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HNANCIAL INVESTMENT CONDITION, AND THE BOARD COMPOSITION PRACTICES, OF CORPORATE CREDIT UNIONS Y4.B 22/1:103-170 Financial Condition* Investnent Pra... V HEARING BEFORE THE COMMITTEE ON FINANCE AND BANKING, URBAN AFFAIRS HOUSE OF REPRESENTATIVES ONE HUNDRED THIRD CONGRESS SECOND SESSION OCTOBER 6, 1994 Printed for the use ofthe Committee on Banking, Finance and Urban Affairs Serial No. 103-170 /^^SHii««, ^m U.S. GOVERNMENT PRINTING OFFICE 83-^09CC WASHINGTON : 1995 ForsalebytheU.S.GovernmentPrintingOffice SuperintendentofDocuments,CongressionalSalesOffice,Washington,DC 20402 ISBN 0-16-046884-1 HNANCIAL CONDmON, INVESTMENT PRACHCES, AND THE BOARD COMPOSITION OF CORFORATI CREDIT UNIONS Y 4.B 22/1:103-170 Financial Condition, Investnent Pra. . . HEARING BEFORE THE COMMITTEE ON FINANCE AND BANKING, URBAN AFFAIRS HOUSE OF REPRESENTATIVES ONE HUNDRED THIRD CONGRESS SECOND SESSION OCTOBER 6, 1994 Printed for the use of the Conunittee on Banking, Finance and Urban Aflairs Serial No. 103-170 U.S. GOVERNMENT PRINTING OFFICE 83-409CC WASHINGTON : 1995 ForsalebytheU.S.GovernmentPrintingOffice SuperintendentofDocuments,CongressionalSalesOffice,Washington,DC 20402 ISBN 0-16-046884-1 HOUSE COMMITTEE ON BANKING, FINANCE AND URBAN AFFAIRS HENRY B. GONZALEZ, TX, Chairman STEPHEN L. NEAL, North Carolina JAMES A. LEACH, Iowa JOHNJ. LaFALCE, New York BILL McCOLLUM, Florida BRUCE F. VENTO. Minnesota MARGE ROUKEMA, New Jersey CHARLES E. SCHUMER, New York DOUG BEREUTER, Nebraska BARNEY FRANK, Massachusetts THOMAS J. RIDGE, Pennsylvania PAUL E. KANJORSKI, Pennsylvania TOBY ROTH, Wisconsin JOSEPH P. KENNEDY II, Massachusetts ALFRED A. (AL) McCANDLESS, California FLOYD H. FLAKE, New York RICHARD H. BAKER, Louisiana KWEISI MFUME, Maryland JIM NUSSLE, Iowa MAXINE WATERS, California CRAIG THOMAS, Wyoming LARRY LaROCCO, Idaho SAM JOHNSON, Texas BILL ORTON, Utah DEBORAH PRYCE, Ohio JIM BACCHUS, Florida JOHN LINDER, Georgia HERBERT C. KLEEN, New Jersey JOE KNOLLENBERG, Michigan CAROLYN B. MALONEY, New York RICK LAZIO, New York PETER DEUTSCH, Florida ROD GRAMS, Minnesota LUIS V. GUTIERREZ, IlHnois SPENCER BACHUS, Alabama BOBBY L. RUSH, Illinois MIKE HUFFINGTON, California LUCILLE ROYBAI^ALLARD, California MICHAEL CASTLE, Delaware THOMAS M. BARRETT, Wisconsin PETER KING, New York ELIZABETH FURSE, Oregon NYDIA M. VELAZQUEZ, New York BERNARD SANDERS, Vermont ALBERT R. WYNN, Maryland CLEO FIELDS, Louisiana MELVIN WATT, North Carolina MCRAAOLUNVRIKINLCIEMN.KH,DIONPeOCnHLnEEsYYyl,,vaNCnaeiIwaifY<'o^rik^-^^.)L.,'W, • ERIC FINGERHUT, Ohio^;; \ (II) ¥kk m^ CONTENTS Page Hearingheldon: October6, 1994 : 1 Appendix: October6, 1994 51 WITNESSES Thursday, October 6, 1994 Barth, JamesA., Chairman, DepartmentofFinance,AuburnUniversity 20 Bauer, Paul A., President and CEO, The BauerGroup 18 Bell, James R., President, U.S. Central CreditUnion 31 Black, Harold A., Professor ofFinancial Institutions and Head, Department ofFinance, UniversityofTennessee 16 Brooke, J. Clayton, President and CEO, Capital Corporate Federal Credit Union, representingtheNational Association ofFederal Credit Unions 36 Brumbaugh, R. Dan, Economist 21 Carver, H. AUen, Director, Office ofCorporate Credit Unions, National Credit Union Administration; accompanied by David Marquis, Director, Office of Examination of Insurance, National Credit Union Administration; and RobertFenner, General Counsel, National CreditUnionAdministration 4 Johnson,RichardM., President andCEO, WesCorpFederal CreditUnion 33 McCool, Thomas J., Associate Director, Financial Institutions and Markets Issues, General Government Division, GeneralAccounting Office 14 Swoboda, Ralph S., President, Credit Union National Association and Affiliates 38 APPENDIX Prepared statements: Gonzalez, Hon. Henry B 52 Kanjorski, Hon. Paul E 54 Leach, Hon. James A 56 Barth, JamesA., and R. Dan Brumbaugh, Jr 119 Bauer, Paul A. (with attachments) 107 BeU, JamesR 141 Black, HaroldA 101 Brooke,J. Clayton 199 Carver, H.Allen(Mwith attachments) 57 Johnson, Richard 175 McCool, ThomasJ 82 Swoboda, Ralph S 234 Additional Material Submitted for the Record Gonzalez, Hon. Henry B.: Letters inviting witnesses to testify before the Committee on Banking, Finance andUrban Affairs 259 HearingNotice to Members ofthe Committee, September 30, 1994 277 Second HearingNotice to Membersofthe Committee, October 5, 1994 278 Press Release of October 6, 1994 re Federal Reserve threat of further interest rate hikes 279 House Banking Committee narrative entitled "The Corporate Credit Union Network" 281 (III) IV — Page Gonza"lAenz,AHnaolny,siHsenoriytBh.e NCoCnUtiAnuCeodrporate Credit Union Study," prepared byHouse BankingCommittee staff 288 Notar, Russell C, President and ChiefExecutive Ofilcer, National Coopera- tive BusinessAssociation, prepared statement 255 SupportingDocumentation: Key statistics on federally-insured corporate credit unions, taken from the "1993NCUAAnnual Report" 295 Financial statistics of corporate credit unions listed in the "1994 Credit Union Directory"by Callahan andAssociates 298 Chapter 6 ofthe July 1991 GAO report entitled "Credit Unions: Reforms forEnsuringFutureSoundness" 299 "Corporate Credit Union Network Investments: Risks and Risk Manage- ment,"chairedbyDr. HaroldA. Black 330 Barth, James R., and R. Dan Brumbaugh, Jr., report on "The Credit Union Industry: Financial Condition and Policy Issues," section on corporate creditunions 336 U.S. Central Credit Union December 1993 Financial Statements and Commentary 345 Executive Summary of the Report on the "Corporate Credit Union Net- work," conmiissionedby the Association ofCredit Union League Execu- tives [ACULE] 358 FINANCIAL CONDITION, INVESTMENT PRACTICES, AND THE BOARD COMPOSITION OF CORPORATE CREDIT UNIONS THURSDAY, OCTOBER 1994 6, House of Representatives, Committee on Banking, Finance and Urban Affairs, Washington, DC. The committee met, pursuant to call, at 10 a.m., in room 2128, Raybum House Office Building, Hon. Henry B. Gonzalez [chairman ofthe committee] presiding. Present: Chairman Gonzalez, Representatives Kennedy, Orton, Leach, and McCandless. The Chairman. The committee will come to order. Hearing no objection, under the rules we are supposed to have at least one other member of the committee, particularly minority, but I am sure they are on their way. I think, though, that 1 will take advantage ofhearing no objection to proceed. This morning's meeting is very important. We are in a period of time in which, as I explained at yesterday's hearing, that the inten- tion is to adjourn Friday; that is for the election, and if that hap- pens, and who knows, then the push is on and members have a jil- lion things they have to do that are scattered all over. There are other hearings going on. But in view of the fact that we will have a joint session to hear President Mandela, I think we ought to proceed with these preliminaries. Last Thursday, the Banking Committee held a hearing to examine the financial condition of the credit union industry generally. At that hearing, the National Credit Union Administration dis- cussed the actions that were taken in regard to different areas of the credit union industn^ that needed careful attention. One such area that has been identified for improvement by Chairman D'Amours and the NCUA board is corporate credit unions. Today, the committee will hear further testimony on that subject from a wide range ofwitnesses. Corporate credit unions are the second tier in the credit union hierarchy. They provide liquidity, investment opportunities, and other services to credit unions which are commonly referred to as "natural person" credit unions. U.S. Central, the largest corporate credit union, often referred to as the credit union industry's central bank, provides services to other corporate credit unions. Although most credit unions have access to the Central Liquidity Fund and the Federal Reserve, a vast majority of them choose to utilize the privately owned corporate credit unions for their liquidity require- (1) merits. In turn, corporate credit unions utilize U.S. Central's services instead ofgoing outside the credit union movement for investment and other advice. Mine and others' primary concern with this unique structure is the fact that the industry's largest trade association, through inter- locking directorates, has £m inordinate influence over the oper- ations of U.S. Central and about one-half of the other 40 corporate credit unions. Given the trade association's broad financial interest and the multiple services it provides to affiliated credit unions, the question of whether or not credit unions are compelled to use CUNA-affiliated corporate credit unions and services despite the availability of superior services elsewhere, is of legitimate concern to the Congress. It is, therefore, extremely important for the Congress to examine the framework ofthis unique structure to ensure that a trade association does not have the ability to exert undue influence over corporate credit unions, the industry, and its regulator. — The savings and loan crisis taught us that a trade association and I say the savings and loan. It really is beyond that. It includes every American financial institutional activity, commercial banks and the like, and we are not out of the woods. What has not generally been noted or perceived, that I know of, is that since, particularly the 1950's, there —have been tremendous watershed and also revolutionary changes societal, demographic, technological, instantaneous dissemination of information t—hrough great technological breakthroughs, electronic and so forth and all of these, of course, had to have an impact, not only nationally but it is world- wide. The unperceived thing is that our system in the United States as structured, the dual banking system, that is, State-Federal, dates back to the origin of when it was State chartered banks that ruled the day until the Civil War. Congress, as generally a multiple body would, there is a lagtime before you catch up. Tne bad part is tnat for the last three or four decades, we have had, on top of what a great American, William Graham Sumner, called at the turn of the century what he foresaw as would be government by clamor. We have had government by clamor and government by crisis and after a crisis, but no anticipation or no long-range anticipation of, or assessment of these vast sea changes and revolutionary occurrences that impact everything, and particularly financial activities. So, therefore, it is very important that we examine this framework at this time in a separate forum and realize, though, that it is part and parcel ofwhat is affecting every other activity. We have that responsibility to not only protect the general interest, because the credit union activities are actually reflective of insured depository institutions, but the United States continues to have a very unique, unparalleled depository insurance where the moral hazards are enormous and tremendous, as was revealed in the 1989-1990 developments. And any effort to reform it has been frustrated by the general opposition ofthe whole cross-section ofthe financial industry. It is long overdue but it has not come about. This committee is particularly interested in that aspect that ex- poses the safety and soundness ofthe institutions that are the benefit shares of the deposit insurance system. Now, there are other activities that are in the main today that we examined yesterday that belong properly to the jurisdiction of the SEC and, therefore, the other committee, our sister committee, Energy and Commerce, but those reflect security bankers that are not insured depository institutions. So we are very much concerned. I think that the leadership on both sides ofour party structure as reflected in the ranking minority leader, Mr. Leach's, concerns and mine dovetail with a generally expressed concern on the congressional level. I want to commend the NCUA board for their stance on corporate's, and I fully support the proposal to eliminate interlocks between corporate credit unions ana State leagues and trade asso- ciations. I am particularly happy, as I complimented Chairman D'Amours last week, because instead of resistance, there is a real- ization that there is a task to perform And I have always felt that the best and the supreme benefit of our system is when there is a congeniality, a commonality of interest, and a charted path that enjoys the goodwill ofthose to whom the Congress looks for the activity in the private sector, and which any responsible Congress- man, not being involved in that, does not want to do anything ex- cept try to help. And if it is mutually undertaken, these are the success stories in the achievement ofproper legislation and the history ofour Congress. So I want to commend the board and I want to commend Mr. Swoboda and CUNA for today's announcement that it has agreed to end the pervasive interlocks between itself and U.S. Central. That sacrifice will ensure greater independence for the general credit union central bank, ifwe want to call it that. And with that, I yield to Mr. Leach. [The prepared statement of Chairman Gonzalez can be found in the appendix.] Mr. Leach. Thank you, Mr. Chairman. I would like to echo the chairman's accolades and the decisions made, as well as his judg- ment on the whole series ofissues. I also want to thank the chairman for holding these hearings on corporate credit unions. As our witnesses noted last week, the credit union industry and the National Credit Union Share Insurance Fund are in the most prudent financial situation in their history. However, certain concerns were raised about corporate credit unions. The GAO identified a number of potential problems in its 1991 report. Since then, the NCUA and the industry have taken a number of steps to correct these problems. However, there are certain questions that should be addressed today. How could U.S. Central invest 111 percent ofits primary capital in a single foreign institution? How can the coimtr^s largest credit union have a primary capital ratio of a mere 1 percent? Put another way, it is ironic that the countrj^s largest credit imion with over $20 billion in assets, which was chartered to provide liquidity for the entire credit union industry, has one ofthe weakest capital bases in American finance. This anomaly begs scrutiny. Again, I want to stress that the credit union industry is by all accounts in solid shape. I want to commend the NCUA and the credit union industry itself for recognizing the potential problem with various corporate credit unions and for beginning to take ac- tion to deal with it. Thank you again, Mr. Chairman, for holding this hearing, and I look forward to the testimony ofthe witnesses. [The prepared statement of Mr. Leach can be found in the appendix.] The Chairman. Well, thank you very much, Mr. Leach. Mr. McCandless. Mr. McCandless. Thank you, Mr. Chairman, I think I will leave this up to you and Mr. Leach. Maybe a small comment. I have always had a concern, particularly since our experience with the savings and loans, as to the way in which financial institutions invest based upon what is attractive at the time and what has come down the pike in the way of a new idea or a financial investment portfolio. And so one could wake up in the middle ofthe night and see a credit union with a large part of its assets in de- rivatives and the rest of it in foreign investments. And something goes wrong and we revisit the pangs ofthe pre-FIRREA which addressed itself to another problem, where maturity did not nec- essarily prevail when it came to the investments of the financial institution involved. There is a concern here, as you and the ranking member have expressed, that I share. Thank you, Mr. Chairman. The Chairman. Thank you, Mr. McCandless. [The prepared statement of Mr. Kanjorski can be found in the appendix.] And without any further ado, we will recognize Mr. H. Allen Carver, the director ofthe Office ofCorporate Credit Unions of the National Credit Union Administration. And may I ask for the purposes of the reporter of this hearing that you introduce your two associates with you at the table? STATEMENT OF H. ALLEN CARVER, DIRECTOR, OFFICE OF CORPORATE CREDIT UNIONS, NATIONAL CREDIT UNION ADMINISTRATION; ACCOMPANIED BY DAVID MARQUIS, DIRECTOR, OFFICE OF EXAMINATION OF INSURANCE, NATIONAL CREDIT UNION ADMINISTRATION; AND ROBERT FENNER, GENERAL COUNSEL, NATIONAL CREDIT UNION ADMINISTRATION Mr. Carver. Mr. Chairman, I am pleased to introduce to my left Mr. David Marquis, he is NCUA's director of the Office of Exam- ination of Insurance; and on my right is Robert Fenner, the NCUA's general counsel. The Chairman. I want to thank you very much for the statement, and let me say that for the record the prepared statement will be in the record exactly as you gave it to us and you may proceed as you deem best. OK Mr. Carver. Good morning, Mr. Chairman and members ofthe committee. We appreciate the opportunity to appear before the committee, and I would like to start into my briefoverview. Corporate credit unions provide essential services to natural person credit unions. Small credit unions, in particular, depend on the