Stop letting credit unions buy community banks

Tax-exempt credit unions are acquiring taxpaying community banks at a record rate. Already this year, both the number of transactions and value of bank assets sold to credit unions have met or exceeded all-time highs.

Outdated federal policies and regulations mean taxpayers are subsidizing these takeovers, enabling credit unions to use their members' capital to make all-cash offers for smaller community banks rather than using the money to benefit their members, as was originally intended.

While community banks have long bristled at the inequities of the credit union tax exemption, the current surge in these acquisitions displaces local sources of credit and expands the federal tax exemption given to credit unions. Congress needs to take immediate action to reform policies that foster this trend and ultimately subsidize banking consolidation on Main Street.

Accounting for roughly a quarter of this year's banking industry deals, credit union acquisitions are fundamentally fueled by the industry's tax exemption — a relic that hasn't been updated since Congress passed it in 1934. While community banks contribute roughly $15 billion in annual tax revenue, the credit union industry enjoys a tax exemption worth approximately $4 billion per year, based on the industry's net income. This tax break for nearly $2.2 trillion only grows as credit unions acquire more community banks.

These deals can materially damage local communities. With community banks accounting for roughly 60% of U.S. small-business loans under $1 million and 80% of banking industry agriculture loans, these deals displace critical providers of capital in local communities. And each transaction expands the portion of the financial services industry exempt from Community Reinvestment Act requirements for lending to low- and moderate-income consumers and small businesses in local markets.

While the CRA applies to community banks and virtually every other depository institution, credit unions are fully exempt. This was originally due to credit unions' establishment more than a century ago to serve people of modest means with a common bond, but lending data show they are falling short of that mission as they expand beyond it. According to Home Mortgage Disclosure Act data, community banks outnumber credit unions by a 2-to-1 margin in low-income or distressed communities and are more likely to lend in census tracts with elevated poverty and unemployment levels.

These deals also pose a threat to U.S. cybersecurity. The National Credit Union Administration is not authorized to examine credit union third-party service providers for cyber risk. NCUA Chairman Todd Harper has called this lack of authority a "regulatory blind spot" that could leave his industry as the "soft underbelly" of the broader financial system. Harper has also noted that the NCUA is the only financial services regulator that doesn't do a "deep dive" exam to ensure compliance with federal consumer protection laws.

While states such as Colorado, Minnesota, Mississippi, Nebraska and Tennessee have acted to restrict these deals, this trend requires a federal solution to ensure fair competition. Taxpayers deserve to know why their tax dollars are underwriting financial services consolidation.

Congress can start by holding hearings examining the credit union tax and CRA exemptions and how they are driving community bank acquisitions. With credit unions using their tax exemption to gain a government-stamped competitive advantage, policymakers should closely examine the various policies encouraging these deals.

Lawmakers should also consider an "exit fee" on these deals to capture lost tax revenue. The exit fee — similar to excise taxes on political expenditures to 501(c)(3) organizations — would be payable by the acquiring credit union to capture part of the tax revenue lost once the acquired bank's business activity becomes tax-exempt.

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NCUA policy also requires meaningful reform given concerns about its oversight. Lawmakers should revive previously introduced bipartisan legislation that would allow the NCUA to directly examine and regulate credit union service organizations and other large service providers. And while the sluggish merger approval processes of federal banking regulators constrain bank-to-bank deals, the NCUA's bureaucratic obstacles and roadblocks to credit union conversions and mergers make it more difficult for a bank to acquire a credit union than vice versa.

More broadly, with federal banking regulators adding more than 7,000 pages of new rules since July 2023, the burdensome regulatory environment on community banks has a role in driving their consolidation. Policymakers should continue advancing legislation to right-size community bank regulation.

Independent Community Bankers of America polling conducted by Morning Consult shows Americans support a congressional review of credit union policy, with 68% of adults saying credit union members should have the same consumer protections that banks provide under the CRA.

Lawmakers also have historical precedent on their side. In 1951, Congress revoked the tax exemption for building and loan associations, cooperative banks, and mutual savings banks, finding that these institutions operated much like commercial banks and should be taxed accordingly. And many other countries have leveled the tax and regulatory responsibilities of their financial sectors, with Australia and Canada rescinding preferential tax treatment in 1995 and 2013, respectively.

Taxpayer-fueled community bank acquisitions are ultimately a negative side effect of federal policies that have expanded credit unions' authority over the decades, allowed them to depart from their founding mission, and preserved an outmoded tax exemption. As these deals continue at a record pace, policymakers should examine the threat they pose to local communities and address the federal policies that subsidize them.