Should Credit Unions Be Taxed? Former Banker Says No

As a banker for more than 30 years, I was one of the `sheep’, saying what all other bankers said, i.e., “credit unions were not on the same playing field with banks and that credit unions should be taxed in order to level that field”. I think it is time to put a stop to that myth. Bankers are correct in asserting that the field is not level, however it is not because credit unions are not paying taxes, it is because credit unions are playing by an altogether different game plan. I have had the opportunity to play from both sides of the field. After spending 30 years in the banking industry, working in banks varying in size from the smallest of $16 million to one of over $300 million, one of which was a member of a holding company of over $4 billion; I am now president of a $20 million credit union. After having spent only one and a half years in my current position, coming here directly from a bank, I have changed the tune I used to sing during my years of banking. The answer to the question as to whether credit unions should be taxed is an emphatic NO! Why am I now singing a different tune? The answer to that question is easy. As a banker I had tunnel vision. I, as other bankers apparently do, looked at the services credit unions are providing as well as those they wish to offer and said “credit unions are like banks”, or, “they are bank want-to-be’s”, or, “they are offering similar services and they should be taxed like banks, giving us (the banks) a level playing field”. My problem was that, as a banker, I did not take time to really know and understand the credit union movement. After arriving at my present position, it did not take me long to discover that there truly is a difference between banks and credit unions. As mentioned earlier, banks and credit unions play on the same field but by a different game plan. It is the game plan that should be evaluated, not the playing field. First of all, a bank, when it begins business does so with a regulatory required capital base. Investors purchasing stock in the bank provide this initial capital base. This invested capital provides banks an immediate source of income as they can invest this capital in securities and loans. On the other hand, a credit union’s capital is built from the ground up, receiving deposits from members, loaning them out to other members thusly obtaining income from the loans. Any income that is not used in paying dividends on share accounts and covering overhead becomes the credit union’s capital at the end of the year. It takes years for a new credit union to obtain a desired capital ratio, one that banks begin with immediately. If the playing field is not level, this is the part of the field it would not apply to as banks have a definite advantage in this portion of the game. In my 30 years of banking, I had the opportunity to sit on the various banks’ Asset Liability Committees. These committees made decisions on managing the assets (loans and investments) and liabilities (deposits) for the betterment of the organization. Also reviewed at these meetings were the services the banks offered along with the related fees to be imposed on their customers to provide non-interest income. At my credit union we also have an Asset Liability Committee that will make decisions for strengthening the organization, including reviewing services and their related fees. On the surface, in regards to managing assets and liabilities, it appears credit unions are similar to banks; however to fully understand the difference, one must go beyond the surface to discover that there is a difference. Let’s compare the Asset Liability Committee game plans to determine what goes on in these meetings. In my experience, the bank committee is always looking at ways to increase income, whether it is interest or non-interest income. Pressure is generally applied by investors, whether individual or corporate, to increase income in order to increase the value of their stock. In my banking experience the main concern of a bank’s Asset Liability Committee was to increase return on investment for their stockholders by increasing customer based fees, increasing loan interest and maintaining interest on deposits as low as possible. Conversely, the concerns of our Credit Union Asset Liability Committee is one that insures we are paying the highest interest on share deposits, charging the lowest possible fees and lowering interest rates on loans in order to benefit our members to the greatest degree. A credit union is looking to do what is best for its members (customers) while retaining adequate earnings to cover NCUA capital requirements. Below the surface of the playing field, we find that credit unions and banks may both have Asset Liability Committees, however, it also shows that credit unions are truly playing by a different game plan. Another distinct difference between the playing field of banks and credit unions is the make up of the board of directors. A bank board is generally comprised of members of the business community that are nominated by other board members because of the business and business contacts they can bring to the bank. They are elected to insure the direction of the bank represents the interests of their investors. I have known several bank board members that, in my opinion, are just “rubber stamp” the wishes of the corporate offices or the wishes of the majority stockholders without consideration for the concerns of their customers. Bank boards are paid for attendance of meetings as well as paid dividends on the stock they purchase as members of the board. Simply stated, credit union boards are comprised of volunteers, members who run for the board and are elected by the other members to represent the interests of the members. At the end of 2002, keeping capital requirements and goals in mind, the Board of Directors of our credit union declared an interest bonus for the month of December on regular share accounts (savings accounts) that amounted to an additional 1%. Our board also declared a 1% bonus interest rebate, to all borrowers, on interest they had paid in 2002. The members received a combined total of over $16,000.00 due to the board’s concern and dedication for our members. This once again demonstrates that credit unions are playing to a different game plan. When was the last time you heard of a bank paying bonus interest or returning interest received on loans to its customers? Bankers are spending time and money trying to convince federal and state legislators to levy a tax on credit unions in order to level the playing field. From my perspective, if banks are troubled about earnings being lost to credit unions, maybe they should abandon their costly campaign to pass legislation to tax credit unions. A novel idea would be for banks to raise their deposit interest rates, lower their loan rates, lower or eliminate many of their consumer related fees to have a “break even attitude” and truly compete with credit unions on a level playing field. Maybe if banks were to change their game plan and provide their customers the same considerations credit unions provide their members, banks would not see credit unions as such a threat. Again, should credit unions be taxed like banks? Absolutely not, Credit unions’ game plans are nothing like those of banks.