Sometimes, it just comes down to “doing the right thing.” NCUA'songoing use of NCUSIF funds to subsidize federal credit unionregulatory costs is a case in point. In just the last five years,the NCUA has allocated $343 million of NCUSIF earnings to theOperating Fund to cover “insurance related” activities performed byexamination staff. These annual allocations ranged from a low of$50 million to a high of $88 million. Title II of the FederalCredit Union Act authorizes the NCUA to charge the NCUSIF forinsurance related activities. NCUA's basis for determining theamount of these allocations is an internal time study of how mucheach examiner's time is spent on insurance related activities. Thesolution is for the credit union system to determine what is“insurance related activity” and what is the responsibility of thecredit union regulator. Many state regulators and state-charteredCUs believe that NCUA has overreached in its interpretation of“insurance related activities” and has overcharged the NCUSIF.State-chartered CUs are therefore being overcharged for shareinsurance, all federally insured CUs are denied a true accountingof their examination and insurance fees, and the NCUA is risking a“solution” to this issue being imposed by Congress. What are these“insurance related” activities? Answer – they are whatever NCUAsays they are, because federal credit union regulation and NCUSIFadministration are nearly indistinguishable. NCUA has allocatedvirtually the entire cost of FCU safety and soundness examinationsto the NCUSIF. This is wrong, and NASCUS urges NCUA to do the rightthe thing, and resist using the Fund to subsidize FCU examinations.A reading of the FCU Act shows Congress never intended NCUSIF asthe primary source of funding federal credit union regulation andexamination. Do you think NCUA would accept such a mingling ofdisparate functions and funds in one of the federal credit unionsit regulates, or, for that matter, in one of the state-charteredcredit unions NCUSIF insures? Assuredly, that state regulatorswould not. But, what about the NCUA's latest version of theoverhead transfer formula? Yes, the latest formula acknowledges thevalue of the work being done by state regulators and begins tofocus on insurance related versus chartering functions. It's animprovement in the previous methodology, and we appreciate thisNCUA Board's efforts over the years to better identify insuranceand regulatory functions. The fundamental problem remains theunderlying assumptions: The internal study begins by assuming thatall NCUA activities related to safety and soundness are done solelyto manage NCUSIF risk. This begs the question: What examination andsupervision activities would NCUA, as the primary chartering andregulatory agency for FCUs cease doing if it stopped administeringthe Fund? The likely answer is – not a single one. Why? Because theFCU Act requires NCUA to conduct federal credit union regulatoryexaminations so they can be used for share insurance purposes.Similarly, NCUA is also directed to use examinations done by stateregulators, to the maximum extent feasible, in managing NCUSIFrisk. As CUNA's Legal Ddepartment said in an October 2, 2001 studycommissioned by NASCUS, “NCUA's role as supervisor of federalcredit unions was not subsumed by its administration of theNCUSIF.” This seems obvious to those of us in state regulatorsyagencies. We do not administer insurance funds, but I assure youthat, as financial institution regulators, the safety and soundnessof our state-chartered credit unions is our preeminent concern andthe primary focus of our resources. The argument that the entiresafety and soundness examination of a federal credit union is onlyan insurance related function, and should be charged to the NCUSIF,means that Congress would have intended for state-chartered creditunions to pay their state regulator the entire cost of a safety andsoundness exam, and then subsidize the cost of the entire federalcredit union safety and soundness examination program. GivenCongress' inclusion of the “nondiscriminatory” provision of Section211 of the FCUA prohibiting the discrimination againststate-chartered credit unions for the benefit of federal creditunions, this supposed congressional intent seems unlikely. How longwill NCUA continue to look away? What must happen for it to takethe proper steps to correct this fundamental flaw in its design?NASCUS hopes that steps are taken now to correct it, before changeis foisted on the NCUA from without. No one wants that. The NCUA isa strong federal credit union regulator, and the NCUSIF iscapitalized by credit unions, and both should remain independent.Neither the NCUA nor the NCUSIF should be folded into any otherregulatory agency or another insurance fund. NASCUS firmly believesthe NCUSIF should remain within the NCUA and that NCUA shouldremain an independent federal agency. This is a leading topic fordiscussion between NASCUS and NCUA Board members and senior staff.The agency's new formula rightly gives recognition to the work doneby the states, but the underlying assumptions are inaccurate. Thereal problem remains; the NCUA has overstepped its authority toapportion expenses to the NCUSIF. How can the NCUA determine therightful cost of deposit insurance and federal credit unionregulation when it refuses to identify and separate its supervisoryand insurance-related functions? It cannot or will not. NCUA'srecent regional restructuring shows the agency capable ofaccomplishing a major organizational change. Further change,separating the regulatory and insurance functions, must beinitiated. While change can be unsettling, ignoring the need for itonly makes for more, and possibly, greater problems later on. Thisnation recently felt the shock waves from massive corporateaccounting fraud, manipulated stock prices, crony capitalism, WallStreet greed and recently, scandals in the once staid mutual fundindustry. Congress swiftly strengthened corporate governance law,the Financial Accounting Standards Board issued new guidelines, andthe SEC and at least two State Attorneys General settledmulti-billion dollar lawsuits and extracted fee reductions forinvestors. These changes were unthinkable a few years ago but newprotections are now in force. The financial world was not thrustinto chaos. Which brings me to our modest NASCUS proposal forrestructuring the NCUA: * NCUA should internally separate NCUSIFinsurance responsibilities from chartering, regulation andexamination of federal credit unions. * NCUA should create aDivision of Insurance whose director reports to the Board, andactivities related to the Fund should be placed under thatdirector. * Regulatory exams of FCUs should be relied on by theFund to the same extent as regulatory exams of state-charteredfederally insured credit unions. That is, these institutions areexamined, they pay for that examination and those exams areforwarded and reviewed by the Insurer, and when necessary, theInsurer might choose to examine a given institution itself. Theabove-suggested changes are from the NASCUS study titled“Restructuring the NCUA” published in November 2003. The completestudy is available in pdf format on the NASCUS Web site atwww.nascus.org and I urge everyone to read it. We do not claim tohave the perfect solution, but it is a good start.