I appreciate the opportunity to speak to you this morning about issues involving credit unions.

Much has happened over the past year. When I spoke to last year's Government Affairs Conference, the Treasury's study of credit unions had been public for only a couple of months. And the legislative battle for H.R. 1151 had barely begun.

Since then, you won that battle. Congress passed H.R. 1151 and the President signed it into law. That legislation enacted much more flexible field-of-membership rules than the Supreme Court had allowed in the AT&T case. The legislation also included the most significant safety-and-soundness reforms since the establishment of the National Credit Union Share Insurance Fund in 1970. Those reforms have laid a solid foundation for making the credit union system and the Share Insurance Fund even safer, sounder, and more resilient than before.

Now I would note that if a nearsighted Rip Van Winkle had attended this conference last year, fallen asleep, and then awakened this morning, he might wonder for just a moment how much progress had been made. Here we are a year later, and you still face Congressional hearings on field of membership, a field of membership lawsuit by the American Bankers Association, and even a Treasury study of credit unions.

Of course, if Rip thought the world had stood still during his slumbers, he'd be quite mistaken. The enactment of H.R. 1151 represents a basic change in the landscape. Yet some of the previous issues continue, even if in a new context and a different form. In that sense, my remarks today may have the flavor of a halftime report. I want to reflect on what has been accomplished and on some of the work that lies ahead.

But first let my express my appreciation for the opportunities that we at the Treasury have had to work with CUNA on a range of issues over the past several years. I believe that CUNA and the Treasury have maintained an open, constructive dialogue, even in the face of some difficult issues. This has been particularly important since the fall of 1996, when the Treasury began its Congressionally mandated study of credit unions. I appreciate the exceptionally able work of Dan Mica and his staff. We look forward to continuing that dialogue in the months ahead.

The Achievements of H.R. 1151

Any review of the past year must begin with the achievements of H.R. 1151, which the President signed into law on August 7, 1998. I want to focus in particular on the safety-and-soundness provisions of that legislation. Those provisions include prompt corrective action, the 6 percent net worth standard, risk-based net worth standards for complex credit unions, and various measures to further strengthen the Share Insurance Fund.

These historic reforms reflect the credit union tradition of getting ahead of problems and taking prudent precautions. They emphasize recognizing safety-and-soundness problems early and correcting then while they're still small. Experience in this country and around the world has repeatedly shown that facing up to financial difficulties and dealing with them head-on ultimately means less uncertainty, less pain, and a speedier recovery.

Let me elaborate on a few of the more important safety-and-soundness reforms.

The new law formalizes a requirement that, to be in good standing, credit unions have at least 6 percent net worth to total assets. Virtually all credit unions already satisfy this requirement today. Indeed, credit unions as a group have 11 percent net worth to assets.

The new law also requires that credit unions set aside, as retained earnings, a small percentage of income if they have less than 7 percent net worth. Well over 90 percent of credit unions already meet the 7 percent target.

Working hand-in-hand with these net worth requirements is a system of prompt corrective action. This system should reduce the number and cost of future credit union failures. That, in turn, should conserve the resources of the Share Insurance Fund, make the Fund even more resilient, and make more money available for lending to credit union members.

Implementing Prompt Corrective Action

Now that prompt corrective action is the law, the NCUA must implement it. Specifically, the NCUA must develop a system of prompt corrective action that is "comparable" to the prompt corrective action statute applicable to FDIC-insured banks and thrifts. And the Senate Banking Committee's report on H.R. 1151 makes clear what "comparable" means. "Comparable" means "parallel in substance (though not necessarily identical in detail) and equivalent in rigor."

The basic idea is for the NCUA to start with the system of prompt corrective action applicable to banks and thrifts. The NCUA must then take account of credit unions' character as not-for-profit cooperatives that (1) do not issue capital stock, (2) must rely on retained earnings to build net worth, and (3) have boards of directors that consist primarily of volunteers. Specifically, the NCUA must omit provisions that do not logically apply to credit unions. A prime example would be the requirement that an undercapitalized bank increase its net worth by issuing capital stock. (Credit unions don't have capital stock in that sense.) By the same token, the principle of "parallel in substance . . . and equivalent in rigor" requires the NCUA to include the provisions of the bank and thrift system that do make sense for credit unions.

Risk-Based Net Worth Requirement

The new law requires the NCUA to develop a risk-based net worth requirement for complex credit unions. According to the Senate committee report,

"The NCUA must design the risk-based net worth requirement to take account of any material risks against which the 6 percent net worth ratio required for an insured credit union to be adequately capitalized may not provide adequate protection. Thus the NCUA should, for example, consider whether the 6 percent requirement provides adequate protection against interest-rate risk and other market risks, credit risk, and the risks posed by contingent liabilities, as well as other relevant risks."

The risk-based requirement involves the NCUA blazing a trail through uncharted territory. We believe that the process would greatly benefit from broad input and careful discussion and debate. We therefore encourage the NCUA to continue seeking comments from a broad spectrum of interested and knowledgeable parties.

Indeed, we would suggest that the NCUA consider reaching out even further. One way of doing so would be for the NCUA to host a conference on how to design the risk-based net worth requirement for complex credit unions. Such a conference could have two key points of focus. First, how to identify credit unions with abnormally high risk-profiles. And second, how to impose an additional net worth requirement appropriate for those higher-than-normal risks.

In addition to the NCUA and its staff, the conference could include credit unions and their trade associations. It could include state credit union supervisors. And it could include risk-management experts from the academic world, from private consulting firms, and from other financial regulatory agencies.

The goal would be to develop ideas that can make the NCUA's decision making and the final risk-based requirement as sound and well-informed as possible. Whatever ideas surfaced at such a conference would be available for the NCUA to evaluate, use, or disregard, as it judged best.

I have shared this idea informally with some of you and with others in the credit union system. I offer it here one more time, mindful that the time available for such a process is growing short. A conference would be a way of bringing together a spectrum of viewpoints and expertise to wrestle with the basic problems of developing a risk-based requirement for complex credit unions.

Treasury's Current Credit Union Studies

Let me now turn to the Treasury's current credit union studies. Congress evidently liked our December 1997 report so much that it required us to conduct three more studies. Such was our reward, and some might see it as further evidence that no good deed goes unpunished.

First, Congress required us to evaluate the differences between the regulation of credit unions and the regulation of banks and thrifts.

Some of you may recall that we have already done that. Indeed, our 1997 report devoted one chapter and a lengthy appendix to just such a comparison. This time around, we will cover not just safety and soundness regulations but all important rules under which depository institutions operate. And we will pay particular attention to how the NCUA is implementing H.R. 1151's safety and soundness provisions, including prompt corrective action.

Second, Congress required us to study credit unions' exemption from the federal income tax and the potential effects of changing that exemption. Congress also invited us to provide recommendations regarding the taxation of small banks (or other recommendations to preserve the viability of small banks). Unlike the comparability of bank, thrift, and credit unions regulations, the tax issue was not part of our previous study.

Third, Congress required us to study credit unions' member business lending. You may recall how last year's Congressional debate shed more heat than light on that subject, and reflected broad disagreement about what these loans are and who they are made to. Our goal is to turn up the light and contribute to a better understanding of credit unions' business lending.

Indeed, Congress has asked us to do just that. Congress directed us to report on member business loans by the size of the loan, and by the type and size of the businesses that receive such loans. Difficult as answering that question will be, Congress has also asked us to study the extent to which member business loans help meet the financial service needs of low- and moderate-income individuals within credit unions' fields of membership.

As you know, credit union call reports do not have this kind of information, nor does the NCUA otherwise collect it. Thus the only way for us to fulfill our obligation to Congress is to ask you for your assistance.

Working with and through the NCUA, we expect to survey credit unions about their member business lending. Only with thoughtful, complete responses can we gather the information that Congress has requested. I would like to ask those credit unions that receive our survey to take the time to respond carefully.

Let me put this request in context. During last year's Congressional debate over member business lending, credit unions tried to tell a story about the importance of this aspect of their business. Think about the time spent in responding to this survey as a means of helping tell your story about member business lending.

We currently expect to issue a single report later this year that will respond to all three of the study requirements. As with our 1997 report, we are taking our Congressional mandate seriously. We will give careful consideration to each of the issues we have been asked to address. And we will remain open for input from CUNA and others as we move forward.

Let me turn now to a more immediate and difficult issue.

The C.F. and Y2K Liquidity

Those of you that heard me speak at this conference last year may recall that I spoke at some length about the Central Liquidity Facility. As the 1997 Treasury report concluded, and as I reiterated here last year, we find that the C.F. provides a false sense of security and is not up to the job of being an emergency lender of last resort.

This may be the conclusion from our report that credit union folks have been the most reluctant to accept. Yet I have heard nothing over the past year to suggest some flaw in our analysis.

Now that a full year has passed since then, we find ourselves back in discussions about the C.F. This time, the discussion centers on Y2K-related concerns. Careful liquidity preparation for Y2K is prudent and necessary. Consideration of where liquidity will come from in a highly unlikely, yet conceivable, liquidity crisis is also prudent and necessary.

Some of you know that we at the Treasury have been actively engaged on this issue for several months. You also may know that Secretary Rubin sent a letter to Congress in January stating that we saw no need for legislative action involving the C.F.

I want to assure you that we are continuing to work with the Federal Reserve, the NCUA, CUNA, and others to ensure that appropriate contingency plans are in place. I would also like to ask that you continue to give serious thought to the concerns that the Treasury has raised regarding the C.F., and to consider long-run options for meeting credit unions' liquidity needs.

Conclusion

In conclusion, let me reiterate my appreciation for the candor and goodwill that have marked the relationship between CUNA and the Treasury over the past few years. While we may not have always agreed, I believe that we have had a highly constructive working relationship. We at the Treasury look forward to continuing that relationship in the months and years ahead.

See Photo.