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Should credit unions lend more?

By David McMillin · Bankrate.com
Monday, December 3, 2012
Posted: 5 pm ET

While credit unions continue to lobby for increased business lending powers, a new report highlights that approving the proposal could result in an increase in the number of credit union failures.

A new study from Ike Brannon, president of consulting firm Capital Policy Analytics, takes an in-depth look at the potential negative impacts of approving that proposed increase, and the International Community Bankers of America is using the report as additional firepower in lobbying efforts to defeat the proposal that would create more competition for small banks.

"Expanding the business-lending authority for taxpayer-subsidized credit unions would widen budget deficits at the federal, state and locals levels, and increase the risk of failures throughout a credit union industry neither equipped nor designed to do wide-scale commercial lending," Camden R. Fine, president and CEO of the ICBA, said in a statement.

While bank safety has clearly been a hot topic over the past few years, credit union failures don't seem to get as much attention. However, the nation's not-for-profit institutions have seen their share of troubles over the past few years, too. Since 2010, data from the National Credit Union Administration shows that 44 credits unions failed in 2010 and 2011. Brannon's report raises a good question. Will increasing credit union lending powers mean more concerns for the economy as a whole?

What's at stake for credit unions and banks

My colleagues and I have been covering the battle between community banks and credit unions over the past few months. Essentially, credit unions are looking to increase their existing loan-to-asset ratio of 12.25 percent to 27.5 percent. The increase would give the nation's not-for-profit institutions the ability to issue bigger loans to more businesses, without the need for more capital.

Community banks have been lobbying against the proposal, and it's easy to understand why. It's a tough climate for small banks right now. On one side, they're competing with megabanks with massive marketing budgets and nationwide presences to attract consumers. On the other side, they're competing with credit unions, which can afford to offer lower bank fees and lending rates due to their tax-exempt status. On top of both of these competitive battles, they're dealing with potentially burdensome regulation if Basel III capital requirements are approved.

What do you think? Are you in favor of giving credit unions the ability to take on more loans? Or do you think that the proposal is risky?

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