Dan Mica: U.S. Treasury's Blueprint Would Mean the Demise of Credit Unions
Posted by Brent Dixon on April 1st, 2008
In Monday’s briefing with Treasury Secretary Henry Paulson on the agency’s regulatory overhaul, Dan Mica said the proposed changes (which include the demise of the NCUA) could mean the end of credit unions as they are today, according to CUNA News Now.
The article goes on to explain Mica’s analysis of the impact on credit unions (and in the end, consumers):
- All institutions desiring federal deposit insurance – whether banks, thrifts, or credit unions; including state-chartered institutions – would be required to obtain the new “federal insured depository institution” (FIDI) charter (report p. 160);
- The recommendation would combine the five federal regulatory bodies into three – the National Credit Union Administration would cease to exist;
- Cooperative institutions could operate under the FIDI charter. However, to qualify for the tax-exemption, these institutions would be required to elect “community status” and meet a series of apparently stringent tests in terms of asset size, field of membership, and service to the underserved. It appears small banks also could meet such tests and claim the tax-exemption (report p. 161);
- A Presidential Executive Order may be issued to all federal regulators expanding an existing interagency working group and directing them to more closely coordinate during the current financial crisis. After the expansion, NCUA will still not be included;
- Finally, there is insufficient information about the new federal regulatory body that would oversee all payment systems.
Is Mica right? Is this the end of credit unions?
- Download the PDF of the Blueprint for a Modernized Financial Regulatory Structure here.
- Thanks to Trey Reeme for the phone call and dialogue about this.
I was wondering this same thing.
I seriously hope not. I think we’ve proven as a movement that we can regulate ourselves pretty well. We managed to stay out of the mortgage crisis by doing the right thing and looking out for our members more than our profit.
Our message of “people helping people” should be all the regulation credit unions need. As long as we continue to advocate for our members and look out for their best interests we can avoid many of the problems that are rising in the economy. In fact we should be able improve the situation through education, advocacy, and financial advising.
If the credit union movement disappears in its current form the world of financial services could lose a major competitor, and competition is necessary to move an industry in the right direction.
Brent -
Of all the items cited in the NewsNow report, two things concern me the most …
If the tax exemption is based in part on an institution’s size, larger credit unions may be taxed even if they are remaining true to their mission.
Secondly, if a small community bank could be tax-exempt despite its for-profit makeup, what’s the point of a small CU having a more restrictive charter?
These two items in my view would really be large challenges for CUs.
Of course, this just forces the larger question even more into the forefront: How does ANY financial institution differentiate itself when everyone looks, acts and talks alike?
The restrictive nature of CU charters has had a tremendous positive influence on their brand strategies, requiring them to remain focused on specific audiences. If they lose this requirement, will they race for the lowest common denominator? Or will CUs find new ways to create differentiation and focus?
@Jeff I would challenge Paulson to find any financial institution, large or small, that better deserves a tax exemption than, say, NC State Employees’ Credit Union. The fact that they are a $15 billion credit union is secondary to the fact that they do things the credit union way: keep operating costs and loan rates low, offer great rates on deposits, and save North Carolinians hundreds of thousands of dollars every day with surcharge free ATMs.
To me, this sounds like a knee-jerk reaction to the subprime lending fiasco. Leadership is not rashly punishing the whole for the bad deeds of a few…it’s addressing the financial institutions (and consumers) who were irresponsible. Seems like the Treasury is scrapping the car for parts because of one flat tire.
Brent, I was wondering who would blog about this first. I was alarmed when I heard the news reports over the weekend, too. I was even more worried when I read CUNA and NCUA’s analysis. I also read an interesting post on the NAFCU Compliance Blog. That blogger seemed to be saying that we have a long way to go before a proposal like this would be considered. I tend to agree. I am not saying that credit union members and advocates should be complacent but this administration and Congress has yet to deal with the immediate fiscal crisis – they’re getting criticized for that and in these uncertain times, both fiscally and politically, I can’t see that Paulson’s proposal will get any traction.
@CUWarrior – SECU is a great example – one of many in NC and nationwide.
What is really baffling to me is that Paulson is articulating this as a fundamental change to be considered after the current meltdown is over … when presumably he is not going to be a public servant, and Bush will no longer be in power.
This whole announcement seems akin to searching for flood insurance when your house is on fire.
I don’t get it.
I’m glad to see so many people keeping any eye on this. It was on Twitter Monday morning and has gotten significant news and blog coverage. Personally, I don’t think it stand a chance. I think too many people would fight it.
Update – http://www.cuna.org/newsnow/08/wash040108-3.html?ref=hed
Congressman ‘apprehensive’ about Treasury’s CU plan
U.S. Rep. Paul Kanjorski (D-Pa.) raised strong concerns this week about the U.S. Treasury Department’s long-term plan to consolidate regulation of credit unions with other financial institutions.
“There is a need to put credit unions on a level playing field with other financial institutions in areas like capital standards and business lending,” said Kanjorski, who chairs the House Financial Services Capital Markets, Insurance, and Government Sponsored Enterprises Subcommittee. “But it should not come at the expense of eliminating the current regulatory system, which has worked well and serves the financial needs of more than 90 million Americans.”
Remember when you were in 1st grade, and just one or two kids were being disruptive, but the teacher punished the whole class?
Brent, thanks for the shout out.
Without a fight from CUs, I believe it’s the beginning of the end of the movement as we know it. Our institutions will continue to exist, but it’s almost like this scenario:
Football Team A (Bankers) are playing Football Team B (Credit Unions). Team B is already a big underdog, maybe even the Chicago Cubs of FIs. At the outset of today’s game, it’s determined by the league commissioner that the head coach of Team B has been fired and that both teams are now playing under one new coach.
Heh, maybe a little melodramatic, but how far away from reality is that?
@ Trey – I think that’s a pretty good analogy. Credit unions are really in for some difficulties.
@ Jeffry – I agree. Innovation and brand building need to be on the priority list of every credit union. Without differentiation, the line between the community CU and the bank next door is blurred.
House Financial Services Committee Chairman Barney Frank: In a paraphrase, Congress backs credit unions.
“Please tell my good friend and former colleague Mr. Mica not to worry about the Treasury proposal to eliminate credit unions. We would never do that. So please tell him not to worry about that.”
http://www.cuna.org/newsnow/08/wash040208-1.html?ref=hedWow, I’ve been out of town and out of touch all week and have missed some awesome conversation. Thanks for all of your points and comments.
Christopher, thanks in particular for that final heads up. I’m definitely resting easier with a statement like that on the books. Though, I have to say, I still feel that major changes, perhaps not as scary, could be in the works for our industry. It’s times like these that really reinfornce how important it is to be true to what we’re called to be as a movement.
It is hard to say in this early stage how much concern we should place on this recommendation. On one hand, there is already a strong resistance to the Paulson comments about Credit Unions – “Some credit unions have arguably moved away from their original mission of making credit available to people of small means, and in many cases they provide services which are difficult to distinguish from other depository institutions” – so we might feel confident this language would not survive through congressional machinations. On the other hand, it is important to note that this was written and proposed by a Republican, and the two Democratic hopefuls for the Presidency have both said it is a small step in the right direction, so both sides seem to have supporters of this proposal.
I find it fascinating and scary at the same time to think through how this would play out if the proposal were to pass through acts of Congress the way it looks today. If a large number of credit unions, which quite often are better capitalized than banks, suddenly become banks, they would make very nice acquisition targets for banks. Smart CEOs know this, and might take actions in advance of conversion to position themselves to elicit or avoid acquisition, depending on their disposition on the matter. To avoid acquisition, a credit union might try to lower its capitalizaiton, or try to merge/acquire enough other credit unions to reach a size that is less likely for acquisition by a bank after conversion.
Another area of interest is the NCUA. If the NCUA and a number of its employees are nearing the end of the NCUA as we know it, might they become a little lax in their regulatory responsibilities? Might the restructuring of regulatory bodies create a period of confusion and chaos where some things could slip through that shouldn’t? Thank goodness we already had our sub-prime blow-up.
There is so much to think about, but then again, it is very early. This conversation will take years to conclude.
The credit union industry should thank itself for this proposed treatment under Secretary Paulson’s proposal.
Many credit unions have morphed into quasi-banks. They look like banks, act like banks, sell the same products as banks, branch like banks, and attempt to attract the same customers as banks.
These CU banks are attempting to execute the loophole in being tax exempt and in the lower regulatory scrutiny that they are given to gain an unfair advantage against banks.
These CUs are not serving the underserved and the “little guys” that CUs were originally chartered and given preferrential treatment to serve.
Is it any wonder that they industry is being scrutinized.
We should force “bank-like” credit unions to convert to banks, pay taxes, comply with regulations, etc.
Credit unions need to step up and take responsibility for doing what is right within its industry. Otherwise, the government will do it for us.
I think it something to take seriously, but there is a very, very, very small chance of this coming to fruition. President Bush’s father created a similar blueprint/document back in the 1990s. It went nowhere. (I think I have the date right!) OTS, NCUA, and Rep. Frank are all opposed to this. OCC doesn’t seem too alarmed. As I stated earlier, this isn’t a slam dunk. Rather, more like a behind the back shot from 100 feet away. We’re engaging Treasury on the issue, as are many others. My 401K balance may be falling, but the sky sure isn’t.