Credit unions make friends-but not with bankers

Federal Reserve Bank of St. Louis - Regional Economist, Oct 2003 by Emmons, William R, Schmid, Frank A

Despite the rather low profile and mundane operations of the vast majority of credit unions, these institutions have long been a source of controversy in the United States, primarily in the banking community. For decades, bankers have objected to the tax breaks and sponsor subsidies enjoyed by credit unions and not available to banks. Because such challenges haven't slowed down the growth of credit unions, banks continue to look for other reasons to allege unfair competition.

Public awareness of the long-simmering credit-union debate was piqued about five years ago by a Supreme Court case pitting commercial banks against credit unions and their federal regulator.1 The court found in favor of banks and their trade association, ruling that the regulator of federal credit unions, the National Credit Union Administration (NCUA), must not allow them to expand by combining more than one field of membership, or common bond among members. In other words, the Supreme Court ruled that each credit union should remain focused on a single membership group-employees of a company, members of a fraternal or religious organization, or residents of a neighborhood, to cite a few examples. Less than six months later, however, President Bill Clinton signed into law new legislation that essentially reversed the Supreme Court's ruling. Thus, credit unions now may expand by merging multiple (unrelated) fields of membership.

But the feud continues. The American Bankers Association (ABA) sued the NCUA in 1999, alleging that the NCUA violated the intent of Congress in implementing the new credit-union legislation. The ABA's complaint was dismissed by a U.S. Appeals Court in late 2001. Still, the ABA continues to document and comment on all sorts of issues related to credit unions.2

Most of the bankers'attacks are waged on three fronts. First, bankers believe it is unfair that credit unions are exempt from federal taxation while the taxes that banks pay represent a significant fraction of their earnings-33 percent last year. Second, bankers believe that credit unions have been allowed to expand far beyond their original purpose. The third major battleground concerns how credit unions are regulated and the financial services they are allowed to offer. For example, banks are subject to the Community Reinvestment Act (CRA), which requires banks to make specified amounts of loans in the communities in which they take deposits. Credit unions are exempt from the CRA. As for the services, credit unions have been allowed to increase the amount of business lending they do; this frustrates bankers, who believe that credit unions should focus on households.

Credit unions Today

Credit unions are regulated and insured financial institutions dedicated to the saving, credit and other basic financial needs of selected groups of consumers. By law, credit unions are cooperative enterprises controlled by their members under the principle of "one person, one vote." In addition, credit union members must be united by a "common bond of occupation or association, or [belong] to groups within a well-defined neighborhood, community, or rural district," according to the Federal Credit Union Act of 1934.

Credit unions numbered 10,041 at the end of last year, serving more than 80 million members. At the same time, there were 7,887 FDIC-insured commercial banks and 1,534 insured thrift institutions (savings and loan associations and mutual savings banks). Most credit unions are very small, though: Credit-union assets totaled $575 billion, compared to $7,075 billion held by commercial banks and $1,359 billion held by thrifts.3

The deposits (or, technically, "shares") of virtually all credit unions are now federally insured by the NCUA, regardless of the type of charter they hold. Federal credit unions are regulated by the NCUA, while state-chartered credit unions are regulated by an agency of the chartering state.

Every credit union is organized around a field or fields of membership shared by the members. A field of membership can consist of any one of the following:

* a single group of individuals who share a common bond;

* more than one group, each of which consists of individuals sharing a common bond (not necessarily the same type in each group); or

* a geographical community.

Common bonds are either occupational (the employees of a firm), associational (members of an association, such as a religious or fraternal organization) or geographical (all individuals who live, work, attend school or worship within a defined community).4

By size, most credit unions (57 percent of federally insured institutions) had less than $10 million in assets in mid-2000. Large credit unions exist, however, and they are an important part of the sector. For example, the 15 percent of credit unions with more than $50 million in assets (1,554 institutions) accounted for 79 percent of total credit-union assets.5

Credit unions play a limited role in the U.S. financial system. More than 95 percent of all federal credit unions offer automobile and unsecured personal loans. A similar proportion of large credit unions (more than $50 million in assets) also offer mortgages; credit cards; loans to purchase planes, boats or recreational vehicles; ATM access; certificates of deposit; and personal checking accounts.6 Only about 14 percent of credit unions have business loans outstanding.7