Full NCUA Town Hall Statement

On behalf of Jay Johnson, Executive Vice President of Callahan and Associates

I will preface my comments on some of the corporate issues mentioned earlier by offering context to understand this subject in a broader framework.

The Economy’s First Responders

One year ago global financial markets were in a total meltdown. The US economy had gone from a financial crisis to an economic one as it descended into a recession of unknown depth and duration. Fear and negativity dominated every headline and public discussion.

During this entire period of almost two years of economic decline and progressive credit market shutdowns, the credit union system has achieved record results. As of June 30, 2009 the credit union system most recent results included:

• Record loan originations for any six month period in its history
  
• Record share growth in the same time frame
  
• The strongest capital of any financial system
  
• Stable financial performance
  
• Increasing market share in every market which credit unions serve

These trends, are not just recent, but are typical of this entire two year downturn. Before there were any government industry-specific programs or proposed emergency alphabet-financing rescues, credit unions were the first responders in increasing, not just making, auto loans, first mortgages, student loans, loan modifications and even growing credit card lines-all at record levels. This was achieved when primary lenders and secondary credit markets had shut down and consumers denied many traditional borrowing options.

A System Response

This “counter cyclical” role is why Congress and states have authorized a tax-exempt cooperative charter going back 100 years. This public policy “covenant” is that cooperatives will respond to member needs in ways that market driven firms cannot. Credit union’s record-breaking performance shows that this good news is often no news. Except for an occasional specific story in the press, these results have not been told. Instead we find both credit union press and even leaders predicting future problems or losses, when in fact these are a very small aspect of the credit union performance record.

This most recent demonstration of the cooperative charter’s value was not just the cumulative efforts of 8,000 independent institutions. Rather it was the result of a cooperative system that includes credit unions, CUSOs, corporates and many other components including state regulators and trade associations.

Corporates were especially important however. For credit unions were able to achieve these remarkable results because the credit freeze that paralyzed lending by almost all other institutions was not even an issue for the 8,000 credit unions. They knew that they had collective liquidity managed by the corporate network of almost $100 billion dollars, not just their own investments, to call upon if needed. Therefore they kept right on lending. Indeed many decided, as one corporate CEO said, to sit out this recession.

Not a Liquidity Problem, but a Confidence One

There have been comments that we face a liquidity challenge with the corporate network. The credit union system has the highest level of liquidity ever—over $268 billion of investments at midyear— an increase of $40 billion from one year earlier. The corporate network does not have a liquidity challenge; rather it has a confidence challenge.

Of this $40 billion increase, only $4 billion went to the corporates and $13 billion went to the banking system. Today third parties are not allowing credit unions to use corporates as escrow agents for payments. Credit unions are turning to banks for these services plus lines of credit. The data shows that credit unions are actively diversifying their investment portfolios and reducing their relative exposure to the corporate system.

Even the guarantee by NCUA of corporate shares is not a sufficient response. Moreover it is not rate causing this exodus; many corporates are paying above market rates on short-term funds. Rather after observing the results of NCUA’s response to the corporate situation over the past 15 months, there is significant doubt about the process of re-designing the corporate system to meet credit union’s future needs.

This uncertainty is a result of cumulative experiences. Credit unions both created and funded the NCUSIF and CLF. Credit union legislative efforts increased the borrowing authority of the CLF to its legislative maximum of 12 times capital of $41 billion. Even though credit unions are the legal owners of both funds, the collective resources were not available last fall, to credit unions during the depths of the market crisis. Repeated requests and written proposals were provided to the highest levels of the Agency for use of these collective funds. This is still the case today.

These requests or proposals would have helped credit unions become even more pro-active in home loan modifications at the time of the most severe market distress. They would have increased liquidity throughout the credit union system. They would have used capital notes to expand the lending capacity of natural person credit unions. Instead credit unions have been forced by examiner edict and economic circumstances to reduce member loans in those areas of the country where they are most needed.

Just one example: NCUA put a capital note of $1 billion into US Central with the assertion that it was insolvent. We now know that US Central was not insolvent and that even if that were to occur, there is nothing that prevents a corporate from operating in a negative capital position, as we see with WesCorp.

However, that capital note extension demonstrates the collective resources available. For that $1 billion dollars (using June 30 data) would bring all 134 credit unions reporting a net worth ratio below 6% back to an adequately capitalized level with just $272 million; all 166 credit unions with capital between 6 and 7% could be brought up to a well capitalized ratio for just another $230 million. There would still leave almost $500 million for additional capital notes! Moreover, looking at earlier precedents, the vast majority of this assistance would be repaid from future earnings. This is what true cooperative collaboration is about.

At a system level, using a 7% well capitalized ratio, $ 1 billion of capital notes would support over $14 billion in additional member loans on the balance sheet. It is loans that actually generate the future capital that sustains credit unions. Few if any credit unions can downsize their way to future success, even if that is the only way to survive.

Today there are dozens of credit unions providing invaluable service to their members and communities because of capital notes used in prior periods of economic challenge. These include SACU (the leading manufactured housing lender in the country), Eglin, USA FCU, Chattanooga TVA, etc. Many are asking why this cooperative solution has not been used in the most severe challenge in over 25 years, as it was in the past.

Contrast with Administration Policy and Practice

There have been a number of Administration’s approaches to resolve the challenges facing banks that directly parallel capabilities or processes NCUA could have used but did not. Two of these are:

1. The Treasury’s Capital Purchase Program. So far, 672 banks have received peak disbursements of $204 billion – of which $134 billion is still outstanding. This program, available to institutions of all sizes, provided capital in various forms or subordinated debt. The program included mutuals. Except for small banks (those under $500 million) Treasury is no longer accepting applications.
   
2. The Supervisory Capital Assessment program. This OCC, Fed, and FDIC designed stress tests to provide forward-looking assessments of the 19 largest bank holding companies. The goal was to assess the capital sufficiency in these firms which hold two-thirds of the US banking system assets. The process included publication of the stress test assumptions, publication of the stress test methodology, and release of the stress test results for each institution.

By contrast credit unions, nor the public, were provided the methodology, underlying assumptions or the results of similar tests on the corporates that NCUA used to justify its conservatorships.

These fundamental differences in policy approach, as well as the lack of response last fall to requests for CLF and NCUSIF assistance, have raised the issue of whether NCUA is willing to work collaboratively, or will just take whatever unilateral action it deems appropriate. Many saw the rapid announcement of Chairman Matz’s appointment when the vacancy occurred on the NCUA board after April 30 as an indication that the Administration sought a different approach at the Agency. Instead of supporting credit unions counter-cyclical lending and public policy purposes, to date the Agency’s action have constrained credit unions in this critical role.

The Greatest Credit Union Advantage

The greatest advantage, the only real sustainable advantage that cooperative system has, is their ability to work together. Credit unions start with no capital except human cooperation. Collaborative resources within the corporate network, the NCUSIF and CLF are a critical part of the system’s strength; or, if not properly used, an Achilles heel.

There has been the suggestion that a better corporate rule will cure the issues confronting the credit union system and corporates. Certainly the review of rules is necessary. However, it is important to remember that rules do not create successful credit unions. Mandating capital levels does not create capital. Rules only provide a framework for creativity, innovation and performance. It is performance that creates capital. With the wrong set of corporate rules, the unintended consequence could be to neuter the corporate network in the name of saving it.

The System’s Need for Corporate Solutions

Models do exist of cooperative wholesale financial institutions that are successful and providing critical benefits to their owners. These models, let alone the future needs of credit unions for aggregation, secondary market access, and rapid distribution of new services and technological back-office enhancements have unfortunately not been part of the discussion of the future role of the corporate network.

I believe what is at stake with the proposed $6 billion dollar corporate expenditure is nothing less than the sustainability of the entire credit union system. The key policy issue is whether these funds will be used to expense the shortcomings of the past or build a new pathway for the future.

Just 30 years ago, another financial system was torn apart by an economic downturn. The savings and loan industry, dedicated to providing affordable housing finance, had a common insurer, regulator, and liquidity provider. As a result of that system’s problems, the FSLIC, recapitalized by the taxpayer was put under the management of the FDIC. Ultimately the two funds were merged. The independent regulator became the Office of Thrift Supervision within the Treasury. The FHLB system was opened up to all real estate lenders. The common vision and purpose of a savings and loan industry was lost. Today that industry is a remnant within the banking system.

The Agency’s Greatest Challenge

Chairman Matz has been quoted in saying NCUA’s toughest challenge will be the corporate resolution. Indeed, the problems are real and losses could be in the billions. While it is the most immediate topic, the need for reforms did not occur solely because of the extreme financial events of the last year. The underlying issues go back at least a decade or more.

In our experience, the most difficult challenge any manager or leader can face is changing the culture of a large organization. In every aspect of our lives, economically, politically, socially, and especially the ongoing impact of technology, change is a fact. This reality can make even the most worthwhile of organizations irrelevant, or worse, economic failures. One need only look at the state of the newspapers, often referred to as the fourth estate because of its crucial role in civic discourse, to see a dramatic example that change is no respecter of purpose.

The cooperative model relies on continually updating the legacy of resources, legal frameworks, organizations, and opportunities handed onto us by our predecessors. There is no immutable law that ordains that the credit union system, including NCUA, will survive in America’s 21^st century financial system. It is only the combined collaborative efforts of all components that can sustain the cooperative model. Both the earlier Morris bank model of consumer finance, as well as the recent savings and loan failure, should remind us that change is inevitable. Our future is not guaranteed.

The challenge, therefore, is not merely the immediate corporate resolution, but how to bring an agency created over 30 years ago into the 21st century. Today, the Agency manages more than $80 billion in collective credit union system resources – including its collective capital in the NCUSIF, its liquidity available through the CLF, and the corporate stabilization TARP-like funds. In addition, the Agency’s personnel manage the daily activities of the two largest corporates with more than $50.5 billion in industry assets. NCUA has extended an NCUSIF guarantee over the other corporate shares of $52.6 billion, for a more or less open ended period.

This means that NCUA today directs more than $180 billion of credit union assets. The Agency has never been in this situation before. Business as usual is not feasible.

This concentration of resources and power within the credit union system, as well as the ability to assess credit unions both operating and insurance fees without effective limit, is an incredible responsibility. Credit unions are deeply concerned about how these resources are used to benefit members and the industry. They have been disenfranchised from their ownership role in the conservatorships. There is widespread credit union reluctance to even consider recapitalizing the corporate system at this time.

If the $6 billion, or more, is spent just to resolve past corporate issues, not build future capabilities, this reluctance will only increase.

I opened this comment by describing the credit union system’s extraordinary and valuable role in this economic crisis by providing members resources to sustain their economic well-being. I believe NCUA can be an invaluable component in helping credit unions as well as the country transition to the new financial system that will be created in this century. Moreover, we believe credit unions, created as agents of change, could expand their leadership role by providing financing to health care cooperatives if that is the reform Congress passes.

All of us are here in this room not just because of the organization that pays our salary, but because we are part of a credit union system of multiple players, roles, and resources. We believe NCUA needs to more fully embrace its role as a part of the system, not that of a standalone player judging from the sidelines. To do this effectively will require from the Agency’s leadership the same innovation, creativity, and efficiency credit unions must exercise in their stewardship of member resources.

Thank you for the opportunity to present these viewpoints.