Following this year's legislation requiring banks to help fix the Savings Association Insurance Fund, Congress will soon address common charters for banks and thrifts. Repeal of the Glass-Steagall Act, which separates commercial and investment banks, will also be a top priority. Moreover, insurance underwriters and agents now acknowledge it's time to remove the barriers between banking and insurance.
It would be difficult to justify revamping the financial system without at least considering the role of credit unions. Moreover, recent judicial proceedings almost guarantee credit unions will be front and center in the upcoming legislative debates.
Congress envisioned in 1934 that credit unions would be formed among small groups of people having a "common bond" - people working for the same company or living in the same community. The National Credit Union Administration has in recent years interpreted the law to allow credit unions to have many disparate groups, each with its own common bond.
Banks, frustrated by the rapid growth of credit unions and their tax- exempt status, brought legal action against the NCUA and the AT&T credit union. The AT&T credit union was chartered in 1952 to serve the "employees of the Radio Shops of Western Electric Company Inc., who work in ... North Carolina." It has since grown to 112,000 members in more than 150 disparate occupational groups spread across all 50 states.
The Court of Appeals for the District of Columbia ruled in July that the NCUA had violated the statutory common bond requirement in allowing credit unions to expand in this fashion. The NCUA decided initially to thumb its nose at the Court.
That strategy backfired last week. The Court refused to reconsider its decision and barred credit unions from adding new members who don't work for the business the credit union was chartered to serve. As NCUA Chairman Norman D'Amours candidly put it, "The order is very broad ... it's about as bad as it could be."
Credit unions contend the ruling is anticonsumer and will hurt millions of Americans. They vow to pursue every avenue to overturn the decision.
Do their arguments hold water? Are credit unions offering products and services that aren't available from banks, thrifts, finance companies and other financial firms? I haven't been able to identify a single product or service offered by credit unions that's not readily available from a variety of financial companies.
Are credit unions serving segments of the general population who wouldn't otherwise be served? Not according to statistics published by the American Bankers Association.
The average credit union member has household income of $42,050, compared with $28,810 for the average nonmember. Fifty-eight percent of credit union members have some college education, compared with 46% for nonmembers. Sixty-six percent of credit union members have full-time employment, compared with 53% of nonmembers. Seventy percent of credit union members own their home, versus 60% for nonmembers.
So what's special about credit unions? About the only thing I can come up with is that they are structured as "mutuals," owned by their members.
Though the mutual form of organization may be special, it's hardly unique. Many thrifts are organized as mutuals. If credit unions want to escape the common-bond requirements, they can do so today by converting to mutual thrifts. Moreover, when Congress acts to unify the charters of banks and thrifts, one can safely assume that the combined charter will provide for the mutual form.
This leaves only the taxation issue to distinguish credit unions from other financial companies. Credit unions don't pay income taxes.
It'll be interesting to see how credit unions that look and act like banks and thrifts - except serving a higher-income clientele, in many cases - will be able to justify their tax-exempt status. One suspects that'll be a very difficult public policy argument to make in view of the federal budget deficits and the scarcity of money for worthy programs.
Mr. Isaac, former chairman of the Federal Deposit Insurance Corp., is chairman and CEO of Secura Group, Washington.
