ADDITIONAL STATEMENTS AND MATERIAL SUPPLIED American Bankers Association, letter to Senator Proxmire__ CUNA International Inc.: Addendum to statement of R. C. Robertson_ Application of reserve formula to December 31, 1968 data (table). Losses on member's shares at Federal credit unions, 1934–69 (table). ment. Page 98 113 111 135 113 113 Selected data pertaining to share insurance for Federal credit unions projected 1970-79 (table) -- 122 Shares and losses-Federal credit unions (table). 113 Thomas, Evert S., Jr., director, Washington office, letter to Senator Comparison of budget-1970 projection adjusted for insurance premiums (table) 143 Loan portfolio as of May 31, 1970 (table). 141 McCarthy, John P., president, statement of. 140 Survey of shareholders by share account as of February 28, 1970 (table)___ 142 National Association of Federal Credit Unions, comparison with CUNA on proposed amendments__ Rogers, Nat S., president, American Bankers Association, letter to Senator 98 Thomas, Evert S., Jr., director, Washington office of CUNA, letter to 112 CHARTS AND TABLES Application of reserve formula to December 31, 1968 data__. 111 142 Comparison of budget-1970 projection adjusted for insurance premiums, 143 Comparison of present law and the reserve level suggested under S. 3822- 7 141 Loans granted by amount, 1968-69 18 Losses on members' shares at Federal credit unions, 1934–69_ 113 Selected data pertaining to share insurance for Federal credit unions projected 1970-79-. 122 Shares and losses-Federal credit unions__ 113 Survey of shareholders by share account as of February 28, 1970, of the 142 FEDERAL SHARE INSURANCE FOR CREDIT UNIONS THURSDAY, JUNE 18, 1970 UNITED STATES SENATE, COMMITTEE ON BANKING AND CURRENCY, SUBCOMMITTEE ON FINANCIAL INSTITUTIONS, Washington, D.C. The subcommittee met, pursuant to call, at 10 a.m., in room 5302, New Senate Office Building, Senator Wallace F. Bennett presiding. Senator BENNETT. Gentlemen, our hearing today will concern the bill, S. 3822. Senator Proxmire, who is chairman of the subcommittee, will not be able to be here today. I should be down listening to the Secretary of the Treasury in the Finance Committee talk about raising the debt ceiling. So I am both a fugitive and a substitute for a fugitive. It will be my privilege to chair the meeting today in Senator Proxmire's stead. (A copy of the bill may be found at p. 20.) Senator BENNETT. Our first witness is the Honorable J. Deane Gannon, Acting Administrator of the National Credit Union Administration. Mr. Gannon, you have been with us a number of times before, and we will be happy to have your testimony this morning. STATEMENT OF J. DEANE GANNON, ACTING ADMINISTRATOR, NATIONAL CREDIT UNION ADMINISTRATION Mr. GANNON. Thank you, Mr. Chairman. Mr. Chairman, I welcome the opportunity of presenting the views of the National Credit Union Administration on S. 3822. This bill would provide insurance for member accounts in State and federally chartered credit unions. S. 3822 is a comprehensive proposal which directs the Administrator of the National Credit Union Administration to insure the member accounts of all Federal credit unions and authorizes him to insure the member accounts of credit unions organized and operating according to the laws of any State, the District of Columbia, the several territories and possessions of the United States, the Panama Canal Zone, and the Commonwealth of Puerto Rico upon their request. Federal credit unions are the only federally chartered thrift institutions that do not provide Federal insurance protection similar to that available to the depositors of most commercial banks and savings and loan associations. (1) State-chartered credit unions in Massachusetts and Wisconsin now have a State plan for insurance of member accounts, and Rhode Island has recently passed enabling legislation of this nature. Credit unions began operating under State law in the United States in 1909. The Federal Credit Union Act was passed in 1934. Today, there are 23,905 Federal and State credit unions in operation in the United States, with more than 22 million members. They have assets of $16.4 billion, loans of $12.9 billion, and savings of $14.2 billion. By the end of the decade of the 1970's, we expect credit union share savings in the United States to be in the neighborhood of $30 billion. There is little question that individuals who have been close to the credit union movement over the years have recognized a need for the kind of protection that is set forth in S. 3822. Stabilization or liquidation funds have been established by State leagues and Credit Union National Association, Inc., for the purpose of assisting liquidating credit unions to return 100 cents on their member share dollars. Forty States and the District of Columbia now have such funds, although they are small in relation to the potential need in most States. Despite the activities of the funds, credit unions continue to liquidate at a loss to their members. In 1969, 31 of the 36 Federal credit unions that liquidated at a loss to shareholders were located in States that had stabilization funds. Presumably those credit unions were not members of their State credit union leagues, or otherwise not eligible for assistance. Arrangements such as this that offer safety to shareholders on a conditional basis are not a satisfactory substitute for a share insurance plan such as is proposed in S. 3822. Overall losses by shareholders in Federal credit unions have not been great. During the history of the Federal credit union program, four-fifths of the 5,606 credit unions that liquidated paid out 100 percent or more to their shareholders. Losses in liquidation amounted to $1.7 million, and net losses through scaledowns amounted to $1.6 million for a total of $3.4 million. An additional $1.6 million in donations, mainly from State leagues, further reduced losses. Without the latter, total losses to Federal credit union members would have reached almost $5 million. It must be emphasized that this reflects only the Federal credit union experience; we have no information concerning the State credit union experience in this regard. While we may take some comfort that four out of every five liquidated Federal credit unions returned all of their shareholdings or more, one can also take the view that it is a matter for concern that any credit union member in this era of consumer protection can lose his savings in his credit union. In recent months we have been conducting a survey of the characteristics of Federal credit union members who sustained losses of $250 or more in the liquidation of their credit union. We have received completed questionnaires from 73 members who incurred relatively large losses. The typical employed individual involved in these losses was more than 50 years of age and in a relatively low-income bracket. A child 12 years of age was involved in one loss. A number of retired. people and at least one widow were involved in others. The largest individual loss reported was $3,400. Perhaps the most significant finding of the survey was that these people thought their savings were insured either because of the word "Federal" in the name of the credit union, because they were given that impression by someone in the credit union office, or for other reasons. Apparently, it is hard to educate credit union employees and members to the fact that savings in a federally chartered and supervised credit union are not insured. Doubtless the experience of a credit union share insurance program would differ from that of FDIC or FSLIC in important respects. A credit union, of course, is unique among the thrift institutions in that it serves only its membership field and not the general public. While some credit unions have had to liquidate as a result of management deficiencies or neglect by their members, most are liquidated because of a closing of a plant, military base, or because of other disruptions to their field of membership. As a consequence, there are always several hundred, typically relatively small, Federal credit unions that are in the process of liquidation at any given time. Taking the last 10 years as a whole, an average of 368 Federal credit unions were in the process of liquidation as of each December 31. An allowance for liquidating State credit unions that might participate in a share insurance plan might bring the number of liquidating credit unions throughout the country to 600 or more per year. Experience has shown that in the absence of donations to prevent loss in liquidating credit unions, two in five liquidations would result in a loss to members. If this ratio holds in the future and is also applicable to State credit unions, we can anticipate that we would be processing between 200 and 300 credit union liquidations on a continuing basis. Because of the large number of relatively small operations, the costs of liquidating credit unions, per dollar of assets, undoubtedly will be greater than has been experienced in the liquidation of commercial banks or savings and loan associations. Since my report, Mr. Chairman, covers the features of the bill in some detail, I will now confine my remarks to the following: The bill provides that the Administrator shall insure the member accounts of all Federal credit unions and may insure the member accounts of credit unions organized according to the laws of any State, the several territories and possessions of the United States, the Panama Canal Zone, or the Commonwealth of Puerto Rico. Applications by credit unions for insurance of member accounts shall provide and shall contain an agreement by the applicant with regard to specific provisions enumerated in section 201, subsections (b) (1) through (9). While credit unions may hold assets of unlike character by virtue of the different authorities and powers permitted by the laws under which they operate, all insured credit unions will pay the same rate of premium for member account insurance. We believe as a matter of equity that all should be required to meet the same net-worth reserve requirements. Accordingly, we suggest that subsection (b) (5) be amended to require agreement by all applicants to maintain regular reserves in amounts not less than those required for Federal credit unions by the Federal Credit Union Act. Federal credit unions are currently subject to a dividend rate ceiling of 6 percent, incorporated in the standard by laws. Credit unions in some States are now permitted to pay dividends in excess of 6 percent. While we do not necessarily take the position that any interest or dividend rate ceilings are desirable, or that the 6 percent ceiling now imposed on Federal credit unions should not be adjusted in the future, we feel that any State credit union participant in an insurance program should come under the same ceilings as those applicable to Federal credit unions. We, therefore, recommend that provision for administrative action to impose dividend ceilings be incorporated in this section, probably as a new subsection (b) (10). We would be glad to furnish the committee with suggested language for this amendment. The Administrator is given authority to require reports of condition and to require the payment of the premium. Provision has been made for a proration of the premium for those credit unions becoming insured during the insurance year both as to months involved and a deduction for the first $10,000 of share account liability so that newly chartered credit unions may avoid the burden of a premium in their formative period. The premium of one-twelfth of one percentum is the same as the gross premium assessed by FDIC and FSLIC. On the basis of the actual loss experience of Federal credit unions that rate of premium appears to be more than adequate. However, the amount of risk which would now be insured is substantially larger than in the earlier years of the Federal Credit Union program. We have no statistics concerning the loss experience of State credit unions. No provision is made in the bill for original funding or capitalization of the National Credit Union Share Insurance Fund. Accordingly, the premium rate of one-twelfth of one percentum may be desirable at the beginning and until the fund reaches an adequate operating level. We, therefore, recommend that section 202, subsection (c) (4) be amended to provide that when any loans to the fund from the Federal Government and the interest thereon have been paid and the fund equals an amount equal to 1 percentum of the aggregate amount of the member accounts in all insured credit unions, the Administrator may reduce the premium charge for insurance. This change would also require an amendment or deletion of subsection (h) (2) which defines "net operating level." In addition to providing insurance for the shares of credit union members, the bill authorizes the Administrator in his discretion to make loans to, or purchase assets in order to reopen a closed insured credit union or to prevent the closing of an insured credit union. |