Vision, Innovation and
Credit Union Regulation

Remarks by NCUA Board Member Dennis Dollar
at CUNA Governmental Affairs Conference

Washington Hilton and Towers
Washington, DC

Delivered February 28, 2000

I want to speak with you today about the new millennium, not from the point of view of Y2K (which is history and you have already heard too many speeches about that) or to give you my personal exposition of where your credit union should be 20 years from now (that is your future and requires your vision, not a regulator’s definition).

But I do want to talk to you about the new dynamic of this new millennium and how it is affecting your credit union TODAY. I would like for us to together this morning look at the things that need to be done TODAY to position you to not only still be around 20 years from now, but to be a leader in meeting the financial needs of your member-owners in not only this generation but the next as well.

And I want to especially share with you some of my thoughts on how we at NCUA can help create a regulatory environment that enables you, even empowers you, to not only have a vision of what you want to be to your members in the generations to come...but to actually be able to get there safely and soundly and without UNNECESSARY regulatory impediments.

Anytime an organization begins a new era, there is always a lot of talk about strategic re-examination...setting goals...internal self-study and analysis.

This, of course, is needed, not because of a new millennium, century, decade or year - but it needs to be done because there are always new dynamics in a rapidly changing marketplace which require it. That is certainly the case now.

The title of my remarks is "vision, innovation and credit union regulation"...vision...innovation... these vital ingredients to credit union success must come from you. They cannot be defined and should not be defined by your regulator. The approach to credit union regulation that we take is what either will allow your vision and innovation to manifest itself or will serve as an obstacle to achieving your vision and becoming more innovative in serving your members.

You know my regulatory philosophy

---FAA Analogy

This must be the philosophy of NCUA in this constantly changing marketplace which will soon see:

---Insurance agent taking deposits for a CD

---Bank teller offers homeowner’s insurance

---Stock Broker making car loans

---Everything offered on-line and can be purchased from the terminal or tv in your bedroom

I was asked recently what is the most significant congressional action of recent years for credit unions. My two-pronged answer may have surprised you.

Although HR 1151 without question had the most dramatic and positive impact on credit unions right to compete in the marketplace after the trying period credit unions faced following the Supreme Court’s ATT decision, I believe the new financial modernization legislation will have the most significant long-term impact on HOW credit unions will have to compete in the marketplace and WHAT the marketplace you have won the right to compete in will look like in the future.

I have heard it said that credit unions were not directly affected by the new financial modernization legislation recently passed by Congress and signed into law by the President.

That is akin to saying someone who lives by the shore is not directly affected by rising water because he is not a fish.

The rising waters of modernization and re-structuring are changing the shoreline of the financial marketplace daily.

Credit unions are an integral part of that financial marketplace, not an appendage.

And credit unions must realize that changes in that marketplace are going to affect them directly.

We as regulators must realize that as well and must react to that changing environment in a way that encourages those we regulate to innovate and demonstrate their vision to not only as Faulkner wrote "to endure, but to prevail."

Government has a tendency to regulate to the last crisis. I think our greater challenge is to foresee and avoid the next crisis.

I see the ability to compete in the changing marketplace with innovation and with quick response to marketplace needs as potentially the next crisis for America’s credit unions.

Despite our long history and inspiring tradition, credit unions are not exempt from competing in this new marketplace. Through HR 1151, you fought for and won the right to compete in the marketplace. Now, you have the responsibility to step forward and meet those marketplace challenges head-on.

There is no exclusion clause from marketplace realities.

If you meet the growing needs of your members for the best in the member services, you will not only succeed but prevail.

Now, contrary to what some may claim, that does not mean that you must be large to meet those needs, for each credit union must map its own growth strategy based upon its field of membership and that membership’s needs and demands.

Some will grow and succeed. Some will remain at their present size and succeed.

Some will take in SEGs and succeed. Some will remain single-sponsor and succeed.

Some will change their charter and succeed. Some will maintain their existing charter and succeed.

But no credit union will be insensitive to its members needs and succeed.

They have too many other choices in today’s marketplace. And more are always coming.

Individual credit unions should not waste their energies complaining about a dissatisfied member who left and joined another credit union.

Credit unions should focus their energies on finding out why that member was dissatisfied and, wherever possible, fix the problem. Credit unions must meet unmet needs or others will.

We can’t quote Filene and Bergengren and act as if the marketplace of the 30s they faced when they showed their vision to birth this dynamic American credit union movement is the same marketplace faced by you - the credit union pioneers of this new millenium.

Filene and Bergengren established a credit union movement capable of and, in fact, destined to grow and strengthen itself with changing times. Well, as Bob Dylan said in what was an era of social change in the 60s but a time of financial market stability, the times they are indeed a "changin."

Like most children of the 60’s who used to listen like I did to Norman Greenbaum’s "Spirit in the Sky," they are probably listening much closer today as I am to Alan Greenspan’s lyrics on interest rates. Yes, times have changed and are yet destined to change even further.

But as things change in this fast-paced marketplace, we are true to the original pioneers of credit unionism when we extend their historical commitment to quality member service to folks from all walks of life through a not-for-profit, volunteer-driven financial cooperative and we extend that time-honored structure and commitment into a new era of technology, a new era of heightened competition and a new era of increased member demands by using every appropriate and safe tool available to serve our members better.

When we talk about balancing our vision for the future with our commitment to our heritage, we must think like our nation’s visionary founders. Thomas Jefferson certainly never envisioned the internet. Yet he helped birth over 200 years ago a constitutional republic fully capable of not only fostering the development of the world wide web, but also flexible enough to find a way to use that technology to allow its citizens to apply for their government benefits and read a federal agency’s regulations from a terminal in their own living rooms. Vision and heritage working hand in hand.

Likewise, Filene and Bergengren likely never envisioned kiosks, audio response and interactive home banking, but they created a credit union movement founded upon responsiveness to the member-owner and a commitment to meeting their financial needs. It was a dynamic movement with the vision to change as the members needed change and to match its vision to the vision of its members.

In short, we have to catch a vision of where our members want to see us go in the future - and go there - safely, soundly and with planning, but GO THERE.

Credit unions cannot expect their members to demand less technology, fewer services, less convenience...simply because they are committed to cooperative credit.

As credit union leaders, you must rise to the demands of your members in this new dynamic marketplace.

Be willing to innovate. Be imaginative. Be like the wife who complained to her friends that her husband had begun doing weird things like getting up in the middle of the night, taking out his fishing pole and dropping it in and out of their bathtub for hours at a time. When asked if she had called a doctor to see him about it, she said she didn’t have time to call a doctor with all of those fish she had to clean.

You have to catch that kind of vision. We have to make sure the rules allow you to catch it.

Referee analogy

---You must decide if the game situation requires a run or a pass. We must make sure you do not hold, jump offsides or go out of bounds . It is beyond the proper role of a referee to call the plays. How much would you enjoy a game where every time to team breaks huddle and comes up to the line of scrimmage, the referee throws a flag because he thinks they are getting ready to jump offside. (After all, one other team jumped offside one time a few years back in a similar formation.)

That is not good referee-ing and it would not be good regulating.

As a result of the well-developed game plans credit unions have been running and a judicious use of our penalty flag to maintain the integrity of the rules, credit unions are further ahead in the game of safety and soundness than ever before. We want to see you stay there as you face the increased demands of this changing marketplace.

Our job at NCUA is to enable credit unions to compete on a tough field successfully - again, not by calling the plays, but by letting the credit unions run their own game plan as long as it is run by the rules of safety and soundness.

As a part of my firm belief in this regulatory philosophy, I have recently announced a regulatory flexibility proposal that I am calling "Reg-Flex."

Today, after over a year of gathering data and almost six months of working with credit unions, NCUA officials, state regulators, trade associations and other federal officials, I would like to take a few moments to outline the broad overview of the "Reg-Flex" proposal I will be bringing before the NCUA Board at our March 16 meeting.

First, Reg-Flex is based upon a belief that NCUA must get away from a "one size fits all" regulatory approach and recognize the differences in individual credit unions. Safe and sound, well-capitalized, well-managed credit unions who have proven their ability to effectively manage risk (and that is your job - to manage risk - not to avoid risk or you would never make a loan or open a branch) have earned, in my opinion, greater regulatory flexibility from certain NCUA regulations which are not specifically required by statute and which have very minimal safety and soundness ramifications when applied to well-capitalized credit unions with such outstanding risk management records.

Such a regulatory approach will result in the removal of unnecessary regulatory obstacles for those credit unions and give them incentive to maintain and even enhance those high levels of financial performance. It will also better enable them to remain competitive in the financial marketplace, foster innovation in member service and extend service to the underserved.

I am a firm believer that extending credit union service to folks from all walks of life is the heartbeat of America’s credit unions. It is what you do every day - without a federal regulation making you do it.

I also know from personal experience as a credit union manager that the single biggest deterrent to extending service to the underserved is often NCUA’s own rules and regulations which can and sometimes do serve to stifle the very innovation and credit union desire to extend service that we at NCUA seek to see you provide.

That is why I feel Reg-Flex is such an important regulatory initiative. It can help shape NCUA’s regulatory focus for this new marketplace.

It will enable the innovation necessary to meet the marketplace demands for increased member service by removing many of the hurdles faced by those who seek to innovate. It is a recognition that, as safety and soundness regulators, we are most effective when we create a regulatory environment which enables those we regulate to call their own plays, meet their own members needs, fulfill their own social contract with their membership - and do all of this within the clearly defined bounds of safety and soundness.

I will be asking my colleagues on the NCUA Board to join me next month in putting out for your comment an Advanced Notice of Proposed Rulemaking which will solicit your thoughts and input in developing a final regulatory flexibility rule in the year 2000.

Among the specific areas in Reg-Flex that we will be seeking your comment on are these.

The trigger.

To be eligible for Reg-Flex, a credit union must have been rated a CAMEL code 1 or 2 for the past two examination cycles and have net capital of 9% or greater.

Generally, this signifies a credit union that has both demonstrated the ability to build capital and has accumulated at least a 200-basis point cushion over the minimum level to be classified as well capitalized under NCUA’s recently adopted prompt corrective action regulation.

These credit unions clearly represent a reduced safety and soundness risk, both to their own members and to the share insurance fund. They have shown historical performance that clearly indicates safe and sound operations, demonstrates positive key performance ratios, and exhibits the ability to withstand potential future business fluctuations.

However, at any time in the future, it must be pointed out that should our ongoing examination and supervision program determine that those positive trends which earned the Reg-Flex eligibility for a credit union begin to show deterioration, the regional office at NCUA will be authorized to revoke the Reg-Flex authority in whole or in part at any time. Although some will dislike this feature of Reg-Flex, it is essential to the integrity of any regulatory flexibility proposal that it be based on earning and maintaining a higher standard of financial management and performance.

Among the regulations that Reg-Flex eligible credit unions may see exempted or more flexibility provided in whole or in part are:

---The 5% cap on fixed assets. Why should we make the business decision for a CAMEL 1 or 2 credit union with 12% capital as to whether they can afford a new mobile branch or a computer upgrade? This classic "one size fits all" regulation has long been in need of an update and Reg-Flex will give us the opportunity to do so. We look forward to your comments on the fixed assets cap.

---Expanded investment authority. Reg-Flex credit unions could be eligible to apply for some investment flexibility regarding both the type of securities allowed and the limits on those securities. (Although it should be realized that any expansion in authority would still be of a conservative nature befitting the traditional credit union investment portfolio) We sincerely seek your comments and guidance in this important area.

---Charitable donations. Why should NCUA tell a highly-capitalized, well-managed credit union whether they can sponsor a little league ball team or donate to a local cancer drive? Reg-Flex will remove such restrictions for eligible credit unions and we encourage you to give us your thoughts on that.

---Appraisals. Reg-Flex would seek to make the required appraisal threshold of $100,000 into one more consistent with that required by other federal financial regulatory agencies...$250,000 is the proposed figure. Again, we sincerely seek your comment.

---Public Unit Shares. Reg-Flex eligible credit unions would be exempted from certain of NCUA’s regulatory restrictions on shares from public bodies, as well as non-member shares that low-income credit unions are authorized to receive but which are limited by regulation.

---Other areas under consideration for possible inclusion in Reg-Flex are higher loan-to-value ratios being allowed for member business lending; expanded group purchasing options; expanded authority on the purchase, sale and holding in the credit union’s portfolio of allowable eligible obligations; and a field of membership related issue to encourage credit unions to expand into an underserved area by freezing the asset base used for calculating the credit union’s operating fee for a two year period, thus giving credit unions who take in an underserved area a two-year break on growth in their operating fee to enable them to build the assets and extend the service necessary to meet the needs of the underserved area.

At present, there will be approximately 3800 federally chartered credit unions who would be eligible for Reg-Flex. I want you to catch this figure. 56.8% of the credit unions eligible for Reg-Flex today are below $10 million.

This is important because we all share concern about the challenges for the small credit union in this changing marketplace.

But I must tell you that I am not a pessimist who believes that the small credit union is an endangered species who cannot compete and meet the needs of their members.

Let’s look at some figures.

As of June 30, 1999, there were 10,837 credit unions insured by the National Credit Union Share Insurance Fund. Do you know how many of the 10,837 have assets less than $20 million?

7,843 - 72.3%

And do you know how many of the remaining 2994 credit unions were once below $20 million in assets?

That’s right. All of them.

Every credit union in America is either a small credit union or once was.

Those who say that small credit unions can’t compete in today’s marketplace are selling them short.

Credit unions of all sizes and types, small and large, occupational and community, federal charter and state...are not only succeeding in this competitive marketplace but are prevailing. Why?

It’s because they are meeting the needs of their members. And doing it well.

We at NCUA can help them to do it even better. How can we do that?

I believe NCUA can help credit unions considerably by removing the unnecessary regulatory requirements that adversely impact all credit unions - but always seem to impact smaller institutions more than larger ones simply because small credit unions do not have the resources to hire a compliance staff or set up an internal audit department.

Read letter from David Wright, Services Center Federal Credit Union in Yankton, South Dakota.

Mr. Wright is correct, and I hear it all over the country as I travel.

If NCUA wants to help me survive as a small credit union...if NCUA wants me to extend service to the underserved...if NCUA wants me to meet the growing demands of a changing marketplace while staying safe and sound - then give me some flexibility within your regulations. As Mr. Wright wrote, "remove the weights" and "let me run."

As long as both you as a credit union and we at NCUA never sacrifice safety and soundness, then I believe you should be allowed to run with only the most essential of weights. Greater regulatory flexibility can be a valuable earned benefit for those credit unions with strong capital and a proven record of risk management. And it can be a real incentive to maintain that record.

That is what Reg-Flex is all about.

I want to encourage you to comment on Reg-Flex, to help us structure it into an effective regulation that maintains safety and soundness, provides an incentive to stay strong, and gives the needed regulatory flexibility to foster innovation, extend service and catch that vision we spoke of a moment ago.

I want to thank CUNA, who along with NAFCU, NASCUS and the National Federation of Community Development Credit Unions, have organized credit union focus groups that have already met with me and contributed greatly to formulating the advance Reg-Flex proposal I have outlined here today.

We do not have all of the answers in Washington. In fact, the best guidance on how to remove unnecessary regulatory burden comes from those of you who are in the trenches of credit union member service every day carrying the extra weight of regulations which just shouldn’t apply to everyone. I hope you will participate in this process. We need and value your input.

Let me close by saying thank you again to CUNA for the opportunity to address you today and for the few extra minutes to talk specifically about my Reg-Flex proposal.

As a former credit union manager, it is always an honor and a highlight of each year to be asked to address the GAC. Although I now wear the hat of a regulator, I consider myself fortunate as I serve on the NCUA Board to have also seen life from the other side of the table...your side of the table, the regulated.

Yes, the regulator and the regulated may from time to time look at issues from a different perspective...that healthy tension we so often talk about. But I always look forward to working with you in the credit union movement to help find ways TOGETHER, with vision and innovation on your part and a regulatory environment on our part which encourages you to reach for that vision and innovation within the bounds of safety and soundness, to assure the credit unions difference for folks from all walks of life in this generation of members and many generations to come.

Thank you very much.