintained a strong level of capital 
with an aggregate net worth ratio of 10.92 percent.\3\ While earnings 
decreased from prior levels due to the economic downturn, federally 
insured credit unions were able to post a 0.30 percent return on 
average assets in 2008.\4\ Delinquency was reported at 1.37 percent, 
while the net charge-off ratio was 0.84 percent.\5\ Shares in federally 
insured credit unions grew 7.71 percent with membership growing 2.01 
percent, and loans growing 7.08 percent.\6\
---------------------------------------------------------------------------
    \3\ Based on December 31, 2008 Call Report (NCUA Form 5300) data.
    \4\ Ibid.
    \5\ Ibid.
    \6\ Ibid.
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    The NCUA's comments will focus in particular on the following 
areas:

    Provisions of H.R. 1106 to permanently increase deposit 
        insurance coverage to $250,000, increasing the NCUA's borrowing 
        authority to $6 billion, and extending the share insurance 
        fund's restoration period to 5 years. The NCUA supports these 
        proposals.

    Emergency borrowing authority for the NCUA. NCUA should be 
        provided up to $30 billion in emergency borrowing authority 
        under the same conditions applicable to the proposed emergency 
        borrowing authority for the Federal Deposit Insurance 
        Corporation (FDIC) in S. 541.

    Systemic risk authority for the NCUA. Providing the NCUA 
        with authority, similar to FDIC, to address systemic risk under 
        extreme circumstances when the authority provided by Section 
        208 of the Federal Credit Union Act is insufficient.
II. DEPOSIT INSURANCE COVERAGE--PERMANENT INCREASE TO $250,000
    The NCUA agrees with the provision in Section 204(a) of H.R. 1106 
to make the temporary increase to $250,000 of the standard maximum 
share insurance amount (SMSIA) permanent.\7\ Reverting the general 
limit for share insurance coverage to $100,000 at the end of 2009 would 
likely be a destabilizing event, affecting public confidence and 
creating burdens for institutions and consumers. Conversely, continuing 
the expanded coverage will allow federally insured credit unions at all 
asset levels to better meet contemporary member needs.
---------------------------------------------------------------------------
    \7\ The term ``standard maximum share insurance amount'' or 
``SMSIA'' means $100,000, adjusted pursuant to subparagraph (F) of 
section 11(a)(1) of the Federal Deposit Insurance Act (12 U.S.C. 
1821(a)(1)(F)), notwithstanding the temporary increase to $250,000 
authorized by the Emergency Economic Stabilization Act.
---------------------------------------------------------------------------
    The temporary increase in the SMSIA to $250,000 helped preserve 
public confidence in federally insured credit unions. Despite the 
widely publicized challenges of the current economic environment, 
during 2008 the average share balance \8\ in federally insured credit 
unions increased by 5.59 percent. All share categories posted 
respectable gains. Since shares were increasing at a projected annual 
rate of 7.69 percent through September 30, 2008, the temporary increase 
in the SMSIA helped prevent a deterioration of liquidity during the 
fourth quarter. While it is impossible to isolate this trend from other 
factors, such as uncertainties in equity markets, NCUA attributes the 
stability of insured shares during the fourth quarter of 2008 to public 
confidence in federally insured credit unions.
---------------------------------------------------------------------------
    \8\ Reflecting their status as member-owned cooperatives, deposit 
accounts in federally insured credit unions are called shares not 
deposits.
---------------------------------------------------------------------------
    If the SMSIA limit of $250,000 remains temporary, the NCUA 
envisions federally insured credit unions experiencing operational 
challenges. During the fourth quarter of 2008, federally insured credit 
unions bolstered efforts to educate their members about the value of 
Federal insurance. Members, in turn, continued to support their 
federally insured credit unions and helped stem a national liquidity 
crisis. NCUA also initiated an intensive national advertising campaign 
and public awareness efforts to reinforce the safety of federally 
insured credit unions. Inconsistency in the SMSIA would undermine this 
progress. In addition, federally insured credit unions would face 
increased balance sheet management challenges if large depositors 
display a reluctance to invest in or renew certificate accounts with 
maturities extending beyond 2009.\9\
---------------------------------------------------------------------------
    \9\ As of December 31, 2008, shares with maturities exceeding 
twelve months exceeded eleven percent of all shares.
---------------------------------------------------------------------------
    Historically, increases in the SMSIA coverage level have not been 
methodical. When created in 1970, the NCUSIF provided $20,000 in 
maximum coverage. Subsequently, the ceiling increased to $40,000 during 
1974 and $100,000 during 1980. Although the maximum available coverage 
for Individual Retirement Accounts (IRAs) increased to $250,000 during 
2006, the SMSIA remained at $100,000 for all other types of share 
accounts. Section 2103(a) of the Federal Deposit Insurance Reform Act 
of 2005 allowed for the adjustment of the SMSIA every 5 years beginning 
April 1, 2010 based on the Personal Consumption Expenditures Chain-type 
Price Index (PCEPI). However, there is no legal guarantee an increase 
in the SMSIA will occur.
    Making the $250,000 SMSIA permanent would create parity, when 
adjusting for inflation, with the SMSIA limits of the 1980s. From 1980 
to 2008, the PCEPI increased from 49.688 to 120.606.\10\ Using the 
PCEPI as a basis, adjusted for inflation the $100,000 SMSIA in 1980 
would equate to approximately $243,000 in 2008 dollars. \11\
---------------------------------------------------------------------------
    \10\ The base year for this data is 2000, with an index value of 
100. The source of this data is the archived Federal Reserve Economic 
data available at the Internet site http://alfred.stlouisfed.org/
series?seid=PCEPI.
    \11\ The computation is as follows: 1) convert the 1980 SMSIA limit 
of $100,000 to 2000 base year dollars [$100,000 / .49688 = 
$201,255.84]; and 2) convert the base year equivalent of the 1980 level 
of coverage to 2008 dollars using the 120.606 index value for 2008 
[$201,255.84  1.20606 = $242,726.61].
---------------------------------------------------------------------------
    Historically, some have expressed concern that increased coverage 
limits of federally insured deposits creates additional moral hazard. 
NCUA believes improvements in the regulation of financial institutions 
offset this concern. In addition, NCUA remains prepared to contribute 
toward reducing insurance losses over the long term as a participant in 
the current review of the Federal regulatory structure. Other 
traditional arguments against higher coverage limits also now have 
diminished relevance. In the past, many perceived higher federally 
insured limits as a detriment to smaller institutions based on the 
belief consumers with greater resources could consolidate their 
business with larger financial institutions. NCUA is not aware of any 
evidence indicating the higher SMSIA has adversely affected smaller 
federally insured credit unions since the fourth quarter of 2008.\12\ 
Federally insured credit unions at all asset levels continue to respond 
proactively to the needs of their respective fields of membership. As 
the table below indicates, the NCUA's 2008 yearend statistics reflect 
how all asset classes of federally insured credit unions reported share 
increases.
---------------------------------------------------------------------------
    \12\ Consumers have continued a broader diversification of assets 
beyond exclusively using federally insured financial institutions. The 
Board of Governors of the Federal Reserve's 2007 Survey of Consumer 
Finances (http://www.federalreserve.gov/pubs/bulletin/2009/pdf/
scf09.pdf) indicates just 15.1 percent of the financial assets of 
families was in transaction accounts or certificates of deposits (not 
including retirement accounts).
----------------------------------------------------------------------------------------------------------------
                                                                                            $100
                                                               Under $10   $10 million   million to   Over $500
                         Asset Group                            million      to $100        $500       million
                                                                             million      million
----------------------------------------------------------------------------------------------------------------
# of Federally Insured Credit Unions........................        3,274        3,249          954          329
Share Growth................................................        4.68%        6.61%        8.12%        8.32%
----------------------------------------------------------------------------------------------------------------

    If the SMSIA limit of $250,000 remains temporary, members with 
funds in excess of $100,000 would need to use multiple insured 
institutions to be fully insured. A lower SMSIA could have the effect 
of causing members with higher levels of funds to conduct business with 
an institution they would otherwise prefer not to use. Efforts to 
impose a limit to consumer choices would not eliminate the ultimate 
need for any federally insured institution to respond to consumer 
needs. In addition, higher limits could also enhance the 
competitiveness of smaller institutions over a longer period of time 
with a greater ability to attract larger deposits.\13\
---------------------------------------------------------------------------
    \13\ This is especially true for federally insured credit unions 
serving predominantly low-income members relying upon nonmember 
deposits to compensate for an inability to develop a competitive 
deposit base organically.
---------------------------------------------------------------------------
    Another common objection to higher Federal deposit insurance limits 
relates to concern about favoring relatively affluent segments of 
society. As the agency charged with overseeing a movement with the 
specified mission of meeting the credit and savings needs of consumers, 
especially persons of modest means, the NCUA recognizes the value 
members with the ability to make large deposits have in providing 
affordable borrowing opportunities for all classes of members. While 
the overwhelming majority of federally insured credit union members 
have deposits well below the current SMSIA, an additional option for 
members with high levels of assets would only help in continuing a 
successful model.\14\ The NCUA also notes federally insured credit 
unions would benefit from a higher SMSIA limit because of a lack of 
access to other avenues of building deposits available to other types 
of institutions such as unlimited coverage for business accounts and 
certificate of deposit registry services.
---------------------------------------------------------------------------
    \14\ The agency notes that without maintaining the $250,000 limit 
in the SMSIA, only individuals able to open IRAs would have access to 
higher levels of coverage.
---------------------------------------------------------------------------
    The NCUA does not anticipate encountering significant operational 
issues if the higher SMSIA became permanent. The agency has the 
infrastructure in place to effectively communicate with both federally 
insured credit unions and members to announce any changes in the 
insured limits. In addition, the NCUA Board left the regulations 
discussing share insurance coverage and signage requirements flexible 
to accommodate additional potential changes to the SMSIA.
    As in the past, if the higher SMSIA limit became permanent, the 
agency would complement formal communications with other resources, 
such as the NCUA's Internet site and periodic educational initiatives 
such as webinars. Although these types of initiatives would have some 
initial costs, ultimately the federally insured credit union system 
would experience a savings through the benefits derived from greater 
long-term liquidity in the system.
    If the SMSIA of $250,000 became permanent, federally insured credit 
unions would incur negligible costs to bring the NCUSIF's equity ratio 
to its targeted level of 1.30 percent. With a SMSIA of $250,000, NCUA 
estimates insured shares would increase by $49 billion for the entire 
federally insured credit union system, reducing the equity level of the 
NCUSIF by only 2 basis points. Since federally insured credit unions 
maintain a NCUSIF capitalization deposit of 1 percent of insured 
shares, an increase to the SMSIA would equate to aggregate additional 
NCUSIF capitalization needs of approximately $490 million. This total 
represents less than one tenth of 1 percent of the total assets in 
federally insured credit unions.
III. EXTEND NCUSIF REPLENISHMENT AUTHORITY TO 5 YEARS
    In the event the NCUSIF equity ratio falls below 1.20 percent, NCUA 
is required to assess a premium (and if necessary recapitalize the 1 
percent deposit) to restore the equity of the NCUSIF to 1.20 percent. 
NCUA believes that extending the time the agency has to reach the 
statutory minimum equity ratio provides an important anti-cyclical 
tool. This would allow, to some extent, the equity level to vary with 
the economic cycle and reduce the impact of recapitalization at the 
trough of the business cycle. Not only does the current structure 
necessitate premium assessments against federally insured credit unions 
when they can least afford it, but it also reduces the amount of funds 
federally insured credit unions can put to work supporting the economy 
when the need is the greatest. In particular, every dollar charged in 
premiums translates to ten dollars not available to be loaned to credit 
union members.
IV. INCREASED BORROWING AUTHORITY FOR THE NCUSIF
    The NCUA strongly supports the provision in Section 204(c) of H.R. 
1106 increasing the NCUA's borrowing authority. Borrowing authority is 
vital for a deposit insurer as the insurance fund's short-term cash 
needs typically far exceed expected losses. For example, with the 
failure of a large institution NCUA might need to promptly (generally 
within 2 days) payout all the insured shares, which for the largest 
institutions would exceed immediately available liquidity, even though 
the ultimate loss (expense) to be absorbed by the insurance fund after 
assets of the institution are liquidated may only be a small amount.
    When Congress established the NCUSIF in 1970, it provided the NCUA 
Board the authority to borrow from the Treasury in an aggregate amount 
not to exceed $100,000,000.\15\ With the passage of time, the size of 
the credit union system, the amount of insured shares, and the 
corresponding size of the NCUSIF and its obligations have all grown 
significantly. As the chart that follows demonstrates, the NCUSIF's 
assets and equity, as well as the assets and insured shares held by 
federally insured credit unions, were much lower than they are today. 
By the end of 1972, borrowing authority was six times NCUSIF assets of 
$16.7 million, nearly six and a half times NCUSIF equity of $15.6 
million, and 0.7 percent of federally insured credit union assets. The 
chart includes figures for year-end 1972 since, after the law 
establishing the NCUSIF was enacted in 1970, NCUA extended Federal 
insurance to State-chartered credit unions over a 2-year period.\16\
---------------------------------------------------------------------------
    \15\ ``If, in the judgment of the Board, a loan to the fund is 
required at any time for carrying out the purposes of this title, the 
Secretary of the Treasury shall make the loan, but loans under this 
paragraph shall not exceed in the aggregate $100,000,000 outstanding at 
any one time. Except as otherwise provided in this subsection and in 
subsection (e) of this section, each loan under this paragraph shall be 
made on such terms as may be fixed by agreement between the Board and 
the Secretary of the Treasury.'' FCU Act, Sec. 203(d)(1) (12 U.S.C. 
Sec. 1783(d)(1)).
    \16\ Equivalent borrowing authority today would be much higher if 
the initial, small volume of insured credit unions during the fund's 
first year of operation were used as the basis for the calculation.
----------------------------------------------------------------------------------------------------------------
                                                       (B)  Ratio of                              (D)  2008
    Basis for Computing 2008                             Borrowing                          Equivalent Borrowing
 Equivalent Borrowing Authority    (A) 1972 Figures    Authority to     (C)  2008 Figures     Authority  (Column
                                                       1972 Figures                                B  C)
----------------------------------------------------------------------------------------------------------------
NCUSIF Assets...................         $16,785,000             6.0        $7,845,581,935       $46,741,626,065
NCUSIF Equity...................         $15,559,000             6.4        $7,667,860,827       $49,282,478,482
NCUSIF Retained Earnings........         $15,559,000             6.4        $1,690,946,528       $10,867,964,059
Insured Shares..................     $13,699,458,000           0.007      $598,122,224,526        $4,366,028,382
FICU Assets.....................     $13,849,997,000           0.007      $801,672,388,418        $5,788,249,546
----------------------------------------------------------------------------------------------------------------

    To keep pace with these changes, and to help the NCUSIF position 
itself for current and future challenges to the economy and the 
financial system, the NCUA recommends the NCUSIF's statutory borrowing 
authority be adjusted proportionally to the increase over time in the 
total assets of insured credit unions. The NCUA believes the assets of 
federally insured credit unions are the best measure of potential risk 
exposure for the NCUSIF. This would result in an increase in NCUSIF 
borrowing authority to approximately $6 billion.
    Finally, the NCUA recommends that Congress provide the NCUSIF with 
additional, temporary emergency borrowing authority. The proposal in S. 
541 to amend the Federal Deposit Insurance Act (FDIA) to increase 
FDIC's borrowing authority from $30 billion to $100 billion also 
includes a temporary provision allowing FDIC to borrow up to $500 
billion if the Treasury Secretary, in consultation with the President, 
approves the higher borrowing authority. Credit unions, like banks, are 
facing challenging times. Many of the challenges are systemic, such as 
the problems with the asset-backed securities held by many corporate 
credit unions. To address such systemic problems, and the potential for 
sudden liquidity needs associated with such problems, the NCUSIF may 
need quick access to very large, short-term borrowings.
    Thus, Congress should add a similar, temporary emergency borrowing 
authority for the NCUSIF in an amount not to exceed $30 billion, five 
times the proposed base borrowing authority of $6 billion.\17\ The NCUA 
would exercise this emergency borrowing authority on terms and 
conditions similar to the emergency borrowing authority for the FDIC. 
The NCUA's emergency authority would only be exercised with the 
concurrence of the Secretary of the Treasury, after consultation with 
the President. This emergency authority would be temporary, expiring on 
December 31, 2010. Any use of this special authority by the NCUA would 
require the agency to submit a report to the House Financial Services 
and Senate Banking Committees.
---------------------------------------------------------------------------
    \17\ The amendments to the FCU Act incorporating both the increase 
in the base limit to $6 billion and the new emergency limit of $30 
billion might look like this: Section 203(d) of the Federal Credit 
Union Act (12 U.S.C. 1783(d)) is amended--
    (1) in paragraph (1), by striking `$100,000,000' and inserting 
`$6,000,000,000'; and
    (2) by adding at the end the following:
    `(4) TEMPORARY INCREASES AUTHORIZED--
    (A) RECOMMENDATIONS FOR INCREASE--During the period beginning on 
the date of enactment of this paragraph and ending on December 31, 
2010, if, upon the written (continued)
recommendation of the Board (upon a vote of not less than two-thirds of 
the members of the Board) and the Board of Governors of the Federal 
Reserve System (upon a vote of not less than two-thirds of the members 
of such Board), the Secretary of the Treasury (in consultation with the 
President) determines that additional amounts above the $6,000,000,000 
amount specified in paragraph (1) are necessary, such amount shall be 
increased to the amount so determined to be necessary, not to exceed 
$30,000,000,000.
    `(B) REPORT REQUIRED--If the borrowing authority of the Board is 
increased above $6,000,000,000 pursuant to subparagraph (A), the Board 
shall promptly submit a report to the Committee on Banking, Housing, 
and Urban Affairs of the Senate and the Committee on Financial Services 
of the House of Representatives describing the reasons and need for the 
additional borrowing authority and its intended uses.'.
---------------------------------------------------------------------------
    The NCUA would like to emphasize that this requested borrowing 
authority, while large in dollar terms, does not represent any 
potential burden on the taxpayer. If the NCUA was forced to borrow from 
the Treasury, the funds would be repaid with interest either through 
the sale of assets or by assessments on all federally insured credit 
unions.
V. SYSTEMIC RISK AUTHORITY FOR THE NCUA
    The NCUA charters, regulates, and provides share (deposit) 
insurance to credit unions. In its role as share insurer for credit 
unions, it functions very much like the FDIC as insurer of banks. The 
FDIA, however, provides the FDIC with a particular statutory authority 
related to its deposit insurance called the ``systemic risk'' authority 
(FDIA Sec. 13(c)(4)(G), 12 U.S.C. Sec. 1823(c)(4)(G)) that the NCUA 
does not have. Congress should consider amending the Federal Credit 
Union Act (FCUA) to provide the NCUA with a systemic risk authority 
similar to that available to the FDIC.
    Section 13(c) of the FDIA empowers the FDIC to provide certain 
assistance to insured banks that are in danger of closing on a 
voluntary basis, subject to certain statutory limitations, such as that 
the assistance be at the least cost to the Deposit Insurance Fund (DIF) 
and that the actions not protect depositors for more than the insured 
portion of their deposits. In an appropriate situation, the FDIC may 
exercise its systemic risk authority to provide assistance not 
otherwise authorized by Sec. 13(c). This systemic risk authority 
requires a determination by the Secretary of the Treasury that 
compliance with Sec. 13(c) statutory limitations would have serious 
adverse economic effects on economic conditions or financial stability, 
and, with the concurrence of two-thirds of the members of the Board of 
Governors of the Federal Reserve and two-thirds of the FDIC directors, 
the FDIC may then take actions to assist insured banks without regard 
to the various limitations enumerated in Sec. 13(c).
    The FDIC used its systemic risk authority last fall. As the current 
financial crisis was unfolding, the FDIC launched its Temporary 
Liquidity Guarantee (TLG) Program as an initiative to counter the 
current system-wide crisis in the nation's financial sector. The TLG 
Program provided two guarantee programs: One that guaranteed newly 
issued senior unsecured debt of insured banks and most U.S. holding 
companies of such insured banks, and another that guaranteed certain 
noninterest-bearing transaction accounts at insured banks. The FDIC 
announced that the TLG Program was necessary to promote financial 
stability by preserving confidence in the banking system and 
encouraging liquidity in order to ease lending to creditworthy 
businesses and consumers. Because the two guarantee programs were 
beyond the general assistance authority contained in FDIA Sec. 13(c), 
the FDIC first obtained a determination of systemic risk from the 
Secretary of the Treasury (after consultation with the President), 
supported by the written recommendations of the FDIC Board and the 
Board of Governors of the Federal Reserve System.
    The NCUA Board has certain tools available under Sec. 208 of the 
FCUA (12 U.S.C. Sec. 208) to address a threat to any given institution 
that is in danger of closing.\18\ These tools are similar to those 
available to the FDIC under FDIA Sec. 13(c), including making loans to, 
purchasing the assets of, or establishing accounts in the institution 
in danger of closing. Like the FDIA Sec. 13(c), FCUA Sec. 208 is also a 
limited authority. For example, Section 208 assistance can only be 
provided to federally insured credit unions that are in danger of 
closing; and each of the assistance actions contemplated under Sec. 208 
is in the nature of a bilateral agreement, that is, assistance in the 
form of asset purchases, loans, and establishment of accounts all 
require that there be a voluntary agreement between the NCUA and the 
affected institution.
---------------------------------------------------------------------------
    \18\ Section 208(a)(1) provides for assistance to federally insured 
credit unions in danger of closing. Section 208(a)(2) provides for 
assistance to credit unions to facilitate a merger or purchase and 
assumption. The references to Sec. 208 assistance in this testimony 
mean Sec. 208(a)(1) assistance.
---------------------------------------------------------------------------
    These Sec. 208 constraints limit the NCUA's ability to respond when 
circumstances arise that present a threat to the overall viability of 
the credit union system. In the current economic climate, such 
circumstances are plentiful. Economic recession has produced a 
substantial rise in unemployment; deterioration in the residential real 
estate market has placed a strain on housing values and mortgage 
lenders and a severe tightening of credit; securities markets are 
disrupted and the values of asset-backed securities are uncertain; and 
all this is leading to significant losses at depository institutions 
across the nation. The cumulative effect of these factors can undermine 
the confidence of the public in the credit union system as a whole, 
creating systemic risk.
    In order to quickly and effectively respond to such circumstances, 
the NCUA needs authority to take action in response to systemic risk. 
There are two recent examples of circumstances in which the NCUA, 
confronted with systemic risks, was forced to take less than optimal 
actions in dealing with these risks.
1. Temporary Corporate Credit Union Share Guarantee Program (TCCUSGP).
    The NCUA Board took action on January 28, 2009 to address concerns 
in the corporate credit union system related to declines in the value 
of asset backed securities and precipitated by a substantial capital 
impairment at a corporate credit union. The NCUA Board, on behalf of 
the NCUSIF:

    Infused $1 billion in capital into the corporate credit 
        union;

    Temporarily guaranteed the entire amount of all share 
        (deposit) accounts at each corporate credit union for about a 
        1-month period; and

    Offered to guarantee the share accounts at each corporate 
        credit union, on a voluntary basis, through December 31, 2010.

In support of the latter two actions, collectively referred to as the 
TCCUSGP, the Board found that each of the corporate credit unions in 
the system met the requirements for assistance under Sec. 208 of the 
Federal Credit Union Act. To maintain confidence in all corporate 
shares, and prevent runs on any particular corporate, the NCUA Board 
would have preferred having the option of involuntarily guaranteeing 
all corporate shares through 2010. Because of the lack of authority to 
address systemic risks, however, the Board was forced to implement the 
TCCUSGP in two steps, using separate legal authorities: a short-term 
involuntary guarantee until such time as each corporate could consider 
whether it wanted a voluntary guarantee, followed by the long-term 
voluntary guarantee.
    In support of the involuntary temporary guarantee, the Board 
determined that an emergency existed that required the NCUSIF provide 
the corporates with an immediate share guarantee during a short time 
period while the Board solicited a written voluntary guarantee 
agreement with each participating corporate. The Board cited its 
Sec. 203(a) power to requisition NCUSIF money ``for such . . . other 
expenses incurred in carrying out the purposes of this title as it may 
determine to be proper,'' combined with the Board's Sec. 209(a)(7) 
incidental powers. 12 U.S.C. Sec. Sec. 1783(a), 1789(a)(7). The 
authority for the long-term, voluntary share guarantee was found in 
Sec. 208, as the voluntary guarantee was tantamount to a conditional 
line of credit, or a loan, and specifically authorized under Sec. 208.
    This two-step process for the share guarantee program was makeshift 
and burdensome, and was also potentially disruptive for the system 
because it relied on unanimous, voluntary participation for full 
effectiveness. The NCUA could not require every corporate to 
participate in the voluntary portion of the TCCUSGP, and a few 
ultimately did not. The final outcome of this less-than-100 percent 
participation remains to be seen.
2. Transaction account guarantees.
    Also, as noted above, this past year the FDIC issued an interim 
rule implementing a TLG program that provided an unlimited DIF 
guarantee for non-interest bearing transaction accounts at insured 
banks. This FDIC action provided assurance to businesses that 
maintained large transaction accounts with balances in excess of 
insured limits that, despite the uncertainties in the economy and among 
depository institutions, they need not move or restructure their 
accounts to in an effort to find a safe haven. The action also helped 
to preserve liquidity and to encourage banks to continue lending 
activities. To implement this DIF guarantee, the FDIC employed its 
systemic risk authority, as the action included banks that were not in 
specific danger of closing, and the FDIC extended the guarantee to all 
banks on an involuntary basis. Some federally insured credit unions, 
like banks, offer non-interest bearing transaction accounts, and the 
NCUA Board considered taking action similar to what the FDIC had done 
to guarantee those accounts. Lacking authority to take global action 
based on systemic risk, the NCUA had no authority to pursue a similar, 
global account guarantee at all federally insured credit unions, and so 
was unable to provide a blanket guarantee to small business owners and 
other entities with transaction accounts at credit unions.
    With regard to the corporate credit union concerns and the various 
guarantees discussed above, the credit union system as a whole would 
have been better served if it had been able to employ a systematic risk 
authority. Still, because the corporate credit unions are a small 
universe, the Board was able to cobble together other legal authorities 
to work around the lack of systemic risk authority. However, the next 
time the NCUA needs to take systemic action for problems that could 
occur within the universe of natural person credit unions, current 
legal authorities might be inadequate to address this much larger 
universe. Accordingly, it is important Congress consider providing NCUA 
with systemic risk authority that parallels the authority of the 
FDIC.\19\
---------------------------------------------------------------------------
    \19\ For example, to parallel the provisions of the FDIA 
Sec. 13(c)(4)(G), Section 208 of the FCUA (12 USC Sec. 1788) could be 
amended by inserting at the end thereof a new paragraph (d) to read as 
follows:
    (d) Systemic risk.
    (1) Emergency determination by Secretary of the Treasury. 
Notwithstanding subparagraphs (a), (b) and (c), if, upon the written 
recommendation of the Board and the Board of Governors of the Federal 
Reserve System (upon a vote of not less than two-thirds of the members 
of such Board), the Secretary of the Treasury (in consultation with the 
President) determines that--
      (A) the Board's compliance with subparagraphs (a), (b) and (c) 
with respect to an insured credit union would have serious adverse 
effects on economic conditions or financial stability; and
      (B) any action or assistance under this subparagraph would avoid 
or mitigate such adverse effects, the Board may take other action or 
provide assistance under this section as necessary to avoid or mitigate 
such effects.
    (2) Repayment of loss. The Board shall recover the loss to the 
National Credit Union Share Insurance Fund arising from any action 
taken or assistance provided with respect to an insured credit union 
under clause (1) expeditiously from 1 or more emergency special 
assessments on insured credit unions as the Board determines 
appropriate.
    (3) Regulations. The Board shall prescribe such regulations as it 
deems necessary to implement this paragraph. In prescribing such 
regulations, defining terms, and setting the appropriate assessment 
rate or rates, the Board shall consider the types of credit unions that 
benefit from any action taken or assistance provided under this 
subparagraph, economic conditions, the effects on the credit union 
industry, and such other factors as the Board determines appropriate.
    (4) Documentation required. The Secretary of the Treasury shall--
      (A) document any determination made under subparagraph (1); and
      (B) retain the documentation for review under subparagraph (5).
    (5) GAO review. The Comptroller General of the United States shall 
review and report to the Congress on any determination under 
subparagraph (1), including--
      (A) the basis for the determination;
      (B) the purpose for which any action was taken pursuant to such 
subparagraph; and
      (C) the likely effect of the determination and such action on the 
incentives and conduct of insured credit unions and uninsured members.
    (6) Notice.
      (A) In general. The Secretary of the Treasury shall provide 
written notice of any determination under subparagraph (1) to the 
Committee on Banking, Housing, and Urban Affairs of the Senate and the 
Committee on Banking, Finance and Urban Affairs of the House of 
Representatives.
      (B) Description of basis of determination. The notice under 
subparagraph (6)(A) shall include a description of the basis for any 
determination under subparagraph (1).
    (7) Rule of construction. No provision of law shall be construed as 
permitting the Board to take any action prohibited by paragraphs (a), 
(b) or (c) unless such provision expressly provides, by direct 
reference to this paragraph, that this paragraph shall not apply with 
respect to such action.
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VI. CONCLUSION
    The NCUA is committed to ensuring a safe and sound financial system 
and appreciates the opportunity to provide input on legislation to 
improve the country's Federal deposit insurance system. At a minimum, 
Congress should act to permanently increase the deposit insurance 
coverage level to $250,000, to increase NCUA's base borrowing authority 
to $6 billion with emergency authority extending up to $30 billion, to 
provide the NCUA with the authority to replenish the NCUSIF over a 5-
year period, and consider providing the NCUA with systemic risk 
authority. These authorities will provide the agency with additional 
tools to continue to deal with the serious economic challenges facing 
all financial institutions.
                                 ______
                                 
                  PREPARED STATEMENT OF WILLIAM GRANT
             Chairman and CEO, First United Bank and Trust,
             on behalf of the American Bankers Association
                             March 19, 2009
    Chairman Johnson, Ranking Member Crapo and members of the 
Subcommittee, my name is William Grant, Chairman and CEO of First 
United Bank and Trust. My bank is a 108-year old community bank, 
headquartered in Oakland, Maryland--a rural town in Appalachia with a 
population of about 2,000. We have assets of $1.6 billion, and serve 
four counties in Maryland and four counties in West Virginia.
    I am pleased to present the views of the American Bankers 
Association (ABA), where I am a member of the ABA's deposit insurance 
task force and where I serve on the America's Community Bankers 
Administrative Committee. ABA works to enhance the competitiveness of 
the nation's banking industry and strengthen America's economy and 
communities. Its members--the majority of which are banks with less 
than $125 million in assets--represent over 95 percent of the 
industry's $13.9 trillion in assets and employ over 2 million men and 
women.
    We appreciate the opportunity to testify on The Depositor 
Protection Act of 2009, S. 541, introduced by Chairman Dodd and 
cosponsored by many other members of this subcommittee. That bill would 
increase the FDIC's line of credit to Treasury from $30 billion to $100 
billion. The ABA strongly supports this bill as it would provide the 
FDIC with needed flexibility to manage the cash-flows in handling bank 
failures and most importantly--because of this added flexibility--would 
allow the FDIC to significantly reduce the special assessment on the 
industry it has proposed for June 30, 2009.
    Let me be very clear at the outset: the banking industry fully 
supports having a strong FDIC fund and stands behind the efforts to 
ensure FDIC's financial health. The industry has always taken our 
obligation to the FDIC seriously, and banks will honor the obligation 
to support the FDIC.
    How this is accomplished is the critical question. The money to pay 
such high expenses cannot be created out of thin air. It is very 
important, therefore, to lower the upfront costs and spread the 
obligation to FDIC over time. S. 541 helps to accomplish this.
    Let me illustrate the impact of the FDIC special assessment: the 
original proposed special assessment would pull over $15 billion from 
the industry in the second quarter of this year. This is on top of the 
regular risk-based quarterly premium paid by the industry which will be 
between $3 billion and $4 billion each quarter. To give you a sense of 
the magnitude of this cost, the industry's full year 2008 net income 
was $16 billion. Even at half the cost, which the FDIC has suggested is 
likely if S. 541 is enacted, it still will impose a substantial burden 
on banks at the very time that they are making every effort to get 
credit into local communities.
    The special assessment is a significant and unexpected cost to all 
banks that has the potential to devastate earnings. We are already 
dealing with a deepening recession, accounting rules that overstate 
economic losses and unfairly reduce capital, regulatory pressure to 
classify assets that continue to perform, and a significant increase in 
regular quarterly FDIC premiums. Each of these is a big challenge on 
its own--but collectively, they are a nightmare. Adding another huge 
one-time cost compounds this burden dramatically. Thousands of banks 
like mine that never made a toxic subprime mortgage loan and have 
served our communities in a responsible way for years and years are 
being unfairly penalized. In fact, a small bank in Texas commented 
recently: ``Is there not a better approach here than choking down the 
small community banks that still have prudent underwriting standards 
and are still trying to serve their long-term customers?''
    Let me tell you the impact such a charge will have on my bank: the 
proposed special assessment would cost my bank $2.47 million--all in 
second quarter of 2009. This will reduce the bank's capital--which is 
the base to support all our lending--by $1.64 million. This very high 
and unexpected cost is in addition to the regular risk-based premium we 
pay to FDIC, which is expected to be about $429,000 per quarter, or 
$1.7 million for 2009. To put this in perspective, the regular premiums 
are four times greater this year than last--not including the large 
special assessment cost. This same story is being repeated across 
thousands of banks in our country. Moreover, some areas, where the 
economic conditions are even more problematic, this added burden will 
make any new lending practically impossible.
    I do want to be clear in saying that First United Bank & Trust will 
meet its obligation to FDIC, regardless of the disposition of S. 541. 
In doing so, however, we will encounter limits on our ability to lend 
in our communities, support local functions and charities, and provide 
jobs.
    In fact, the special assessment is completely at odds with banks' 
efforts to help communities rebuild from this economic downturn. This 
assessment makes the cost of raising new deposits much higher, and 
therefore, acts as a disincentive to raise new deposits. Fewer deposits 
will hinder our ability to lend. The reduction in earnings will make it 
harder to build capital when it is needed the most. Banks will also be 
forced to look at ways to lower other expenses, which may limit their 
ability to sponsor community activities or make charitable donations--
something most banks have done year after year. Some banks have told us 
that they may even have to consider reducing bank staff in order to pay 
for this high cost. In fact, a small community bank in Wisconsin, with 
11 employees, commented that: ``The proposed assessment to us is 
equivalent to the cost of one fulltime employee. We may not be able to 
afford to keep existing staff. I'm concerned that we will be forced to 
reduce our head count or certainly not be able to add staff as 
planned.''
    The implications for this significant FDIC charge will impact every 
corner of my community, and indeed, every community the banking 
industry serves. It is patently unfair and harmful to burden a healthy 
bank like mine that is best positioned to help the economy recover. 
Given the impact that the proposed assessment will have on banks and 
their communities, it is critical to consider alternatives that would 
reduce the burden and provide the FDIC the funding it needs in the 
short-term. S. 541 is an extremely important step in this direction as 
it would enhance FDIC's ability to draw on working capital, if 
necessary, and enable the FDIC to reduce the special assessment 
considerably.
    Importantly, the FDIC does not intend to use the line of credit at 
all unless the economy deteriorates even more dramatically than 
anticipated. If it does draw on it, it is a borrowing that must be 
repaid by the industry_with interest. This obligation of the industry 
is often lost in the discussion about government support and confused 
with taxpayer losses. Nothing is further from the truth. The banking 
industry stands fully behind the FDIC and remains committed to assuring 
its financial health. The FDIC has been funded completely by banking 
premiums since it came into existence in 1933. All the costs of bank 
failures and all the personnel and other program costs have been borne 
by the industry. It has been the healthy banks which have had nothing 
to do with the excessive risk-taking of banks that have failed that end 
up bearing the cost. While the industry is prepared to meet its 
obligations, in this difficult time it is critical to reduce the impact 
and spread the cost over a long period of time. This is why enacting S. 
541 is so important and so urgently needed.
    In my statement today, I'd like to focus on three main ideas:

    The banking industry is committed to assuring that the FDIC 
        is financially secure. Banks have always paid the full cost of 
        FDIC. Since the industry will bear the full cost of any FDIC 
        expenses, it is a question of timing of the payments and 
        balancing the impact of any payment on the ability of banks to 
        lend in their communities.

    The FDIC special assessment is a significant burden that 
        will impact earnings, capital, and cost of funds--all of which 
        makes it far more difficult to lend. The cost of rebuilding the 
        deposit insurance fund needs to be reduced and spread out over 
        time.

    The $100 billion line of credit is critical to reducing 
        FDIC assessments on banks. ABA fully supports S. 541 and urges 
        quick action to enact it.

I will cover each of these in turn.
I. The Banking Industry is Committed to Assuring that the FDIC is 
        Financially Secure
    The banking industry knows how important deposit insurance is to 
our customers. In fact, the very rapid growth in deposits over the last 
quarter, indeed the last year, shows just how valuable this additional 
level of security is to bank customers. It is no wonder that depositors 
feel this way as no insured depositor in a failed bank has ever lost a 
penny. Perhaps less well-known is that bank premium payments have paid 
all the costs of the FDIC--including all the personnel and 
administrative costs to run the agency (which is in excess of $1 
billion per year) and all the bank failure costs.
    The industry remains committed to assuring the financial strength 
of the FDIC. The industry had built up the Deposit Insurance Fund (DIF) 
to over $50 billion by the end of 2007. The housing market collapse and 
rapidly deteriorating economy have resulted in 25 bank failures last 
year and 17 this year. The IndyMac failure on July 11, 2008 was 
particularly costly--subtracting about $10 billion from the DIF. As a 
result of these losses, the DIF reserve ratio (the fund divided by 
insured deposits) fell to 0.40 percent at the end of the last year. 
This was due not only to the rapid growth in insured deposits, but more 
importantly reflects the fact that the FDIC has set aside over $22 
billion from the fund to pay for losses expected in 2009. These 
reserves are not included in the calculation of the reserve ratio. 
Thus, in total, the FDIC has $41 billion in resources--$22 billion for 
possible failures plus $19 billion in the fund to cover additional 
unexpected costs.
    In February 2006, Congress made important improvements that allowed 
the FDIC greater flexibility to manage the insurance fund and authority 
to enhance the risk-based premium system. Unfortunately, there was 
little time to allow this system to become fully operational before 
this severe economic downturn began to take its toll. Nonetheless, the 
reform act of 2006 continues to provide a solid base for rebuilding and 
maintaining the FDIC deposit insurance fund.
    Under the new rules, the banking industry pays quarterly premiums 
that are set to reflect differences in ``risk'' of the banks, 
determined by a combination of bank examiner ratings and financial 
ratios. Under that system, premiums paid this year will raise about $12 
billion. This represents a fourfold increase in premiums from last 
year. For banks located in more economically distressed areas, the 
risk-based increase is likely to be even higher. Bank examiners have 
also been very critical of banks (particularly in these areas) even 
though most of the banks in these regions remain well-capitalized and 
ready to lend. The expense will adversely affect a bank's earnings, 
perhaps leading to a CAMELS downgrade and a higher FDIC insurance 
premium, where the cycle begins again.
    In spite of these challenges, banks had planned for and budgeted 
for the increase expected in quarterly premium assessments. However, 
the huge special one-time assessment announced on February 27, 2009 was 
unexpected. The negative consequences of this change--all at once--will 
be dramatic.
    The industry is prepared to do its part and pay for 100 percent of 
the insurance needed to preserve confidence in our industry. The only 
issue is one of timing. S. 541 will be very helpful in providing the 
industry with the time needed to fund the DIF while at the same time 
enabling the industry to meet the needs of our communities.
II. The FDIC Special Assessment is a Burden That Will Significantly 
        Impact Earnings, Capital, and Cost of Funds--All of Which Makes 
        it Far More Difficult for Banks to Lend
    The FDIC is proposing to siphon funds out of the banking system at 
precisely the time that it and other parts of the government are trying 
to pump money in. This is the ultimate in mixed messages and will 
significantly undermine the effectiveness of the other programs. It 
would be far better to adopt a plan that would enable banks to fund the 
system at a time when higher insurance premiums will not jeopardize an 
already fragile economy.
    The $41 billion already at the FDIC and $12 billion a year ($60 
billion over 5 years) in risk-based premiums should be sufficient--
under current economic assumptions--to cover the FDIC's estimated $65 
billion in losses over the next 5 years and rebuild the DIF back to its 
normal operating range. The FDIC has told the industry, however, that 
the special assessment is needed as an additional layer of protection 
against the possibility that losses this year and next may be greater 
than anticipated, leaving the agency with less flexibility to manage 
the cash-flow required to satisfy insured-depositor claims.
    Let me again be very clear: the banking industry will meet its 
commitment to fully fund the FDIC. We appreciate the difficult 
situation that the FDIC is in, and understand that rising losses from 
bank failures have created short-term funding needs. The industry has 
always taken our obligation to the FDIC serious and banks will honor 
the obligation to support the FDIC. It is a matter of timing that is 
the issue here, not the obligation. Thus, how the repayment is done, 
and over what time period, is the critical question.

    Here's an example of how many bankers feel:

    From an Illinois community bank ($425 million in assets): 
        ``The FDIC seems to be failing to realize that most community 
        banks continue to serve as a stable foundation for lending to 
        businesses and individuals. By imposing this assessment, the 
        FDIC is placing further strain on the institutions that have 
        great potential to help pull our nation out of this financial 
        crisis. Wall Street has been rewarded, and now Main Street is 
        being penalized.''

    From an upstate New York community bank ($500 million in 
        assets): ``We annually provide over $100 million in loans to a 
        wide range of businesses, consumers and homeowners. We truly 
        operate the way a main street bank should, safely and 
        profitably, all with an focus on supporting the community in 
        every way possible. We never issued a subprime mortgage, 
        purchased private label CMOs or MBSs. Basically, we did what we 
        were supposed to do. This year we estimated that our FDIC 
        insurance premiums were going to increase to $610,000 up 
        approximately $410,000 from 2008. While we were extremely 
        disappointed that banks that operated very poorly, without 
        prudent controls and with an eye for ever greater profits at 
        the expense of everything else, were the source of the 
        increase, we understood that all must share in the pain if this 
        Country is going to move forward. However, the increases in 
        premiums being proposed now will increase our costs another 
        $950 thousand. This is not acceptable!

    The money to pay such high expenses must come out of earnings or 
reductions in expenditures. Banks will also be forced to look at ways 
to lower other expenses, which means less lending, fewer sponsorship of 
community activities, fewer donations to local charities, and in some 
banks, reductions in staffing. The implications for this significant 
FDIC charge will impact every community. Spreading the costs over a 
long period of time is the best method to minimize disruptive effects. 
Alternatives are clearly needed to help ease this burden on all banks.
III. The $100 Billion Line of Credit is Critical to Reducing FDIC 
        Assessments on Banks
    Enacting S. 541 will provide the necessary flexibility to the FDIC 
to continue to meet its responsibilities without extracting significant 
funds from the banking industry that could be better used to facilitate 
loans in banks' communities. S. 541 would increase the FDIC's line of 
credit to Treasury from $30 billion to $100 billion and provide for 
additional flexibility for the FDIC to borrow beyond that under 
extraordinary circumstances. What is not well understood is that the 
FDIC's ability to borrow for working capital (to handle the cash needs 
in resolving bank failures) is directly related to the level of the 
fund and the (current) $30 billion line of credit. Thus, increasing 
that line to $100 billion significantly increases the FDIC's working 
capital line.
    The last time the line of credit was increased was in 1991, when 
Congress increased it from $5 billion to $30 billion in the FDIC 
Improvement Act. At that time, Congress also provided for working 
capital that, as I mentioned, is many multiples of (roughly nine times) 
the $30 billion line of credit plus the fund balance. Since that time, 
the banking industry has more than tripled in total assets; thus, 
setting a new line of credit at $100 billion is consistent with the 
growth of the industry.
    By expanding the flexibility to access working capital, the FDIC 
has less immediate need for cash from the industry as a buffer against 
unexpected losses. Thus, rather than pull $15 billion out of the 
industry, the FDIC has suggested that it could cut that level in half 
and have sufficient funding. Of course, even at half the proposed rate, 
the cost is significant, and we continue to look for ways to eliminate 
the upfront cost or, if it cannot be eliminated, at least lower it 
significantly and certainly spread it out over a much longer period of 
time. We emphasize that the special assessment is on top of 
significantly elevated risk-based premiums.
    The FDIC should assess premiums to recapitalize the insurance fund 
over a reasonable period, keeping in mind the present need to keep 
capital in the system to increase stability and to bolster lending. 
Recently, the FDIC extended the recapitalization period for the reserve 
ratio to return to the statutory level of 1.15 percent from 5 years to 
7 years. The FDIC should consider extending the recapitalization period 
further, to at least 10 years, and be reassured that the industry 
remains fully committed to bringing the fund back to required levels as 
conditions improve.
    Policymakers should consider other options to help stretch out the 
repayment period for banks. One option to consider is a funding source 
like the Financial Corporation (FICO) bonds issued from 1987 to 1989 to 
pay for the costs incurred by the Federal Savings and Loan Insurance 
Corporation (FSLIC) from savings association failures in the late 
1980s. These were a series of 30-year bonds with an aggregate principal 
of $8.2 billion. This helped to spread out the cost of failures at that 
time. Other types of borrowing or even capital investments by banks in 
the FDIC should be considered. Having options in place is important so 
that there is a viable mechanism to provide the FDIC with capital to 
offset losses, yet have the commitment of the banking industry to repay 
any temporary funding over a long period of time.
    On a final note, let me say that the banking industry, like all 
businesses, is working hard to cut costs and make sure our operations 
are as efficient as possible. We believe that the FDIC should do the 
same. Thus, we urge the FDIC to continue seeking the least-cost 
resolution of failed institutions and provide details so the industry 
and public understand the costs incurred. Moreover, the FDIC should 
reduce all other unnecessary expenses, keeping in mind that every 
dollar the FDIC spends comes out of the insurance fund.
Conclusion
    The ABA fully supports a strong, financially secure FDIC fund in 
order to maintain the confidence depositors have in the system. The 
banking industry has been responsible for all of the FDIC's cost since 
its inception in 1933. We appreciate the desire on the part of the FDIC 
to have an extra layer of protection in this difficult environment with 
so much uncertainty about the number and cost of bank failures. 
However, how this is done is very important to every bank and every 
community we serve. The special assessment is a significant and 
unexpected cost to banks that will devastate earnings and reduce 
lending so critical to our economic recovery. Therefore, the ABA fully 
supports S. 541 and urges quick action to enact it into law.
                                 ______
                                 
                    PREPARED STATEMENT OF TERRY WEST
               President and CEO of Vystar Credit Union,
           on behalf of the Credit Union National Association
                             March 19, 2009
     Thank you, Chairman Johnson, and Ranking Member Crapo, for the 
opportunity to appear before the Subcommittee today on behalf of the 
Credit Union National Association on issues relating to deposit 
insurance.
    I am Terry West, President and CEO of VyStar Credit Union in 
Jacksonville, Florida. I am also serving as the Chairman of CUNA's 
Corporate Credit Union Task Force, which was formed to address concerns 
regarding corporate credit unions, institutions that provide payments, 
settlement, liquidity and investment services for natural person credit 
unions. The Credit Union National Association is the largest advocacy 
organization for credit unions in this country, representing the 
nation's 7,900 State and Federal credit unions, which serve 
approximately 92 million consumers.
VyStar CU
    VyStar is a State-chartered, federally insured credit union serving 
the Jacksonville community; we have approximately 350,000 members and 
$3.8 billion in assets. I am pleased to report that VyStar continues to 
be an important source of lending as well as a variety of financial 
services to our members during this period of economic crisis, offering 
a variety of loan products, including 30-year mortgage loans where we 
pay up to $5,000 no closing costs at 5.375 percent, and small business 
loans. We also help our members modify existing loans and work with 
them to provide financial counseling and restructure their debt, 
particularly for those facing job losses or a reduced income. In 
addition, we help over 9,000 small businesses in our area meet their 
financial needs through deposit and loan services. We are also just now 
launching a Money Makeover on local television aimed at teaching 
consumers how to reduce debt and save, especially during this economic 
crisis.
Background on Natural Person and Corporate CUs
    I am even more pleased to report that VyStar's efforts are being 
repeated in communities all across this country by the nation's State 
and Federal credit unions, as highlighted by the Wall Street Journal 
supplement on Sunday, March 15th. As the article points out, credit 
union loans in 2008 rose by 7 percent to over $575 billion, up about 
$35 billion from the previous year. Meanwhile, banks in this country 
saw loans decline about $31 billion in 2007, from $7.9 to $7.876 
trillion, as the Journal reported. I have attached a copy of the 
Journal article. While credit unions are generally performing well, 
some natural person credit unions in States such as California, 
Florida, Arizona, Nevada and Michigan are facing real stresses, 
including capital reductions, primarily as a result of the collateral 
damage from their respective economic environments.
    The corporate credit union network has been particularly hard hit, 
due in part to the impact of mortgage-backed securities, which are 
permissible investments for the corporate credit unions, on their net 
worth. These concerns are highly relevant to the Subcommittee's 
consideration of deposit and share insurance because they have a direct 
impact on the costs of insurance to credit unions that is provided by 
the National Credit Union Share Insurance Fund (NCUSIF).
The NCUSIF
    Like the Federal Deposit Insurance Corporation (FDIC), the NCUSIF 
provides account insurance, backed by the full faith and credit of the 
U.S. Government, to the institutions it covers. However, the NCUSIF 
differs from the FDIC in one very important way. The FDIC is generally 
funded by assessing premiums to insured banks. The costs of the NCUSIF 
are borne by federally insured credit unions, which must provide and 
maintain with the NCUSIF 1 percent of their insured shares. Federally 
insured credit unions may also be assessed an insurance premium, up to 
twice a year, to bring the NCUSIF to its normal operating level, which 
is set by the NCUA Board within a range of 1.2 percent to 1.5 percent, 
as directed by the Federal Credit Union Act (``FCU Act'' or ``Act''). 
The current level is 1.3 percent. If the NCUSIF equity level falls 
below 1.2 percent, a premium must be assessed under the Act.
    This system has many positive features. It reflects the self-help, 
cooperative nature of the credit union system by calling on federally 
insured credit unions to serve as the first line of defense against 
insurance losses before any taxpayer funds would ever become involved. 
However, the current economic crisis has also exposed some dangers in 
the system. In particular, when, as now, the industry faces a general 
economic downturn, and individual credit unions need their capital the 
most to support continued lending to local communities, the insurance 
fund can impose sudden, large, and unexpected drains on the capital of 
credit unions all across the country. This, in turn, can limit the 
continuing ability of credit unions to carry on their core functions 
just when they are needed most. Some of the reforms proposed below are 
designed to mitigate this problem.
NCUA's Actions To Assist Corporate CUs
    Because the National Credit Union Administration (NCUA) took action 
in January to provide $1 billion in capital to the largest corporate 
credit union, U.S. Central, and to guarantee the uninsured shares of 
corporate credit unions, all federally insured credit unions have been 
hit with an estimated 80 plus basis points in insurance expenses this 
year and an average 62 basis point hit to federally insured credit 
unions' return on assets (ROA). This is comprised of more than 50 basis 
points to restore the 1 percent deposit and the remainder in the form 
of a premium assessment.
    CUNA did not oppose NCUA's action in January to help the corporate 
credit unions, which we felt was necessary. However, we did not support 
the agency's decision as to how the costs would be funded or when they 
had to be recognized for accounting purposes. We believe NCUA did not 
thoroughly consider alternatives to contain those costs for the credit 
union system.
    As a result of NCUA's actions, a very large number of credit unions 
will experience negative ``bottom lines'' or ``net income'' and all 
will see their net worth decline, solely because of the insurance 
expenses.
    On February 27, 2009, the FDIC issued an interim final rule with a 
request for comments calling for an emergency 20 basis point special 
insurance assessment in June and possibly an additional assessment of 
up to 10 basis points thereafter. Bankers objected to the amount and 
according to the Washington Post and others, the FDIC has agreed to 
mitigate the impact of the assessment cutting it in half to 10 basis 
points. The FDIC has also adopted a rule that allows it up to 7 years 
to bring the reserve ratio of its Deposit Insurance Fund up to 1.15 
percent. This will allow the agency, under its ``extraordinary 
circumstances'' authority, to spread out future assessments for 
federally insured banks and thrifts for two additional years. The 
agency also made changes to its assessment rate regarding its Temporary 
Liquidity Guarantee Program that will help reduce insurance 
assessments.
Actions to Mitigate CUs Costs That Do Not Require Legislation
    We believe there are steps of a similar nature and effect that NCUA 
could take to help minimize the impact of insurance costs on federally 
insured credit unions. For example, while the 1 percent equity level in 
the NCUISF arguably must be replenished in the same year that it is 
drawn down, the NCUA Board currently has authority under the FCU Act to 
spread out credit unions' premium expenses that fund the remaining .30 
percent balance of the NCUSIF to bring the ratio to 1.30 percent. We 
urge this Subcommittee to encourage NCUA to use its current authority 
to help reduce the impact of insurance costs on federally insured 
credit unions this year.
    We also note that limited assistance--up to $10 billion--from the 
Treasury's Troubled Assets Relief Program (TARP), or Financial 
Stability Plan (FSP), to the NCUSIF and to a small number of individual 
credit unions could be extremely important in helping to blunt the 
impact of the insurance expenses on the credit union system. We believe 
such funding, which would be fully repaid by the credit union system in 
a reasonable amount of time, is appropriate under the circumstances. 
Some banker groups have had the temerity, given where certain banks are 
regarding TARP money, to charge that credit unions' tax exemption would 
be threatened if we receive such funds. In our view, this should not be 
the case, because any funds from TARP would be reimbursed. Further, 
Treasury has developed a TARP program specifically for Subchapter S 
Banks, which receive very favorable tax treatment. No one is suggesting 
that this step undermines their generous tax benefits the Subchapter S 
banks receive from the Federal Government. While this hearing is not 
focusing on accounting issues, the impact of accounting rules regarding 
fair value and assets that have to be reported as ``other-than-
temporarily impaired'' have taken their toll on the credit union 
system, along with others in the financial system, particularly for 
corporate credit unions. While positive developments from the Financial 
Accounting Standards Board (FASB) are in the offing, we urge the Senate 
to remain vigilant and keep the pressure on FASB to address these 
issues in a timely and effective manner.
Legislation is Needed
    We also think it is imperative that NCUSIF have the statutory 
authority it needs to address insurance issues and manage insurance 
costs, both to facilitate its operations and to help credit unions 
handle their expenses. This is particularly important in light of the 
current financial crisis. More specifically, CUNA is supporting the 
following:

    Legislation to continue share and deposit coverage for 
        accounts up to $250,000. We feel this additional coverage has 
        provided consumers with needed confidence in their financial 
        institutions and hope the Senate will continue the current 
        level of account insurance.

    Increased authority for the NCUSIF to borrow up to $6 
        billion from the U.S. Treasury to facilitate its ability to 
        spread out insurance costs to credit unions. The FDIC is 
        seeking an increase in its borrowing authority from $30 billion 
        to $100 billion, with additional authority to borrow up to $500 
        billion with the concurrence of the Federal Reserve Board and 
        the Treasury Department, in consultation with the President. 
        NCUA has much more limited borrowing authority, which has not 
        been increased from $100 million since the NCUSIF was created 
        in the 1970s. As credit unions continue to be affected by the 
        economy, and in recognition of the $250,000 insurance ceiling 
        which may be extended, thereby increasing the NCUSIF's 
        exposure, we urge the Senate to increase the NCUSIF's borrowing 
        authority. We also support additional authority for the NCUSIF 
        under exigent circumstances, which would allow it to borrow an 
        additional amount, up to $30 billion, that we urge the Senate 
        to approve for the NCUSIF.

    Authority for the NCUSIF to allow federally insured credit 
        unions to spread out premium expenses for a period of up to 8 
        years. CUNA strongly believes that NCUA has authority now to 
        spread out about 30 basis points in insurance expenses for a 
        reasonable period of time, without any new legislative 
        authority, and we urge this Subcommittee to encourage NCUA to 
        use that authority. However, we also support legislation that 
        would expressly permit NCUA to collect credit unions' premium 
        costs over 8 years, as the FDIC would be permitted to do. This 
        change would provide an extremely important mechanism that 
        would allow NCUA to manage its resources more effectively while 
        lessening the impact of assessments on federally insured credit 
        unions.

    Enhanced authority for NCUA through its Central Liquidity 
        Facility (CLF) to provide liquidity to all member credit 
        unions, both natural person and corporate credit unions, and 
        capital to those member credit unions that represent systemic 
        risk to the NCUSIF. Such additional authority would provide 
        another mechanism the NCUA Board could employ to spread out the 
        costs associated with problem cases that are paid by credit 
        unions. Authority for the program, which would be funded 
        through the CLF's borrowing authority and that of the NCUSIF, 
        would end after 7 years. Borrowings would be repaid from within 
        the credit union system. The NCUA Board would be directed to 
        write regulations to implement the program and NCUA's 
        implementation would be subject to Congressional review.

    Systemic risk authority to NCUA, on a similar basis to that 
        provided to FDIC. While we cannot imagine that Congress 
        intended NCUA would not have such authority, the FDIC was able 
        to point to specific provisions in its Act to provide unlimited 
        deposit insurance coverage for non-interest bearing transaction 
        accounts. Without a specific systemic risk provision, NCUA has 
        been reluctant to take this action, even though we believe NCUA 
        has such authority to act on a case-by-case basis under 12 
        U.S.C. 1788. We believe that given the uncertainty of the 
        economic crisis, parallel authority for NCUA to address 
        systematic risk issues in a timely fashion is reasonable.
Conclusion
    While CUNA is supporting additional resources for the NCUSIF and 
urging Congress to help with other issues, such as mark-to-market 
accounting, that will have an impact on the credit union system 
including corporate credit unions, we are also supporting regulatory 
changes in the corporate credit union system that will substantially 
strengthen their capital, reduce their numbers to increase 
efficiencies, focus their services on core activities that are needed 
by natural person credit unions, and address corporate governance 
issues. All of these changes are designed to prevent problems of the 
nature and magnitude that the credit union system is currently facing.
    In closing, Mr. Chairman, Ranking Member Crapo and all the members 
of this Subcommittee, we appreciate your review of these issues today. 
Every day, credit unions reinforce their commitment to workers and a 
host of others seeking to better their quality of life by providing 
them loans on terms they can afford and savings rates that are 
favorable. We hope you agree that credit unions and other institutions 
that continue to do the right thing, despite impediments, should not be 
disadvantaged by the political process. We look forward to working with 
you to help ensure the credit union system continues to be a ``safe 
haven'' for the 92 million individuals and small businesses who look to 
their credit unions for financial services. I would be happy to respond 
to your questions.
             SAFE HAVENS: CREDIT UNIONS EARN SOME INTEREST
                The Wall Street Journal,  March 15, 2009
                           By Jonnelle Marte
    Cash isn't exactly flowing like it used to. The stock market can't 
find a bottom. Big banks have become wards of the government while 
smaller banks are failing at a rate of about one a week. Savers worry 
about the institutions where their cash is parked, while people who 
need to borrow scramble to find willing lenders.
    Buffeted in every direction by the continuing financial Katrina, 
more and more savers and borrowers are finding a safe harbor in the 
sleepiest, most unexciting corner of the financial world: credit 
unions. Often, it's right in their office, maybe a couple of floors 
down or at the end of the hall.
    Long a haven for cash-strapped workers, car buyers and Christmas-
club savers, the nation's 8,000 credit unions are gaining new stature 
as reliable sources of lending in the tempest-tossed credit market.
Seeking Savers and Borrowers
    They've also wooed consumers by offering a win-win combination of 
generally higher interest rates for savings accounts and lower rates 
for loans, when compared to most banks.
Tim Foley
    Typical spreads: Right now, a 1-year certificate of deposit at a 
credit union pays about 2.29 percent versus 1.74 percent at a 
commercial bank, according to Datatrac, a financial research firm that 
analyzes interest rates for banks and credit unions. A home-equity line 
of credit at a credit union charges an average of 4.41 percent compared 
to 4.77 percent for banks--but banks charge slightly less for a 30-year 
fixed-rate mortgage with a 5.33 percent rate, compared with the 5.39 
percent charged by credit unions.
    Membership in credit unions rose to almost 90 million in 2008, from 
85 million in 2004. And the loans on their books topped $575 billion in 
2008, up from $539 billion in 2007. By comparison, 8,300 U.S. banks saw 
loans outstanding decrease $31 billion last year, to $7.876 trillion 
from $7.907 trillion in 2007.
    Stephen Birkelbach joined the Community First Credit Union in 
Jacksonville, Fla., 3 years ago when he was shopping for a car. 
``Community First not only had the best rate,'' says Mr. Birkelbach, 
who at the time transferred over the accounts of his local carpet-
cleaning business. ``I was so impressed with the customer service and 
the up-front attitude I moved everything over to them.''
    Mr. Birkelbach financed a truck with the credit union a year later. 
Then he refinanced his mortgage in January. He says he couldn't find 
another financial institution that would match the 4.25 percent 
interest rate he got at his credit union.
    Like the rest of the financial universe, credit unions can't help 
feeling pinched, but they've maintained stability and--so far--aren't 
being propped up with Federal money. (Although there is a plan to 
support 28 special ``corporate'' or ``wholesale'' credit unions that 
provide financing and other services to smaller ``retail'' credit 
unions.)
    Only two retail credit unions have closed so far this year. Of the 
15 credit unions that were liquidated in 2008, nine were due to real-
estate problems, according to the National Credit Union Administration, 
the government agency that regulates federally insured credit unions.
    ``At this point the [credit union] industry is solid,'' says Karen 
Dorway, president and director of research for BauerFinancial, a firm 
that analyzes banks and credit unions.
    Credit unions have largely avoided the banking world's turmoil by 
sticking to their plain-vanilla business model: taking in deposits from 
owner-members and lending the money back out to them. And they're 
writing more loan checks than they have in years--still mainly for home 
and auto loans, but for more business loans, too.
    ``Credit unions have not changed their standards so if you could 
get a loan 5 years ago, you can get a similar loan today,'' says Daniel 
Penrod, industry analyst for the California and Nevada Credit Union 
Leagues.
Loan Activity on the Rise
    Loan growth has been robust--especially with first mortgages and 
used-auto loans. Last year's 7 percent growth in loans at credit unions 
was higher than the 2 percent growth seen in previous recessions, says 
Mike Schenk, senior economist for the Credit Union National 
Association, the industry trade association.
    ``We've been able to stay in the game,'' he says.
    But that doesn't mean credit unions are immune to the troubled 
economy. Loan delinquencies are up--especially in housing-bust areas of 
Nevada, California, Arizona and Florida--but they are still far from 
the levels seen at most banks.
    Nationwide, loan delinquencies for credit unions hit an estimated 
1.45 percent in January, double the 0.68 percent rate from 2006, but 
less than half the 2.93 percent national delinquency rate for banks.

    Here are few more things you may want to know:

    Joining: Credit unions require members to have something in common, 
such as a neighborhood, school, workplace or church. Larger credit 
unions offer a full menu of banking services, from checking accounts to 
mortgages. Smaller credit unions may have more limited services. Most 
credit unions will let you open a savings account with just $25; but 
only members can take out loans. Use the online finder at 
www.FindaCreditUnion.com.

    Deposit Insurance: The National Credit Union Administration is the 
Federal agency that regulates federally insured credit unions, which 
include all Federal credit unions and most State credit unions. The 
Federal insurance is through the National Credit Union Share Insurance 
Fund and the insurance limits are the same as at banks. As at banks, 
coverage is higher if the money is in different types of accounts, such 
as a regular share account and an individual retirement account.

    Do some research: Compare credit unions and banks in your area by 
reviewing ratings at Bankrate.com/brm/safesound/ss_home.asp and 
Bauerfinancial.com/btc_ratings.asp. BankRate's reports are free but 
Bauer charges, with prices starting at $10. Both rate banks and credit 
unions by looking at qualities like capital ratio, loan delinquency and 
liquidity.
                                 ______
                                 
                PREPARED STATEMENT OF STEPHEN J. VERDIER
  Senior Vice President and Director of Congressional Relations Group,
       on behalf of the Independent Community Bankers of America
                             March 19, 2009
    Chairman Johnson, Ranking Member Crapo, members of the 
Subcommittee, I am Stephen J. Verdier, the Senior Vice President, and 
Director of Congressional Relations Group for the Independent Community 
Bankers of America (ICBA). I am pleased to represent the ICBA and its 
5,000 community bank members atthis important hearing on ``Current 
Issues in Deposit Insurance.''
    ICBA commends the Committee for conducting a hearing on deposit 
insurance issues at this critical time in our history. The current 
crisis demands bold action, and we recommend the following:

    ICBA strongly believes that now is the time for Congress 
        and the FDIC to address the inequities between large and small 
        banks in the deposit insurance system.

      ICBA strongly believes Congress should require a systemic 
        risk premium be assessed against the ``too big to fail'' 
        institutions to compensate the taxpayers and the Federal 
        Deposit Insurance Corporation (FDIC) fund for the risk exposure 
        these companies represent because of their size and activities. 
        Part of the premium could also be used to pay for the cost of 
        improved regulation of the systemic risk institutions. The 
        superior coverage received by depositors, other liability 
        holders and even shareholders of ``too big to fail'' 
        institutions alone justifies the premium.

      The amount of assets a bank holds is a more accurate 
        gauge of an institution's risk to the FDIC than the amount of a 
        bank's deposits. Under the current system that assesses 
        domestic deposits, community banks pay approximately 30 percent 
        of FDIC premiums, although they hold about 20 percent of bank 
        assets. And while community banks fund themselves 85-95 percent 
        with domestic deposits, for banks with more than $10 billion in 
        assets the figure is 52 percent. Thus, while community banks 
        pay assessments on nearly their entire balance sheets, large 
        banks pay on only half. ICBA believes that it would be fairer 
        if the FDIC were to use assets minus tangible equity (to 
        encourage higher levels of tangible equity) as the assessment 
        base instead of domestic deposits. Congress should require this 
        change.

      Congress should also repeal a provision in the 2006 
        deposit insurance reform law that protects ``too big to fail'' 
        banks from being assessed fairly for deposit insurance.

    In response to the strains on the Deposit Insurance Fund 
        (DIF), the FDIC has proposed to more than double last year's 
        base assessment rate and also to impose a special assessment of 
        20 basis points due on September 30, 2009. ICBA opposes this 
        special assessment. When combined with the regular assessment 
        rate for 2009, the special assessment will be detrimental to 
        most community banks' earnings and capital and will adversely 
        affect their ability to lend and serve their communities.

      ICBA supports increasing the FDIC's standby line of 
        credit with Treasury, as provided in S. 541, the Depositor 
        Protection Act of 2009. According to FDIC Chairman Bair, the 
        increased borrowing authority under S. 541 would allow the FDIC 
        to reduce this special assessment to as much as one-half of the 
        proposed rate.

      ICBA appreciates Chairman Bair's commitment to a 
        reduction in the special assessment, if S. 541 becomes law. 
        Nevertheless, ICBA urges the FDIC to seek alternatives to the 
        special assessment, such as borrowing from Treasury or the 
        industry or issuing bonds, to temporarily fund the DIF, with 
        the industry repaying the amount borrowed, with interest. This 
        would keep needed capital within our communities for lending. 
        The DIF will still be industry-funded if the FDIC uses its 
        borrowing authority, but the industry would be able to spread 
        the cost of funding the DIF over time.

    ICBA supports provisions in H.R. 1106, the Helping Families 
        Save Their Homes Act, to make permanent the increase in deposit 
        insurance coverage from $100,000 to $250,000.

    ICBA urges Congress to make permanent the unlimited 
        coverage for transaction accounts, which is now temporarily 
        provided by the FDIC under its Temporary Liquidity Guarantee 
        Program. Both this program and the increase to $250,000 have 
        not only bolstered depositor confidence in FDIC insured 
        institutions, but they have helped community banks compete for 
        deposits against ``too big to fail'' banks and money market 
        mutual funds.

    ICBA supports a provision in H.R. 1106 to allow the FDIC to 
        ensure holding companies with significant non-bank assets pay 
        their fair share of any deficit in the FDIC's Temporary 
        Liquidity Guarantee Program.
Deposit Insurance is Fundamental to a Sound Economy
    Deposit insurance has been the stabilizing force of our nation's 
banking system for 75 years. It promotes public confidence by providing 
safe and secure depositories for both businesses and consumers. Some 85 
to 90 percent of community bank funding comes from domestic deposits. 
As a result, the Federal deposit insurance system also provides 
important protection to the funding base for community banks.
    A strong FDIC is a fundamental element of the American banking 
system and a sound economy. A strong FDIC gives the public confidence 
their deposits aresafe in the nation's 8,400 banks and savings 
associations. Unfortunately, there are inequities in the deposit 
insurance system that unfairly put community banks at a competitive 
disadvantage with respect to their larger competitors, particularly, 
the ``too big to fail'' banks.
Congress Should Address Inherit Inequities in the Deposit Insurance 
        System
    In the last twelve months, the Federal Government, faced with the 
most severe financial crisis since the Great Depression, has taken 
unprecedented measures to bolster a faltering financial services 
industry. While these actions were justifiable steps to protect the 
national economy, the past twelve months have exposed what community 
banks have always known to be true: the ``too big to fail'' banks enjoy 
a vastly superior form of protection from the Federal Government than 
the too-small-to-save community banks. The depositors of the ``too big 
to fail'' banks have unlimited deposit insurance coverage. They have no 
reason to fear a bank failure will diminish the amount of funds held in 
``too big to fail'' banks because the Federal Government will not allow 
those banks to close. The protection for the ``too big to fail'' banks 
extends to other liability holders and often their shareholders. Yet, 
the ``too big to fail'' banks pay nothing extra for this superior 
coverage. ICBA strongly believes now is the time for Congress and the 
FDIC to address the inequities between large and small banks in the 
deposit insurance system.
Systemic Risk Premium
    The government has dedicated more than $150 billion in taxpayer and 
FDIC funds to shore up the nine largest banks. ICBA strongly believes 
Congress should require a systemic risk premium be assessed against the 
``too big to fail'' institutions to compensate the taxpayers and the 
FDIC fund for the risk exposure these companies represent because of 
their size and activities. Part of the premium could also be used to 
pay for the cost of improved regulation of the systemic risk 
institutions. The superior coverage received by depositors, other 
liability holders and even shareholders alone justifies the premium. As 
part of this effort, Congress should also repeal a provision in the 
2006 deposit insurance reform law that protects these ``too big to 
fail'' banks from being assessed fairly for deposit insurance.
FDIC Assessment Base Must be Changed
    Currently, the FDIC assesses deposit insurance premiums against all 
domestic deposits in banks and thrifts. This assessment base unfairly 
burdens communitybanks by requiring community banks to pay a 
disproportionately high share of deposit insurance premiums.
    Bad assets, not deposits, cause bank failures, and all forms of 
liabilities, not just deposits, fund a bank's assets. The amount of 
assets that a bank holds is a more accurate gauge of an institution's 
risk to the FDIC than the amount of a bank's deposits. Under the 
current system that assesses domestic deposits, community banks pay 
approximately 30 percent of FDIC premiums, although they hold about 20 
percent of bank assets. And while community banks fund themselves 85-95 
percent with domestic deposits, for banks with more than $10 billion in 
assets the figure is 52 percent. Thus, while community banks pay 
assessments on nearly their entire balance sheets, large banks pay on 
only half.
    ICBA believes it would be fairer if the FDIC were to use assets 
minus tangible equity (to encourage higher levels of tangible equity) 
as the assessment base instead of domestic deposits. Changing the 
assessment base does not change the amount of revenue the FDIC will 
receive. It only changes how the premium assessments are distributed 
among FDIC institutions. Under the asset-oriented assessment base, 
community banks would bear their proportionate share, orabout 20 
percent of deposit insurance premiums rather than the current 30 
percent. If the assessment base were broadened, as urged by ICBA, the 
special assessment would be reduced to 12 basis points.
    In connection with the proposed special assessment, the FDIC has 
asked for comments on whether, for purposes of the special assessment 
only, the FDIC should use the asset-oriented assessment base. ICBA 
strongly believes the FDIC should use the asset-oriented assessment 
base for any special assessment and Congress should make the asset-
oriented assessment base a permanent part of the deposit insurance 
system for all assessments.
Special Assessment Issues and Borrowing Authority under S. 541, the 
        Depositor Protection Act of 2009
    The current severe recession has put pressure on the FDIC's Deposit 
Insurance Fund due to bank failure losses. The FDIC projects further 
losses could severely strain the FDIC's resources, potentially 
undermining public confidence in Federal deposit insurance. The FDIC 
has always been funded by the banking industry, and community banks are 
willing to do their part to recapitalize the DIF to safer levels. 
However, the FDIC must maintain a balance between recapitalizing the 
DIF and ensuring assessments charged to banks for deposit insurance do 
not reach counterproductive levels that would divert capital needed for 
lending to promote economic recovery in our communities.
    In response to the strains on the DIF, the FDIC has proposed to 
more than double last year's base FDIC assessment rate and also to 
impose a special assessment of 20 basis points due on September 30, 
2009. These assessments would increase the DIF reserves by $27 billion, 
with the special assessment bringing in about $15 billion by itself. 
ICBA opposes this special assessment. When combined with the regular 
assessment rate for 2009, the special assessment will be detrimental to 
most community bank's earnings and capital and will adversely affect 
their ability to lend and serve their communities. The FDIC itself 
estimates the 20-basis-point special assessment would reduce aggregate 
2009 pre-tax income for profitable banking institutions by 10 to 13 
percent, increase losses for non-profitable banks by 3 to 6 percent and 
reduce the industry's aggregate year-end capital approximately 0.7 
percent. A survey of ICBA members reveals this estimate is much too 
low. Thirty-two percent of community banks estimate the special 
assessment will consume 16-25 percent of their 2009 earnings; 17 
percent estimate it will consume 26-40 percent.
    Community banks are being unfairly penalized with this assessment. 
They did not participate in the risky practices engaged in by large 
Wall Street institutions that led to the economic crisis, yet they are 
being penalized by having to pay this onerous special assessment.
    ICBA urges the FDIC to seek alternatives to the special assessment, 
such as borrowing from Treasury or the industry or issuing bonds, to 
temporarily fund the DIF, with the industry repaying the amount 
borrowed, with interest. The DIF will still be industry-funded if the 
FDIC uses its borrowing authority, but the industry would be able to 
spread the cost of funding the DIF over time. In addition, the FDIC 
should seek to shift the cost of replenishing the DIF to those 
institutions responsible for the economic crisis and away from 
community banks.
    ICBA supports the Depositor Protection Act of 2009, S. 541 
introduced by Banking Committee Chairman Dodd, Senator Crapo and 
others. The bill would increase the FDIC's standby line of credit with 
the Treasury from $30 billion to $100 billion. S. 541 would also 
temporarily allow the FDIC to borrow up to $500 billion with the 
concurrence of the Federal Reserve and the Secretary of the Treasury, 
in consultation with the President. According to FDIC Chairman Bair, 
the increased borrowing authority under S. 541 would allow the FDIC to 
reduce this special assessment to as much as one-half of the proposed 
rate.
    ICBA appreciates Chairman Bair's commitment to a reduction in the 
special assessment, if S. 541 becomes law. We are also encouraged by 
reports that the FDIC may devote some fees received in connection with 
its Temporary Liquidity Guarantee Program to shoring up the DIF now, 
rather than waiting to transfer TLGP fees to the DIF at the end of the 
TLGP. However, we still believe it is in the best interest of our 
communities, if the FDIC were to find an alternative to the special 
assessment in order to keep as much capital in the community banking 
system for lending.
    ICBA also urges the FDIC to use the asset-oriented assessment base 
for all deposit insurance assessments, including any special 
assessment, for the reasons cited above.
Coverage Levels
ICBA Supports Making the $250,000 Coverage Level Permanent
    The Emergency Economic Stabilization Act temporarily increased 
deposit insurance coverage from $100,000 to $250,000 through December 
31, 2009. Community banks face stiff competition for deposits, the 
primary source of community bank funding. The additional coverage has 
not only bolstered depositor confidence in FDIC-insured institutions, 
but it has helped community banks compete for deposits against ``too 
big to fail'' banks and money market mutual funds. The additional 
coverage has helped community banks be a part of solution to the credit 
crisis caused in large part by the activities of larger financial 
institutions. ICBA supports provisions in H.R. 1106, the Helping 
Families Save Their Homes Act of 2009 to make the increase permanent.
ICBA Supports Covering All Amounts in Transaction Accounts Permanently
    As part of the FDIC's efforts to promote stability and liquidity in 
banks, the agency established an optional guarantee of all amounts 
above $250,000 in transaction accounts in FDIC-insured institutions 
under its Temporary Liquidity Guarantee Program (TLGP). The program 
provides a guarantee of all sums in non-interest bearing transactions 
accounts and very-low interest transactions accounts (interest at not 
more than 50 basis points per annum). More than 6,000 banks, including 
thousands of community banks, have chosen to participate in this 
program.
    The program, like the $250,000 insurance level, has been a useful 
tool for community banks competing with larger banks--including the 
``too big to fail'' banks--for commercial deposits.
    Participation in the program also frees up capital and resources 
used by community banks to purchase Treasuries and other securities for 
repurchase agreements that secure commercial and public deposits. 
Community banks can use the freed up resources to promote lending in 
their communities. ICBA urges Congress to include permanent unlimited 
coverage for non- and low-interest bearing transaction accounts in 
deposit insurance legislation.
ICBA Supports a Fairer Assessment Method under Systemic Risk Provisions
    H.R. 1106 addresses another issue ICBA has raised with respect to 
the FDIC's TLGP. The FDIC used its systemic risk authority to establish 
the TLGP. The net costs of any activity under the systemic risk 
authority must eventually be borne by all FDIC-insured banks and 
thrifts through an assessment based on the institutions' assets minus 
equity. The statute does not expressly authorize the FDIC to assess 
non-bank and non-thrift affiliates, including holding companies. The 
Debt Guarantee portion of the TLGP has been extended to holding 
companies because much of the bank debt is issued at the holding 
company level. However, should a special assessment be needed to make 
up for any deficit in the TLGP, the FDIC cannot levy an assessment 
against the non-bank assets of a holding company. H.R. 1106 would allow 
the FDIC to ensure holding companies with significant non-bank assets 
pay their fair share of any deficit in the TLGP. ICBA appreciates the 
support of the FDIC for this provision. We urge the Senate to include 
this change in any deposit insurance legislation.
Mandatory Rebates
    The letter of invitation asks us to address mandatory rebates in 
the FDIC deposit insurance system. The 2006 deposit insurance reform 
legislation requires the FDIC to refund one-half of all amounts in the 
DIF in excess of the amount needed to keep the DIF's reserve ratio at 
1.35 percent (and all of the excess over 1.50 percent). The legislation 
also gives the FDIC flexibility by allowing the FDIC to suspend a 
refund (i.e., rebate), if the FDIC finds there is a significant risk of 
loss to the fund within the next year. Since under the FDIC's 
restoration plan the DIF would not reach a 1.15 percent reserve ratio 
until 7 years from now, at the earliest, ICBA does not believe the 
rebate provisions are a near-term issue. At some later point, it could 
be appropriate for Congress to reexamine these provisions. We note the 
rebate provisions have never been implemented because the DIF has not 
been at the trigger levels since the 2006 legislation was adopted.
Conclusion
    Congress should address current inequities in the deposit insurance 
system that put community banks at a competitive disadvantage. Congress 
should adopt asystemic risk premium to compensate for the risk ``too 
big to fail'' banks create for taxpayers and the FDIC. Congress should 
require a fairer assessment base for deposit insurance by requiring 
assessments against bank assets minus tangible equity.
    In addition, the Senate should adopt the increase in borrowing 
authority provided to the FDIC by S. 541. This would allow the FDIC 
more flexibility to recapitalize the DIF and avoid a special 
assessment. The Senate should make permanent the increase in deposit 
insurance limits to $250,000 and make the unlimited guarantee of 
transactions accounts permanent. These increases in coverage have 
helped bolster depositor confidence and helped community banks compete 
with ``too big to fail'' banks and money market mutual funds. The 
Senate should also adopt the fairer method for assessing for deficits 
in the FDIC's TLGP found in H.R. 1106. These provisions in H.R. 1106 
will ensure holding companies with significant non-bank assets pay 
their fair share of any deficit.
    ICBA appreciates the opportunity to testify today, and looks 
forward to working with this Committee on these vital issues.
                                 ______
                                 
                 PREPARED STATEMENT OF DAVID J. WRIGHT
               CEO, Services Center Federal Credit Union,
     on behalf of The National Association of Federal Credit Unions
                             March 19, 2009
Introduction
    Good afternoon, Chairman Johnson, Ranking Member Crapo and Members 
of the Subcommittee. My name is David Wright and I am testifying today 
on behalf of the National Association of Federal Credit Unions (NAFCU). 
I serve as the CEO of Services Center Federal Credit Union, 
headquartered in Yankton, South Dakota. I have been CEO of Services 
Center FCU for the last 33 years. Services Center FCU is a low-income 
designated credit union operating in six counties. Four of the counties 
are in southeastern South Dakota and two are in northeastern Nebraska. 
This is a very rural part of the country. One of the counties has an 
average population of just 6 people per square mile. My credit union 
has some 6,200 members and assets of $37.5 million. Services Center FCU 
was selected as NAFCU's Credit Union of the year in 1990 and again in 
2008.
    I was selected as NAFCU's credit union professional of the year in 
1993 and have served on numerous committees for the association, 
including the NAFCU Awards Committee, Membership Committee and Regional 
Advisory Committee.
    NAFCU is the only national organization exclusively representing 
the interests of the nation's federally chartered credit unions. NAFCU-
member credit unions collectively account for approximately 65.4 
percent of the assets of all federally chartered credit unions. NAFCU 
and the entire credit union community appreciate the opportunity to 
participate in this discussion regarding deposit insurance issues for 
America's credit unions.
    Historically, credit unions have served a unique function in the 
delivery of necessary financial services to Americans. Established by 
an act of Congress in 1934, the Federal credit union system was 
created, and has been recognized, as a way to promote thrift and to 
make financial services available to all Americans, many of whom would 
otherwise have limited access to financial services. Congress 
established credit unions as an alternative to banks and to meet a 
precise public need-a niche that credit unions fill today for nearly 89 
million Americans. Every credit union is a cooperative institution 
organized ``for the purpose of promoting thrift among its members and 
creating a source of credit for provident or productive purposes.'' (12 
USC 1752(1)). While nearly 75 years have passed since the Federal 
Credit Union Act (FCUA) was signed into law, two fundamental principles 
regarding the operation of credit unions remain every bit as important 
today as in 1934:

    credit unions remain totally committed to providing their 
        members with efficient, low-cost, personal financial service; 
        and,

    credit unions continue to emphasize traditional cooperative 
        values such as democracy and volunteerism.

Credit unions are not banks. The nation's approximately 7,800 federally 
insured credit unions serve a different purpose and have a 
fundamentally different structure than banks. Credit unions exist 
solely for the purpose of providing financial services to their 
members, while banks aim to make a profit for a limited number of 
shareholders. As owners of cooperative financial institutions united by 
a common bond, all credit union members have an equal say in the 
operation of their credit union--``one member, one vote''--regardless 
of the dollar amount they have on account. These singular rights extend 
all the way from making basic operating decisions, to electing the 
board of directors--something unheard of among for-profit, stock-owned 
banks. Unlike their counterparts at banks and thrifts, Federal credit 
union directors generally serve without remuneration--a fact 
epitomizing the true ``volunteer spirit'' permeating the credit union 
community.
    Credit unions have grown steadily in membership and assets, but in 
relative terms, they make up a small portion of the financial services 
marketplace. Federally insured credit unions have approximately $813.4 
billion in assets as of year-end 2008. By contrast, Federal Deposit 
Insurance Corporation (FDIC) insured institutions held $13.9 trillion 
in assets and last year grew by an amount that exceeds the total assets 
of credit unions. The average size of a Federal credit union is $92.5 
million compared with $1.673 billion for banks. Over 3,200 credit 
unions have less than $10 million in assets. The credit union share of 
total household financial assets is also relatively small, just 1.4 
percent as of December 2008.
    Size has no bearing on a credit union's structure or adherence to 
the credit union philosophy of service to members and the community. 
While credit unions may have grown, their relative size is still small 
compared with banks. Even the world's largest credit union, with $36.4 
billion in assets, is dwarfed by the nation's biggest banks with 
trillions of dollars in assets.
    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.'' In fact, Congress acknowledged this 
point when it adopted the Credit Union Membership Access Act (CUMAA--
P.L. 105-219) a decade ago. In the ``findings'' section of that law, 
Congress declared that, ``The American credit union movement began as a 
cooperative effort to serve the productive and provident credit needs 
of individuals of modest means . . . [and it] continue[s] to fulfill 
this public purpose.''
    Credit unions continue to play a very important role in the lives 
of millions of Americans from all walks of life. As consolidation of 
the commercial banking sector has progressed with the resulting 
depersonalization in the delivery of financial services by banks, the 
emphasis in consumers' minds has begun to shift not only to services 
provided but also--more importantly--to quality and cost. Credit unions 
are second to none in providing their members with quality personal 
financial service at the lowest possible cost.
    While the lending practices of many other financial institutions 
led to the nation's subprime mortgage debacle, data collected under the 
Home Mortgage Disclosure Act (HMDA) illustrates the value of credit 
unions to their communities. The difference between credit unions and 
banks is highlighted when one examines the 2007 HMDA data for loans to 
minority applicants with household incomes under $40,000. According to 
the 2007 HMDA data, banks have a significantly higher percentage of 
mortgage purchase loans (20.8 percent) charging at least 3 percent 
higher than the comparable Treasury yield for minority applicants with 
household income under $40,000. Credit unions, on the other hand, had 
only 4.4 percent of their loans in that category.
The National Credit Union Share Insurance Fund (NCUSIF)
    I am pleased to share with the Subcommittee NAFCU's assessment of 
how the National Credit Union Share Insurance Fund (NCUSIF) is 
structured, and our thoughts on current issues in deposit insurance.
    As you may know, the primary reason credit unions came together in 
1967 and formed NAFCU was to lobby Congress for the establishment of a 
Federal insurance fund for credit unions--a goal that was realized in 
1970. Like the credit unions whose accounts it insures, the NCUSIF is 
itself cooperative in nature. Unlike FDIC insurance, which was 
initially funded with taxpayer dollars from the United States Treasury 
as seed-money, every dollar that has gone into the NCUSIF since its 
inception has come solely from the credit unions it insures.
    The NCUSIF was originally structured in the same manner as the 
FDIC, i.e., the source of funding was based on premium collected from 
insured institutions. In 1985 the amount of money at NCUSIF began to 
dwindle because of mounting losses, low earnings on investments and 
extensive growth in credit union insured savings. Credit unions 
realized that NCUSIF needed to be recapitalized and in 1985 every 
insured credit union made a deposit of 1 percent of its members insured 
savings to NCUSIF. By making this deposit, the mutual or cooperative 
structure of NCUSIF began. As of January 2009 NCUSIF has $7.5 billion 
in total assets with a total equity of $7.3 billion. As a percentage of 
total insured savings NCUSIF has an equity ratio of 1.28 percent.
    Credit unions insured by the NCUSIF are required by statute to 
maintain a deposit equal to 1 percent of its insured shares in the 
insurance fund (12 USC 1782(c)(1)(A)(i)). This ``insurance deposit'' is 
adjusted annually in the case of a credit union with total assets of 
not more than $50 million, and semi-annually for those credit unions 
with total assets of $50 million or more (12 USC 1782(c)(1)(A)(iii)). 
The National Credit Union Administration (NCUA) Board has a statutory 
obligation to establish a ``normal operating level'' for the fund which 
``shall not be less than 1.2 percent and not more than 1.5 percent'' 
(12 USC 1782(h)(4)). If the equity level of the NCUSIF is in the 1.2 
percent to 1.3 percent range, the NCUA Board may assess a premium in 
order to restore the equity level back to the normal operating level. 
If it falls below 1.2 percent, the statutory floor, the NCUA Board is 
required to assess an insurance premium to restore the fund to a 1.2 
percent equity level (12 USC 1782(c)(2)(C)).
    While the NCUSIF is now fundamentally structured differently than 
FDIC insurance, we believe it is imperative that there be parity in 
coverage levels between the two funds. Failure to do so could create 
public confusion and concern over the safety of their deposits and 
destabilize the current system. We believe that an important aspect of 
this parity has to include giving the NCUA the authority it needs to 
take actions to maintain the stability of the fund.
Current Challenges in Deposit Insurance
    As part of the Emergency Economic Stabilization Act of 2008, 
Congress increased the coverage on FDIC and NCUSIF insured accounts to 
$250,000 through December 31, 2009. This change serves to maintain 
public confidence in insured depository institutions in the current 
economic environment. This temporary increase prohibited the NCUA from 
using this higher amount to calculate any insurance premiums. NAFCU 
urges the Senate to enact legislation to permanently extend this 
increase. Failure to do so could lead to decreased confidence in 
financial institutions and lead people to withdraw funds, creating 
additional challenges for financial institutions.
    While credit unions have faired better than most financial 
institutions in these turbulent economic times, many have been 
impacted, through no fault of their own, by the current economic 
environment.
    In particular, the corporate credit union system has felt the 
biggest impact. In examining the corporates, NCUA notes that, ``Nearly 
80 percent of the securities held in the corporate credit union system 
remain highly rated, but a portion of the securities has been 
downgraded below investment grade due to underlying collateral 
performance.'' The expected losses from these investments by corporate 
credit unions are approximately $4.7 billion. It is with these facts in 
mind that on January 28, 2009, the NCUA Board approved a series of 
actions regarding the corporate credit union system.
    Among the actions taken, NCUA:

    Guaranteed the uninsured shares of ``all'' corporate credit 
        unions through February 2009 and established a voluntary 
        guarantee program for the uninsured shares of 23 corporate 
        credit unions through December 31, 2010 (the guarantee will 
        cover all shares, but does not include paid in capital and 
        membership capital accounts);

    Issued a $1 billion capital note to U.S. Central Federal 
        Credit Union;

    Issued an Advance Notice of Proposed Rulemaking (ANPR) on 
        restructuring the corporate credit union system; and,

    Will be declaring a premium assessment to restore the 
        NCUSIF equity ratio to 1.30 percent, to be collected in late 
        2009.

The resulting impact on NCUSIF will be approximately $4.7 billion, 
dropping the NCUSIF's equity ratio from the current 1.28 percent equity 
ratio (as of January 2009) to an estimated 0.49 percent. Because credit 
unions follow GAAP accounting there was an immediate impairment to the 
1 percent deposit. FICUs had to recognize this impairment by setting 
aside enough money in a contingency liability account to bring the 
deposit at NCUSIF back to 1 percent level. As previously noted, the 
FCUA requires NCUA to assess a premium when the fund's equity ratio 
drops below 1.2 percent. That premium assessment must occur before the 
end of 2009 and NCUA intends to bring the NCUSIF equity ratio up to 
1.30 percent by assessing a premium of 0.3 percent later this year. As 
part of the same actions on January 28th, NCUA also announced a 
systematic review of the $64 billion in mortgage backed securities held 
by corporate credit unions in order to refine the ultimate liability 
and subsequent charge to each credit union. That review was recently 
completed, but results have not yet been made public.
    The consequence is that over 5,350 federally insured credit unions 
(approximately 68.6 percent of all FICUs) will be in the ``red'' in 
2009. Approximately 203 FICUs will be downgraded in PCA (Prompt 
Corrective Action) levels, which could lead to further NCUA actions to 
help stabilize those institutions.
    NAFCU's analysis of 4th quarter call report data on credit unions 
indicates that, absent legislation, FICU member services will be 
adversely impacted in 2009. Such adverse impacts could include 
increased fees, higher rates, lower dividends, and/or decreased 
lending. In fact, as FICUs will suffer a reduction in $4.7 billion in 
capital in 2009, the impact on consumer and business lending alone 
(based on NCUA estimates that credit unions make approximately $7 worth 
of loans for every $1 in capital) could total $33B, further adversely 
impacting the economy as the Nation strives to rebound from its 
economic malaise.
Proposed modifications to the NCUSIF
    NAFCU urges the Senate to enact an amendment that would amend the 
FCUA to establish a restoration plan period for the NCUSIF. This would 
provide the NCUA Board with the authority to replenish the NCUSIF by 
restoring the equity ratio through a restoration plan which is 
consistent with the Federal Deposit Insurance Act and could extend the 
replenishment over a period of up to 8 years versus the current 1-year 
timeframe. H.R. 1106 included such an amendment that would extend the 
repayment period over 5 years. Such an amendment would allow NCUA to 
assess premiums over 8 years to restore the fund from an equity ratio 
of 1.0 percent to 1.3 percent. Because credit unions must follow GAAP, 
and it is an impairment, restoration of the fund to the 1.0 percent 
deposit must, however, still occur in the same year.
    NAFCU also strongly urges the Senate to provide the NCUSIF an 
increase in borrowing authority from the Treasury Department. This 
change is long due since the current level of $100 million was 
established in 1971, and has not been modified for the growth of credit 
unions and their member deposits over time. H.R. 1106 would increase 
the borrowing authority to $6B.
    Furthermore, NAFCU encourages the Senate to provide systemic risk 
authority to NCUA, on a similar basis to that provided to FDIC. This 
would be a very important step to address systemic emergencies when the 
authority provided under Section 208 of the FCUA is inadequate. The 
FDIC has pointed out specific provisions in its Act to provide 
unlimited deposit insurance coverage for non-interest bearing 
transaction accounts. Providing NCUA with parallel authority to the 
FDIC to address systemic risk under extreme circumstances is an 
important step to provide consumer confidence in these very challenging 
economic times.
    NAFCU believes that the NCUA and Congress should work to find 
additional ways to help stabilize the corporate credit union system 
outside of using the NCUSIF. One such approach could be to use the 
Central Liquidity Facility (CLF) for credit unions. Established by the 
FCUA and funded by Congress, the CLF provides loans to natural-person 
credit unions to meet their liquidity needs in turbulent times. We 
believe some changes to the FCUA to allow the CLF to help the corporate 
credit union system could help address the current situation, and 
provide relief from the current pressure NCUA's actions have had on the 
NCUSIF. In particular, NAFCU supports an amendment to the FCUA which 
would allow the NCUA to use funds from the CLF directly to help the 
liquidity and capital needs of all credit unions, including corporate 
credit unions. This change, if coupled with some form of flexibility on 
OTTI accounting, would go a long way to helping credit unions. We would 
welcome the opportunity to work with the Committee to address this 
issue. Some suggested language to accomplish this is outlined below.
Proposed Amendments to the Federal Credit Union Act (12 U.S.C. 
        Sec. Sec.  1751-1795)
Section 1795
    The Congress finds that the establishment of a National Credit 
Union Central Liquidity Facility is needed to improve general financial 
stability by meeting the liquidity and capital  needs of credit unions, 
and thereby encourage savings, support consumer and mortgage lending, 
and provide basic financial resources to all segments of the economy.
Section 1795a
    (1) ``liquidity needs'' means the needs of credit unions primarily 
serving natural persons for--
    (3) . . . Reserves shall not be considered as part of surplus;
    (4) ``member'' means a Regular or an Agent member of the Facility; 
and 
    (5) ``capital needs'' means cash available necessary to meet the 
needs of credit unions--
      (A) to increase net worth or capital; and
      (B) to stabilize the credit union system, as determined by the 
Board.
Section 1795c:
    Membership.--(a) A credit union primarily serving natural persons 
may be a Regular member . . . ''
Section 1795e
    Extension of Credit Provision of funds.

    (a)(1) A member may apply for an extension of credit from the 
Facility to meet its liquidity needs. The Board shall approve or deny 
any such application within five working days after receiving it. The 
Board shall not approve an application for credit the intent of which 
is to expand credit union portfolios. The Board may advance funds to 
the member on terms and conditions prescribed by the Board after giving 
due consideration to creditworthiness.
      (2) A member may apply for the advancement of funds by the 
Facility to meet its capital needs under such terms and conditions as 
the Board shall prescribe to allow the funds to be categorized as net 
worth or capital. 
Additional Section of the Legislation
Recoupment.
    Upon the expiration of the 5-year period beginning upon the date of 
the enactment of this Act, the National Credit Union Administration 
Board shall:

  (a)  submit a report to Congress on the utilization of the authority 
        conveyed by Section 1795e(a)(2) of the Federal Credit Union 
        Act; and
  (b)  establish a plan under Board regulations implementing this 
        section, to recoup, over a period of time, necessary amounts to 
        ensure that Section 1795e(a)(2) does not add to the deficit or 
        national debt.
Conclusion
    In conclusion, NAFCU continues to support an independent NCUSIF. 
Furthermore, we believe Congress must make the temporary increase in 
deposit insurance coverage to $250,000 permanent. Actions by the NCUA 
to help stabilize the corporate credit union system using the NCUSIF 
threaten to put a strain on natural-person credit unions. We believe 
legislative relief in the form of extending the repayment time, 
increasing borrowing authority for the NCUSIF and modification of the 
FCUA as it relates to the CLF are all steps that will help the 
continued stability of the NCUSIF. Thank you for the opportunity to 
appear before the Subcommittee today, I welcome any questions that you 
may have.
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