Statement of Dennis Dollar Before US House of Representatives

STATEMENT

DENNIS DOLLAR, ACTING CHAIRMAN

NATIONAL CREDIT UNION ADMINISTRATION

BEFORE THE

SUBCOMMITTEE ON VA, HUD, AND INDEPENDENT AGENCIES

OF THE

COMMITTEE ON APPROPRIATIONS

U.S. HOUSE OF REPRESENTATIVES

MAY 15, 2001

Good morning, Mr. Chairman and members of the Subcommittee. I am pleased to be here to present the National Credit Union Administration’s request for the NCUA Central Liquidity Facility (CLF). Appearing with me today are Herbert S. Yolles, President, Central Liquidity Facility and Deputy Director, Examination and Insurance; Owen Cole, Vice-President, Central Liquidity Facility; Anthony La Creta, Acting Director for Community Development Credit Unions; and Robert Fenner, NCUA’s General Counsel.

The CLF, established in 1979, serves as a liquidity source for credit unions. The CLF borrowing authority is not used to build up credit union loan volumes because the Federal Credit Union Act prohibits using proceeds from CLF loans to expand credit union portfolios. Rather, the funds are advanced strictly to support the purposes stated in the Federal Credit Union Act – liquidity needs of credit unions – a policy recently restated by the NCUA Board. The CLF sustains confidence in the credit union system, as credit unions know that during periods of temporary liquidity shortages, an alternative, special purpose lending facility is available to meet their needs.

The CLF is owned by its member credit unions, which contribute all of the CLF’s capital by the purchase of stock. When a CLF member has a liquidity shortfall due to short term, seasonal or protracted needs, it may seek a loan from the CLF. The CLF can finance a limited amount of lending activity from its assets, but it also has the authority to borrow to meet liquidity demands. Currently, the CLF utilizes the Federal Financing Bank as its exclusive source for borrowing funds.

Until fiscal year 2000, the limit on CLF borrowing for new loans to credit unions included in the appropriations bills was $600 million. For fiscal year 2002, the CLF budget submitted by the Office of Management and Budget seeks to reimpose the $1.5 billion limit on borrowing set by Congress last year. OMB also requests a $309,000 limit on administrative expenditures for fiscal year 2002. We believe that the cap on the CLF’s borrowing authority is unnecessary and should be omitted from the Appropriations bill, as it was for fiscal year 2000 in the supplemental appropriations law, P.L. 106-31. It should be stressed that an increase in the borrowing limit has no budgetary or scoring impact.

The Federal Credit Union Act also limits the CLF’s borrowing authority. Under the Act, the CLF’s borrowing is limited to 12 times its subscribed stock and surplus, currently a limit of about $21 billion. When Congress first imposed the $600 million limit in 1980, $600 million exceeded 12 times the subscribed stock and surplus of the CLF by more than $200 million. Despite the dramatic growth in credit unions and increase in the CLF’s subscribed stock since 1980, the appropriations limit was not adjusted until your legislation for fiscal years 2000 and 2001.

As you know, Mr. Chairman, in anticipation of potential liquidity demands due to the Year 2000 date change, this Subcommittee removed the cap on CLF borrowing in the supplemental Appropriations measure for fiscal year 2000. For fiscal year 2001, we commend your Subcommittee for increasing the borrowing ceiling to $3 billion. The Senate bill maintained the $600 million ceiling. The final compromise amount was $1.5 billion. We were comfortable with this final figure in the 2001 fiscal year budget, and, because liquidity demand remained low, the $1.5 billion figure indeed proved adequate for 2001. In our estimation, the $1.5 billion would remain adequate for 2002 if current trends continue.

With the exception of a brief period of anticipatory borrowing prior to the Year 2000 century date conversion, the CLF has been largely inactive for the past five years. The CLF continues to experience infrequent demand for liquidity loans from its member credit unions. This is due, in no small part, to the strong financial position of credit unions and the ample levels of on-hand liquidity maintained during the 1990s. This is not to say, however, that credit unions are not in need of a special purpose liquidity lender. The CLF is a very important resource for credit unions that experience an unexpected need for liquidity, especially when primary funding sources are inadequate or unavailable.

We cannot foresee the exact circumstances that might necessitate a broad-based need for CLF lending but we are dedicated to the principle that we must be ready and able to fulfill that purpose; a purpose established by Congress when it created the Facility. In recent years, liquidity has been a significant issue. For the past few years, credit unions have continued to increase loans to members faster than they have raised new shares. Thus, the amount of on-hand liquidity they can readily convert to cash has diminished as a percentage of assets. Liquidity remains an important priority. Like all depository institutions, credit unions are forced to borrow if their on-hand supply of liquidity is depleted beyond the level of current funding obligations. Credit unions do plan for such borrowing but there are times when contingency funding arrangements are potentially inadequate. Such times call for a responsive CLF.

The CLF made one loan in January of this year that typifies its importance to member credit unions. It was a small loan of $4 million for 90 days but it was a major source of stability for the borrower. The loan request came from a CLF Agent, in this case a corporate credit union that was borrowing on behalf of one of its member credit unions. The member credit union is affiliated with a sponsor manufacturing facility that suddenly commenced a series of intermittent plant closures. The plant began closing for two weeks and reopening for two weeks on a rolling basis. Effectively, the cash flows of the individual members were cut in half and the shares of the credit union were similarly impacted. As employee paychecks are a big part of the core deposits, this unexpected disruption caused an immediate and substantial demand for funds that exceeded the credit union’s established credit line with the corporate. With an advance from CLF, the Agent quickly was able to address the liquidity needs of the credit union while meeting its other fiduciary obligation to adhere to regulatory and board-established credit limits.

Whether it lends on an isolated basis or whether it is called upon to address a more widespread or even systemic demand for loans, the CLF is an efficient, effective, and low cost facility that is well adapted to meet the unique needs of its member credit unions.

Although we are all pleased that Y2K-related withdrawals did not materialize in the amounts we prepared for and that borrowing has been low since then, we should not conclude from this experience that a higher borrowing cap is unnecessary. The fact that the timing of the Y2K event was widely anticipated and generally foreseeable makes it a poor example for gauging the likely magnitude of an actual liquidity emergency. Typically, liquidity emergencies occur with little or no warning and may result from any variety of adverse economic or financial events. The severity and duration of such a liquidity emergency are also impossible to forecast.

Rather, we concluded from the Y2K experience that the CLF’s capacity to borrow and lend is importantly tied to the public’s perception of the health of credit unions. The confidence generated by an adequate liquidity resource strengthens the stability of the system and may actually obviate or mitigate the need for a costly liquidity build up on the part of credit unions. The knowledge that the CLF was available as a backstop, and that funds for liquidity would be forthcoming, was also an important factor in lessening actual liquidity demand at year’s end. Credit unions knew that, if needed, the CLF could borrow adequate funds to meet liquidity demand, and they communicated this confidence to members. This, in turn, reduced members’ perceived needs for accumulating additional cash. Thus, the CLF has an important psychological effect, even without lending activity.

The imposition of an inadequate borrowing cap on the CLF, however, could prevent it from fulfilling its statutory mission to promote credit union stability by providing liquidity and could potentially destabilize member confidence during an abrupt, unanticipated emergency situation. An unreasonably low borrowing cap severely restricts the CLF and would very likely prevent it from functioning as intended in the event of even a moderate liquidity strain.

NCUA supports the Administration’s request of $309,000 for our fiscal year 2002 operating expenses. Actual fiscal year 2000 operating expenses for the CLF were $230,000 – significantly below our budget limitation of $296,303. Fiscal year 2001 expenses are estimated to be $296,000. Fiscal year 2002 operating expenses are estimated to increase only slightly because of normal salary increases. These administrative expenses do not come from appropriated funds, but are paid from the CLF’s income.

Turning to another subject, I would like to thank this Subcommittee for its efforts in providing an additional $1 million for the Community Development Revolving Loan Fund (CDRLF) in fiscal year 2001. We do support OMB’s request of $1 million for fiscal 2002. As you know, the Fund makes loans and technical assistance grants to low-income credit unions. We were gratified that for the first time ever, $350,000 of this funding was dedicated to providing technical assistance grants. The appropriation for technical assistance was particularly useful, as the only other source for NCUA’s technical assistance is earnings on the CDRLF funds. Because CDRLF loans are low interest – the current interest rate is two percent – the earnings generated are insufficient to meet all the technical assistance requests. For example, in fiscal year 2000, while we granted $292,729 in technical assistance to 116 credit unions, we denied $203,826 of such requests – not because the applications lacked merit, but because we lacked the funds. The NCUA Board constantly struggles with the tension between the need to keep loan interest rates low and the need to generate interest income in order to be able to provide additional technical assistance. The additional funds for technical assistance provided last year greatly assisted our efforts to provide technical assistance to low-income credit unions.

I am proud of NCUA’s stewardship of the CDRLF. Since 1987, when the NCUA began administering the Fund, we have revolved our $12 million appropriation ($6 million initially, $1 million added in fiscal years 1997, 1998, 2000 and 2001, and $2 million added in fiscal year 1999) into 177 loans totaling $27 million and 290 technical assistance grants totaling $1.8 million. In fiscal year 2000 alone, we approved 25 loans to 25 credit unions for a total of $5.5 million. As of April 30, 2001, our pending loan applications total $1.35 million and pending technical assistance applications total $152,277. We greatly appreciate the Subcommittee’s continued support of our efforts to provide assistance to low-income credit unions.

Finally, I would like to briefly summarize the current condition of credit unions and the National Credit Union Share Insurance Fund (NCUSIF). Overall, the credit union system continues to be in robust health.

Credit unions had another banner year in 2000 -- assets and capital are at record levels, while the number of problem credit unions remains low. During 2000, total assets of federally-insured credit unions increased by 6.1%, from $411.4 billion to $438.2 billion. Despite the increase in assets, credit unions’ overall capital to asset ratio remained strong at 11.4 percent, on average. Problem credit unions (those rated code 4 or 5) represent less than one half of one percent of total shares, and the total number of problem credit unions declined from 338 to 202. These figures demonstrate the continued overall safety and soundness of the credit union system.

The credit union insurance fund also remains strong. For the sixth consecutive year, and the seventh time in its history, the National Credit Union Share Insurance Fund returned a dividend to credit unions on their deposits in the fund. The dividend this year totaled $99.5 million. The timing of the dividend payment changed in order to comply with a provision of the Credit Union Membership Access Act that became effective this year requiring dividends, if any, to be paid following the close of the calendar year. In December, before the dividend payout, the equity level of the Share Insurance fund reached 1.33 percent. Even after the dividend, the Insurance Fund returned to the normal operating level of 1.30 percent of insured deposits on January 31, 2001.

In summary, the credit union industry remains in excellent condition, with a strong insurance fund. While demand for technical assistance and loans still outstrip supply, low-income credit unions are receiving more assistance than ever before, thanks to the efforts of this Subcommittee.

Mr. Chairman, thank you for allowing me to testify today. I will be happy to answer any questions.