State-chartered credit unions in California are seeking permission from regulators there to raise capital by selling more shares in their institutions both to members and nonmembers.
The proposal - the first of its kind in the country - has angered the state's bankers, who claim it would give credit unions another way to become more "bank-like" without having to pay taxes or comply with banking regulations.
As it stands, credit unions are only allowed to raise capital by accumulating earnings, after dividends are paid to their members. Most credit unions are adequately capitalized under this structure, but some are struggling to maintain capital ratios required by regulators because their membership enrollment has outpaced their income, said Charles Bruen, the chief executive officer of $350 million-asset First Entertainment Credit Union of Hollywood.
"Some credit unions have become victims of their own success, and they can't grow earnings fast enough," Mr. Bruen said.
He said the problem was exacerbated by passage of the Federal Credit Union Act in 1998, when Congress raised the equity capital requirements for federally insured credit unions from 6% to 7% as a tradeoff for letting them expand their fields of membership. Several fast-growing credit unions in California are feeling the squeeze, and the California Credit Union League is asking the California Department of Financial Institutions to let state-chartered credit unions there raise capital in other ways.
Last year the California Legislature gave the state agency the authority to grant credit unions alternative means of raising capital, the first state in the country to do so.
Officials at the Department of Financial Institutions were not available for comment.
Mr. Bruen, who is also chairman of a task force petitioning California regulators, said state credit unions would like first to sell members additional shares.
Members already receive one share in a credit union automatically by opening an insured account. These extra shares would be uninsured deposits, which members would have to keep in the credit union for a certain length of time. In return, members would be paid a higher dividend rate.
But Brian Maas, vice president of government relations for the California Bankers Association, contends that if credit unions were to sell more shares, they would abandon their traditional mission of serving all members equitably.
"Those members buying additional shares would have more of a stake in decision-making in that credit union," Mr. Maas said.
Not so, according to Mr. Bruen. He said members buying additional shares would not have a bigger say, just higher dividend payments commensurate with higher risk. "There would not be weighted voting based on the number of shares a member may have. Credit unions would still be democratically controlled - one member, one vote."
Credit unions chartered in California also want to sell shares to nonmembers. These shares too would be uninsured deposits that would have to remain in the credit union for a given amount of time, but would be sold to nonmembers, such as companies wishing to help establish a credit union for their employees. Nonmembers purchasing shares would also receive dividends.
Mr. Maas adamantly objected to any sale of credit union shares to nonmembers. He maintained that dividends to nonmembers would actually be "profits" from their investment in the credit union - and if any investor were to make a profit from the institution, the credit union would cease to be a nonprofit.
Mr. Bruen insisted that nonmembers would not be buying into the "ownership" of the credit union, since they would not be able to vote on credit union matters. They would merely be investing in an uninsured financial instrument offered by a nonprofit institution, he said.
The California Bankers Association has a problem with the whole premise of credit unions obtaining additional capital, Mr. Maas said, because it is afraid that credit unions would use this extra capital to get into more "bank-like" lines of business. For example, some in California are lobbying for the authority to establish in-house trust departments.
"But if they want to operate more like a bank, they should pay taxes like a bank and be subject to the same regulations as banks, such as the Community Reinvestment Act," Mr. Maas said.
Mr. Bruen responded that while credit unions are seeking to offer more services associated with banks, they are not structured the way banks are; they remain nonprofit entities and therefore should keep their tax-exempt status, he said.
He agreed that credit unions' expanded powers are hurting banks, but "credit unions should not be penalized for their success," Mr. Bruen said. "Obviously, our members are voting with their feet, or we wouldn't have these growth issues in the first place."
Even if California legislators were to give the state-chartered credit unions more leeway in obtaining capital, those that are federally insured through the National Credit Union Administration would still be restricted under federal statute. If the California Department of Financial Institutions approves the alternative measures, Mr. Bruen said, credit unions across the country will begin fiercely lobbying Congress to authorize the federal agency to give federally insured credit unions the same freedoms.
