WASHINGTON -
Since 1990, the average return on assets (ROA) for credit unions has gone from around 0.80% and was 0.81% for 2006; while the average for banks, which were struggling with S&L-like loan problems, then had to boost capital for new industry-wide rules, went from a mere 0.25% to 1.27% last year, the GAO found.
Release of the study comes a week after NCUA reported that the average ROA for credit unions plunged in the first quarter to a 20-year-low of just 0.73%.
The study also shows that 2,356 closely held banks-roughly a third of the number of credit unions still in existence-now qualify for a credit union-like federal tax exemption as Subchapter S corporations. The bankers are currently lobbying for legislation that would expand the Subchapter S tax exemption and make it available for more institutions.
In addition, banks took $108 billion in tax deductions in 2004 and $6 billion in tax credits. The report also describes instances of banks' participation in abusive tax shelters.
In contrast, credit unions' federal tax exemption is estimated to be worth just about $1.4 billion for 2007.
The data appears to show that despite the bankers' claims, competition from tax-exempt credit unions is not hurting their profitability or growth prospects, according to Fred Becker, president of NAFCU, which prompted then Rep. (now Sen.) Bernard Sanders to ask for the study.
"This report makes it abundantly clear that banks-despite their protestations that credit unions get a 'free ride' on the tax exemption issue-avail themselves of literally hundreds of billions in federal tax deductions and credits each year and are growing at a rate that is double that of credit unions," Becker said.
"This study pounds a big dent into the bankers' persistent and loud argument to Congress that banks are suffering at the hands of credit union competition," said CUNA President Dan Mica, in a prepared statement.
The study was conducted at the request of then-Rep. Sanders, the Vermont socialist who is the biggest credit union supporter in Congress. At the time of his request Sanders was a member of the House Financial Services Committee and one of the sponsors of the CU regulatory Improvements Act. Since then, Sanders has been elected to the Senate. Sanders made the request to demonstrate the multiple benefits enjoyed by the banks, despite their protest about credit union advantages through the tax exemption. Sanders, asked the GAO to look at the various federal tax policies and programs since the 1980s that have benefited banks and thrifts. He also asked investigators to perform a review of these institutions' executive compensation.
But contrary to finding a disadvantage for banks, the GAO study shows that the total profits for banks has increased an average of 8% a year since 1990, while credit union profits have increased an average of 3% annually.
The GAO also detailed billions of dollars in federal benefits accrued by banks, including the costs of the S&L bailout, which cost taxpayers almost $200 billion, to date.
The study also found that credit unions, as well as banks, continue to increase their reliance on fee income as margins dwindle on loans and investments.
Since 1990, credit unions have more than doubled the portion of net income they earn from non-interest, to 31% in 2006, from 15% in 1990; while banks have gone to 43%, from 32%.
The study shows that credit union profitability, as measured by ROA, peaked in 1992 at just over 1.20% when billions of dollars were flowing from failed and threatened S&L into credit unions. At the same time profits and banks and S&L were hurting because of real estate crisis that caused the S&L bailout and because the industry was adjusting to new regulatory capital standards resulting from the Basel Accord. Banks reduced their lending to meet Basel's new capital requirements.
But the GAO did not have enough data to draw conclusions on executive compensation at banks, saying just that limited information suggests that executive pay has increased.
