December 7, 2009

By Melvin Green,2014-05-07 17:16
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December 7, 2009

    Remarks by

    Chairman Debbie Matz

    National Credit Union Administration


    Missouri Credit Union Association

    Annual Advocacy & Business Meeting

    Jefferson City, Missouri

    March 23, 2010

    Thank you very much. I’m delighted to join you, and it’s a special honor to be here on such a momentous occasion Rosie’s final legislative meeting.

No one embodies the spirit of the credit union movement better than Rosie. For

    more than 10 years, Rosie’s dedicated service has helped sustain and strengthen Missouri’s credit unions. During Rosie’s decade at the helm of MCUA, Missouri’s

    credit unions have enjoyed an impressive growth rate of 57 percent. One of

    Rosie’s outstanding traits is that she is a visionary in creating ways to help member

    credit unions. Last year, in the aftermath of the worst economic downturn since

    the Great Depression, Rosie somehow found a way to offer a $500,000 dues rebate!

    And she managed to do this while maintaining MCUA’s solid financial

    performance and reserves.

    In addition to her service to Missouri’s credit unions, Rosie established a strong reputation among her peers nationwide, bringing her member-service values to her

    work as Chairman of the American Association of Credit Union Leagues. It was a

    fitting tribute when AACUL presented Rosie with this year’s Eugene H. Farley League Leadership Awardan extraordinary and well-deserved national honor.


Allow me to thank you, Rosie, for your outstanding record of service to Missouri,

    to the entire credit union community.

[Lead the applause.]

Thanks in large part to Rosie and the MCUA team, Missourians can look with

    pride at the strength of your state’s credit union industry. Your spirit of enterprise

    and commitment to member service are certainly alive and well among Missouri’s 144 credit unions.

Here in ―the Show-Me state,‖ your industry’s performance has shown significant

    strength. You have an admirably high proportion of healthy credit unions 101 have a CAMEL 1 or 2. This represents nearly 90 percent of Missouri credit union

    assets. Your overall modest rate of delinquencies and charge-offs are indications

    of sound lending standards and good management at most of Missouri’s credit unions, large and small.

    You’ve compiled this strong record even at a time when Missouri’s economy like the nation’s – has been under greater stress than at any time since the 1930s. The

    national stimulus package has been helping to breathe some new life into the

    economy but Missouri’s unemployment rate, hovering (like the nation’s) in the 10-percent range, remains unacceptably high. The new job-creation package,

    signed by President Obama last week, will inject additional investments that will

    help spur employment and raise incomes for Main Street Missourians.


If there’s a silver lining in the midst of this economic crisis, it is this: In a day-and-

    age when every other part of America’s financial-services sector has seen its reputation tarnished, credit unions are still shining.

Credit unions have lived up to their Main Street values, throughout this economic

    downturn. Unlike Wall Street, you don’t have to look at the stock-market tables to know what your value is.

    Yet, over the past several years, no part of America’s financial sector has been immune from the pressures of the financial crisis and of the prolonged recession that it triggered. The credit union industry now confronts an array of challenges

    that will test your resilience.

As the federal agency that ensures the safety and soundness of the credit union

    system, NCUA is committed to helping you through those challenges. It’s certainly

    in America’s best interest to have a strong, sustainable credit union industry –

    providing capital to hard-working families and good, solid businesses. When

    people get the credit they need to turn their dreams into reality, they can create

    what our country needs most, right now: good jobs for Main Street Americans.

Today, I’d like to discuss some of the challenges that are ahead for credit unions

    and to explore how, by working together, we can try to turn today’s challenges into tomorrow’s opportunities.

I’ve been in my new role at NCUA for seven months now. When President Obama

    asked me to come back to the agency, where I had served as a Board member from

    2002 to 2005, I didn’t hesitate for a second.


But what a difference there is, between the economic conditions when I first served

    on the Board and the landscape we face today. The credit-market turbulence that

    started in 2007 seemed to come out of the blue causing a financial crash in 2008, and the deep economic slump of 2009.

We seem to have gotten past the worst of the downturn by now, and many of the

    key economic indicators are beginning to turn upwards. Nonetheless, it’s going to

    take awhile to clean up all the wreckage caused by this crisis.

The statistics remain worrisome. Nationwide, the number of credit unions

    downgraded to CAMEL 4 and 5 almost doubled during the economic downturn

    and those credit unions hold more than 5 percent of all insured shares. Even larger

    is the growing group of credit unions rated CAMEL 3, which now account for

    nearly 14 percent of all insured shares. Many of the 7,600 federally insured credit

    unions while still well capitalized will be draining capital this year, due to

    negative earnings. At the same time, delinquencies and loan losses continue to

    increase. Undoubtedly, these will lead to an increase in failures.

So NCUA is stepping up to the plate. Our examiners are carefully monitoring the

    call reports of all federally insured credit unions, looking for red flags.

Although, as I indicated earlier, the overall health of the credit union system is

    sound, we’re watching for a number of specific warning signs that have caused failures in recent years. These include increases in delinquencies in member

    business lending, indirect lending, and loan participations. We’re particularly concerned about credit unions that are not doing their own due diligence. If you


make member business loans, you must do your own underwriting even if you use

    a vendor or CUSO. If you make indirect loans, you must not delegate loan

    approval authority. And if you participate in loans, you still must do your own

    due diligence, even if the originator is another credit union.

We have asked our examiners to review call reports of every credit union. If they

    see that a credit union has suffered a significant increase in delinquencies in any of

    these areas, they will visit the credit union even if an exam is not on the regular schedule.

Were also looking very closely at any institutions that are holding too many fixed-

    rate, long-term mortgages on their books. We’ve been warning, for months now, that higher interest rates are a question not of ―if‖ but of ―when.‖ And you’ve

    seen, just in the past few weeks, that the Federal Reserve is indeed beginning to

    raise interest rates. So for those of you here today who are credit union

    executives we urge you to take action now make sure your portfolio is strong

    enough to withstand the interest-rate risks that will soon hit your balance sheet.

I know that some of you think NCUA is over-reacting. But the reality is: Were

    taking precautions to prevent dangerous situations from arising before it’s too late.

    We’re taking the disciplined steps that are needed to protect the credit union

    system as a whole.

With our careful oversight, our examiners don’t intend to play a regulatory game

    of ―gotcha.‖ We must uphold rigorous standards at credit unions large and small because we aim to protect the 90 million members who depend on the safety and

    soundness of the credit union system.


    If the recent financial meltdown taught us anything, it’s that – particularly in financial services weakness, whether real or perceived, can trigger ripple effects

    very quickly. That’s why we don’t ever want you to be in a place where any

    cracks start showing.

There will be positive long-term benefits from our continuing efforts to strengthen

    the system. During the recent years of stress, we’ve spent a great deal of time addressing credit unions’ immediate problems. But, as we look ahead toward an

    economic recovery, we can again appreciate the industry’s longer-term potential.

    Because we’ve insisted on taking precautions early before dangerous situations arise all of us now have stronger reason for long-term optimism. We’ve taken many of the necessary steps to strengthen the system. The assessments to preserve

    the insurance fund and to stabilize the corporate credit union system painful as they have been in the short term will put the overall system in a stronger position

    for the long term.


Even as we position the credit union system for a prosperous future, let me

    underscore one of the central challenges that we now confront, as we try to resolve

    the problems of the past.

As you know, NCUA has taken bold, decisive action to deal with the corporate

    credit union crisis. Yes it was indeed a crisis. If we had not confronted the


situation head-on if we had allowed the corporate crisis to become a consumer

    crisis the nation’s credit union system would have faced a grave systemic risk.

Let me take just a couple of minutes to explain in straightforward terms what

    occurred, and the steps we’re now taking to make sure that such a crisis can never

    happen again.

I’d like to start by assuring you that I fully recognize the legitimate anger that

    many of you feel about the corporate crisis. That anger has come through loud and

    clear in the comments we’ve received to the proposed new corporate rule, and in the town hall meetings we’ve held. In personal conversations with many of you,

    I’ve heard about the pain you have felt, amid the damage to the credit unions

    you’ve worked so hard to build. I know many of you blame NCUA after all, two examiners were on site at US Central and WesCorp. I understand that. But

    there’s plenty of blame to go around. NCUA shares some of that blame. So do the

    managers and boards of those corporates who exercised such poor judgment.

Much of the blame falls outside the credit union industry. Mortgage brokers made

    questionable loans that led to waves of foreclosures. Rating agencies handed out

    AAA ratings for mortgage-backed securities that are now known as ―toxic assets.

    When this mortgage bubble burst, the fallout caused an extraordinary and

    unforeseen decline in the global economy.

    But it’s not productive to look back to assess blame. It’s only productive to look back for the purpose of learning from our mistakes so we don’t repeat them. That’s what NCUA has been doing for the past year, as we developed the proposed corporate rule and asked for your comments.


I know youre all living with the consequences of the corporate failures. So I think

    it would be helpful to take a few minutes to explain how the corporate crisis

    unfolded. Some of the points are somewhat technical, but I’d like to help you gain a better understanding of exactly what took place, and to explain the thinking

    behind the key elements of our proposed rule.

The global credit crisis of 2007 and 2008 exposed the four giant corporate credit

    unions to extreme shock, because they held a vast amount of residential-mortgage-

    backed securities. When the market for those bonds suddenly plummeted, the

    corporates’ losses pushed them toward insolvency.

If the corporates had abruptly stopped operating, that would have threatened to end

    the services they’ve long provided to natural-person credit unions. That’s because three-quarters of natural-person credit unions have used the corporates as their

    primary agents for clearance and settlements taking care of the complicated ―financial plumbing‖ behind services like checking accounts, debit accounts and

    ATM transactions.

Worse: About 90 percent of natural-person credit unions had investments in the

    corporates. If the corporate system had collapsed, the natural-person-credit-union

    system would have suffered huge and insurmountable losses shattering confidence in all of America’s credit unions. Since they had such large

    investments in the corporates, they would have lost about $30 billion in net worth

    about one-third of the net worth of all natural-person credit unions. This would

    have led to the collapse of at least 800 perhaps as many as 1,200 natural-person credit unions.


In addition, your federal Share Insurance Fund would have had to levy huge

    assessments on the remaining credit unions, in order to cover the remainder of the

    losses. It’s uncertain whether those remaining credit unions could have withstood

    the strain. They would have been facing enormous costs in terms of capital and a

    catastrophic loss of public confidence.

We simply could not let that happen. As a result, NCUA had to put two of the

    largest corporates US Central and WesCorp into conservatorship. And we’ve

    also had to carefully monitor the operations of the other large corporates that are

    under severe pressure.

Then, to stabilize the entire credit union system, NCUA placed guarantees on

    shares at all corporates. This ensures that your credit unions’ investments in

    Missouri Corporate and any other corporates are backed by the full faith and credit

    of the United States government.

    Our aim has not been to ―bail out the corporates: We aimed to stop them from bleeding, as their assets were hemorrhaging value. NCUA did what we had to do,

    to save the system. We preserved public confidence. We stabilized the corporates.

Going forward, we must ensure that never again will the entire credit union system

    be threatened by one group of credit unions or even one single credit union.

For the long term, NCUA is focused on providing a framework for safety and

    soundness that protects the system. We’re determined to enact new safeguards to

    make sure that such a situation can never happen again.


    The NCUA Board released the proposed new rule on corporates on November 19. By the time the public comment period closed on March 9, we had received over 800 comment letters, totaling over 2,500 pages. I assure you, we will read every one.

    By contrast, the proposed rule runs 234 pages. Let me distill, for you, the proposed new rule into its four main themes. It involves changes in four critical areas that are flawed in the current rule.

    First: On capital standards: The new rule will significantly strengthen capital requirements, aligning corporates with Basel One standards; subjecting corporates to a leverage capital requirement in an effort to reduce risk; and imposing Prompt Corrective Action standards on corporates that match those that apply to all other federally insured financial institutions.

    Second: On asset-liability management: It proposes specific ALM requirements to ensure that the gap between the average life of assets and liabilities does not present excessive risk. It also prohibits a corporate from accepting funds from a single source that exceeds 10 percent of the corporate’s assets. This will avoid

    excessive reliance on a single lender or depositor.

    Third: On risk concentration: It will limit risk by forbidding corporates from excessive concentration in a single type of asset. Promoting a diverse portfolio of investments will help avoid the kind of risk concentration that was permitted under the flawed corporate rule that was approved in 2002. I voted against that rule for this very reason.


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