Banks Hold Undeniable Sway Over CU Legislation
Attendees of CUNA's Governmental Affairs Conference last week were spared a winter storm, but there was a flurry of activity.
One of the primary topics of speeches and Capitol Hill visits during the GAC was expected to be expanding credit unions' member business lending authorities and the crystal ball did not disappoint. Credit unions certainly got an earful from the NCUA Board members and pro-credit union lawmakers about pushing through legislation to raise the member business lending cap from the current 12.25% to 25%.
At the same time, Federal Reserve Chairman Ben Bernanke told the House Financial Services Committee that credit unions should have some activities restricted, such as member business lending, because they are tax exempt, which gives them competitive advantages. Agree with him or not on various policies, Bernanke is a very intelligent man and to hear him speak with such great ignorance is somewhat surprising. Obviously, he has many other issues of greater influence before him but to hear of him regurgitating banking trade association rhetoric was appalling. This is exactly why credit union executives need to flood Washington at least once a year. While Bernanke doesn't have any vote on legislation, his opinion certainly can carry a lot of sway.
NAFCU has long had a strong working relationship all the way to the top ranks of the Federal Reserve, including a meeting with at least one sitting board member every year. The group needs to work to pin down Bernanke and tell him how it is.
The idea that credit unions have competitive advantages over banks is laughable. First, it's been shown time and again that more than 1,000 banks don't pay any income taxes at all. Second, credit union directors are unpaid volunteers so it can be very difficult to recruit qualified individuals to do the same work bank board do. Third, credit unions, except for those designated low-income, can only raise capital through retained earnings. They can't just go off and sell some stock if they want to grow or need quick cash; credit unions need to earn it through lending and investments. Which brings me to my fourth point, Chairman Bernanke: credit unions are very limited in what they can invest in. Fifth, regardless of the tax exemption, small businesses are begging for capital that they aren't getting anywhere else. If this economy is to recover it will be up to the small businesses to expand and they cannot do that without the necessary capital. Instead of handing out hundreds of billions in support for the poor banks that have such a competitive disadvantage, why not help out the Americans in this country who actually work for a living at no expense to them without griping about the miniscule credit union tax exemption. Instead the Fed doled out TARP money for the banks to sit on or just buy up other banks, which does no one any good other than the banks' executives and board members.
House Financial Services Committee Chairman Barney Frank told GAC attendees that member business lending is controversial and won't move unless there's a prospect for progress in the Senate. In Washington, Frank is known as the consummate legislator, and if he wants to get something done, he gets it done. He's not always aligned with credit unions but has been generally supportive of their work. Obviously, though he's not going to stick his neck out for credit unions or that legislation would be a done deal by now.
Someone will stand up and defend credit unions though. Last week after press time, two credit union representatives were scheduled to testify before Congress on the member business lending legislation and back credit unions' founding right to offer member business loans. Hopefully there will be some GAC hangers on to stack the room with credit union executives to further drive home the point with Congress.
The banks have argued that credit unions don't have the experience or wherewithal to handle business lending in addition to the tax exemption. My answer to that is if you want to be able to better measure the risk in a credit unions' portfolio then allow credit unions to use a risk-based capital framework. Credit unions really need to push this point in addition to the member business lending expansion, but the issue seems to have been lost in the current legislative snowstorm.
Here again the administration, not necessarily Congress though it does its part, is holding up progress The Treasury Department has long held reservations regarding risk-based capital for credit unions. I admit risk-based analysis of assets is part of what got us in this financial crisis because at the time, a 30-year mortgage with a decent amount of equity paid in was considered safe. However, our current economic crisis is a once in 80 years phenomenon, concentration risk wasn't considered (at least in corporates), and lenders and investors are not supposed to avoid risk but measure and hedge for it. We just need a new way of measuring risk.
NCUA Chairman Debbie Matz vowed strict regulation in a letter to Treasury Secretary Tim Geithner on the heels of Bernanke's remarks if the legislation passed. This isn't just in reaction to Bernanke though because it's something she's stated before as has NCUA Board Member Gigi Hyland, who is a proponent of greater disclosure on the loans.
Of course in the halls and the breakout sessions at the GAC, much of the talk was about the corporate community. Many people continue to hold on to the raging anger that really is very unconstructive to moving forward. U.S. Central and WesCorp have been under conservatorship for nearly a year now. It's time to stop grieving and move forward.
Many have been disappointed with the NCUA's proposed regulation on corporates stating that they cannot continue to operate under that rule. Still more were angry about CUNA's corporate task force report stating the corporate model is not viable. I have to tell you all, something has to happen and not everybody's going to like it. The credit union community needs resolution and it needs it now, including what the NCUA plans to do with the legacy assets, which must be the first problem solved. Then the market needs to work out the rest.
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