Royce: Risk-based Capital is a Model Credit Unions Must Have

Credit unions play an important role in our nation’s financial marketplace. If current membership trends continue, more than 100 million Americans will soon be conducting their financial business with these not-for-profit financial cooperatives. While credit unions are in excellent financial condition, a number of limitations in federal law are preventing them from fully meeting the financial needs of their members and communities. On November 21st, three fellow members of the House Financial Services Committee joined me in introducing H.R. 3579, the Credit Union Regulatory Improvements Act of 2003 (CURIA), the most comprehensive federal credit union legislation introduced since the enactment of the Credit Union Membership Access Act almost six years ago. At its heart, CURIA better protects the American taxpayer by subjecting federally-insured credit unions to net worth standards that take into account the amount of risk contained in their individual balance sheets. By various measures credit unions are well capitalized. My concern is that the current law requires credit unions to reserve at a flat rate against all assets with only limited regard to risk of loss to the federal share insurance fund. This flies in the face of international trends in financial services regulatory policy, which is to manage risk through the establishment of risk-based capital standards. It simply makes no sense to me that federal law would require an insured credit union to reserve the same amount of funds for an investment in a Treasury security as it would reserve for a sub-prime loan to a member. We need to change the way we look at capital in the credit union system. Doing it when the industry is financially sound makes it easier to fashion a more sensible federal policy. CURIA also promotes small business growth and development. I am a strong supporter of small business and want to promote federal policies that encourage their economic expansion. In many communities credit unions are ready to offer loans to small businesses but are prevented from doing so by a restrictive cap on member business loans. The member business loan cap, roughly 12% of assets, is forcing many credit unions with business lending programs to curtail lending at the very time small businesses need funding for expansion. The member business loan cap was an arbitrary limit imposed by Congress in 1998, when we last modified the Federal Credit Union Act. Experience shows us that we need to increase the threshold or risk preventing small businesses access to important sources of financial services. Too many Americans have no relationship with a financial institution, CURIA will change field of membership restrictions to allow credit unions to offer check cashing and international remittances financial services to anyone within the credit union’s field of membership – regardless of whether or not they choose to become a member. Such a change can help draw underserved populations to credit unions where they will pay lower fees for services and, hopefully, grow more comfortable doing business with a traditional financial services provider. CURIA also clarifies several areas of federal law relating to mergers, fields of membership and institutional governance. Collectively, the provisions contained in CURIA will help ensure the continued vitality in the nation’s credit union system by removing unnecessary limitations while promoting safe and sound development. Credit unions stand out from other financial institutions because they are not simply places to deposit money and obtain loans. Their presence in local communities benefits all consumers. I hope you will join me in supporting this bipartisan effort to strengthen credit unions.