Don't believe that the economic stimulus package introduced by President Bush last week has nothing for credit unions. Because if it is adopted it could have a major impact on the credit union movement- particularly the provision to exempt all dividends paid on stocks from taxation.
The proposal is aimed at reversing the three-year flow of funds out of the stock markets by making stock investments more attractive. But where have much of those funds gone over the last few years? To federally insured deposit accounts, such as those in credit unions. Over the past two years, credit unions have experienced a flood of more than $120 billion of new shares (savings), much of it transferred from plummeting stock market accounts.
Creating new incentives for stock market investing will pose disincentives to other types of investments, including credit union and bank deposits. After all, there's just so many ways a dollar can be spread.
Credit union lobbyists were still studying the ramifications of the presidents' proposal last week. But one official expressed concern over such a measure because of the potential impact on credit unions. The banking lobby was reported last week to be discussing an initiative to expand the proposed exemption to interest paid on savings accounts. But that initiative is a long shot.
The flood of new shares has had a dramatic impact on credit unions. It has allowed credit unions to lower their cost of funds to historic lows, enabling them to maintain historically high ROAs (return-on-average assets).
But it has also diluted capital ratios. Industry officials have been wondering on the duration of these newfound funds, with most observers expecting them to be short-term. But the continued troubles in the stock market have made them longer-term than expected.