<p>WASHINGTON-The deposit insurance reform legislation (H.R. 3717) was voted out of the House Financial Services Committee last Wednesday by an overwhelming 52 to 2 bipartisan vote. The bill remained very similar to its original form following the mark-up. The bill contains provisions to increase general deposit insurance coverage to $130,000, while IRA coverage was doubled to $260,000, according to NAFCU Director of Legislative and Political Brad Thaler. The coverage amounts will be indexed to inflation every five years. One change is the formula used to calculate inflation, which was offered in an amendment by Congressman Richard Baker (R-La.). Two separate amendments regarding municipal deposit insurance coverage did not make it into the bill, but they could be resurrected when the bill goes to the House floor. No date has been scheduled yet for full House action. One amendment, offered by Representative Sue Kelly (R-N.Y.) and was withdrawn, would provide thrifts the same insurance options as banks in providing municipal deposits, leaving credit unions to fend for themselves. The other by Congressman Greg Meeks (D-N.Y.) would increase municipal deposit insurance coverage only in those states where all insured depository institutions were provided parity. The latter amendment was voted down by a voice vote. Thaler said he expects some compromise to be reached on the issue. The secondary capital amendment, expected to be offered by Congressman Brad Sherman (D-Calif.), was not offered at this time, but may reappear either in a manager's amendment to the deposit insurance reform bill or in the regulatory relief legislation. In a letter to House Financial Service Committee Chairman Mike Oxley (R-Ohio), the American Bankers Association expressed its opposition to the secondary capital amendment for credit unions. "Adoption of this amendment would represent a fundamental change in the capital structure of the credit union industry. By moving away from the concept of "member-owned" equity towards a reliance on capital contributions from non-members and the broader marketplace, the very essence of a credit union's ownership structure is called into question," the ABA wrote. "Credit unions claim to be different from banks, specifically citing their structure of cooperative ownership by their depositors as a primary distinction between themselves and their taxed competitors. Yet, this amendment would, for the first time, allow the broader credit union industry to issue `ownership interests' to nonmembers. It would also force credit unions to generate a level of returns necessary to attract such capital. Not only does this dramatically change the focus of credit unions away from serving their membership towards a market-driven capital structure, it also raises a host of corporate governance concerns, such as voting rights of holders of such ownership stakes, board composition, etc." The ABA also called into question the germaneness of the amendment, as well as the impact it would have on low-income credit unions to attract additional capital, which is already permitted under the Credit Union Membership Access Act. Credit union lobby groups retaliated with their own letter writing campaign. CUNA President and CEP Dan Mica wrote in his letter to Oxley, "It is appalling that the ABA continually acts as the bully on the financial services block. Their positions are detrimental not only to others in the financial services industry, whether it be the realtors, insurance agents, mutual funds and securities industries, or credit unions, but most importantly, to the consumers of America. Ultimately, the monopolistic practices advocated on behalf of the banking industry by the ABA result in fewer choices and higher prices for the consumers of America." Specifically, CUNA pointed out that credit unions seek the ability to issue non-voting debt instruments to investors in a way that would not dilute the cooperative ownership structure of credit unions. Additionally, Mica said investors in low-income credit unions, mainly banks with CRA-requirements and socially vested groups, were not the same groups that would provide secondary capital to other types of credit unions. Likewise, NAFCU defended that germaneness of the Sherman amendment, writing that, "Allowing NCUA the flexibility to promulgate secondary capital rules and regulations applicable to federally-insured credit unions is simply another way to bolster the safety and soundness of credit unions, as secondary capital funds would serve as another buffer between credit unions and the National Credit Union Share Insurance Fund (NCUSIF)." In related news, NCUA Chairman Dennis Dollar recently released an agency study, which found that the increase in deposit insurance coverage could delay dividends paid out to credit unions, and in an extreme scenario, cause NCUA to assess a premium. The study unveiled that if the legislation passes this congressional session, a strong possibility exists that the NCUSIF equity ratio would be reduced enough to require at least two years for the fund ratio to be re-built through earnings sufficiently to begin offering dividends, Dollar told a group of California and Nevada credit union leaders. NCUA conducted the study over two months and indicated that an increase in deposit insurance coverage would likely spur an increase in share deposit growth. According to NCUA Chief Financial Officer Dennis Winans who performed the study, the increase in coverage could lead to a 12% or $82 billion growth in insured funds over a period of years. He ran scenarios with this growth occurring in one year, two years, five years, and the most likely ten years. If the increase in deposits occurred in one year, the equity ratio would decline 14 basis points (bp) incurring a $109 million aggregate premium to restore the ratio to 1.2% as required by the Credit Union Membership Access Act. However, the agency has discretion over assessing a premium when the equity falls below the 1.3% equity ratio goal set by the NCUA board. Additionally, if this growth occurs in one year, NCUA predicted it would take three years before a dividend could be provided again. On the other hand, if the growth takes 10 years, NCUA would not be required to assess a premium and likely would not choose to do so. Winans said, "If we don't see long-term problems for credit unions, we probably won't set a premium." The study explained that if one credit union pays a premium they all do. "Under the Federal Credit Union Act, any insurance premium assessment would be charged to all federally insured credit unions since premiums are not risk-based. Insurance premiums are expenses to credit unions and therefore, would have some impact on their "bottom line." Again, Winans said, "The feeling is that a straight line on premiums for credit unions is the way to go." He pointed out that the highest risk credit unions would be the least able to pay and that the Federal Deposit Insurance Corp. is demonstrating this problem right now. Even if the expected growth takes about 10 years, it could be a couple years before NCUA can grant credit unions a dividend. However, CUNA Economist Bill Hampel said this is immaterial. If the legislation does not pass, given the current economic conditions and influx of funds, NCUA still would not be able to give a dividend next year. The question is how much longer would it delay a dividend for credit unions, he said. The first impact felt by credit unions would be all the currently uninsured deposits up to $30,000 per account in the general increase. The big impact overtime though would be the retirement account increase as the baby boomers reach retirement age, Hampel commented. "The IRA coverage, I think, will work over a period of several years," he said. Over the ten year period, the equity ratio would drop a minute 4bp and the agency could, at its discretion, assess a 0.03% premium, or $123 million, to restore the 1.3% equity ratio set by the NCUA board. The NCUA study is available at the agency's Web site (www.ncua.gov). [email protected]</p>

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