WASHINGTON – Even before he began speaking, the title of Professor Lawrence White's report-"Caught in a Regulatory Vise: The Peculiar Problem Faced by Federally Insured State Chartered Credit Unions"-hinted at the key finding of his study: the regulatory structure of the NCUA and the NCUSIF is not only placing the agency in a position of a conflict of interest, it's forcing federally-insured, state-chartered credit unions to cross-subsidize federal credit unions. The finding was the central point of discussion at a press conference June 29 held by Boeing Employees' Credit Union, Tukwila, Wash. which commissioned the independent study conducted by White, the Arthur E. Imperator Professor of Economics at New York University's Stern School of Business. "NCUA has engaged Deloitte & Touche LLP to perform an independent study of the process by which NCUA transfers funds out of the NCUSIF through the overhead transfer rate. What is unclear is the scope of the study that is underway," said BECU President/CEO Gary Oakland. "Is it to validate the numbers provided by NCUA to Deloitte & Touche? Or is it to test the logic behind the overhead transfer rate? Professor White's report suggests that it is critical to both federal and state-chartered credit unions that the logic of the overhead transfer rate be included in the study," Oakland continued. "It's been at least 15 years since we've struggled with this issue, and we haven't gotten a lot of dialogue on it although we've found a lot of support for our concerns. We don't want to wait until the Deloitte & Touche study comes out. We want to have an independent source of information and raise the level of awareness and dialogue now," said Oakland. Specifically, Prof. White's report offered that the "Primary manifestation of this conflict of interest is the NCUA's transfer of funds from the NCUSIF to itself (to cover its safety-and-soundness expenditures) and ultimately to federal credit unions through lower assessments of operating fees," he wrote. "The transferred funds from the NCUSIF reduce the dividends that it would otherwise pay out to its members: FISCUs and federal credit unions. FISCUs thus suffer a reduction in NCUSIF dividends, without a corresponding reduction in examination fees. In essence, FISCUs are forced to cross-subsidize federal credit unions." The situation "is exacerbated by the NCUA's ability to make its own determination of the size of the `overhead transfer rate.The NCUA faces a constant temptation to increase the size of the transfer (and the concomitant reduction in federal examination fees), so as to favor federal credit unions and disadvantage FISCUs," White continued. White pointed out that NCUA's transfer of funds from the NCUSIF to itself to cover the agency's safety-and-soundness expenditures are mostly devoted to examining and supervising federal credit unions. The agency, meanwhile, does not make parallel transfers to the states to cover their safety-and-soundness expenditures. "This is not a beneficial form of regulatory competition," White said. In the long run, he cautioned, all credit unions will be affected if the underlying problem isn't addressed. "Though federal credit unions may be beneficiaries of this process in the short run, their benefits will diminish over the longer run if increasing numbers of FISCU's switch to federal charters, and federal credit unions will surely suffer if the NCUA's actions diminish the vigor of regulatory competition," White wrote. NCUA is in a regulatory competition with the states, but unlike the states, the agency gets to transfer funds from the NCUSIF to cover part of its expenses, White said. As a result of the increasing amounts of these transfers, NCUA has been able to lower the examination fees for federally chartered credit unions, creating a distinct financial advantage for federally chartered credit unions at the expense of forgone dividends for state and federal credit unions insured by NCUSIF. "Exacerbating the problem is the fact that NCUA gets to decide for itself what expenses of the agency will be covered by NCUSIF and how much funding will be transferred to cover those expenses," White said. White offered that there are six potential solutions to the problem. Keeping in mind that each one has its advantages and disadvantages, they are: do nothing; hire outside accountants/consultants to determine the overhead transfer rate; construct "Chinese walls" within the NCUA; have the NCUSIF pay comparable (parallel) transfers to the states; have the NCUSIF cease making transfers to the NCUA (except for pure administration); and establish the NCUSIF as a separate federal agency. None of the alternatives are perfect, White said. The best solution to resolving the current conflict of interests, he said, is for the NCUSIF to cease paying transfers to the NCUA (except for pure administration). This would eliminate the fiscal disparity that FISCUs face vis–vis federal credit unions as a consequence of the NCUA's transfers. The action would also, he said during the press briefing, "eliminate NCUA's ability to exploit the conflict for the benefit of federally chartered credit unions at the expense of state-chartered credit unions." It would also assure that beneficial regulatory competition between the states and NCUA would remain, but that regulatory competition would be focused on how to make credit union charters more attractive through modifications in powers or procedures, not on how one credit union should be subsidizing another, White said. "The deposit insurer should have a perspective that is unclouded by conflicts of interest with respect to regulatory competition itself," White said. This is a structural issue, not a personality issue, Professor White stressed at the press conference. "The problem is in the inherent institutional structure of NCUA, it is not an issue of individuals or personalities." NASCUS President/CEO Doug Duerr concurred. "The NCUA Board consists of three people appointed by the president of the United States who have the autonomy to decide what the agency is going to spend its money on and where the money is coming from." He continued that, "The entire credit union world is taking a look at this issue. It's been a NASCUS issue for a long time. We knew about the disadvantages, and we always felt the NCUSIF should not pay NCUA for doing its examination work. Now for the first time, the whole credit union world is look at it. The outcry is coming from federally insured state chartered credit unions. The advantages or disadvantages of being state or federally chartered should be in the business climate, not in dollars and cents." Duerr offered that the problem is partly due to the fact that "safety and soundness has become synonymous with insurance." "That's absolutely incorrect," he said. "Even before there was such a thing as the NCUSIF, credit unions were being examined for safety and soundness. Safety and soundness is a regulatory issue, not an insurance issue." Duerr stressed that, "this is not a state versus federal charter issue. If federally chartered credit unions were being charged what it really costs NCUA to examine them, then they (federally chartered credit unions) would know what the actual cost of supervision is and they wouldn't let NCUA be as bloated as it is. "We simply want NCUA to be accountable. Now the agency has no accountability responsibility, and the people paying for this are credit union members," said Duerr. Oakland echoed Duerr, saying that, "Fairness to both federal and state-chartered credit unions demands a thorough examination and a full and open debate on the issue. Without a full and open debate, NCUA lacks the budgetary accountability that all credit unions deserve from the agency that it is spending the funds contributed by them to NCUSIF." Duerr said he did take notice of and applauded NCUA Acting Chairman Dennis Dollar's announcement June 28 that the annual NCUA budget process should be "more open to the stakeholders who fund this agency" and his intention to begin holding public hearings on the NCUA budget beginning with the agency's 2002 budget. "The announcement is clearly a move in the right direction," Duerr said." It's a good thing the agency is considering it because the credit union movement is starting to demand it." He emphasized though that, "NCUA's announcement is reactive to an industry outcry. The decision comes on the heels of significant industry criticism about the overhead transfer, budget and accountability that was prompted by last year's overhead transfer decision, followed by the agency's decision to lower the assessment fees. That event prompted the credit union community to demand more accountability by the NCUA." Oakland said he hopes the hearing begins the debate and dialog on the overhead transfer rate, and helps CUs understand the issue and the implications. -

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