Have Credit Unions Become Stealth Banks?
Troy Stang likes to explain things by referring to “Grampa’s” credit union, founded to serve the parish of a Catholic church in Melrose, Minn., with checking accounts and farm loans. Stang, who worked for his grandfather as a teenager, is now president of the Northwest Credit Union Association, a trade group in Oregon. This is how credit unions see themselves: small, risk-averse, and family-run.
Unlike banks, which can raise capital by issuing bonds or selling shares, a credit union can raise capital only by retaining its own earnings, a practice seen as a source of stability by regulators. A bank answers to its shareholders, who want to see profit. A credit union answers to its depositors, who want better service and lower rates. Unlike banks, credit unions don’t pay taxes on the money they make on loans.
Yet like banks, credit unions have been consolidating for the past 20 years—and getting far bigger. Ten years ago there were only 70 credit unions with assets of more than $1 billion. Now there are 195. Overall, however, the number of credit unions has dropped by more than half since 1990. For the ones that remain, growth—in members, loans, and deposits—continued almost unabated during the financial crisis, possibly in response to Bank Transfer Day, a movement to place deposits with credit unions.
This has led banks and their trade associations to start asking whether credit unions should be subject to the same regulations as banks. Debbie Matz, chairwoman of the National Credit Union Administration (NCUA), pushes back, saying credit unions are “becoming bigger, but because of their structure, they’re very much still credit unions.”
The median credit union still runs out of a single branch and holds assets of about $20 million. But the largest in the U.S., the Navy Federal Credit Union, founded to serve sailors and Marines, now has $54 billion in assets. By comparison, only 1.4 percent of all U.S. banks have assets of more than $10 billion. Credit unions such as Tinker in Oklahoma and OnPoint in Oregon have assets in the $3 billion-plus range, dwarfing most commerical banks in their states. This year Matz’s agency opened a new division to focus on the four credit unions with assets greater than $10 billion. The number is not accidental. Each of these institutions could at a single stroke wipe out the NCUA’s $11 billion insurance fund for credit unions.
Consumers have come to expect credit unions to provide online banking, branch offices, and an ATM network, each of which increases back-office costs and encourages further consolidation. Credit unions were originally designed to serve only a single church parish, community, or company, and credit union employees made calls on loans based on personal knowledge of their own depositors. More sophisticated consumer credit scoring by banks has erased this advantage, and a law in 1998 opened up membership for the credit unions, weakening the link between them and their depositors. To get a car loan from NASA Federal Credit Union, you can join the Moon Society, a nonprofit group, for $20.
In February the American Bankers Association wrote a letter to Congress, asking that credit unions lose their tax-exempt status on the profits they make on loans. A bill in Oregon would do the same for credit unions in the state with more than $500 million in assets. “If credit unions have evolved to the point where they are competing directly with banks,” says Keith Leggett, senior economist for the American Bankers Association, “they should be treated the same.” Matz says taxing credit unions would finish off the smaller ones and so diminish consumer choice.
More significant, a bill now before Congress would allow credit unions to issue subordinated debt. This would add a new party, with different interests, to a credit union’s capital mix. Even subordinate debt holders have a habit of asserting themselves in a crisis. Stang says that as long as a credit union remains a cooperative—a single vote for every depositor—it serves its purpose, regardless of size or capital structure. His grandfather’s institution is now the Central Minnesota Federal Credit Union, with more than $500 million in assets.