Credit union lobbyists, unsurprisingly, like the idea credit unions are taking advantage of their tax exemption to acquire community banks, but these taxpayer-subsidized deals nonetheless have a demonstrably negative impact on local communities.
As this trend expands the segment of the financial services industry exempt from tax and key regulatory oversight while reducing access to financial services, several states have taken steps to restrict such acquisitions. It is high time for Congress to investigate at the federal level.
As credit union lobbyists plead their innocence over branch closings…most of which, by the way, are happening in larger banks – credit unions actually exacerbate consolidation among local community banks. The sad truth is that this phenomenon involves large credit unions using their tax subsidy to make inflated offers to buy smaller, healthier institutions.
The average community bank has maintained or increased its market share of deposits in rural and urban communities since 2008, reflecting their continued commitment to the local communities they have served for generations. But credit unions are using their advantage in the taxpayer-funded market to prey on healthy community banks.
In fact, the five community banks acquired this year paid $44 million in taxes last year, and three of them posted above-average return on assets and net interest margins. Despite false claims by credit union industry groups, these deals drive out sound, paying, local financial institutions from the communities they serve.
With each purchase by a credit union of a community bank increasing the federal tax exemption for more than $1.8 trillion in credit union assets, these transactions have serious implications for local communities that depend on the revenue. taxes to support schools, hospitals and local municipalities. But the harm to consumers goes far beyond government coffers.
With the country’s community banks accounting for about 60% of lending to American small businesses, taxpayer-subsidized credit union acquisitions risk displacing this key provider of capital. This is of particular concern given that community banks have led the financial response to COVID-19 by providing about 60% of federal Paycheck Protection Program loans to save about 49 million jobs, exceeding cooperative PPP loans. credit by a factor of 16 to 1.
These acquisitions also expand the portion of the financial services industry exempt from the Community Reinvestment Act, reflecting a broader negative impact on low- and middle-income communities.
While credit unions were created a century ago to serve people of modest means with a common bond, data shows that they are not fulfilling this mission. Community banks are much more prevalent in low-income or struggling communities, outnumbering credit unions by a margin of 2 to 1. And according to data from the Home Mortgage Disclosure Act, community banks are more likely than credit unions to lend in census tracts where poverty and unemployment are above average.
Ultimately, the consolidation of the financial services sector reduces the availability of local financial institutions in communities that need them most. This includes traditional small credit unions, which are in decline while larger credit unions are growing. Credit unions in all asset classes under $500 million lost both members and loans in 2020, while these over $1 billion assets represent 6% of the industry but 75% of its tax exemption. No wonder credit union lobbyists want this problem to go away.
Policy makers in several states were right to react to this disturbing trend. Mississippi Governor Tate Reeves recently signed a new state law require that acquired bank assets remain under the control of an FDIC-insured institution. This law followed a decision by the Nebraska Banking Department that only chartered financial institutions organized to do business in the state can participate in a cross-industry acquisition or merger – rejecting an attempted bank acquisition by an out-of-state credit union State.
But it’s a matter of national importance, and taxpayers have a right to know more about how the grant they’re funding is being used to support financial services consolidation. Congress should respond by hold hearings to study this trend, ask a study by the Government Accountability Office of the evolution of the credit union industry and ultimately considering a “exit fee” on these acquisitions to capture the value of tax revenue that is lost once the business activity of the acquired bank becomes tax-exempt.
It wouldn’t be the first time Congress has reconsidered a financial services tax exemption. In 1951, lawmakers revoked the tax exemption for building and loan associations, co-operative banks, and mutual savings banks, holding that these institutions operated much like commercial banks and should be taxed accordingly.
As credit union bank acquisitions continue, policymakers should investigate these transactions and determine whether the credit union tax exemption should continue to fund them.