Community Banks Strengthen Communities

Even well intentioned ideas sometimes outlive their useful life.  I am talking about the model of financial services delivery via a credit union.  When these entities were chartered they were designed to serve "individuals of modest means that shared a common bond".  So, for example, a large manufacturer might have started a small credit union whereby their employees and their direct family members could transact simple financial transactions; such as savings and checking accounts and the occasional personal loan for a home or auto.  In exchange for many restrictions, including who could be a customer, these credit unions were given a state and, often times, a federal tax exemption.  Makes sense, right?  At one point, even I would conceed that there was a place and a purpose for this type of organization.

Today nearly every credit union operates far outside of this original mandate.  Study after study, independent or otherwise, now conclude that community banks actually do a better job serving people of modest means.  By contrast, credit unions customers have a higher average net worth than community bank customers.  Further, the common bond has eroded to something along the lines of whether or not the prospective member can "fog a mirror".  To add to this, credit unions have entrenched themselves in business lending, something that they historically have little knowledge of.  All the while, their sweetheart tax exemptions deal rides on.  Today credit unions claim that they need the 12.5% cap placed on their member business lending activities more than doubled, so they can support the American economic recovery.  The two major national credit union associations, CUNA and NAFCU, claim that community banks aren't lending enough to small business.

So let's take a step back, and examine a few facts.  Community banks are flush with cash in this low rate environment, meaning they have money to lend, both to small businesses and to consumers who qualify.  Congress passed a bill that created a small business lending fund, this fund was woefully undersubscribed because most community banks had plenty of liquidity to lend and did not need a high priced loan with strings from the federal goverment.  Community banks are subject to an entirely different, and far more stringent set of regulations than credit unions are.  For example, community banks must comply with the community reinvestment act and consumer compliance laws.  Did you know that neither of those apply to credit unions?  How does the latter make you feel?  

As a tax payer, it is important for me to point out that community banks are required to lend in a safe and sound manner and to maintain high levels of capital.  Credit union capital standards are much lower than community banks, meaning they are able to tolerate less loss and risk than a like sized community bank.  Now look back to the member business lending issue I just mentioned.  Credit unions, who are held to a much lower standard of safety and soundness are choking down loans that they do not have adequate experience making or understanding, member business loans.  In short, the tax exempt credit unions are loading up on risk they don't understand, risk that would be unacceptable under community banking regulatory guidelines, and they generally have lower capital levels than their community bank bretheren. Does this sound familiar?  Does anyone remember the savings and loan crisis of the 1980's.  

While I believe credit unions should pay their share of taxes - if it looks and acts like a bank it should pay taxes like a bank, I also believe the regulatory discrepency must be addressed in the short term, or the tax payers risk bailing out an industry that has not paid a dime in taxes.  So now you know how a credit union can offer a higher deposit rate and a lower loan rate than the tax paying community bank down the street.  They are gambling with your tax dollars, betting with your does that make you feel?


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