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WASHINGON – One of the oddest sidelights to the question of credit unions becoming mutual banks may be the conversions’ impact on the mutual banking industry as credit unions make the jump from a relatively small credit union industry to an even smaller segment of the overall banking world, that of mutual savings banks. In the 1960s, according to the FDIC, there were roughly 6,500 mutual savings banks and federal savings and loan associations spread across the U.S., a number which has dwindled to merely 770 today, according to Charlotte Bahin, a senior vice president with Americas Community Bankers and widely respected analyst of the small part of the U.S. banking industry occupied by mutual thrifts. Bahin and other analysts lay the blame for the closing of mutual savings banks or their conversion to other bank charters on a number of different factors. On the one hand it became harder for mutual banks to make money and hold their depositors after Congress repealed Regulation Q in 1980. Regulation Q had been a Depression era regulation which limited the amount of money that a financial institution could pay in interest on savings accounts. In practice the regulation helped the thrift industry because it limited the cost of their deposits and allowed a healthy spread between deposit rates and loan rates. When Congress eliminated Regulation Q, thrifts found themselves fighting a losing battle with other financial institutions and new vehicles, like money market funds, which offered better returns on money. It also became more difficult to start thrifts as capital requirements grew, Bahin explained. When thrifts began it was relatively easy to find groups of people with a little extra savings who might want to invest in a thrift. Now it is less likely that a thrift can find the needed investors at the $60,000 or $75,000 level needed to start a thrift who won’t want a larger ownership stake in the institution than a mutual savings bank charter would allow. But the biggest single blow to the thrift industry came in the Savings and Loan Crisis of the 1980s which saw roughly 1,300 thrifts worth just over $620 billion leave the market. The crisis, which came about for a number of different reasons, brought about the Resolution Trust Corporation whose auditors were called in to resolve the tangled mess of failed thrifts and recover what it could from the catastrophe. The crisis also saw the elimination of the traditional federal thrift regulator, the Federal Home Loan Bank Board, replaced by the Office of Thrift Supervision and capital requirements which thrifts had never had. These spurred the conversion, merger and closing of more thrifts as well as discouraged the creation of new thrift institutions, Bahin and other analysts explained. “I think that if the savings and loan crisis not occurred we would easily have 1,700 thrifts today and not merely 770,” said Eric Luse, a partner in the Washington D.C. law firm of Luse Gorman Pomerenk and Schick, a firm specializing in mutual banks and which advises credit unions seeking to move to a banking charter. All these losses have meant that a once venerable part of the U.S banking industry has become substantially reduced and have left credit unions that change charters in the odd position of bringing new blood to the trade. “Most people don’t realize it, but the bank that played such a key role in the movie It’s a Wonderful Life was a mutual thrift bank,” Bahin said. “We at the ACB are strongly in favor of thrifts and think they bring something tremendously vital to the U.S. banking market.” Bahin and other analysts say that the only really efficient way the thrift industry will grow in the 21st century will be through credit unions and other financial institutions which convert into that charter. “The changes in regulation combined with market changes have made it both harder to make money as mutual thrifts and harder to attract investors,” said Bahin, “About the only way new thrifts come into being now are though credit union and other conversions of financial institutions into this charter,” she said. The way the markets have changed have made it clear that mutual thrift banks and credit unions have more in common, with the exception of the taxation issue, than mutual banks have with other types of banks. The differences and similarities are profound enough that there could even one day be a mutual industry that could include both banks and credit unions provided, Bahin said, the tax question can be resolved. “I wouldn’t want to downplay the taxation issue,” Bahin said, “because it is the source of so much bad blood, but fundamentally there are a lot of places of overlap between mutual banks and credit unions” Unless a mutual thrift adopts a mutual holding company structure, for example, its growth is also limited to retained earnings. Also, while the structure of who can vote differs between charters, both types of institutions are still controlled by the members or depositors. In credit unions, each member gets one vote regardless of deposit balances while a mutual thrift typically allocates one vote per every hundred dollars in deposits up to 1,000 votes This nexus gives mutual banks and credit unions many overlapping concerns such as how to meet branching and other service needs efficiently and how to better compete with larger institutions with more resources. But Bahin maintained that a resolution of the tax issue is the key element since there was such a history behind it. Mutual thrifts, she explained, had been tax exempt until 1952 and had many fewer powers than credit unions do today. “Their tax exemption was repealed when Congress came to believe they steadily competed with other taxed banks in a growing number of areas – and they didn’t have the powers that credit unions have,” Bahin said. [email protected]

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