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FEDERAL SHARE INSURANCE FOR CREDIT UNIONS

FRIDAY, JUNE 19, 1970

U.S. SENATE,

COMMITTEE ON BANKING AND CURRENCY,

SUBCOMMITTEE ON FINANCIAL INSTITUTIONS,

Washington, D.C.

The subcommittee met, pursuant to recess, at 10:07 a.m., in room 5302, New Senate Office Building, Senator William Proxmire, chairman of the subcommittee, presiding.

Present: Senators Proxmire and Bennett.

Senator PROXMIRE. The subcommitee will come to order.

Our first witness this morning is Mr. R. C. Robertson, president of CUNA International, Inc., Washington, D.C.

Mr. Robertson, we are very happy to have you.

STATEMENT OF R. C. ROBERTSON, PRESIDENT, CUNA INTERNATIONAL, INC.; ACCOMPANIED BY WILFRED MacKINNON, PRESIDENT, CREDIT UNION NATIONAL ASSOCIATION, INC., AND J. ORRIN SHIPE, MANAGING DIRECTOR, CUNA INTERNATIONAL AND CREDIT UNION NATIONAL ASSOCIATION

Mr. ROBERTSON. Good morning.

Senator PROXMIRE. Your international headquarters are in Washington, is that right? The national headquarters are in Madison? Mr. ROBERTSON. The international is in Madison. We do have an office in Washington, however.

Senator PROXMIRE. I'm glad you are here, then. I am reassured. I am very proud of the fact that your headquarters are in Wisconsin, especially in Madison.

You have a substantial and detailed statement of 23 pages. Without objection, the entire statement will be printed in the record. (The statement appears on p. 113.) We would appreciate it if you could highlight and abbreviate it.

We have four witnesses today, and if you can do that I would appreciate it very much.

Mr. ROBERTSON. Thank you very much, Mr. Chairman.

Senator PROXMIRE. I hope you will identify the very distinguished gentlemen who are with you today for the record.

Mr. ROBERTSON. I will be happy to.

Mr. Chairman and members of the subcommittee, Senator Bennett, I am R. C. Robertson, president of CUNA International, Inc., the association of credit unions with which 92 percent of the 23,900 U.S.

(85)

credit unions are affiliated. Over 22 million Americans are members of these credit unions-thus this legislation affects and concerns approximately one out of every 10 citizens of our Nation.

Before proceeding, I want to provide additional information to qualify myself as a witness before this subcommittee. I have been associated directly with the Federal credit unions for over 15 years, serving in every capacity at every level of the organized credit-union movement.

Since 1959 I have served as general manager of the Arizona State Employees' Federal Credit Union which at the present time has assets in excess of $5 million. In addition, I have served as a chapter president, president of the Arizona Credit Union League, and at the present time I am serving my third term as president of CUNA International, Inc., the worldwide association of credit unions, and I am president-elect of the World Council of Credit Unions which will replace CUNA International on January 1, 1971.

I am very pleased to recognize at this time my companions here for this hearing representing our association.

On my left, Mr. Wilfred MacKinnon, manager of the Humble Employees Credit Union of Baytown, Tex., a State-chartered credit union. Mr. MacKinnon is president of the Credit Union National Association, Inc., the confederation of U.S. credit unions.

Also with me today, on my right, is J. Orrin Shipe, managing director of CUNA International and the Credit Union National Association.

Excuse me. I just reversed it. He is on my left. They switched on me, Mr. Chairman. But I think you certainly know Mr. Shipe very well. The other distinguished gentleman is Mr. MacKinnon.

Certainly we thank you, Mr. Chairman, and members of the subcommittee for the opportunity to appear here today to present testimony in support of the concept and major provisions of the proposed legislation embodied in S. 3822 which has been introduced by the distinguished Senator from Utah and the ranking minority member of this committee, Mr. Bennett, and cosponsored by 13 other Senators. I must add, however, that we will be proposing some changes to Mr. Bennett's bill which we believe are essential for successful operation of a share insurance program for credit unions.

At this point I would like to express the appreciation of the organized credit union movement as represented by my organization to Senator Bennett for his courtesy and that of his staff in making available advance copies of his bill so that CUNA could consider it and develop our position during our annual meeting in Madison, Wis. in mid-May.

As you know, credit unions alone of all federally chartered financial institutions do not have a Federal deposit insurance program.

The matter of share insurance has been a subject of discussion and debate within the movement ever since the Federal Credit Union Act was passed in 1934.

Until this year the official position of CUNA International on the subject, based on resolutions adopted at our annual meetings, has been in opposition to a Government-sponsored share insurance plan.

In recent years, the division of opinion has been almost equally divided over such a program.

Despite this division of opinion, our credit unions historically have always been vitally concerned about the security of their shareholders' savings. Basically, a credit union is a financial institution of the common man--the "little fellow," if you please. They are cooperative, selfhelp organizations where the welfare of one member has been the concern of all members.

So throughout the years, the credit unions themselves have developed various programs to provide stability and protection for their shareholders.

Stabilization funds were established in many States and at the CUNA national level. Credit unions invested in these funds which were and are used in assisting credit unions threatened or involved in liquidation. And in the past 2 years we have developed and were just on the verge of implementing an even more comprehensive program known as the national savings "reserve program.'

Moving on, in deference to the chairman's comments about our lengthy testimony, we have been very much engaged, of course, in members' security of their share savings, and not only have we worked more recently on our own program, the savings reserve program, a reserve concept much along the lines of more sophisticated stabilization, but we have been very proud of the tailormade bonding program which has been quite comprehensive and has covered us in virtually all of those areas that our institutions, credit unions, are subject to, exposed to, and I might say they parallel those same risks where other financial institutions have protected themselves through deposit type insurance programs.

So we have been very proud of our comprehensive bonding program. Despite the fact that losses to shareholders in our credit unions have been insignificant dollarwise over the years, in May 1970 by almost a 2-to-1 vote, the U.S. Forum, that segment of CUNA International composed exclusively of U.S. credit unions, went on record in favor of the principle of a Federal share insurance program.

I will discuss the minimal, nonrecovered losses I refer to later in my testimony in relation to premium charges for a Federal share insurance fund.

Now, turning to the bill, S. 3822, CUNA International favors and supports the basic purpose and the major concepts in this proposed legislation.

We are in agreement on the concept of a Federal Share Insurance Fund to be established in the U.S. Treasury. We agree that participation in such a program should be mandatory for Federal credit unions, with State-chartered credit unions' participation being on an optional basis.

We agree that the program logically should be administered by the Administrator of the National Credit Union Administration, with the advice and counsel of the National Credit Union Board.

It is considered essential, however, that any program of Federal share insurance should be tailored to the peculiar needs and operations of credit unions and at a cost that is consistent with the risk being assumed. Such a program must also encourage the formation of new

credit unions and foster the continued existence and development of our smaller credit unions now in operation; and preserve the dual chartering system of credit unions under Federal and State law.

I am certain that the members of this committee are well aware of the fundamental differences of philosophy, objectives and daily operational procedures existent between credit unions vis-a-vis banks and savings and loan associations. The great dependency on volunteers to manage, direct and operate most of the more than 23,900 credit unions in the United States is again a truly unique characteristic of our institution.

In addition, the size of the majority of our credit unions in comparison with other financial institutions must be considered in devising any program of Federal share insurance.

Today over 70 percent of all credit unions in the United States have assets of $300,000 or less. Further, the manner of operations of these credit unions varies from the volunteer manager-treasurer working out of his living-room a couple of hours a night, to the more sophisticated credit union operations which encompass the most modern facilities and procedures.

These are but some of the factors which we feel must be considered in designing a program to provide share insurance protection for credit union members. A program closely patterned after FDIC or FSLIC will not meet the specific and peculiar problems of credit unions.

The legislation must not be utilized as a device which would curtail or even forbid the development and formation of new credit unions. It must not establish conditions which would place impossible restraints on small or low-income credit unions. I would like briefly to discuss some of the provisions of S. 3822 which we feel must be revised or deleted from the bill if these conditions are to be satisfied.

S. 3822 provides authority for the Administrator of the National Credit Union Administration to insure federally chartered and Statechartered credit unions. The bill does not, however, contain provisions for insuring member accounts of thousands of American civilian and military personnel at U.S. overseas installations.

For example, there are four unchartered credit unions serving American military and civilian personnel at overseas installations which are United Credit Union, Japan; Kadena Credit Union, Okinawa; Lajes Credit Union, Azores; and Kagnew Station Credit Union, Ethiopia.

In order to assure the opportunity of share insurance for these credit union members, we recommend that section 201 (a) be amended to authorize the Administrator to insure member accounts in these credit unions under such rules and regulations as he may prescribe.

In connection with overseas credit union operations, it should be noted that there are 11 Federal credit unions which operate 28 suboffices all over the world which serve American military and civilian personnel on military installations. The legislation should provide specific authority for the Administrator to insure member accounts in overseas suboffices.

A more basic question exists concerning the authority of the Administrator to insure and the eligibility requirements contained in sec

tion 201 (b)-(d). Presently, the proposed legislation would require all Federal credit unions to make application for insurance immediately on a mandatory basis, and State-chartered credit unions may apply for insurance at any time (sec. 201(b)).

The bill provides, however, that the Administrator may reject the application of any credit union, State or Federal chartered, in the event specified conditions exist, such as inadequate reserves, unsafe or unsound financial policies or conditions, et cetera (sec. 201 (c) (2)). Concerning Federal credit unions, it is our opinion that denial of insurance protection by the Administrator upon enactment of this legislation would inevitably result in the forced liquidation of at least some, if not all, of the Federal credit unions the Administrator fails to insure.

Most certainly, member confidence in a credit union denied insurance will be adversely affected, with a possible run on share capital in the credit union. This may well increase the losses to credit union members which would frustrate the intent of this legislation.

Accordingly, we would recommend that, upon passage of this act, the Administrator shall insure all Federal credit unions in existence at that time, with the exception of those Federal credit unions already in liquidation or against which involuntary liquidation proceedings have commenced.

We would further recommend the Administrator be empowered to insure a Federal credit union on a provisional basis in the event he finds that its capital is impaired or that its financial policies or condition are unsafe or unsound. The provisional insurance certificate could be issued for a period of not less than 1 year nor more than 2 years.

If such deficiencies or conditions are not corrected within the time specified by the Administrator in a notice to the credit union, the Administrator shall, unless the Federal credit union has already gone into voluntary liquidation, place the credit union in involuntary liquidation and appoint a liquidating agent therefor.

On the other hand, if the Administrator finds that such conditions have been corrected, he could then issue a full insurance certificate to the credit union.

The effect of these recommended changes would result in the insurance of all Federal credit unions, either on an outright basis, or provisionally for a period no less than 1 year and would obviate the requirement of Federal credit unions to make application for insurance.

Concerning newly chartered Federal credit unions, we would recommend that each Federal credit union chartered after the enactment of this act shall be insured under this act on the date its charter is approved by the Administrator, and shall be issued a certificate stating that it is so insured.

As to insuring State-chartered credit unions, we would agree that the Administrator should have the discretion to insure or not to insure as coverage is optional to these credit unions. In considering the applications of State-chartered credit unions, we would further agree that before granting approval of any such application, the Administrator should consider the financial condition of the applicant,

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