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WASHINGTON – Stressing the importance of passage of H.R. 1042 to the safety and soundness of credit unions, George Reynolds, senior deputy commissioner for the Georgia Department of Banking and Finance urged members of the House Subcommittee on Financial Institutions and Consumer Credit to support the measure. Reynolds testifed April 13 on behalf of NASCUS before the subcommittee at a hearing held by subcommittee Chairman Rep. Spencer Bachus (R-Ala.) He joined NCUA Chairman JoAnn Johnson and FASB Chairman Robert H. Herz who also testified. “While this bill is extremely brief, I cannot overemphasize the criticality of this change to the safety and soundness of credit unions,” Reynolds told subcommittee members. He explained that FASB 141 replaces the pooling method of accounting with the purchase accounting method for mergers of mutual enterprises. “Without the proposed statutory amendment, the new accounting methodology does not allow the retained earnings of a merging credit union to be added to the retained earnings of a surviving credit union. Ultimately, safety and soundness is an issue because credit unions are discouraged from mergers, even when their regulator recommends them,” he stated. Reynolds told the subcommittee members that H.R. 1042 would revise the definition of net worth to include both the retained earnings of the surviving credit union and any credit union(s) that combine with the surviving credit union. “This would permit capital to be added in a merger transaction and would serve to augment the capital position of the surviving credit union,” he stated. “Without the proposed statutory amendment, a merger transaction between two credit unions would not allow the retained earnings of the merging credit union to be added to the retained earnings of the surviving credit union. This will discourage mergers recommended by state regulator.Without the ability to combine the capital of the two institutions, in addition to the assets and liabilities acquired on the balance sheet, there would be a serious disincentive to effect such mergers,” he stated. “If a credit union could not be merged due to PCA concerns caused by the inability to add the capital of the merged credit union, then credit unions in a weakened condition would be more likely to face liquidation or requests for NCUA financial assistance in merger transactions. An increase in liquidations would cause greater reputation risk, a severe loss of confidence for the credit union industry, greater losses to the deposit insurance fund and increased costs to the industry and ultimately to consumers,” said Reynolds. He also pointed out that most CUs have some deposits that exceed the deposit insurance limit, “and these members could face the prospect of losing these funds in a liquidation. “Simply stated, this is a recipe for disaster. I never want the credit unions that I regulate in Georgia, or the credit unions in any other state to be confronted with this possibility,” the Georgia regulator told the subcommittee. “The statutory changes presented in H.R. 1042 are needed to make certain that the implementation of purchase accounting does not have an adverse safety and soundness impact upon the credit union industry,” said Reynolds. “H.R. 1042 proactively addresses the safety and soundness concerns of state regulators.,” he said in closing. -

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