National Consumer Cooperative Bank: Oversight Adequate But Federal Loan
Repayment Needs Monitoring (Letter Report, 02/24/95, GAO/GGD-95-63).

Congress created the National Consumer Cooperative Bank to provide
financial and technical assistance to cooperatives to increase their
contribution to the nation's economy.  Although the Farm Credit
Administration (FCA) examines the Bank, which holds about $536 million
in assets, Congress did not assign regulatory or enforcement powers over
the Bank to FCA or any federal financial regulator.  The Treasury
Department holds $183 million in debt that the Bank must repay by 2020.
This report examines (1) the ability of the present oversight
arrangement to effectively monitor the Bank's safety and soundness and
(2) the Bank's obligation to repay the Treasury debt.

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  GGD-95-63
     TITLE:  National Consumer Cooperative Bank: Oversight Adequate But 
             Federal Loan Repayment Needs Monitoring
      DATE:  02/24/95
   SUBJECT:  Fiscal policies
             Lending institutions
             Bank management
             Financial management
             Debt
             Loan repayments
             Bank examination
             Banking regulation
             Farm credit banks
IDENTIFIER:  Farm Credit System
             Savings Association Insurance Fund
             SAIF
             
******************************************************************
** This file contains an ASCII representation of the text of a  **
** GAO report.  Delineations within the text indicating chapter **
** titles, headings, and bullets are preserved.  Major          **
** divisions and subdivisions of the text, such as Chapters,    **
** Sections, and Appendixes, are identified by double and       **
** single lines.  The numbers on the right end of these lines   **
** indicate the position of each of the subsections in the      **
** document outline.  These numbers do NOT correspond with the  **
** page numbers of the printed product.                         **
**                                                              **
** No attempt has been made to display graphic images, although **
** figure captions are reproduced.  Tables are included, but    **
** may not resemble those in the printed version.               **
**                                                              **
** Please see the PDF (Portable Document Format) file, when     **
** available, for a complete electronic file of the printed     **
** document's contents.                                         **
**                                                              **
** A printed copy of this report may be obtained from the GAO   **
** Document Distribution Center.  For further details, please   **
** send an e-mail message to:                                   **
**                                                              **
**                                            **
**                                                              **
** with the message 'info' in the body.                         **
******************************************************************


Cover
================================================================ COVER


Report to Congressional Requesters

February 1995

NATIONAL CONSUMER COOPERATIVE BANK
- OVERSIGHT ADEQUATE BUT FEDERAL
LOAN REPAYMENT NEEDS MONITORING

GAO/GGD-95-63

National Consumer Cooperative Bank

(233411)


Abbreviations
=============================================================== ABBREV

  CAMEL - capital adequacy, asset quality, management, earnings, and
     liquidity management
  FCA - Farm Credit Administration
  GSE - government-sponsored enterprise
  NCB - National Cooperative Bank
  NCBSB - National Cooperative Bank Savings Bank
  OTS - Office of Thrift Supervision
  SAIF - Savings Association Insurance Fund

Letter
=============================================================== LETTER


B-258190

February 24, 1995

The Honorable Alfonse M.  D'Amato
Chairman, Committee on Banking,
 Housing, and Urban Affairs
United States Senate

The Honorable Marge Roukema
Chairwoman, Subcommittee on Financial
 Institutions and Consumer Credit
Committee on Banking and Financial Services
House of Representatives

The past chairmen of your committee and subcommittee asked us to
determine if the National Consumer Cooperative Bank's (NCB)\1 safety
and soundness is effectively monitored by the present oversight
arrangement.  Congress created NCB in 1978 to provide financial and
technical assistance to cooperatives to increase their contribution
to the nation's economy.  The Farm Credit Administration (FCA)
examines this approximately $536 million asset institution; however,
Congress did not assign regulatory or enforcement powers over NCB to
FCA or any federal financial regulator.  The U.S.  Department of the
Treasury holds approximately $183 million in NCB debt that NCB must
repay no later than October 31, 2020. 

This report addresses the adequacy of federal oversight for
monitoring NCB's safety and soundness and NCB's obligation to repay
the Treasury debt.  We are making recommendations to Congress to
ensure better monitoring of the government's financial interest. 


--------------------
\1 In November 1984, the National Consumer Cooperative Bank adopted
"National Cooperative Bank" as a trade name, although its formal name
has never been changed. 


   RESULTS IN BRIEF
------------------------------------------------------------ Letter :1

Although NCB was chartered by Congress, it is a private,
cooperatively owned financial institution with limited ties to the
government.  Despite its name, NCB is not a true bank because it does
not accept insured deposits.  While NCB is examined by FCA, an
independent federal agency that is overseen by Congress, its primary
discipline comes from private sector lenders, from whom NCB borrows
most of its funds.  The government does not guarantee any obligations
incurred by NCB.  In addition, it appears that NCB's creditors do not
believe that the government would intervene if NCB became financially
stressed.  In the absence of insured deposits or an explicit or
implicit federal guarantee, we do not see any need for additional
regulatory oversight because NCB's safety and soundness appear to be
effectively monitored by the existing combination of federal
examination and market discipline. 

While NCB is a private institution, as defined above, it does have a
direct financial link to the government--the part of its debt held by
Treasury.  Should NCB fail, the government's direct exposure to loss
as of December 31, 1993, was about $183 million in NCB's debt held by
Treasury and any interest owed on that debt.  NCB is required to pay
interest semiannually.  The law requires NCB to maintain a schedule
to ensure repayment of the principal amount of the debt no later than
October 31, 2020.  NCB adopted a plan in February 1993 to accumulate
a portion of the funds needed to repay the debt.  During the course
of our review, NCB adopted a plan to prepare for retiring the total
principal amount no later than October 31, 2020. 

Treasury is not required by law to approve or monitor NCB's repayment
plan.  However, we believe it would be appropriate for the law to be
amended to require that Treasury approve NCB's repayment plan and,
through FCA, monitor NCB's performance against the plan.  In our
opinion, Treasury's involvement would help ensure that NCB maintains
the repayment schedule, thus meeting the requirements of its debtor
relationship with Treasury and better protecting the taxpayers'
interest. 


   BACKGROUND
------------------------------------------------------------ Letter :2

NCB's mission is to support eligible cooperatives with credit and
technical assistance and encourage broad-based ownership, control,
and participation in NCB.  In general, cooperatives eligible for NCB
loans and services are organizations operating on a cooperative,
not-for-profit basis to produce or furnish goods, services, or
facilities primarily for the benefit of their member-stockholders who
are the ultimate consumers.\2

Under the 1978 National Consumer Cooperative Bank Act, NCB was
established as a mixed-ownership government corporation and
"instrumentality of the United States." NCB received initial federal
funding through Treasury purchases of shares of its class A stock. 
In 1981, Congress converted NCB from an instrumentality of the United
States to a federally chartered, private financial institution that
is owned and controlled by its cooperative stockholders.  The 1981
amendments to the act provided that all Treasury-held stock be
exchanged for NCB class A notes.  The act prohibited Treasury from
purchasing any class A stock issued by NCB after the exchange
occurred on December 31, 1981.  Treasury now holds approximately $183
million in class A notes, which must be repaid no later than October
31, 2020. 

In addition to these public funds, NCB raises funds from private
lenders; its major creditors are banks and insurance companies.  NCB
uses these funds and funds from other liabilities, combined with
members' equity (retained earnings and members' stock), to make loans
and provide services to eligible cooperatives.  The act requires all
borrowers to own not less than 1 percent of the face amount of their
loans in class B stock when the loan is made.  It has been NCB's
practice to guarantee that it will redeem the borrowers' stock at par
value when the loan is repaid.  It is through this required stock
purchase that borrowers become member-stockholders in NCB.\3 NCB's
total common stock and retained earnings comprised its core capital
of 20 percent as of December 31, 1993. 

The business activities of NCB have diversified since its creation. 
Initially, NCB served cooperatives in retail food, sporting goods and
other industries, and housing cooperatives.  Today, NCB serves
community health centers, health maintenance organizations, and
employee stock ownership plans as well as worker-owned cooperatives
in manufacturing, retail, and service industries.  In addition, NCB
serves retailer-owned wholesale food and hardware cooperatives. 
NCB's transactions range from making a simple loan to a quilting
cooperative in rural Alabama to securitizing assets\4 to improve
liquidity for cooperatives. 

NCB is governed by a 15-member board of directors.  Twelve members
are elected by the stockholders, who are borrowers or organizations
controlled by eligible borrowers.  Three members are appointed by the
president of the United States, with the advice and consent of the
U.S.  Senate.  Of these three members, the act requires that small
business proprietors, eligible low-income borrowers, and the federal
government be represented.  The government position on the Board has
been vacant since 1990. 

The act, as amended in 1981, provides for the creation of a nonprofit
affiliate of NCB that does not have capital stock.  This affiliate,
the NCB Development Corporation, specializes in lending to low-income
and newly established cooperatives and also provides loans and
technical support to established cooperative enterprises.  The
Development Corporation's assets are not included on NCB's
consolidated financial statements.  As of December 31, 1993, the
Development Corporation's fund balance was over $56 million, which
was derived from about $25 million in government appropriations, $13
million from NCB, and about $18 million in retained earnings.  Its
nine-member board includes six NCB directors who elect three outside
directors. 

Since 1984, NCB has acquired a federally insured savings bank and
created six subsidiaries to help serve its customers.  The NCB
Savings Bank (NCBSB) had approximately $76 million in assets at
December 31, 1993.  NCBSB is examined and regulated by the Office of
Thrift Supervision (OTS).  Deposits of up to $100,000 at the savings
bank, like those of other thrift institutions, are insured by the
Savings Association Insurance Fund (SAIF), which is backed by the
full faith and credit of the U.S.  government.  If NCBSB were to
fail, SAIF would be responsible for repaying insured depositors. 

The subsidiaries perform services for cooperatives, such as
investment management.  See appendix I for a list of NCB subsidiaries
and affiliates.  As shown in table 1, the consolidated assets of NCB,
its subsidiaries, and NCBSB totaled approximately $536 million at
December 31, 1993. 



                                Table 1
                
                  Selected Financial Data for NCB, Its
                Subsidiaries, and NCBSB, as of December
                                31, 1993

Category                                                        Amount
--------------------------------------------------------------  ------
Assets
----------------------------------------------------------------------
Cash and cash equivalents                                       $31,30
                                                                 0,314

Investment securities
----------------------------------------------------------------------
Available-for-sale                                              26,406
                                                                  ,171
Held-to-maturity                                                3,380,
                                                                   698
Loans and lease financing                                       417,43
                                                                 8,593
Loans held for sale                                             40,274
                                                                  ,829
Less:allowance for loan                                         (12,30
 and other assets                                               9,359)
Excess servicing fees receivable                                29,275
 and other assets                                                 ,730
======================================================================
Total assets                                                    $535,7
                                                                66,976

Liabilities and Members' Equity Liabilities
----------------------------------------------------------------------
Short-term borrowings                                           $31,54
                                                                 1,577
Long-term debt                                                  130,35
                                                                 4,889
Other borrowings                                                2,040,
                                                                   406
Patronage dividends payable in cash                             3,147,
                                                                   860
Other liabilities                                               75,653
                                                                  ,929
Subordinated class A notes                                      182,98
                                                                 9,162
======================================================================
Total liabilities                                               $425,7
                                                                27,823

Members' Equity
----------------------------------------------------------------------
Common stock                                                    $80,24
                                                                 5,148

Retained earnings
----------------------------------------------------------------------
Allocated                                                       12,844
                                                                  ,968
Unallocated                                                     16,949
                                                                  ,037
======================================================================
Total members' equity (core                                     $110,0
 members' equity                                                39,153
======================================================================
Total liabilities and                                           $535,7
 members' equity                                                66,976
----------------------------------------------------------------------
Source:  NCB consolidated financial statement, 1993 annual report. 

NCB acquired NCBSB to help fulfill its mission of providing credit to
cooperatives.  According to NCB's application, its primary reasons
for acquiring NCBSB were to have an institution that could solicit
nontransactional deposits from its cooperative members,\5 originate
loans to cooperative borrowers, and buy portions of NCB loans using
the NCB-attracted deposits as the funding source.  The act authorizes
NCB to accept certificates of deposit and pay interest on them; but
NCB officials said that they could not attract large deposits (e.g.,
in amounts of $10,000 or more) without federal insurance. 

In the past, we provided two legal opinions on NCB matters at the
request of Congress.  In a 1982 legal opinion, we determined that
NCB's conflict of interest policy met the statutory requirements and
that a specific cooperative was an eligible NCB customer.\6 In 1986,
we opined that NCB was authorized to form subsidiaries and invest in
affiliates.\7 We also issued a report\8 on NCB soon after it was
converted to a federally chartered, private financial institution
owned by its cooperative stockholders. 


--------------------
\2 The National Consumer Cooperative Bank Act sets out additional
criteria.  For example, an eligible cooperative must make membership
available on a voluntary basis without discrimination.  It must
restrict voting control to members on a one-person, one-vote basis. 
The act excludes certain cooperatives, such as credit unions
(although certain credit unions may receive technical assistance),
mutual savings banks, and mutual savings and loan institutions. 
Except under certain circumstances, the act also excludes
cooperatives eligible for credit from the Farm Credit System banks
for cooperatives, the Rural Electrification Administration, the Rural
Telephone Bank, and others. 

\3 A similar practice in the Farm Credit System led Congress, in
1987, to provide statutory protection for such stock to existing
stockholders and to expressly require that borrower stock issued in
the future be at risk.  There is currently very little remaining
protected stock in the Farm Credit System.  We recently issued two
reports on the System and its regulator.  See Farm Credit System: 
Farm Credit Administration Effectively Addresses Identified Problems
(GAO/GGD-94-14, Jan.  7, 1994) and Farm Credit System:  Repayment of
Federal Assistance and Competitive Position (GAO/GGD-94-39, Mar.  10,
1994). 

\4 Securitizing assets is the process of bundling similar types of
loans and creating a security, which is sold in the securities
markets. 

\5 Nontransactional deposits involve limited banking activity, such
as certificates of deposit, for a fixed number of days or years. 
Such deposits are in contrast to a checking account where deposits
and withdrawals are made often. 

\6 Letter of the Comptroller General, GAO, to the Chairman, Committee
on Banking, Finance and Urban Affairs, House of Representatives,
December 16, 1982, (B-200951). 

\7 Letter of the Comptroller General, GAO, to the Chairman, Committee
on Banking, Finance and Urban Affairs, House of Representatives,
October 10, 1986, (B-219801). 

\8 See The National Consumer Cooperative Bank:  An Institution In
Transition (GAO/RCED-84-75, Dec.  15, 1983). 


   OBJECTIVES, SCOPE, AND
   METHODOLOGY
------------------------------------------------------------ Letter :3

The primary objective of our review was to determine if the financial
safety and soundness of NCB is effectively monitored by the present
oversight arrangement.  In addition, we wanted to determine the
extent of any potential losses to the government if NCB were to fail. 
Our work focused on NCB, including its relationship with NCBSB. 

In the course of our work, we analyzed the National Consumer
Cooperative Bank Act to determine NCB's mission and operational
requirements and requirements related to its Treasury debt.  We
analyzed the statutory provisions applicable to safety and soundness. 
We reviewed FCA's examination reports and related documents on NCB
for 1990 through 1994 to determine the key safety and soundness and
other issues FCA assessed.  We also analyzed the deficiencies or
problems examiners identified.  We reviewed FCA, NCB, and other
organizations' relevant documents to determine NCB's responses to
FCA's findings. 

We compared the scope and results of FCA's examinations with issues
that we have found, in previous work, to be important to the safety
and soundness of financial institutions.  In making this comparison,
we looked for any constraints FCA examiners might have had in
identifying or addressing NCB problems.  We also asked FCA
examination officials about their experiences and opinions regarding
any such constraints. 

We reviewed OTS examination reports and other documents on NCBSB, and
we also reviewed OTS reports for 1990 through 1994 on NCB as the
savings bank's holding company.  We focused on any transactions
between NCBSB and NCB, documented and analyzed any safety and
soundness deficiencies examiners identified, and traced both
institutions' responses and OTS' and FCA's follow-up. 

To form our opinion on the adequacy of the government's monitoring of
NCB's safety and soundness, we compared the results of our analyses
to the safety and soundness provisions of the act, FCA's own
standards, and the characteristics of lax financial institution
oversight that we had identified in previous work.  We modified these
criteria to reflect the fact that FCA does not have regulatory or
enforcement authority over NCB.  We considered whether FCA called for
NCB to address examiner-identified deficiencies or problems
documented in each examination report and whether FCA followed up
until these issues were corrected.  We met with NCB, FCA, OTS, and
Treasury officials to discuss our work and solicit their opinions
about the adequacy of federal oversight of NCB. 

To assess the discipline imposed by the private sector lenders, we
analyzed opinions of NCB's creditworthiness issued by credit rating
firms and the performance requirements imposed by NCB's major private
creditors.  We compared our findings to the performance requirements
of selected federal regulators of financial institutions. 

To identify the extent of the government's exposure to financial
loss, we reviewed the Treasury-NCB financing agreement, notes, and
applicable law.  We compared NCB's credit ratings and the
characteristics of its financial relationship to the government with
those of other business entities with government ties. 

We did our work between December 1993 and September 1994 at the NCB
headquarters in Washington, D.C., and at the FCA headquarters in
McLean, VA.  Our work was done in accordance with generally accepted
government auditing standards. 

We obtained written comments on a draft of this report from NCB, FCA,
and Treasury.  We incorporated these comments in the text where
appropriate and summarized them on pages 24 and 25 of this report. 
In addition, the full text of each entity's comments and our
responses are provided in appendixes II through IV. 


   NCB HAS FEW TIES TO THE
   GOVERNMENT
------------------------------------------------------------ Letter :4

One important reason that the government regulates financial
institutions is to help stabilize the nation's financial system.  A
second and related reason is to protect depositors whose accounts it
insures and to protect the government deposit insurance funds from
large losses.  Neither of these reasons apply to NCB because it is a
comparatively small institution that does not have insured
deposits.\9

The government also regulates certain financial institutions, e.g.,
certain government-sponsored enterprises (GSE), when the market
perceives that the government stands behind their obligations.  These
GSEs expose the government to the potential for large losses.\10
Because GSEs have congressional charters and strong financial ties to
the government, investors perceive that GSE debt has an implicit
government guarantee.  Although NCB is a federally chartered, private
institution that is cooperatively owned by its stockholders, it has
much weaker financial links to the government.  It appears NCB's
creditors do not believe that the government will intervene if the
bank becomes financially stressed.  Thus, because NCB is a small
institution that does not accept insured deposits, and the
government's potential loss due to NCB's outstanding debt to the
Treasury is limited to $183 million, the reasons why the government
regulates financial institutions do not apply to NCB. 

Congress chartered NCB to help fulfill the financial and technical
assistance needs of a special segment of the economy--cooperatives. 
Congress found a lack of access to adequate credit and a lack of
technical assistance hampered consumers' and other self-help
cooperatives' formation and growth.  The reasons Congress established
NCB are similar to its reasons for establishing GSEs.  Congress
chartered GSEs to help fulfill the credit needs of certain sectors of
the economy, and their charters limit each GSEs' activities.  For
example, the Farm Credit System exists to facilitate the flow of
funds to the agricultural sector.  Similarly, NCB is limited to
providing credit to cooperatives. 

Other than its charter, NCB's link to the government is financial. 
Congress provided funds to establish NCB, and it continues to support
NCB by allowing Treasury to hold its debt until 2020.  When Congress
privatized NCB in 1981, it required that all outstanding Treasury
stock in NCB be converted to subordinated debt.\11 The act prohibited
Treasury from buying any NCB stock in the future.  Further, as we
discuss later, Congress required repayment of the debt by October 31,
2020.  At the same time, the government declared that it does not
guarantee obligations incurred by NCB. 


--------------------
\9 NCBSB has deposits that are insured by SAIF.  However, NCBSB is
regulated by OTS, which has comprehensive regulatory and enforcement
powers. 

\10 The largest GSEs and the estimated assets they control in fiscal
year 1995 are:  the Federal National Mortgage Association, $863
billion; the Federal Home Loan Mortgage Corporation, $617 billion;
the Federal Home Loan Bank System, $172 billion; the Farm Credit
System, $60 billion; and the Student Loan Marketing Association, $49
billion.  NCB is not identified by the Office of Management and
Budget or by us as a GSE.  See Budget Issues:  Profiles of
Government-Sponsored Enterprises (GAO/AFMD-91-17, Feb.  1991).  In
addition, the Congressional Budget Office has cited NCB as an example
of Congress' subsidizing an entity's activities without giving it
federal grants or the legal characteristics of a GSE that would imply
a federal guarantee of its debt securities.  See An Analysis of the
Report of the Commission to Promote Investment in America's
Infrastructure, CBO, February 1994. 

\11 The debt is represented by notes that are subordinated to any
secured or unsecured notes and bonds issued by NCB, but the notes
have first preference over all classes of NCB stock. 


      GOVERNMENT-HELD DEBT
      ENHANCES NCB'S CREDIT BUT
      GOVERNMENT EXPOSURE TO LOSS
      IS LIMITED
---------------------------------------------------------- Letter :4.1

NCB's Treasury debt has a favorable interest rate for NCB and,
because it is subordinated debt, it enhances NCB's creditworthiness
to private lenders.  However, the actual amount at risk and,
therefore, the potential loss to the government is limited to
principal and accrued interest.  Thus, the government's potential
loss, as of December 31, 1993, would have been limited to about $183
million in principal and any interest due.  In contrast, most GSEs
have access to federal funding at Treasury's discretion, should it
ever be needed.  Treasury's funding authority varies for each GSE,
but totals billions of dollars.  For example, Treasury is authorized
to purchase up to $2.25 billion of the Federal National Mortgage
Association's obligations. 

Until October 1, 1990, NCB paid interest rates on its Treasury debt
that were below the interest rates paid on Treasury debt of
comparable maturities.  The act, as amended in 1981, limited the
interest NCB paid on the debt to 25 percent of NCB's gross revenues
less necessary operating expenses, including a provision for possible
losses.  The effective rates of interest for 1988, 1989, and 1990
were 2, 2, and 3.5 percent, respectively.  According to FCA, the
subsidy due to the below market rates (assuming a market rate of 8
percent) amounted to approximately $11 million in 1989 alone.  We
believe this comparison underestimates the actual subsidy because NCB
would not have been able to borrow long-term funds at Treasury
rates.\12

A 1989 amendment to the act provided for a change in the interest
rates on the notes.\13 After October 1, 1990, the interest paid was
to be pegged to outstanding Treasury debt of comparable maturities. 
This action raised the 1991, 1992, and 1993 effective interest rates
to 7.1, 6, and 5.4 percent, respectively.  The future rates for four
series of notes were to be set, according to their respective
maturities, to equal market rates for Treasury obligations having the
same maturities.\14 At December 31, 1993, those rates ranged from
2.98 percent to 8.82 percent.  These rates were better than NCB could
have obtained in the private market so it still benefited from the
Treasury funds, although the subsidy had been reduced since 1990. 

In addition to the favorable interest rate on this debt, NCB's
creditworthiness is enhanced by the nature of this subordinated debt. 
Subordinated debt gives private creditors some assurance that, should
the institution fail, funds owed to them will be repaid before those
of subordinated debt holders.  Thus, subordinated debt acts like
equity from a superior creditor's perspective.  The value of this
debt to other creditors is illustrated by the fact that agreements
with these creditors generally prohibit NCB from prepaying the debt. 
This limitation preserves private creditors' place "in line" should
the bank be liquidated.  One NCB official explained that the
prepayment prohibition was demanded by their lenders.  He said
lenders did not want to extend credit without the additional security
provided by the prepayment prohibition. 


--------------------
\12 It was not within the scope of our work to explore the accounting
treatment of this subsidy by NCB and Treasury. 

\13 The amendment also provided that NCB may, with Treasury's
approval and consistent with the other provisions of the act, issue
replacement notes.  The full amount of the class A notes can still
remain outstanding until 2020.  However, the final due date was
advanced from December 31, 2020, to October 31, 2020. 

\14 Per NCB's agreement with Treasury, the total principal of the
debt comprises four series of notes whose interest rates are tied to
the 91-day, 3-year, 5-year, and 10-year Treasury rates.  As each note
comes due, NCB has the right to borrow again from Treasury, the
maturing amount under the same terms.  NCB has stated it intends to
avail itself of this right.  For example, the 3-year Treasury note
for approximately $37 million, with an interest rate of 4.24 percent,
matures on October 1, 1996.  At that time, NCB can borrow the
principal amount again and Treasury is to issue a new 3-year note at
the prevailing rate of interest.  Interest on all notes is payable
semiannually. 


      WITHOUT GUARANTEE, MARKET
      PROVIDES FUNDS UNDER STRICT
      COVENANTS
---------------------------------------------------------- Letter :4.2

In previous work on GSEs,\15 we noted that their close ties to the
government, and especially the markets' perception of an implicit
government guarantee of their debt, encouraged GSE risk-taking and
exposed the government to possible losses.  GSE debt totals hundreds
of billions of dollars and their operations are important to certain
sectors, such as housing and agriculture.  Because of their size,
their public policy purposes, and the probability that the federal
government would assist a financially troubled enterprise, we
recommended that the government supervise GSEs' risk-taking
activities.  However, NCB is a comparatively small institution, and
the cooperative community is not entirely dependent on NCB for
financing.  Most importantly, it appears creditors do not believe
that the government would assist NCB if it were financially stressed. 
The creditors impose discipline on NCB as a requirement of extending
credit, and NCB appears to be responsive to this market discipline. 

The 1981 amendments state that debt issued by NCB is not guaranteed
by the government.  In remarks concerning this amendment, one Member
of Congress said in regard to NCB debt that

     ".  .  .  the bank's obligations should be viewed in the market
     as are other issues of private corporations.  The U.S. 
     Government is not to be responsible in any way for these
     obligations.  There is not even to be a moral obligation of the
     United States behind these obligations."

Credit-rating firms accept the government's declaration that it is
not liable for NCB debt.  The three credit-rating firms that have
given NCB's short-term senior debt an investment-grade rating assumed
that the government would not protect NCB's creditors if the bank
failed.  For example, Moody's Investors Service reported in October
1993 that "NCB retains loose ties with the U.S.  Government, but it
is unlikely that the Government would provide support to the bank in
a stress situation."

NCB borrows funds from private lenders on the strength of its own
credit and is subject to the discipline imposed by the market through
covenants in agreements with its creditors.  NCB's creditors impose
restrictions that are typical of those in private market financial
transactions.  For example, NCB's major creditors require that NCB

  -- maintain proper books and records that are available for
     creditors' inspection;

  -- not transact business with affiliates except on an arms-length
     basis;

  -- remain primarily in its present line of business and not change
     its operations significantly; and

  -- meet specific minimum standards for net worth, earnings,
     liquidity, and debt ratio. 

Breaching any of these requirements would result in default and,
according to NCB, probable liquidation of the institution.  NCB's
creditors also require periodic reports to enable them to monitor
NCB's performance.  These include quarterly financial reports,
reports of an annual independent audit, detailed calculations showing
compliance with various financial requirements, reports on the loan
portfolio, and reports on loan losses and loan loss reserves. 

These creditor requirements show that NCB is subject to significant
market discipline similar to the discipline imposed by government
regulators on banks and GSEs.\16 In the case of capital standards,
NCB actually meets a higher standard.  For example, the regulatory
standards for bank core and total risk-based capital are 4 percent
and 8 percent of assets, respectively.  NCB believes that it needs to
hold much higher amounts of capital to obtain funding in the private
markets.  As of December 31, 1993, NCB held 20-percent core and
26-percent risk-based capital. 


--------------------
\15 See Government-Sponsored Enterprises:  The Government's Exposure
to Risks (GAO/GGD-90-97, Aug.  15, 1990) and Government-Sponsored
Enterprises:  A Framework for Limiting the Government's Exposure to
Risks (GAO/GGD-91-90, May 22, 1991). 

\16 FCA imposes some similar requirements on the Farm Credit System,
as does the Office of Federal Housing Enterprise Oversight on the
Federal Home Loan Mortgage Corporation and the Federal National
Mortgage Association, and the Federal Housing Finance Board on the
Federal Home Loan Banks.  The failure of the regulated entities to
meet regulatory requirements would not necessarily result in
liquidation. 


   NCB'S PLAN TO REPAY TREASURY IS
   NOT SUBJECT TO GOVERNMENT
   APPROVAL
------------------------------------------------------------ Letter :5

The act contains two provisions relating to the repayment of NCB's
Treasury debt.  One section provides for repayment of the debt on the
basis of any annual sale of class B stock.  However, the act does not
specify that NCB must sell class B stock.  The other section requires
that NCB maintain a schedule to ensure repayment of the debt by
October 31, 2020.\17 This provision does not require that Treasury
monitor the repayment plan.  FCA encouraged NCB to adopt a long-term
repayment plan.  NCB adopted a partial schedule or plan in February
1993 and a new plan in November 1994. 


--------------------
\17 In addition, section 211(c)(1) of the act provides that before
NCB makes contributions to the nonprofit NCB Development Corporation
it "shall set aside amounts sufficient to satisfy its obligations to
the Secretary of the Treasury for payments of principal and interest
on Class A notes and other debt." As we noted previously in this
report, NCB has paid all interest when due.  NCB also has made
payments on the notes required due to the sale of class B stock, as
we discuss in this section. 


      MECHANISM TO PAYDOWN DEBT
      EFFECTIVELY ELIMINATED
---------------------------------------------------------- Letter :5.1

Section 104(c) of the act, added in the 1981 amendments, states that
beginning October 1, 1990, NCB shall use the proceeds from the sale
of certain stock to borrowers (class B stock) to redeem an equal
amount of the Treasury-held notes (class A notes).  NCB applied such
proceeds for fiscal years 1991 and 1992 (approximately $1.4 million
and $.3 million, respectively).  However, in March 1992, NCB changed
its policy on borrower stock to effectively eliminate this mechanism
for paydown of the debt. 

In March 1992, NCB announced it would no longer sell class B stock to
borrowers, but would facilitate the sale of stock among the borrowers
themselves.  Borrowers are required to hold at least 1 percent of the
amount of their NCB loans in class B stock.\18 However, the act does
not specify that NCB must sell class B stock.  Thus, although the act
requires NCB to use the proceeds from the sale of class B stock to
redeem the Treasury-held notes, under its current policy, there will
no longer be stock sales that generate such proceeds.  If the policy
should change so that NCB would again make payments on the principal
of the debt, Treasury would once again receive such payments. 

In addition, before the March 1992 policy change, NCB guaranteed that
it would redeem outstanding class B stock at par when a borrower
repaid its loan.  Under the new policy, NCB will honor outstanding
commitments but will not redeem this stock in the future.  NCB
officials stated that the Board changed the policy to enhance NCB's
financial base.  Over the long term, NCB officials believed that with
this enhancement they would have a larger financial cushion (capital
plus subordinated debt) than if NCB repaid part of the Treasury-held
notes with proceeds from the sale of class B stock and obligated
itself to redeem that class B stock in the future.  In short, NCB
believes it is not prudent to repay the Treasury debt sooner than the
ultimate due date of October 31, 2020. 


--------------------
\18 There is an adequate amount of outstanding class B stock to allow
potential borrowers to obtain the required 1 percent and to allow
growth in NCB lending because there is class B stock in excess of 1
percent of NCB's total loan portfolio.  As of December 31, 1993,
outstanding class B stock totaled $59.7 million.  NCB's loan
portfolio totaled $457.7 million; borrowers needed to hold a total of
only $4.577 million in class B stock (1 percent of $457.7 million). 
Thus, some $55 million is available for sale to borrowers.  NCB
customers have excess class B stock because NCB previously paid a
portion of its patronage dividends in class B stock.  Between 1984
and 1990, NCB paid 20 percent of its patronage dividends in cash and
80 percent (up to 10 percent of the customers' loan amounts) in class
B stock.  The balance was paid in class C stock. 


      NCB RECENTLY ADOPTED A NEW
      PLAN FOR REPAYING THE DEBT
---------------------------------------------------------- Letter :5.2

Another section of the act (section 116(a)(3)(C)), also added in the
1981 amendments, states that "after December 31, 1990, the Bank shall
maintain a repayment schedule for class A notes which will assure
full repayment of all class A notes not later than December 31,
2020."\19

NCB adopted a plan in February 1993 to accumulate a portion of the
funds needed to repay the debt.  Because this plan provided for
accumulating a portion of the funds ultimately needed, rather than
the total amount, we refer to it as a "partial plan." The partial
plan established a sinking fund and provided for NCB to pay $1
million to the fund annually for 15 years.  The fund, plus its
accrued income, was to be used with other funds to retire the
Treasury debt when due.  The partial plan did not address how the
balance of the funds would be obtained. 

The NCB Board also directed management to develop a new plan for the
retirement of the total amount of the debt.  In November 1994, the
Board approved a new plan for the ultimate repayment of the total
principal amount by October 31, 2020.  NCB's new plan provides for
the creation of a class A Note Redemption Reserve Fund and the sale
over the next 25 years of preferred stock or subordinated debt.  NCB
projects that the Reserve Fund will accumulate $100 million by 2020
from NCB contributions and an assumed average yield of 6 percent. 
The NCB plan notes that given the subordinated status of the class A
notes, the Reserve Fund will be subject to claims of senior
creditors.  The plan stipulates that NCB will obtain the remaining
funds needed to retire the class A notes through the sale of
preferred stock or subordinated debt.  NCB adopted a strategy for
issuing such stock or subordinated debt every 5 years beginning in
2000. 

The subordinated debt is viewed as added equity by senior creditors
and thus affords NCB creditors some protection should NCB become
troubled.  NCB's new repayment plan maintains this protection by
noting that the Reserve Fund will be subject to claims by senior
creditors.  Without the subordinated debt or an amount of equity that
creditors believe to be adequate, the risks posed to creditors would
be greater, and we believe creditors might demand that NCB meet even
more stringent standards or pay higher interest rates. 

We met with Treasury's Director of the Office of Cash and Debt
Management and other Treasury officials to get their views on NCB's
responsibilities regarding the $183 million in subordinated debt. 
The officials reported that NCB has made all interest payments as
required, and we verified this fact by reviewing Treasury's records. 
In 1992 and 1993, NCB used the proceeds from the sale of class B
stock in the preceding fiscal years (a total of about $1.7 million)
to redeem an equal amount of class A notes as the law requires. 
Treasury officials were unaware of the 1992 NCB policy change that
will preclude similar redemptions in the future.  The officials said
that they saw nothing in the act that requires NCB to sell class B
stock and that, therefore, they concluded NCB's policy change is not
inconsistent with the act. 

The Treasury officials told us they fully expect NCB to repay all
outstanding debt by October 31, 2020, and believe it is NCB's
responsibility to have a plan to do so.  They noted that the act says
"the bank shall maintain a repayment schedule" to ensure full
repayment of the notes and thus, they said, it is up to the bank to
determine what that plan will be.  Treasury officials were not aware
of NCB's partial repayment plan and had not discussed with NCB any
additional plans for repaying the debt.  The Treasury officials told
us that if NCB were unable to repay the full principal in 2020, as
the law requires, NCB ultimately would have to answer to Congress. 
During the course of our review, Treasury officials contacted NCB
officials who told them of the sinking fund plan.  After NCB adopted
its new repayment plan in November 1994, NCB officials told us they
provided the plan to Treasury officials and discussed its
implementation with them.  As of December 1994, NCB was seeking its
senior creditors' approval of the new plan. 

The Treasury officials also told us they will continue to monitor
receipt of NCB's payments of interest, monitor notes when due, and
follow up as needed.  Treasury is, therefore, monitoring the current
interest payments on, and renewal of, NCB's class A notes.  As with
failure to repay principal, if NCB were not able to meet their
obligations, Treasury officials believe, based on their past
experience, that NCB ultimately would have to answer to Congress.  In
commenting on our draft report, Treasury officials noted that in
instances when other borrowers did not make principal payments at
maturity, "Treasury notified these entities of their failure to pay
and required payment, including late fees." Further, the Treasury
officials noted that they would consider whatever legal or other
action they view as appropriate in the event of an NCB default. 

In summary, the officials did not believe Treasury is obligated to
ensure that NCB has and follows an acceptable plan to repay the debt. 
We agree that Treasury is not so obligated under present law.  We
believe, however, that prudent and responsible financial management
on the part of the government would call for Treasury, as NCB's
government creditor, to protect the public's investment in NCB by
approving and monitoring NCB's plans to repay its debt.  We believe
this is more important now because NCB's policy change regarding
selling class B stock means that one mechanism for debt repayment has
been effectively eliminated. 

We asked the Treasury officials if there were entities similar to NCB
with outstanding debts to Treasury and what the repayment
requirements were.  The officials could not identify any similar
entity with such debt.  They did tell us about two semipublic
entities for which Treasury held notes.  However, in both cases a
federal agency had cosigned the notes.  It appears to us, therefore,
that NCB and Treasury have a unique debtor-creditor relationship. 


--------------------
\19 In a 1989 amendment to the act, the final redemption date for all
class A notes was changed to October 31, 2020.  (See P.L.  101-206,
Sec.  2, 103 Stat.  1831 (1989)). 


      FCA ADVISED NCB TO ADOPT A
      NEW PLAN FOR REPAYING THE
      TREASURY DEBT
---------------------------------------------------------- Letter :5.3

FCA officials were aware of both NCB's policy change regarding class
B stock and the creation of the sinking fund.  They noted in the 1991
examination report, issued in 1992, that the new method of stock
exchange among borrowers would allow NCB to preserve and strengthen
its financial cushion.  The officials told us they had not considered
the effect of the policy change on the repayment of the Treasury
debt, but on the immediate safety and soundness of NCB. 

FCA did not directly address NCB's repayment of the Treasury debt in
the 1990 or 1991 examination reports.  Examination officials told us
that in discussing NCB's long-range planning process with the Board,
they noted the need for NCB to make plans regarding this debt.  NCB
included this objective in its 1993 revised strategic plan and
established a sinking fund for repayment of the debt, which FCA
acknowledged in its 1992 examination report issued in early 1993. 
FCA told us they again questioned NCB officials about the plans for
debt repayment during their 1993 examination completed in May 1994. 
FCA notified NCB in the report of examination that it should adopt a
long-term plan to repay the Treasury notes.  NCB responded that it
was considering such a plan and would provide FCA a copy when it was
adopted by the NCB Board. 

We asked FCA officials if they planned to approve or comment on NCB's
proposed plan.  The officials noted that FCA had no authority to
approve or disapprove the plan.  If NCB adopts such a plan, FCA
officials said they would evaluate it during the next annual
examination.  We believe it would be useful to Congress for FCA to
evaluate and report on NCB's repayment plans in the annual reports of
examination.  However, we do not believe it would be appropriate for
FCA to be given authority to approve such a plan.  Such authority
could be interpreted as a regulatory function and lead to confusion
about FCA's role as NCB's examiner.  In addition, as FCA
acknowledges, there may be a perceived conflict between FCA's
examination function and its involvement in the design or approval of
the debt repayment plan.  We believe that responsibility for
approving and monitoring the implementation of any such plan should
rest with Treasury, NCB's government creditor. 

In a past study of government programs to assist troubled private
firms and municipalities, we developed guidelines for structuring and
administering such programs.\20 NCB is not a troubled institution,
but like some of the entities aided by assistance programs, it
received a loan from the government that must be repaid.  Our
guidelines proposed that Congress create some mechanism to administer
and oversee assistance programs.  A primary reason for oversight is
to help ensure that the government funds are repaid.  In our past
study, we recommended that an administrator or board review, approve,
and monitor the financial plans of the assisted entity and report to
Congress.\21 We see no reason why these guidelines, with regard to
repayment of government funds, should not be applied to NCB.  While
NCB is not a troubled institution, it seems appropriate for the
government to approve and monitor implementation of NCB's plan to
repay this long-term debt. 

We believe that it would be prudent for Congress to require Treasury
to approve and monitor NCB's required plan for repaying its
outstanding debt.  Congress required similar oversight arrangements
in extending loans or loan guarantees to the Consolidated Rail
Corporation, the Chrysler Corporation, Lockheed Aircraft Corporation,
New York City, and the Farm Credit System.  We believe that the clear
intent of the law is for NCB to have a plan that ensures full
repayment.  We also believe that such a plan, at a minimum, should
specify how NCB would accumulate or obtain the total amount of the
funds due to Treasury in 2020.  The law requires that after December
31, 1990, NCB maintain "a repayment schedule" to ensure full
repayment in 2020, but does not define this repayment schedule.  In
November 1994, NCB adopted a new plan.  In commenting on our draft
report, NCB officials said they were seeking the approval of their
senior creditors to implement the plan. 

These senior creditors' reviews raise the possibility of revisions to
the new plan.  We understand NCB's need for the subordinated Treasury
debt to borrow in the private markets, and we recognize that Congress
intended to support NCB by allowing the Treasury debt to remain
outstanding until 2020 (except for partial payments on the principal
when class B stock is sold).  Nevertheless, we believe it is
appropriate for Congress to give Treasury a broader role in
reviewing, approving, and monitoring NCB's plans to repay the debt. 
NCB took the initiative to submit its new repayment plan to Treasury. 
In addition, NCB officials said they had discussed with Treasury
officials the possibility of entering into an agreement relating to
the implementation of the plan if the plan is acceptable to Treasury. 

To avoid duplication in reviewing NCB's financial records, we believe
FCA could review NCB's performance against a Treasury-approved
repayment plan during its annual examination process.  FCA could
report the results of this review in its examination reports and
provide copies to Treasury. 

The act already provides for the government to have a representative
on the NCB board, and Congress could link the selection of the
representative to the government's need to ensure the NCB debt is
repaid.  Of the 15-member NCB board, 3 members are to be appointed by
the president with the advice and consent of the Senate.  According
to the act, one of these three members is to be "selected from among
the officers of the agencies and departments of the United States.  . 
.  ." Congress could require that this representative be from
Treasury. 


--------------------
\20 See Guidelines for Rescuing Large Failing Firms and
Municipalities (GAO/GGD-84-34, Mar.  29, 1984).  We developed these
guidelines from our own experiences and those of others involved in
the government programs to assist the Consolidated Rail Corporation,
Lockheed Aircraft Corporation, the Chrysler Corporation, and New York
City. 

\21 The mechanism Congress established in 1987 to oversee assistance
to the Farm Credit System reflected our guidelines.  The Farm Credit
System Assistance Board approved plans of the assisted Farm Credit
Banks, monitored them closely, and reported to Congress.  (See
GAO/GGD-94-39, Mar.  10, 1994). 


   FCA EXAMINATIONS FOCUS ON NCB
   SAFETY AND SOUNDNESS
------------------------------------------------------------ Letter :6

FCA examines NCB annually and addresses issues that are important to
safety and soundness, such as capital adequacy, internal controls,
and standards of conduct.\22 The examiners evaluate NCB against
requirements in the act and NCB policy and procedures.  The act
directs FCA to examine NCB and forward the reports to Congress.  It
does not specify the frequency, scope, or purpose of the
examinations. 

On the basis of our review of FCA's examinations of NCB, and other
documents that reflect its monitoring of NCB operations, we believe
FCA applies the same standards of quality to its examination of NCB
that it applies to the Farm Credit System.  In a recent study, we
determined FCA was an effective regulator of the Farm Credit
System.\23 FCA effectively addressed the problems examiners
identified at the System banks we studied.  FCA customized its
examinations and monitoring for each individual institution within a
framework of minimum standards.  FCA also ensured quality and
reliability in examinations through supervisory review, quality
standards, peer reviews, and other techniques. 

FCA has conducted full examinations of NCB's capital, asset quality,
asset and liability management, management, earnings, liquidity, and
related internal controls since 1990.  FCA assigns a CAMEL\24 rating
to NCB to reflect its overall condition and the nature of oversight
needed.  FCA officials told us that their examinations before 1990
were more limited in scope because they focused on asset quality. 
However, the officials said FCA has always reviewed NCB's compliance
with the act's borrower eligibility requirements. 

We believe FCA examiners have the combination of experience and
acquired expertise on NCB lending to make them appropriate examiners
for NCB.  FCA officials noted that NCB's lending to cooperatives is
similar to lending activities of the Farm Credit System banks for
cooperatives.  Because FCA has retained a core group of examiners on
the NCB examination team for some 12 years, the FCA officials
believed they had developed the special expertise needed to examine a
particularly unique portion of NCB's loan portfolio--its cooperative
housing loans.  In discussions with us, NCB officials agreed that FCA
had developed appropriate expertise to examine the bank. 

In addition to its annual, on-site examinations, FCA reviews OTS
examinations of NCBSB and OTS' reports on NCB as the thrift's holding
company.  Since 1992, OTS and FCA have exchanged examination reports. 
In 1994, OTS participated in FCA's examination of NCB as part of its
holding company review.  The FCA officials told us that they are
comfortable with the ongoing arrangement with OTS, and they believe
it allows them to adequately monitor the relationship of NCB and
NCBSB. 

Since 1991, FCA has reviewed NCB's compliance with the statutory
limit for housing-related loans and the standard for loans to
low-income cooperatives, or those serving low-income persons.  FCA
broadened its examination scope in 1993 to review other statutory
requirements related to NCB's mission, such as the eligibility of its
board members. 


--------------------
\22 We identified capital, internal controls, external and internal
audits, financial reporting, standards of conduct, and lending and
investing practices as key safety and soundness issues in previous
work.  Deficiencies related to these issues have been associated with
problem and failed financial institutions. 

\23 (See GAO/GGD-94-14, Jan.  7, 1994). 

\24 CAMEL is a rating system that assesses capital adequacy, asset
quality, management, earnings, and liquidity management.  Regulators
of all financial institutions assign CAMEL ratings on the basis of
their examinations. 


   FCA SUPPORTS REGULATION OF NCB
------------------------------------------------------------ Letter :7

On two occasions since 1991, the FCA Board recommended to
congressional banking committee officials that FCA or some other
regulator be given comprehensive regulatory authority over NCB. 
According to the Board, comprehensive authority would add the power
to promulgate regulations and take enforcement action to FCA's
authority to examine NCB.  The current FCA Board members told us that
comprehensive authority is needed to address any problems that might
arise and, if FCA is to continue examining NCB, protect its
credibility as a regulator. 

FCA Board members and senior officials emphasized in March 1994
meetings with us, and previously to banking committee officials, that
NCB is functioning satisfactorily.  FCA has found that NCB is
adequately capitalized, and NCB cooperates in addressing any
FCA-identified weaknesses.  Nevertheless, the FCA Board members and
senior officials believed comprehensive regulation of NCB is
warranted and will become more important if NCB grows and undertakes
new activities.  The FCA Board had no official position on which
government agency should regulate NCB, but the Board maintained that
FCA has the requisite experience. 

FCA's NCB examination team leaders told us they generally were able
to talk through issues with NCB officials and reach an acceptable
settlement.  We saw evidence of this in examination reports and
correspondence between FCA and NCB.  In the four examinations we
reviewed (for calendar years 1990 through 1993), NCB sometimes made
incremental changes over the 4-year period to address FCA's safety
and soundness-related concerns.\25 Essentially, the FCA officials
told us that they must rely on moral suasion to convince NCB to make
a change because FCA has no regulatory or enforcement authority.  FCA
can only suggest that NCB address any deficiencies it believes exist;
without regulatory and enforcement power, FCA cannot compel NCB to
take any action or cease any activity. 

As noted previously, FCA is required to forward examination reports
to Congress; FCA submits the reports to the House and Senate banking
committees.  The reports we reviewed provided information that
enabled us to compare NCB's current condition with the previous year
and to evaluate NCB's responsiveness to FCA.  The examination reports
discussed NCB's current conditions relative to safety and soundness
and mission-related requirements of the act.  FCA described and
evaluated actions taken by NCB to address weaknesses noted in past
examinations.  It noted additional weaknesses that needed to be
addressed.  Other useful information was provided as well.  For
example, circumstances that mitigated or contributed to an identified
risk were discussed.  NCB management's responses to the examiners'
findings were reported.  At times, NCB management agreed during the
course of an examination that changes in some policy or procedure
were needed, and FCA reported their position.  Appendixes to the
reports provided financial data for the past 2 years, included
comments on selected loans FCA reviewed, and provided other
information. 

Although it lacks enforcement authority, FCA has explicitly directed
NCB to correct weaknesses and respond by a certain date.  FCA's
letters transmitting the reports to the NCB Board Chairman directed
the board to address each concern or weakness identified in the
examination report, and the letters also listed specific issues for
the NCB Board to address in a written response to FCA.  FCA asked for
a written response within a specific time after the next NCB Board
meeting. 

In addition, FCA has communicated with the relevant congressional
committees as needed.  It appears to us that this direct line of
communication strengthens FCA's role as NCB's examiner.  On two
occasions, as we noted previously, a congressional committee
requested us to provide legal opinions on the issues that concerned
FCA. 

The examination reports are not publicly released.  However, NCB
issues publicly available annual reports, which include audited
financial statements and quarterly reports as required by the
securities laws. 

The FCA Board cited two undesirable consequences of the agency's
continuing as NCB's examiner without regulatory authority.  The FCA
officials said FCA could be criticized if NCB had serious problems
that remained unresolved, even though FCA has no power to compel NCB
to address problems.  In addition, the officials said the Farm Credit
System could be harmed if FCA's reputation as an effective regulator
were questioned.  Because the System raises debt in the capital
markets, the FCA officials believed that any damage to FCA's
reputation could translate into higher cost debt for the System and,
ultimately, for farmers. 

The first potential negative consequence--criticism of FCA-- reflects
FCA's concern about its reputation and the resultant standing in the
regulatory community and with Congress.  It is our opinion that FCA's
limited responsibility regarding NCB is clear.  Therefore, if NCB did
not resolve problems that FCA identified, we think that NCB would be
subject to criticism, not FCA.  The act requires FCA to examine NCB
and report to Congress, and our review showed that FCA is providing
Congress with detailed information on NCB's financial condition in
its annual examination reports.  It is clear to us that if NCB did
not resolve problems identified by FCA, FCA can, as it has in the
past, convey its concerns to Congress.  Once informed, it becomes
Congress' responsibility to act, as it has in the past. 

We discussed the second potential consequence--higher debt costs for
the Farm Credit System--with the head of the corporation that markets
System debt.  He said the possibility of any negative impact on the
System from FCA's inability to require NCB to take any necessary
actions would be remote because creditors would understand that NCB
is not part of the System.  We concur that it is unlikely that the
cost of System debt would increase due to any unresolved problems at
NCB because it is clear NCB is not part of the System.  In commenting
on our draft report, FCA officials said they had no substantive
disagreement with this position. 


--------------------
\25 We did not provide specific examples to illustrate this point
because the examinations are confidential documents and their
contents cannot be publicly disclosed. 


   CONCLUSIONS
------------------------------------------------------------ Letter :8

The government's current arrangement for overseeing NCB's safety and
soundness appears to be working satisfactorily.  Given NCB's weak
ties to the government, the markets' apparent perception that there
is no implied government guarantee of NCB's debt, and the significant
discipline imposed on NCB by its creditors, there does not appear to
be any need for a different oversight arrangement. 

However, there is a need for closer monitoring of NCB's plans to
repay its debt to Treasury.  NCB has a unique position as a federally
chartered, private entity that is cooperatively owned by its
stockholders with subordinated debt held by Treasury.  The act makes
NCB responsible for maintaining a schedule to ensure full repayment
of the class A notes no later than October 31, 2020.  During the
course of our review, NCB adopted a new plan.  However, no
representative of the government is charged with approving the plan. 
In the past, Congress required government oversight when it provided
loans or loan guarantees to several private firms.  To safeguard the
public funds loaned to NCB, we believe the government should ensure
that NCB makes and follows a plan for repaying the full amount of its
outstanding debt that is acceptable to Treasury.  We believe a
government-approved plan is especially important now that the
statutory provision for repaying a portion of the debt each year has
been effectively eliminated by NCB's policy change on the sale of
class B stock. 

Although FCA encouraged NCB to adopt a new plan for repaying its
Treasury debt, it is not responsible for approving NCB's repayment
plans.  FCA's role is to review NCB's safety and soundness through
annual examinations and report to Congress.  To charge FCA with
approving NCB's repayment plan could lead to confusion about FCA's
limited role of examining and reporting.  In addition, as FCA
acknowledges, there could be a perceived conflict between FCA's
examination function and its involvement in the design or approval of
the debt repayment plan. 

Treasury is NCB's creditor and has a responsibility, as a matter of
good financial management, to ensure that debts owed to the
government are repaid.  As NCB's creditor, Treasury currently
administers the loan and receives the interest payments.  Therefore,
it seems appropriate to us that Treasury should be responsible for
approving and monitoring NCB's compliance with a plan for principal
repayment.  Once Treasury has approved NCB's plan, FCA should include
in its annual examination a review of NCB's performance against the
approved plan.  Thus, Treasury could use FCA's work to monitor NCB's
compliance with the plan. 

The National Consumer Cooperative Bank Act does not, however, require
Treasury to approve or monitor NCB's plan to repay the debt.  The act
does allow the president, with the advice and consent of the Senate,
to appoint 3 members of NCB's 15-member Board.  The government has
not appointed a representative to the NCB Board for almost 4 years. 
Since Treasury holds NCB's debt on behalf of the government, one of
the government's representatives could be from Treasury. 


   RECOMMENDATIONS TO CONGRESS
------------------------------------------------------------ Letter :9

We recommend that Congress amend the National Consumer Cooperative
Bank Act to require the Department of the Treasury to approve NCB's
plan, including any future revisions, for repayment of the class A
notes.  Treasury should also, through FCA, monitor NCB's performance
against the plan and require revisions as needed.  The amendment
should provide for FCA to evaluate and report NCB's compliance with
the terms of NCB's approved repayment plan as part of FCA's annual
examination process and provide Treasury, as well as Congress, with
the reports of examination. 

We also recommend that Congress require that the government's
representative on the NCB Board be a representative of Treasury. 


   AGENCY COMMENTS AND OUR
   EVALUATION
----------------------------------------------------------- Letter :10

We requested comments on a draft of this report from NCB, FCA, and
Treasury.  The written comments of each entity and our responses
appear in appendixes II through IV.  NCB did not disagree with the
substance of our recommendations.  However, NCB prefers that the
recommendations be accomplished without statutory amendments.  NCB
expressed a desire to avoid any matter, such as pending congressional
action, that might pose concerns to the private capital markets
regarding NCB's status.  We continue to believe that the changes we
recommended should be made through statutory amendments to better
ensure their consistent implementation in future years despite
changes in personnel and other intervening factors.  For example,
before the NCB debt is due in 2020, changes in the economy and NCB's
performance could necessitate revisions to NCB's debt repayment plan. 
Treasury's duty to approve any revisions, and to require revisions if
necessary, should be provided for in the law and not left to the
judgment of future officials.  NCB's status as a congressionally
chartered financial institution with subordinated debt held by
Treasury is well known to the private capital markets.  Our
recommendations to Congress do not propose any change in NCB's
status.  Thus, while we cannot predict the reaction of the capital
markets, we see no reason for our recommendations to pose concerns to
them. 

FCA reaffirmed its opinion that regulatory and enforcement authority
should be given to some federal financial institution regulator. 
However, FCA officials said they would offer no further objections to
the current arrangement whereby they examine NCB and report to
Congress, and they did not object to providing examination reports to
Treasury, as we recommend.  FCA agreed with our finding that Treasury
is the appropriate entity to approve NCB's plan for repaying the
Treasury debt.  FCA agreed that evaluating and reporting on NCB's
compliance with a Treasury-approved NCB repayment plan is an
appropriate part of its examination function.  FCA expressed concern
about our description of this FCA role in some portions of our draft;
we clarified the language where appropriate. 

Treasury did not object to monitoring an NCB repayment plan, but
noted that without specific legislation requiring NCB to meet the
conditions of such a plan, it would have no authority to hold NCB to
the plan's conditions.  We recognize that Treasury would not have
such authority and expanded our recommendation to say that it should
be given authority to require revisions.  Congress, unless it chose
otherwise, would continue to retain the responsibility for taking any
action warranted against NCB.  This is the same arrangement Congress
has relative to NCB's safety and soundness--FCA monitors NCB's
performance and reports to Congress. 

Also, Treasury did not object to our recommendation that Congress
require the government's representative on the NCB Board to be from
Treasury.  However, Treasury noted this representation would not
necessarily be an effective way to ensure NCB's repayment of the
Treasury debt.  We believe a Treasury representative could assist the
Board in considering the effects of NCB policies and practices on its
long-term financial health, including provisions for repaying the
Treasury debt.  A Treasury representative could provide valuable
expertise in other areas as well.  While many factors will affect
NCB's ultimate ability to repay its debt, we continue to believe a
Treasury representative on the Board could be effective in ensuring
repayment of the debt. 

Finally, although Treasury did not directly object to our
recommendation that Congress require Treasury to approve NCB's
repayment plan, the Department stated that such a requirement and
having a Treasury official on NCB's Board could create a conflict of
interest.  In Treasury's opinion, such involvement could cloud its
role as an "arms-length creditor." We note, however, that in the
past, Treasury representatives have served on the boards of entities
with outstanding Treasury loans or loan guarantees.  For example, the
Secretary of the Treasury served on the boards that oversaw federal
programs to assist Lockheed and Chrysler.  As we discuss in our
report, it is appropriate for Congress to require oversight of
outstanding government loans, and it is appropriate for Treasury, as
NCB's creditor, to fulfill this role.  Good financial management
calls for such oversight.  NCB's financial health and its ability to
repay the debt owed Treasury are inextricability linked.  Thus, we
see no reason why Treasury's role as NCB's creditor would be
compromised by having a Treasury representative on NCB's Board. 


--------------------------------------------------------- Letter :10.1

We are sending copies of this report to the Chairman of the NCB
Board, the Secretary of the Treasury, and the Chairman of the FCA
Board.  We will also make copies available to other interested
parties upon request. 

Please contact me on (202) 512-8678 if you have any questions
concerning this report.  Major contributors to this report are listed
in appendix V. 

James L.  Bothwell
Director, Financial Institutions
 and Markets Issues


LIST OF NCB SUBSIDIARIES AND
AFFILIATES
=========================================================== Appendix I

NCB Mortgage Corporation, a majority-owned subsidiary, originates,
sells, and services real estate and commercial loans. 

NCB Financial Corporation is a wholly owned subsidiary established as
the holding company of NCB Savings Bank. 

NCB Business Credit Corporation, a wholly owned subsidiary, provides
equipment lease financing and financial services. 

Cooperative Funding Corporation, a wholly owned subsidiary of the NCB
Business Credit Corporation, is a registered broker-dealer and
provides corporate financial services. 

NCB Investment Advisers, Inc., a wholly owned subsidiary of the NCB
Business Credit Corporation, offers investment management services
tailored to the needs of cooperatives. 

NCB I, Inc., a wholly owned subsidiary of NCB, is a special purpose
corporation that holds credit enhancement certificates related to the
securitization and sale of cooperative real estate loans. 

NCB Development Corporation, an NCB affiliate, is a nonprofit
organization that provides loans and technical support to
cooperatives. 

NCB Savings Bank, located in Hillsboro, OH, is a federally chartered
and insured savings bank. 




(See figure in printed edition.)Appendix II
COMMENTS FROM THE NATIONAL
COOPERATIVE BANK
=========================================================== Appendix I

See comment 1. 



(See figure in printed edition.)

See p.  23. 


The following are GAO's comments on the National Cooperative Bank's
(NCB) December 14, 1994, letter. 

GAO COMMENTS

1. We added information about NCB's newly adopted plan to repay the
Treasury debt.  See pages 2 and 12 through 14. 




(See figure in printed edition.)Appendix III
COMMENTS FROM THE FARM CREDIT
ADMINISTRATION
=========================================================== Appendix I

See comment 1. 



(See figure in printed edition.)

See comment 2. 


The following are GAO's comments on the Farm Credit Administration's
(FCA) December 16, 1994, letter. 

GAO COMMENTS

1. FCA's additional comments included suggestions to further clarify
or expand on portions of the draft report.  We modified the text as
appropriate. 

2. We modified the text to clarify our position, with which FCA
agrees, that it is appropriate for FCA to evaluate NCB's compliance
with a Treasury-approved plan for NCB's repayment of Treasury debt. 




(See figure in printed edition.)Appendix IV
COMMENTS FROM THE DEPARTMENT OF
THE TREASURY
=========================================================== Appendix I

See comment 1. 

See comment 2. 

See comment 3. 



(See figure in printed edition.)

See comment 4. 

See p.  25. 


The following are GAO's comments on the Treasury's December 23, 1994,
letter. 

GAO COMMENTS

1. Our draft report noted our agreement with Treasury's position that
under present law Treasury is not obligated to ensure NCB has and
follows an acceptable repayment plan.  (See p.  15.) We recognize
that without explicit legislation, Treasury has no authority to hold
NCB to the conditions of any plan.  We added Treasury's reiteration
of this point on page 24. 

2. We did not suggest in our draft report that Treasury challenge
NCB's current policy not to sell class B stock.  Our draft noted
Treasury's finding that the NCB policy is not inconsistent with the
act, and we did not take issue with this position.  (See pp.  14 and
15.) Treasury proposed that it likewise could not challenge NCB if it
decided to deviate from its class A note repayment plan in the
future.  We do not disagree with Treasury, and we again note our
recommendation that Congress give Treasury authority to approve and,
through FCA, monitor a repayment plan. 

3. Our draft report noted that Treasury was monitoring the interest
payments and renewal of NCB's class A notes.  (See p.  15.)

4. We clarified Treasury's position regarding its treatment of NCB,
or other borrowers who might fail to pay principal owed when due, by
adding the additional information provided.  (See pp.  15 and 16.)


MAJOR CONTRIBUTORS TO THIS REPORT
=========================================================== Appendix V

GENERAL GOVERNMENT DIVISION,
WASHINGTON, D.C. 

Thomas M.  McCool, Associate Director
William J.  Kruvant, Assistant Director
M.  Kay Harris, Evaluator-in-Charge

OFFICE OF THE GENERAL COUNSEL,
WASHINGTON, D.C. 

Rosemary Healy, Senior Attorney

*** End of document. ***