I would like to make three points in my testimony:
- That all legislative initiatives need to be crafted from the
standpoint of providing options;
- That special attention be given to the need for a check and
balance of the regulator-NCUA;
- That the "hidden or unseen value" of the cooperative
franchise must be recognized and protected.
I. I agree with many of specific recommendations provided by witnesses
to update, modernize or enhance the Federal Credit Union Act. However
I would like to urge an approach that would enhance options rather
than simply expand powers.
Some view legislation as creating an "idealized" blueprint
or roadmap for the future of credit unions. Instead, I believe the
approach should be crafting broad principles and emphasizing the
need for diverse approaches to issues such as:
- Expanded investment powers
- Options for share insurance
- Options for different capital structures
- Options for loans; and so forth
One way to think about this approach is to ask, what should be
the legal basis for non-profit, financial cooperatives to operate
in the 21st century? For a moment, drop the words "credit union"
which all of us associate with specific experiences. Instead think
more openly about the cooperative, member-owned financial services
network of the future. In essence the legislative rewrite would
be more like developing a constitutional framework for cooperatives,
not a business plan process.
Why is this approach desirable?
No one knows precisely what the future holds. The forces of deregulation,
technology innovation, changing consumer preferences and globalization
make the future virtually unpredictable. Will the number of credit
unions in the future be a few, large dominant institutions per state
or thousands of local organizations working together to create national
networks? No one knows. Either scenario is possible. The Act should
be flexible enough to allow many different views of the future.
attached slides show some of the trends, that are shaping credit
unions' future today. The key chart is the analysis by peer group.
While it is fairly easy to foresee how the largest 1,000 will survive
and what the fate of the smallest 1,000 credit unions is likely
to be, the key is to craft a framework that can accommodate the
needs of the middle 6-8,000 credit unions that are fighting for
II. A second requirement of the legislative
approach is the creation of a more responsive federal regulatory
environment. NCUA in its present board format has existed for just
23 years or about ¼ of the time credit unions have been in
existence. The last few years have been rife with stories and examples
of NCUA's actions that have not been in the best interests of credit
unions. The challenge is how to build checks and balances so that
credit unions are not forced out of the system due to a non-responsive
or politically-driven regulator.
At present there is no Congressional or administrative oversight
of NCUA. Only the CLF's lending authority is subject to Congressional
review. An NCUA board member can be removed only through impeachment.
An example of the need for oversight is the current misappropriation
of funds from the NCUSIF. The greatest threat to the safety and
soundness of the credit union share insurance fund is the NCUA itself.
There have been no credit union insured losses charged to the fund
for the past six years. But during the same time period NCUA has
spent over $300 million from the NCUSIF's income. Money collected
for one purpose, to pay for losses on insured savings, has been
expensed for the operation of the agency. When in the future these
funds are needed, the money will not be there.
Returning to my first point, the need for options, including choice
of share insurance, is critical to creating checks and balances
on the authority of the federal regulator.
III. My third point is to have legislation
that enhances the "hidden value" of the cooperative charter.
Nothing is more powerful than when individuals freely combine to
carry out a common purpose. Cooperative solutions are an alternative
to the safety net approach of the federal government or the for
profit solutions of the private sector.
Recently a federal credit union went on a charter odyssey in just
over two years which it converted to a mutual savings bank, than
to a stock thrift form of organization, and most recently agreed
to a merger with another bank holding company.
This is the first time that the value of a former credit union
has been established in the marketplace. IGA FCU was formed in 1975
and spent all but the last 2 years as a federal credit union. The
premium paid by the acquiring bank as outlined in the press releases
is as follows:
- Price to latest 12 months earnings: 26.3 x (times)
- Price to tangible book value: 140.7%
- Premium over tangible book value
- As a percent of deposits: 6.42%
Thus the organization, which for most of its business life had
operated as a credit union, had created considerable franchise or
"intangible value" when the ongoing business assets were
put up for bid.
Many of the country's leading credit unions could possibly attract
an even higher
market premium if they were forced to seek other charter solutions
to serve member
needs. But this need not happen, nor should it.
I believe that the hidden value or intangibles of the cooperative
approach are more than the operating or business franchise. It also
includes the values that bring people together to work for cooperative
good, not just for individual or corporate success. It is this expression
of values that uniquely enables credit unions to create another
way to bring financial services to consumers in the 21st century.
Respecting and enhancing this ability of individuals to join together
should be at the core of any legislative effort.