The idea of credit unions acquiring banks has advocates for the banking industry questioning whether the credit union tax exemption is justified, as many larger credit unions have drifted away from their mission. In fact, many feel it is time for the larger more aggressive credit unions to return to the mission of credit unions as originally contemplated by Congress or lose their tax-exempt status.

So, what exactly was on the mind of legislators when a sweet tax exemption was doled out to the credit union industry? Many believe the original idea was not for credit unions to be an alternative to banks competing with the competitive advantage of a tax exemption, but rather credit unions should offer tax-subsidized financial services to the underserved and individuals of modest means. Many find it ironic that legislation such as the Community Reinvestment Act designed to ensure the inclusion of serving those of modest means does not apply to credit unions, and in fact, that the credit union industry lobby’s against being subject to this legislation.

The facts on the street seem to imply that credit unions are vying for bank customers and are not focusing primarily on serving individuals of modest means. Additionally, in many cases, credit unions are not located in economically distressed communities.

The credit union tax exemption that exists today was not likely not meant to be spent on large executive salaries, lavish facilities, and naming rights to stadiums. Nor was the tax exemption meant to subsidize the purchase of banks and bank assets effectively removing them from the taxpayer rolls. But it appears these are areas where credit unions are leveraging their tax-exempt status according to many.

As we emerge from the pandemic, the trend of credit unions purchasing or attempting to purchase state and federally chartered banks seems to be gaining traction and are on an upward projection which is troubling in some respects.

Some in the credit union industry feel that they are not buying banks since they are not acquiring a bank charter. So, they wonder how could they be purchasing a bank? This argument is weak at best, since if either a bank or a credit union ends up with the assets of a bank, the result is the same, the bank is sold, and the charter is relinquished unless it becomes part of a multi-bank holding company and remains intact operating as a subsidiary.

What really has many up in arms is the untold story related to the cost of the credit union tax subsidy. The subsidy story outlined by Explore Credit Unions is an interesting one. Explore Credit Unions estimates that the credit union industry is approximately $1.3 trillion in size and pays no federal taxes. That’s right – $1.3 trillion in size and pays no federal taxes.

To put that in perspective, in the State of California the average Californian earning approximately $67,000 per year would pay roughly $6,100 in federal taxes. Another way of looking at the issue is credit unions are nearly indistinguishable from banks in many cases, yet don’t pay federal taxes. The uncalled-for subsidy is essentially depriving the Treasury of approximately $2 billion a year. That is a lot of money, especially in a period when both individual and corporate taxes are speculated to be on the increase under the Biden administration.

The trend of credit unions buying banks is driven in large part by their non-taxpaying status that provides the credit union with the ability to pay more in a transaction. Additionally, credit unions are not beholden to shareholders, or that matter it appears to their mission of serving the underserved.

A recently announced and troubling example of credit unions buying banks involves the $10 billion dollar credit union – Vystar Credit Union, which walks and talks like a bank, using its tax-free -status to purchase a bank for $189 million effectively removing the bank from the taxpayer rolls. One must wonder how this pending transaction relates in any fashion to the credit union mission as originally contemplated by Congress.

Although the tax exemption is seen as a disruption of the free market of financial services, the condition worsens when it is granted to an institution that almost parallels the behavior of community banks and is integrated with booming financial success.

Credit unions maintain a tax exemption grant because of their not-for-profit structure, claiming they can use this to lower costs for consumers. However, the evidence tends to point to the credit unions choosing to act like banks, chase mainstream clientele, and stray from the mission of serving the underserved.

Although the credit union industry has taken a little heat from the bankers, policymakers, and academics related to evidence showing credit unions operating in the financial interests of their senior leadership, rewarding executives handsomely, and spending thousands on naming rights to stadiums, the outcry has not been loud enough to end the subsidy nor the trend of credit unions acting like banks and buying banks.

Stay tuned as more transactions involving credit union purchasing banks at taxpayers’ expense emerge.

#banking #banks #financialservices #communitybanking

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