But first, let me give you a quick update on the broader economic environment.

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Mitchell Tate
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1 Remarks of Emil Henry, Assistant Secretary for Financial Institutions U.S. Department of the Treasury Before the National Association of Federal Credit Unions 9/19/2006 Washington, DC- Good morning and thank you for inviting me to speak to you here today. It is an honor to address the leaders of many of our nation's federal credit unions. You serve a vital role in the financial services industry, and for that I thank you. Here in Washington, D.C., and at the Treasury Department in particular, these are exciting times. As many of you know, the Treasury has recently undergone a change in leadership. In July, Henry Paulson was sworn in as Secretary of the Treasury. I can tell you, Secretary Paulson is a thoughtful, focused and energetic leader. He is always thinking, and he is always working-- even when he is sleeping. We are all excited that he has taken up the call of public service and he will make a major impact in his time here at the Department. Indeed, many of the issues that I will talk about today are issues in which Secretary Paulson has already taken an active interest. I would like to spend my time today on a variety of topics including Sarbanes-Oxley, GSE reform, financial literacy and education, a new $1 Coin initiative through the U.S. Mint, and of course, issues that I know are close to your hearts regulatory burden and National Credit Union Administration's (NCUA) prompt corrective action (PCA) proposal. But first, let me give you a quick update on the broader economic environment. General Economic Overview As we sit here today, I am pleased to say that our economy is robust on so many levels. The overwhelming evidence indicates our economy is firing on all cylinders. Quickly, let me give you some of the facts: 128,000 jobs were created in August, more than 1.7 million jobs have been created over the past 12 months, and more than 5.7 million jobs have been created since August Our economy has now added jobs for 36 straight months.

2 The unemployment rate is 4.7 percent below the average of each of the past three decades. Employment increased in 48 states over the past 12 months ending in July. Over the first half of this year, our economy grew at a strong 4.2 percent annual rate faster than any other major industrialized country. Productivity has grown a strong 2.4 percent over the past four quarters, well ahead of average productivity growth in the last three decades. Per capita disposable income has risen 9.2 percent in real terms since the beginning of Total wage and salary income increased in real terms at an annual rate of 3.3 percent in the second quarter. This follows an 11 percent surge in the previous three months. Manufacturing production has risen 5.6 percent over the past 12 months. Manufacturing productivity has grown 3.8 percent over the past four quarters. The numbers tell a compelling story. The president's policies--in particular the tax cuts of provided the foundation for a dramatic economic expansion Of note, tax revenues at the Treasury notwithstanding the lower marginal rates enacted during this administration are at the highest in the history of our country. Both individual and corporate tax receipts have been very strong this year. Total receipts for FY 2006 are up 11.7% percent over last year. Indeed, individual receipts over the April/May tax period were the second highest in history while corporate receipts on Friday's quarterly payment date again reached a record high. In fact, the Treasury Department announced yesterday that Friday's corporate tax receipts totaled $71.8 billion. Together with other receipts, Friday's gross receipts hit $85.8 billion. These are both records and represent the largest single-day receipts in the nation's history 20 percent higher than receipts on the same quarterly tax payment date last year. Tax cuts are not placed under a mattress or locked in a safe. They are spent, invested or saved all of which produces or supports economic activity which, of course, leads to further tax revenue. Financial Services Issues As I mentioned earlier, Secretary Paulson was sworn in just two months ago, but he has not wasted any time getting to work. If you happened to catch Secretary Paulson's first speech at ColumbiaBusinessSchool in August or his speech in here in Washington last week, you noticed that the Secretary articulated a few issues on his agenda both domestically and internationally. Key on this agenda is the idea increasing American business and financial market competitiveness around the world. Secretary Paulson has stressed that we need to continue working to open markets abroad, and to keep our own markets open and competitive. In this vein, one of the key issues we will be working on in Domestic Finance is ensuring that U.S. capital markets remain competitive. One area that certainly deserves our attention is Sarbanes-Oxley. As you know, Sarbanes-Oxley was enacted in response to the significant corporate scandals that shocked our markets a few years back. It was enacted in the midst of a political and economic crisis and it passed almost unanimously.

3 As a Wall St. investment banker for 20 years before I came to the Treasury, I experienced the broad market repercussions of the Enron and Worldcom scandals firsthand and it is hard for me to overstate their impact--both in terms of value destruction and a broad loss of confidence. After the Worldcom announcement in 2002, I remember sitting in my office that summer as the equity markets proceeded to collapse. We felt like we had been punched in the stomach. Sarbanes-Oxley was an important and good law with a much-needed restorative impact. Confidence in senior management, in boards of directors and in financial statements was restored. Investor confidence is obviously a crucial element to properly functioning markets and sustained economic growth. Sarbanes-Oxley strengthened the role of directors as representatives of stockholders and reinforced the role of management as stewards of the stockholders' interest. This was a big step in the right direction. As corporations have more and more experience in the implementation of this important legislation, it has become clear that there are many concerns about the burdens associated with Sarbanes-Oxley. These concerns largely focus on the compliance burden associated with Section 404. We are also learning of large numbers of IPOs being listed on non-us exchanges and there is concern that Sarbanes-Oxley may be a contributor to the listing decision. In many cases, the costs in terms of both dollars and human capital are extraordinary, especially for many smaller companies. In fact, the SEC established an Advisory Committee on Smaller Public Companies to examine the impact of the Act on these companies. At this point it's unclear where things stand on Sarbanes-Oxley review. Treasury is often called upon to get involved in this debate. Thus far, we have not done so, but it is something that we will follow closely. Another issue that we are closely following is the effort to reform and strengthen the GSE regulator. As I am sure you know, both houses of Congress have bills pending to impose stricter regulation on the housing GSEs. In July of last year, the Senate Banking Committee approved a bill that has not yet gone to the full Senate, and last October a GSE regulatory reform bill passed the full House. It is our view at the Treasury that the GSEs via their $1.4 trillion retained mortgage portfolio impose the potential for systemic risk on our financial system in three ways: 1) their large size; 2) their high degree of inter-connectivity with the rest of our financial system; and 3) the lack of market discipline associated with them. We believe that this risk imbedded is substantial and is not necessary for them to carry out their mission. We have argued strongly that these concerns need to be addressed and that the best way to do so is through a legislative solution. The Treasury will remain engaged on this important, principled issue and is reviewing options in the event there is no legislation before Congress lets out prior to the November elections.

4 Credit Union Issues Credit unions occupy a somewhat unique place in the financial institution marketplace by offering access to financial services to millions of Americans based on a cooperative ownership structure. As you know, credit unions have long provided their 86 million members with valuable financial services that help them to achieve financial security and enable them to own their own home, automobile, or business. As a result of strong local ties, credit unions are uniquely situated to meet the financial services needs of our Nation's communities and encourage economic growth, job creation, and savings. The President recognized the important role that credit unions play and pledged in 2000 to maintain credit unions' tax exempt status. As I stand here today, I can wholeheartedly say that the Administration continues to support credit unions' tax exemption. Financial Literacy As you know, credit unions' activities promote economic development and financial education in their local communities. Both your organization and the Treasury Department share a strong commitment to financial education. Treasury is working hard to fulfill the President's vision of an Ownership Society and an important part of that is equipping people with the skills they need to understand their money. To help make Americans more financially literate, Treasury organized an Office of Financial Education in I know several of your members have worked with that office. Under the FACT Act, that office got another job in 2003 leading a Commission of 19 other federal agencies tasked with raising the level of financial literacy nationwide. The Commission launched a federal government web site and hotline in 2004 dedicated to financial education the web site is located at mymoney.gov and the number is mymoney. We encourage you to make use of those resources. The Treasury's Office of Financial Education has always found the credit union community to be a willing and able partner in spreading financial literacy across the country. We have honored many credit unions for their work, and have collaborated with many others. Earlier this year, along with 19 other agencies, we released the first event National Strategy for Financial Literacy. And you will be pleased to know that credit unions were well represented in that document. Regulatory Relief Another topic that we have heard from credit unions on is regulatory relief. Two separate regulatory relief bills have passed the House and Senate and both chambers are working toward a single bill. This legislation would eliminate outdated and burdensome regulations on financial institutions. Evaluating the structure of our financial institutions' regulatory oversight is integral for their efficient operations, and I applaud the efforts of both the House and Senate. As I have said before, it is my hope that we can move America's financial services sector forward and leave unnecessary regulatory burdens in the past.

5 Capital Reform As you know, the National Credit Union Administration and various portions of the credit union industry have been working on proposals that would modify credit union capital requirements and the corresponding Prompt Corrective Action (PCA) framework. This work has led to a number of positive developments, such as applying a risk-based framework to more credit unions and properly accounting for credit unions' investment in the National Credit Union Share Insurance Fund (NCUSIF). As you know, credit unions are subject to a higher minimum leverage capital requirement than is required for other insured depository institutions, and the risk-based capital framework that applies to credit unions operates in a slightly different manner than the framework for other insured depository institutions. One common thread in capital requirements across types of financial institutions is that either the leverage or the risk-based requirement is the binding constraint. While the leverage requirement is currently the binding constraint for most credit unions, this is also the case for other insured depository institutions that have a relatively lowrisk portfolio of assets. While often discussed in the context of PCA, the core issue is the minimum capital standards that apply to credit unions. The most challenging aspect of this debate is what to do after the credit unions' investment in the NCUSIF is properly accounted for? The general rationale for imposing a higher minimum leverage capital requirement on credit unions is that, unlike many other insured depository institutions, credit unions can generally only build capital through increases in retained earnings. Other factors that have been cited for imposing a higher leverage capital requirement surround the proper accounting for credit unions' investment in the NCUSIF and their investments in corporate credit unions. So, should credit unions be subject to the same minimum leverage capital requirements as other insured depository institutions? In considering this and other issues related to credit unions, let me make a few observations. There are fundamental differences between credit unions and other depository institutions that lead to different types of treatment across these institutions. Of course, these fundamental differences support the varied tax treatment of credit unions. The Administration's support of credit unions' tax exemption is based firmly on the principle that the business models and organizational structures of credit unions are different from other insured depository institutions. There are also important differences in the capital structure of credit unions vis a vis other depository institutions. As I mentioned a moment ago, credit unions can only raise equity capital by increasing retained earnings. This is an important feature that is grounded in the cooperative nature of credit unions. Thus, unlike other depository institutions, credit unions do not have access to other sources of capital to build a capital cushion when financial conditions are good. Since the basic goal of a minimum leverage capital requirement is to encourage financial institutions to maintain sufficient capital levels so that the PCA requirements are not triggered,

6 this argues for somewhat differing capital requirements between credit unions and other institutions. The NCUA has made good progress over the years in refining their capital reform proposal to address these issues. We look forward to continuing our dialogue on this and other credit union issues next year. Presidential $1 Coin Program And before I conclude, let me just take a moment to make a quick pitch for a new program that one of Treasury's bureaus, the U. S. Mint, has just unveiled the Presidential $1 Coin Program. The Presidential $1 Coin Program is authorized by the Presidential $1 Coin Act of 2005, authored by the House Financial Services Committee and the Senate Banking Committee and signed by President Bush on December 22, The $1 circulating coins will commemorate the service of American presidents by issuing $1 coins at a rate of four per year, in order of their service. The legislation also provides for one-half ounce pure gold "First Spouse" coins to accompany the release of each presidential coin. The Presidential $1 Coins, as specified by law, are identical in composition to the current Golden Dollar featuring Sacagawea. The George Washington $1 Coin, will be released around President's Day, The others for 2007, John Adams, Thomas Jefferson and James Madison, will follow at roughly 3-month intervals. The reverse of these coins will carry a bold and dramatic image of the Statue of Liberty, extending to the coin's rim. I want to thank NAFCU for participating in the recent coin user's group forum hosted by the United States Mint and the Federal Reserve. The Congress and Administration will be looking to federal credit unions to help make your members aware of and want to use these beautiful new coins as they appear in circulation beginning next year. Your active participation is needed. Conclusion As you can see, these are busy and exciting times at the Treasury Department and I'm looking forward to continuing the dialogue with you all. Thank you again for the opportunity to be with you this morning and I would be happy to take any questions you might have at this time.

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