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I am pleased to speak to you this morning about the recently enacted credit union legislation.
Let me first say that I appreciate the opportunity we had to work with NAFCU on this legislation. From the fall of 1996 when the Treasury began its congressionally-mandated credit union study, right up to the bill's enactment last month, I believe that NAFCU and the Treasury have maintained an open, constructive dialogue.
This dialogue greatly facilitated the Treasury's understanding of credit unions and credit union issues. I believe that it improved our mutual understanding of the issues we faced and that it contributed to the development and enactment of this important piece of legislation.
I will talk a bit later about Treasury's future work on credit union issues. But let me say here that I look forward to a continued dialogue with NAFCU as we do that work.
Safety and Soundness Safeguards in H.R. 10
August 7 will go down as a landmark day in credit union history. H.R. 1151 -- now Public Law 105-219 -- will nurture the growth and the health of credit unions and the National Credit Union Share Insurance Fund. This is an historic piece of legislation. It reflects the credit union tradition of getting ahead of problems and taking prudent precautions.
Think back to credit unions' decision in the early 1980s to step forward and voluntarily recapitalize the Share Insurance Fund. This forward-thinking action not only ensured the Fund's stability through the turmoil of the late 1980's and early 1990's. It also set credit unions apart from other insured depository institutions during that time.
I believe that the new law's safety and soundness safeguards will similarly be seen in the future as a forward-looking step that protected credit unions and their Share Insurance Fund from future difficulties. These safeguards, especially prompt corrective action, have already begun paying dividends for credit unions.
During Senate debate over member business lending, Senators that opposed adding new restrictions on credit unions repeatedly pointed to the bill's prompt corrective action provisions. They argued, as did the Treasury, that these provisions provided the sort of assurance needed that member business loans would not threaten credit unions' safety and soundness. The bill's prompt corrective action safeguards will also pay dividends in the years to come. You might say that enactment of these safeguards are like a stitch in time that saves nine.
It is important to realize that these safeguards emphasize early recognition and quick response to emerging problems. Recent experience has clearly shown that facing up to financial difficulties and dealing with them head-on ultimately means less uncertainty, less pain, and a speedier recovery. To see this, just contrast how we faced up to our banking problems in the early 1990s while Japan did not.
Let me take a few minutes now to describe some of these provisions and what I see as the key issues to consider as the NCUA begins implementing them.
The new law formalizes a requirement that credit unions have at least 6% net worth to total assets in order to be in good regulatory standing. Virtually all credit unions already satisfy this requirement today. Indeed, credit unions as a group operate today with 11 percent net worth to assets.
The law also requires that credit unions set aside, as retained earnings, a small percentage of income if they have less than 7% net worth. Ninety-four percent of credit unions have more than 7% net worth, and those credit unions hold 94% of total credit union assets.
Working hand-in-hand with these net worth requirements is a system of prompt corrective action. Prompt corrective action is a net-worth-based approach to safety & soundness supervision. It seeks to resolve net worth deficiencies before they grow into large problems. You can think of it as a structured decision-making process aimed at ensuring timely regulatory action.
We fully expect -- and I believe that you should fully expect -- that this system of prompt corrective action will benefit credit unions and the credit union system. It will reinforce the commitment of credit unions and the NCUA to resolve net worth deficiencies promptly, before they become more serious. It will promote fair, consistent treatment of similarly situated credit unions. It should reduce the number and cost of future credit union failures. In so doing, it should conserve the resources of the Share Insurance Fund, make the Fund even more resilient, and make more money available for lending to credit union members.
The goal of prompt corrective action is to resolve net worth deficiencies promptly so as to minimize losses to the Share Insurance Fund -- and hence losses absorbed by other credit unions and their members. The goal is early detection and prompt corrective measures to ensure that the credit union does not get into deeper trouble, and preferably does not need to be put into receivership.
The new law sets the proper foundation to accomplish this goal. The ultimate fulfillment of the goal also depends upon the rules established to implement it and how credit unions and the NCUA put the rules into practice.
Let's consider some of the key aspects of prompt corrective action, including some of the issues facing the NCUA in implementing the law's prompt corrective action requirements.
The law gives the NCUA and credit unions a golden opportunity to create a system that reinforces credit unions' safety and soundness. You might think about it in this way: Credit unions make a valuable contribution to encouraging thrift, encouraging their members to save for a rainy day. Likewise, this new bill encourages credit unions and the NCUA to prepare in good times to withstand difficult economic conditions.
The law says that the prompt corrective action system developed by the NCUA needs to be comparable to that for banks and thrifts. What does comparable mean?
The Senate Banking Committee's report says that comparable means parallel in substance (though not necessarily identical in detail) and equivalent in rigor. Thus, the system of prompt corrective action that NCUA will institute should be a streamlined version of that used by bank regulators. Streamlined because many of the provisions in bank prompt corrective action simply don't apply to credit unions, principally provisions having to do with bank capital stock. At the same time, those provisions in the bank regulations that do apply should be incorporated by the NCUA, both in substance and in rigor.
As you consider the various net worth categories, and the implications for credit unions and the NCUA associated with each category, I believe that the important situation to consider is that of an undercapitalized credit union. An undercapitalized credit union faces one crucial requirement -- the development of a net worth restoration plan.
This is the key to prompt corrective action. A credit union that finds its net worth eroding -- for whatever reason -- is called to make a careful evaluation of its situation and to develop a rigorous plan for increasing its net worth. The development of this plan will engage both the credit union's managers and its board of directors in a timely consideration of the credit union's difficulties.
The NCUA also has an important role here. It must carefully review a credit union's net worth restoration plan to ensure that it is feasible, that it will indeed be responsive to the credit union's particular situation, and that it will succeed in restoring the credit union's net worth.
The benefits of a prompt, meaningful response should be self-evident. First, the responsibility for planning and executing the response lies with the credit union's management and board, not with the regulator. Second, timely correction of a credit union's financial difficulties ensures that the credit union will be around to continue serving its members. And third, by reducing costs to the Share Insurance Fund, prompt corrective action also aids all other credit unions by reducing their Share Insurance Fund costs and by ensuring the public's confidence in credit unions' safety and soundness. The ultimate goal is not a rush to receivership but a rush to recovery.
Future Treasury Studies of Credit Union Issues
Let me now turn to the Treasury's future involvement in credit union issues. The new law gives us several responsibilities regarding credit unions.
First, the law directs the NCUA to consult with the Treasury as it develops its new safety and soundness regulations. Second, the law directs the Treasury to prepare three reports for Congress.
In one study we must report on credit union member business lending. Congress asked us a series of questions about member business lending. It is my hope that our research in this area will shed more light on this subject than was available during the recent congressional debate of these loans.
In another study we must evaluate the differences between credit union regulation and the regulation of banks and thrifts. Then we must study the potential effects of applying bank and thrift regulations and federal income tax requirements on credit unions.
Finally, Congress asked us to report on recommendations we would like to make regarding the taxation of small banks and any other recommendations we deem appropriate that would preserve the viability and growth of small banks.
As a general comment on these three studies, let me repeat what I said almost two years ago to a credit union group as we began our earlier credit union study, I think a few simple principles should guide our approach: Be fair and objective. Be thorough and rigorous. Be open and inclusive.
As with the earlier study, we will approach these new studies with open minds, open ears, and an open door. I believe that this approach served us well the last time around and helped to produce a report that was fair and objective.
With that said, I have just a few observations to make at this time about the new studies. As you know, the recent congressional debate over credit union member business lending reflected broad disagreement as to what these loans really are and who they are made to. I hope that our study can provide the kind of information needed for thoughtful consideration of the issue.
Indeed, Congress has asked us to do just that. Congress directed us to report on member business loans by size of the loans, and by the types and sizes of businesses that receive such loans. Difficult as answering that question will be, Congress has also asked us study the extent to which member business loans help meet the financial service needs of low- and moderate-income individuals within credit unions' fields of membership.
As you know, credit union call reports do not have this kind of information, nor does the NCUA. Thus, the only way for us to fulfill our obligation to Congress is to ask you for your assistance.
Our plans as to how we will do this are still being developed, but the general approach is taking shape. Working with and through the NCUA, we expect to survey credit unions on their member business lending. Only with thoughtful, complete responses from credit unions can we gather the information that Congress has requested. I would like to ask those credit unions that receive our survey to take the time to carefully respond.
During the congressional debate on member business lending, credit unions tried to tell a story about the importance of this aspect of their business. Think about the time spent in responding to this survey as a means of helping tell your story about member business lending.
With respect to comparing credit union regulations with bank and thrift regulations, some of you may recall that we have already done that. Indeed, one chapter and a lengthy appendix in our 1997 report are devoted to just such a comparison. Hence, in updating this work, we will be paying particular attention to the NCUA's implementation of the new law's safety and soundness provisions, including the implementation of prompt corrective action.
Credit Unions in our Financial System
Before closing, let me offer a few thoughts on credit unions' role in our financial services system, and on the relationship between banks and credit unions.
Credit unions today serve some 70 million Americans. While credit unions hold a small portion of the nation's financial assets, credit unions are vital institutions to their members. I believe that the new bill will strengthen credit unions and the credit union system, enabling them to continue to serve their members well as we enter the next century.
The past year has been marked by a great deal of animus between banks and credit unions. The debate is over now and Congress has charted a course on credit union membership. I hope that both banks and credit unions can turn their attention and energies to what really matters -- encouraging thrift, making credit available, and enabling individual Americans to reach financial security.
Credit unions in particular have a critical role to play in assisting people of modest means. This is not just because Congress says so, or because such a charge was given to credit unions in the original Federal Credit Union Act. This is so because providing such assistance is at the very core of what credit unions are.
From the very beginning, people formed credit unions (and, I might add, similar cooperative saving and lending associations) to pool the resources of those with limited means for the mutual benefit of all. This has always been, and I hope shall remain, the core value of credit unions.
Strengthened by the recent liberalization of the field of membership restrictions, credit unions should look to the future without forgetting their past. What has made credit unions special is their service -- especially their service to those people that might otherwise have been overlooked in our financial system.
Conclusion
In conclusion, let me reiterate my appreciation for the candor and goodwill that has marked the Treasury's dialogue with NAFCU the past two years. While we may not always have agreed, I believe that we have had a constructive working relationship that has helped to produce the recent bill. We at the Treasury look forward to continuing this relationship in the months ahead.