Credit Unions Are a Great Investment for America

It’s that time of year again when the industry converges on Washington with a list of asks and   hometown anecdotes. It also means that the banking industry will be posting ads in the D.C. area implying that the credit union tax exemption is the root cause of all the financial ills facing the banking industry in general and community banks in particular. After a while, it gets a little silly.

It could be a little worse this year. After all, that same banking industry is apoplectically reacting to bank and credit union mergers even as it continues to merge community banks out of existence. We also have criticism of overdraft fees and an NCUA chairman arguing that there is a need for greater consumer protection.

The good news is that this pessimism is largely unfounded. In fact, over the years it is my personal opinion that the industry has been a little too cautious when it comes to extolling its successes, so I am going to do the extolling for it. The federal credit union industry was created by Congress to provide a national framework for a not-for-profit banking system at a time when the for-profit banking system was in serious need of reform. Its success in providing millions of Americans an alternative source of often cheaper funding and continued financial stability has more than vindicated Congress’s decision to assist the industry by forgoing taxes. In fact, yours truly would argue that the industry has demonstrated a durability and vitality of which the industry and its regulators should be proud.

The core argument against the credit union industry is that the tax exemption provides an unfair advantage which puts community banks at risk. But congressional passage of the Reagle Neal Act, not tax exempt credit unions, are what put community banks on the endangered species list. The top 15 banks make up almost three quarters (76.64%) of the deposits for all banks in the U.S. according to WalletHub. According to a report by the NRCC, when banking competition was robust in the mid-1990s, 84% of institutions held less than $330 million in deposits. Today, nearly half of the banks that remain hold $1.3 billion or more.

Nevertheless, the industry spends so much time defending its tax exemption that it often does too little to point out what a stable source of alternative banking it has been for the American public. Here are just a few examples:

• It has only been a little more than a year since Silicon Valley Bank triggered a financial run that had to be contained by the Treasury Department. The root cause of this bank run was the fact that banks such as SVB hold deposits well in excess of FDIC insurance coverage. In fact, according to the FDIC, “at its peak in 2021, the proportion of uninsured deposits in the banking system was 46.6%, higher than at any time since 1949.” According to CUNA, more than 91% of credit union deposits are insured. Over 90% of SVB deposits were uninsured. In other words, by many measures, credit unions are actually a safer place to put their money than banks.
• Let’s go back to 2008. The Great Recession was caused because of the insatiable need of financial institutions to feed the engine powering mortgage securitization with even more mortgages, irrespective of whether borrowers could actually afford them. This mess was only cleaned up with a trillion-dollar taxpayer bailout. Although the credit union industry was certainly impacted by this debacle, it was not a cause of the problem but in many ways an inevitable victim of it. Notably, credit unions have done such a good job of paying back the money owed to the government that they’ve received refunds for a portion of these payments.

What both these examples have in common is that a more atomistic approach to banking with less emphasis on quarterly stock prices shields these generally small institutions from larger, unexpected financial trends that put the economy at risk and will continue to do so in the future.

If it were up to me, the remarkable success of the industry in avoiding the financial turbulence of recent years should be a talking point that all Congress members would be told about and all credit unions would be proud of.

Incidentally, none of this is to suggest that we don’t need for-profit banks, we do. Without a strong and vibrant banking system, we wouldn’t and couldn’t have the strongest economy in the world. All I am saying is that there is a place for a not-for-profit, tax exempt alternative model that provides members a greater spectrum of financial choice than would otherwise be the case.

Even as banks argue that the tax exemption gives credit unions too big an advantage, a rising chorus argues that they don’t do enough with the exemption. (Why does a tax-exempt institution have to charge fees anyway?) Credit unions are the only tax-exempt entities I know of that must successfully compete against for-profit entities or go out of business. In an ideal world, deposits grow magically, loans are never delinquent and fees never have to be charged. But the world is not a fantasy and, with or without a tax exemption, tough choices have to be made and revenue has to grow.

Speaking of growing, the banking industry loves to point out that a relative handful of credit unions are now worth billions of dollars. The capitalist in me says that this reflects a job well done and is something to be celebrated by ensuring that members have additional choices in where to put their money. Since when did competing successfully become a bad thing?

The history of the credit union industry demonstrates that the tax exemption has been a benefit to the American public. But just like a picture tells a thousand words, an anecdote is more convincing than a recitation of statistics. As they cram into those offices next week, every credit union should be able to provide at least one example of the type of services and products it offers that it would not be able to if it had to worry about nettlesome stock prices. I have never met a credit union that could not meet this challenge.

Henry Meier is the former General Counsel of the New York Credit Union Association, where he authored the popular New York State of Mind blog. He now provides legal advice to credit unions on a broad range of legal, regulatory and legislative issues. He can be reached at (518) 223-5126 or via email at henrymeieresq@outlook.com.