SMALL BANKS AND CREDIT UNIONS

From The Nader Letter

Dec. 1997

Several presidents of small independent banks have written with complaints that our column (“Eliminating Competition, October 1997) was overly generous to the credit unions and failed to mention key concerns of the banking industry. The issue that prompted the column is the bank-financed lawsuits which seek to eliminate the authority of the National Credit Union Administration (NCUA) to charter multi-occupation credit unions. Through interpretations of NCUA’s chartering authority in existence since President Reagan’s Administration, employees in small companies could become members of a larger credit union formed by a different and unrelated occupational unit.

Many small businesses employ only a handful of workers and the numbers are often too small to support a viable credit union. These employees would be shut out of credit union membership without the current NCUA authority which allows them to join larger occupational credit unions. But, that authority is being challenged by banks, and the Supreme Court is expected to decide next year whether the multi-occupational credit unions are legal.

The President of The Savannah Bank in Georgia — Archie H. Davis — complains that “nowhere in the article did you mention that credit unions pay no income taxes… and are not subject to the Community Reinvestment Act (CRA).”

Similarly, B. M. Broderick, Jr., who is the CEO of First American Bank in Canton, South Dakota tells us “you conveniently left out a very critical ingredient or two that gives credit unions the upper hand in pricing their products.”

We believe that credit unions are an important part of a much needed diversity in our financial system. We think it would be unfair to deprive people from credit union membership simply because they work in businesses and occupations too small to support a separate credit union. We think the Reagan-era interpretation of the credit union “common bond” was a proper solution to the problem.

But, it is isn’t our intention to dust off the concerns of small bankers lightly. They, too, represent a vital sector of the financial system and, like credit unions, often provide choices for consumers turned off by the impersonal “take it or leave it” attitude of interstate banking giants.

It is no surprise that Mr. Davis and Mr. Broderick raise questions about taxes. That seems to be a common and intensely felt concern throughout the banking industry.

Credit unions counter that they operate as non-profit cooperatives owned and controlled by their members and do not generate profits on which taxes could be assessed. Income of the credit unions flow back to the member-owners in the form of interest on their share accounts. The individual members, of course, pay taxes on any interest they receive on their shares.

In contrast, commercial banks operate under a different structure as profit-making institutions. They pay taxes, but only on their net profits after deducting all of their expenses of doing business including executives’ salaries. And as credit union leaders are quick to point out, any commercial bank that wants to become a non-profit institution can avail itself of the same tax status as a non-profit credit union.

The credit unions’ exemption from the Community Reinvestment Act runs a close second among the independent bankers” concerns.

Here, credit unions argue that by law they serve only their members, not the entire community. Therefore, they contend, CRA shouldn’t apply since, by charter, they are serving all their members.

This argument holds more water for small credit unions who serve relatively small number of employees than it may for larger credit unions with geographically scattered membership.

Representative Joseph Kennedy of Boston — certainly no enemy of credit unions — has introduced legislation repeatedly to apply a CRA-like test to the bigger credit unions. It hasn’t gotten out of the House Banking Committee, but the issue is very much alive.

Even the argument against CRA by smaller credit unions would be strengthened by greater

evidence of actual participation by members and the more frequent use of the credit unions’ vaunted one-member, one-vote in deciding policies. That would help in supporting the argument that all credit unions serve all their members on an equal basis. It doesn’t help the cause of any credit union when only a handful of members show up at an annual meeting and leave the key decisions to a core of insiders.

In the end, small banks and credit unions may find they have more in common than either group is willing to admit at the moment. What ought to be concerning the leaders of small banks and credit unions is the rapid consolidation of the banking industry and the absolute indifference of the Congress to the resulting concentration of economic power.

Hugh McColl, CEO of Nations Bank and one of the leaders in the rush to merge, openly talks about a handful of banks at the top of the heap with the remaining institutions reduced to little more than “boutiques.”

Similarly, Edward Crutchfield, head of First Union Bank Corporation with branches and recent acquisitions up and down the east coast, dismisses the concerns about “bigness” in the banking world as just so much “nostalgia.”

Congress, instead of taking steps to curb mergers and maintain a competitive banking system, is rushing to combine banks, securities firms, insurance companies and even industrial corporations in massive conglomerates.

This consolidation of economic and political power does not serve the interests of credit unions or independent banks. It is something that could swamp all small and independent financial entities and make it difficult, if not impossible, for the voices of diversity to be heard in the marketplace.

The Independent Bankers Association of America (IBAA) recognized this fact last year and, along with consumer, community, small business, rural and labor groups, mounted an effective campaign against legislation which would have created these nationwide conglomerates. But, the legislation is still pending. It would be useful to have the credit union trade associations — Credit Union National Association (CUNA) and the National Association of Federal Credit Unions (NAFCU) to join with IBAA and the other groups in the next session to oppose these moves to economic concentration.

Here, the credit unions and the independent banks might find some points of agreement that would serve the public interest as well as each group’s self-concerns.

From the standpoint of consumers and the well-being of the nation’s economy, it is extremely important to maintain choice and competition in the marketplace. In the financial arena this means a viable and thriving independent banking industry alongside a strong and vital credit union movement. Neither should be diminished or lost.