Credit unions thought they won a great victory over banks two years ago with the enactment of legislation that liberalized membership rules.

The banking industry subsequently took its complaint to the courts, saying that the National Credit Union Administration had gone too far in implementing the law.

But a number of credit unions - mostly the large conglomerates - now believe that the NCUA didn't go far enough. They are abandoning their federal charters for more liberal state charters.

This development is of grave concern to community banks and smaller credit unions, for competitive as well as safety and soundness reasons. The large credit unions not only are seeking more liberal charters, but they are also studying whether to abandon federal deposit insurance.

So far virtually all of the credit unions fleeing the federal charter want more liberal field-of-membership rules and additional authorized activities at the state level. Some recent examples:

  • In California, nearly 40 federal credit unions have applied for conversion to state charters during the past three years. The five largest applicants' assets total more than $2 billion. State-chartered credit unions are pushing for "super wildcard" authority, meaning they could engage in any activity authorized for any credit union in the country, and the authority to branch internationally.
  • In Oregon, rules that took effect this year allow credit unions to apply for a community charter with no population limits.
  • In Washington, credit unions can convert to a hybrid charter, which mixes facets of occupational field-of-membership charters with community-based charters.
  • In Connecticut, Sikorsky Federal Credit Union has applied to become a state-chartered credit union with a statewide field of membership. The $320 million-asset credit union's proposed field of membership would overlap the state's other 200 credit unions, both state and federally chartered, most of which are much smaller.

A prominent credit union leader has gone on record in favor of a new "common bond" rule that would permit anyone to join a credit union.Credit union leagues in 11 states - California, Colorado, Idaho, Montana, Nevada, North Dakota, Oregon, South Dakota, Utah, Washington, and Wyoming - are funding a study into whether the NCUA should serve as both regulator and insurer.
This comes at a time when state-chartered credit unions are looking at creating their own deposit insurance fund and pulling out of the National Credit Union Share Insurance Fund, operated by the NCUA. Credit unions that have converted from federal to state charters don't like having two regulators - their state regulator and the NCUA.

Currently, eight states - Alabama, California, Idaho, Illinois, Indiana, Nevada, New Hampshire, and Ohio - allow credit unions to have private insurance. Credit unions in some other states are trying to convince state regulators of the need for a private insurance option. They cite advantages that actually raise serious safety and soundness concerns, including increasing member account insurance to an astonishing $500,000, from $100,000 today.

So much for the argument that credit unions serve the common man.

Developments at the state level have spurred the Credit Union National Association and the National Association of Federal Credit Unions to call for new legislation to help federally chartered credit unions catch up by virtually eliminating the common bond and expanding investment authority.

What does all this mean? The presence of more and more state-chartered credit unions, with more liberal field-of-membership restrictions and no tax obligations, would make it harder for community banks and traditional credit unions to compete and survive.

The rapidly growing credit union conglomerates raise safety and soundness concerns by margining capital. It is also questionable that these credit unions have sufficiently trained staff to handle such expansion.

By opting for private insurance, state-chartered credit unions would establish a dangerous precedent, de-linking them from federal oversight and, if necessary, prompting corrective action to avoid failures.

In my view, Congress should do the following:

  • Require credit unions fleeing their federal charters and opting for private deposit insurance to understand they are on their own if something goes wrong. State and private deposit insurance programs have a history of ultimately requiring taxpayer funds.
  • Require state-chartered credit unions that have federal deposit insurance to obtain federal regulatory approval before engaging in new activities - like banks do.
  • Require credit unions that want new powers and expansion ability to pay their fair share of taxes. My mutual savings bank operates just like a credit union. We have no stockholders, but we lost our tax subsidy in 1952 and have been paying our fair share ever since.

Correcting that inequity, either by taxing credit unions or giving community banks tax relief, and ensuring safety and soundness practices should be the highest priorities.

Mr. Garrison is chairman, president, and chief executive officer of Walden Savings Bank of Walden, N.Y., a director of America's Community Bankers, and a former chairman of the group's credit union task force.

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