Compliance Blog

Posted by Anthony Demangone

Recently, the Independent Community Bankers of America (ICBA) fired off a letter to the U.S. Treasury Department that criticizes the credit union industry's ability to properly manage risks due to the recent conservatorship of three corporate credit unions.  Due to this mismanagement, the ICBA figures that credit unions should stop asking for increased powers to make member business loans. The ICBA used the opportunity to ask Treasury to reconsider the merits of the tax exemption for credit unions as well. 

Here is their letter to the Treasury Department. The President of the ICBA, Cam Fines, pens a blog. (It is called Finer Points, which is a pretty clever name.)  And he covered the same issue there as well. 

Here's our letter in response.

Personally,  I'd like to take a moment to address this issue myself.  I try to be a straight shooter, and I will do my best to paint the picture as I truly see it.

In reality, I'm disappointed.  Credit unions have a so much in common with community banks.  Take this, for example. We are like brothers from another mother, if you will.  With regulatory burdens mounting and the CFPB waiting on the sidelines to jump into the game, we could be working together to educate congress on the importance of small institutions and the dangers of over-regulation.

Rather than do this, the ICBA takes a dark day for credit unions, and holds it up high for political reasons.  I understand why ICBA wrote that letter.  If they can convince Congress to end the credit union tax exemption and prevent the extension of member business lending, that is good for ICBA's members. And they pay Mr. Fine's salary.  From that point of view, the letter makes perfect sense.  But the letter is what it is - a power grab, of sorts.  If you can harm your competitors, by any means, you win.  I live inside the beltway.  I get it. 

But if you step back and look at the letter from a distance, it distorts facts and hides others.  Let me address some of the ICBA's points.

The credit union industry has seen major failures within its corporate system due to poor risk management. Ergo, they should not be able to expand their powers to make member business loans.

Since the first corporate credit union was conserved, roughly 196 banks and thrifts have failed.  Mr. Fine's letter didn't mention this.  Using his logic, if our conservatorships equate to poor risk management and poor lending standards, what do the 196 failures equate? Well, I'll stop you there.  The fact that 196 banks failed means just that - 196 banks failed.  We don't want to see banks lose their abilities to lend to consumers and small businesses.  And the fact that we've had our own problems does not mean that the credit union charter is flawed in any fundamental way or cannot manage an increased ability to offer member business loans.  Every facet of the U.S. financial system has traveled a rocky road in the past few years. Credit unions have failed.  Banks have failed  Having one member of the financial system point at another's problems for political gain is in poor form.  Pot.  Kettle. Black. Or something like that. 

With the economy in poor form, Congress should consider repealing the credit union tax exemption. 

Ah, the tax exemption issue.  My favorite.  When it comes to taxes on institution income, credit unions do indeed have a 100 percent, crystal-clear, undeniable advantage over their banking brethren.  And when it comes to swatting flies, a fly swatter has a 100 percent, crystal-clear, undeniable advantage over a pistol.  

The U.S Congress bestowed a wonderful tax advantage on credit unions.  But that's not the whole story. We have limited powers as well.

• Our corporate governance creates incentives that are tilted toward the membership and away from profit.  We have a volunteer board of directors who are elected from our membership. They hire the CEO and set his or her salary.  No outside stockholders pull away profits. From a corporate governance model, there is less separation from ownership and control in the credit union model. Is it a better system than a bank or a thrift?  No, it is just different.  It is a cooperative structure.  The members own their own financial institution.  Whether the member actively takes part in the process is immaterial.  They have the right to do so.  (Most Americans do not vote for local elections.  That doesn't mean we aren't a democracy, for goodness sake.) 
• We have limited powers.  Every bank in America can accept any credit union member as a customer.  It doesn't work that way in reverse. Sure, some credit unions have a very large field of membership. But it is still a limited field of membership.  In addition, we have limits on lending, member business lending, interest rates, prepayment penalties, expelling members, the products and services we can offer, our ability to make charitable donations, and more.  You can't look at the tax exemption without also considering the limitations on our powers and our corporate governance model.  To do so is misleading.
• I've mentioned this before quite a few times.  The free market system is a hell of a thing.  It cuts through rhetoric. We vote with our feet.  If something is better or easier, we'll take advantage of it.  Based on the market, I've come to two conclusions.  The credit union system works, but it is a clunky model to use - as there are few incentives to start one.  Here's what I mean.  We're seeing a ton of people flock to credit unions.  The member-owned system is a good alternative for people to consider. Given their awesome, undeniable tax advantage, you'd think you'd see a long-line of folks lining up to start a credit union.  But you don't. Why would a venture capitalist start a credit union?  They wouldn't.  You can't get rich by forming a credit union.  You'll benefit the field of membership, but that's about it.  So, until I see community banks switching to a credit union charter, or ex bankers gathering to form new credit unions, the idea of an "unfair" advantages will simply ring hollow to me.  

Conclusion.  I have nothing against banks or thrifts.  For-profit business organizations are the life-blood of the American economy.  I wish them well.  My first real account was held at Kish Bank in Lewistown, Pennsylvania.  It was a fine financial institution.  I just checked its website, and it looks like it still is.  You'll never hear me or NAFCU argue against the likes of Kish Bank.  In fact, we wish them well.  I understand that some will take the view that if my competitors win at something, I, by definition have lost.  I don't see it that way.  Why must we always have winners and losers? Why must credit unions lose so that banks like Kish Bank can win?  It is a negative, pessimistic way to go through life. I think the ICBA's argument, again, is simply a power play that tries to take advantage of recent bad news in the credit union industry. 

It rings hollow.  It is misleading. It is wasteful.  It is also very predictable.