One of the biggest financial disasters every to hit the state of Rhode Island was the collapse of the credit-union system in 1991. Apart from the damage to depositors separated from their funds, the collapse precipitated a massive bail-out by the taxpayers through an increase in the sales tax. This, in turn, had and continues to have a negative impact on Rhode Island businesses.
Transcript from a videotape of the Rhode Island House, April 12, 1988
The Beginning of the End for RISDIC
On April 12, 1988 the Rhode Island House of Representatives spent 4 minutes debating bill 88-H 8907 -- purported to be a move to strengthen liquidity-reserve requirements for savings accounts in credit unions. In reality it eliminated them, allowing credit unions to back their deposits with a "line of credit" from an institution which could not make good on those lines of credit. This set the stage for the collapse of RISDIC (the Rhode Island Share & Deposit Indemnity Corporation).
The following is a complete transcript of the debate on that tragic bill, from the videotape of the proceedings in the House on April 12, 1988:
Speaker De Angelis: "... the next item."
Reading clerk: "88-H 8907."
Speaker: "Representative Casinelli:"
Casinelli: "Mr. Speaker, ladies and gentlemen of the House. This act would require credit unions to have reserves of at least 15 percent of its total assets, and would limit credit unions from permitting overdrafts in excess of $500. It's a good act. I move its passage."
Speaker: "Representative Casinelli moves passage ... seconded by Representatives Lamb, Boyle. ... On the act, Representative Driver:"
Driver: "Thank you Mr. Speaker -- a question for the sponsor if I may."
Driver: "Joe, it seems to me that this eliminates the need for even a 5 percent cash reserve, because they can satisfy the 15 percent with written contractual lines of credit. Is that correct? And they wouldn't have to have any other reserves."
Casinelli (shrugs and looks around)
Speaker: "Representative Boyle:"
Boyle (majority whip): "Rodney, they're allowed to do that now. In fact most credit unions satisfy the liquidity reserves, in fact, by a written line of credit."
Driver: "Well, doesn't the present law -- underneath what's crossed out here -- require that they have 5 percent of its total assets liquidity reserves, and that's defined as cash on hand, liquid deposits maintained with the reserve agents, and that's it?"
Boyle: "Well, I do know something about this from being on the advisory committee of a credit union. I can tell you that the 20-percent law now is easily satisfied by getting a written line of credit from Rhode Island Central. (He probably meant the Rhode Island Credit Union League's Corporate Credit Union.) And, in fact, that's the highest standard in the United States. And this just allows a credit union to use the other T bills and other type of assets to satisfy that. And it's very solid, very clean, and there's no problem with it. And we use written lines of credit right now."
Driver: "But is it correct there's no cash reserve whatsoever if this bill passes?"
Boyle: "Again, we've always satisfied that requirement through a line of credit. And I don't think what you're addressing is addressed in this bill."
Driver: "See, there was a period. There were two sentences on the bottom of page one. Now there's only one sentence with an `and' ..."
Boyle: "It's an accumulation. You can use it through liquid assets, you can use it through a written line of credit, you can use your overnight U.S. Treasury bills -- all these things as long as it results in 15 percent satisfies the requirement. And that is still the highest standard in the United States!"
Driver: "But before this bill is passed -- as the law stands now -- I read 5 percent liquid assets. And that would no longer be there, I believe. The definition...?"
Speaker: "Representative Casinelli:"
Casinelli: "Mr. Speaker, ladies and gentlemen of the House, presently other financial institutions are not required -- I don't know if you know this -- to maintain liquidity reserves under Rhode Island law. O.K., that's number one -- just to sort of clarify that. Nevertheless, the industry and the regulatory agencies favor, they favor the maintenance of reasonable liquidity reserves. And this bill provides such a requirement. That's exactly what this bill does. That's the way it is."
Driver: "Well, I have a problem with it. I don't read it that way. Thank you."
Speaker: "Representative Gorham:"
Gorham (minority leader): "I think Representative Driver's spotted a real problem with this bill because, as I read the law at the present, credit unions have to keep 5 percent reserves which would consist of cash, deposits, Treasury bills. And in addition to that 5 percent, the law reads now in addition to that 5 percent, they have to have a 20 percent line of credit to back up the credit union. So, this bill would cut that back to simply a 15 percent line of credit -- which is quite a cut. The credit unions would not be as strongly backed as they're required to be now."
Speaker: "Representative Caruolo:"
Caruolo: "Mr. Speaker, I rise to state that I agree with Representative Driver; and contrary to what the whip said, the current law -- at least the way it's given to us in this bill -- would require the 5 percent liquid reserve, and in addition to that they'd have to keep the line of credit open. Rodney Driver's example is the most extreme possible under the wording of this law. But it is, in fact, what's possible. What would be required if this law became one of our statutes would be that they kept a line of credit -- 15 percent of their deposits -- totally in the aggregate. So it theoretically wipes out any need for any cash to be kept on hand -- and it most certainly weakens the reserve requirements required by law for credit unions in this state."
Speaker: "Shall the act pass? The clerk will unlock the machine. Have all members voted? ... The clerk will lock the machine and take the count. There are 48 in the affirmative, 32 in the negative and the act passes. ... The clerk will read the next item on today's calendar."