Upsides of bank sales to credit unions

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In December, I testified before the House Financial Services Committee in my capacity as a financial industry regulator.

During questioning, several committee members noted the trend, recently reported in the media, of credit unions “acquiring” banks. I was glad to take those questions, as I welcomed the opportunity to clarify this issue.

It is important to clear up the most common misperception of these transactions. When speaking of credit unions “acquiring” banks, these credit unions are actually purchasing bank assets and certain liabilities in market-based transactions. These purchases could include loans and deposits, but credit unions could not own bank stock, for example.

Some argue that these transactions threaten the original mission of credit unions, and because of this, credit unions no longer warrant their tax exemption. However, while credit unions are exempt from federal income taxes, they may still be subject to payroll taxes, property taxes and sales taxes.

Moreover, in instances where a credit union and bank transaction leads to continued or improved financial services for an underserved community, these transactions should be welcomed as a needed boost to financial inclusion efforts.

Data show the banks involved in these transactions are typically smaller institutions with lower profitability. These voluntary transactions are subject to regulatory oversight.

When a bank proposes to transfer its deposits to a federal credit union, the NCUA requires a two-step process to establish the membership status of the bank’s former customers.

First, the federal credit union must confirm the bank customers are within the federal credit union’s field of membership. Second, those customers must become full members of the federal credit union. (For state-chartered credit unions, the state regulatory agency determines field-of-membership eligibility and credit union membership.)

These are a relatively small number of transactions: Since 2012, there have been roughly 30 credit union and bank transactions. By comparison, there were about 250 acquisitions of smaller banks by larger banks in the last year alone. Yet very little is discussed about the potential effects of such acquisitions on competition and access to financial services.

This question of financial inclusion and access to financial services is critical. There needs to be a recognition that these transactions are occurring at a time when options for financial services are dwindling in far too many of our communities.

Credit union and bank transactions may be particularly beneficial for underserved and rural areas, which have seen a severe contraction in access to financial services over the last decade as financial institutions shut down branches.

In November 2019, a Federal Reserve report detailed the decline of banking services in many American counties from 2012-2017. The majority of U.S. counties lost bank branches during that time frame, but rural counties were particularly hard hit.

The Fed found that 40% of rural counties lost bank branches over that five-year span. The loss of access to financial services was felt particularly by African-American and low-income residents of the affected counties.

When communities lose access to financial services providers, it’s like cutting off the oxygen to the local economy: small businesses suffer; jobs are lost; and consumers, particularly in low-income households, are more likely to turn to predatory lenders.

The National Credit Union Administration is taking steps to add clarity to the purchase and assumption process. At its Jan. 23 meeting, the NCUA board proposed a new rule to codify and clarify oversight of credit union transactions with any non-credit union entity.

Provisions of the proposed rule help protect all stakeholders affected by a potential transaction. This includes an express listing of the statutory requirements for such transactions, clearer direction on credit union membership requirements and other requirements aimed at ensuring full transparency and accountability.

In the meantime, the NCUA will continue to monitor these transactions carefully. And we will continue to take all prudential measures needed to ensure the ongoing safety and soundness of the federally insured credit union industry.

Banks and credit unions are part of the same financial ecosystem and seek to provide quality financial services to Americans. In a time when far too many American households are unbanked or underbanked — and when communities are suffering due to a loss of financial services providers — banks and credit unions should not be pitted against one another.

The top priority should be financial inclusion and access to regulated, affordable financial services.

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M&A Law and regulation Federal credit unions Credit unions State-chartered credit unions NCUA Federal Reserve