From the CUNA Governmental Affairs Conference in Washington through credit union interactions with policy makers throughout 2011, four key issues will be top priorities:
1. Taxation: With growing deficits, a huge debt burden, and calls from the electorate for fiscal discipline, it seems everything is “on the table.”
Credit unions must make it abundantly clear that taxing credit unions would result in a huge net societal loss. While eliminating the federal tax exemption would have produced roughly $600 million in federal revenue in 2010, that’s only part of the story. The exemption allows credit unions to embrace a different structure, and causes them to behave differently than other financial institutions. In 2010, credit unions leveraged the tax exemption into direct financial benefits (to members) totaling $6.5 billion and indirect benefits (to nonmembers) totaling $3.5 billion.
The benefits arise from credit unions’ better rates, and fewer and lower fees, and from the pressure this puts on banking institutions to adopt more consumer-friendly pricing. Taxation—changing incentives—likely would make credit unions act more like banks, putting nearly $10 billion in consumer benefits at risk.
2. Debit interchange: Few issues have raised hackles as much as the new interchange regulation and the Federal Reserve’s proposed 12 cent-per-transaction fixed price. While all but three large credit unions have been exempted from the price-fixing scheme, grave concerns exist about the effectiveness of the exemption. Will the card companies create a two-tiered system?
Even if they do, will merchants honor it? The law says merchants must honor all cards. But it doesn’t include language to ensure effective oversight or enforcement. Nothing prevents merchants from steering transactions away from smaller institutions.
This is a big deal. In the extreme, it puts at risk roughly two-thirds of credit union debit interchange—a total of $1.7 billion. A completely ineffective carve-out would mean credit union debit interchange income would fall from an average 27 basis points (bp) on total assets to about 10 bp on assets. The average credit union would have to impose annual fees of $33 a card to make up for the lost revenue.
While this extreme impact is unlikely to occur (especially in the short-run) the financial impact of the interchange threat is larger than other big financial challenges. For example, corporate stabilization expenses likely will equal 9 bp on assets (assuming payments can be treated as a prepaid expense) and insurance premiums will equal 5 bp on assets in 2011.
3. Capital reform: At the start of the economic downturn, 90% of credit unions had net worth ratios of 9% or greater, compared with only about 75% at the end of September 2010.
CUNA estimates 2,900 credit unions might have interest in access to alternative capital. These credit unions serve 48 million members—nearly half of all credit union members. The definition of those needing capital reform: credit unions with net worth below 9% of assets, and those with capital between 9% and 12% that have experienced a minimum two percentage point decline in their net worth ratio since year-end 2007.
While not all credit unions have immediate need (or desire) for access to alternative capital, many do. And millions of members will suffer in the absence of this reform. Moreover, this significant enhancement to the credit union charter will benefit all credit unions—whether or not they immediately use the authority.
4. Member business lending: Since the beginning of the economic downturn, credit union business loans increased 40%, while bank business loans declined nearly 20%. But many credit unions might be forced to curtail these critical services.
Nearly 500 credit unions are approaching the arbitrary 12.25% business lending cap. CUNA economists conservatively estimate credit unions would make an additional $12 billion in member business loans in the first year after lifting the cap. This small-business capital infusion would create an estimated 134,000 new jobs—a big economic boost with no cost to taxpayers.
These issues are at the forefront, but industry leaders face many challenges. It’s time to make your voices heard!
MIKE SCHENK is CUNA’s vice president, economics and statistics. Contact him at 608-231-4228.