Regulatory ‘blind spot’ shows risks of tax-subsidized credit union bank purchases
By Brad Bolton
The growing trend of tax-exempt credit unions using their federal subsidy to acquire taxpaying community banks has gotten the attention of several states, but the nation’s chief credit union regulator recently hinted at another reason why this is an issue of national importance: the threat it poses to U.S. cybersecurity. National Credit Union Administration Chairman Todd Harper’s calls for Congress to give his agency the same authority as banking regulators to supervise for cyber risk is yet another reason why policymakers should more closely examine the credit union industry’s taxpayer-subsidized purchases of community banks across the country.
While Harper’s NCUA is the federal agency charged with regulating the credit union industry, it is not authorized to examine credit union third-party service providers for cyber risk. Harper has called the lack of authority a “regulatory blind spot” that means the agency doesn’t “necessarily know what is happening” with credit union cybersecurity and could leave his industry as the “soft underbelly” of the broader financial system. Harper also noted that the NCUA is the only financial services regulator that doesn’t do a “deep dive” exam on compliance with federal consumer protection laws.
This regulatory imbalance — which Congress has failed to address through legislation — offers yet another reason why federal policymakers should respond to credit union acquisitions of community banks. Credit unions are also exempt from federal taxes and other regulatory standards that apply to taxpaying banks, meaning taxpayer funds help large credit unions make inflated purchase offers of smaller, healthy institutions that diminish access to local financial services in many communities.
While community banks contributed over $12 billion in tax revenue in 2020, the credit union industry enjoys a tax exemption worth between $2 billion and as much as $4.4 billion per year, based on the industry’s net income. Each credit union purchase of a community bank — a trend that peaked last year and is expected to continue apace in 2023 — increases the federal tax exemption for more than $2 trillion in credit union assets, meaning these transactions have serious implications for local communities that rely on tax revenues to support public services. But the harm to consumers goes well beyond government coffers.
With the nation’s community banks accounting for roughly 60% of U.S. small-business loans, taxpayer-subsidized credit union acquisitions risk displacing this critical provider of capital. And these acquisitions expand the portion of the financial services industry exempt from the Community Reinvestment Act. This law requires financial institutions to lend to low- and moderate-income consumers and small businesses in their local market, but — like federal taxes and cybersecurity regulations — it does not apply to credit unions.
The regulatory imbalance reflects these deals’ broader negative impact on low- and moderate-income communities. While credit unions were established a century ago to serve people of modest means with a common bond, the data show they are falling short of that mission. Community banks outnumber credit unions by a 2–1 margin in low-income or distressed communities and are more likely to lend in census tracts with above-average poverty and unemployment, according to Home Mortgage Disclosure Act data.
Ultimately, consolidation in the financial services industry reduces the availability of locally based financial institutions in communities most in need of them. That includes smaller, traditional credit unions, which are declining while larger credit unions expand. Credit unions in every asset category under $500 million lost both members and loans in 2020, while those over $1 billion in assets comprise just 8.6% of industry institutions but 75% of its tax exemption.
To counter the negative impact of these deals, policymakers in several states have begun pushing back. Mississippi last year enacted a law requiring acquired bank assets to remain under the control of an FDIC-insured institution. The Nebraska banking department separately ruled that only chartered financial institutions organized to do business in the state may participate in a cross-industry acquisition or merger — rejecting an attempted bank acquisition by an out-of-state credit union. And Colorado state lawmakers voted down legislation to allow credit unions to hold municipal deposits and other public funds.
While states have started to respond, this is a matter of national importance, and taxpayers are entitled to know more about how the subsidy they fund is being used to underwrite financial services consolidation. Congress should respond by holding hearings, requesting a Government Accountability Office study on the credit union industry, and considering an “exit fee” on these acquisitions to capture the value of the tax revenue lost once the acquired bank’s business activity becomes tax-exempt.
There is precedent for reconsidering a financial services tax exemption. In 1951, Congress revoked the tax exemption for building and loan associations, cooperative banks, and mutual savings banks, finding that these institutions operated much like commercial banks and should be taxed accordingly.
As credit union banking acquisitions continue, policymakers in Washington should join the states in taking a closer look at these deals and whether government policy should continue supporting them.
Brad Bolton is president and CEO of Community Spirit Bank in Red Bay, Ala., and chairman of the Independent Community Bankers of America.
