Trade association executives utilize ongoing, galvanizing issues to keep their constituencies riled up, to keep money rolling in, to insure attendance at conferences and to get credit union volunteers to hike their hills. Our fears ensure their job security. All trade associations do this, not just ours.
To keep our credit union blood boiling post HR-1151, our trades have served up blatantly anticonsumer causes such as bankruptcy reform, credit card reform and opposition to cram-downs. In every case there was no real benefit to credit unions. We could have been on the side of the angels, yet we chose to hop into bed with banks and monoline credit card behemoths. This is among the reasons for our dropping out of CUNA and the Texas Credit Union League earlier this year.
When things get quiet out here in credit union land, our trade associations pull out the cause célèbre guaranteed to inflame the passions of true believers: taxation of credit union income. Credit union taxation is the gift that keeps on giving for credit union and banking trade association executives and lobbyists.
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I have gone on record in letters published in banking magazines that I will readily support taxation if all FOM restrictions are lifted and if credit unions are allowed to calculate capital exactly the same way as banks.
My caution to my banker friends (and I do have a few) is that they may want to be very careful about what they wish for. Do bankers really understand what will happen if my credit union gets loose in their markets with no FOM restrictions and parity in balance sheet capital calculations? I am positive that they really don't understand the potential impact.
Bankers and their trade associations are firmly entrenched in the position that if only credit unions would pay income taxes, then credit unions would be forced to raise loan rates, lower deposit rates and charge higher fees. Only then would banks have a level playing field.
Bankers look at credit union income statements through their for-profit lenses. Because bankers have to deliver an ROE to owners and investors, they assume that credit unions will react to taxation the same way a banker would, which would be to replace the income.
My competitive financial advantage over my banking peers has nothing to do with taxation. It has everything to do with return on equity. Bankers have to produce an ROE. I don't.
The only impact taxation would have on TDECU is that we will double in size every seven years instead of every five years. So what?
The NCUA special assessments prove my point. Last year and for the next nine years, credit unions are paying special NCUA assessments, assessments that have just about the same impact as a 35% tax on credit union net income.
The assessments we paid–and will pay for the next decade–did not drive us to change loan and deposit rates and fees last year, nor will they in the future.
Paying a 35% tax on income would have the same impact on how we price: none, nada, zip.
I have been a credit union executive for 25 years and the CEO of one of the 75 largest for almost nine years. Not once during my career have I ever been required by a board (or investors) to deliver a targeted, attractive ROE..
All I have to do is maintain 8% capital. I have to keep the capital safe and sound and grow it to keep pace with asset growth. But, I don't have to produce an ROE that would please equity investors and owners. That is my powerful, strategic and financial advantage over banking executives.
If bankers want to level the playing field and force credit unions to raise loan rates, lower deposit rates and increase fees, they should support efforts for credit unions to solicit at-risk capital from institutional and individual investors. That would not only drive credit union pricing changes to match banks, it would drive a stake through the heart of the credit union movement.
Evidently the NCUA would like to help out the bankers in this regard. As I was writing this commentary, a news flash from the NCUA popped up on my computer screen. Speaking at a World Credit Union Conference, NCUA Chairman Debbie Matz stressed the need to require credit unions to hold sufficient levels of capital as a fundamental role for regulators. "Adequate capital reserves ensure the safety and soundness of the industry, and can soften the impact of unexpected market fluctuations and economic volatility," Matz said.
The reality is that the only thing that credit union CEOs care about when it comes to capital is having enough to keep the NCUA off our backs. If I had to produce an ROE acceptable to equity investors, as do my banking brethren, I'd have a real problem on my hands. That would definitely drive radical changes in our product pricing and fee structures.
Like Matz, many of my credit union peers believe that credit unions should be permitted to obtain secondary capital. They seem to think that there are wealthy, but naive, investors out there who will invest in subordinate equity positions while having no influence on the institution and possessing no voting rights in proportion to their investment. Good luck.
Frankly, I hope banking competitors persist in believing that my advantage is no taxation. That will take their eyes off the real advantages I have.
Edward C. Speed is CEO of Texas Dow Employees Credit Union, Lake Jackson, Texas.
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