WASHINGTON–The American Bankers Association said it vigorously opposes a proposal by NCUA that would formalize the process for credit unions purchasing the assets of banks, saying the practice is “growing at an alarming rate.”
As CUToday.info originally reported here, in January the board put out for comment a proposal on what it formally calls “combination transactions,” saying at the time it had 17 pending applications for full or partial acquisitions of non-FICU assets and liabilities in its pipeline.
Throughout its letter and in a statement, the ABA repeatedly refers to “tax-exempt” credit unions purchasing “tax-paying” banks.
“First, NCUA proposes to simplify the requirements which apply to combination transactions between a federally insured credit union and another type of financial institution—namely a bank,” the ABA comment letter states. “Second, NCUA outlines that the directors of a federally insured credit union proposing an acquisition of a bank would understand the nature and consequences of the proposed transaction…ABA believes that credit unions are aggressively targeting banks for acquisition to expand their business lines and grow their field of membership outside of their chartered mandate to serve low- and moderate-income individuals. ABA urges the NCUA to establish proper regulatory guidelines for their institutions upon the assumption of liabilities or merger with another institution that is not a credit union; or alternatively, for credit unions with greater than $500 million in assets to assume a bank charter upon the acquisition of a bank’s assets and liabilities.”
‘Passive Regulatory Standard’
The ABA letter goes on to state, “NCUA’s proposed rulemaking propels credit union expansion into an already competitive and crowded banking market due to unique federal benefits and a passive regulatory standard. Expressed more simply, NCUA would allow any tax-exempt credit union to purchase a tax-paying bank, a practice that is growing at an alarming rate, without imposing new restrictions. More than twice as many credit union acquisitions of banks occurred in 2019 than the previous year.
“While many credit union advocates would like to dismiss this trend as ‘typical consolidation,’ the reality is that these credit unions are targeting wealthy communities, which is counter to their chartered mission and tax-favored status to serve people of modest means,” the letter continues. “Further aided by their tax advantage, credit unions are employing an acquisition strategy that outprices taxpaying banks for the same deals.”
Driven by ‘Largest 5%’
The ABA letter cites a statement by the Federal Reserve Bank of St. Louis that suggests “…credit unions might be willing to pay a higher price because of their favorable tax treatment,” a strategy the letter states is being driven by the largest 5% of credit unions. Those credit unions, said ABA, “happen to be the largest beneficiaries of the tax subsidies—to open new markets that are neither local nor share a common bond with their existing membership.”
The bank group’s letter further argues that “beyond the obvious concerns that credit unions are leveraging their tax exemption to purchase tax-paying banks, there are other troubling aspects that public policymakers need to consider.”
‘Troubling Aspects’
According to the ABA, those aspects include:
- “To expand market share and compete directly with tax-paying banks, it is the largest tax-exempt credit unions that are acquiring smaller banks.”
- “The acquisitions of tax-paying banks by tax-exempt credit unions are in saturated markets where there are plenty of financial services options for consumers.”
- “Going against the chartered mission of serving a local defined community with a common bond, many large credit unions are targeting banks outside of these defined areas, and many are in wealthy neighborhoods.”
- “The acquisitions of tax-paying banks by tax-exempt credit unions are designed to grow rapidly and expand to serve higher risk business lending activities.”
- “Large credit unions acquiring tax-paying banks should be regulated similarly to the institutions they are purchasing.”
No Longer ‘Mission Focused’
The ABA letter concludes, “Many of the largest credit unions today do not resemble the mission-focused institutions they once were. There is an ever-growing chorus that questions the NCUA’s intentions to properly oversee and enforce regulations on a rapidly expanding number of large and complex credit unions. There is no denying that the credit union charter is unique as it conveys responsibilities to justify the tax-exempt status of these institutions. However, for credit unions to enjoy the tax exemption, they should adhere to their statutory mission to meet the needs of financial consumers of small means. Further, consumers may not realize that credit unions are not held to the same regulatory standards as other financial institutions, which is why ABA believes the largest credit unions should, at a minimum, receive the same level of regulatory scrutiny as banks.”