PORTLAND, Ore.-While the bank lobby has long argued credit unions are de facto operating as commercial banks and should be treated-and taxed-as such, a new study argues there is no evidence to support the claims.
The study was commissioned by the Northwest Credit Union Association, which said it did not dictate the findings. It was performed by Randall Pozdena and Michael Wilkerson, two Ph.D economists employed by ECONorthwest, an economics, finance and planning consultancy. Pozdena is managing director and senior economist. Wilkerson is a senior economist.
The conclusion of the ECONorthwest study states, "All of the major claims made by critics of the credit union industry are unsubstantiated." The authors offer seven specific refutations:
* CUs' share of consumer deposits has not been growing for more than a decade.
* There is no evidence that either the community bond designation or corporate tax policy has had any positive statistical effect on deposit or institution share trends.
* CUs' growth and consolidation is mainly a response to the risk and inefficiency of reduced scale revealed by CU liquidations in the 1970s and 1980s-not a consequence of changes in common bond designation or tax policy.
* Untaxed CU net income is not going to higher credit union labor compensation.
* Consistent with the theory of cooperative banking, credit unions continue to provide superior deposit and loan rates, in addition to greater protection from portfolio risk relative to outside-ownership commercial banks.
* The channeling of free cash flow to savers and borrowers means that free cash flow does not go untaxed.
* Credit unions have not abandoned small account holders.
According to the ECONorthwest study, if the corporate income tax exemption or enlargement of the common bond population were making credit unions inexorably more successful financially, it should be reflected in an increase in the share of credit unions relative to the total of financial institutions. However, the study states, the share of credit union organizations had been rising as credit union shares of deposits and assets rose in earlier decades, but have been falling or level since the 1970s.
"Credit unions are clearly not poised to dominate commercial banks in either share of deposits and assets or in the number of institutions," the study states.
The study also addresses the argument that CUs should be taxed because they accrete high net incomes. The authors respond that if cooperatives are operating so as to maximize benefits to their members, they can be expected to channel net income to their members in the form of lower loan rates and higher deposit rates.
"These flows of income out of the cooperative influence personal tax obligations, so credit unions create income tax revenues for federal and state governments despite exemption from corporate income taxation."
'Last Thing We Need'
Troy Stang, president and CEO of the Northwest CU Association, told Credit Union Journal the trade group commissioned the study in response to what he termed the "same old banker message points over and over."
"We wanted someone independent to look at these arguments," he said. "The credentials of this firm and these individuals really speak for themselves. We did not tell them to take any angle, they chose how to test these theories. I appreciate these economists looking at the whole picture."
Absolutely the CUs in Oregon and Washington are bigger than they were 20 years ago, Stang acknowledged, but not, he said, at the expense of banks. "In this day and age of 'Too Big to Fail' banks, the last thing we need as a country is to eliminate the credit union charter, simply from a diversification standpoint," he asserted.
Stang said he has heard all the banker arguments for years, but, "I knew in my heart of hearts when you pool people with common interests together there is an inherent sense of ownership.
"Credit union members know they are borrowing from their co-workers and neighbors, not a big corporation, and these economists showed it," he declared. "They showed the success of the cooperative umbrella-and showed that success did not come from the demise of the banking system."
Pozdena told Credit Union Journal he was aware of the bank attacks on the CU tax exemption from his 14 years with the Federal Reserve Bank of San Francisco.
"Some of the critics were saying if credit unions were acting like a bank they should be taxed like a bank," he recalled. "The Northwest Credit Union Association asked me to examine that, both theoretically and empirically."
No Big Surprise
According to Pozdena, nothing in the findings of the report particularly surprised him. "I took the engagement because I am familiar with credit unions and their differences from commercial banks. I know the form of credit unions-they are cooperatively formed and managed. Also, they cannot offer all the products and services banks can, and cannot obtain outside equity. So it did not surprise me they are smaller and are growing more slowly than banks because they are hamstrung by some of those limitations, but also they have a lower risk profile."
