This is the most difficult andcomplicated final rule since I began my service on the NCUA Board.All of these covered credit unions should be proud of the fact thatthey made it through our most recent financial crisis. Historysuggests, however, that the next crisis is likely different fromthe last crisis, and the one before that.

Our job is to set these institutions up to succeed in the nextcrisis because the consequences, if they do not succeed, aresystemic risk for the Share Insurance Fund and for the entirecredit union movement.

No matter how remote the likelihood of failure us we have toremember that the cost of failure is borne not just by theseinstitutions, but is borne by all insured credit unions throughtheir Share Insurance Fund assessments. A failure by any one ofthem would have a material impact on the SIF, which is why we allhave a stake in the outcome and need to work with them to make surethis never happens.

As someone who hails from the Pacific Northwest, which issubject to the risk of earthquakes, the analogy I make is that thecredit union community has to be ready for, “the big one.” JustThursday morning there was an earthquake that measured 5.7 on theRichter Scale off of Vancouver Island.

This doesn't mean that “the big one” will happen, or is evennecessarily likely, but rather that we have to be prepared forit.

We prepare for earthquakes by having building codes.

We prepare for financial disasters by having safety andsoundness regulations.

Building codes differ based on the size and nature of abuilding, its life expectancy, and where it is located and the riskit faces.

The requirements for multi-family housing are typically morestringent than for single-family housing, the requirements forcommercial and very large buildings are more stringent, and therequirements for buildings in precarious locations are even morestringent.

Similarly, when this board issued its liquidity regulation, itdifferentiated between credit unions of different sizes.

The rule we issue today is a tool designed to help ensure thesurvival of the largest credit unions during even the moststressful financial circumstances, even if the chances of suchevents occurring is remote.

Because it is a tool to ensure future success, and not a measureof current success or health, and because this process is new bothfor the NCUA and for covered credit unions, I have been persuadedby the arguments that during an initial period, stress test results should remain private.

My personal preference is for transparency and openness, butduring this shake-down period disclosure might generate more heatthan light.

Like the other financial regulators, once this system is up andrunning smoothly, the agency may want to release stress testresults, as the Fed and the FDIC are now doing. This rule permitssuch flexibility.

But that is a decision which this rule leaves to a future boardwhen the rule is reviewed every third year.

It has been suggested that this rule should be delayed, and inparticular that it should wait until after a final risk-basedcapital rule is issued.

I would note that some of the people asking us to delay thisrule until after a risk-based capital rule is issued also don'twant a RBC rule to be issued. That would mean that we would neverissue a stress testing rule.

It has also been suggested that we issue guidance instead of arule. While guidance will have to be issued after a rule isadopted, it is not a substitute for a rule.

To return to the building code analogy, building codes areusually mandatory, not simply a set of “best practices.” For thesereasons, I support enactment of a final rule, and do not believe itmakes sense to delay its issuance.

I want to emphasize, however, that we have listened to thecomments and have made significant changes to the final rule toaddress many of the concerns that have been raised.

First, while we are proceeding with adoption of a rule today, weare providing more time, as requested, for covered credit unions tomodify their capital plans if modifications are necessary. Thefinal rule triples from 30 to 90 days the length of time a coveredcredit union has to modify its capital plan if modifications arenecessary.

In addition, we have recognized that implementation the firstyear may take longer than in subsequent years, and we have builtflexibility into the final rule to provide additional time ifneeded to get systems up and running.

Second, rather than just issuing supervisory guidance toimplement this proposed rule, Director (Scott) Hunt and theOffice of National Examinations and Supervision team willconsult with covered credit unions before final supervisoryguidance is issued under this rule.

Since this regulation and the guidance we issue will impactstate chartered, federally insured credit unions, I am alsorecommending that the agency consult with and work cooperativelywith state supervisors before issuing final guidance.

I also want to note that when the Fed, the FDIC, and the OCCissued their proposed stress test supervisory guidance last Augustthey put that guidance out for formal comment for about 60 days.While this rule does not require a formal comment period, my hopeand expectation is that the draft guidance will be circulatedwidely for comment and that the comments will be taken intoconsideration before final supervisory guidance is issued.

Both the flexibility in the first year timeline, and theconsultation that will take place with covered entities on thesupervisory guidance are designed to address concerns such aswhether the NCUA and the third-party it retains to conduct testswill be ready, and whether the covered credit unions willunderstand their responsibilities and the relationship, between thestress test and a credit union's exam, its CAMEL rating, and

its RBC requirement.

Stress testing, the CAMEL rating and supervisory examinationsare done for different purposes and it is important to rememberthat a change in one does not necessarily require a change in theothers. While a change in an institution's risk profile, or itscapital, could impact one or more of these measures, the change isdue to the underlying change in risk or capital, not because aninstitution's stress test results, its CAMEL rating, or its exam isdirectly tied to one of the other measures.

A third major change in the rule is that while the originalproposed rule would have had the NCUA conduct stress testsindefinitely, the final rule allows credit unions to apply toconduct the tests themselves, under NCUA supervision, after threeyears.

This is a compromise between having the NCUA run the testsforever, which is the process the Fed follows for institutions over$50 billion that present the possibility of systemic risk to theeconomy, and the system of company-run tests the Fed and the FDICuse for institutions between $10 billion and $50 billion.

I originally thought it would be sufficient for the NCUA tofollow the FDIC model of company-run tests. Given the history ofwhat has occurred during the corporate crisis, and the first yearof the FDIC tests, I am convinced it is prudent to start withNCUA-run tests so we establish public confidence in the process,and commonality in how the scenarios are applied to the coveredcredit unions.

Once both the NCUA and covered credit unions are familiar withthe process and on the same page, and there is confidence in thevalidity of the tests, I believe we can, and should, transition tocredit union-run stress tests, which this rule allows under NCUAsupervision.

Another difference between this rule and the Fed's rule forlarge banks is that the Fed requires two stress tests a year, andour rule, like the FDIC's rule, only requires one stress test ayear. That is another effort in this rule to reduce the burden oncovered credit unions.

A major reason why I support an eventual transition tocredit-union run stress tests is that while the agency may have torely on a third-party to conduct the tests in the early years, Ibelieve it is imperative that we develop the talent we needin-house to run and supervise stress tests. ONES is a new office,so it is appropriate to bring in additional expertise in the earlyyears, but in the long run we need to develop expertise within ourown staff to run and/or supervise stress tests.

As an agency, we need to start preparing today for the risks wewill be facing tomorrow.

This is particularly necessary because while there are currentlyonly four, soon to be five, credit unions over the $10 billionthreshold, there are another 15 or so “waiting in the wings” whoare over $5 billion and who at their current rates of growth mayexceed $10 billion during the next decade.

In the long run, as the number of covered credit unions grows,it will be more cost-effective to invest in our internal capabilityto run and/or supervise stress tests, than to continue contractingwith a third party.

A fourth major change in the rule is that we responded tocriticisms that we hard-wired into the rule certain economicassumptions. The final rule removes those hard-wired assumptionsand requires instead that reverse stress-test analysis be done.This change makes the rule more flexible, and some may say that itmakes the rule too vague. We have to choose, however, betweenspecifying assumptions in the rule, and providing greaterflexibility so that the tests can appropriately recognize changingeconomic circumstances, differences among covered credit unions,and alternative models and assumptions.

A fifth major change is that we have added language to ensurethat we will work cooperatively with state credit union supervisorson this issue. If, as I have suggested, we also work cooperativelywith them on the proposed supervisory guidance, we can ensure thatthe dual chartering system is protected.

In summary, we have:

• Accommodated commenters requests that stress test resultsremain confidential in the early years with board flexibility todisclose results in future years;
• Provided a path that allows covered credit unions to run theirown tests after three years;
• Provided additional flexibility on the timeline forimplementation, particularly in the first year;
• Removed hard-wired assumptions which some commenters felt weretoo inflexible; and
• Strengthened language protecting the dual charteringsystem.

I also want to address the cost of the proposed rule.

I, too, am concerned about cost, but the cost of action must bebalanced against the cost of inaction. The corporate crisis isevidence that the cost of inaction may be orders of magnitudegreater than the cost of action. We need to view this challengethrough the prism of an insurance provider, which is what theNCUSIF is. While the cost of the proposed rule is notinsignificant, I would note that the covered credit unions haveapproximately 7.5 million members. At $250,000 per insured member,the estimated cost of the proposed rule is equal to the exposurethe Share Insurance Fund has on the accounts of just 20 of those7.5 million members. As an insurance premium, that is a very lowcost compared to the covered risk. We must, however, work to keepthat cost as low as possible, which is why I believe it ispreferable in the long run for us to develop the expertise we needin-house, rather than continuing to contract this work out to athird party.

I would be remiss if I did not acknowledge the contributions ofmy two fellow board members, former Chairman Fryzel for leading theAgency during a very difficult period, and our current Chairman,Ms. Matz, for building a stronger regulatory framework that iscapable of addressing the challenges of the future as well as thechallenges of the past.

I also want to thank Chairman Matz for working with me and otherstakeholders to address many of the concerns that were raisedduring the comment period.

Finally, I want to express my willingness to consider additionalchanges as we proceed with implementation if further changes arewarranted. It is important to the covered credit unions, to theagency, and to the Share Insurance Fund that we all succeed in thisendeavor.