WASHINGTON–The CU Capital Markets Symposium recently hosted in New York City by NCUA Board Member Rodney Hood is another sign it’s time to end the credit union tax exemption, according to one executive with the American Bankers Association.
Writing in the ABA Banking Journal, Robert Flock, VP in ABA’s Office of Strategic Engagement, where he leads ABA’s policy work on credit unions, according to the association, stated, “National Credit Union Administration Board Member Rodney Hood recently hosted a credit union capital markets symposium at an unexpected site: the New York Stock Exchange. Yes, you read that right.
“Lobbyists for tax-privileged credit unions never tire of claiming that CUs are meant to be member-owned not-for-profit cooperatives, beholden only to the will of their members, not the whims of Wall Street,” Flock continued. “Nevertheless, to Wall Street they go—in pursuit of investor capital to help drive rapid growth. On the agenda at the symposium: a panel discussion on using subordinated debt and secondary capital to expand credit unions’ assets under management.”
The ‘Pivot From Mom & Pop’
According to Flock, it’s “important to understand” how this “pivot from mom and pop to Wall Street has taken place and why it matters.”
“The mission of credit unions to provide consumer financial services to clearly defined communities in underserved areas—as well as their structure as not-for-profit cooperatives—was the basis of their federal tax-exempt status,” he opined. “Their corporate structure was meant to reinforce a focused approach to member-services. The absence of shareholders or outside investors driving the priorities of the institution has empowered credit unions to focus on people over profits. (Or so the theory goes.)”
Flock argued that “all that changed” in 2022 when the NCUA board voted to authorize larger credit unions to borrow funds from “Wall Street investors and count it toward their regulatory capital requirements.”
A ‘Widening Divide’
“This change allows the largest credit unions to tap hedge funds and private investors to fuel rapid expansion—something they normally wouldn’t be able to do because their ‘member-owned’ structure had previously meant their growth, like that of taxpaying mutual community banks, was limited to retained earnings,” Flock continued. “Interestingly, only the largest credit unions and those designated as ‘low-income’ can utilize this new authority. The result is a widening divide between the traditional member-owned and mission-driven community financial institutions that cater to Main Street and the ultra-large growth-oriented credit unions heading to New York. Unfortunately, the latter now comprise the vast majority of the credit union industry—representing 85% of assets and 82% of accounts.”
Flock quoted PenFed President and CEO James Schenck as saying during the NCUA event that “for us, securitization was the natural growth process.”
‘Startling to Say the Least’
“This transformation of CUs from community financial institutions serving low-to-moderate-income members into sophisticated financial institutions tapping capital markets is startling to say the least,” stated Flock. “The fact that the industry’s regulator, which should be safeguarding the congressionally mandated mission to serve people of modest means, is leading the charge to Wall Street to promote this sort of expansive growth is especially troubling.”
Flock closed by asking Congress to rethink whether credit unions’ “preferential” tax treatment is still justified.
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