WASHINGTON — Taking advantage of the current crises in the U.S. mortgage and credit markets, the U.S. Department of the Treasury last week unveiled the most sweeping package of changes to U.S. financial institution and market regulation in almost 80 years.

Treasury Secretary Henry Paulson introduced the proposal, which the Treasury broke up into short-, interim, and long-term goals, on March 31. The plan offered a few measures to try to address the immediate problems in the mortgage and credit markets and proposed long-term changes across the entire spectrum of financial institutions and markets (see related stories, pages 1 and 3). For example, the Treasury plan proposed eliminating the Office of Thrift Supervision, the federal regulator for federally chartered mutual savings banks; it proposed rolling the Securities and Exchange Commission and the Commodity Futures Trading Commission into one federal securities regulator; and it suggested reducing the current five federal financial regulatory agencies for thrifts into one and eliminating the distinctions between charters.

Instead of having separate banking or credit union or thrift charters, the proposal would have only one charter, a federally insured depository institution charter, overseen by one overarching federal regulator covering all institutions that wanted federal deposit insurance.

The report suggested rationalizing the supervision of state-chartered banks as well, but in practice appeared to suggest that if a state-chartered bank (or by extension a credit union) wanted access to federal insurance, it would have to accept federal supervision.

Unsurprisingly, the credit union trade associations, NCUA, and credit union industry regulatory champions all objected to the proposals with varying degrees of energy.

CUNA broke with established practice to send out a press statement on March 30, a Sunday, decrying the move.

“The plan, as we interpret it, would place a single bank regulator over credit unions–essentially turning credit unions into banks,” said CUNA CEO Dan Mica in the statement.

“This makes no sense. This consolation plan will only result in increased loan rates, decreased savings rates, higher fees and the loss of a not-for-profit alternative for the nation's 90 million credit union members.

“Credit unions are not the cause of today's housing and credit crisis; indeed they have been lauded in the media and by policymakers for their performance and willingness to help consumers in these troubled times. It was no different during the Great Depression, the S&L crisis or any other turbulent economic period in our nation's history since the formation of credit unions nearly 100 years ago.

“Time and again, credit unions were the one type of financial institution that did not require government assistance or rescue.”Any plan that would eliminate the credit union choice for consumers in the financial marketplace is poor public policy and extremely shortsighted. We will immediately move to energize our grassroots and political activists in the entire credit union movement to oppose any effort that would lead to the termination of the credit union system,” he argued.

NAFCU took a more contemplative tone as it joined CUNA in its criticism.

“Credit unions play a distinct and unique role in the economic marketplace,” said NAFCU CEO Fred Becker in a March 31 statement. “In fact,” he added, “NAFCU was established to create an independent regulator for federal credit unions and a federal insurance fund that we believe provide the necessary safeguards for a healthy credit union system.”

“The value of the current, separate federal regulatory and share insurance structure for credit unions is undeniable. Unlike other federal depository insurance funds, the National Credit Union Share Insurance Fund has never cost U.S. taxpayers a penny. It has been quite effective in enhancing the safety and soundness of these nonprofit, volunteer-led financial cooperatives, and we remain committed to preserving that,” Becker said.

Becker predicted that the Treasury's latest blueprint for reform would not go far in the waning days of the Bush administration or the final session of this Congress. “We believe it is more likely that some of the legislative matters already before us, including mortgage reform, will move forward this year and we look forward to getting those bills enacted.”

Even Secretary Paulson stated that major changes are unlikely in the near future. “These long-term ideas require thoughtful discussion and will not be resolved this month or even this year,” he said.

NASCUS picked up on the proposal's evident disdain for state charters as a point of concern.

“NASCUS will thoroughly review the proposal and continue working with Treasury and others to ensure that state authority is maintained over state-chartered institutions. It is the role of state governments to determine proper regulation of its state-chartered institutions including credit unions,” said NASCUS CEO Mary Martha Fortney. “The dual chartering system is threatened by the preemption of state laws and the push for uniformity.”

“Credit union dual chartering has benefited the nation and the states for nearly 100 years. The dual chartering concept is based on the important foundation of competition and choice between state and federal charters. Disruption of the current structure would have various negative impacts,” she added. “It would diminish state and federal regulator cooperation, tip the balance of power between states and the federal government and minimize the economic benefit and enhanced consumer protections available to states through state-chartered institutions.”

As an agency that's very existence the proposal challenges, the NCUA refrained from actually decrying it and instead choosing to couch its objections in terms of credit union members not being well served by a “blurring” of depository charters.

“Credit unions provide an important and unique financial services alternative for America's consumers. Credit unions, as member-owned and democratically controlled cooperatives, are fundamentally different in both their structure and mission from other financial service providers,” the agency said in a prepared statement. “The cooperative form of organization, and the mission of serving a broad spectrum of consumers, including those of modest means, have fostered a credit union system that consistently provides better rates for consumers across a broad range of products and that consistently outranks the competition in consumer satisfaction surveys.”

The agency noted that it had sent a comment letter to the Treasury about the proposal in November 2007 but refrained from commenting on whether the department had paid attention to the agency's opinions.

None of these reactions are terribly surprising. All of these associations or agencies have a direct interest in the existing system and might object to making sweeping changes to it. But others outside the credit union industry have seen a flaw in the way the report approaches credit unions in the reform scheme.

David John is a senior research fellow at the Heritage Foundation, a former bank executive and former legislative director for NAFCU; the Heritage Foundation is a conservative Washington, D.C. think tank. John, who said he saw financial regulation as a “sometimes necessary inconvenience” praised the proposal overall with the exception of what it suggested for credit unions.

“I think credit unions are different enough that they should not be just lumped in with other depositories,” John said, adding that he thought the authors of the report had merely not done their homework when it came to credit unions. “After all, credit unions are still such a small part of the overall financial picture that they could have been overlooked,” he added.

John praised the report for charting a path toward stripping away layers of regulation that have accumulated over the years, asking why, for example, should a bank have as many as three regulators or why should securities rooted in commodities or in stocks have different regulators even though there is often only a hair's difference between the two types of products.

John said the financial industry needs these kinds of changes to be able to adapt to changing markets and consumer needs. But he also said the regulatory proposal seeks to do more than just streamline the regulatory process. It also seeks to change the whole scheme for how financial institutions are regulated, moving away from a matrix of rules and more toward a schedule of goals that financial institutions would seek to meet as part of their regulatory responsibilities.

How a financial institution might meet those goals, which could include having an acceptable risk profile, John said, would be up to them, as long as they meet them.

Nothing Imminent

In his remarks introducing the proposal, Paulson acknowledged that it would be the responsibility of the next president and future Congress to work toward making the kinds of changes the Treasury proposed. John agreed and pushed the time line back to perhaps the Congress after the next one, although he observed that it was likely that the short-term parts of the proposal may pass fairly quickly and that there might be movement on other parts of it if the condition of financial and credit markets continued to worsen.

This attitude mirrored the reactions from some legislators to the proposal. Representative Paul Kanjorski (D-Pa.), a credit union industry legislative champion, expressed skepticism about the parts of the proposal addressing credit unions and support for other parts.

“There is a need to put credit unions on a level playing field with other financial institutions in areas like capital standards and business lending, but it should not come at the expense of eliminating the current regulatory system, which has worked well and serves the financial needs of more than 90 million Americans,” Kanjorski said. “We must preserve and protect the unique cooperative nature of the American credit union system.”

But he also noted with approval that the proposal would create a federal insurance charter and license mortgage originators. He also praised the overall effort as well, noting that in some ways it was long overdue.

“Our capital markets have significantly evolved. After all, no one had conceived of mortgage-backed securities at the time we created the Federal Reserve and the Securities and Exchange Commission,” he observed.

Meanwhile from the other side of the aisle and the Capitol building, Senator Judd Gregg (R-N.H.), ranking member of the Senate Budget Committee, made the following statement on the U.S. Treasury Department's proposal to modernize and strengthen the U.S. financial regulatory structure.

“The proposal outlined today by Treasury Secretary Paulson to reorganize the regulation of the country's investment and banking industry, along with the insurance industry, is a step in the right direction,” said Gregg. “We clearly need a more centralized and focused management of the regulation of these entities. There currently is too much of a hodgepodge of different agencies with overlapping jurisdictions and chaotic bureaucratic rules.

“We need more transparency so that investors and borrowers know what is happening to the money they're investing or the money that they're borrowing–where it is going and what it is costing them. This will be accomplished through the type of approach outlined by Secretary Paulson. I think it's a positive step toward correcting some of the structural problems we have in the area of oversight.”

NAFCU acknowledged that the long time frame for acting on the proposals and the short number of months available to both the Bush administration and the current Congress had strongly influenced how they saw it.

Speaking to reporters, NAFCU's Becker denied “belittling” the administration's proposal but reminded them that there have been many sorts of sweeping recommendations from previous administrations that have gone by the wayside. The association will keep its focus on the important legislative goals it has already set, Becker said.

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