and for failure to install security devices; and extensive cease-anddesist procedures; and authority to remove credit union officers and directors have caused considerable adverse reaction throughout the credit union movement.

Certainly, some of these provisions are necessary to protect and preserve the integrity of the fund. However, we submit that preservation of the small credit union operation serving a limited field of membership as well as the encouragement of participation of thousands of dedicated volunteers to support credit union activities is of equal, if not greater, importance.

A penalty of $100 per day could immediately dissipate 6 months' income of many of our smaller credit unions.

Alternatively, perhaps some of these provisions could be tempered or even eliminated, consistent with the nature of the institution to be insured.

For example, is there any compelling reason for a $100-per-day penalty for a credit union which fails to advertise its deposits are insured? (Sec. 205 (a)). What do we do with a credit union volunteer who drags out a table and chair in the lunchroom of his factory two or three times a week and transacts his credit union business? It be may hard to visualize this type of operation, but we have many credit unions operated completely by volunteers on a part-time basis.

Thus, it would appear to be preferable to provide that if a credit union is not an insured credit union and it advertises or implies that its deposits are insured, then this penalty should accure.

Similarly, under section 205 (f) (1), which allows the Administrator to establish minimum standards as to the installation, maintenance of security devices and procedures to discourage robberies, burglaries, and larcenies, we would hope that any such requirement would be commensurate with the extent of the risk of such criminal acts, the extent of the assets exposed to loss, and consideration of the expense to the credit union in relation to its assets or income.

As you know, presently 70 percent of all credit unions in the United States today have assets of less than $300,000. In comparison with most other financial institutions these credit unions are basically small operations. In most cases, their gross income in any one year would be $30,000 or less, and the problem of trying to operate within this amountof income in view of ever-increasing costs is becoming more difficult on a daily basis.

Accordingly, the additional expense to the smaller credit unions resulting from such requirements to have safety procedures and devices is of paramount concern to us. As important, it should be noted that all Federal credit unions are required to have a bond which, among other things, protects against direct loss or damage of property due to fraudulent, dishonest, or criminal acts of credit union employees, directors or any other person, which we urge should also be considered in the establishment of these requirements.

In addition, a substantial question exists as to the necessity for the extensive cease-and-desist procedures outlined in these subsections particularly in view of the substantial authority given to the Administrator under section 206 (b) to terminate a credit union's insurance in the event that it does not correct unsafe and unsound practices

or conditions or violations of the laws or regulations. Under the latter provision, the Administrator can require the correction of deficiencies within 20 days, if he considers such deficiencies serious enough to warrant such action. This authority appears to be more than adequate.

Similarly, the provisions of section 206 (g) and (h), giving the Administrator authority to remove directors, officers or committee members for certain prohibited activities is in our opinion a preemption of the right of shareholder credit union members to appoint and remove, if necessary, the persons they choose to run their credit

union.

In this respect, credit union members have far greater rights to control the management of their credit unions than the depositors in banks and savings and loan associations.

It is considered essential to credit union philosophy that this right be maintained. Traditionally, the credit union has encompassed groups of people bonded together to provide for themselves a place to save and to borrow money at reasonable rates. Collectively, they have selected their managers and officers. In the event an officer, manager or committee member fails to meet his obligations to the group he serves, it should be the right of the group collectively to remove him.

Similarly, in the event the credit union members remove one or more directors so that there is less than a quorum, credit union members should retain the right to select new board members, rather than the Administrator, and in this respect section 206 (h) (2) is objectionable.

On a different subject, it is noted that section 207 (a) (1) of the bill provides that upon the Administrator's finding that a Federal credit union insured under the act is bankrupt or insolvent, he shall close the credit union and appoint himself as liquidating agent.

Mr. Chairman, as you and the members of this committee are well aware, leagues and other credit union organizations have for many years assisted in the liquidation proceedings of liquidating credit unions. We believe the existing structure of the State league organization could materially assist the Administrator, and certainly reduce the cost of liquidation to the credit unions. We therefore recommend that the language of section 207 (a) (1) be amended-page 43, line 5so as to permit the Administrator to appoint a liquidating agent other than himself.

Concerning section 9 of S. 3822, we have reservations as to the necessity to change reserve requirements for Federal credit unions in order to implement an effective program of Federal share insurance. In this regard, we strongly believe that the current reserves of Federal credit unions are more than adequate to meet anticipated delinquencies. For example, the latest published figures of the National Credit Union Administration for the period ending December 1968, reveal that Federal credit unions had reserves of $417,387,000 in relation to assets of $6,902,175,000. In fact, the reserve to delinquent loan ratio was 272.2.

Furthermore, the total loans charged off by Federal credit unions since 1934 through December 1968 of $124,809,000, a loss ratio of twenty-five hundredths of 1 percent of loans made during this period. Although the 1969 figures have not been published, there is every indication that the amount of reserves has kept pace with the growth in assets in our Federal credit unions.

Turning to the proposed changes in the reserve requirements in S. 3822, we would agree that reserves should be accumulated in relation to the total of outstanding loans and risk assets rather than total assets.

However, there is no necessity for increasing the amount to be transferred to the regular reserve account on an annual basis in view of our current build-up reserves and particularly in the event a Federal share insurance program becomes a reality.

The formula proposed in S. 3822 would have the effect of increasing the amount required to be transferred to the reserve account, particularly for the credit unions which have not as yet built up a 5-percent reserve. This provision would seriously impair the dividend-paying capability of many of our smaller credit unions as well as our fastergrowing credit unions which would jeopardize their efforts to attract share capital and probably stultify their growth.

Accordingly, we have serious reservations as to the formula proposed in S. 3822 and would suggest that this is a subject which deserves additional study and deferral at this time as it is of such vital importance to our Federal credit unions and their members.

Mr. Chairman, a final comment we would like to offer for committee consideration concerns the role of the National Credit Union Board in matters pertaining to the operations of the insurance fund. We, of course, do not believe it necessary for the Administration to consult the board relative to the day-to-day operations of the fund.

On the other hand, we firmly believe the Administration should seek counsel and guidance from the board in the development of broad operational policies and the issuance of guiding regulations.

We therefore recommend, Mr. Chairman, that the language of S. 3822 contain provisions spelling out the role of the National Credit Union Board in matters pertaining to the operation of the National Credit Union Share Insurance Fund.

Mr. Chairman, there is just one other matter we would like to discuss in connection with S. 3822 which concerns the problem of providing liquidity and meeting the capital requirements of liquidating credit unions.

As you know, the present legislation is principally concerned with. the avoidance of member loss in insolvent credit unions. However, the majority of credit unions which liquidate do, in fact, pay at least 100 cents on the dollar.

Oftentimes the liquidation of these credit unions is quite lengthy and members must wait for their money principally because the credit union does not have sufficient liquid assets to pay off member accounts immediately. Therefore, some procedure is desired whereby the member accounts in these liquidating credit unions may be paid off with the least possible delay.

47-444-70-8

In this regard, the experience of our State league stabilization programs has shown that one very effective way to provide immediate funds to liquidating credit unions is to guarantee central credit unions and other agencies which purchase the notes of and loan to these liquidating credit unions to he extent of 100 cents on the dollar. This procedure permits a more orderly and efficient liquidation with early satisfaction of member share accounts.

We would strongly recommend that S. 3822 be amended to authorize the Administrator to guarantee any organization or agency, including a central bank facility for credit unions which the organized credit union movement has already approved in principle and is now preparing for early implementation-which lends to or purchases the notes of a liquidating credit union.

The extent of any such guarantee should, of course, be limited to the same amount of insurance now provided in S. 3822 for member accounts. With such authority, the Administrator could encourage the flow of liquid capital into liquidating credit unions from sources outside the share insurance fund itself without any additional risk or demand on the insurance reserve and would provide an effective way to quickly pay off members' share accounts and avoid potential hardship for our credit union members.

My apologies in that regard, Mr. Chairman. However, I find it extremely difficult to condense many of these very important points. Thank you very much, Mr. Chairman, and Senator Bennett.

Senator PROXMIRE. Thank you, Mr. Robertson. I want to congratulate the distinguished ranking minority member of this committee Senator Bennett-for having taken the leadership in this matter. I think he has done a fine job and a very constructive job and deserves a lot of credit.

I say this because I am about to put into the record a letter from the American Bankers Association that opposes the bill. They maintain their record of always having opposed deposit insurance, and they do it in saying that the bill, if we are going to have a bill, is a bill they want, but they prefer to wait until the report of the Commission just appointed by the President.

That will be printed in the record. (The letter referred to follows:)

Hon. WILLIAM PROXMIRE,

THE AMERICAN BANKERS ASSOCIATION,
New York, N.Y., June 18, 1970.

Chairman, Financial Institutions Subcommittee,
Senate Banking and Currency Committee,
Washington, D.C.

DEAR SENATOR PROXMIRE: In connection with hearings before the Financial Institutions Subcommittee on S. 3822 providing for share insurance for credit unions, The American Bankers Association wishes to make the following comments.

A new share insurance program affecting institutions with nearly $15 billion in share accounts would undoubtedly have an important impact on the role of credit unions, the relationships with their members and the interrelationships with other financial institutions. Accordingly, it might be appropriate to delay this legislation until the President's Commission on Financial Structure and Regulation has completed its study.

We understand the subject of credit unions will be on the agenda of the Commission, and action by the Congress on legislation of this type would have the benefit of a full exploration of the expanding financial importance of the role of credit unions and of the problems relating to the protection of their shareholders.

Although the provision of share or deposit insurance would seem to be a simple and universally accepted principle, it does create a number of problems regarding credit unions. For example, credit unions are chartered under the concept of limited membership with a common bond or affiliation for limited purposes. Share insurance would go a long way toward encouraging wider powers in contravention of the limited-role concept.

A common practice by the FDIC in the case of banks, and the FSLIC in the case of savings and loan associations, is to merge failing institutions with sound ones to avoid immediate large pay-outs from the insurance fund. Such a practice with respect to credit unions, wherein a failing institution in one firm, organization, or community would be merged with another somewhere else would violate the common bond concept and would not be an appropriate tool in the case of such institutions.

If, however, legislation for the insurance of credit union share accounts is enacted, S. 3822 is the most desirable approach. It provides regulatory safeguards without changing the basic character of credit unions. The legislation provides that anyone who has been convicted of any criminal offense involving dishonesty or breach of trust cannot serve as an officer of an insured credit union. The Administrator shall promulgate rules and regulations to be followed by insured credit unions in order to protect such institutions against burglaries and larcenies. It also provides for share insurance cancellation, for cease and desist powers to be exercised by the Administrator and for officer removal for unsafe and unsound practices or for breaches of trust.

In addition, the legislation provides that if the Administrator decides that the fund needs a loan, he may borrow from the Secretary of the Treasury up to an amount totaling $100 million at any one time.

Despite the safeguards and the other desirable provisions in S. 3822, The American Bankers Association feels that the problem has enough complexities with respect to the impact of share insurance on credit unions and their relationship to other financial institutions to await the results of the work of the President's Commission on Financial Structure and Regulation.

Sincerely,

NAT S. ROGERS, President.

Mr. PROXMIRE. Mr. Robertson, I want to congratulate you and the credit union movement on the position you have taken here. It is very constructive, especially when you recognize the fine record which have over the years of safety and security for your members, your investors. It is a remarkable record.

you

It is a record of losses which if expressed in percentage terms would be, as you say, not significant, and I would say is infinitesimal losses. Of course, to those who lose their money it still can be a lot of

money.

I also congratulate you on your willingness to adapt under difficult circumstances where you have a divided membership. You say they are about equally divided now on share insurance, for it and against it. You have taken a forthright position, and you have obviously gone into painstaking detail in analyzing the Bennett bill.

What will be the impact on the chartering and growth of new credit unions if the reserve formula in S. 3822 is enacted?

Mr. ROBERTSON. Mr. Chairman, first may I say thank you very much for your kind comments with regard to our very good progress.

Insofar as the impact is concerned, we are very much concerned for the small credit unions, as indicated in the testimony, and beyond