In 2016, the NCUA issued this opinion letter authorizing the creation of “network” credit unions. As envisioned by the NCUA: 

1. A “network” credit union would effectively allow the non-surviving credit union to continue to operate under its own name as a division of the surviving credit union. 
2. A committee comprised of members of the merged credit union would be appointed to serve in an advisory role. At least one seat on the nomination committee would be reserved for members of the merged credit union. 

Following the publication of this letter, the Filene Research Institute urged credit unions to consider adopting this model as part of merger considerations. According to Filene, this approach would allow smaller credit unions to reduce expenses without compromising their own identity. This is a framework that should be further explored and strengthened. 

At the time these ideas were floated, yours truly was somewhat skeptical. Why create another layer of bureaucracy when the ultimate decision-making power will remain in the surviving credit union’s board of directors? I’ve since changed my mind because I see the network model as providing the only means of maintaining the existence of small credit unions and the unique attributes they bring to the industry as a whole.  

This is a lesson the banking industry learned a long time ago. In 1956, Congress passed the Bank Holding Company Act. The Act lets banks operate multiple institutions while continuing to grow. Today, there are relatively few independent community banks. Still, the statute enables many financial institutions to serve small communities in a way they wouldn't be able to but for the assistance of larger institutions. As explained in a 1957 Duke Law Review article, “a well-managed bank holding company system offers certain distinct advantages to its banking subsidiary and to the latter's depositors and borrowers. The holding company typically affords its affiliate investment and management counsel of a quality and scope normally unavailable to the independent banker.” 

In other words, the statute strikes a compromise between the inevitable demands to grow larger and the desire to maintain a local identity. If this banking structure is ever to be a truly robust option for credit unions, then we will have to go to Congress and advocate for necessary statutory changes. Most importantly, credit unions need the authority to act as independent subsidiaries of holding companies with independent boards that are also entitled to the advantages of being owned by a larger institution. For example, a bank holding company has an obligation to serve “as a source of strength to its banking subsidiaries,” pursuant to which it is expected to be ready to provide adequate resources to its banking subsidiaries during periods of financial adversity.  

All too often, the merger discussion is framed as either good or bad for the industry as a whole. In reality, mergers reflect the dynamics of the financial services industry. Whether you are talking about a for-profit bank or a not-for-profit credit union, success or failure comes down to how much profit can be squeezed out of incredibly thin operating margins. Economies of scale will always be a key growth strategy. A well-functioning holding company framework would strike the appropriate middle ground, allowing the largest credit unions to continue to grow while permitting smaller institutions to maintain their unique identities. 

The threat of ending the tax exemption for “large” credit unions should serve as a reminder to the industry that, regardless of a credit union’s asset size, it has a vested interest in protecting the core attributes of what makes a credit union a credit union. Any tax based on asset size is effectively a cap that will force credit unions to choose between curtailing their growth to meet members' needs or being penalized for running a growing business. Over time, there would, of course, be fewer and fewer credit unions. After all, why would any board pay a tax imposed on for-profit corporations without taking advantage of the benefits of being a for-profit corporation? Banker attacks are as inevitable as the sunrise. A diverse industry comprised of institutions of all shapes and sizes will always be the best defense against these assaults.