By Robert Flock
Yes, you read that right.
Lobbyists for tax-privileged credit unions never tire of claiming that CUs are meant to be member-owned not-for-profit cooperatives, beholden only to the will of their members, not the whims of Wall Street. Nevertheless, to Wall Street they go—in pursuit of investor capital to help drive rapid growth. On the agenda at the symposium: a panel discussion on using subordinated debt and secondary capital to expand credit unions’ assets under management.
It’s important to understand just how this pivot from mom and pop to Wall Street has taken place and why it matters.
The mission of credit unions to provide consumer financial services to clearly defined communities in underserved areas—as well as their structure as not-for-profit cooperatives—was the basis of their federal tax-exempt status.
Their corporate structure was meant to reinforce a focused approach to member-services. The absence of shareholders or outside investors driving the priorities of the institution has empowered credit unions to focus on people over profits. (Or so the theory goes.)
But last year, all of that changed. NCUA finalized a rule authorizing large credit unions to borrow money from Wall Street investors and count it toward their regulatory capital requirements. This change allows the largest credit unions to tap hedge funds and private investors to fuel rapid expansion—something they normally wouldn’t be able to do because their “member-owned” structure had previously meant their growth, like that of taxpaying mutual community banks, was limited to retained earnings.
Interestingly, only the largest credit unions and those designated as “low-income” can utilize this new authority. The result is a widening divide between the traditional member-owned and mission-driven community financial institutions that cater to Main Street and the ultra-large growth-oriented credit unions heading to New York. Unfortunately, the latter now comprise the vast majority of the credit union industry—representing 85 percent of assets and 82 percent of accounts.
At the recent NYSE event, James Schenck, president and CEO of PenFed, remarked that “for us, securitization was the natural growth process.” For America’s second-largest federal credit union, that “process” included the issuance of nearly half-a-billion dollars in notes during an auto-loan securitization last year. PenFed’s open charter and these new capabilities enable it to pursue growth and maximize income.
This transformation of CUs from community financial institutions serving low-to-moderate-income members into sophisticated financial institutions tapping capital markets is startling to say the least. The fact that the industry’s regulator, which should be safeguarding the congressionally mandated mission to serve people of modest means, is leading the charge to Wall Street to promote this sort of expansive growth is especially troubling.
As modern credit unions continue their march from Main Street to Wall Street, Congress should consider whether credit unions are distinguishable from community banks—and, if not, whether their preferential tax treatment is still justified.
Robert Flock is a VP in ABA’s Office of Strategic Engagement, where he leads ABA’s policy work on credit unions.