Financial condition, investment practices, and the board composition of corporate credit unions : hearing before the Committee on Banking, Finance, and Urban Affairs, House of Representatives, One Hundred Third Congress, second session, October 6, 1994

394 Pages·1995·11.3 MB·English

by  United States. Congress. House. Committee on Banking, Finance, and Urban Affairs

HNANCIAL INVESTMENT
CONDITION,
AND THE BOARD COMPOSITION
PRACTICES,
OF CORPORATE CREDIT UNIONS
Y4.B 22/1:103-170
Financial Condition* Investnent Pra...
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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
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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)
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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 pro-
ceed with these preliminaries.
Last Thursday, the Banking Committee held a hearing to exam-
ine 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 serv-
ices instead ofgoing outside the credit union movement for invest-
ment 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 asso-
ciation does not have the ability to exert undue influence over cor-
porate 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 gen-
erally been noted or perceived, that I know of, is that since, par-
ticularly the 1950's, there —have been tremendous watershed and
also revolutionary changes societal, demographic, technological,
instantaneous dissemination of information t—hrough great techno-
logical 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 cri-
sis and after a crisis, but no anticipation or no long-range anticipa-
tion 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 frame-
work 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 deposi-
tory 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 in-
dustry. 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 ben-
efit 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 minor-
ity leader, Mr. Leach's, concerns and mine dovetail with a gen-
erally 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 ac-
tivity 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 his-
tory 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 cred-
it 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 num-
ber 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 an-
other 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 insti-
tutions 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 ad-
dressed 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 state-
ment, 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 pro-
ceed 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 per-
son credit unions. Small credit unions, in particular, depend on the