Comparing Credit Unions with Commercial Banks: Implications for Public Policy
Mohanty, Sunil K., Journal of Commercial Banking and Finance
Credit unions continue to serve an important purpose in US economy by providing financial services to low- and moderate-income individuals based on common bond of membership. However, since the passage of the Credit Union Membership Access Act of 1998 (CUMAA), credit unions have expanded the "membership base" far beyond the original intent of the Act. Some of them have grown aggressively to match the size of large community banks while offering many of the same financial services provided by their bank peers. This paper argues that the tax preferences and favorable regulations enjoyed by many large size credit unions can influence the performance and competitiveness of other depository institutions (those that are not eligible for the preferential tax and regulatory treatment), providing an unfair competitive advantage to such credit unions over the other taxable depository institutions. Therefore, a major economic policy issue emerged is whether credit unions that have grown in size and complexity in terms of the range of financial services they provide should continue to receive the tax subsidy and favorable regulatory treatment.
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. …