FROM THE OFFICE OF PUBLIC AFFAIRS

I. Introduction

I appreciate the opportunity to speak to you this morning about the Treasury's study of credit unions.

I'd like to begin by thanking Dan Mica for inviting me and for all the cooperation we received from CUNA in the course of the study.

I also want to express our appreciation for the input we received from credit unions across the country, including quite a few of you here today.

You as credit unions have a great story to tell. A story about people working together. A story about mutual self-help. And a story about satisfied members.

On December 22, 1997, the American Banker published its annual customer satisfaction survey. This survey found that credit unions continue to rank highest of all financial institutions, with 73 percent of credit union members saying they are "very satisfied" with their credit union. The American Banker called credit unions "the perennial service quality champs."

As we did our study, I was reminded of how unions come in all shapes and sizes. The credit unions we visited exemplify that diversity.

For example, we visited a $2 million credit union run by one person. We visited a credit union that operates out of an inner-city church basement -- and has a 50-year history of working with immigrant populations. We also visited large, sophisticated credit unions that offer their services over the World Wide Web. Despite the differences among these credit unions, each had a strong focus on serving its members.

Credit unions also have a great story to tell about their financial soundness. The credit union system today is financially solid.

Credit unions have significantly increased their net worth over the past five years. As a group, you now have net worth exceeding 11 percent of total assets. This is prudent and far-sighted. A strong base of net worth puts you in a strong position to lend to your members, generate returns for your members, and serve your members through good times and bad.

But times have been good. Increased net worth, growing loan portfolios, and a prosperous national economy have meant few credit union failures. The National Credit Union Share Insurance Fund has suffered few losses in recent years and has paid dividends on your 1 percent deposit in each of the past three years. The Fund has had to assess insurance premiums only once since 1985, when the 1 percent deposit system took effect. That fact highlights the Fund's resilience and the strong performance of credit unions even during the regional recessions of the 1980s and the national recession of the early 1990s.

One additional general observation: by emphasizing service to members over pursuit of the bottom line, credit unions add something special to our financial services system. That's also a great story.

We at the Treasury worked on our study of credit unions for over a year. We met with, and listened carefully to, hundreds of people. And last December we published a report setting forth our findings and recommendations. The report is 125 pages long; I can't cover it all in the time we have here. I do want to note that copies of the full report, or our 13-page summary, are available from CUNA.

They're also available at the Treasury's web site on the Internet.

I'm going to turn now to four selected topics from the report. First, the National Credit Union Administration's safety and soundness regulations. Second, whether the NCUA should continue to administer the Share Insurance Fund. Third, whether credit unions' 1 percent deposit in the Share Insurance Fund should continue to be treated as an asset on credit unions' books. And fourth, credit unions' access to emergency liquidity.

II. The NCUA's Safety and Soundness Regulations

I'll start with the NCUA's safety and soundness regulations. We reviewed all of those regulations. We also compared them with the safety and soundness regulations that apply to other federally insured depository institutions. We found some differences between the two sets of rules. When we did, we asked whether the differences made good sense. Throughout this process, we kept in mind that credit unions are not-for-profit cooperatives -- which gives them a distinctive character. We kept in mind that credit unions come in all shapes and sizes. And we kept in mind that many credit unions are smaller and have simpler portfolios than many banks and thrifts.

But we did find points on which we believe action by Congress or the NCUA is appropriate. I want to talk about three of them this morning. The first involves the process by which the NCUA makes major safety and soundness policies and lets credit unions know about them. You might call it rulemaking for short. I'll come back to it in a moment. The second involves net worth requirements. And the third involves prompt corrective action.

Let's first look at the way that the NCUA makes major safety and soundness policies and then lets credit unions know about those policies. We found that the NCUA had a greater tendency than the other federal financial regulatory agencies to put fundamental safety and soundness policies not in regulations but in guidelines, manuals, policy statements, or standard by-laws. For example, if you wanted to find the limit on loans to one borrower, you had to look in the standard by-laws. Informality can be good. But it's also important to know what the real rules really are. Some seemingly informal policies can get treated like rules: if the examiners find you violating them, they'll criticize you. If that's what's going on, the rule should be written down in a place you can find it.

We recommend that the NCUA make important safety and soundness rules readily accessible to credit unions. We also recommend that if the NCUA means for a rule to have the force of law, it should give people a chance to comment before it adopts the rule.

This approach would benefit credit unions in at least three ways. It would provide clarity -- so that credit union managers and directors know what is expected of them. It would promote consistency. And it would make for better rules. Rules are almost always better when they're made through an open process with plenty of input from the people who will have to comply with them.

The second area where we recommend action involves net worth requirements. Net worth forms the buffer that protects credit unions and the Share Insurance Fund from losses. As I noted earlier, credit unions as a group are very well capitalized -- with 11 percent net worth to total assets. We at the Treasury believe that now is the right time to formalize a requirement that credit unions have at least 6 percent net worth to total assets in order to be in good standing. 96 percent of credit unions have more than 6 percent net worth, and those credit unions hold 98 percent of total credit union assets. We would also propose that credit unions set aside, as retained earnings, a small percentage of gross income if they have less than 7 percent net worth. 93 percent of credit unions have more than 7 percent net worth, and those credit unions hold 93 percent of total credit union assets.

The third area we point to involves prompt corrective action. Prompt corrective action is a net-worth-based approach to safety and soundness supervision. It seeks to resolve net worth deficiencies before they grow into large problems. You can think of it as a structured decision-making process aimed at ensuring timely regulatory action. Prompt corrective action has applied to all other federally insured depository institutions since 1992, and the results have been good.

We recommend that Congress establish a system of prompt corrective action for credit unions -- specifically tailored to credit unions as not-for-profit, member-owned cooperatives. We have in mind a system that would take effect 18 months after enactment.

Such a system of prompt corrective action would benefit credit unions and the credit union system. It would reinforce the commitment of credit unions and the NCUA to resolve net worth deficiencies promptly, before they become more serious. It would promote fair, consistent treatment of similarly situated credit unions. It should reduce the number and cost of future credit union failures. In so doing, it 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. And it would respect and complement the cooperative character of credit unions.

These changes -- involving little cost or burden today -- would pay good dividends to credit unions and their members for many years to come.

III. National Credit Union Share Insurance Fund

My second and third topics involve the National Credit Union Share Insurance Fund.

A. Who Should Administer the Share Insurance Fund

Congress required us to report on whether some entity other than the NCUA should administer the Fund. There is some potential for the NCUA's mission as a charterer or supervisor to conflict with its responsibilities for administering the Fund. But we believe that separating the Fund from the NCUA would not be the best response.

We believe that the system of prompt corrective action that I've just described would mitigate any potential conflict between promoting credit unions and protecting the Fund. We accordingly recommend that the NCUA continue to administer the Fund.

B. The 1 Percent Deposit

Congress also required us to report on whether credit unions should continue to be permitted to count their 1 percent deposit in the Share Insurance Fund as an asset on their own books. Now bankers, the Bush Administration, and the General Accounting Office have expressed concern that this involves double-counting of capital because it treats the same dollars as reserves of the Fund and as assets of credit unions. Capital can't be in two places at once, they say. So they advocate requiring credit unions to write off the 1 percent deposit.

But saying that there's double-counting doesn't mean that the 1 percent deposit should be written off. The basic goal is to provide adequate protection for the Share Insurance Fund and the taxpayers who stand behind it. Three reforms that I outlined earlier are particularly relevant here: a 6 percent net worth standard; a requirement that credit unions with less than 7 percent net worth set aside some of their income as retained earnings; and a system of prompt corrective action. We believe that these measures, coupled with existing safeguards, will ensure adequate protection of the Fund. By contrast, requiring a writeoff the 1 percent deposit wouldn't be nearly as constructive. Accordingly, we recommend against requiring a writeoff.

C. A Technical Reform

I'd also like to mention a technical recommendation involving the Share Insurance Fund. The NCUA calculates the Fund's reserve ratio by dividing the current month's reserves by the insured shares at the end of the preceding calendar year. This means that it calculates each year-end reserve ratio using a denominator that's a year old. That just doesn't make sense. We recommend calculating the reserve ratio by dividing the current reserves by the current insured shares, and using the most recent data available for each.

IV. Credit Unions' Access to Emergency Liquidity

I want to turn now to the fourth topic from the study: credit unions' access to emergency liquidity. This topic came to our attention as we reviewed corporate credit unions. Corporates provide their member credit unions with a safe place to invest unloaned funds. And one way they can invest those funds is by lending them to other credit unions. The corporate system does a fine job of reallocating excess liquidity.

But what would happen if we had a systemic crisis, whether in the financial system generally or in the credit union system specifically. What if, in the midst of that crisis, there were no excess liquidity? Let me emphasize that our financial system is in excellent shape right now, and that even in the future such a crisis would be extremely unlikely.

But public officials are paid to worry about things like that -- and to make sure that such a challenge could be handled if it did arise.