Credit Union Study; Request for Comments

DEPARTMENT OF THE TREASURY

Office of the Secretary

Credit Union Study; Request for Comments

AGENCY: Office of the Secretary, DOT.

SUMMARY: Legislation recently enacted by Congress requires the

Secretary of the Treasury (Secretary) to conduct a study of credit

unions and submit a report to Congress by September 30, 1997.

This notice invites all interested parties to provide their views

on the topics listed below and on any other issues relating to the

study that they may wish to bring to our attention. We strongly

encourage all interested parties to submit comments for the record.

DATES: Comments should be in writing and must be received by February

28, 1997.

ADDRESSES: Send written comments to: Credit Union Study, Department of

the Treasury, Room 3025, 1500 Pennsylvania Avenue, NW, Washington, D.C.

20220.

FOR FURTHER INFORMATION CONTACT: For further information, please

contact: Joan

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Affleck-Smith, Director, Office of Financial Institutions Policy, at

(202) 622-2740, or Edward DeMarco, Financial Economist, at (202) 622-

2792.

SUPPLEMENTARY INFORAMTION: Section 2606 of the Omnibus Consolidated

Appropriations Act for 1997 (Public Law No. 104-208) requires the

Secretary to conduct a study of corporate credit unions and other

credit union issues. In conducting the study, the Secretary must

consult with the National Credit Union Administration (NCUA), the

Federal Deposit Insurance Corporation (FDIC), and the Office of the

Comptroller of the Currency (OCC).

Suggested Format of Comments

Please comment on some or all of the issues under study, as listed

below.

I. National Credit Union Share Insurance Fund

In 1970, Congress created the National Credit Union Share Insurance

Fund (NCUSIF) as a way for credit unions to obtain federal deposit

insurance. Like the Federal Deposit Insurance Corporation's Bank

Insurance Fund and Savings Association Insurance Fund, the NCUSIF

insures each depositor for up to $100,000. However, the NCUSIF is

structured and administered differently than the insurance funds for

banks and thrifts. In the legislation, Congress directs the Secretary

to study specific issues pertaining to the NCUSIF.

First, the Secretary must evaluate the treatment of the NCUSIF's

required 1 percent deposit by member credit unions. Legislation enacted

in 1984 required each credit union to maintain a deposit with the

NCUSIF equal to 1 percent of its insured shares. Credit unions count

these deposits as assets while the NCUSIF counts these same funds as

part of its equity. Congress raises the question of whether or not the

accounting treatment of the 1 percent deposit is appropriate. Congress

also requires the Secretary to study how the NCUA uses the deposit

amounts when determining equity capital ratios.

Second, the Secretary must analyze the potential for, and potential

effects of, having some entity other than the NCUA administer the

NCUSIF.

We request comments on:

1. The NCUA's oversight of the NCUSIF;

2. The desirability of having credit unions expense the 1 percent

deposit that they maintain at the NCUSIF; and

3. The advantages and disadvantages of separating the NCUSIF from

the NCUA.

We also request responses to the following specific questions

regarding the NCUSIF:

4. Does the current accounting treatment of credit unions'' 1

percent deposit create risks to the NCUSIF, credit unions, or both? In

particular, what is the risk that large losses in the NCUSIF would

impair the 1 percent deposit at a time when credit unions were under

stress?

5. If you believe that the 1 percent deposit should remain

refundable (i.e., should continue to be treated as an asset), explain

why. In particular, identify how such treatment promotes safety and

soundness and protects the NCUSIF and ultimately the taxpayers. If the

1 percent deposit remains refundable, how should the deposit be used in

determining a credit union's equity capital ratio?

If you believe that the 1 percent deposit should be expensed,

explain why. In particular, identify how expensing the deposit would

promote safety and soundness and protect the NCUSIF and ultimately the

taxpayers. In addition, please describe how the existing deposits

should be expensed.

6. The NCUA currently has a single office--the Office of

Examination and Insurance--handle both examination and share insurance.

Do any conflicts arise from that structure? Would any such conflicts be

most properly handled by separating examination and insurance within

the NCUA or by establishing management and oversight of the NCUSIF

outside of the NCUA? If the latter, should the NCUSIF be a stand-alone

agency or incorporated into the FDIC or some other existing federal

agency? Explain.

7. What changes, if any, are needed in the NCUA's current oversight

or operation of the NCUSIF? If you advocate changes, explain why those

changes are needed. Identify the safety and soundness or taxpayer risk

issues involved, and how your proposed solution deals with the

identified problem.

II. Corporate Credit Unions

The network of corporate credit unions, including U.S. Central

Credit Union, emerged in the 1970s to meet the liquidity and investment

demands of the growing number of natural person credit unions.

Currently, corporate credit unions provide liquidity to member credit

unions, invest member credit unions' excess funds, and perform check-

clearing and other related transactional services for member credit

unions. In this study, we will examine, in cooperation with federal

banking agencies, the ten largest corporate credit unions, including

examining their investment practices, financial stability, financial

operations, and financial controls.

In addition, Congress directed the Secretary to evaluate the NCUA's

supervision of corporate credit unions. Concern has been raised that,

at least until recently, the NCUA did not adequately oversee the risk-

taking of corporate credit unions and had no specialized examination

group to deal with the unique circumstances of corporate credit unions.

While the NCUA has addressed many of these shortcomings, Congress

requested an assessment of the NCUA's supervision of corporates today.

At the time of this notice's publication, the NCUA is finalizing

substantial changes to its regulation governing corporate credit

unions, 12 CFR Part 704. The proposed changes to Part 704 would

significantly alter certain regulatory requirements applicable to

corporate credit unions. The NCUA received extensive public comments on

those proposed changes, and we have reviewed those comments. In your

comments, be careful to distinguish between Part 704 as in effect at

the time this notice is published and the revised Part 704 proposed by

the NCUA. Should the NCUA complete the rulemaking process and issue a

final Part 704 regulation before the comment period for this notice

ends, you should focus your comments on the new Part 704.

We request comments on:

8. The safety and soundness of corporate credit unions; and

9. The NCUA's supervision of corporate credit unions.

We also request responses to the following specific questions

regarding corporate credit unions:

10. What is the appropriate scope of activities for corporate

credit unions?

11. What risks, if any, do corporate credit unions pose today to

natural person credit unions or to the NCUSIF?

12. Are the current investment practices of corporate credit unions

appropriate? Are NCUA regulations and NCUA oversight adequate for the

risks undertaken by corporate credit unions?

III. NCUA Regulations

Congress directed the Secretary to examine the NCUA's current

regulations. In particular, we will focus on NCUA regulations affecting

(i) the NCUSIF, (ii) corporate credit unions, and (iii) credit union

safety and soundness.

At the time of this notice's publication, the NCUA is finalizing

substantial changes to its regulation governing the investment and

deposit activities of natural person credit unions

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at 12 CFR Part 703. The proposed changes to Part 703 would

significantly alter certain regulatory requirements applicable to such

credit unions. The NCUA received extensive public comments on those

proposed changes, and we will review those comments. In your comments,

be careful to distinguish between Part 703 as in effect at the time

this notice is published and the revised Part 703 proposed by the NCUA.

Should the NCUA complete the rulemaking process and issue a final Part

703 regulation before the comment period for this notice ends, you

should focus your comments on the new Part 703.

We request comments on:

13. NCUA regulations in the specified areas.

We also request responses to the following specific questions

regarding NCUA regulations:

14. In order to improve credit unions' safety and soundness, what

changes, if any, should be made in the Federal Credit Union Act or the

NCUA's regulations? Explain.

15. Are there elements of safety and soundness regulation of banks

and thrifts that, if carried over to credit union regulation, would

make a meaningful improvement in the NCUA's oversight of credit unions'

safety and soundness? Explain.

Dated: December 26, 1996.

Richard S. Carnell,

Assistant Secretary for Financial Institutions.

[FR Doc. 97-141 Filed 1-8-97; 8:45 am]

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