Now is the time for the banking industry to unite behind an effort to level the playing field with credit unions. Consider what’s going on around the industry, and it is possible to perceive a “perfect storm” of factors that make now the right time.
First, the Independent Community Bankers of America launched its Wake Up initiative on Oct. 21; the campaign encourages bankers to speak out about a $2 billion annual tax subsidy for credit unions, many of which are growing far beyond any recognizable common bond (317 have more than $1 billion in assets). The latest industry trend has the boldest credit unions growing by acquisition. Credit unions have purchased 21 banks in the last two years.
Second, the recently installed chairman of the American Bankers Association is a former credit union executive who converted her institution to a bank. Laurie Stewart, president and CEO of the $686 million Sound Financial in Seattle, joined the A.G.E. Federal Credit Union staff and quickly became its president in 1989. It was called Credit Union of the Pacific by 2003 when she converted the institution into a mutual savings bank. Five years later, she took it public. Stewart is the exemplar for credit union executives who outgrow their charters.
And third, a member of the National Credit Union Administration is calling for stricter regulation of large credit unions. Todd Harper, a former NCUA staffer, joined the board earlier this year and is calling for the regulator to create a consumer compliance exam program for large, complex credit unions, according to the American Banker.
Credit union competition was a dominant theme at the September Iowa Bankers Association annual meeting. State legislators recalled a recent failed effort to tax state chartered credit unions. More than one lawmaker noted that even if the state changed the law to tax credit unions, it is doubtful the move would do much to level the competitive landscape. “Credit unions have options,” said Lee Hein, a Republican in the Iowa House. “They can move to a federal charter.” Such a move, he said, would be an obvious way for a state credit union to avoid the impact of a new state law.
But bankers at the Des Moines assembly said there’s nothing obvious about it. The Iowa credit union law has fewer field of membership restrictions than the federal law; some credit unions, it was suggested, may be willing to pay a tax in order to continue to exercise the liberties of the state credit union charter. (Of the 88 credit unions in Iowa, only one has a federal charter.)
The credit union industry, however, continues to enjoy broad support from the public and from most elected officials. Few understand the tax differences between banks and credit unions, and many don’t care. Bankers, nonetheless, can make a compelling case that the current environment is unfair, anticompetitive and bad for taxpayers. The banking industry should continue to push methodically for change.
First and foremost, in states where the state charter is more liberal than the federal charter, banker advocacy groups should lobby for changes that put the state charter on a par with the federal charter. In an era of ubiquitous banking (via hand-held devices, computer, phone, mail and branch) there is no reason for a state charter to be more permissive than an already generous federal charter.
Next, bankers in all states should work to level the taxation playing field for smaller institutions. But rather than working to expand the reach of taxation, the effort should be to exempt smaller banks from taxation, especially when profits come from credit extended to local business owners and residents.
And finally, work should be done to apply taxation to income earned at the largest credit unions. Those billion-dollar-plus credit unions should pay taxes like any other large financial institution. It is pretty difficult to argue that a billion-dollar-plus credit union is about the neighborhood or any modest-sized affinity group. An entire metro area, for example, is not an affinity group; it is a market — the same kind of market served by tax-paying banks.
Credit union advocates argue that their institutions should be exempt from federal income taxes because they do not have the ability to sell stock the way banks do. Given all the credit unions that are buying banks, it doesn’t seem like they lack capital. Nonetheless, I think once a credit union reaches a certain threshold — and I’m not real picky about the size (maybe $500 million, perhaps $1 billion) — they should be allowed to sell stock like a bank. Make them pay the same taxes that every other financial institution pays and let them raise capital like any other financial institution as well.