Deficits and Taxation
In contrast to the tax discussions during the budget surplus year of 1998, when HR-1151 was debated, today deficits are an economic reality. Congress and many state legislatures are likely to be turning over every stone in search of tax dollars.
According to political observers, a proposal resulting in taxes affecting just 10% of the credit unions is plausible. Although numbering less than 1,000, these credit unions are the most profitable and fastest growing. Controlling about 75% of credit union assets, their profile deviates from the median credit union. Many are capturing market share from the smaller 6,800 credit unions, alienating that group. Without their support and facing critics at the highest levels of government, this small group of fast growing credit unions (likely re-characterized as "credit associations") may end up getting squeezed into a box resulting in taxation and only modest new powers. Mutual savings banks had to wait over 20 years after being taxed before gaining any significant new powers.
Trapped in the NCUSIF
In addition, because the group provides substantial support for NCUA and the NCUSIF, the legislation may include prohibitions on leaving the NCUSIF, in order to preserve the safety and soundness of the fund. (The precedent: savings banks were prevented from leaving the Savings Association Insurance Fund (SAIF).) Credit union trade associations are likely to consider it "noble" to negotiate such a "compromise". Consequently, the many credit union executives that threaten to convert to a bank, if taxed, may find themselves trapped in a less desirable "credit union like" charter.
Who will argue their case for conversion to a bank? Credit union trade associations and the NCUA will be content with the status quo. Smaller credit unions, with the pressure for taxation gone, will have no incentive to defend the larger. Bank trade associations are unlikely to lobby for the right of the 1,000 to convert to a bank; it would seem self serving, and may be opposed by bankers that resent helping former credit unions. Arguing on your own behalf will be met with accusations of "Enron" like greed and the belief that the few new powers bargained for are sufficient for now.
Congress Saw the Need to Convert
Congress, during the HR-1151 debates, recognized that significant restrictions were being placed on credit union growth by the bill; so a streamlined escape route was crafted for those institutions seeking to shed credit union restrictions. Critics, however, recognizing the legislation "opened the barn door" want to make the process more difficult. Should credit union legislation be introduced, in the "spirit of compromise", critics (such as the credit union trade associations) are likely to attach anti-conversion amendments to stop conversions, thus preserving their turf.
Since HR-1151 streamlined the process of converting to a bank charter, members have overwhelmingly supported the move, regulatory approvals have been swift, and the pioneering institutions have prospered. The voting process is simpler than converting to private insurance since only a simple majority of members voting need to approve of the move; and the NCUA board's approval is not required.
Advice from Stephen R Covey's book: "First Things First" may apply for some facing the bank conversion decision: (1.) "Let go of paradigms that are popular and pleasing, but based on illusion". (2.) "Let go of extrinsic sources of security".
For more information about the mutual bank charter, the stock bank charter, raising regulatory capital, bank holding companies, and other progressive growth strategies contact the author, Alan D. Theriault, President, CU Financial Services, at 800-649-2741.