Blurring the Lines

By Newkirk, Kristine | Independent Banker, December 1994 | Go to article overview
Save to active project

Blurring the Lines


Newkirk, Kristine, Independent Banker


EDITOR'S NOTE: When asked to name their competition, community banks often place credit unions high on the list. This is the first in a series designed to help community banks better understand the challenges posed by credit unions.

The idea behind credit unions was a sound one. Intended as a relief tool of the Great Depression, lawmakers established the credit union charter to "make available to people of small means credit for provident purposes through a national system of cooperative credit." In exchange for restrictions on membership, Congress endowed federal credit unions with a number of competitive advantages over other depository institutions that include tax-exempt status and a waiver from Community Reinvestment Act coverage.

So what went wrong? An industry that was chartered to serve those of limited means is now serving persons with incomes greater than patrons of commercial banks. An industry founded on a cooperative, nonaggressive premise is now predatorially pursuing customers of commercial banks, as well as encroaching on the territory of other credit unions. Institutions intended to serve a specific, well-defined group of individuals are assuming a national, and in some cases international, presence.

Where are the institutions that Congress envisioned in passing the Federal Credit Union Act of 1934? What has prompted their predatorial actions of late and the blurring of the lines between the credit union industry and the banking industry? What cause is there for the privileged status that credit unions continue to enjoy? The banking industry has a competitive obligation to raise these questions and others, and to remain abreast of the rapidly evolving credit union industry.

Raising the awareness and understanding of credit union issues is important to maintaining and furthering community banks' market share.

Growth Gone Unchecked

The rapid and ongoing relaxation of regulations governing credit unions has fostered tremendous growth in the industry, an aggressiveness that to date has gone unchecked by Congress. In the past, lawmakers have been unwilling to review the actions of the regulator for federally insured credit unions, the National Credit Union Administration. And the very subject of credit unions has been Congressional taboo. As a result, the NCUA continues to operate unfettered, and the credit union industry continues to experience tremendous growth.

It is evident from the rapid rate of equity generation during 1993 that credit unions have embraced an aggressive growth agenda. This growth is made possible only due to the benefits of tax-exemption and the ever-loosening common-bond restrictions.

The Revenue Act of 1916 exempted cooperative banks and mutual savings associations from federal taxation due to their structure as cooperative, nonprofit banks. Shortly thereafter, the Attorney General extended the exemption to credit unions because they were "substantially identical" to cooperative banks.

In 1951, cooperative banks and mutual savings associations lost their tax-exempt status. As stated in the accompanying Senate Report, cooperative banks and mutual savings associations were actively competing with banks and other taxable institutions for public savings. Retaining the tax exemption would have been discriminatory, while taxing mutual savings banks would place them on a parity with their competitors. Credit unions however, retained their tax-exempt status, though no explanation was given in the Senate Report for the continuing exception.

Credit unions' tax-exempt status translates into a higher rate of return than that earned by banks. Tax payments made by banks in 1993 resulted in a 47-basis-point charge to earnings, thereby contributing to a net income for credit unions which exceeded that of banks by 23 basis points.

The windfall from foregone tax payments permits credit unions to grow at a faster rate than banks as they return what they would pay out in taxes to capitalization and dividends.

The rest of this article is only available to active members of Questia

Sign up now for a free, 1-day trial and receive full access to:

  • Questia's entire collection
  • Automatic bibliography creation
  • More helpful research tools like notes, citations, and highlights
  • Ad-free environment

Already a member? Log in now.

Notes for this article

Add a new note
If you are trying to select text to create highlights or citations, remember that you must now click or tap on the first word, and then click or tap on the last word.
Loading One moment ...
Project items
Notes
Cite this article

Cited article

Style
Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

Cited article

Blurring the Lines
Settings

Settings

Typeface
Text size Smaller Larger
Search within

Search within this article

Look up

Look up a word

  • Dictionary
  • Thesaurus
Please submit a word or phrase above.
Print this page

Print this page

Why can't I print more than one page at a time?

While we understand printed pages are helpful to our users, this limitation is necessary to help protect our publishers' copyrighted material and prevent its unlawful distribution. We are sorry for any inconvenience.
Full screen

matching results for page

Cited passage

Style
Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

Cited passage

Welcome to the new Questia Reader

The Questia Reader has been updated to provide you with an even better online reading experience.  It is now 100% Responsive, which means you can read our books and articles on any sized device you wish.  All of your favorite tools like notes, highlights, and citations are still here, but the way you select text has been updated to be easier to use, especially on touchscreen devices.  Here's how:

1. Click or tap the first word you want to select.
2. Click or tap the last word you want to select.

OK, got it!

Thanks for trying Questia!

Please continue trying out our research tools, but please note, full functionality is available only to our active members.

Your work will be lost once you leave this Web page.

For full access in an ad-free environment, sign up now for a FREE, 1-day trial.

Already a member? Log in now.

Are you sure you want to delete this highlight?