Bank buys raise questions about the ‘credit union difference’

By Robert Flock and Harris Simmons
ABA Viewpoint

America’s banks have long argued that credit unions compete for customers with unfair advantages. They pay no federal taxes, face much lighter regulatory oversight despite offering the same services, and unlike banks, they don’t have to meet federal requirements to serve low-to-moderate-income communities – even though that’s why Congress created credit unions in the first place back in the 1930’s.

Thanks to intense industry lobbying and an outdated view of small credit unions as quaint financial institutions serving teachers, factory workers and even church groups, few people in Washington have paid much attention to credit unions. That allowed them to grow into a $2.2 trillion industry with large credit unions now operating across multiple states, providing commercial loans and offering “great rates for everyone.”

In the last few weeks, the world has started to wake up to the reality of today’s credit unions.

A recent CNN report raised troubling questions about the nation’s largest credit union’s commitment to fair lending. That prompted members of Congress to demand answers.

Now there’s another major reason for Congress to scrutinize the industry. Credit unions are swallowing up tax-paying banks at an alarming rate, using the tax break lawmakers granted them to serve people of modest means.

Following a record 16 credit union bank buys announced in 2022, credit unions’ share of total bank purchases hit an all-time high last year. With four deals already announced in 2024 – two of them especially significant – and policymakers asking tough questions about credit union activities, now is the time for Congress to carry out its oversight responsibilities and hold its first hearing on credit unions in nearly 20 years.

Although it’s atypical for credit unions to disclose terms, press releases regarding a couple of this month’s proposed transactions included financials – and the numbers are staggering.

The aptly named Global Credit Union – a $12 billion Alaska-based financial institution – will pay $231.2 million for a $1.5 billion bank in Renton, Washington. If the transaction is completed later this year as expected, it would be the largest bank to ever be acquired by a credit union.

On the other side of the country, a $7 billion New York-based credit union will acquire a $600 million bank for $28.6 million, the first deal in that state.

According to press statements, both credit unions will now be able to “expand” their commercial banking and branch locations. The press releases failed to mention what would end with these transactions: the banks’ federal tax payments and their obligation to comply with Community Reinvestment Act requirements to serve low- and moderate-income communities.

In a memo following November’s Community Depository Institutions Advisory Council meeting, the Federal Reserve noted that credit unions’ nonprofit status gives them a “distinct advantage” in the bidding process. Indeed, their tax exemption makes them attractive suitors given their ability to pay cash – hundreds of millions of dollars in one recent instance.

While these deals are subject to regulatory approvals, several states have taken steps to prevent credit unions from buying banks. In addition to Mississippi, which enacted legislation requiring entities purchasing banks to have FDIC deposit insurance, regulators in half a dozen other states have determined such transactions are not permissible. That’s because state policymakers recognize that when tax-exempt non-profits are buying banks for cash and removing them from local tax rolls, something’s not right.

With legislation being considered in Massachusetts, South Carolina, and West Virginia, policymakers in other states will likely encounter this issue as multibillion credit unions target new markets for growth. These brazen credit unions are compromising their mission of service to members of modest means connected through some common bond in a well-defined, local area – and raising serious questions about their tax-exempt status.

As states weigh in, Congress and federal regulators have been largely silent.

Though the former FDIC Chairman Jelena McWilliams voiced concerns about credit unions’ tax and Community Reinvestment Act exemptions as it related to bank purchases, and even NCUA Chairman Todd Harper chimed in last November noting that customers of banks that are acquired by credit unions have less consumer financial protection (a striking statement from the country’s top credit union regulator), Congress has yet to take any meaningful action to address this troubling phenomenon.

The much ballyhooed “credit union difference” harkens back to the movement’s founding nearly a century ago when these not-for-profit financial cooperatives had a clearly defined role. Bank acquisitions clearly demonstrate that the industry’s activities have expanded far beyond its original mission – and congressional intent.

Without regular oversight from Congress, the credit union industry has drifted from its roots, endangering its vaunted image in the process. Much has changed since the last credit union hearing in 2005, and lawmakers have an obligation to scrutinize this growing industry.

It’s long past time to schedule a hearing and take a closer look at today’s credit unions.

Robert Flock is a VP in ABA’s Office of Strategic Engagement. Harris Simmons is chairman and chief executive officer of Zions Bancorporation and past chairman of the American Bankers Association.

ABA Viewpoint is the source for analysis, commentary and perspective from the American Bankers Association on the policy issues shaping banking today and into the future. Click here to view all posts in this series.