Guest Opinion: Dark Clouds Hover Over Dual Chartering
It was the year 1909 when Pierre Jay, the first banking commissioner of Massachusetts, was successful in getting the first credit union act passed in the commonwealth. Many other states followed suit, and then in 1934, the Federal Credit Union Act was enacted, establishing a federal charter and a choice of charter for credit unions. Today, there are more than 7,000 credit unions, state and federal, serving the financial needs of our nation's citizens.
The credit union system knows this history. NASCUS believes it is important to revisit it to remember that while working to maintain the safety, soundness and viability of the credit union system, essential elements of the movement's long and successful history have been charter choice, dual chartering and diversity of regulation.
When functioning properly, a balanced dual chartering system benefits both the movement and the regulators. A properly balanced dual system fosters a constructive competition between state and federal regulators and drives agencies to seek efficiencies and think creatively about public policy questions. Regulatory efficiencies and creative approaches to public policy are critical to maintaining a viable, innovative system.
NASCUS and others believe this important balance provided by the dual chartering system may be at risk, and we must work to ensure dual chartering is viable and thriving, not at risk.
The NCUA has an important responsibility to protect the insurance fund from material risk. In this capacity, it can be both necessary and proper for NCUA to promulgate rules of general applicability to all federally insured credit unions, regardless of their charter. However, the NCUA also has an obligation to the dual chartering system. In fact, NCUA's roles as both chartering regulator and as deposit insurer, unique among federal agencies, place a greater burden and obligation on the agency to protect the legacy of the dual system.
NCUA's proposed and final rulemaking over the past 18 months concerns NASCUS. Little in the proposals indicates NCUA is giving due consideration and the proper weighting to its obligation to the dual chartering system. We are troubled about the impact of recent NCUA proposed rulemakings on state law, diversity and the health of charter choice for credit unions.
In spite of the fact that we shared some of the NCUA's concerns in these areas, we could not support the agency's CUSO, loan participation, or interest rate risk proposals. Certainly, NASCUS's concerns with these proposed rules were derived in part from their sweeping preemptory nature. However, our opposition was driven primarily by the fact that state regulators generally believed the proposals were severely flawed from a supervisory perspective. In retrospect, it is unsurprising that a rule that unnecessarily preempts state authority also missed the mark from a supervisory perspective. These proposals leave little flexibility for states to authorize distinct powers for their credit unions, a disturbing trend to NASCUS with respect to the long-term viability of the dual chartering system.
When insufficient regard is afforded the necessary balance between state and federal regulators, the result often presents as overly broad, stifling regulation. In the alternative, when due deference is given to a balanced dual chartering system, all stakeholders benefit.
Efforts to eliminate risk without giving consideration to state authority and diversity are homogenizing the credit union system. Many financial products that are commonplace today arose from innovations in state-chartered financial institutions. NCUA's share insurance rules that preempt state authority diminish the opportunity for varying state laws to provide flexibility for innovation of new products and services. As the U.S. Treasury Department observed more than 20 years ago long before our current economic and corporate crisis, “Diversity of supervision increases the chances that innovative approaches to public policy problems will emerge.... A sole regulator, not subject to challenge from other agencies, might tend to become entrenched, conservative and shortsighted." Entrenched, conservative and shortsighted regulation is of no benefit to any of the stakeholders of the credit union system.
It's important also to recall another time when dual chartering was integral to the health of the credit union system–the AT&T lawsuit that sparked H.R. 1151, the legislative remedy to federal credit union field of membership issues. At that moment, the state system faced its own test of balancing immediate regulatory considerations with the long-term health of the dual system. NASCUS supported NCUA and the federal charter because state regulators felt strongly that any damage to one charter ultimately affected the other. The federal charter needed the fix to field of membership that H.R. 1151, the Credit Union Membership Access Act, provided. Therefore, our support was unhesitating, in spite of the fact that the legislation provided no benefits to the state system but rather imposed numerous restrictions on state credit unions.
It is short sighted to believe that the system can be successful without regulatory agencies working to maintain the necessary regulatory balance.