Message To The Banks: Be Careful What You Ask For
The bankers continually complain (although I would use other less family-friendly words) about credit unions and our success in serving our members and with elected officials.
We know the litany of their complaints. But I want to take look at a couple of issues they have not publicly considered.
What if all credit unions converted to banks and became "member FDIC?"
If the National Credit Union Share Insurance Fund (NCUSIF) was dissolved and all federally insured credit unions' shares became federally insured with one of the funds in the Federal Deposit Insurance Corp., what impact would that have upon the banking community, especially the smaller, community banks that complain they are hurt by credit union success in the marketplace?
First of all, the Bank Insurance Fund (BIF) (which I will presume would be the only federal insurance fund with the merging of the Savings Association Insurance Fund into it as proposed in the bank's regulatory relief packages in Congress) would immediately become under-funded, and would require all federally insured institutions to pay insurance premiums to get back to a reasonable $1.25 equity ratio ($1.25 per $1,000 in insured deposits).
The addition of $500 billion of federally insured credit union shares (deposits) into BIF would cause the BIF equity ratio to fall to about $1.11 (using September 2004 data). This would put pressure on the newer community banks to pay an FDIC insurance premium (which many have not done because of the record strength of the banking industry).
True, federally insured credit unions (while keeping the option for privately insured, state-chartered credit unions) would be required to make an insurance payment. However, these institutions would be sitting on the cash from having their 1% NCUSIF deposit returned. The net effect would be even more liquidity for credit unions to meet the needs of their members though higher dividends, lower loan rates, or even more programs to meet the needs of consumers left "high and dry" by the for-profit banking industry.
Yet, the consumer/member-first philosophy of credit union would continue to place their needs first in providing local, affordable financial services. How would those community bankers feel about paying a deposit insurance premium (the same as credit unions) while their "competition" has more resources to deploy into services? Can't imagine they would be thrilled?
Would credit unions fall victim to the trap that savings and loans did in the 1950s when they lost their tax exemption?
When the bankers were successful in getting Congress to remove the tax-exemption status for the savings and loan industry in the 1950s they were successful in keeping the s&l powers constant despite paying a full share of federal taxes. Bankers are trying to "inform" Congress that credit unions have "outgrown their original intent" and should be paying federal taxes.
But would bankers want credit unions (and our dedication to superior member/consumer service) to have all of the powers for products, services, and capital that they currently enjoy or will get into the future? Credit unions would be able to offer the full range of deposit services (including trust, pension, and public agency services). The same would be true of loan products, including elimination of term and interest limits, full business lending authority, and full powers to lend to government agencies.
Since the National Credit Union Administration is pushing Basel II capital standards on credit unions, then credit unions would be able to obtain additional Basel II capital through subordinated debt, preferred stock, and trust-preferred securities in a full taxation scenario.
Credit unions would want full powers for full taxation. Would the bankers go for that?
I would ask any banker who is a member of any of the alphabet soup of bank trade associations the following question: Would you be better as a community bank with credit unions that fully participate in the FDIC (with added costs to your bank), have exactly the same powers you have, and not have the shareholder demands for higher profits and higher stock prices (that credit unions would not have)?
Since past performance is an indication of future performance, I know my answers. What are yours?
Greg Badovinac is compliance officer at Western FCU, Manhattan Beach, California.
This article originally appeared in the California Credit Union League's Digest, March 2005, and is reprinted here with permission.
Money is the wise man's religion. - Euripides