The Challenge The ABA has made credit union taxation its #1 legislative priority even ahead of...

The ChallengeThe Challenge

The ABA has made credit union taxation its #1 The ABA has made credit union taxation its #1 legislative priority even ahead of combating legislative priority even ahead of combating terrorism!terrorism!

The ABA and MBA have launched “Operation The ABA and MBA have launched “Operation Credit Union” as yet another attempt to tax CUs.Credit Union” as yet another attempt to tax CUs.

Rep. Bill Thomas (R-CA), chair of the House Ways Rep. Bill Thomas (R-CA), chair of the House Ways & Means Committee has publicly expressed interest & Means Committee has publicly expressed interest in the issue.in the issue.

Credit unions must now respond to the intense Credit unions must now respond to the intense lobbying efforts of the bankers with our own lobbying efforts of the bankers with our own information campaign.information campaign.

The ChallengeThe Challenge

America’s Community Bankers have also joined the fightAmerica’s Community Bankers have also joined the fight The ABA has a well-coordinated, multi-year campaign The ABA has a well-coordinated, multi-year campaign

under way.under way. The strategy is “divide and conquer” by proposing taxes on The strategy is “divide and conquer” by proposing taxes on

the largest credit unions in the country.the largest credit unions in the country. Taxation of credit unions would be a tax on consumers and Taxation of credit unions would be a tax on consumers and

would alter the service-driven character of credit unions. would alter the service-driven character of credit unions. Bank conversions would almost certainly result.Bank conversions would almost certainly result.

The banking industry is not being hurt by the longstanding The banking industry is not being hurt by the longstanding CU tax exemption. Consumers and credit unions would be CU tax exemption. Consumers and credit unions would be severely impacted by the loss of the exemption.severely impacted by the loss of the exemption.

Financial Services IndustryFinancial Services Industry

1.5% of the total:

Financial ServicesFinancial Services Changes – Changes –

1997 to 20021997 to 2002 Growth from $26.8 trillion to Growth from $26.8 trillion to

$37.8 trillion – Up 41% or $37.8 trillion – Up 41% or 8%/year.8%/year.

Banking (including CUs) have Banking (including CUs) have given up market share to finance given up market share to finance companies, securities firms and companies, securities firms and gov’t guaranteed mortgage pools.gov’t guaranteed mortgage pools.

Credit unions have grown more Credit unions have grown more rapidly – 55% or 11% per year. rapidly – 55% or 11% per year. Market share has only changed Market share has only changed from from 1.35% to 1.48%!!1.35% to 1.48%!!

Total:$26.8 tril.

Total:$37.8 tril.

Total: $4,204,000 Total: $59,764

Merging to form a 2nd $ trillion bank Merging to form a 3nd $ trillion bank

The top 10 Credit Unions hold $59 billion, equal to 1.4% The top 10 Credit Unions hold $59 billion, equal to 1.4% of the top 10 Bank assets which total $4.2 trillionof the top 10 Bank assets which total $4.2 trillion

Deposits in financialinstitutions have dropped From 36% to 21%

Mutual fund shares and equities have increased from 16% to 29%

In the last 20 years…..

Total consumer liabilities (debt) as a percentage of assets has stayed the same at 46%, with a slightly higher concentration in mortgage debt.

Financial Services Financial Services SummarySummary

Credit unions are small players in the $38 trillion Credit unions are small players in the $38 trillion financial services industry.financial services industry.

This large industry is becoming increasingly This large industry is becoming increasingly dominated by diversified financial services providers dominated by diversified financial services providers and large banks.and large banks.

Consolidation and convergence continuesConsolidation and convergence continues Credit unions serve an important niche for consumers Credit unions serve an important niche for consumers

and small businesses. The tax exempt status is both and small businesses. The tax exempt status is both warranted and needed as credit unions provide warranted and needed as credit unions provide affordable financial services to middle class affordable financial services to middle class American households and people of modest means.American households and people of modest means.

The Message:The Message:Why CUs Are Tax Exempt…Why CUs Are Tax Exempt…

Credit Unions are not-for-profit, democratic, financial Credit Unions are not-for-profit, democratic, financial cooperatives, owned by their members.cooperatives, owned by their members.

CU Boards serve as unpaid volunteers.CU Boards serve as unpaid volunteers. CUs have a social mission to provide service to people CUs have a social mission to provide service to people

of modest means as part of their member base but they of modest means as part of their member base but they primarily serve middle class members.primarily serve middle class members.

Broader service offerings and expanded fields of Broader service offerings and expanded fields of membership do not make credit unions less deserving membership do not make credit unions less deserving of the tax exemption.of the tax exemption.

It’s the structure! CUs cannot distribute their earnings It’s the structure! CUs cannot distribute their earnings to outside stockholders!to outside stockholders!


($ millions 12/03)

Credit unions can neither compensatetheir directors nor distribute earningsto outside shareholders

(MI)


Top 4 Michigan Banks: Assets 12/03 # Offices

Standard Federal $69 bil. 470 Comerica $55 bil. 426 5th Third $48 bil. 811 Bank One $20 bil. 254Totals: $192 bil. 1,961

All Michigan Credit Unions:

Total Assets: $28 bil. Total Offices: 1,500

In the U.S., Credit Unions holdless than 2% of the total $38 trillionin assets held by the financial services industry: (Banks, insurancecompanies, mutual funds, securities firms, finance companies, etc.)

Commercial Banks & Credit Commercial Banks & Credit UnionsUnions

Facts, Fallacies, and Recent TrendsFacts, Fallacies, and Recent Trends

Mike SchenkMike Schenk

Economics & Statistics DepartmentEconomics & Statistics Department

CUNA & AffiliatesCUNA & Affiliates

[email protected]@cuna.coop

Bankers claim that credit unions are getting “too big”

• At year-end 2003 banking institutions held over fourteen times moreassets than credit unions ($9.077 trillion vs. $629 billion). Thenation’s largest bank (J.P. Morgan Chase) is as large as the entirecredit union movement.

• The average banking institution is fifteen times larger than the average credit union ($986 million vs. $66 million in assets).

• At year-end 2003, roughly one-half of U.S. credit unions had less than $10 million in assets. Overall, 1.4% of banking institutions arethis small.

• Over one-half of banking institutions have $100 million or more in totalassets at year-end 2003. Just 12% of credit unions are this large.

Commercial Bank/Thrift and Credit Union Size Comparisons

Commercial Banks & Thrifts

Credit Unions

Total industry assets (billions)J.P. Morgan Chase

$9,077$629

$629

Average asset size (millions) $986 $66

% of institutions with $10 million or less in assets 1.4% 49%

% of institutions with $100 million or more in assets 52% 12%

Source: FDIC, CUNA.

Bankers claim credit unions are growing “too fast”

• The first U.S. CU was established on November 24, 1908.

• Assets in all U.S. CUs grew to $629 billion by year-end 2003.

• In other words it took 95 years of growth for the credit union movement to grow to $629 billion in assets. In contrast, U.S.banking institutions grew by $641 billion in 2003 alone!

• The November 2003 U.S. Banker magazine reported thatcommunity banks make up one-third of the fastest growingsmall companies in America.

Bankers claim credit unions are making “huge” market share gains

• Credit union market share of financial institution assets has notchanged markedly over the past decade. Credit union market shareIn the banking sector was 5.70% in 1993 and increased to 6.49% by year-end 2003.

• In contrast, bank market share started 1993 at 74.1% but nowstands at 78.3% of total banking sector assets.

• In other words, as the S&L industry shrank, bank marketshare increased by four percentage points whereas credit union share increased less than one percentage point.

Bankers claim that credit union member business lending is “exploding”• The number of credit unions engaged in member business lending

in 2003 is nearly identical to the number in 1995.

• According to the NCUA the average size of credit union memberbusiness loans at year-end 2003 was $120,851. However, a 1991Treasury Department study found that 59% of credit union loans made for business purposes were loans of $50,000 or less.

• Credit union market share of commercial loans stands at less than 1% atyear-end 2003. Commercial banks control 90% of the commercialloan market.

• A recent ABA survey revealed that only 4% of commercial bankersviewed credit unions as chief competitors in business lending,in business deposits, and in business investment management (February2002 ABA Banking Journal).

Bankers claim credit unions make it difficult for them to compete

• The dollar amount of bank profits have increased in thirteen of thepast fourteen years.

• Bank profits as a percent of average assets (ROA) have been above 1% in each of the past eleven years. The 1.40% level of ROA banksrecorded in 2003 was a modern-day record.

• In 2003 7,866 banks and S&Ls (86% of the total banking financialinstitutions) recorded full-year ROA greater than 1.0%. Moreover,4,352 (48%) had ROA of at least 1.5% and 2,416 (26%) hadROA exceeding 2.0%.

• Small banking institutions (those with less than $100 million in assets) recorded a healthy ROA of 0.95% on average in 2003.


• But in “The Economic Performance of Small Banks, 1985-2000” (November 2001 Federal Reserve Bulletin) William F. Bassett and Thomas F. Brady conclude that “…small banks have thrived over the past decade and a half despite what might be seen as a variety of adverse circumstances, including extensive bank consolidation, a solid improvement in the balance sheet health of large banks, rapid growth in mutual funds and other elements of a ‘parallel’ banking system, and a steady decline in the real value of deposit insurance. Despite these circumstances and abstracting from the effects of mergers and acquisitions, small banks have grown considerably more rapidly than large banks and have tended to meet or exceed them in some measures of profitability….The robust growth and high profitability we find at small banks apparently have not gone unnoticed by the investors that have formed significant numbers of new banks in recent years.”

• In a more recent publication, “What Drives the Persistent Competitiveness of Small Banks” (A Federal Reserve Economic Discussion Series paper published in May, 2002) Bassett and Brady further reveal that increased deposit account interest costs at small banks primarily reflect the higher rate of return that small banks earn on their assets. So it’s not the credit unions that are driving them up.


• Banking industry publications consistently contradict the idea that credit unions are hurting small banks. Publications like the American Banker, ABA Banking Journal and Independent Banker are replete with stories about how community bankers (individually and collectively) are making bumper profits and growing like crazy. The vast majority of the successful banks these publications highlight face credit union competition on a daily basis.

• While it is possible to find small banks that have poor financial or operational performance, credit union competition is at or near the bottom of the list of causes. The contributors to crummy bank performance seem to be (in no particular order) fraud, mismanagement, nepotism, overly aggressive expansion, too many big fancy branches, bad pricing decisions (on either side of the balance sheet), too much credit risk (i.e., overly-aggressive lending decisions), weak ALM, misguided investment decisions, bad service, and lack of synergy in mergers. This, as most bank consultants will tell you, is not an exhaustive list.


• Since 1988, 2,712 new banking institutions have been chartered and 848 new institutions have been chartered in just the past five years.Bankers simply wouldn’t be chartering new institutions if creditunion competition was as stifling as bank trade groups claim.

• If bankers really believed that credit unions had unfair competitiveadvantages they would convert their institutions to credit unioncharters. None do this however because doing so would exposethem to democratic ownership and control, would likely cause banker salaries to decline dramatically, and would force theseinstitutions to adhere to a more restrictive regulatory regime, including higher capital standards.


• According to the January 24, 2004 issue of The Economist Citigroup announced that it had made 2003 net profits of $17.85 billion – more than any other company in history.

• Citigroup’s 2003 earnings exceed the GDP of nearly 60% of thecountries in the world.

• As a group, American banks made roughly $300 billion in profits in

2003 -- a third of all corporate profits (1/24/04 Economist). This includes balance sheet profits as reported on call reports as well as profits from all the non-banking financial businesses that are owned and controlled by banking institutions.

In Michigan, no new creditunions have been chartered in the last 20 years. Over 50new banks have beenChartered.

in the U.S.

Bankers claim the credit union tax exemption hurts government budgets

• If bankers really cared about government budgets they wouldn’t be chartering so many SubS institutions. In fact, over 2,000 of theseinstitutions have been chartered since 1997. And bankers continue to try to expand SubS eligibility and/or eliminate all taxation of dividends.

• While SubS status is not the same as a tax exemption, it results insignificant loss of government revenue. For example, the direct costto the federal government from banking institution SubS elections isestimated to be $949 million in lost revenue in 2003 and $3.8 billionin lost revenue since 1997.

• Bankers want state policymakers to believe that taxing state chartered credit unions raises state revenue. In fact recent experience shows itsimply encourages state chartered credit unions to convert to federal charters. It also results in revenue losses because these converted institutions no longer pay state supervision fees.

Total = $3.8 billion since 1997

Bankers claim the credit unions don’t serve their members

• Credit union members seem to believe that credit unions do a great job ofproviding the products and services they need. Indeed, credit unions haveoutpaced other financial institutions by a wide margin in every American Banker customer satisfaction survey since 1989.

• Bank trade groups also like to point out that credit unions don’t serveall members, often accusing them of “cherry picking” the best customers and ignoring low-income individuals. However, these same bankers also complain loudly when credit unions expand their membership fields into underserved areas.

• Moreover the record exposes banker rhetoric for what it is. For example,historical HMDA statistics provide good clues about credit unioncommitment to the underserved. This data consistently shows thatlow income and minority borrowers in the market for a mortgage are substantially more likely to be approved for a loan at a credit union.

What PresidentialWhat PresidentialCandidates Are Saying….Candidates Are Saying….

What LawmakersWhat LawmakersAre Saying….Are Saying….

What MichiganWhat MichiganNewspapers are Saying….Newspapers are Saying….

The Public BenefitsThe Public BenefitsFrom Congressional From Congressional

Support For:Support For:

The Credit Union tax exemption which The Credit Union tax exemption which allows credit unions to offer affordable allows credit unions to offer affordable financial services to the middle class and financial services to the middle class and people of modest means.people of modest means.

Legislation like CURIA and the updated Legislation like CURIA and the updated Michigan CU Act which helps credit unions Michigan CU Act which helps credit unions remain competitive and viable.remain competitive and viable.

Legislation that encourages consumer Legislation that encourages consumer saving and access to affordable credit.saving and access to affordable credit.

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