general training ielts review

(chairman matz)busy schedulesand a lot on your plate, and so, we appreciateyour being here. the listening sessionsthat we've done in the past, we've done listening sessionsevery two years, have really beenvery helpful to us and really do help usbecome better regulators, and i hope it's also helpfulto you to understand some of the decisionsthat we've made and why we've made them.

so, i'm looking forwardto a robust discussion today. i just want to explain to youbefore hand so you know that these sessionsare being recorded. we record them so thatthose who aren't here can listen to themfrom their offices or their homesif they care to. it usually takesa couple of weeks for us to get them up,because we have to have them closed captioned,so it takes a little while,

but just so you know,it might influence what you say and howyou say it. just saying. before i begin,i do want to introduce my wonderful colleagues... board member metsger, whom manyof you have not yet met, and board member fryzel,whom i know many of you know, because if i'm not mistaken,he's the favorite son here. so, welcome back.

i'll let the otherstaff members at the head table hereintroduce themselves so you know who's here. (mark treichel)i'm mark treichel,and i'm the executive director. (lara rodriguez)i'm lara rodriguez,i'm the deputy general counsel. (larry fazio)larry fazio,the e&i director. (john worth)john worth,chief economist. (chairman matz)i'm also pleasedto welcome here some of ourstate regulator colleagues.

my good friendand former ncua board member, joann johnson is heresomewhere. there she is. and her supervisory examiner,ann mulcahy, i believe is also here. so, welcome. we also havefrom the illinois department of financial institutions,the director, francisco menchaca,and acting supervisor

for the credit union section,david anderson. i believe they're here. thank you for being with us. we also broughta large part of our senior staff here. we have our... associate regional directorsfrom this region, while keith was not available,but we do have myra, and we have theassociate regional directors

from both regions. we also haveour supervisory examiners here. are you on that side,or that side? both, oh okay. evenly distributed. we have them herefor a variety of reasons so that they can heardirectly from you, the folks they interact with,about things that are on your mind,and so that they can

also offer suggestionsbased on their experience about possible waysto improve the exam process. i assure that we are hereto listen to you. and every time we've hadlistening sessions, we've always come backwith good ideas about things that we might be ableto implement and change. so, we really arelooking forward to an important dialogue. now, i know,just a guess that

most of you areprobably here to talk about risk-based capital. just a wild guess. we have received over2,000 comment letters, 2,056 to be exact,and we will respond to every commentin the preamble to the final rule. i was pleased to seethat the comment letters are very thoughtful

and raise some verysignificant concerns. i'd like to addressseveral of the major concerns right now just sosome of you might say, "oh, i can leave now. i don't need to be here." i'm not encouragingyou to leave, but i hope it allayssome of your fears before we even get started. so, number one.

we get the messageand understand that some of the risk weightsneed to be changed. while they all needto be reviewed, in many cases,some will be changed. we got that messageloud and clear. so, we are literallyreviewing every risk weight in the proposed rule. and just for example,there are some that we plan to consider loweringas we finalize the rule,

and those include investments,cusos and corporates, mortgages and memberbusiness loans. in particular,i know that there is a valid concern amongbusiness lenders who were grandfathered inby congress in 1998 and as a result,do not have a cap on member business lending. and here in the midwest,i especially know how critical agriculture loans are to farmersand to rural communities.

so, it was not ourintention to put you out of businessor to prevent you from making those loans. we really understandthat we need to take a close look at howwe've designed those risk weights. we share your concern,and we will be sure to address thatin the final rule. so, i know that'sa big concern out here.

i heard it wheni went out to minnesota a few months ago to speakto the annual meeting there, and that is somethingthat we will definitely address. another issue that hasmade the rounds and gotten a lotof publicity is the fact... well, it comesacross as a fact. it's actually a myth -- now, bill hampel,don't jump up from your seat, okay --

that credit unionswill not be required to raise seven billion dollars. okay, i know you've heardthat they will be required, that you will be required,to raise $7 billion, but we believe that thatis based on a very questionableassumption. we believe the proposed rule, even if it was doneright now, which is probably the mostconservative version,

would likely costless than $700 million, because a bufferis not required. it is not required. and in fact,if the proposed rule became final tomorrowwithout doing anything, more than half of allthe credit unions that are subjectto the rule would have a bufferof at least 3.5 percent or even higherthan they have today

if they doabsolutely nothing. the third issue thati know is a big concern is that examinerswould be authorized to raise any individualcapital requirement -- any individual credit union'scapital requirement. and again... i admit, we could havewritten this section in a more artful way. it needs to berewritten.

it was not our intentever that examiners would have this huge,independent authority. and in fact,this language was taken from the current regwhich has been in place for many years,and it's something that we have had out thereas a possibility but not somethingwe've used, because we've made itvery challenging. if an examiner feels that such arecommendation is necessary,

they have to getthe approval of their supervisory examiner,of their regional director, and then of the ncua board. so, it's quite a high hurdlefor an examiner to get there. so, it will berewritten to make it clear that this is nota responsibility or an authoritythat we intend to rest with the examiner. we've also heardloud and clear

that you feelthe implementation period needs to be extended. and in fact,we agree with that. we agree with thatfor several reasons. one is that we knowthat you all need more time to adjust to it. the other reasonis pretty selfish. we need more timeto adjust to it, because if we're goingto collect more granular data

on the call reports, which manyof you have suggested, we need time to changeour call reports, make sure that theyactually work the way they're intended to. that's going to takeus some time. so, we don't anticipategoing forth with the implementation periodthat was proposed in the recentproposed rule. you can look forwardto a change there.

and again,i just want to emphasize, this is a proposed rule. we will be makingsignificant changes. we have a history of makingsignificant changes based on the commentswe have received in the past such as with ourloan participation rule and our derivatives rule. those rules,when finalized, were a lot differentthan the proposed rules.

and it was basedon the comments that we got. and for that,we are very appreciative. ultimately,we all have the same goal which is a safe and soundcredit union industry. and we feel thatworking together, we can get there. and that's why we're doing thesethree listening sessions. we had the first onein los angeles, and we have one here,and then we have another one

next weekin alexandria, virginia. what we hope toachieve today is really to havea very constructive dialogue and not just a dialogueabout what's wrong, but a dialogue aboutwhat improvements can be made and what solutionsyou might recommend. i know we're going to heara lot about additional changes to risk-based capital. we appreciate that.

we look forwardto hearing them. but we're also hopingthat you might have some changes toour exam process, unless of coursewe've achieved perfection which has been our goal. so, if we don't getany comments, we'll assume that we'redoing it just right. and any other ideasto streamline existing regs... i don't know ifsome of you know it,

but a month or so ago,we proposed for comment a review that's requiredunder something called and what we call egrpra. it's the economic growthand regulatory paperwork reduction act. and we put out33 rules, and you all haveuntil september 2nd to comment on those. and what we're looking forare ways to streamline

those rules and make themmore efficient and make them easierfor you to comply with. so, at our lastlistening session, we didn't get anycomments on that or even onthe exam process. and so, we look forwardto hearing from some of you today perhapsabout changes that we can make in thingsother than risk-based capital. so, now looking around, we havea very large group here,

and you may be wonderinghow we're going to get to hear from everyone. so, we're going to usethe same format that we used when we held ourlistening sessions in 2012. you all have a padand some pens on your table. and so, we're going to giveyou some time after the opening remarks. we'll give you 10or 15 minutes to get together and talk and come up with yourthree to five top priorities.

and because some of youmay not feel comfortable talking before a group,we're going to ask you to pick somebody at your tableto present that option to us. and initially, we hope thatyou'll have one option, or one commentor one criticism that you put forward. if we have time,we'll come back and go throughthe tables again. but, we're going to askyou to speak into the microphone

and tell us your nameand organization, because we are doingthis auto-recording, and it helpsin transcription if we know who you're fromand what organization you represent knowingthat you speak for the table. we're not doing it justso we can go into your credit union and takeretaliation against you. we might, but that won't bethe primary purpose right now.

so, we intend to be hereuntil 4:00, and then i know somepeople have planes to catch and need to get on their way. we will use allthe time that we have and look forward toan interesting discussion. before we move alongto letting you discuss amongst your tables,i know you'd like to hear from our current board members. so, board member fryzelwho, i believe

is the favorite son here, i offer you the opportunityto say a few words. (board member fryzel)thank you, chairman. i don't know aboutbeing the favorite son while i'm sitting up here,but perhaps when i leave? but welcome to all of youto our great city of chicago. i know many of you arefrom the surrounding suburbs, about half the other peopleare from other states. but we ordered thisperfect weather for you,

and i hope you canenjoy some of the great things that we have herein the city of chicago. i've always considered itto be a world class city. we have probably someof the best restaurants in the world. we have fantasticarchitectural buildings. we've got the greattrump tower now in chicago. we have the beautifullakefront, which i hope you allget to see today,

because it really,really looks fantastic. we've got the museumof science and industry, natural history. we've got the art institute,the planetarium, the aquarium,just so many things to see here. we're the front runner for theobama presidential library which will soon be builtafter he leaves office. and we've just landedthe george lucas star wars museum for chicago.

contrary to popular belief,the risk-based proposal will not be a permanentexhibit of that museum. but i think one of the wordsthe chairman emphasized today was proposed. and that's what you allhave to keep in mind. this is justa proposed rule. this is somethingthat is not going to go into effect withoutsubstantial changes. and the chairmanhas repeatedly said

everything ison the table. so ncua is looking ateverything that has been recommendedby the industry, by the trade associationsto change this rule to make it a better one. and i think thatin making your comments today and making your suggestionsthat you also do it in a way that you expectus to do it. when we propose somethingor when we say something,

tell us why it willmake it better. tell us why it will bea better rule as a result of the commentthat you are making. as a result,i think that we'll be able to achieve somethingboth the regulator wants, a safe and soundcredit union industry, and what the individualsand the industry want, something that theycan live with, something that theycan continue to provide

the valuable servicesto the members and not be in any wayconfined by the rule. so, with that in mind, i want to thank youfor all coming out today and in the wordsof dr. frasier crane, i'm listening. (chairman matz)and now board member metsger. (board member metsger)thank you. michael, thank you forletting us be in your city.

(board member fryzel)congressman,you're welcome. (board member metsger)thank you very much. i don't know how i shouldtake that demotion, but... anyway, it's a pleasureto be here. i want to speakjust really briefly, kind of leading off whatmichael has just said. hearing from you today,getting information, that is actually helpfulin how we progress to have a safe and soundsystem that protects you,

and protects the system, from other peoplein the system. that's whatthis whole issue is about. the credit union systemis a cooperative, except that you don'tshare in the earnings of each other. you only sufferin their losses. so, it is our fiduciaryduty is to make sure that we do everything possibleto protect the system

and protect youindividually. as you look at the system, and you have overthe past few months, and as we talk aboutsome of the issues today, i just want to remind you to try to move past the minutiaeinto what is material. minutiae's important -- we're working on all thatwith all these different risk weights --

but only in the larger context,and that is what changes makea material difference and why? and so, to the extentthat you can help us by saying if you havean issue with something, this is why this makesa material difference and be able to explain that,that is really, really helpful. and in many of your letters,you did that. so i just want to emphasizethat let's look at the bigger picture.

you know, how does thisimpact us individually? how does it impactthe industry? and how does this rule do that? and what are suggestionsto make it more meaningful? because the end of the dayour goal is not to have a rule just to have a rule,the purpose is to have a rule that gives us and gives youand your board of directors a good snapshot of yourcapital risk. that's what thisis all about.

it's incumbent on usto do that. it's incumbent on youand your boards to do that individually. and that's what we're tryingto refine. so, we look forwardto the discussion, and thanks for coming today. (chairman matz)thank you. so right now is a good timefor you to get together with your groups,come up with your lists.

we'll give you about10 minutes, and then we'll come backand start our discussion. okay, please, again,give us your name. speak into the microphone,there should be a mic coming over. and give us your nameand credit union. hello. (chairman matz)let's start offwith an easy one. earle shelner,

educational communitycredit union. and i am not surewhat will be the easy side of things. larry, are you ready? we had a few differentmajor concerns. one that has beenin the last listening session was the comment periodbeing extended again after the new proposed rulemay be coming out, or final rule.

but, at this table,we have smaller credit unions. we have ag credit unions. we are a mortgage lendingcredit union. so, it hit a lotof different areas. and you did mentionat the beginning you don't want to shut offag loans. our credit union,personally, we have $415 million in assets, 185 of themare in mortgage loans and another$30 million

are in mortgagebacked securities. and i see you raisingyour eyebrow already. you probably aretaking our name down. (laughter) but what doesn't show upon the call report is what term thoseloans are. over 35 percentof those loans are in fixed rate10 year or less term loans. and another 15 percentare in 12 year fixed rate loans.

you can't capture thatinformation in the call report without changingthe call report. and that givesa whole different risk profile to our particularcredit union. one of the other commentswere you're not looking at maybe the experience,especially on the ag loans from the dakotas, the smaller institutionsthat will be impacted, although, you don't seemto think they're impacted.

the ncua or cuna hasseven billion. you're saying 700 million. i don't believeeither one of those numbers. but i think fromwhat cuna's saying, currently, we're movingfrom 11.3. so, in your numbers,we're good from a capital standpoint,but in five years, we would be underneaththat 10.5, and we would haveto raise capital.

the other point thatcame up was your statement at the beginningthat we don't need a buffer with net worth. every time our net worthat our institution, and it could becompletely different, but every time our net worthhas decreased, it becomes an exam finding. so, i don't think nothaving a buffer is really an option.

i think we have to havesomething there, or the exam procedurewill be rated down in that c area. those are my comments. (chairman matz)okay, so you raiseda number of issues there. i didn't write them down,so you might have to help me, but in terms of the buffer,that is an individual credit union decisionhow much of a buffer you feel you need to have.

but even if we did nothingto this rule, half of the credit unionsunder the proposed rule would have a bufferof 3.5 percent or more. so, those credit unionshave the buffer that they already have,so even if they felt they needed the buffer,they'd already be there. so, that's why we feelconfidently that the seven billion dollarsis really overstated. on the ag loans,as i said,

we did not intendto put any credit unions out of business. we are going to takea look at ag and mortgage loansand cusos and reevaluate whatthe risk weights should be for those. there was somethingelse you raised: call report data. well, we do feel thatwe need more granular data

for the exact reasonthat you said, which is why we feelthat we need an extended implementation period,because we're going to need to make significant changesto the call report. and so,even if it wasn't being done so that all of youcould prepare for it, we need to prepare for it. so, yes, in orderto do this effectively, we will need to havemore granular data

for the call report. larry, i don't knowif there's anything you wanted to answer to that,or add to that. (larry fazio)he covered a lot of ground. one thing i did hear --i'm just trying to make a list of things --you talked about the experience factor? did i get that right? i wasn't sure exactly.

so, when you said"experience factor" -- like the experiencethe credit union has in a particular product line,? that particularcredit union's experience? right, the agricultural lending, mortgage lending,business lending. yes, that was correct. we have south dakotacredit unions represented here. those credit unionsknow ag lending.

our credit union doesn't. they have experience there. mortgage lending, we feel,our credit union has experience there. and then there's credit unionsthat do member business lending that i'm sure feelthey have experience there. it seems like itmight be better, because everything is basedon outliers from what you guys have said.

is using some of yourcapital market specialists to come in and verifysome of these outliers, whether they havethe management capabilities, for these kinds of loansversus assessing a penalty on all credit unions? (larry fazio)i appreciate that point. and i'm going tolay out a mental model -- a way of thinking aboutcapital standards. because i think thisis at the heart of your point

about experience. so, if you thinkabout capital standards, i like to think about themin like four degrees of sophistication. the simplest levelis the leverage ratio, right? your capital requiredto total assets. and for credit unionsit's seven percent; for banks, it's five. that doesn't distinguishat all about the risk

of those assets. it just says,"i don't care what kind of assets you are, you got to haveseven percent capital." that's the simplestway of doing it. the most sophisticated wayof doing it -- so, jumping down to the bottomof the four tiers -- is the capital,the comprehensive stress testing thatwe're doing here in the u.s.

for the largest banks... and will begin doingfor a handful of the largest credit unionsunder the new stress testing rule. that really looksat the credit unions' or the banks' very specificcontrols and their processes and their portfoliosand their history, and it does allkinds of analysis around that. and then it stresses thatwith the goal of making sure

that under stress,they still have enough capital. i think the level you'redescribing is the third level. it's one stepabove that... where smaller credit unionsand banks still do their own sophisticatedcapital planning and managementand risk management around all of that. and we examine thatas part of the exam process. examiners are lookingat your strategic plans

and they're lookingat your business model, and they're lookingat how you're managing those risks and howit relates to your capital and earnings. and that is a veryinstitution-specific analysis. this proposed rule --as all of the international, and in the u.s., of course,risk-based capital standards work -- is a more broadlyapplicable risk-based system. and so it's one step --so, that's level two --

it's one step moreprecise than the simple leverage ratio,which doesn't even look at the assets. so, it does go throughand makes some broad distinctions betweenasset classes. but there's no way for us,in that type of a system, to do the typeof precision you're talking about,where we're looking at every single individualinstitution's experience.

that's why we still havean exam and supervision process. banks have been under a prettyrobust risk-based capital system for some time,but they still have an examand supervision process. and we do, too. there's no way to makea risk-based capital system in a reg[ulation] that'sbroadly applicable as preciseas you're suggesting. having said that,it is critically important,

as you articulated,that credit unions do manage whatever businesslines they're in effectively. and we do understand thatmany of you who've been in these productsand services for many years have done a good job. and capital standardsare predicated on the fact that you're doinga good job actually. the risk weights arepredicated on the fact that it's being managedeffectively,

because capital standardsare about the unexpected. they're not aboutexpected losses -- expected lossesare readily quantifiable. accounting's going to makeyou book it. it's aboutthe unexpected losses. what happens if you're wrong? something goes wrongthat you weren't thinking about. do you have the capitalto weather that? and that's whatthe capital standards

were designed to do. back there. okay. yes, marshall boutwellfrom georgia, peach state federalcredit union. sure, okay. we had a lot of thingsfloating around the table. and i don't want to getinto a bunch of specifics, because i think you...

you have gotten a lotof great comments about the risk weightingsof individual components. i think,and the table felt, that everything needsto be changed. virtually everythingthat was proposed. one of the thingsthat i'm worried about is long-term strategic riskto the industry. and that is undera reputation risk which field examiners will usethat language periodically.

i'm a $250 millioncredit union, pretty diversified portfolio,eight percent net worth and 10.5. percent,or a little bit better, risk-based net worth. the same institutiondown the street, called a bank,will have risk-based capital with the same exactbalance sheet of 15 plus percentrisk base. now, the consumersof america should

be able to lookat those numbers and say the bank is safer without havingto explain all of the details of how ncua,as a regulator, comes up with 10.5versus the bank regulator at 15. and i think it sets us upover the long haul for people to assumethat banks are safer than credit unions. so, that's oneof the things i think.

and by the way, we had 80... over 80 banks in georgiafailed during the recent crisis. and credit unions in georgiasailed right on through. history proves thatwe have a great capital system and a great wayof supporting one another. you do individual analysison credit unions, and that's where youshould catch the outliers, the rogues that wedon't want to hurt our

risk-based,or our insurance fund. another questionthat was asked... and i thought it wasa very good one, and you did addresssome of it in your preliminary comments, debbie,you've received 2,000 letters and a lot of very well crafted,thoughtful letters about different components. can you share a little more,definitively, what you've learnedand what impact

it's going to haveon the weightings? (chairman matz)well, i'll startoff by saying it. i'd like each of youto just do one question so we get to spreadit around, but i'll startwith your second question, which is that we learnedthat we need to take a look at all of ourrisk weights and reconsiderhow we've done them. and we are going to do that.

so, we will takea top to bottom look at all the decisionsthat we made that went intothe proposed rule. on the part ofthe second part of the question which is that credit unionscame through the crisis just fine,there is an asterisk there. and the asterisk is thatwe, ncua, pumped $26 billioninto the system to provide liquidity.

had we not done that,the credit union system as it exists todaywould not exist. and so to sayyou all did fine means that you were dependanton outside liquidity because as a universe,you did not have enough capital. and so, we want to makesure that that never happens again. but in addition,we have been told unequivocally by thegovernment accountability office

and by our owninspector general that we need to havea risk-based capital system. and our statute is very clearthat we need to have a risk-based capital systemthat's comparable to what the banks have. so, we do need to do this,and we are going to do it. so, i think that that'san assumption that you really need to take away from herethat we are going to go forward with a risk-basedcapital system,

but we will makesignificant changes from the proposed rulethat you have all seen and had someconcerns about. larry, did you wantto take it from there? (larry fazio)i would only add to that... so, we havea statutory mandate to have a risk-based system. we have a statutory mandateto be comparable to the fdic. so, your initial point about --i think you catalogued it

as strategicor reputation risk over the long-term of this competitive advantage issue between a bankand a credit union and a comparability there -- we do have a mandateto be comparable. but the third mandate we haveis that we have to take account of any material riskin our capital, our prompt corrective actioncapital risk-based system. and so, there's a bitof a disconnect there for us

that we're tryingto balance. we did...when wedeveloped the proposal, we were very consciousabout the comparability, competitive issuebetween banks and credit unions. and in fact,all of our starting points for the risk weightswere the fdic's risk weights in their july 2013final rule. and so that was oneof the triggers that prompted usto continue down the path

of updating ourcapital standards -- risk-based --which hadn't been updated since the inceptionback in 2001. and so, we started withthe fdic as the reference point, and we varied from thatonly when we had good compelling datato suggest we should. and we variedin both directions. in one direction,we varied to reflect that credit unionslending performance

in the consumer arenahas been much better -- demonstrably better --than banks. and so we adoptedthe european union risk weight of 75% insteadof the 100% in that area. there's otherareas were we varied to the opposite. investments is one ofthe big areas that's pointed out. we are dealing withthe risk of price decline

on investments more soin our role than fdic's focuspurely on credit risk, and we acknowledge that. and that's because we'vedone it that way all along, and that ties backto that third statutory mandate of taking accountall material risks. another area where we variedis in real estate in member business loans. the first concentration zoneis identical

to fdic's risk weights. it's only when credit unionsthat have a lot more of that activity --real estate loans or commercial loans --that the risk weights go up. and that's to accountfor concentration risk, which has been a material riskfor credit unions historically, and that reflects howit's currently done in the current risk-basedrequirement. and so, we maintainthat framework.

so, that was at leastthe thinking behind the proposed rule. we are sensitiveto that issue, of being comparable and not putting you at an unduecompetitive advantage. but we also have thisstatutory mandate that we have to befaithful to, and we're trying to finda way to balance those. and also tryingto find ways --

and that's wherethe comment process has been very helpful -- different ways of thinkingabout getting at concentration riskand interest rate risk or price risk... while tied intothe capital role, is there a better,more comprehensive way that we can do thatthat's not just through a weighting scheme?

and so, those are thingsthat we're looking very carefully at. (inaudible question) you said that you wentfrom the fdic and then eitherit gave us credit for where we were betteror took into account material or other risk. so, what you're sayingis that my statement may actually be right,that we are more risky

than banks with the samebalance sheet? i mean, as far asthe public is concerned. this is whati'm saying. you're making us conformto a standard that the banksare not being required to conform to. and if it's very logicallythought through, as it sounds like,then either the bank regulator's failing to doits job,

or we are less safethan i thought we were. (larry fazio)well, all i can sayto that is, by and large,i think credit unions have performed betterthan banks and i do think,by and large, they're safer. and it is a bit of an "applesand oranges" comparison. when you read fdic's rule,it is crystal clear that they're dealingwith credit risk only

in their risk weights,in their asset classes... and we have thisbroader mandate. and so, we're dealingwith other types of risks in our mandate. and so, that's whyyou do get a bit of an apples to orangescomparison without the asterisk thatgoes with that in having to explain,"yes, but our calculation is more comprehensivethan theirs."

the other pointi would make to that is, they don't ignorethose risks, necessarily. they deal with themmore through other approaches. they'll issue capital ordersfor other risks that cause banksto raise capital -- for interest rate riskand other types of risk. so they don't ignore it,they just deal with it a slightly different way. (chairman matz)i might add that sinceeverything is on the table,

that too is on the tablefor reconsideration. thank you. my name is david woodrufffrom zia credit union in the state of new mexico. at our table hereis represented credit unions from illinoisand wisconsin, and we have a coupleof items we wanted... the number one item wasthat given that there is going to be substantialrevisions,

as you've already mentioned, we believe that the proposalshould come back as a proposal so that we canhave a comment period again on this since it's changingso dramatically, that it shouldn't justcome out as a final rule without further comment andfurther review and discussion. the other one is that, asmr. fazio was just mentioning, there areduplications, the penaltiesand the risk weights

are on things that arealready limited. and that should betaken into account instead of beingpunitive where we have limits on how muchwe can invest in cusos or lend to cusos,and then on top of that, we have a risk rating,mbls. we have limits,we have other ways of managing that already,requirements to manage interest rate risk,

and then on top of thatyou're throwing on the risk-based capitalat such a level that you should takeinto consideration what you're already doingto limit those areas. (chairman matz)two questions, because wewant to have time to get around,but for those very reasons, we are going to bereviewing those risk weights. okay, and can you give usanother comment period? bring this out to give usa review again?

(chairman matz)we are doing a topto bottom review. if after we do that review and look at ourproposed changes, if under the administrativeprocedure act we determine that we arerequired to because we have madesignificant changes to the intent of the reg,we will. but if we determinethat these are changes consistent with whatwe have proposed,

and that it's justreally more of a fine-tuning, and we are not requiredto re-propose it, we probably will not. maybe the law shouldn'tbe the governing thing, maybe it should be what's rightfor the credit union. so... (applause) (chairman matz)you may all applaud,but we've been through a crisis, and if we had doneall the things

that we had been recommendedto do before the crisis, there probably wouldn'tbe a credit union system here today. so, you may havea perspective about running a credit union, and i think you all doa fine job of running your credit unions, but you're not standingin our shoes as regulators, and you're not heldaccountable

for the safetyand soundness of the system, which is what we are heldaccountable to the government accountabilityoffice, to our ig,to members of congress, and to the 96 millionpeople who have their funds in credit unions. so, i know you all thinkthat you know exactly what's needed,and i'm sure you do in terms of runningyour day-to-day business,

but from our perspective, we see the safetyand soundness from a very differentperspective and have a differentresponsibility. and so, if we feelthat in order to comply with the apa we needto put it out, we will. if we don't feelthat we need to put it out to comply with the apaand because we feel we've been workingon this for two years,

this has been two yearsin the making, and that we don'twant to lose more time in doing somethingthat we feel is essential to the safety and soundnessand the future of the system going forward,then we will not do that. sir, is therea microphone here? good afternoon. good afternoon,steve schmitz, i'm with first communitycredit union

in jamestown, north dakota. i have credit unionsfrom iowa at my table also, and two of us happen to begrandfathered in on mbls, and very much appreciateyour concession that there isgoing to be changes to the risk weighting,but from that, and i've hadthis discussion before, is calling all mblsa concentration or a single concentration,i haven't heard any mention

that that is going to belooked at. and calling a 48 plexapartment building the same as agoperating loan simply should not bein the same risk bucket. we actually split outbusiness loans up into 16 different buckets internally. and i'm not sayingit has to be 16, but there needs to besome concession that not all mblsare the same.

and then to keep this brief,i will just follow up with the question thatthe buffer is not required. we lose 500 pointson the buffer with the new proposed rule, i think it will be betterunder the final rule. gentlemen here to my rightloses 300 basis points. now, it is not mayberequired in the regulation, however it is documentedin every single exam how much we are above it.

and i would be concerned,because we go from being 375 points abovethe risk-based requirement to being 125 points under. so, we would no longerbe considered well capitalized. and i would have a feelingthat that will be mentioned even if we wereat 10.51 or 10.52, it would be questioned or brought intothe exam process as it is now.

(chairman matz)let's see, first question, yes, the mbls will berecalibrated, which is why we feelwe need time. one of the decisionswe need to make is just how granularto make the call reports. we don't want everybodyto be so burdened by the call reportsthat that's all they're doing. but on the other hand,we feel that if we had more information,as fdic does,

we could probably doa better job of making policy and regulatingthe credit unions. so, yes, the mbls will beone of the items that we intend to dissectand have more granular data on. and i'll let larry answerthe second part of that. (larry fazio)so, in terms of the mbls,just to follow up on that... we did considergoing down that path of... because there's reallytwo things going on there, embedded in your point.

one is how werisk weight mbls, and the second is howthe concentration dimension of that weightingsystem works. and so, let me takethem one at a time. for the concentration dimension,we did consider looking at doing the concentrationdimension -- and we could debate whether weshould have to do that or not, but that'sa separate debate -- but assuming you takethat as a given,

we did look at doing itby commercial loan type. because we do havesome data that breaks outcommercial loans... probably not asgranular as we needed, but at least some level. and what we found was,there weren't that many commercial lenderswho were doing a broad array of different types of loans. so, it adds a fair amountof complexity to our proposal

and wouldn't have reallymade much of a difference for many credit unions. perhaps you're theexception to that. the second piece is,fdic actually does have much more granular dataon their call report on commercial lendingthan we do on business lending, and they weight allcommercial loans at 100%. so, they don't finda big distinction. there's one exceptionto that --

high volatilitycommercial real estate gets 150% risk weight,and don't ask me to define what high volatilitycommercial real estate is right now. so they haven'treally made a big distinction, despite theirgranular data, on the risk weights themselvesfor commercial loans. and i'm just sayingthis for context. that is somethingwe are very closely looking at.

we're going to doa lot more analysis on that, and we are exploringmany different alternative ways to think about this. but at the end of the day, there's alwaysthis tension, too. we can get really,really, really precise, but the other sideof that is we're helping one or twocredit unions and we're havingevery other credit union

have to fill out more dataor whatever. and it's a balancing act. can i clarifyone thing though, (inaudible) and those of us that aredoing business lending and have been doing itfor years than the 100%, if it's good enoughfor banks. 'cause we actuallygo up under basel iii we go from 12%to almost 14%,

and we still havethat 350 point buffer, under the proposed we go125 points under. so, if it's good enoughfor the banks, i would putour mbl portfolio up to a typicalcommunity bank, and would performvery similar. (larry fazio)yeah, no, and i getyour point there. that really goes to, should we be going afterconcentration risk

in that setting? and i get that, and we'relooking at that, too. "is there another wayto get a concentration risk be faithful toour statutory mandate?" and unfortunately,this comes back to, we have a differentstatute than fdic does when it comes totheir risk-based scheme for capital standard. they only --through the rule --

they only take into accountof credit risk. we're having to takeaccount of more. but there mightbe other ways to get there. i think the second partof your question was on the buffer? so, let me say it this way. maybe john, if you couldpull up that slide on.. i can't actuallyreally see that. yeah, there you go.thanks.

i'm going to stand upfor this one... so, let me just say,i understand totally that, if you're heldto a standard -- and let's just stickwith the current standard of leverage ratioas 7 percent, right... we've had that since 1998when cuna was passed, right? so that's the standardfor the leverage ratio every federally insuredcredit union's being held to, including the smallestcredit unions, right?

and i get, if i'm runninga credit union like you, i don't want to get right downto the wire on that, right? you're going to wantto operate above that. so one of the debates is,is that required by the law? because that's law, right? seven percent's law -- that's not evena reg[ulation] by us. that's law. so, is operating above7 percent required by the law?

not technically, right? but i understand whyyou would want to, and i'd do the samething in your shoes. so, then the nextquestion we have is: well, how many folkscurrently are comfortable at operating above that,but maybe not way above that? and so, that's kind ofwhat we looked at when we broke outthe distribution... what we have up hereon the graph

is the distributionof the leverage ratios for credit unions that would besubject to the proposed rules. so, it's not allcredit unions up here -- it's the 2,200 or sothat are over $50 million assets that would be subjectto the proposed rule. and what you can see is, there are 34 thatare already below 7 percent, so they're notwell capitalized now under the currentlegal requirement.

you have another 523 that areoperating at 9 percent -- between 7 and 9 percent -- so, less thana 200 basis point buffer, to use that term, right? if you wanted to dothe math real quick, the system averagefor capital is about 10.5, so how many are belowthe average? that's another 600 about --if i did the math real quick -- so, about half arebelow the average,

which is about the definitionfor the median, right? i'm looking at myeconomist here. is that how that works? median versus average? so, not everybody is goingto need to be all the way up to the average, right? some credit unions noware perfectly comfortable operating barely abovethe requirement, with not necessarilya 350 basis point buffer.

and so, we understandyou're going to want to operate above the line. the question is, how much? and i think that'swhere it comes to, that's going to be basedon your strategies, your business models,what your long term growth objectives are. what's really going onin your risk portfolio versus the sort oflaw of averages

that the risk-based standardsare based on. and yes, that will continueto be a part of the conversation you're going to havewith your examiners, because there are two thingsthat are critical, financially speaking,to manage in a credit union or a bank: capital and liquidity. and so that's always goingto be at the core of our exam process.

one of the things weare sensitive to, and we're looking at,when we come out with a final ruleof aligning all of our systemsaround that new rule; training,our technology, call report,exam platform, and our policiesand procedures. and so we'll be lookingvery closely at creating more clarityand certainty for you

that if you arewell capitalized, according to the newregulatory framework, the checks and balanceson the conversation the examiners willhave with you about capital adequacy. and so, we'll make surethat we have the appropriate checks and balancesabout that, and how they evaluate the 'c' in your camel rating and all that will allbe cohered

to the newregulatory setup. and then i'll concludewith this point -- and i think the sesin the room will back me up on this... the more credibleand robust of a capital -- right sized, of course -- but the more robustof a risk-based capital system we have as a regulation, the less inclinedthey're going to be

to think that you don'thave enough capital. part of our challengeright now is we don't have a good system, and pretty mucheverybody knows it. and so, they're noteven looking at that. they're looking at yourcredit union, your risk, and what they thinkis the right amount of capital. if we can get it a little closerwith the reg[ulation], there's less likelihoodthat they're going to

want to need to varyfrom that. (chairman matz)anyone from thisside of the room? okay, my name'ssean rathjen, consumers credit unionin illinois. the first item thatwe want to mention is, i think all of usin this room are really proudof the credit union system in terms of what we didwhen the crisis hit and how we were therefor our members

to continue to lend money. i think we're alsoproud that the crisis in the corporate systemthat we bailed it out, and that federal moneydid not bail out the credit union systemlike it did in the banks. what i'm really worriedabout, or our group here, is that we have to makesure that this framework makes it viable for usas an industry to be able to compete withthe "too big to fail" banks.

supposedly, that's whywe had the last crisis, and now they're even bigger. so, capital is an importantpart of the analytics in determining howyou can grow a business, so i think that allneeds to be on the forefront of our mindswhen we finalize this proposal. and i would highly encouragethe agency to have another comment period.

the next item isthe reserve percentages. we would find it valuableif those reserve percentage mathematics werereleased to us, and we see it similarto when the examiners come in the credit union,they want to see our al models, they want to see ourcapital adequacy calculations, they want to seethe consultants that come in. and i think the greaterthe disclosure that's given with how these reservepercentages were developed

would provide some insighton our side as to why you came upwith those percentages. so, we would encourage youto take a look at offering that. the next point is relatingto interest rate risk. it seems evident withinthe proposal that we're trying to address,interest rate risk through higherreserve percentages for investments,

higher reserve percentagesfor real estate loans. and i think we all knowthat the only way to determine interestrate risk is evaluating cash flows on both sidesof the balance sheet. so, if we're goingto try to attack interest rate riskas opposed to credit risk, i think there has to be somecomponent of the analytics to look at both sidesof the balance sheet to be able to effectively assesswhat the interest rate risk is

in a credit union. now, to morespecific issues. (chairman matz)-one second.-okay. (chairman matz)i think you've goneover your limit. let us answerthose questions, because we're nevergoing to get to every tableif every table just asks multiple questions. so larry, i'll defer to you.

(larry fazio)so, again, i get your pointon the "too big to fail" and the competition issue,and that does go back to an earlier point. we are cognizant of that -- the whole competitivelandscape issue with banksand credit unions. again, tryingto reconcile that with our statutory mandate... when you say "reservepercentage mathematics,"

are you talking aboutthe risk weights? yes. (larry fazio)okay. just wanted to make surei understood what you were talking about there. and again, we orientedoff of the fdic rule, and we really onlyvaried from that when we had compellinginformation to vary from that. again, we have statutorymandate to be comparable,

and so that was our baselinethat we started with. i can tell you, overall --and we did disclose in the preamble why we variedand then the math behind that, especially for the consumerloan variation -- we spent a lot of timetalking about that. most of the otherrisk weights that vary are actually carried forwardfrom the current constructs, so we really didn'tchange them. and so, we didn't do a lotof explaining on that

because we weren'tchanging them. but i think going forward,whether we end up having to re-propose or weend up having a final rule, you'll see a lot more detailin the future about exactly how we arrivedat a lot of those conclusions. you'll have a lot of funreading that, by the way, because it's going to bea volume. and then finally, your pointabout interest rate risk... we did actually discussat length,

when we were engineering,doing the initial engineering onthe proposed rule, doing a more comprehensiveinterest rate risk analysis and tying that into the capitalstandards through that. we came to the conclusionthat there were a fair numberof challenges with that, and so we maintainedthe simpler approach that we've beenusing to date, but as we've gonethrough the comment process,

and as i've continuedto think personally about it, i think we do needto go back and really lookhard at that again. and so we are,we are looking at that. and i don't know whatwe'll end up with, but we're looking ata lot of different options on that. and i would say thatthe proposal, as well as the currentrisk-based system...

it deals a little bitwith interest rate risk, but it doesn't deal withit all the way. and you do --you're absolutely right -- you need to look atboth sides and the cash flows to really come toa determination about that. so, we're going to be lookingat that closely. (chairman matz)to the table back there. i'm jim roche,premier credit union palatine, illinois.

i know you feel that youhave a mandate to do this risk-basedlending, risk-based capital,i'm sorry. but it says it's differentfor banks from credit unions. and i think that that hasn'tbeen emphasized enough here. you don't have to haveall these rules, and they're not going to workout the way you want them to. what you're doing isyou're looking at this on a micro level.

you're saying,"we're going to limit the concentration risksthat you have on an individualcredit union basis." well, really, you're pushingus back 25 years with a lot of this,back to the time when we did car loans. let's not do the business loans. let's not get involved in more sophisticated investment techniques,

let's not dothe business lending. you push us back that way,we're not going to be in a position to competewith the myriad of competition that we have now,not just banks, but we have amazon and targetand everyone else out there chipping away at us. you're going to make itmore difficult for us with these rules. and what you're doing isyou're looking at it

on a micro level,but on the macro, you're actually creatingconcentration risks. the whole industry is goingto be squeezed back into the old waysof doing business as much as possible, and then if there'sa downturn in those, you're going to havea real collapse. not just a few credit unionshaving troubles, but the industryhaving troubles.

we had a number of thingswe talked about. (chairman matz)i'll stop you thereso we can respond to that, because i really would liketo keep it to one issue per table so we canmove on. we are required to put outa rule on risk-based capital. we are required to do that. the gao told uswe must do that and gave us a time to do itafter which they're going to come back to checkto make sure

that we did do it and theyreport to congress on it. our own inspector generaltold us that we must do it. so, we need to do a ruleon risk-based capital. our statute is clearthat we need to have a risk-based capital rulecomparable to the banks. whether or not we includeconcentration and interest rate riskon top of that is something that we areconsidering. and even though the statutesays that we need to include

"all material risks" as opposedto the banking statute which says they needto only look at credit risks, we are going to takeanother look at that. and so, i'm not surewhere we will wind up, but we don't want to makeit more difficult for you to do business, but we want to make surethat you're doing business in a safe and sound manner. so, larry, i don't knowif you have anything

you'd like to add to that? (larry fazio)i think there'san underlying issue that was the gistof your comment. two things. you used the term, i think,"to limit our concentration." we're really actuallynot trying to do that. we're trying to sayyou can take more risk, but you just need to havethe ability to pay for it if it doesn't work out,

versus making everybodyelse pay for it. and so, i think was itmr. metsger who said, you know, "you don't share inthe earnings, but you all do sharein the losses." and so, it's really not fairthat if somebody's going to take a lot more risk and benefit,heads: they win, but tails: everybody else loses. and so, that's one ofthe motivating things behind risk-based capital.

it's to make sure thatthe banks and credit unions who are taking more risks --we're not saying you can't take that risk --but you need to hold the right amount of capitalto go with it. which goes back to yoursecond, i think, underlying premise ofthe incentives that happen as a result of the differentialsin risk weights, right? a pure leverage requirementdoesn't create incentives because it doesn't lookat your assets,

it just says you haveto have 7% of total assets. risk-based does lookat your assets. so, some people processthat as we're trying to create incentives for youto do certain things and to not do others. the other way to thinkabout that -- and the way we thinkabout it, is -- no, we're nottrying to tell you what you canand can't do,

but there are legitimatedifferences in the risks of different activitiesthat must be accounted for. we accept, as a society,in car insurance, in health insurance,in life insurance, and other places...that if you do certain things -- you're a smokeror you drive a fast car, or whatever -- you're going to payhigher premiums, right? or you're going to havea higher deductible.

or both. and so, part of whatthe underlying philosophy or theory aboutrisk-based capital is, you can do those things --you can have the corvette and you candrive fast -- but you have to havea higher deductible to go with that. and so, we have to takeaccount of there are actual differences in risk,not all loans

have the samerisk profile, some are riskierthan others. not all investments havethe same risk profile. so, we're not tryingto force you back into an old business model. we're just trying... in fact, we're tryingto do the opposite. we're trying to modernizeour system to reflect the new realities.

maybe we didn't get thatexactly right. we're going to keepworking on that, but the goal is to getthat right with a final rule. and then i think, finally --and i hear you about this -- there is this concern...not only the competitive advantage issue betweenbanks and credit unions that have a slightlydifferent construct in terms of differentregulatory standards, but also the less regulated...the non-financial institutions

that are competing with youin traditional banking type ways. and that's just notsomething we can control. we understand that, but it's not somethingwe can control. i'd like one last commenton this. and that said,earlier it was mentioned you're acting asour regulator. the majority of the peoplein this room

are probably statechartered, but they're federally insured. you're our insurerfor most of us, not our regulator. and i know that thiskeeps on coming up in the 30 some yearsi've been in the industry, there's a lot of confusionon that it seems, at ncua. (chairman matz)well, the state regulator'sresponsibility in joint exams is to regulatefor compliance,

and since we're the insurer, we regulate for safetyand soundness. and that is the maindistinction. to the table right here. excuse me. i'm bernie winne, ceo of bostonfirefighters credit union, at the table there'ssomebody from nebraska and someone fromiowa as well. first of all, thank youto everybody who's at the table

for being here and exposingyourself to the industry and listening to our comments,and our, i guess, complaints. so, we appreciate youbeing here and doing that. some of my commentsare a little bit redundant, and i'm going to tryto change them to make them a little bitless so, but obviously focusingquite a bit on the risk weights. as stated, they're harsh. and they're harsh,as mr. fazio has stated,

somewhat because of theinterest rate risk and concentrationrisk components that have been added in. the rule doesn't allowfor differentiation between a credit unionemployee's effective mitigation tacticsand one that does not. that distinction can reallyonly right now be done asa supervisory issue when examination teamscan sit down

with management teamsand pour through the myriad of informationthat's necessary in order to get a reallygood handle on how a credit union is handlingtheir mitigation tactics. somebody mentioned two sidesof the balance sheet, obviously two sides of thebalance sheet are in play here. the agency did a reallygood job earlier this year in coming outwith some guidance about the use of derivatives.

if a credit union wereusing derivatives to manage theirinterest rate risk, there is no way thatthis addresses that situation, and yet, you could reallybe taking quite a bit of that risk offthe table in doing so. so, i think there's a lotof information that needs to be looked atthat is not present in this current system. now, having said all of that,

maybe more datais necessary, and if more data is,in fact, necessary, that argues thatmaybe the call report needs to be modified. a suggestion that i'vethrown out before is maybe there'sa call report a and a call report b. hate to use the irsas a guideline for anything, but when we file our taxesat the end of the year,

if you're a simpletax payer, you use a 1040aor a 1040ez. if you're a simplecredit union, maybe you usea 5300ez, and if you're a morecomplicated credit union, maybe you use something else. that distinction might be ableto be done by asset size, it might be able to be doneon a voluntary basis, or if i'm a credit unionthat is seeing my numbers

go to a point wherei'm not comfortable and you guys aren'tcomfortable either, then we file moreinformation, more data, and it supports our causethat we're doing things well. let me just concludeby saying there was a comment made earlier about whothe risk takers or who the stakeholdersare here. i contend that we'reall stakeholders.

i'm sitting here todaytalking, not for my own credit union,but for the industry because my own credit unionis very well capitalized and honestly not affectedat all by this regulation. but i think we as credit unionscare about this system because if the systemdoes have problems we pay for it. so i think we're all lookingfor a good, strong, and fairregulatory system,

i don't think we're tryingto get out of anything. (chairman matz)thank you, larry,did you want to respond to that? no? back there? hi there, rudy pereira,i'm the ceo at royal credit unionin eau claire, wisconsin. now thank you very muchfor this opportunity. they say that 40is the new 30, 1050 is the new 7.

and that's the realityof the situation for us particularly at royalwhere our capital is over 11% now. we've done a good jobof raising capital, but under the risk spacewe're slightly under ten and a half. but ultimately in orderto maintain ten and a half we have to raise more capitalto go above whether it be for mergers,growth, et cetera.

so i think for us andfor many in this room the issue really isaround the waiting and appreciate the fact thatyou're going to look at that. because 200%on a credit union has over 35%concentration, which we do, seems a bit harsh. particularly whenwhen you look at the banks it's 100% which wouldmake a big difference.

and i'll take oneand appreciate where you mentioned aboutagricultural loans and looking at that. i would also take a lookat one more if you want to bereal specific is the one to four familyor one to four unit apartments. the banks don't count thatas mbls. for us it's about 140basis points of risk. but it's still inthe whole risk category.

and so i think it needsto be a little more specific and appreciate that you'regoing to look at that. (chairman matz)that specific commentabout the one to four units is something thatwe plan to look at when we review our memberbusiness loan rule in the fall. that would be appreciated,thank you. (chairman matz)stay tuned. i have just two morereal quick.

one, and one is notabout risk base, so... (chairman matz)oh, good. ...at our table. as far as goodwillis concerned, i think that alsoneeds to be looked at. one of the things thatcredit unions looking at helping other credit unionsin mergers, especially whenthey're in trouble, need to consider goodwill.

that's a threat tothe insurance fund if we don't mergethose credit unions. so that's something thatwe want to help out and we help our industry,so to consider that. and then the non risk baseis around the filing period it was mentioned at our table that especiallysmall credit unions that rely ona single staff person who on the day of filinggoes out sick

and you have to havesomebody file that they could be facinga major fine that could put themout of business so a grace period particularly around the smaller credit unions would be appreciatedto be looked at. (chairman matz)well, thank youfor bringing that up. and i know you're referring tothe civil money penalties and some of you mighthave gotten notices that you filedyour call report late

and we don't justautomatically assess civil money penaltiesto those of you who filed late. the first thing we dois go to the regions and have the regionscontact the credit unions and find out if there wasan extenuating circumstance like if it was one personand that person was out sick, which is a situationthat we've had, we give them a pass. if there has been floodingor some electrical problem

or some other situationthat's out of their control so even though we startedwith 104 credit unions that filed late we areactually down to 84 because there were 20that had reasonable reasons why they couldn't get itin on time. and as far as the others,respective of their size, we need to get the data. because if we don't getthe data on time we can't produceour reports on time

and when we can't produceour reports on time we hear fromthe other regulators, we hear from membersof congress. they don't care how bigthe credit union is, they don't care whatour issues are, they wantthe call reports on time and so we must havethe call reports filed on time. and so this wasa last resort for us. we wrote lettersto credit unions about it,

we spoke about it, we did everything thatwe felt we could to let credit unions knowthey needed to get their call reportsin on time. what was the result? we had a thousand credit unionswho filed late and that was simplyunacceptable. so we've gone down now. first we wentto 500 some odd

and now we're down toabout 100 or 84 and we're definitely goingin the right direction. now the civil moneypenalties ultimately could be onerous, but if the credit uniondecides to sign a consent agreement it's reallywhat i consider a minimal amount. some credit unions we chargeda couple hundred dollars, and so we're notdoing this to be punitive.

and we don't get the money;the money goes to treasury. we're doing it because weneed to do our job and in order todo our job we need to getthe call reports in on time. and it's interesting becauseat fdic they have zerolate filers ever. ever. and so it just seems likewe have been too lenient about it

and we're takingthe flak for it. and so this seems to bethe only way to get our message through. you file late,you don't have a valid excuse, you're going to get hitwith a civil money penalty. so, i'm sorry,it does seem harsh, it was not somethingwe wanted to do, but we couldn't figure outany other way of getting our point across.

paul trylko,amplified credit union in austin, texas. sorry if i jumpedin front of somebody. you know, first of alli'd like to say that we do appreciateand thank you for the forum, not only withthe commentary letters, but having this forum. so we appreciate youtaking the time to listen and get feedbackfrom the industry.

i'd say too, you know,i think we understand the need for risk basedcapital. we already have risk basednet worth that we've been working under. i think what you're hearingfrom the comment letters and today is just we needto recraft it and i think you allare certainly open and willing to listento that so thank you. i know there's a desire,too,

to be on parityand i know that the mandate, i understand that. i would say aside from, i would say that we didweather the storm comparatively betterthan our counterparts. so our systems seemedto work going throughthat recession. i think, i don't want to be redundant, i know there was commentsmade earlier

about risk based capital simply looks at the assets, so work on those risk weightsi think we need, we would like to seethose risk weights and you're going to belooking at it, to where the risk weightsgives good parameters because the only way toreally, truly manage risk is what we do every day and that's be lookingat the whole balance sheet and what are the mitigatorsthat we have in place.

so that's the second legof the stool is the exam process. so i feel like that's wherethat should be done. risk based capital seemsto do a good job of managing interest raterisk and i think you all said too,we've got to look at all, consider all material riskand i appreciate that, but it also, i believe,says making sure that we take into consideration the unique qualities

of credit unionsto balance that out. but concerns that we had, i'll give you a coupleof specific ones, but just maybe ina broader sense right now, the long term impact, while we may be managinginterest rate risk, i know marcia was concernedabout strategic and reputation risk, i think we sharedthat same concern,

but maybe from a differentaspect. if the risk based capitalstandards are too tight do we run the risk ofbeing in a situation where from a reputationstandpoint we may have to say noto our members when we hitcertain limits. this ties in withother regulations sometimes, too where if you hita certain limit, where we used to be,we still can participate out,

but there's limitson participation so these things can domino. we would appreciate if you'dconsider all aspects, these things allfit together. and then onthe strategic side concern froma long term standpoint, you have to manage risk and that's how you, in some cases,not in some cases, in all cases, you're serving your membersbut also making money,

and we don't want it tohave a long term impact on our ability fromdifferent business models to suppress earnings. two things that specificallywe discussed at our table and this kind of ties into strategy as well, is goodwill being deducted from the numerator and kind of along with thatthe ncusif deposit being deducted. we appreciatethat those are assets

and feel like theyshould be risk weighted. we'd suggest that it be atone to one risk weight, risk weight them likeany other asset, but don't deduct thembecause they are an asset of the credit union. and i guess probablythe last comment would just be appreciate that you'reengaging credit unions in the process,appreciate that. we'd encourage you to,

i think you're alreadygoing down that path of rewritten rulesso we can look at and continue to engagethe credit union movement. i think somebody elsesaid it well, we're all stakeholders in this, this is important to all of us,so thank you all. larry, do you want torespond to that? (larry fazio)so, i think that the easiestthing to respond to is the goodwill deductionand the ncusif deduction

towards the end there. goodwill and some otherintangible assets are deducted under thebasel international framework as well as in fdic's risk basedcapital system. they're not assets availableto monetize in any type of... you know, if you neededto sell them, or if we had toliquidate the credit union or merge it withanother credit union.

so that's, i think,why they've been deducted in the international settingand why we adopted that for the proposal as well. i would say, for sure,it's not lost on us that credit unions thathave already done mergers -- especially ones where we wereinvolved as the insurer -- that have goodwillon their books already, we might want to bethinking about is there some wayto grandfather that in

because you did those priorto a change in the capital standards. going forward,how banks have handled it -- because they have to deductit as well -- is they price it into the deals and so it getsaccounted for that way. so we're looking athow to handle that, but we appreciate youpointing that out. the share insurance funddeduction goes back

to a longstandingconcern by policymakers -- treasury in particular -- that that 1% deposit that youhold as an asset on your books is also an asseton our books and is treated as equityon our books. and, of course, it's doublecounted in the system and it's not available for thoseindividual credit unions to pay for losses out of.

and it's...if we end upusing it to cover losses -- like we almost had to doduring the corporate crisis, but for the stabilization fundlegislation -- it immediately is a write downon your books, as well. so part of the reason,by the way, we have a 7% leveragerequirement that's 2% higher thanthe 5% bank requirement is because of the shareinsurance fund deduction. but that still needsto be accounted for

in a risk basedcapital system as well, because those two areworking in parallel. and so that's whywe've brought that forward into the proposal,is to make sure that it's beingaccounted for. and, in fact, the moreprecise way to account for it is the way we're doing it,by deducting it. because by justraising the bar -- like congress did goingfrom five to seven --

they assumed that it wasa full 1% of assets. it's not, it's 1%of insured deposits, insured shares, which isless than assets. and, based onyour funding structure, that can vary significantly. in some credit unions it's aslow as 40 basis points because they have a lotof retained earnings and borrowed moneyor what have you, and others are closerto 80 or 90% of total,

90 basis points. and so the moreprecise way to do it is to deduct it ratherthan just assume everybody hasthe same level and raise the bar. so that's why wedeveloped those rule the way we did. (chairman matz)there's a questionover here. my name is todd fanning,

i'm with the university of iowacommunity credit union and larry's comment aboutthose who drive corvettes paying morein insurance premiums, using that as a backdropthose that have driven them for 20 years witha clean driving record pay less. those that have accidentsor tickets will pay more. so using thatas a backdrop have you consideredor will you consider those institutions thatmay have higher concentrations

of mortgageand commercial lending that have historicallyvery little delinquency and at the same time alsohave very, very strong earnings, will there be some creditof some sort given for them? (larry fazio)one of the thingswe have in the current risk based rule-- not the proposal, but actually is in placecurrently -- is what's called a riskmitigation credit, and it had that sametheory in mind.

okay, yes, you're drivinga faster car. by the way,do you have a corvette? because that would betotally cool if you did, but... but, anyway. so, yeah, is there a wayto build in some "you've been doing this verywell for a long period of time." we tried thatin the current rule back in 2001, with what's calleda risk mitigation credit i thinkwe've used that...

credit unions have askedfor it once or twice, and we granted it once. it's very challengingto figure out just how much of a credityou should get and how that exactly works. and so it's one of the thingsthat we're going back and still going tothink about. it's featured inthe comments. there might be a waywe can figure that out.

part of the issue thereis, do you have a pretty robust standardthat has an out like that? a credit out? or do you dial backthe standard a little bit and through thesupervision process go after the folks who don'thave the good driving record, or the long history of a proven driving record? but i think, despiteyour 20 year good record of driving your corvette,

you still would pay higherthan an accord, right? so, all right. greg higgins,wings financial credit union. couple of items thatour table came up with have been said overand over again, but would like to reiteratebecause they are important to those at our table. and the first is to reopen the comment period. we're making significantand substantial changes,

in your words,to the regulation, and we're movingthe ratios. we're looking at all of them,reopening them. at a macro leveli don't think we can say what those tweaks will doto the industry. we just don't havethe data to do that. we have to do iton an individual level. so to help you level setwhere an appropriate line is we would request thatyou reopen it up,

allow credit unions to seeon a micro level how it will affect them and allow them to comment. i think that goes backto... (chairman matz)...hopefullythe last time today, okay? i appreciate the comment,and we understand it. we are going to make changes, we are going to make surewe are consistent with the apa, but if we do not feel in orderto be consistent with the apa we need to put it outfor comment again

we will likely not put it outfor comment again. we feel we have given thisample consideration, we've been working on itfor two years, we've had over 2,000 letters, we've had threelistening sessions, i've had more meetingswith members of congress than i can count, and we feel that when we areready to put this out in final it will be readyto be final.

understand, i thinkour table, though, would like to reiterate whatcongressman metsger said earlier about this beinga cooperative system. i understand the stricturesof the law and what you're allowed to do, we would just ask that youtake it into consideration. second quick comment is onthe no buffer needed. we'd request that you letthe field examiners know that. at our table it'sbeen put to us as

you have rumble strips,you have guardrails, and then you go off the cliffand the cliff is the limit. so we request that youpass that down, especially asit goes forward. question is whether10% really becomes 11%. credit unions haveworked for years to create a system that canremain relevant to our members and competitive in the marketplace. with the derivatives ruleas initially proposed

as it finally came out withthe risk based credit rule and with the interest raterisk reviews that are ongoing our tablefears that we're moving to a zero risk base system. and i know, larry,you said we're not, that's not the intentto do it, that's certainly the perceptionin the market and whether this rule requires$700 million as the chairman said to keepcapital levels up

or $7 billion, those are dollars thatcome out of the system from our members becausewe have no alternate way of raising capital. ultimately this devaluesthe credit union charter and our concern is thatas you devalue the charter other charter optionslook more attractive and those institutions wholooked at those other charters then can convertare the healthy credit unions

that we rely on. quick question goes tointerest rate risk. it's been rumoredfor some time that we're moving toadding an s onto our camelsto account for sensitivity, interest ratesensitivity. wanted to,i know you're looking at it in the context of this. question is if itdoesn't come out

in the rbc rule when canor should we expect an interest ratesensitivity rule coming into place? (chairman matz)okay. you can expect that it will not, will not come out in theinterest rate risk rule, okay? that is not going to happen. we are looking at it. as you know, fdic does thatand occ does it.

we are at the preliminarystages of considering whether or notwe should do it. in terms of your commentsabout the $700 million, the $700 million thatwill be paid or that much capitalthat will be raised, not paid, capital that will be raisedby some credit unions that need to hold additional capital, are actually an investmentin the system because it will savethe entire system

from paying forthose losses that occur if those credit unions do nothold the $700 million. and that will bea significant amount higher than that. so, you know,there are tradeoffs and we understand that, but what we'retrying to do is to keep the systemsafe and sound and we are not trying toimpede you from

doing your business. you talked aboutinterest rate sensitivity, and the interest rate sweepsthat some of you might have experienced. we are not going intoevery credit union to look at how you're handlingyour interest rate risk. what we did was we wentthrough the call reports and we took those credit unionsthat we considered had excessive interest rateson their books.

we then looked at those, i believe it was 100credit unions, larry. there were some that had overa billion dollars and... what was it, again? okay, there were 13 creditunions over a billion dollars that we were reallyconcerned about because of what appeared,from the call report, to be excessive interest raterisk on their books. we sent, really,a swat team

into those credit unionsbecause we were so concerned about the size ofthose credit unions and what appeared to beexcessive interest rate risk on their books. and we thought that therecould be an imminent failure in those credit unionsthat would have a significant impacton the share insurance fund and those credit unions. we found that insome of them, a handful,

once we went in and theyexplained what the situation was we felt comfortable thatthey were addressing theirinterest rate risk situation which is one of the reasonswhy we feel we may need more granular dataon the call report. some of the others we feltyou need some work to do and they were very cooperativeand understanding and actually appreciatingwhy we came in there. and then there were somewhich was like

banging our headagainst the wall and it's going to be kind ofa knock out drag out fight with them to get themwhere we feel they need to be. so we are not going into every credit union to look atinterest rate risk. we are going intothose credit unions that are large, that pose significantrisk to the fund and that have concernsto us

because of whatappears to be significant interest raterisk on their books. larry, did you want toembellish that at all? (larry fazio)can i show the slide? (chairman matz)you want to show the slide? okay! ta-dah! (larry fazio)we are looking at the "s" i don't know what we'llultimately do with that,

but we are looking at that. i think that's a case ofcan we label interest rate riskmore discreetly in terms of the camel ratingand that's... no, that has nothing to do with risk based capital, the 's' is just howwe would rate the interest rate risk. the chairman's right, that's not a function of the rule.

the other thing we're doing, and there is a nexus,ultimately, in some form or fashion tothe risk based capital rule and this the historical distinction we need to make between what's in a reg[ulation]versus what do we handle through the exam andsupervision process, right? and that's a continuum. sometimes everything'sin the reg, sometimes we handlecertain things

all through the examsupervision process, and sometimes it's a mixtureof the two. what we're doing right nowon interest rate risk, though, is what the chairmandescribed. we're really looking forthe outliers. and when i say "outliers,"i mean people that we're worriedthat won't survive a rise in rates of300 basis points or more. now, i don't know whatrates are going to do.

i don't think any of us do. we can all speculate aboutwhat we think that's going be, but the point aboutinterest rate risk management... it's not about guessingwhat the future is. it's about managingcan you survive what could happen,plausibly. and a 300 basis point change in the rate curve is certainly plausible, especially withwhere we're at in the cycle.

but i don't know that it's going to happen, and i don't know whenit's going to happen and if it's going to happen. but if it does, can yourcredit union survive it? that's the questionwe're asking. and we're trying to bevery targeted with this. we're not trying to go examineevery credit union for this. there are some where you canlook at an fpr and go, "yeah, interest rate risk isprobably not their problem."

but there's others whereyou look at the fpr, you go "wow, they seem prettyfar out on the tree limb. let's go takea closer look." and that's what we didwith the 13. we're going to go throughoutthe rest of this year... we're going to be lookingat another group between 250 millionand a billion, because those are also of size. but we wanted to startwith the biggest.

but this gives you a sense -- what we have up hereon the graph -- is this is credit unions thatare 250 million or greater in assets. so it's not all credit unions. it's the 2,200 or -- i'm sorry,this is 786 credit unions -- that are bigger than250 million in assets. and this is, on the bottom hereon the scale

is the net long termasset ratio. let me just haveone caveat here. that is not a precisemeasure of interest rate risk. it's a crude metric gaugethat we used based on call report data,right? so we're not basingour conclusion about interest rate riskbased on this. this is what prompts usto ask questions, okay? and so, when you look at thisthe industry average

is about 35 to 38 forthe net long term asset ratio. is that right, john? so 35 would be... can you show? he's got a laser pointerthing he can do. so, 35. it's about over here, right? nice. i did not expect that, okay.

is that the best you got? that's the best he's got? all right, well,you saw where it was, right? that's the highest it's ever been, but that's not what bothers meor what worries me as much. it's the tail, oh,that's even better, you can, you know -- it's the tail over here. this is 60%.

this is the group that'sbetween 60 and 70. this is the group that'sbetween 70 and 80. this is the group thatnorth of 80% of assets are in netlong term assets. that seems high. it seems high, right? now, maybe it's fine. maybe they'redoing derivatives. by the way, we have about, noteven a dozen credit unions

doing derivatives. so that's morethan a dozen. maybe they're usinglong-term funding strategies like federal home loan bankfixed rate advances. well, i can see thatfrom the call report, and most of them aren't. so how are they managing that, and how are theygetting comfortable with that level of risk?

and that's the question we have. so when we went on site, the chairman wasexactly right... the 13 that we didthe initial round. in about half of themwe got comfortable with where they were at. you know, some were out hereand we said, "the nature of your cash flows on both sidesof the balance sheet

are such that you could -- and you have enough capital,by the way -- that if rates went upyou'd have some losses... you could afford it becauseyou have enough capital, and you would roll out of itquickly enough that you'll survive." so fine,we left them alone. of the other half it was a mixed bag between they knew...

so, of the other halfhalf of them knew that they had too much riskand were already themselves starting to implementplans to reduce it, and we just happenedto come in and they're like, "oh, we're not surprised you're here. by the way, here's whatwe're already doing." and we're like,"okay, yeah. proceed,that makes sense." and so that last halfof the half --

so about a quarter of them --were the ones that had buried the needleand were ready to drive off the cliff. now, where is the cliff? the cliff is if ratesgo up, right? so it's plausible that ratesdon't go up, or they don't go upvery fast, it seems likethey're fine. the problem is, they'rehighly exposed if they do.

and so it's aboutwhat could happen, not what we think'sgoing to happen. and so we're workingwith those credit unions to dial them backa little bit. part of this exercise -- the reason why we did itthe way we're doing it -- is also to see if we cancome up with better guidance for credit unions who dowant to take interest rate risk to serve their members and to make a bottom line

and to do all ofthat sort of stuff... but so that they understandwhere the cliff is, where the guardrail is,to use, i think somebody's expressionwas a good one... you know,there's the rumble strips, and then there'sthe guardrail. and where do we needto set the guardrail to say "look,you can take high risk. you can take highinterest rate risk

if you can manage it well." so, the bar for managing itgoes up here. "and you have the capitalto support it. but there's a point whereyou don't have the capital tosupport it. and now you're not justbetting your farm, you're betting the neighbor's farm, that rates aren'tgoing to go up." and that's where i thinkit's our job to say

"that's where the guardrail is." you can't betthe neighbor's farm on that rate bet. you can bet your farm,but not theirs. and so we're tryingto figure out how to calibrate that -- get all the guidanceinto one place so that everybody's onthe same page, and so that not only youunderstand

where we're going tobe coming from, but all of our examinersacross the country are consistent in their approachon this matter. mark starr,florida credit union, gainesville, florida. and i have some finegentlemen from utah and florida at our table. we had a numberof issues. i would like to startby kind of restating

something someone elsesaid earlier. i think we should allfeel good, i think especially ncuathat we just went through a very severe recession andcorporate credit unions aside, the natural personcredit unions did very well. i know chairman matz,you said you put $26 billion of capitalinto the industry, that's really not, you really put 26 billionin liquidity,

but that was really related to the corporate credit union situation. (chairman matz)no. larry, you can explain. i did say liquidity,but it was to prevent in the first instanceof losses from the corporates we would have lost, what,larry, how many credit unions? (larry fazio)so the initial round wouldhave taken out

about 1,200 to 3,000,depending. and then those credit unionfailures would have taken outother credit unions. but she put liquidity. my pointis that corporate credit unionsituation aside... (chairman matz)no, no, no, no, no. we don't put that aside. we don'tput that aside.

i mean, if we're not going tolearn anything from the past then we can't make policyfor the future. and i agree with that,but i guess my point is is that i don't think ithas anything to do with a natural personrisk based capital regulation. (chairman matz)and i guess there'sa fundamental disagreement. and we might just have to agreeto disagree on that. sure, but as a whole,credit unions did well. i mean, we survived a severeeconomic shock

and i think that is a creditto the good job that the regulators didin the 20 years prior to the recession, it's a creditin risk management practices, it's a credit to what everybodyelse in this room did, also. and i think it's important that we not forget that and that's whywe're all still here, that's why we're allstill standing. (chairman matz)no, you are all still standingbecause of all the money

that was pumped intothis system. and let's not -- larry,do you want to? and i'm not trying toturn this into a debate about corporate credit unions. all i'm saying is thatif you isolate that the industry, the natural person sideof the business did really pretty well giventhe severity of the shock. and that's my only point

and i think it'sextremely relevant to risk based capitalregulation discussion. (larry fazio)let me... so, let's takefor a second and set the corporates aside,just for a second. even without that, we hada lot of big natural person credit unionsstruggle during the crisis, many of which we didn'tthink were going to make it. and, in fact, it was ourintervention in those cases --

some of which are stilloperating today, so we can't really talkabout them in detail -- weren't going to make it. now, admittedly, some of themwere in the wrong place at the wrong time. ground zero in california,florida, nevada. some of them werein those places, but had also done thingsthat compounded the impact to them, like havea lot of concentration

in certain asset classesthat got hit the hardest in those areas. so they're geographicallyconcentrated, and then they're concentratedin the product line that got clobberedduring the crisis. they mismanaged theirunderwriting, too, i think. (larry fazio)i'm sorry? they mismanaged underwritingand other things, too. (larry fazio)well, we could debate that,and there's variations there.

so we didn't come through itcompletely scot free even if you set asidethe corporate crisis. i do thinksome credit unions were very effectivein saving the day and we were very effective in going into some to make sure that that happened. i think the fundamental -- now i'm going to come tothe corporates here -- the fundamental way tothink about this...

people can agree todisagree about this, but i just want to put thisout there for perspective... natural person credit unionsby and large use the corporatesfor two things: to process their paymentsand as an investment vehicle. what was happening that leadto the corporate crisis was the corporates were takingthat deposit money from credit unions and thenturning around and transforming it intoriskier assets,

and then down streamingthe benefits of that. so credit unions --natural person credit unions invested in the corporates, who, in turn, madethese bad investments. so you could argue --outsider looking in -- well, the credit union systemdidn't do a very good job. and we're in that boat, too, of doing our due diligencearound what the corporateswere doing,

because you putyour money at risk by investing inthe corporates. and so the losses thatthe chairman's articulating -- the $26 billion -- those would have been lossesto the natural person credit unions as a result oftheir investment in the corporates. and so that's, in effect -- what -- from one perspective,at least --

we're saying has stillgot to be owned by even the natural personcredit unions in terms ofthe decision making. so, the other wayto look at it is we trustedin the system, we trusted inthe rating agencies, we trusted in ncua'soversight of the corporates, and we've learnedour lesson. and we won't ever havethat happening again,

and now that we're notusing them as much asan investment vehicle, we won't make thosetype of investments because we wouldn't make themdirectly ourself, only they were making them. and again,i wasn't trying to get into a corporatecredit union discussion, so i apologize for that. but the point i wastrying to make

is that we did --and again, if you take the corporatesout of it -- we did a lot of things rightto get through the recession as well as we did. as an industry we didbetter than banks, particularly comparablefor our size. so, you know, i think our risk management practices were more effective.

that's directly relevant toa risk based capital regulation. we talked a lot, we came up with a numberof different issues. i think the first one iswe think that the 8% adequatelycapitalized level in the proposal is probablyas far as you need to go. we don't think there'senough risk there to justifythe ten and a half. we don't thinka heavier buffer is needed.

(chairman matz)can we stop you thereso larry can respond rather than justgoing on? (larry fazio)so i think what you'rereferring to is, instead of just havinga system under the proposal that says to be adequatelycapitalized for risk based purposes,you have to have 8% or greater? right. we actually have also

a ten and a half percentstandard for well capitalized. so to be well capitalizedyou have to have ten and a half. we did that fora couple reasons. first one is comparabilitywith the standards that banks are held to. when you look at the bank riskbased capitals requirements -- and there's several,it's not just one -- in effect, they're going tohave to hold ten and a half percentcapital

to be not only well capitalizedbut to have no restrictions on their activities. if they have less thanten and a half risk based, they're going to haverestrictions on dividends and on bonuses and things. for credit unions if you fallbelow ten and a half -- or to say itanother way, if you becomeadequately capitalized from being well capitalizedfor whatever reason --

the only thing that happensis, under law you have to have a ten basis point earningsper quarter. so basically the lawsays be profitable. but there aren't anyrestrictions on your activities. so there's nothing bad,quote-unquote, that happens -- there's no restrictionsyou're subject to -- by being adequatelycapitalized. now i get the optics of it. when you go to your boardsyou want to be able to say

you're well capitalized. and i get that your examiner'sgoing to raise an eyebrow if you fall toadequately capitalized. but in the contextof the rule there isn't anyrestrictions that happen if you fall belowten and a half and becomeadequately capitalized. so that's why we did it, and that's why we thinkit's comparable.

because the ten and a halfstill does create an incentive to be strongly capitalized, and if you juststopped at eight those incentivesaren't as significant. on the risk weightings. we don't think there'sany more interest rate risk, credit riskor concentration risk at credit unionsthan banks. so we don't see,

and actually i've seen repotsfrom equifax who's a credit bureaureporting agency that they used to put outthese reports on a quarterly basisthat showed losses by product, by score. and they would show itby issuing entity type or lending entity type. and the credit union losseswere typically 25% to a third lessthan banks

and organizationslike ally bank or what used to begmac. finance companiesa loss is on, of course credit union losseswere half what a finance company losswould be. but my point is thatour losses are much, i think, much lowerthan banks. i know if you look atcommercial loan losses for the year 2013compared to banks

our loss ratiowas lower. as an industry. so my point is thatif anything you could argue thatwe deserve lower risk weightings for asset categoriesthan basel iii, certainly not higher. and so we think that's somethingthat needs to be fixed. i think something, you know,something we did

when we saw the regand we put this in our comments, is that we simulated howour balance sheet might look five years out,ten years out. and, you know, we havelow income designation so we put a lot,we have community charters and there's others at the tablethat have done the same thing, so we put a lot of emphasison commercial lending. we found that to be a goodopportunity for growth and we've been doing themfor about eight or nine years.

but when we ranour commercial was up to 25%of our assets you know, our capitalthat we would have under basel was 44% more than underyour proposed regulation. and again, you know,our portfolio performs well and as an industryour portfolio performs better than the banks today. so we really think,

i think ncua needs to alsolook at how our balance sheetsare going to look in five years or ten years. what's the successfulbusiness model for credit unionsin the future and you need to do itby asset categories because, as you know, we're all very,very different as you go up in size and what our business modelslook like.

because i think this is a regulation that has to look forward, and i think that'sthe scariest part of it, i know to me. we think some,again, we had the low incomedesignation and servingthe underserved, this kind of takes awayfrom that. we had another issue

that had nothing to do withregulation, it was field of membershipand this was a federal charter sitting at the table. and concerned about,you know, getting associationsapproved and i would state iteven more broadly that the whole fieldof membership thing that ncua hasreally creates geographicconcentration risk.

we're in anenvironment today where credit unions,where consumers are going to be doing mostof their banking, we think, with mobile devices. you can even apply for a loanand close a loan with a mobile device. it makes no sense to haveartificial barriers about who a credit unioncan do business with and it really createsa big, i think,

competitive disadvantage forthose credit unions that do. (chairman matz)can i stop you thereand respond to that? that's a statutory issue. and that is oneof the things that i think congress would sayseparates the banks from the credit unions, the field of membership. and the law isvery prescriptive about how we interpretthe field of membership.

we have tried to beas permissive as possible in permitting larger fieldsof membership, for instance, for communitiesgoing up to two and a half millionpopulation and in terms of associations. the proposed rulewe put out was really intendedto make it easier to bring in associationsbecause we listed seven types of associationsthat would automatically

be admissible without havingto file any paperwork, such as unionsand alumni groups and churches and there weresome other things. but we were certainlyin our comment period hoping that if therewere others we could add to the list. but we're working withinthe constraints of a very prescriptivefederal statute. another point,there's a proposal out

to change how,by the aicpa, on how allowance forloan losses is done. when it came outabout a year or so ago it, the initial thinking was it could doublewhat credit unions have to have intheir allowance account. that is still pending. my understanding isit's going to be put out, possibly beforethe end of the year

and we, none of us knowhow it's going to end up. if it came outas originally proposed it would double whatwe all, as a group, have to have inour allowance account. you're only giving us creditfor 125 basis points in the risk basedcapital reg. that is something you'dhave to look at, it's something the fdicwould have to look at, also. the other comment,last comment i'll make to larry

is i'd sure love to seethe empirical data that justifiesheavier risk weights. how did you quantify concentration of risk and interest rate riskand build that back in to the heavier risk weightingson the various asset classes? i think that's somethingwe'd all find at least very interestingto see. (chairman matz)well, i think on that,and we are going to be as transparentas possible,

but not until we come upwith the final rule because we'd just bespinning our wheels putting out information on a rule that's going to be changed. but when we come up andcome out with a final rule the preamble will bevery specific about how we cameto those conclusions because i think you all havea right to know that. here, oh, okay.

...with 1st mid americacredit union. i have just a couple comments. the first comment thatcame up at the table was with regards to, as complex asthe proposed rule is, and i know you're going tobe looking at the implementation period,you're going to go back and reconsider the 18 months,so forth, is to possibly do itin phases

because it impacts everybodyso dramatically. is there a way to considerdoing that in phases rather than everything'seffective on a certain date? that was one comment. (chairman matz)well, that's somethingwe will consider. the other thingto piggyback off of a couple of other commentsthat have been made, specifically withmember business lending, and that's, my concern isthe impact to our membership

and the factthat if the rule thatcomes down is too stringent thatthat will directly impact the members and,that we try to make loans to. i'll use a specific examplein our case. we are at,we do member business lending. one of the other gentlemenhere at the table, keith burton fromgcs, they don't do memberbusiness lending.

he has a member that was lookingfor a member business loan and since keith doesn't do ithe referred it to us. my concern is if the rulesbecome too stringent and at a certain point in timewe would decide that we can't do any morewe wouldn't have been able to accommodate keithand his member, where does that member go? and at that point in timethat member goes to the competition,the banks, specifically,

and then keith loses a member,we lose a member, and credit unionslose overall. and that's one exampleof what's happening at a local level, but i'm sure that can becarried over throughout the whole nationin cases like that. so that would be one requestthat i would have, is that when you look at it,when you look at that rule, don't make it so thatit's a barrier

for credit unions to continueto accommodate members and what their needs are. (chairman matz)another pointthat's well taken. i think you all knowi'm a big advocate of credit unionsmaking business lending for a variety of reasons. i think it diversifiesyour portfolio, i think it's a greatbook of business, i think it's offeringcredit unions

and small businesses something that they may not have access toanywhere else. so we will be careful, that's the last thingwe want to do is limit that, but it is very risky. and there are some credit unionswe've discovered, unfortunately, that take onmore than they can handle or that don't really havean experienced commercial lenderon their staff.

and so those areconcerns that we have, but our intent is not to make it more difficult to make business lendingbecause we think that's really important to the credit union community and to the communitiesin which you live. larry, did you want toadd to that? edward nilges,navy federal credit union. i'm afraid we're going tobring up the subject of the second npr again,

but i hope in the spirit ofthis being a listening session that you will listento our concerns and points of viewon this topic-- (chairman matz)i thought i saidit was the last time i was going to answer that. you don't necessarilyhave to respond, but i would loveto be heard. (chairman matz)okay, that's fair. and so would the folksat my table.

this is a flawed ruleand navy federal and the other credit unionsat the table do not support it. the rule is badfor big credit unions, as we said in la, it is bad forsmall credit unions, and it is bad forall credit unions, period. ncua has acknowledgedthat substantive changes need to be made and thateverything is on the table.

but the only way credit unionswill have confidence that you have trulylistened to us is to issuea second npr. in this npr we askthat ncua reduce capital requirementsfrom ten and a half percent to eight percentto align with the adequately capitalized floor congress intendedfor complex credit unions. (chairman matz)can i just stopright there?

because we've gotten all thesein comment letters, we are readingthe 2,000 comment letters, i have said overand over again if we need to adhereto the apa and reintroduce,repropose it, we will. if we don't, we won't. i just feel likethere are other people here who have other commentsto make. all the comments you're makingare in the comment letters.

we are not, i cantell you unequivocally, we are not reducing therisk-based capital level to 8%. okay? so we are going toput something out that we feel confidentwill be workable, will not impede the businessof credit unions that aren't holding excessiverisks in their portfolio and we'll protect the safetyand soundness of the system. and so, you know, i don't quiteknow how many times that--

chairman matz,if you'd let me finish. the point i'd like to make is that the current pca, rb, and w approachi think is adequate or very good, actually,in the way that it is used to distinguishthose credit unions that are complex. what i am proposing here is thatthe same approach be usedwith this framework. identify thosethat are complex,

you've noted the factthat your concern is around those credit unions who are potentially currently classified asadequately capitalized, but are presenting other issues. to me that tells methat we need to draw better the line betweenadequately capitalized and not. that's what's inthe current framework, that's what we propose forthe 8% in the new framework. i have not heard thatdiscussed in la,

and i listenedto the three hours, and thereforei'm bringing it up. but i assume it's inyour comment letter. it's something that we did nothave in the comment letter, we're proposing it now. and we could discuss itfurther if you'd like. and we'll also be in the sessionin alexandria. being as it'sin our backdoor, backyard. next, obviously, we'd liketo revisit all the weightings.

in particular we're concernedabout the weightings for agency securities as we've discussed, mortgage risk weights, and the risk weights forall other investments which we feel should be limitedto one percent. (chairman matz)and i believe we agreedthat we will take another lookat all of those. and i love to hear that. finally,a couple more things

in this second mprthat we'd love to see is concerns aroundthe imcr process and the proposal thatthose be addressed, as you mentioned. and then finally,parity with the banks in terms of implementation timeframes as we discussed. so to put it short, we feel the second mprwould be an opportunity for ncua to regainthe confidence

of the regulated entities and feel as though we've truly been heard. allow us to see howthe final proposal, if you will, would affect us and give usanother opportunity. thank you very much. (chairman matz)is there anybodywho has a comment that has not been madebefore? sir? there's somebodyover here.

she's bringingthe mic over. hi, i'm ed berg fromfirst northern credit union in chicago. (chairman matz)would you liketo stand up? sure. it is important to havean additional buffer above your regulatorycapital because when we got hitin 2007 if i didn't have that i'd bebelow seven now.

and while we won't find outfor a few more years how it all plays out, i think mr. fryzelshowed great leadership and courage to bring us forwardand make decisions. i question wherethe complexity came from. why did 50 millionbecome the cutoff? (chairman matz)good question. that's a good question and onethat we are revisiting. when we, i guess it wasa year or 18 months ago

that we took a lookat the definition of small credit unionswhich was $10 million and had beenfor over a decade, we thought that thatreally was no longer sufficient in the changing credit union landscape. but we didn't want to justpick a number out of the air and say, "oh, maybe it shouldbe 35, maybe it should be 40,maybe it should be 50."

so john worth,our chief economist and larry, our directorof examination insurance, their staffs puttheir heads together and came up with indicesof what might constitute credit unionsthat were involved in complex operations. and i wouldn't do justiceif i went down the list of what thoseindicators are, but they can explain itif you're interested.

and so based on thosedefinitions of complexity the cut-off actuallywas about $35 million. those below $35 millionweren't involved in these complexoperations, those above 35 did. but then we thought weprobably should have a buffer in there. so we made it 50. but it was actually basedon a thorough analysis.

in a rule we said and i think it was thanksto congressman fryzel, he said, "let's come backin two years..." this is a good thing. congressman,did i say again? what's with me? (board member fryzel)looking for a job. (chairman matz)i don't know, i keep saying it,that's the second time, okay. board member fryzel.

did i revealyour secret? this was a suggestionof board member fryzel, that we come backin two years rather than wait forour three year cycle, and reevaluate whetherthat definition is still significant. and so the staff is nowin the process of taking another lookat what constitutes complex credit unionsand whether we can lift

that threshold. it is our hope that wewill be able to lift that threshold which would then exempt more credit unionsfrom this rule. but we are takinganother look at it, it was not arbitrary,it was objective. john, do you want to tell themwhat it was based on? (john worth)sure. so the small creditunion rule

that came outabout two years ago was developed based,looking at a lot of activities and the preponderanceof those activities by different asset sizes. so, for example,and there wasn't, there wasn'ta single activity. we looked at a seriesof activities that are associated with morecomplexity of supervision, more complexity inthe examination program

and looked at thepreponderance of those by asset class. and what we saw was thatwhen you reach a threshold, at that time it was about$40 million asset size, you really saw thatthis index really sort offlattened out and that from that point onas credit unions got larger, of course they were gettingmore complex and doing more activities,

but they seem to have a turning point at around $40 millionand that was one of the aspects that the board tookinto account in thinking about whatthe new level would be and as part ofthe policy process we'll be rethinking thatand going back to look at that again. (chairman matz)does that answeryour question? i'm wondering if any ofthe ses would like to chime in

and talk a little bit aboutthe exam process, what you're finding,how it's going. have you all picked somebodyto do that? if not, pick someone quickly. chairman matz, i'm rich klecunand i'm one of the directors of special actionsof region 4 with chris bryant. and i'd like to commenton

our region 4specialist program. region 4developed a way to allocate our specialiststo our regional team in priority examinations. region 4 we have seven regionallending specialists, four capital marketspecialists, and three information systems officers. and we have received a lotof positive feedback

from many credit unionscommenting about the experience levelof our specialists. our specialists have manyyears of experience whether at ncua oroutside of ncua in many key areas such ascommercial lending, interest raterisk evaluations, investments,asset liability management, and information systems. and so that is an itemthat we wanted to comment on

is a success story thatit has worked very well and the credit unionsseemed pleased and provided verypositive feedback on the useof our specialists and the experience levelof our specialists. thank you for the opportunity to comment. (chairman matz)i don't know if any of youwant to comment on that or if you've hadexperience with that. (chairman matz)did you, over here?

my name is mike dillon, i'm withsouth division credit union. we're a low incomedesignated credit union on the south sideof chicago. all this talk aboutrisk based capital is great. but what it really getsdown to is where the rubberhits the road and it's withour examiners. we learned about thisrisk based capital program

a year ago. some of it was run by usand on us. we didn't really think thatthat was apropos at the time, and actually our state regulatordidn't think it was apropos as well. but it was still run. we're really concerned about, and i think a lot of othercredit unions are, about the competenceof the examiners,

how much they know aboutthe risk based capital, how much they know aboutsome of the other things that are involved withdetermining risk of the credit unions, and we reallyare concerned about their levelof training and how they apply the trainingat the credit union, and actually understanding whata credit union is all about. what our business model is,how we operate,

how we have toserve our members, and how we do anything otherthan just make money for the safety and soundnessof the fund. (chairman matz)well, you know, that's a very helpfulcomment for us because we spenda lot of time, not only thinkingabout training, and discussing it, but actually trying to givethe credit union

examiners as muchtraining as possible on a wide varietyof issues. so when we bringnew credit union examiners in, we give them fivelevels of training and then give themon the job training. so we're ina situation now where about 40% of our examinershave been with us for less than five years.

so as you can imaginewe have really been struggling with getting themup to speed and getting them trainedeffectively. but mark, i don't know if youwant to address that issue because that'sin your area. (mark treichel)right, well, in additionto the core classes, the first five levelswe invest in each examiner has an additionaltwo classes they take including real estate,interest rate risk.

it's on. and they have subject matterspecialties for each examiner so they'll concentratein a core area. additionally every other yearwe have a national training conference, we just had thatin jacksonville, florida, where we talked aboutinterest rate risk, fraud detection, and several other key focusesof our training

for the exam program. so, again the chairman mentioned that many of the examinershave less than five years on the job. we get them on board, we invest heavilyin the training program, but it is a constant challengethat's being faced in the united stateswith the aging of the baby boominggeneration.

so we're throwinga lot of energy and effort into the program, but it's a constant fightto keep the good examiners. we have the challenge ofcomparability of pay that we have to comply withwith the fdic and we have to focus on keeping those coreexaminers into the program. so it's a good point. (chairman matz)and if you can help usin that way

it would really enlighten us. if you feel thatthere's an area that we aredeficient in we need to know that. because we really struggle,you know. now we have a focus, our top supervisorypriorities this year are interest rate riskand cyber security. and so when we hadthe examiners

in jacksonville for two weekswe really focused on that. but it's only two weeks. and so we are trying, we had the region 3 and 4supervisory examiners here since we had the hotel, getting trainedon various issues. i mean, we really strugglewith how to get the training to themin the best way and the most cost-effectiveway.

we do a lot through webinars. and if you havesuggestions on that, that is something thatwe talk about a lot and really struggle with. so we'd like to know ifwe're not hitting the mark, if you feel that thereare different ways we could be doing it. in fact, forour entry level trainers we actually bring in ceosof small credit unions

because when i met withthe small credit unions, in a small credit union group, one of the things they saidis that "they need to hear from us aboutthe problems we have." so now every time they gettrained on small credit unions we bring in a ceo. and i have to say,we do not bring in the ceos who necessarily viewncua kindly. we bring in some of the peoplewho are really feisty

and who havereally had issues so that they can reallyunderstand what they're up againstand what the goals are and how best they cando their jobs, but permit the smallcredit unions to thrive and maybe do thingsa little differently than they're accustomed to. so it really helps usif you can give us some feedback on that.

this is dallas bergl, i'm with inova federalcredit union in elkhart, indiana. first of all i'd like to startby thanking everybody that came to the meeting todayfor showing up and taking your time awayfrom what we should be doing which is servingour members to deal with rbc,in particular, as a potentiallydamaging regulation,

so thanks for being hereand all the letters you wrote. i think that's invaluableand i'm sure it will help them improve the final regulation. as far as risk based capitalregulation goes one of the most importantthings and i'm, since this isa listening session i'm going to put forthsome comments and try and not structure themin the form of a question until the end.

but as ceos in particularthe most important thing we really do is to tryto manage our balance sheets and our income statements. and those two are obviouslydirectly linked. and the way in whichthe initial regulation was structured was going tocreate great impediment for our abilities to do that, and i'm glad to hear there'sgoing to be some changes in the risk weighting,

particularly ina number of areas. for example, why depositsin the fed would be more risky thancash in your vault or why my investmentin clf is risk weighted is beyond me. but sounds like some ofthose things will be resolved in the end, so that will be very nice. there's a number ofother concerns

that have already been addressedaround mortgages and so on. but in particular it'sthe complexity of the balance sheetthat i'm concerned we're going to lose our controlover as ceos. our credit union is locatedin elkhart, indiana. we have the dubious distinctionas being referred to as the white hot centerof the economic meltdown by"the wall street journal" in about 2009 or '10

and our organization had tofocus specifically just on balance sheetmanagement and i'm happy to say thatwe hit our goals and our objectives. we never fell belowwell capitalized under the current regime, and we also only hadone year in which we had anything otherthan positive net earnings and that was based on the ncua'srescue of our industry.

that is really wherethe rubber meets the road, and particularlyduring periods of extended low interest rateenvironments, it changes the way in which wehave to manage the balance sheet in order to have revenuesto put towards our reserves and to serve our members. as was pointed out earlier, the only place we get our money is from our membership,

and so the way in whichwe manage the balance sheet is particularly important. and in our case,during 2009 and 2010, there really weren'tany other options then to make mortgage loans. there were no demands forcar loans and personal loans, and those people that wereasking for those kind of things really were not people we feltwe should be giving loans to when they'd been out of workfor 12 or 15 or 20 weeks

and they just neededsomething to eat. i mean, as much as we wantedto help them, we knew they didn't havethe ability to repay. so the mortgage refinance boom, and particularlyduring that time, was very helpfulto our organization. now, an interesting scenariooccurred in that, again, there were virtually no carloans to be done in our market to speak of.

there certainly wasn't enough to keep our balance sheetafloat, and of course then yourinvestments were earning zero, as most of them are still today. so as we did more and moremortgage loans, we would sell those offto freddie mac, and we're very efficientand fortunate we have a very good programthat can do that. all the whilewe're selling these off,

we're harvesting the gain,we're putting it to the bottom line,making money, and our regulatorsare coming in and saying, "we don't feel that you shouldbe doing that many mortgages. you have too muchconcentration risk in your mortgage department." and we had no options; couldn't invest itand make money, we couldn't do car loansand make money,

so we're selling itand we're harvesting the gain, and members would come backand refinance with us and so onand so forth. so in any event,some credit unions chose to hold those mortgages. we chose to sell them to avoid the interest rate risk concerns, and it was very beneficialto us. a regulator came inand asked us,

"how much money wouldyou guys have made hadn't you sold mortgage?" so we did the calculation,came back, and it came out to an extramillion-and-a-half dollars or so a year we would have made. and they said, "well, we can'tunderstand how that's possible." and we told them, "it's possiblebecause you didn't ask if we didn't do more mortgageloans what would have happened, you said if we didn't sell them.

we would havehad to hold them, thus our interest rate riskwould have gotten out of hand and we weren't comfortablewith that." so then they wanted to knowwhat the balance sheet would have looked like,and the income statement, if we just didn't do mortgageloans altogether, which is insane. that's justa fundamental concern. so these are the kind ofregulatory issues

that really happenon the ground. i have a letteror email still from one ofthe supervisory examiners that was shared withanother examiner that said, "we don't understandhow this credit union's going to be able to meetyour budgetary goals." this examiner doesn't thinkthat's possible, and we did. we reached our income goals. so that's the kind of thingthat actually goes on

in the ground,in the field. and you needto be aware of that. as you're taking awaysome ability to manage our balance sheet, that's goingto create a crisis, and in everyeconomic environment where the rates are high or low,there are risks, and it's our jobsto manage those. we can't lose our toolsto manage those,

and you and dc don't havethe ability to understand the variations acrossthe country on the ground. we have a lot of very educatedpeople in our industry, a lot of peoplewith master's degrees and some people with phds. we certainly rely on peoplewith phds that help us guideour organization. and there are smart peopleat the agency as well. they need to work together

to achieve whatwe need to get done. so, that's the long statement. one of the big concernsthat i have specifically about rbc as it's proposed is the statutory requirementsthat we already have upon us for capital and the fact thatthe new regime, potentially you couldbe well capitalized and still only be adequatelycapitalized under rbc.

we think there are some... that's a real problem thatcan't be just explained away, and possibly a legal issueas well, so that's a concern of mine. and those are my comments. (chairman matz)i appreciateyour comments on that, and there are individualvariations, of course. there are 6,400 credit unions and 6,400 business plansand ways of doing business,

and so we make policyfor the universe, but superviseon an individual basis. and... that seems to be the wayregulators work. we don't make policiesfor individual credit unions because we couldn't. so what we do is trainthe examiners to understand the differencesand different approaches. and sometimes i guessit works better than others,

and if it's not workingwe need to know about it so that we can help out. but in terms of the restof the question, i don't know if larry,you want to jump in, or lara? i don't know which one of youwant to answer that question about "adequately"versus "well" capitalized. (larry fazio)i just want to make surei understand your last point about the "adequate"versus "well."

could you do that one more timefor me? my concern iswe have a requirement to be-- seven percentbe well capitalized. that's statutory,you guys don't have any control over that issue. so if we createa risk-based capital module that uses other calculations based on the structureof our balance sheet, that could potentially makea credit union

under risk-based capitalbe adequately capitalized even though they haveseven percent statutory capital. we have a bit of a conundrumthere. (larry fazio)i understand now. so, that's how the currentsystem actually works. there's the seven percentleverage requirement -- and there is a risk-basedrequirement now... i'm not talking aboutthe proposed rule. there is an existing one.

and if you didn't meet that, you could go from "well"to "adequate" or "adequate"to "under" capitalized based on thatrisk-based piece now. the reality, though, is... i think eight credit unionsbump up against that, and only two of themactually dropped to less than "well,"or less than "adequate." and so it's really not affectingvery many people,

which is why i think creditunions don't really generally remember or think aboutthe current rule, because it doesn't affectvery many credit unions. but that'sthe current construct. that's alsothe long-standing construct with the banking agencies in terms of promptcorrective action. the leverage ratio standardand the risk-based standard work to complementeach other,

and they work in tandem. the other pointi neglected to make is given that the regulatorshave the ability to determine whether or notthe ten-and-a-half percent is adequate fora particular credit union, that scenariocould occur there as well. so you're given the discretionunder the proposal to say, "you have ten-and-a-halfpercent, however, we think you needeven more.

although you may haveseven percent statutory number and a ten-and-a-half percentnumber, we want you to have even more." (larry fazio)yes, you're talkingabout the individual minimal capital requirement, which would have to goto the board under the law. i would point out,by the way -- because we liketo compare to what the competitionhas to do --

fdic spends two whole pagesin their preamble explaining how they canoverride every single aspect of their risk-basedcapital system... the weight, the classes,the threshold. and so, ours is far morebright-lined than theirs is in terms of the authoritieswe have to override that. and in our case, it would haveto come to the board. (chairman matz)here, here. my name is mike daugherty,i'm president

of community plusfederal credit union in rantoul. we're a twenty-million-dollarcredit union. i know that... and i wanted to talk aboutthe risk-based capital briefly. you're probably thinkingthis does not apply to you, we talked about that earlier, however,over the last sixteen years, we have averaged two hundredsixty mergers per year.

that's good times and bad. in my county,there are three credit unions between ten and twenty milliondollars in assets. at our laststrategic planning section, i said to my boardthat ten years from now, i know all three of uswill not still exist. maybe none of us will. and what i didn't sayto the board was i probably could havemoved that up from ten

to possibly five years. so i do think that this, when i saw this ruleand i saw the fifty million, i said to myself, well,that's us two mergers from now whether we're the survivingor the merged credit union. at the end of last year,there were 1,240 credit unions between 20 and 50 millionin assets. i think all of thoseshould be concerned about the impactof this rule.

just last month, our board washaving a strategic discussion on the subject of mergers. under what conditionswould we want to be a surviving partner? under what conditions would weconsider a merger offer? and under what conditionswould we walk away from one? and one of the board membersdid bring up, well,if this rule's in place and it would put us overthe fifty million,

we'd have to seriously considerwalking away from it. (chairman matz)and why is that? because of a possiblenegative impact. (chairman matz)-but you're exempt from it.-you would have to look at that. (chairman matz)but you're exempt from it. i'm saying if we wereto do a merger that put us overthe fifty million in assets, then we would haveto consider that. and going back to my pointearlier

about the rate of mergersin this country, the 1,240 credit unions, i think there's a good chancea substantial number of them over the next...three to ten years, whatever timeframeyou want to pick, a substantial numberof those credit unions will be merged or will grow towhere this would apply to them. i know you receivedover 2,000 comment letters and i know that's you'vesaid repeatedly today

that there are going to bemajor changes in this, and that's good. i would like for youto reconsider the definitionof the complex rule. (chairman matz)we are going to. all right. and then my last point, i started in this businessas a loan officer, so i have a lot of experiencein saying no.

i'm also a parent,which gives me a lot of experiencesaying no. i have to say, though,that i have a tendency to, when i say no with the kids,it means no. my wife is a little bit wiser and she will occasionallycome to me and say, "yes, but you're wrong." so my no becomes a yes. so i would ask you to possiblyreconsider your repeated noes

in that context. (chairman matz)mm-hm. mm-hm. i, too, am a parent,but when i say no, i mean no. oh, i'm reminded thatwe have ten minutes left, so we probably only have timefor a few more questions. hello, thank you. my name's matt wohlers. i'm with blackhawkcredit union,

janesville, wisconsin. my question is for mr. worth. i'm going to quotefrom your youtube video from june of this year, the one that's entitled"ncua interest rate risk." there's a sentence in there: "today,both economic fundamentals and federal reserve guidance strongly pointto a rising rate environment.

in fact, the federal reserveboard members and bank presidents believe short-term interest rateswill rise dramatically over the next few years." so i took note of the federalreserve guidance part, the word "strongly,""in fact," and "dramatically." and then of coursei went to investigate the actualfederal reserve guidance that they publishafter every meeting.

and this sentence is included in the last three or fourfederal reserve guidences, and some variation of itgoes back to maybe december. the sentence is this: "the committeecurrently anticipates that even afteremployment inflation neared mandate-consistentlevels, economic conditions may,for some time, warrant keeping the targetfederal funds rate below levels

the committee views as normalin the long run." okay, so my question is, would you please compareand contrast your statement and the federal reserveguidance statement, and identify any differencesin the tone, the tenor, the content,and why there is a difference, if you think there is one,thank you. (john worth)i like the essay question style,that's good. what i woulddraw your attention to

is with each release, the fed actually puts outa survey of the policymakingcommittee as to where they thinkinterest rates are going to bein the future. i was going to seeif we had a graph with us; i don't have it with me. but you can actually go see, and i'd be happyto send it to you,

you can go plot out wherethe median interest rate is for the short-term ratesas defined by the survey of their forecasts. and you'll see thatunder that, it actually looks a lotlike the forward curve the financial marketsare pricing in today with a pretty steepupward tick over the nexttwo to three years. and i think it's helpfulto compare that,

compare and contrast thatto the formal guidance, which, as you know, there'sa lot of parsing of words, very careful. even at a hundred basis points, which would be a dramatic risein short-term rates, that would still putshort-term rates well below where they've beenhistorically. even at 200 percent,200 basis point rise, we'd still be about 130,150 basis points below

where short-term rateshave been historically. so there's actually reallyno conflict between those two. we can see from what the fed issaying in its survey that the members ofthe policymaking committee are forecasting, and obviously forecastsdon't always come true, are forecasting higher ratesin the near future, but those rates can alsobe well below what rates havehistorically been.

so both things can be true, and i really would call yourattention to their survey, and i'm glad you brought it up, because it really is indicativeof their view is that we will be cominginto a rising rate environment. again, those are forecasts. forecasts don't alwayscome true. and as larry mentioned before, the goal of our interest raterisk policymaking

is really that credit unions have safe and soundbalance sheets under a wide varietyof interest rates because none of uscan tell the future. i appreciate the question,it's a good question. (chairman matz)i think this isour last question. carl sorgatzwith great lakes credit union in north chicago, illinois. chairman matz, you've commenteda couple of times

about the comparability issue relative to the developmentof the rbc proposal, and more specifically,i think larry's addressed the risk rating percentagesas being the baseline factor for determiningat least the starting point of where those percentageswould be. my question is,given the fact of, again, the difference betweencredit unions and banks and the performance level overthe recent economic downturn

and how wellwe outperformed the banks, is there consideration, as you go backand review the proposal, that it will not simply bethat this is the floor, in other words, baseline,floors, whatever fdic has, that we won't go below that, but will you takeinto consideration looking at those risk ratingspercentages at a level that could bemore indicative of the industry

and the industry risk factors so that it's not just relativelybased on what the fdic has, and that's considered the floor,and we build from there. and i just have a follow-upcomment after that. (larry fazio)i want to be clear. when i saidwe started with the fdic weightsas a baseline, we varied in both directionsfrom those. for example,consumer loans we've lowered,

because credit unions did havea better performance. so we don't approach itas the fdic is the floor. it's the starting point, and we vary from there --both directions -- when we have good cause to. and there's a couple of areaswhere we modeled it off of the approachto the asset class and the risk weightingoff of the fdic's approach, but pick the lowest.

for example,in equities, cusos -- i know this is one of the onesthat comes up a lot -- cuso investments. as an equity investment, that is the lowest possibleweight you could get under the fdic rule:250. and you have to go throughall of this convoluted math to figure out whereyour equity investment falls. cusos, onan apples-to-apples basis,

would probably bemore like 400 percent under the fdic framework. but they had this catch-allthat says "if you can't fit it into anyof these buckets, use 250." and we thought,"well, we'll just keep it simple and use 250." so we picked the lowest of thefdic framework in that example. now there's other arguments,i know, that can be made about rethinkingabout cuso investments,

and we're looking at those. especially, can we makedistinctions between types of cusos,and things like that. but generally speaking, we didtry to favor credit unions where it made sense to. okay, my follow-up isjust simply, again -- it's been stated before -- but when we look atthe leverage capital ratio that credit unions have,versus banks,

and we look at the abilityof banks to go out and raise outside capital, and then we look at certainly the lower basel requirementspotentially -- at least onthe initial proposal, which is why i brought upthe idea about looking at thisin terms of credit unions as differentiation -- again, it certainly presentsthat question

to a lot of credit unions,i think, that i've heard the discussionabout consideration of other charter offersor opportunities. and i'd hateto see that happen because of the proposalthat might come out that really would push morecredit unions in that direction, so hopefully you'll take thattotally under consideration. before we wind up, board member fryzel,

would you like to saya few comments? (board member fryzel)yeah, thanks, chairman. thank you allfor coming out today. i know could have spent the daya lot better serving your membersor being outside, but i thinkwhile you're here with us, you gave us a good opportunity to hear a lot ofdifferent viewpoints and a lot of issues raised,

and i think very strongly you statedwhat your feelings are on the risk-based capital rule. like the chairman said,there are going to be changes, and i think there aregoing to be a lot more changes than you can anticipate, but we're all working towardsa rule that is going to beboth helpful to the industry and to the regulatoras well.

to the individuals who stood upfrom each of the tables and said whattheir questions were and expressed their feelings,i commend you. that's kind of hard to dosometimes before your peers and before the regulator. and to those individuals, and especially the gentlemanwho raised the corporate issue, if you would stop bythe rear door on your way out and pick up your new camelrevised ratings,

i'd be very happy. thank you againfor all being here. (chairman matz)board member metsger? (board member metsger)thank you, madame chairman. again, to reiterate whatboard member fryzel said, i do appreciate thatyou've taken the time to come here and spendthis afternoon with us on what is a gorgeous dayin chicago, i didn't knowyou had days like this.

(board member fryzel)every day is gorgeousin chicago. (board member metsger)absolutely, wonderful dayto be outside, so we really do appreciateand value the information you've provided today. i recognize quitea few people in the room, various statesthat i've been visiting, and see you here again today. and as the chairmanhas mentioned, we're going throughall of your letters,

and when i meet with a group,i go through every letter from the people who arescheduled to be with me to make sure that i amcurrent with their thoughts, and i am giving themserious consideration. i just wanted to make-- i guess this isthe old journalist in me, i just have a few commentsi want to make on some of the thingswe heard today, just so you understandwhere we're coming from

as we're tryingto get through this. paul from texas, you said somethingthat i haven't heard, although i've been talking aboutit internally at the agency and i thoughtit was very important, and larry just reiterated itat the end here, and that iswhen you mentioned that we already havean rbc, which really confused me,

i've been talking to peopleas if this is new. i think part ofthe problem is that we haven't reallyconveyed the fact that we're proposing revisingsome risk weights in a rule you already have, and it's part 702of our rules, and i would ask youto look at that. but in talkingto credit unions, i'm amazed athow many don't know

that we have a rbc rulein place now and we're tryingto make changes to it and modernize it, and we need to do that and we need to do it well. but this is not new. we're trying to changehow we risk weight issues. and in asking why a lot ofpeople don't seem to realize that we have a rbc ratio inaddition to your leverage ratio

i realize it's notflashing out at you like ourrisk-based calculator. and rbc is reported backin terms of dollars rather than percentages, so you'd actually haveto do the math, and from what i understand, about the only timethat you might know what your rbc currently is is if an examiner tells youthat you're below it.

and so keep that in mind, and if you look at part 702, you'll seethese risk weights there, you'll see concentration limitsin your mortgages. you'll see interest rate riskin your investments. they all exist now. and what we're looking at isare those the right ones, how might we change them? i know withthe education credit union,

you mentioned you are biginto first mortgages, and under the proposed rule, non-delinquent 30-yearfixed-rate mortgages only require half as muchcapital as is required under your current rbc. it actually cutsthe capital requirement in half. and even if you concentrationis greater than 35 percent, your capital requirementis still a third less than what you currentlyhave to maintain,

and you have had tomaintain for 13 years. so i think partof our problem is that we're notcommunicating well what that is,but i think if you take a look atwhere everything is, we can try to find the rightbalance to do that. the same thing is truewith investments. we've triedto look at those in terms of their weightedaverage life

under the current rule, and in the proposed ruleas well. but under the current rule, for example, if your investmentsare zero to one year, one to three,three to five, your capital requirementis a lot greater today and it has beenfor 13 years, than it is and under the proposed rule,it's only at the upper end,

if you're really going longand betting the farm going long, then capital could bean issue. so keep in mind, please,as we look at this is that when people say,"gee, we have to manage now to our leverage ratioand the rbc." well, you've been doing thatfor 13 years, we haven't asked youto do that math, we've kind of done thatfor you at ncua. but we do want to getthe new risk weights right.

but i wanted to clarifythat this is an existing rule that we're trying to tweak, and i accept the factthat we haven't done a good jobof communicating that. the second thingi wanted to point out, i thought it was a good point. todd from iowa, you talked about that corvette. by the way, i love that newcorvette that's coming out.

i can't afford one, but thatnew 2014 corvette is great. but you made a comment, too, about consideringyour experience and how well you're managingthings versus others, and that's a good point. as regulators,and compared with fdic, we have a little differentproblem with that, and we're going to tryto remedy that. and larry pointed that out, too,

how do we figureyour experience in in terms of ourrisk weightings? and that is important. it's something of concernfor me. but the other fact is thatat the end of the day when we figurewe're trying to protect the share insurance fund,we have to make sure that the capital'sthere within the system so that you're notwriting checks

to cover someoneelse's mistake. but there are differencesbetween credit unions and banks, and one is that,under our cooperative system, under the statute,you all pay the same amountof money for your insurance regardless of your risk. in the fdic,assessments for the insurance fundare based on your risk, the risk that you haveon your portfolio.

but in our system someonewho's really out there taking a lot of riskdoesn't pay a dime more for the insurance than you,who are managing it well. and we can't control that. the best thing we can dois make sure that we understand the risk and we have some kindof rev. limiter on that, because you're all goingto be charged the same. it's not like that corvette.

the guy that drivesthe corvette or the guy that drivesthe volvo are going to payexactly the same premium, and we have to be consciousof that. and the final thing,well, actually, and that same pointi wanted to say is that it is importantif we can find a way to take long-termmanagement experience with products and servicesinto account,

i do believe that's somethingvery, very valuable. you know, bernie here,with boston firefighters. i had to lookat his numbers again. i told berniei was absolutely amazed. his delinquency rate, .04 on these loans. i was looking at it,i said, "no, this has got to bea mistake." there's only one roguefirefighter out there,

who didn't pay a loan back? that's impossible. and yet, it was. everybody pays him back. i don't know,i was telling bernie, "maybe it's kind of the waythey work." but yeah, that's somethingwe need to consider. you've got a long historyof low loan delinquency. we have to figure out howto take that into account.

the final thing, and we talk about bufferand everything else, at the end of the day, you've got 6,400 credit unions. this isn't the new eralittle league, okay? not everybody wins. our goal should not be to makeeverybody get a gold star. there is a differencebetween credit union one and credit unionsixty-four hundred,

and we need to protectyour interests and the interests ofthe ninety-six million credit union members thathave a safe and sound system. and the fact that ourcurrent rbc system indicates there's only two credit unionsthat are undercapitalized, i think, as your experience, especially as ceos know,that's impossible. you know there's a lotof other credit unions out there that are in seriouscapital trouble.

so our system needsto be adjusted, not to be punitivebut to be accurate and to be fairand to make sure that we are doing our job --prudentially -- to make sure that we havea safe and sound system. mike and debbie and i, every month we have mergerscross our desks. sometimes months or years lateryou read about them, and you've probably participatedin some, you've probably

helped take some of thosetrouble credit unions in. well, all those mergersaren't all because people thought that it would be funto get together. some of them are becausethey didn't have the capital and they werein serious trouble. there's a lot morethan two credit unions that are in this country that probably needto add a little capital. we're trying to finda good system.

so i just wanted to put a littlesense of reality in there. having been on a credit unionboard for a long time and a legislatorleading credit union efforts, i appreciatewhat you do, and the overwhelming numberof credit unions and credit union assetsare a stellar example of the financial servicesyou are providing in this country. but we never make rulesfor you.

we make rulesfor the outliers to make sure thatthey look to your standard, and that's whatwe're trying to create. so, sorry for the long wind, but i wanted to give somefeedback from what i heard. we're going to work very,very hard to get this right and to ensure thatthe vast majority of all of you and your membersare not negatively impacted but in fact benefittedby a stronger system.

i want to thank you allfor coming. these listening sessionsare always very helpful to us because we always come backwith new ideas about things that we might nothave messaged well like maybe looking at ourtraining and how we're doing it and whether it's effective, looking at a new definitionof complex, and hearing from you againabout some of the issues with risk-based capital.

but i hope,on the other hand, that among the takeawaysthat you have is, one, that we do listen, and two, i mean,i feel a little frustrated because i don't knowhow many times we've said both in printand in speeches that the seven billion dollarnumber of cost is simply wrong; that all credit unions will notbe required to add a buffer; that we are going to changemany of the risk weightings;

that we are going to extendthe implementation period. so i hope if nothing else, that that's a takeawaythat you bring with you and share that withyour colleagues so that we relievesome of the angst in the system, because i think thatthe angst in the system is really far greaterthan it needs to be. and what i find is thatevery time i go up and talk to a memberof congress,

which seems to be prettyregularly these days, and explainwhat we're doing and why, and give themthe actual effect, they always say,"okay, we get it." and so i hope thatyou get it as well and understand thatthis is not punitive, that we are not tryingto put anyone out of business, that to the extentsome of the ag lenders and taxi medallion lenders,

and those who were grandfatheredin as member business lenders feel like they would not surviveunder this rule, we hear that. we will make a change. we do not intendto put you out of business. so i hope thatthese are messages that you take away with you, that we have heard your message, that we will make changes. and as board member metsgersaid,

everyone is not goingto be happy with this. and what i've toldmembers of congress when they've said to me, "well, the main thingwe care about is the implementation period," and i said, "i agree with that,we're going to extend it. but i guarantee,no matter how long we extend it, it will never be long enough." and so we understand that,

and our goal as regulators is toprovide a safe and sound system. it's not to providea consensus, it's not a vote, and it's not to makeeverybody happy, but it is to providea safe and sound system so that ten and twenty yearsfrom now, your credit union is stillaround serving its members. so we want to hear from you about thingsthat we can do better.

it's always helpful,we are always open to that. if you can't reach us, and i think you haveample opportunities, particularly through our staffsor through us directly, you have your examiners,you have ses, you have your rds. we always wantto hear from you about thingsthat are burdening you that we can change.

some of the best changeswe've made in the past few years have been changesthat have come from you and from your board members. and i say that sincerelybecause there are things that i wouldn'thave known about if i hadn't gone out and spokento you and your board members, because they're things about howyou do your day-to-day business, and some of those thingswe actually can change. so we appreciateyour being here,

we really appreciatehow hard you work to serve your members, and we certainly want to keepyou in business doing that. so thank you again, and i hope you havesafe travels back.