Chairman JoAnn Johnson testifies before
the House Financial Institutions
and Consumer Credit Subcommittee
Washington, June 9, 2005 – National Credit Union Administration (NCUA) Chairman JoAnn Johnson presented the agency’s views on regulatory efficiency and reform initiatives for credit unions and banks.
“It is certainly in the interest of the regulator for credit unions to have burdensome regulations eliminated,” said Chairman Johnson. “The health of the industry going forward is dependent on credit unions being able to be competitive in a changing financial marketplace. The regulatory improvements and relief sought is consistent in ensuring safety and soundness for the nation’s credit unions.”
“NCUA appreciates Chairman Bachus for his leadership in calling this hearing and values the opportunity to present NCUA views regarding needed regulatory relief and improvements to the Federal Credit Union Act. Additionally, NCUA supports credit union provisions in the recently introduced “Credit Union Regulatory Improvements Act (CURIA) of 2005,” Chairman Johnson said. “It addresses some of the most compelling statutory and regulatory reform issues being discussed within the credit union industry today.”
Also in response to questions regarding NCUA’s disclosure process for credit unions desiring to convert to a mutual savings bank, Chairman Johnson stated, “As member-owned financial cooperatives, credit union members have the right to choose the charter they deem most appropriate for their membership. Likewise, as member-owned institutions, it is incumbent upon the leadership of these credit unions to maintain full disclosure to their members and comply with the required disclosure requirements. With potential consequences such as losing equity and ownership in the institution, clarity must remain a vital part of the disclosure process. It is important for credit union members to be fully informed so they may cast an educated and meaningful vote.”
Chairman Johnson’s recommendations included a necessary statutory change to authorize NCUA to implement a risk-based prompt corrective (PCA) system for federally insured credit unions.
Risk-Based Capital and Prompt Corrective Action Reforms
“Reforming capital standards is vital for credit unions as other federal banking regulators explore implementation of capital reforms, Chairman Johnson noted. “While maintaining a leverage ratio, NCUA's PCA reform proposal incorporates a risk-based approach to credit union capital standards.
The NCUA’s proposal for reform takes into account the low-risk nature of credit unions. For the leverage requirement, NCUA supports a reduction in the standard net worth (i.e., leverage) ratio requirement for credit unions to a level comparable to what FDIC requires. The current minimum leverage ratio for well-capitalized credit unions is set by statute at 7 percent compared to 5 percent for FDIC-insured institutions.
“This places credit unions at a competitive disadvantage when not warranted to protect the insurance fund,” Chairman Johnson said.
“Enabling NCUA to adopt a PCA system that remains relevant and up-to-date with emerging trends in credit unions and the marketplace provides safety, efficiency, and benefits to the credit union consumer,” Johnson said. “I believe our reform proposal achieves a much needed balance between enabling credit unions to utilize capital more efficiently to better serve their members, while maintaining safety and soundness and protecting the share insurance fund. A well-designed risk-based system would alleviate regulatory concerns by not penalizing low-risk activities and by providing credit union management with the ability to manage their compliance through adjustments to their assets and activities. A PCA system that is more fully risk-based would better achieve the objectives of PCA and is consistent with sound risk management principles.”
Method of accounting for credit union mergers
An important technical amendment addresses the statutory definition of net worth to include amounts that were previously retained earnings of a merged credit union. Without this amendment, only the “retained earnings” of a continuing credit union will count as net worth after a merger, which will discourage mergers, even assisted merged necessary to resolve problem institutions.
Check cashing, wire transfer and other money transfer services
To reach Americans outside the traditional financial services mainstream, Chairman Johnson said that federal credit unions should be authorized to provide check cashing and money transfer services to anyone eligible to become a member, particularly those left behind to predatory and high-cost non-traditional financial companies and often forced to pay excessive fees for check cashing, wire transfers and other services.
Extend 12-year maturity loan limits
The 12-year maturity limit on federal credit union loans should be eliminated Chairman Johnson told the committee, noting it is outdated and unnecessarily restricts lending for second homes, recreational vehicles and for other purposes in accord with conventional maturities that are commonly accepted in the market today.
Increase investment limits in CUSOs to 3 percent
The Federal Credit Union Act authorizes a federal credit union to invest an unrealistically low 1 percent of shares and undivided earnings in “CUSOs,” credit union service organizations, which provide invaluable services to credit unions and members. The chairman noted the NCUA Board believes it should have the flexibility to set the limit by regulation; however, increasing the CUSO investment limit from 1 percent to 3 percent is an improvement NCUA supports.
Expand investment options
The Federal Credit Union Act limits federal credit union investment authority restricting federal credit unions ability to remain competitive in a rapidly changing financial marketplace. “The NCUA Board believes the Act should be amended to provide investment authority as approved by the NCUA Board,” said Chairman Johnson.
Voluntary merger authority
The Federal Credit Union Act allows voluntary mergers of healthy federal credit unions, but requires that NCUA consider a spin-off of any group over 3,000 members in the merging credit union. When two safe and sound federal credit unions wish to merge, combing financial strength and service to members, NCUA believes they should be allowed to do so without a possible spin-off.
Regulatory relief from SEC registration requirements
NCUA is seeking regulatory relief from a requirement that credit unions register with the Securities and Exchange Commission as broker-dealers when engaging in certain securities activities.
“The requested parity relief for credit unions would apply only to those activities otherwise authorized for credit unions under applicable credit union chartering statutes, including third-party brokerage arrangements, sweep accounts, and certain safekeeping and custody activities,” Chairman Johnson said.
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