Letter to House Financial Services Committee Chairman Oxley in response to the American Bankers Association regarding alternative capital
April 16, 2002
The Honorable Michael Oxley
House Financial Services Committee
United States House of Representatives
Washington, D.C. 20515
Dear Chairman Oxley:
It is with regret that I am compelled to respond to the letter addressed to you on April 12, 2002, by Ed Yingling of the American Bankers Association (ABA). The letter outlines in misleading and inaccurate detail why the ABA objects to a proposed amendment by Rep. Brad Sherman to H.R. 3717, the Federal Deposit Insurance Reform Act of 2002, to be marked up by the House Financial Services Committee on April 17.
Mr. Yingling's letter, unfortunately, once again demonstrates that the ABA is more worried about crushing competition than it is about establishing a record of service and trust on behalf of the banking industry. The ABA, as well as some of the other banking organizations, seems to spend more time trying to find ways to establish a monopoly than in strengthening their own members' operations. This is the same group that only recently petitioned the Federal Reserve Board for expanded powers in the real estate brokerage business. In advancing their argument, the ABA suggests that providing banks with this authority would expand "consumer choice," and that additional competition would be good for consumers and result in lower prices for these services. This is the ultimate in arrogance and hypocrisy. When these same arguments are used by other players in the financial services industry, the ABA consistently dismisses them.
It is appalling that the ABA continually acts as the bully on the financial services block. Their positions are detrimental not only to others in the financial services industry, whether it be the realtors, insurance agents, mutual funds and securities industries, or credit unions, but most importantly, to the consumers of America. Ultimately, the monopolistic practices advocated on behalf of the banking industry by the ABA result in fewer choices and higher prices for the consumers of America.
With respect to the ABA letter of April 12, the following will set the record straight regarding the proposed Sherman amendment:
ABA Assertion: the Sherman amendment "has nothing to do with deposit insurance reform" and is "non- germane" to the bill.
CUNA Response: the role of alternative capital is clearly germane to the proposed bill, as it directly amends a provision of the Federal Credit Union Act that pertains to the National Credit Union Share Insurance Fund (NCUSIF). In addition:
1. The bill already has a number of significant items not related to the pricing of insurance: additional allowable investments; coverage increases; merging BIF and SAIF; and Deposit Insurance Fund (DIF) restoration plans.
2. The replacement of the fixed Designated Reserve Ratio (DRR) with a Reserve Range is not only a pricing issue. It is also a safety and soundness issue in that the FDIC Board is to determine the DRR within a range of 1.15% and 1.4% based on the Board's assessment of "(1) present and future risk of losses to the deposit insurance fund;" and "(2) economic conditions." The NCUSIF Board already has the authority to set a normal operating level within the range of 1.2% to 1.5%. The NCUA could more precisely estimate "present and future losses to the fund" if credit unions had access to additional forms of capital.
3. In a similar vein, Section 8 "Requirements Applicable to the Risk-Based Assessment System" could very easily include the creation of additional capital to allow credit unions to minimize risk to the share insurance fund, and for NCUA to more accurately assess that risk.
ABA Assertion: Allowing credit unions other than low-income credit unions to access additional forms of capital moves away from the reliance on member owned equity, allowing credit unions to issue "ownership interests" to nonmembers, with the concomitant corporate governance issues of voting rights, board composition, etc.
CUNA Response: Credit unions are emphatically not seeking the ability to issue equity to anyone other than members. More specifically:
1. Credit unions seek the ability to issue non-voting debt instruments to investors in a way that would not dilute the cooperative ownership structure of credit unions.
2. These debt instruments would be subordinate to the share insurance fund and thus provide additional protection to the NCUSIF. They would therefore be counted as part of a credit union's capital base for purposes of prompt corrective action (PCA) rules, which are designed to minimize losses to the share insurance fund. Without access to such funds, well-run credit unions of various types and sizes may at times be unable to accept normal, healthy growth because of PCA rules. Access to additional sources of protection for the share insurance fund would not constrain growth to the sometimes slow accumulation of retained earnings.
3. These debt instruments would confer no voting or control rights to the holders.
4. To the extent credit unions may wish to issue new forms of equity to their members, they would be structured in such a way as not to violate the one-member, one-vote nature of credit union governance. Either an equal amount of equity could be required of all members, or special, nonvoting equity certificates could be sold to those members wishing to purchase them.
ABA Assertion: The amendment may have a negative impact on the ability of low-income credit unions to attract capital. The amendment, they say, would force these low-income credit unions to compete with other credit unions for the "pool" of capital currently available to such low-income institutions.
CUNA Response: The truth of the matter is that low-income credit unions obtain their secondary capital from an entirely different "pool" of investors from that which other credit unions would tap. More specifically:
1. Investors that provide low-income credit unions with secondary capital generally fall into one of two categories: those attempting to fulfill a social mission, and those trying to comply with regulations such as CRA requirements. The former group includes charitable trusts, foundations, and faith-based organizations. The latter are primarily banks attempting to meet CRA requirements.
2. Clearly, neither of these two groups would substitute their secondary capital investments in low-income credit unions for investments in some other type of credit union. Doing so would not help them accomplish their social or regulatory goals.
3. Investors in the subordinated debt issues of mainstream credit unions would likely be those seeking attractive market returns on investments based on their analysis of the financial condition of the issuing credit union.
ABA Assertion: The ABA asserts that Congress, in enacting the Credit Union Membership Access Act, specifically prohibited credit unions from issuing capital stock and relying on anything other than retained earnings.
CUNA Response: The ABA inaccurately portrays the issue of secondary capital for credit unions that are not low-income as one that Congress fully considered during its deliberations of the Credit Union Membership Access Act in 1998 and rejected. This is simply false. As the legislative history of the CUMAA indicates, Congress did not focus on the authority for natural person credit unions that are not low-income to issue secondary capital.
1. The ABA points to a single provision in a Senate Banking Committee report [Rept. No. 105-193, page 12] as proof that Congress "specifically reinforced its view" that credit unions may not issue capital stock. The language cited, which is in the Federal Credit Union Act, is taken out of context to distort its relevance. Only when read with the previous subsection is the intent of this language clear (12 USC 1790d(b)(1)(A);(B)). Under that language, Congress directed the NCUA Board to develop a PCA system that was comparable to Section 38 of the FDIC Act, while taking into account that, at the time CUMAA was enacted (as now) credit unions did not issue capital stock and their only method of building net worth is through retained earnings. When read as Congress intended, it is clear that the language cited is descriptive and not prohibitive. Had Congress intended to prohibit secondary capital for credit unions it would have included a clear directive to this effect in the statute.
2. The ABA also erroneously states that the same safety and soundness rules that apply to credit unions apply to banks. In fact, credit union PCA requirements are more stringent as credit unions are the only federally regulated financial institutions that have net worth levels, such as well-capitalized and adequately capitalized, specifically delineated in the statute. These levels are higher than the capital requirements imposed by regulation on banks.
In summary, the ABA has once again demonstrated that it will automatically oppose attempts by others to improve service to the consumer, and will use misleading and inaccurate information to do so. The Sherman amendment is not only germane to deposit insurance, it would strengthen what is already an incredibly safe fund for credit unions, while enabling credit union members to reap the benefit of even greater service.
Daniel A. Mica
President & CEO
cc: Members of the House Financial Services Committee