Credit Union Trades Contest Charges that CUs Part of Demise of Small Banks

By SARAH SNELL COOKE CU Times Washington Reporter WASHINGTON-CUNA and NAFCU came out in strong opposition to a Viewpoint piece that appeared in the Aug. 20 issue of the American Banker from two senior economists at the Dallas Fed who charged that credit unions were partly to blame for the decline in small banks. CUNA Chief Economist Bill Hampel quoted the two economists as saying, “Were small banks actually thriving, there would be more of them, not more migration to larger size classes.” Hampel reasoned, “Now let me see. To thrive, a bank must somehow be vibrant and successful, but not grow. That’s a new one. It is this sort of logic that stands behind their view that (1) small banks, despite their best efforts, have performed poorly for the past 20 years, and (2) credit unions are particularly responsible for the demise of small banks.” His letter, entitled Case Against CUs Has Fuzzy Logic, Huge Oversights, appeared in the Aug. 27 edition of the American Banker. In a separate letter published the same day, NAFCU President and CEO Fred Becker asserted that the economists’ column “reads like a chapter out of the American Bankers Association’s playbook on credit unions.” Of the Fed economists, who were speaking on their own behalf, he added, “Mr. [Jeffery] Gunther and Mr. [Robert] Moore do raise some interesting points about the plight of America’s small banks, but as far as credit unions are concerned, it is a far cry from an objective analysis. I am certainly grateful that they did not speak on behalf of the Dallas Federal Reserve Bank. It has always been our experience that the Fed views credit unions as an important part of the financial services sector and not a competitive threat to banks.” CUNA’s top economist noted that Gunther and Moore say credit unions have falsely claimed that small banks are performing well. According to Hampel, it is not CUNA but the Fed’s own economists who have reported such results. He even quoted Fed Governor Mark Olson who told a 2003 Fed Bank of Chicago conference, “The influx of start-up capital reflects the longer-term financial success of community banking as a business model,” among other compliments. Hampel pointed out Gunther and Moore’s “unusual way of assessing growth at small banks.” He continued, “For example, if over their more than 18-year period of analysis, a small bank had experienced significant growth, only to be acquired by a larger bank late in the period, none of that growth would be attributed to small banks. Thus they report that small banks grew less than credit unions over the period.” Other Fed economists found that credit unions and small banks grew at similar rates, according to Hampel. He added that Gunther and Moore’s mathematics showed small banks that were strong enough to grow into larger banks as a weakness in small banks. The two Fed economists also suggested that another problem for small banks is regulation and that credit unions are underregulated. Hampel pointed out that Gunther and Moore’s letter did not even mention the largest competitive threat to small banks, and that is large banks. “In just the last 10 years the share of depository institution assets held by just the largest 100 banks has risen from 43% to 65%,” he stated. Additionally, mutual funds and money markets do not appear in the analysis, Hampel emphasized, while credit unions’ share of household financial assets has remained below 2%. “I’m not saying life has been easy for small banks.But to suggest that credit unions are less regulated than banks is ridiculous,” Hampel wrote. He agreed that credit unions are not subject to the Community Reinvestment Act, which addressed banks’ redlining practices, “But in virtually every other regard they are more regulatorily constrained than banks: Credit unions still face binding – although somewhat reduced – field-of-membership restrictions; have no access to net worth other than retained earnings; are subject to higher capital requirements than banks; are much more limited in business lending; and face more restrictive investment regulations.” Hampel also noted a 2001 Treasury Department report, which found that federal credit unions “have more limited powers than national banks.” He concluded, “Small banks are doing just fine, thank you – and the numbers show credit unions are among the least of the challenges they truly face.” [email protected]