Community banks may be struggling to keep up with another side of the banking industry: credit unions.
Earlier this week in testimony before Congress, Sal Marranca, Independent Community Bankers of America chairman, made the case for repealing the tax exemption status that federal credit unions currently enjoy. From the chairman's testimony:
The current tax exemption that credit unions enjoy is directly linked to their original mission of serving individuals of modest means. However, after decades of 'mission creep,' which has resulted in multi-billion-dollar credit unions, that tax exemption can no longer be justified.
Marrana's comments come as the House Financial Services Subcommittee on Financial Institutions and Consumer Credit debates the Small Business Lending Enhancement Act, a piece of legislation designed to increase credit union lending power. The proposal would significantly increase a credit union's ability to approve larger loans for its members.
Community banking institutions and credit unions may appear to be somewhat similar. Both of them tend to be more consumer-friendly, typically offering free checking programs and better interest rates than big banks. Consequently, the two also compete for like-minded account holders, consumers who prefer cost-effective banking to the bank fees that come with the convenience of thousands of ATMs and branches.
However, Marranca's testimony highlights the crucial distinction between the two: profit versus not-for-profit. As the two types of institutions continue to work to attract new personal and small business accounts, it's fair to say that tax exemptions tilt the field in favor of credit unions. While community banks pay state and federal taxes each year, credit unions can put those dollars to use to offer more benefits, services and discounts to their account holders.
I certainly understand Marranca's point of view. Community banks are in arguably the toughest position on the banking playing field. They're competing with one side that features some members who are too big to fail and another side that receives a tax advantage. Still, I can’t side with his request. For every "multi-billion-dollar credit union," I bet there are hundreds of small credit unions that heavily rely on their tax-exemption status.
What do you think? Are some credit unions getting so big that their tax-exempt status should no longer apply?