Why are taxpayers still subsidizing credit unions' bank buyouts?

Robyn Aaron

While credit unions cheer community bank acquisitions for helping them meet their deposit growth goals with few regulatory hurdles, the record pace of these taxpayer-subsidized deals nevertheless remains fueled by bad public policy. Given the tax and regulatory disparities, increased cybersecurity risks and consumer impact of credit union purchases of community banks, policymakers should take a closer look at these deals and whether government policy should continue supporting them.

Credit union acquisitions of community banks have serious implications for local communities beyond their expansion of the federal tax exemption for more than $2 trillion in credit union assets. With the nation's community banks accounting for roughly 60% of U.S. small-business loans and 80% of agriculture loans, these acquisitions risk displacing a critical provider of capital. And each transaction expands the portion of the financial services industry exempt from Community Reinvestment Act (CRA) requirements for lending to low- and moderate-income (LMI) consumers and small businesses in local markets.

The CRA regulatory imbalance reflects these deals' broader negative impact on LMI communities. While credit unions were established more than a century ago to serve people of modest means with a common bond, the data shows they are falling short of that mission as they have expanded beyond their founding mandate and the National Credit Union Administration (NCUA) has failed to hold them accountable. Community banks outnumber credit unions by a 2-1 margin in low-income or distressed communities and are more likely to lend in census tracts with above-average poverty and unemployment, according to Home Mortgage Disclosure Act data.

Further, NCUA Chairman Todd Harper's recent calls for Congress to give his agency the same authority as banking regulators to supervise for cyber risk raises another reason why these acquisitions are an issue of national importance: the threat they pose to U.S. cybersecurity. While Harper's NCUA is the federal agency charged with regulating the credit union industry, it is not authorized to examine credit union third-party service providers for cyber risk.

Harper has called the lack of authority a "regulatory blind spot" that means the agency doesn't "necessarily know what is happening" with credit union cybersecurity and could leave his industry as the "soft underbelly" of the broader financial system. Harper also noted that the NCUA is the only financial services regulator that doesn't do a "deep dive" exam on compliance with federal consumer protection laws.

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This regulatory imbalance combines with a tax exemption worth between $2 billion and as much as $4.4 billion per year, based on the industry's net income, in stark contrast to the $12 billion in tax revenue community banks contributed in 2020. All together, these policy imbalances leave little wonder why credit union bank acquisitions peaked last year and are expected to continue apace in 2023 — credit union executives can combine their members' capital with the savings from their tax exemption to make inflated all-cash offers to buy out healthy community banks in largely private deals with little transparency.

And credit union executives, hesitant to expand via purchases of other credit unions because that is a "longer dance" than acquiring tax-paying community banks, surely understand that the NCUA has a role here as well. The agency has established increased transparency to credit union mergers that make these transactions more difficult than closed-door deals that buy out community banks for well over their book value.

While Colorado, Nebraska and Mississippi have pushed back against these deals in their states, this trend is a matter of federal policy and national importance. Taxpayers are entitled to know more about how the subsidy they fund is being used to underwrite financial services consolidation. Congress should respond by holding hearings, requesting a Government Accountability Office study on the credit union industry and considering an "exit fee" on these acquisitions to capture the value of the tax revenue lost once the acquired bank's business activity becomes tax-exempt.

Far from "the free market at work," the record pace of credit unions' taxpayer-fueled community bank acquisitions is ultimately a negative externality of federal policies that have expanded credit unions' authority over the decades, allowed them to depart from their founding mission and preserved an outmoded tax exemption that dates back more than a century.

Congress in 1951 revoked the tax exemption for building and loan associations, cooperative banks and mutual savings banks — finding that these institutions operated much like commercial banks and should be taxed accordingly — and many other countries have leveled the tax and regulatory responsibilities of their financial sectors. Today, as credit union banking acquisitions continue, policymakers should investigate this growing trend and whether federal policy should continue to support them.