Monday's American Banker article ("Treasury: Credit Unions No Threat to Banks, Thrifts") began with a very important conclusion that is backed up by the Treasury Department's two-year studies of credit unions.
These studies reveal that credit unions are not "a threat to the viability and profitability of other insured depository institutions" and that credit unions have no "competitive advantage." Further, in our view, a closer look at the study's comparisons of regulatory requirements between banks and credit unions makes it clear that credit unions are more heavily regulated and have fewer powers than do banks.
In fact, the Treasury studies make the case that credit unions, as well as banks, need regulatory relief.
Look at the appendix to the first report, Comparing Credit Unions with Other Depository Institutions. It is a testament to regulatory overkill.
Credit union regulations are much more restrictive than bank regulations as they apply to insurance, securities, and a host of other financial services that credit unions have been given very limited ability to offer in the modern marketplace.
Bankers argue that's the price of credit unions' income tax exemption. They point to the Treasury's estimate that taxing credit unions could raise $1.37 billion to $1.62 billion per year from 2000 through 2009. However, the Treasury does not support taxing credit unions. Its report recognizes that taxing credit unions would raise safety and soundness concerns, since not-for-profit institutions cannot raise capital as for-profit institutions do.
Though the income tax exemption may save credit unions an average of $1.5 billion per year, credit union members save about $5.5 billion per year in lower loan rates, lower fees, and higher savings rates (which are taxed as dividends). This difference factors in to all the benefits of a not-for-profit cooperative: no outside stockholders, lower overhead costs, and 150,000 volunteers serving on credit union boards and credit committees.
Congress recognized credit unions' value while upholding the income tax exemption in the Credit Union Membership Access Act of 1998.
Yet the law was not a credit union modernization bill. It simply restored membership eligibility rules that had been in place from 1982 to 1996. At the same time, the bill added regulatory restrictions - a cap on select employee groups, a ceiling on member business lending, and increased reporting requirements.
It is clear that credit unions pose little threat to banks today. But as reported in the American Banker article, bankers continue to suggest that credit unions might someday become a "bigger threat" by making more business loans to members.
Let's examine the evidence:
- Credit unions' share of the business lending market is less than 1%.
- Nearly half of this share is held by just 92 credit unions.
- One-quarter of all credit union business loans are made to members with household incomes of less than $30,000.
- Another 20% goes to households with incomes of $30,000 to $50,000.
- Nearly 60% of all member business loans have balances of less than $50,000.
- Only 2% have balances over $500,000.
- Credit union member business loans are "less risky than commercial loans made by banks and thrifts."
All of this is documented in the second Treasury report, Credit Union Membership Business Lending.Constrained by regulations and without the power to serve members to the best of their ability, credit unions need a new charter for the 21st century.
This is why the Credit Union National Association created the Renaissance Commission. We are not looking for a "quick fix." We are gathering input throughout the credit union movement. We are working to build consensus for legislative and regulatory changes that would enhance credit unions' ability to serve their members for years to come.
Mr. Mica is president and chief executive officer of the Credit Union National Association in Washington.
