CUNA Comment Letter
Insurance and Regulation of Credit Unions' Foreign Branches
November 13, 2000
Ms. Becky Baker
National Credit Union Administration Board
1775 Duke Street
Alexandria, VA 22314-3428
RE: Insurance and Regulation of Credit Unions Foreign Branches
Dear Ms. Baker:
The Credit Union National Association appreciates the opportunity to file comments on the National Credit Union Administrations Notice of Proposed Rulemaking regarding NCUAs role in insuring and regulating state chartered credit unions that branch outside of the United States. CUNAs views reflected in this letter were developed by our Examination and Supervision Subcommittee, chaired by Gary Wolter, with input from CUNAs Federal Credit Union Subcommittee, State Issues Subcommittee, International Subcommitee, the World Council of Credit Unions and the Filene Research Institute.
Summary of CUNAs Position
CUNA has several concerns relating to the insurance and regulation of state branches on foreign soil.
- Regarding the regulation of state chartered foreign branches, NCUA should not encroach upon the authority of state regulators to oversee the operations of the state-chartered credit unions they oversee.
- Concerning Share Insurance, NCUA should generally follow the parameters established by the Federal Deposit Insurance Corporation with important modifications to reflect the constraints on credit union operations.
- This means that state chartered credit unions should be able to operate foreign branches, to the full extent permitted by their state law and the legal requirements of the host country.
- In addition, state chartered credit unions should be able to offer uninsured accounts at such foreign branches.
- It also means that such operations should not be subject to undue regulatory interference from NCUA, including intrusion into field of membership issues for state-chartered credit unions foreign branches.
- Finally, we support broader authority for federal credit unions to serve individuals abroad than that permitted by NCUA under its Chartering and Field of Membership Manual.
Legitimate Safety and Soundness Questions
CUNA agrees with NCUA that there are significant safety and soundness issues that must be addressed in connection with the operation of foreign credit union branches. These issues include the proper management of the credit unions entire operations, including the branch, capital adequacy and risk management, ability to comply with local requirements and met foreign standards, and the economic stability of the host country.
However, none of these concerns is insurmountable, as demonstrated by the federal banking regulators, such as the Federal Deposit Insurance Corporation and the Federal Reserve Board.
We firmly believe that NCUA, working with the state regulators, can draw upon the experience and expertise of the federal bank regulators to develop a supervisory framework that will enable state chartered credit unions to branch on foreign soil, if they chose to do so, and operate in a prudent manner without unwarranted interference from the regulators.
States Are the Principal Regulators of CU Foreign Branches
State credit union supervisory agencies have the primary responsibility for overseeing the operations of state credit unions, including foreign branch activities. We do not think state regulators authority in this area should be eroded in any way. In that connection, NCUAs involvement in the supervision of foreign branches of state chartered credit unions must be confined to material safety and soundness issues and concerns. Even in that role, NCUA should coordinate with the states in addressing such concerns, as the Federal Credit Union Act requires.
State CUs Should Be Able To Offer Uninsured Accounts at Foreign Branches
NCUA correctly notes that many deposits held in foreign branches of U.S. banks are by practice, uninsured. NCUA notes that banks have express statutory permission to offer uninsured foreign deposits. The agency cites the statutory definition of a bank deposit-- that clearly permits banks and thrift institutions to offer deposits outside of the U.S. that are not insured, as well as deposits that are insured (12 USC 1813(l)(5)(A). Under this statute, deposits that are not payable in the U.S. are not insured accounts. In order for the account to be insured, it must be payable in the U.S., and the institution and the customer must agree to that fact under express contract terms.
NCUA states that there is no comparable statutory or regulatory provision for credit unions and absent a regulatory change, the agency would have to require that shares in a foreign branch of a state chartered credit union be insured. As indicated above, if such accounts are insured, NCUA would have much greater authority to regulate foreign branch activities.
We do not believe NCUA needs additional statutory authority to permit state chartered credit unions to offer foreign accounts that are not insured. Indeed, language in the Federal Credit Union Act already authorizes NCUA to permit such as option. Under 12 USC 1782(h)(3), the Act defines the term, insured shares-- to include: share, share draft, share certificate and other similar accounts as determined by the Board .--
We urge NCUA to amend its policies to allow state chartered credit unions to have this option, as banks and thrifts are allowed to do.
NCUAs Supervisory Authority
Because NCUAs supervision of state chartered foreign branches should be based solely on safety and soundness, we believe that NCUA should follow the model established by the Federal Deposit Insurance Corporation in defining the parameters of its supervisory activities.
The Federal Deposit Insurance Corporation relies heavily on the Federal Reserve Boards Regulation K regarding the supervision of overseas operations (12 CFR 211). Under this rule, banks must, among other things:
- Obtain prior approval from the Federal Reserve Board;
- Have $1 million in capital and surplus for the foreign branch;
- Post additional reserves if required;
- Follow lending limits, as a percent of capital; and
- Agree to reporting and recordkeeping as required.
We believe Regulation K provides a useful reference for the development of safety and soundness rules for state credit union foreign branch operations. However, such requirements must be tailored to dovetail with state authority and to take into account credit union differences.
We do not believe NCUA should require prior permission for a foreign branch, as branch approvals should be the domain of the state regulator. Rather, the credit union and the state agency should coordinate to provide reasonable notice to NCUA and to address concerns NCUA might raise.
While additional capital may be necessary, it must be proportionate to the risk the credit union is undertaking with the foreign branch operation. We do not believe a specific additional net worth requirement should be stated in NCUAs regulation or policies, but that it be must based on a case-by-case evaluation of a state chartered credit unions situation relative to the foreign branch. We believe the same rationale should apply to a requirement for additional reserves as well.
Regarding recordkeeping and reporting requirements, the foreign branch of a state-chartered credit union should be treated as its domestic branches are, and NCUA s examination and/or review of the branchs operations must be coordinated with the state regulator. In that connection, the FDIC, Federal Reserve and the Federal Financial Institutions Examination Council have developed tremendous expertise in this area, which NCUA should draw upon, rather than establishing its own foreign branch program.
NCUAs Specific Questions
NCUA raises concerns about its ability to enforce its liquidation and conservatorship powers outside of the U.S. NCUA should work with state regulators and the FDIC and other federal banking regulators to address this concern.
NCUA states that supervisory issues relating to overseas branches could result in hiring additional staff and retraining existing examiners. We do not see this as a major problem for NCUA, which need only look as far as the FFIEC and the FDIC for assistance. If NCUA determines its own examinations are critical, then it should consider developing an arrangement with the FFIEC or the FDIC to utilize examiners who already have expertise in this area.
NCUA questions whether it should require an opinion audit of the foreign branchs activities. NCUA should coordinate such requirements with the state regulators. In general, we do not believe the audit requirements for a foreign branch should be different from requirements for domestic ones.
NCUA raises the specter of regulating the field of membership a state-chartered credit unions branch overseas. We oppose such an expansion of NCUAs authority. NCUA should absolutely refrain from regulating field of membership issues, which are not related to safety and soundness, for state chartered credit unions.
NCUA suggests that there should be a separate insurance application for foreign branches. NCUA has not provided any rationale, other than safety and soundness concerns of a general nature to support the need for a separate application. We believe NCUA should provide its arguments as to why such a process is necessary in order to elicit useful comments from the credit union system on this point.
NCUA suggests that it might set limits on the amount of lending that a foreign branch could undertake. As stated above, we believe branch-specific limitations or additional requirements must be coordinated with the state regulatory and imposed only on a case-by-case basis, depending on the risk and other factors associated with the operation of the branch.
Federal Credit Union Authority
While not the subject of NCUAs notice, we believe NCUA should also be reviewing its position on the ability of federal credit unions to operate branches on foreign soil, and that this issue should be the subject of comments (such as when NCUA develops a proposed regulation on foreign branching).
Currently, a federal credit union may establish a service facility outside the United States only if the facility is located on a United States military installation and at a United Sates embassy. Further, foreign branches are prohibited for the primary purpose of serving citizens of a foreign country.
While we appreciate the changes NCUA made in the Chartering and Field of Membership Manual in 1999 to expand the ability of federal credit unions to serve individuals in foreign countries, we do not think that NCUA is required by statute to contain such activity to U.S. military installations and U.S. embassies. Because we do not believe such authority is limited under the Federal Credit Union Act, we urge NCUA to allow federal credit unions to operate on foreign soil in a manner that is comparable to the most permissive authority provided under certain state laws. We would be pleased to provide you with a list of such statutes, if it would be useful. We also think that Credit Union Service Organizations (CUSOs) are another vehicle federal credit unions could use to reach members on foreign soil.
Foreign Credit Unions Operating in the U.S.
Likewise, NCUA has not sought comments on the subject of foreign credit unions doing business in the United States. The North American Free Trade Agreement (NAFTA) has important implications for this issue, which we believe credit unions should also be invited to address when the agency develops a proposed regulation on foreign branching.
The issues of insurance and regulation of foreign branch operations are very significant one. While the number of such operations today is limited, how NCUA approaches these matters will have important ramifications for foreign branching in the future. Safety and soundness associated with foreign branching is a legitimate interest that must be addressed. However, NCUA must not attempt to use unreasonable concerns about the National Credit Union Share Insurance Fund to needlessly limit these activities.
Thank you for consideration of our views.
Mary Mitchell Dunn
Associate General Counsel and Senior Vice President
|Cc:||NCUA Board Chairman Norman DAmours
NCUA Board Member Dennis Dollar
NCUA Board Member Yolanda Wheat
Mr. Arthur Arnold, Chief Executive Officer, World Council of Credit Unions
Mr. Bill Sayles, Managing Dir-CU Center for Innovation, Filene Research Institute
CUNA Governmental Affairs Committee
CUNA Examination and Supervision Subcommittee
CUNA State Issues Subcommittee
CUNA Federal Credit Union Subcommittee