Study Rebuts Banks’ Claims on Subsidies
A consumer group is turning the tables on banks’ chief complaint against credit unions, saying bankers receive far more in federal subsidies than their nonprofit rivals.
The study, to be released today by San Francisco’s Consumer Action, contends banks receive two to five times as much in federal benefits as credit unions, even after adjusting for banks’ far greater asset size.
Bankers immediately disputed the study, saying the Consumer Action researcher used faulty economic assumptions, exaggerated the benefits that banks receive relative to credit unions and failed to fully account for laws that benefit credit unions.
“They’re just making up numbers,” said David Burgess, policy director for California Bankers Assn.
The study by sociologist Mark Cooper, Consumer Action’s director of research, is the latest swipe in the cat fight between nonprofit credit unions and the banks that are trying to stem their growth. Bankers say credit unions’ tax-exempt status gives them an unfair competitive advantage.
The study estimated that credit unions would have to pay $1 billion if forced to pay full corporate taxes. Adding in credit union’s “safety net,” including the potential cost of guaranteeing credit union deposit insurance, would boost credit unions’ total federal subsidy to somewhere between $1.1 billion and $2.5 billion, Cooper said.
By contrast, Cooper estimated banks receive a benefit worth $21 billion to $34 billion from the federal safety net that protects banks against failure; $2 billion in taxpayer funds for interest on the savings and loan debacle; and $4 billion to $6 billion in “free” funds thanks to checking deposits that do not pay interest. Credit unions must pay interest on their accounts.
Adjusting for credit unions’ smaller size, banks conservatively receive at least twice the federal benefit per dollar of assets, and probably five times as much, Cooper said.
Credit unions have $380 billion in assets and claim 70 million members. Banks, which receive more than 90% of the nation’s deposits, claim assets of $6.3 trillion. The bank deposit insurance pool took over the depleted savings and loan insurance fund after the S&L; crisis of the 1980s.
The bulk of banks’ federal subsidy comes from deposit insurance, Cooper argued. Banks tend to be less well-capitalized and invest in riskier assets than credit unions, increasing banks’ chances of failure, he said.
The idea that federal deposit insurance amounts to a subsidy has been hotly debated among economists, bankers and academics, with Federal Reserve Board Chairman Alan Greenspan arguing that deposit insurance is a subsidy, and other respected economists arguing that it isn’t.
Bankers dismiss the likelihood of another S&L-sized; bailout, saying bank rules and regulations have changed radically since 1991. Banks’ capital levels are at historic highs, and their deposit insurance fund is currently over-funded and its investments making so much money that the largest, healthiest banks are excused from paying premiums into the fund.
In addition to their tax-free status, member-owned credit unions are also not required to adhere to the federal Community Reinvestment Act, which requires banks to invest in minority and low-income communities. Banks say those two factors give credit unions an unfair advantage.
The study “is trying to create a lot of black smoke to direct the public’s attention away from the fact that credit unions have a huge subsidy and no obligation to reinvest back in the community,” said James Chessen, chief economist for the American Bankers Assn. in Washington, D.C.
Bankers also pointed out that the Credit Union National Assn., the credit union trade organization, serves on Consumer Action’s board. The economist who reviewed Cooper’s findings, Pomona College instructor James D. Likens, is chairman of the board of Glendale’s First City Savings Federal Credit Union and teaches a summer management course for the credit union association. Likens said he is one of the few academics who understands credit union economics, which was why he was asked to review the findings.
Banks’ battle against credit unions claimed a short-lived victory last year, when bankers successfully argued before the U.S. Supreme Court that credit unions had overstepped their legal mandate. The Supreme Court found credit unions had extended memberships far beyond the “common bond” required by the Federal Credit Union Act of 1934, which created credit unions. The justices said credit unions must limit their membership to individuals within a single company, community or occupation.
Credit unions turned to Congress, saying consumers would wind up paying higher fees and getting worse loan terms if the ruling were allowed to stand. Credit unions say their lack of a profit motive means they can provide lower-cost loans and accounts with fewer fees and higher interest rates than banks provide.
Congress responded by passing a law that essentially overturned the Supreme Court decision, allowing credit unions to continue their expansion. Federally chartered credit unions continue to include more than one occupational group in their memberships, as long as each new group doesn’t exceed 3,000 people.
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