CUNA urges Congress to address CU capital

WASHINGTON (5/21/09)—Just hours before a bill with corporate credit union stabilization provisions was signed into law, representatives from the Credit Union National Association (CUNA) and the National Credit Union Administration (NCUA) joined other industry groups to testify Wednesday on a broad slate of natural person and corporate credit union issues.

At the hearing conducted by the House Financial Services

Click to view larger image Bill Lavage, president/CEO of Service 1st FCU, Danville, Pa., testified on CUNA's behalf that "the capital of some credit unions is being wiped out on the basis of estimates." CUNA Chief Economist Bill Hampel is seated behind Lavage.(CUNA photo)
" subcommittee on financial institutions and consumer credit, Bill Lavage, president/CEO of Service 1st FCU, Danville, Pa., testified on CUNA's behalf that "the capital of some credit unions is being wiped out on the basis of estimates."

The NCUA's current corporate credit union stabilization plan calls for a $1 billion infusion and estimates that a further $3.7 billion would be needed to guarantee current corporate credit union deposits. Under this plan, the NCUA estimates that it would require $5.9 billion in total funds to restore the National Credit Union Share Insurance Fund to its normal operating equity ratio level of 1.3%.

"We need a mechanism [so that] if the estimates are wrong, the capital can be returned [to credit unions]," Lavage urged the subcommittee.

The hearing, which centered on the NCUA's corporate credit union stabilization plan, was also attended by representatives from the National Association of State Credit Union Supervisors and the National Association of Federal Credit Unions.

Although the original goal of the hearing was to discuss H.R. 2351, the Credit Union Share Insurance Stabilization Act, many of the details addressed by that bill were included in S. 896, the Helping Families Save Their Homes Act, which President Barack Obama signed into law yesterday. (See related story: President's pen turns corporate stabilization bill into law)

Therefore, the focus of the hearings "shifted to ensuring the efficient implementation" of the corporate stabilization plans, Rep. Paul Kanjorski (D-Pa.) explained in his opening statement.

Regarding the NCUA estimated shortfall, the agency based its $5.9 billion share insurance deficit on estimates by the Pacific Investment Management Company, LLC that predicted that corporate credit unions would lose as much as $16 billion on some securities investments.

However, more recent estimates have predicted a lower total, which could change the total needed to replenish the share insurance fund. Lavage asked the NCUA to provide greater detail regarding the underlying assumptions used to arrive at these numbers.

As it reacts in the aftermath of the current economic downturn, NCUA Chairman Michael Fryzel testified that pending NCUA regulations could limit the types of investments that corporate credit unions are allowed to take part in to help avoid potentially dangerous economic situations in the future.

The NCUA could also investigate the investments of corporate credit unions to ensure that their investment profiles are substantially diversified, he added.

Rep. Brad Sherman (D-Calif.) during the hearing stated that he'd support allowing credit unions to issue alternative capital, a move that would free up credit unions to grant more loans to their members.

Credit unions could also be permitted to issue subordinated debt at zero risk or cost to the government, Sherman added.

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