This bill would amend title 18 of the United States Code to include the National Credit Union Administration and insured credit unions in the Criminal Code.

Included in the bill is a proposal to revise the regular reserve requirement for Federal credit unions (sec. 116, Federal Credit Union Act). The formula proposed is one which the National Credit Union Administration developed after a comprehensive study of Federal credit union losses and reserves which was published in September

1968.

This formula would increase the required reserve contribution for the small, newly organized Federal credit unions but generally would permit a decrease in the transfer for those which reach the reserve goals of 5 percent, 712 and 10 percent of outstanding loans and risk assets. For many, and perhaps most, Federal credit unions, this formula may result in an offset of the premium charge for share account insurance.

In conclusion, we believe that credit union members should be protected by a Federal system of share insurance along the lines of that set forth in S. 3822. Most credit union members are workingmen and women and are often in lower income brackets. Many keep all their savings in their credit union and cannot afford the loss of those funds. S. 3822 provides a comprehensive legislative proposal for a program that would achieve-without cost to the Government-an important goal in the area of consumer protection.

Accordingly, Mr. Chairman, we recommend that this bill so amended be enacted.

Senator BENNETT. Thank you very much, Mr. Gannon.

From my point of view, as the author of the bill, I think your last statement is very important. You recommend the enactment of the bill with some amendments which you propose.

Mr. GANNON. That is right, Mr. Chairman.

Senator BENNETT. Up to this time, one of the basic problems has been whether or not there should in fact be any share insurance for credit unions. I am happy that the Credit Union National Association in its recent meeting adopted that position in principle, though they too feel that it may be wise to recommend certain amendments to this particular bill.

So I feel that we are no longer discussing the basic question of whether or not there should be share insurance. We are talking about the details of the bill to develop the most effective program.

A proposal has been introduced in the House which would eliminate most of the administrative provisions in S. 3822. Are you aware of this proposal?

Mr. GANNON. I have seen the bill, Senator. I have not examined it in great detail.

Senator BENNETT. Are you in a position today to tell this committee whether you support these administrative positions in S. 3822 or most of them as being a necessary part of a workable program?

Mr. GANNON. Mr. Chairman, as a supervisor, I guess I would say I should have some apprehension, because I think that these are designed primarily to limit the power and authority of the supervisor.

On the other hand, I think that this is well and good that any bill of this type sets forth these details specifically so that they are well understood by the supervisor and those that are supervised. I find nothing objectionable from a supervisor's standpoint in these provisions.

Senator BENNETT. In your statement you say that on the basis of your experience with Federal credit unions, one-twelfth of 1 percent may be more than adequate. You suggest that perhaps we should start out on that basis with the theory that maybe we should go to a lower basis after we have established a certain level of reserves or support, which you suggest be set at 1 percent.

Isn't it true that Federal credit unions have never been through a real economic crisis?

Mr. GANNON. I think this is true basically, Senator. While the Federal Credit Union Act was passed in 1934, we were creeping out of the depths of the depression in 1934, so I think your statement is

correct.

Senator BENNETT. Now, I personally am not wedded to one-twelfth of 1 percent, and I realize that the bill would give the administrator some leeway. The bill suggests that we give that leeway when the fund reaches 2 percent of the aggregate amount of members' accounts rather than 1. Again, I think that this is something that can be worked out. But my own interest is in developing an adequate base before we start to lighten the income of the funds.

Mr. GANNON. I think, Senator, that that

Senator BENNETT. Particularly since there is no initial fee on which to begin a reserve.

I am very much interested in your statement which I am putting together as a composite. You say that there are now 23,905 Federal and State credit unions in operation, and on page 3 you say that over the history of the movement 5,606 have been liquidated.

Now, that is about 25 percent or better than 25 percent of the total amount now existing. True, many of them are liquidated at 100 percent. But I think that percentage of better than 25 percent represents a much higher percentage of liquidation than has existed in the banks protected by the FDIC funds.

So the problem, while different, is still, nonetheless, quite real in my opinion.

Mr. GANNON. Mr. Chairman, as I indicated in my remarks, the majority of the liquidations of credit unions are beyond the control of the members and the officials. The plant will close. They will close a military installation. And so the credit union must of necessity close. Its field of membership is gone. It must liquidate.

This is not a reflection upon the officials or upon the members. It is a fact of life that they are closely alined with the type of field membership.

Senator BENNETT. That is right. This is an added risk that is ininvolved in the establishment of a credit union.

Mr. GANNON. That is right, Mr. Chairman.

Senator BENNETT. This might be a reason for providing some insurance.

You also say that most credit unions are related to a particular plant or installation or operation. But is it not true that lately there

has been an interest in developing credit unions around the neighborhood or some other relationship that reflects more a slice of the general public rather than membership related to a particular institution?

Mr. GANNON. In our efforts to serve the limited income people in this country, Senator, we have organized credit unions in ghetto areas. The basis of membership is pretty much as you indicatedresidence in a well-defined neighborhood.

Senator BENNETT. I have some questions which were handed to me in which Senator Proxmire is interested. I would like to ask them, and you may either respond to them now or respond to them in writing afterwards.

Does the reserve requirement in S. 3822 correspond to the reserve requirement recommended in your study published in September 1968 ? Mr. GANNON. Yes; it does. It is identical.

Senator BENNETT. Does this study contemplate the establishment of the share insurance program when it arrived at the level of reserves considered necessary?

Mr. GANNON. No. In 1968 when we made the recommendation, we did not contemplate the existence of a share insurance plan.

However, in order to amplify my position, I would think that we should not look upon the insurance as a substitute for reserves in credit unions. I look upon it more as catastrophe insurance that would come into play after the credit union reserves had been exhausted.

Senator BENNETT. Do you think if share insurance were adopted it would be possible that the level of reserves recommended in your study could be somewhat reduced?

Mr. GANNON. I think it is possible, Mr. Chairman. Here again, as you indicated with respect to the premium rate, I don't think that anybody has the pat answer as to what level of reserves is necessary. We talk in terms of adequacy.

Senator BENNETT. At this point I would like to put into the record, for Senator Proxmire, a comparison of the present law and the reserve level suggested under S. 3822, which is intended to indicate a pattern under which they could be reduced.

(The comparison referred to follows:)

COMPARISON OF PRESENT LAW AND THE RESERVE LEVEL SUGGESTED UNDER S. 3822

Total reserve requirement.
Annual allocation to reserves.

Present law

10 percent of shares.
20 percent of net income.

S. 3822

10 percent of risk assets.

15 percent of gross income until reserves equal 5 percent of risk assets.

10 percent of gross income until reserves equal 71⁄2 percent of risk assets.

5 percent of gross income until reserves equal 10 percent of risk assets.

Senator BENNETT. Would you comment on the recommendation by CUNA that the premiums for Federal share insurance be deducted from the required allocations or reserves?

Mr. GANNON. It is possible that such a premium could be deducted from the contribution to the reserve. On the other hand, as I indicated before, I have some difficulty in looking upon an insurance premium

as really a contribution to reserve. But if the rate of contribution was adequate, it would be possible to permit the premium to be deducted. Senator BENNETT. Under S. 3822, the administrator would not be required automatically to insure all existing Federal credit unions. Under the bill, if Federal share insurance is denied to existing Federal credit unions, they would have to liquidate. CUNA has suggested that as an alternative, the marginal credit unions be given 1 or 2 years' provisional share insurance certificates, and then if they were not up to standard they would be required to liquidate. Would you comment on

this?

Mr. GANNON. Yes; Mr. Chairman. First of all, of course, the Federal credit union, if it was not insured, would have an option of converting to a State credit union if they wanted to follow that path.

So that they do have one more alternative other than liquidation.

I think that there is some danger in burdening the fund with all losses at its inception. I think that a better plan would be take a look at the credit unions. For those that are in a weak or unsatisfactory condition, we would have them get their house in order and then become insured.

Senator BENNETT. Do you have any idea, in round figures, of how many marginal credit unions there might be at this time?

Mr. GANNON. Well, this would be just a "top of the hat" guess. I would say about 2 percent of our credit unions might fall in this category.

Senator BENNETT. That is about 500?

Mr. GANNON. About 500.

Senator BENNETT. You state in your testimony that it is possible if you add State credit unions to the list that there might be as many as 600 liquidating each year.

Mr. GANNON. That is our estimate; yes.

Senator BENNETT. So there is, or could be, a relationship between 500 and 600.

Mr. GANNON. That would be my best guess.

Senator BENNETT. An argument has been made that one-twentieth of 1 percent might be more appropriate than one-twelfth of 1 percent. In your statement you indicate that perhaps there should be a time pattern here, maybe one-twelfth of 1 percent until a certain level has been reached and then a lower rate later. Would you like to comment again on that?

Mr. GANNON. Yes, I would, Mr. Chairman. I think the premium rate of one-twentieth would in terms of past experience be more adequate as well as the one-twentieth.

If we are to look in terms of building the insurance reserve to the 1 percent, with the one-twelfth premium, if our figures are right, and making certain assumptions, it would take about 16 years to reach this 1-percent level.

With a one-twenieth premium, it would take about 27 years to reach the 1-percent level based on the same assumption.

But in relation to past experience, one-twentieth would be adequate. Senator BENNETT. Of course, as I said earlier, most credit unions have never faced a crisis like the depression of the 1930's which brought

the insurance program into existence. And we have no assurance that we're going to go another 40 years before we have another such experience.

In 1964 CUNA developed a share insurance bill which would have required an original fee and a significantly higher annual insurance fee. Do you know of any changes that would be a basis for the much lower rate of one-twentieth that they are now recommending?

Mr. GANNON. I believe as an incidental consideration that the State plans in Wisconsin and Massachusetts both have a rate in excess of the one-twelfth, for whatever value that may be.

I think as you indicated, Mr. Chairman, the secret of an adequate rate is getting enough protection to withstand the onslaught that may come. And it would be my proposal, as I have suggested in my testimony, that a one-twelfth premium during the early years might be more desirable, and then have a cutback by giving the administration authority to reduce the premium.

Now, maybe 1 percent is too high before you would give him this authority.

Senator BENNETT. It is my understanding that under the present FDIC operation, while the law requires one-twelfth, cutbacks are now available under certain circumstances to a rate as low one-thirtieth.

Mr. GANNON. I think they are rebating about two-thirds of the premium, Senator. It would be my suggestion-that we handle it in this way. Then if we need to augment the fund, we could just reduce the amount of the rebate.

Senator BENNETT. I think that's all. I think we have covered the matter adequately.

Thank you very much, Mr. Gannon.

Mr. GANNON. Thank you, Mr. Chairman.

Senator BENNETT. I appreciate your experience and judgment, and I am sure that this testimony will be valuable to the committee.

Our next witness is Mr. Richard H. Grant, treasurer-manager, Pease Air Force Base Federal Credit Union.

Mr. Grant, welcome to the committee.

You have a very short statement. We will be glad to listen, to it.

STATEMENT OF RICHARD H. GRANT, TREASURER-MANAGER, PEASE AIR FORCE BASE FEDERAL CREDIT UNION, PORTSMOUTH, N.H.

Mr. GRANT. Thanks very much, Senator.

Mr. Chairman, may I first introduce myself. I am a former vice president of CUNA International, and currently a director of that organization. I am not, however, here as a representative of CUNA International.

I am also president of the Defense Credit Union Council which has as its members credit unions serving primarily Defense Department personnel.

However, it should be noted that since share insurance became an active issue very recently, the Defense Credit Union Council has not. met, and therefore I cannot honestly say that I am representing their official feelings.