Yesterday, the House Financial Services Committee's Subcommittee on Financial Institutions and Consumer Credit held a hearing on H.R. 2351, the “Credit Union Share Insurance Stabilization Act,” which would “recapitalize the credit union deposit insurance system to ensure the long-term stability of the credit union system.” In his prepared remarks, Representative Paul E. Kanjorski (D-PA), who introduced the legislation, commended Subcommittee Chairman Luis Gutierrez (D-IL) for urging Senator Christopher Dodd (D-CT) to incorporate the creation of a credit union stabilization fund into S. 896, the “Helping Families Save Their Homes Act,” which President Obama signed into law yesterday afternoon. He went on to state that, “[w]ithout this law, two-thirds of credit unions would have had negative earrings in 2009 as a result of the need to rebuild deposit insurance reserves” and approximately 225 credit unions, “would have fallen below limits where they would be deemed adequately capitalized.” He stated that the purpose of the hearing is to “ensure the efficient implementation” of this law.
Testifying before the Subcommittee were the following witnesses:
- Michael E. Fryzel, Chairman, National Credit Union Administration (NCUA)
- George Reynolds, Chairman, National Association of State Credit Union Supervisors and Senior Deputy Commissioner, Georgia Department of Banking and Finance
- Jim Bedinger, Chief Operations Officer, Chicago Patrolmen’s Federal Credit Union on behalf of the National Association of Federal Credit Unions
- William Lavage, President and Chief Executive Officer, Service 1st Federal Credit Union on behalf of the Credit Union National Association
Chairman Fryzel told the subcommittee that the impact of allowing the corporate system to cease functioning would have been “devastating" to retail credit unions and consumers, but this legislation “represents a real solution to the problem.” Chairman Fryzel believes that the bill will: (i) preserve the strong, well-capitalized Insurance Fund that Congress, NCUA and the public demand; (ii) enable credit unions to bear the costs in a more manageable way; and (iii) comply with GAAP accounting, which is mandated by the Federal Credit Union Act and which must be adhered to, to maintain public confidence in the industry. He further stated, “[m]y commitment … is to make certain that NCUA puts the hard lessons we have learned to good use. I will look to the industry and to Congress for input. I will incorporate the best ideas we have at our disposal. And above all I will keep a clear focus on the central mission of protecting credit union members.”
Mr. Reynolds offered several regulatory solutions to prevent the current situation from happening again, including: (i) identifying contributing factors and critically analyzing regulation; (ii) revisiting past regulatory assumptions regarding concentration and systemic structure; (iii) developing improved oversight and regulation; and (iv) reaffirming the consultation and cooperation between state and federal regulators. He also encouraged Congress to consider the following points: (i) pass legislation to mitigate the impact of corporate credit union losses on natural person credit unions; (ii) improve regulatory oversight and require more prudent risk management expertise for corporate credit unions; (iii) recognize state authority and encourage transparency between state and federal credit union regulators; and (iv) improve capital standards for the credit union system by allowing supplemental capital for all credit unions.
Mr. Bedinger expressed the view that corporate credit unions should keep the following principles in mind when undergoing corporate restructuring: (i) continue to serve the liquidity and operational/ payment systems needs of natural-person credit unions; (ii) operate under a risk-based capital system; and (iii) continue to operate under corporate governance standards created and policed within the industry. He went on to state that maintaining membership capital should not be mandatory and that voluntary membership capital should be structured with a maximum cap an assessments based on usage. He also encouraged limiting term limits for credit union board members to three years, prohibiting allowing trade association or league staff members to serve on corporate boards and establish an independent supervisory and investment oversight committees.
While the hearing did not focus on accounting issues, Mr. Lavage noted the burden placed on credit unions, particularly corporate credit unions, that certain accounting rules with respect to fair value assets that have to be reported as other than temporarily impaired (“OTTI”). Last month, the Financial Accounting Standards Board (FASB) issued new accounting rules that would provide only credit losses for OTTI assets have to be deducted from earnings, but did not allow OTTI-classified assets to reflect any recovery on the assets prior to maturity or sale. Mr. Lavage urged Congress to “remain vigilant” and advise FASB to address these issues in a “timely and effective manner.”