The recent surge in credit union acquisitions of community banks in Florida and elsewhere is a disturbing trend that promises a negative impact on taxpayers nationwide. Through these deals, large credit unions are increasing their taxpayer-subsidized footprint by buying up smaller, taxpaying community banks. With this trend contributing to banking industry consolidation, reducing tax revenues and furthering the credit union encroachment into full-service banking, policymakers should re-examine the credit union industry’s tax and regulatory subsidies.
The asset disparity of institutions involved in these deals underscores their inequities. According to S&P data on the nine credit union-community bank acquisitions of the past year, the total assets of acquiring credit unions was $24 billion, while acquired community banks totaled $2.3 billion. Add to that a pending deal set to close in the fourth quarter in which a $1.6 billion credit union is buying up a $236 million community bank.
This is hard to swallow for many community bankers given the tax advantages that their credit union competitors enjoy. However, this trend should give pause to all taxpayers, considering every credit union purchase of a community bank diminishes tax revenues and further solidifies a publicly subsidized sector of the financial services industry. The previously cited transactions amount to a loss of roughly $3.9 million in income taxes, according to December 2018 call report data. More broadly, the Joint Committee on Taxation last year tallied the federal cost of the credit union industry’s tax exemption at roughly $10 billion through 2022 — an annual cost to taxpayers of nearly $2 billion and rising. The inequity is exacerbated by the fact that credit unions are not subject to the full set of regulations that community banks face, including Community Reinvestment Act rules.
Meanwhile, they have the unique luxury of a federal regulator that typically acts as an industry advocate, rather than a conscientious supervisor — the National Credit Union Administration.
Despite legal challenges and setbacks, the NCUA has advanced a series of rules expanding credit unions’ ability to dodge membership restrictions, make commercial loans and leverage their tax subsidy to raise capital from outside investors. Most recently, the agency proposed allowing federal credit unions to hold nonmember deposits of up to half of their paid-in and unimpaired capital and surplus (less any public unit and nonmember shares). In the case of credit unions designated as low-income institutions, as most credit unions are, these nonmember deposits could come from any source. At the same time, former NCUA Chairman and current board member Mark McWatters’ admission last year that the industry’s fund insuring credit union deposits would be at risk without taxpayer subsidies raises questions about the industry’s dependence on the taxpayer subsidy.
And for anyone asking why more banks aren’t returning the favor by acquiring credit unions, the NCUA has a role in that as well. The agency has established bureaucratic obstacles and roadblocks to credit union conversions and mergers that make it more difficult for a bank to acquire a credit union than vice versa.
No wonder the credit union industry has begun to feel the heat from members of Congress and the courts over its taxpayer-fueled expansion. Following the concerns raised last year by former Senate Finance Committee Chairman Orrin Hatch, the tax exemption established by Congress decades ago for people of modest means with a “common bond” appears to be increasingly under fire. Even executives at smaller credit unions are wondering whether the exemption makes sense for the largest and most growth-oriented members of their industry.
The current rash of mergers is yet another indicator that tax-exempt credit unions have become virtually indistinguishable from taxpaying commercial banks. It’s time for Washington to take action on this unbalanced arrangement and join many other countries around the world in leveling the financial services sector’s tax and regulatory responsibilities.
