Comparing Credit Unions with Commercial Banks: Implications for Public Policy

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INTRODUCTION

Banks have always been considered the major financial institution and for most people, they provide services such as loans and deposits. Similar to banks, credit unions are regulated financial institutions dedicated to meeting the saving, credit, and other basic financial needs of selected groups of consumers. Credit unions have enjoyed almost a century of existence. However, the competitive environment between banks and credit unions has changed significantly since the Depository Institutions Deregulation and Monetary Control Act (DIDMCA) went into effect in 1980. During the past decades, changes in regulation, advances in financial markets, developments in information technology, and the competitive environment within the financial services industry have enabled banks to provide a wide variety of banking services, including making more loans to lower-income households than in the past. Over the same period, credit unions have also benefited from these developments in finance, technology and competition. Banks have merged to form what is known as mega banks and credit unions have also merged to form their own conglomerates that provide a wide range of financial services from basic depository and loan services to life insurance and mutual funds.

Despite the low profile and mundane operations of the vast majority of credit unions, the tax-exempt status enjoyed by these institutions has long been a source of controversy in the United States. Much of the criticism of credit unions is based on the belief that tax-exempt credit unions are no longer serving the purpose and intent of the original legislation. 1 Critics argue that large credit unions are more interested in growth of membership rather than focusing on serving "people of small means". A recent study by GAO (2003) finds that credit union customers are less likely to be from low- and moderate-income households than are the bank customers. Changes in regulatory environment have helped relax the "common bond" requirement for credit union membership, leading to legislation in the Credit Union Membership Access Act of 1998 (CUMAA). CUMAA also permitted federal credit unions to serve multiple membership groups. A credit union study by Federal Reserve Bank of Dallas suggests that the expansion of credit union, aided by favorable regulations, has posed a formidable threat to the growth of small banks in recent years. The study also suggests that "... the loosening of membership restrictions enhanced growth opportunities for credit unions, especially when coupled with policies favoring credit unions' exemption from both federal taxation and the regulatory requirements of the Community Reinvestment Act (CRA)."2 In summary, critics argue that the rapid growth of larger credit unions, recent changes in legislation, expansion of membership to outside group, evolution of credit unions into full-line banking services, and the credit unions serving wealthy depositors and making loans to people with higher income make credit unions look similar to banks. (3) As such, some critics suggest that these mega-credit unions should be taxed at a similar rate as their commercial bank peers. (4)

Prior studies have assessed the competitive environment of credit unions and banks. While those studies commissioned by banks suggest the need for changes in regulation to "level the playing field", the studies commissioned by credit unions favor no change in regulations. However, the independent studies from the United States Government Accounting Office (GAO) and the Treasury Office provide mixed reviews. While the 2001 Treasury report on credit union provides no recommendations for changes in legislation or regulation, (5) the 2003 GAO study recommends changes in regulations in light of the changing competitive environment in financial services industry. (6) Thus, much of the criticism of credit unions leads to a major public policy question should credit unions receive preferential tax and regulatory treatment? …