Thursday, March 13, 2014

Bank Switching to CU: Extrememly Difficult, If Not Impossible

In a letter to House Ways and Means Committee Chairman Dave Camp, the National Association of Federal Credit Unions (NAFCU) wrote that the "[n]ext time a banker complains to you about credit unions, we would urge you to ask them if they have looked at converting to one."

However, this disingenuous and unscrupulous statement cannot go unchallenged.

While I believe in charter choice, there are many issues that make converting from a bank to a credit union extremely difficult, if not impossible.

One complication deals with common bond or field of membership. Banks are open to the public, while credit unions have a defined field of membership.

While a small bank in a limited geographic area may be able to meet the field of membership requirement, a larger bank would have difficulties.

Another common bond operational issue -- would the converting bank have divest part of its customer base to comply with the field of membership requirements?

I guess there are ways around the field of membership issue. The converting bank could form an association or become a partner of the American Consumer Council so as to qualify all its customers as members. But this just makes a mockery out of the field of membership requirements.

In addition, most people with any financial acumen would note the relative difficulty of this transaction for a stock entity.

A stock organization converting to a credit union would have to first compensate its shareholders for their ownership interests. This would effectively wipe out the capital of the entity that is converting to a credit union.

On top of that, bank balance sheets are fundamentally different from credit unions. Many banks are commercial lenders, while most credit unions are consumer lenders. A bank converting to a credit union would most likely exceed the aggregate member business loan cap and would need to shrink its business loan portfolio most likely by shedding these loans (probably at a loss) to comply with the law.

Furthermore, banks hold assets that credit unions are not allowed to hold. Once again, a requirement to divest these assets could mean that the bank is selling these assets in an unfavorable environment at fire sale prices.

I think most people would agree that an entity that has no capital and is divesting assets at a possible loss would pose a significant threat to the National Credit Union Share Insurance Fund.

Do you think the National Credit Union Administration is going to charter such an entity?

The last point I would like to make is proposing that a taxpaying bank switch to a tax-exempt credit union could put the credit union tax exemption at risk.


  1. Interesting commentary. The main point I take from this is both banks and credit unions have competitive advantages and disadvantages with their charter. Noting the balance sheet restrictions cited above, it is also disingenuous to cite the tax exemption as an unfair competitive advantage. And all of this misses the most obvious and important point...that the structure, a non-profit cooperative, is the primary reason for the tax exemption

  2. There are financial cooperatives that are taxed. So, the tax exemption arises from more than structure.

    1. The tax exemption arose from something that no longer applies to credit unions.
      The reason the tax exemptions remains is congress loves the campaign funds it gets from banks and credit unions while delivering them CFPB, durbin, higher compliance costs, cram down and no relief.
      Definition of insanity and ABA, Cuna Nafcu, icba are part of the problem.

  3. The comment by Nafcu to the committee was so silly, it didn't need a response.
    The real question is, why is it so hard for a credit union to switch charters?
    No banks want to switch to credit unions, it's a huge step back.
    Credit unions want to and have wanted to switch to bank charter because it's better for their members and business, in spite of taxes.
    Why don't you focus on that terrible flaw in the cu regulations?
    My credit union is one of a few I know that would switch if NCUA wasn't holding us hostage with the rule.

  4. Keith,

    If the ABA succeeds in removing the credit union tax advantage, have you considered what the implications could be to community banks that will then have some very strong competitors who likely will also no longer have growth limitations on business lending, capital attraction and fields of membership? While all of those limitations have ways to get around them, they still keep a vast majority of the industry confined to limited products and growth opportunities.



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