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H.R. 1042—THE NET WORTH

AMENDMENT FOR CREDIT UNIONS ACT

HEARING

BEFORE THE

SUBCOMMITTEE ON 

FINANCIAL INSTITUTIONS AND CONSUMER CREDIT

OF THE

COMMITTEE ON FINANCIAL SERVICES

U.S. HOUSE OF REPRESENTATIVES

ONE HUNDRED NINTH CONGRESS

SECOND SESSION

APRIL 13, 2005

Printed for the use of the Committee on Financial Services

Serial No. 109–16

(

(II)

HOUSE COMMITTEE ON FINANCIAL SERVICES 

MICHAEL G. OXLEY, Ohio, Chairman

JAMES A. LEACH, Iowa 

RICHARD H. BAKER, Louisiana 

DEBORAH PRYCE, Ohio 

SPENCER BACHUS, Alabama 

MICHAEL N. CASTLE, Delaware 

PETER T. KING, New York 

EDWARD R. ROYCE, California 

FRANK D. LUCAS, Oklahoma 

ROBERT W. NEY, Ohio 

SUE W. KELLY, New York, Vice Chair 

RON PAUL, Texas 

PAUL E. GILLMOR, Ohio 

JIM RYUN, Kansas 

STEVEN C. LATOURETTE, Ohio 

DONALD A. MANZULLO, Illinois 

WALTER B. JONES, JR., North Carolina 

JUDY BIGGERT, Illinois 

CHRISTOPHER SHAYS, Connecticut 

VITO FOSSELLA, New York 

GARY G. MILLER, California 

PATRICK J. TIBERI, Ohio 

MARK R. KENNEDY, Minnesota 

TOM FEENEY, Florida 

JEB HENSARLING, Texas 

SCOTT GARRETT, New Jersey 

GINNY BROWN-WAITE, Florida 

J. GRESHAM BARRETT, South Carolina 

KATHERINE HARRIS, Florida 

RICK RENZI, Arizona 

JIM GERLACH, Pennsylvania 

STEVAN PEARCE, New Mexico 

RANDY NEUGEBAUER, Texas 

TOM PRICE, Georgia 

MICHAEL G. FITZPATRICK, Pennsylvania 

GEOFF DAVIS, Kentucky 

PATRICK T. MCHENRY, North Carolina 

BARNEY FRANK, Massachusetts 

PAUL E. KANJORSKI, Pennsylvania 

MAXINE WATERS, California 

CAROLYN B. MALONEY, New York 

LUIS V. GUTIERREZ, Illinois 

NYDIA M. VELA ́ ZQUEZ, New York 

MELVIN L. WATT, North Carolina 

GARY L. ACKERMAN, New York 

DARLENE HOOLEY, Oregon 

JULIA CARSON, Indiana 

BRAD SHERMAN, California 

GREGORY W. MEEKS, New York 

BARBARA LEE, California 

DENNIS MOORE, Kansas 

MICHAEL E. CAPUANO, Massachusetts 

HAROLD E. FORD, JR., Tennessee 

RUBE ́ N HINOJOSA, Texas 

JOSEPH CROWLEY, New York 

WM. LACY CLAY, Missouri 

STEVE ISRAEL, New York 

CAROLYN MCCARTHY, New York 

JOE BACA, California 

JIM MATHESON, Utah 

STEPHEN F. LYNCH, Massachusetts 

BRAD MILLER, North Carolina 

DAVID SCOTT, Georgia 

ARTUR DAVIS, Alabama 

AL GREEN, Texas 

EMANUEL CLEAVER, Missouri 

MELISSA L. BEAN, Illinois 

DEBBIE WASSERMAN SCHULTZ, Florida 

GWEN MOORE, Wisconsin, 

BERNARD SANDERS, Vermont

Robert U. Foster, III, Staff Director 

(III)

SUBCOMMITTEE ON FINANCIAL INSTITUTIONS AND CONSUMER CREDIT

SPENCER BACHUS, Alabama, Chairman

WALTER B. JONES, JR., North Carolina, 

Vice Chairman 

RICHARD H. BAKER, Louisiana 

MICHAEL N. CASTLE, Delaware 

EDWARD R. ROYCE, California 

FRANK D. LUCAS, Oklahoma 

SUE W. KELLY, New York 

RON PAUL, Texas 

PAUL E. GILLMOR, Ohio 

JIM RYUN, Kansas 

STEVEN C. LATOURETTE, Ohio 

JUDY BIGGERT, Illinois 

VITO FOSSELLA, New York 

GARY G. MILLER, California 

PATRICK J. TIBERI, Ohio 

TOM FEENEY, Florida 

JEB HENSARLING, Texas 

SCOTT GARRETT, New Jersey 

GINNY BROWN-WAITE, Florida 

J. GRESHAM BARRETT, South Carolina 

RICK RENZI, Arizona 

STEVAN PEARCE, New Mexico 

RANDY NEUGEBAUER, Texas 

TOM PRICE, Georgia 

PATRICK T. MCHENRY, North Carolina 

MICHAEL G. OXLEY, Ohio 

BERNARD SANDERS, Vermont 

CAROLYN B. MALONEY, New York 

MELVIN L. WATT, North Carolina 

GARY L. ACKERMAN, New York 

BRAD SHERMAN, California 

GREGORY W. MEEKS, New York 

LUIS V. GUTIERREZ, Illinois 

DENNIS MOORE, Kansas 

PAUL E. KANJORSKI, Pennsylvania 

MAXINE WATERS, California 

DARLENE HOOLEY, Oregon 

JULIA CARSON, Indiana 

HAROLD E. FORD, JR., Tennessee 

RUBE ́ N HINOJOSA, Texas 

JOSEPH CROWLEY, New York 

STEVE ISRAEL, New York 

CAROLYN MCCARTHY, New York 

JOE BACA, California 

AL GREEN, Texas 

GWEN MOORE, Wisconsin 

WM. LACY CLAY, Missouri 

JIM MATHESON, Utah 

BARNEY FRANK, Massachusetts 

(V)

C O N T E N T S 

Page 

Hearing held on: 

April 13, 2005 ................................................................................................... 1

Appendix: 

April 13, 2005 ................................................................................................... 13

WITNESSES 

WEDNESDAY, APRIL 13, 2005

Herz, Robert H., Chairman, Financial Accounting Standards Board ................. 3

Johnson, Hon. JoAnn, Chairman, National Credit Union Administration ......... 1

Reynolds, George A., Senior Deputy Commissioner, Georgia Department of 

Banking and Finance, representing the National Association of State Credit 

Union Supervisors ................................................................................................ 5

APPENDIX 

Prepared statements: 

Oxley, Hon. Michael G. .................................................................................... 14

Bachus, Hon. Spencer ...................................................................................... 16

Royce, Hon. Edward R. .................................................................................... 19

Herz, Robert H. ................................................................................................. 20

Johnson, Hon. JoAnn ....................................................................................... 66

Reynolds, George A. ......................................................................................... 71

ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD

National Association of Federal Credit Unions, prepared statement ................. 75

(1)

H.R. 1042—THE NET WORTH 

AMENDMENT FOR CREDIT UNIONS ACT 

Wednesday, April 13, 2005

U.S. HOUSE OF REPRESENTATIVES, 

SUBCOMMITTEE ON FINANCIAL INSTITUTIONS

AND CONSUMER CREDIT, 

COMMITTEE ON FINANCIAL SERVICES, 

Washington, D.C. 

The subcommittee met, pursuant to call, at 2:28 p.m., in Room 

2128, Rayburn House Office Building, Hon. Spencer Bachus [chairman of the subcommittee] presiding. 

Present: Representatives Bachus, Feeney, Hensarling, Sanders, 

Sherman, Meeks, and Green. 

Chairman BACHUS. [Presiding.] The committee will come to 

order. 

Today we are here to have a hearing on H.R. 1042, the Net 

Worth Amendment for Credit Unions Act. 

I am going to go ahead and depart with opening statements and 

move right to our panel because of the time. 

At this time, Ms. Johnson, we will just hear from you, and we 

will go from you to Mr. Herz and then Mr. Reynolds. 

So, welcome to the committee. 

STATEMENT OF HON. JOANN JOHNSON, CHAIRMAN, 

NATIONAL CREDIT UNION ADMINISTRATION 

Ms. JOHNSON. Chairman Bachus and Ranking Member Sanders 

and members of the subcommittee, I appreciate your invitation to 

appear here today to speak on behalf of the National Credit Union 

Administration to support the important legislation you have introduce: the Net Worth Amendment for Credit Unions Act. 

NCUA anticipates that the Financial Accounting Standards 

Board will act in 2005 to lift the current deferral of the acquisition 

method of accounting for mergers by credit unions, thereby eliminating the pooling method and requiring the acquisition method beginning in 2006. 

When this change to accounting rules is implemented, it will require that in a merger, net assets on a fair value basis of the merging credit union as a whole, rather than retained earnings, be carried over as acquired equity, a term not recognized by the Federal 

Credit Union Act. 

This FASB policy has been in place since mid-2001 for most business combinations, and the delay by FASB in implementing it for 

credit unions has allowed all of us to explore how credit unions 

2

could conform to the new financial reporting standards. H.R. 1042 

is a good solution. 

Without the changes to the Federal Credit Union Act proposed 

by H.R. 1042, only retained earnings of the continuing credit union 

will count as net worth after a merger. 

This result would seriously reduce the post-merger net worth 

ratio of a federally insured credit union, because this ratio is the 

retained earnings of only the continuing credit union stated as a 

percentage of the combined assets of the two institutions. 

A lower net worth ratio has adverse implications under the statutory Prompt Corrective Action regulation. This result will discourage voluntary mergers, and on occasion make NCUA-assisted 

mergers more difficult and costly to the National Credit Union 

Share Insurance Fund. 

Without a remedy, an important NCUA tool for reducing costs 

and managing the fund in the public interest will be lost. 

This agency, and the credit unions we serve, are grateful for the 

analysis and time you are devoting to this matter and for bringing 

us quickly to the point of advancing the narrow and specific 

changes to the Federal Credit Union Act needed to preserve credit 

union capital in mergers that take place after FASB fully implements its policy for credit unions. 

FASB’s proposed change to accounting rules, along with an 

amendment to the Federal Credit Union Act, that allows NCUA to 

recognize ‘‘any amounts that were previously retained earnings of 

any other credit union’’ will, I believe, produce results consistent 

with the goal of FASB and comparable to results achieved for other 

business combinations. 

The result preserves the capital accumulated by both institutions 

and, importantly, is less likely to place the combined institution 

into a lower PCA category. 

My written statement describes the consequences for federally insured credit unions, were they to fall into lower PCA categories as 

a result of a merger, that does not recognize the retained earnings 

of the merger credit union. 

A merger normally has a necessary or beneficial impact, but it 

may cause adverse consequences if the retained earnings of the 

merged credit union are lost—an unexpected and undesirable consequence for credit unions, their members and NCUA. 

The management and board of directors of the continuing credit 

union considering a merger will give pause when faced with this 

result, as will NCUA. 

The number of mergers—around 300 a year—has been relatively 

constant for a number of years, so the significance of both the potential problem and the significance of the solution offered by H.R. 

1042 is quite real. 

If FASB’s statement of financial accounting standard 141 had 

been applied to federally insured credit unions in 2004, without the 

statutory adjustment provided by H.R. 1042, some $300 million in 

credit union capital might have been lost for PCA purposes. 

The Net Worth Amendment for Credit Unions Act clearly and appropriately preserves the only source of hard earned credit union 

capital when mergers of institutions are accomplished: retained 

earnings. 

3

Thank you, Mr. Chairman, Ranking Member Sanders and the 

many co-sponsors for introducing H.R. 1042, for holding this hearing today and acting to preserve the capital of federally insured 

credit union. 

[The prepared statement of Hon. JoAnn Johnson can be found on 

page 66 in the appendix.] 

Chairman BACHUS. Thank you. 

Mr. Herz, we welcome you. 

STATEMENT OF ROBERT HERZ, CHAIRMAN, FINANCIAL 

ACCOUNTING STANDARDS BOARD 

Mr. HERZ. Thank you, Chairman Bachus, Ranking Member 

Sanders and all the members of the subcommittee. 

I am Bob Herz, chairman of the Financial Accounting Standards 

Board, and I am very pleased to appear here today. And I want to 

thank you for inviting me to participate at an important and I 

think timely hearing. 

I have brief prepared remarks and would respectfully request 

that the full text of my testimony and all supporting materials be 

entered into the public record. 

Chairman BACHUS. Without objection. 

Mr. HERZ. Thank you. 

Chairman BACHUS. And that will be for all our panelists, if you 

have prepared remarks. 

Mr. HERZ. The FSAB is an independent, private-sector organization. Our ability to conduct our work in a systematic, thorough and 

unbiased manner is fundamental to achieving our mission, that is, 

to establish and improve general-purpose standards of financial accounting and reporting for both public and private enterprises. 

Those standards are essential to the growth and stability of the 

U.S. economy, because creditors, investors and other users of financial reports rely heavily on credible, transparent, comparable and 

unbiased financial information to make economic decisions. 

And because the actions of the FASB affect so many organizations, our decision-making process must be open, it must be thorough, and it must be as objective as possible. 

Therefore, our rules of procedure require an extensive and public 

due process. 

That process involves public meetings, public roundtables, field 

visits to affected parties, liaison meetings with interested parties, 

consultation with many advisory councils, and exposure of our proposed standards to external scrutiny and public comment. 

In June of 2001, after several years of extensive public due process, the FASB issued a standard to improve the accounting and financial reporting for business combinations. 

That standard, supported by many users, auditors and preparers 

of financial reports, provides that all business combinations be accounted for by a signal method: the purchase method. 

The standard thus eliminated an existing alternative method of 

accounting for business combinations, the so-called pooling-of-interest method. 

But in developing the standard, the board decided to defer its effective date for combinations between credit unions and other mutual enterprises. 

4

The board concluded that a deferral was appropriate so that we 

could consider further the need for additional interpretive guidance 

explaining such things as how the purchase method might be applied by those enterprises. 

Since the issuance of the standard, the board has continued to 

specifically discuss combinations between mutual enterprises, including credit unions, at eight public board meetings. 

In connection with those meetings, individual board members 

and staff sought input on the issue from many representatives of 

credit unions and other mutual enterprises at public and private 

meetings and at a number of conferences across the country. 

The board has tentatively reaffirmed the conclusion reached in 

our 2001 standard on business combinations that unions between 

credit unions and other mutual enterprises should be accounted for 

as acquisitions of businesses under the purchase method, consistent with the accounting for such transactions applied by all 

other types of business enterprises, including all other depository 

and lending institutions. 

In addition, the board has developed proposed changes to improve the procedures for applying the purchase method, which includes additional interpretive guidance to assist credit unions and 

other mutual enterprises in applying the purchase method. 

The board plans to include these tentative decisions for mutual 

enterprises and credit unions, together with some other tentative 

decisions on applying the purchase method, in a proposal for public 

comment. 

Right now we expect that proposal to be issued for comment by 

the end of June this year. 

Following the comment period, the board will, at public meetings 

over a number of months, carefully consider the comments received 

and all other input from credit unions and other enterprises in response to the proposal. 

As with virtually all of our projects, these public redeliberations 

will most likely result in a number of changes to clarify and hopefully improve the proposal. 

And only after carefully evaluating the key issues raised and 

carefully considering the input received in response to a proposal 

will our board consider whether or not to issue a final standard. 

We have reviewed the provisions of H.R. 1042, the Net Worth 

Amendment For Credit Unions Act. Consistent with our mission 

and expertise, we do not take positions on proposed legislation or 

other public policy initiatives, except in those limited circumstances 

when those initiatives would impair the mission and independence 

of the FASB. 

However, we do have a couple of observations. 

First, we would observe that the provisions of H.R. 1042 appear 

to revise the definition of net worth as defined under the Federal 

Credit Union Act. 

The proposed revision of that definition appears to resolve a potential regulatory issue that many in the credit union industry 

have said if not resolved would have adverse consequences for 

mergers of credit unions. 

5

Secondly, we also observe that the provisions of H.R. 1042 do not 

appear to establish or change general-purpose standards of financial accounting and reporting, i.e., what we are responsible for. 

We therefore very much appreciate, Mr. Chairman, your leadership in addressing this important matter in such a thoughtful and 

appropriate way. 

Thank you. 

[The prepared statement of Robert H. Herz can be found on page 

20 in the appendix.] 

Chairman BACHUS. Thank you. 

Mr. Reynolds? 

STATEMENT OF GEORGE REYNOLDS, SENIOR DEPUTY COMMISSIONER, GEORGIA DEPARTMENT OF BANKING AND FINANCE, REPRESENTING THE NATIONAL ASSOCIATION OF 

STATE CREDIT UNION SUPERVISORS 

Mr. REYNOLDS. Thank you, Chairman Bachus and members of 

the subcommittee. 

I am George Reynolds, Senior Deputy Commissioner for the 

Georgia Department of Banking and Finance. I appear today on behalf of the National Association of State Credit Union Supervisors, 

NASCUS, the professional state credit union regulators association. 

In addition to being a state regulator, I am a certified public accountant, allowing me to study and understand the financial standard board, FASB’s recommendations and their impact on mutuals. 

My testimony today is to urge your support of H.R. 1042, the Net 

Worth Amendment for Credit Unions Act. This act amends the 

Federal Credit Union Act to clarify the definition of net worth for 

purposes of corrective action. 

While this bill is extremely brief, I cannot overemphasize the 

criticality of this change to the safety and soundness of credit 

unions. 

The Financial Accounting Standards Board is making changes to 

accounting standards for business combinations between mutual 

enterprises, which includes credit unions. 

The result of these changes is two-fold: First, the pooling-accounting method will no longer be an acceptable method of accounting for business combinations; second, purchase accounting will 

now be used almost exclusively for business combinations. 

My brief time before the subcommittee does not permit a detailed 

explanation of purchase accounting versus pooling accounting. I do, 

however, want to outline the serious, unintended consequences of 

this change. 

Without the proposed statutory amendment, a merger transaction between two credit unions would not allow the capital of the 

merging credit union to be added to the retained earnings of the 

surviving credit union. This will discourage mergers recommended 

by state regulators. 

Mergers are a safety and soundness tool regulators use to protect 

funds deposited by American consumers and to preserve the National Credit Union Share Insurance Fund. 

Our department and other state departments regularly use mergers to combine weak or troubled financial institutions with larger 

6

and stronger financial institutions, providing a win-win for both 

American consumers and the insurance fund. 

Without the ability to combine the capital of the two institutions, 

in addition to the assets and liabilities acquired on the balance 

sheet, there would be a serious disincentive to effect such mergers. 

This is particularly important in purchase accounting, which provides for reflecting assets and liabilities acquired at their fair market value. 

Marking the balance sheet to market, while not being able to include acquired capital, is a recipe for capital dilution. After a merger, such credit unions might find themselves in a prompt corrective 

action, PCA, category which would result in unintended mandatory 

regulatory actions. 

If a credit union could not be merged due to PCA concerns 

caused by the inability to add the capital of the merged credit 

union, then credit unions in weakened condition would be more 

likely to face liquidation or requests for NCUA financial assistance 

in merger transactions. 

An increase in liquidations would cause greater reputation risk, 

a severe loss of confidence for the credit union industry, greater 

losses to the deposit insurance fund, and increased costs to the industry and ultimately to consumers. 

Additionally, most credit unions have some deposits that exceed 

the deposit insurance limit. These members could face the prospect 

of losing these funds in a liquidation. 

Stated simply, this is a recipe for disaster. I never want credit 

unions that I regulate in Georgia, or the credit unions in any other 

state, to be confronted with this possibility. 

In addition to problem institutions, sound credit unions have 

sought merger partners in order to provide for greater efficiencies 

of scale, management succession and improved member services. 

We have been in a period of industry consolidation in credit 

unions during the past several years. Without these changes, credit 

unions that might otherwise be operating in a safe fashion might 

not be able to execute optimal business decisions which would benefit the credit union and its members. 

The impact of H.R. 1042 would be to revise the definition of net 

worth to include both the retained earnings of the surviving credit 

union and the capital of any other credit union with which the surviving credit union is combined. 

This would permit capital to be added across in a merger transaction and would serve to augment the capital position of the surviving credit union. This makes sound business sense and increases 

the safety and soundness of the credit union industry. 

In closing, this bill proactively addresses the safety and soundness concerns of state regulators. 

Chairman Bachus, on behalf of NASCUS, please accept our appreciation for your foresight and steadfastness in your commitment 

to introduce H.R. 1042. 

This concludes my remarks. NASCUS appreciates the opportunity to testify today. We welcome further participation and dialogue. And I will respond to any questions the subcommittee may 

have. 

Thank you. 

7

[The prepared statement of George A. Reynolds can be found on 

page 71 in the appendix.] 

Chairman BACHUS. I thank you. 

Mr. Hensarling? 

Mr. HENSARLING. Thank you, Mr. Chairman. 

This seems like a fairly straightforward matter, so I will be brief. 

Mr. Reynolds, you had some pretty strong language in your testimony, if I heard you correctly: ‘‘recipe for disaster’’ if we do not 

pass this, you ‘‘cannot overemphasize the criticality of this change.’’

So can you go into a little bit more detail as far as what you see 

what is going to happen in the state of Georgia if we do not pass 

this with respect to the safety and soundness of the credit unions 

that you help oversee, and ultimately what could happen to the 

members of credit unions in Georgia as far as the fees and services 

that are offered? 

Mr. REYNOLDS. Well, Congressman, we have been very successful 

in using merger as a tool to resolve problem credit unions without 

cost to the taxpayer and without disruption of services to members. 

I am concerned that without this change that the number of 

credit unions that are going to be willing to merge with troubled 

credit unions is going to be reduced significantly, that the credit 

unions that otherwise might be interested in acquiring or merging 

with a credit union to get their field of membership would have a 

serious disincentive without this change, because they could find 

themselves potentially in a PCA situation. 

So I do think it is a very serious issue. 

Mr. HENSARLING. Mr. Herz, just for a point of clarification, I 

think I heard you correctly, but is it your opinion that H.R. 1042 

does not dictate any general accounting standards or undermines 

FASB’s role? Is that what I think I heard you say? 

Mr. HERZ. Yes. I mean, from our perspective—I am certainly not 

an expert in what constitutes appropriate regulatory capital or capital adequacy. That is up to the regulators. But this would, as I understand it, just affect the regulatory capital computation rather 

than prescribing different GAAP. 

Mr. HENSARLING. Mr. Chairman, I think I have heard enough 

and I yield back. 

Chairman BACHUS. Thank you, I appreciate your participation. I 

think you asked the right questions. 

At this time I am going to recognize Mr. Sanders to not only—

I am going to have five minutes for questions, but an additional 

time for an opening statement. 

Mr. SANDERS. Well, thank you very much, Mr. Chairman. I will 

not take all of that time. I apologize for not being here earlier, but 

you know how it is sometimes on Capitol Hill. 

So I want to welcome all of our guests. 

And thank you, Mr. Chairman, for holding this important hearing. 

And as you know, Mr. Chairman, I am pleased to be an original 

co-sponsor of your Net Worth Amendment for Credit Unions Act, 

and I applaud you for doing what you are doing. 

This legislation I think, as we all know, is necessary to conform 

to new accounting practices for mergers of credit unions that the 

8

Financial Accounting Standards Board is scheduled to put into effect early next year. 

And I want to thank the National Association of Federal Credit 

Unions for bringing this issue to our attention, and I am glad that 

we could work together in crafting a bill with wide support. 

What I would just like to do is ask a few questions of our guests, 

if I might, Mr. Chairman. 

Let me start off with Chairwoman Johnson: My understanding is 

that NCUA has recently shared with some members a proposal to 

move to a risk-based PCA system for credit unions. 

Is this amendment also part of that proposal? Or would that proposal, if enacted, eliminate the need for this amendment? 

Ms. JOHNSON. Thank you, Congressman, for the question. 

No, they are two separate issues. The risk-based capital is a separate proposal. Both of the issues we are talking about do deal with 

prompt, corrective action but from different standpoints, so they 

are totally separate. 

Under the Federal Credit Union Act, there is only one way for 

insured credit unions to build capital, and that is through net 

worth. And a risk-based system would more accurately measure 

the correct levels of net worth based on a risk profile. 

What we are talking about here today is actually just concerning 

the merger of credit unions and how the capital is accumulated. 

Mr. SANDERS. Thank you very much. 

If I could ask Mr. Herz a question—and I just wanted to be sure 

that the record is clear: Is it your understanding that this bill 

would not in any way legislate accounting standards? 

Mr. HERZ. Yes. 

Mr. SANDERS. Now, I like that man. 

[Laughter.] 

That man is going to go far in Washington. You will be very popular. 

And, Mr. Herz, let me ask you another question: Do you have 

any update on when FASB will be issuing the proposed rule and/

or when the rule will become effective? Has there been any consideration to delaying the effective date so that this issue can be addressed by Congress? 

That will take more than one word, right? 

Mr. HERZ. Yes. 

We are due to issue the proposal, the exposure draft, the end of 

June. It will probably be out for comments for 90 to 100 days, that 

kind of period. We will probably hold some public roundtables. 

After that we will get in comment letters. And then, depending 

on the input we get, we go into what is called redeliberation: We 

go through the issues again based upon all the comments. 

Depending on how long that takes and what we hear, we may 

get out a final standard this year. It may take longer. 

This project, the larger project of which this is part—by the way, 

we have been doing the mutual part of this with the Canadians. 

They have had a big interest in this subject as well. 

And other parts of this are being done with the International Accounting Standards Board, whose standards are recognized in 

about 100 countries in the world. 

9

So if any of you have been involved in international logistics, you 

understand that sometimes getting everybody to agree on things 

can take some time. But it is worth it. 

If I had to hazard a guess—and this is just an absolute guess; 

it really depends on the input we get—I am not sure this will be 

effective at the beginning of January 2006. But I still support, very 

much support, this action, this bill, as I understand it, because it 

is kind of a win-win from my perspective. It allows the regulators 

to get on with their mission; it allows us to get on with our job. 

Mr. SANDERS. Okay, thank you very much. 

Thank you, Mr. Chairman. 

Chairman BACHUS. Thank you. 

Mr. Sherman? 

Mr. SHERMAN. Thank you. 

I believe most of the questions have been answered, but that will 

not get me to be overly brief. 

[Laughter.] 

It is good to know that this does not involve legislating accounting standards. I believe that you have indicated that this bill has 

nothing to do with secondary or alternative capital. 

Ms. JOHNSON. That is correct. 

Mr. SHERMAN. And it has nothing to do with risk-based capital. 

Ms. JOHNSON. That is correct. 

Mr. SHERMAN. You know, when I studied accounting, the net 

worth portion of the balance sheet was a combination of retained 

earnings, paid-in capital, donated capital and whatever capital or 

net worth one would acquire through the purchase-method merger. 

And if you are a creditor, if you are looking at the safety and 

soundness of an institution, it does not matter what flavor of net 

worth is there. 

And this bill solves that problem by indicating that retained 

earnings from the predecessor institution and retained earnings 

from the continuing institution are both capital available to meet 

needs. 

Can anybody think of a reason someone would advance to oppose 

this bill? 

Ms. JOHNSON. No, sir. 

Mr. SHERMAN. Next? You are shaking your head, but that will 

not make the record. 

Mr. REYNOLDS. No, absolutely not. 

Mr. SHERMAN. And third? 

Mr. HERZ. I am not a regulatory capital expert, but, again, from 

our point of view, since it does not interfere with our setting of generally accepted accounting principles, it seems like a good idea to 

me. 

Mr. SHERMAN. For the first time ever, I yield back before my 

time is completed. 

Chairman BACHUS. Thank you. 

We kind of want to set a record for the shortest hearing, and we 

have had absolutely nothing negative said about this legislation. 

I will just make two more points, and that is acquired equity—

and Chairman Herz, you said acquired equity is counted as net 

worth for generally accepted accounting practices. 

10

So what we are proposing doing is really bringing the credit 

union board, national credit union board, and the act that gives the 

definitions in line, as far as I am concerned, with generally accepted accounting principles and will actually allow them to follow that 

method. 

The second thing I will say is that I think this is particularly important in that, Ms. Johnson, Chairman Johnson, one of your duties, when you have an institution that for safety or soundness reasons needs to be acquired by a stronger institution, you have to go 

out and try to find a white knight. And unless we make this 

change, that is going to be much harder. 

Ms. JOHNSON. That is right. We perceive it could be much more 

difficult to find that necessary merger partner. 

Chairman BACHUS. And I am not sure that that has been said 

yet. But I think that from a standpoint of allowing you to fulfill 

your mission, this will make it, when we do have an institution 

that needs to be taken over by a stronger institution, this will 

make it easier to do that. 

Ms. JOHNSON. That is correct. 

Mr. Green? I am sorry, and I——

Mr. GREEN. Thank you, Mr. Chairman and Mr. Ranking Member. 

When you are a neophyte at the very end of the line, I understand. 

[Laughter.] 

I understand, and is it an——

Chairman BACHUS. And I apologize to you. I did not realize——

Mr. GREEN. Mr. Chairman, no apology necessary, thank you very 

much. 

And thank you to the members of the panel, because you have 

truly made this issue transpiculously clear for me. And I want to 

be as terse and laconic as possible, given that we are setting the 

record. 

But I do want you to know that I appreciate the comment that 

you made about the troubled credit unions, because I am concerned 

about the shareholders in those troubled credit unions. 

And if they cannot find a suitable partner, ultimately people pay 

the price, and these are people that have faces and families. 

We really appreciate the opportunity to eliminate what could be 

an injustice as it relates to the families that will suffer. 

So I thank you for the information that has been imparted. 

And I yield back the rest, remainder and balance of my time, Mr. 

Chairman. 

Chairman BACHUS. Thank you. 

This will conclude the hearing. 

We do have one or two things. 

First of all, I want to thank all the co-sponsors of this bill, including my Ranking Member, Mr. Sanders. I think this is a great 

example of a noncontroversial legislation that has bipartisan support and apparently no opposition. 

So I would hope that we can get this bill on the floor very quickly 

and pass it over to the Senate. 

11

Co-sponsors include Ms. Brown-Waite, Gutierrez, Kanjorski, 

LaTourette, McCarthy, Ney, Renzi, Sanders, Feeney, Hooley, Kelly, 

Maloney, Moore, Ron Paul, Mr. Royce and Mr. Sherman. 

It is not often that we have Mr. Sherman and Mr. Sanders and 

Mr. Paul on the same bill. 

[Laughter.] 

So this gives you an idea of exactly how much support there is 

for this legislation. 

I want to introduce, without objection, a letter from the National 

Association of Federal Credit Unions signed by Mr. Becker—I saw 

him earlier. I would like to submit this for the record, without objection. 

So at this time the hearing is closed. 

We appreciate your testimony. 

We are adjourned. 

[Whereupon, at 2:59 p.m., the subcommittee was adjourned.] 

(13)

A P P E N D I X

April 13, 2005

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