If banks win, consumers lose

The battle approaches its climax in the Supreme Court and in Congress

Consumers fed up with high bank fees and interest rates can save from $200 to $500 a year by joining a credit union. Unbanked consumers-people using check-cashing outlets and convenience stores-could save about $450 a year. Consumers could save even more now that surcharges at bank automated teller machines have become more widespread.

And you can expect those savings estimates to increase as big banks raise existing fees, add new ones, and raise the bar for customers who try to avoid those fees, according to a recent report by the U.S. Public Interest Research Group entitled "Big Banks, Bigger Fees." Credit unions are a competitive yardstick, holding down rates charged by bigger banks.

That's a key point in the battle with bankers. Nonprofit credit unions provide consumers an alternative to for-profit banks and check-cashing outlets. Credit unions simply want to continue offering consumers that choice.

"We have to do only 10% of the business to keep the for-profit entities honest," the late Louise McCarren Herring used to say. The quote actually comes from fellow Ohioan Murray D. Lincoln, who was an advocate of cooperatives. But Herring-a signer of CUNA's constitution in 1934 and the "Mother of Credit Unions" in Ohio-liked to apply Lincoln's quote to describe credit unions' role in the financial sector.

"She's absolutely right. I don't think there's anything the bankers would rather see than credit unions eliminated as a competitive threat," says CUNA President/Chief Executive Officer (CEO) Daniel A. Mica. "We serve as a counterbalance to the rates banks charge, and they don't like that.

"Why would banks put this tremendous effort, over all these years, against an entity that's tiny compared with banks?" Mica asks. "I don't think they're worried about the 10% of business credit unions do at all. I think they'd like to eliminate credit unions as a competitive threat, thereby eliminating the counterbalance on rates, which would free them to raise rates and fees even higher than they already are."

Sponsors support choice

Co-sponsors of H.R. 1151-the Credit Union Membership Access Act-support the bill because it offers consumers a choice. The bill's initial sponsors-Reps. Steven LaTourette, R-Ohio, and Paul Kanjorski, D-Pa.-don't view the bill as antibank but as pro-consumer and pro-competition. There's room for both banks and credit unions in the market, LaTourette has said. Since he and Kanjorski introduced the bill in March with 18 original co-sponsors, support has now grown to 129 co-sponsors as of mid-November.

Here's what some other sponsors

* Rep. George Brown, D-Calif.: "The Credit Union Membership Access Act is not an antibank bill. It simply gives more Americans the opportunity to choose a credit union for their financial services. This bill will help credit unions remain a viable financial service to the millions of Americans who depend on them."

* Rep. Zach Wamp, R-Tenn.: "I'm not against banks. I'm for consumers. Credit unions stand up for their member-owners. They're volunteer-driven, they're not for profit, and they hold our money in trust. Credit unions are as American as apple pie. Why would we not stand up for that?"

* Rep. Marcy Kaptur, D-Ohio: "Credit unions are close to my heart. Their members are ownersnot absentee owners. They know their members."

* Rep. Bob Filner, D-Calif.: "I've never seen a group that learned so quickly the rules of the game and are willing to get involved."

* Rep. Lynn Rivers, D-Mich.: "I really do believe with credit union membership, `It's a Wonderful Life.' Credit unions are like real-life angels for real-life families."

* Senate Banking Committee Chairman Alfonse D'Amato, RN.Y., also recognized the benefit of mutual institutions a year ago when he spoke to the annual convention of America's Community Bankers in Atlanta. He said the mutual form of depository institution ownership should be preserved. "Owner-depositors have a greater stake in providing credit to their communities," said D'Amato.

Savings and loans (S&Ls) have dwindled rapidly since the S&L crisis. Only 1,300 remain-down from 3,600 in the late 1980s-and only 40% of them are mutuals. Fortunately, there still are 11,748 mutually owned credit unions.

Ten percent is about all the banking business credit unions do. Credit union savings account for 7% of household savings held by depository institutions. Banks, bank mutual funds, and bank trusts hold 75%, and thrift institutions have 17%, according to CUNA's economics and statistics department.

On the loan side, credit unions have 12% of consumer installment credit; banks and bank security pools hold 57%. S&Ls, savings banks, finance companies, and nonbanks hold the rest.

The question is whether consumers will continue to have the opportunity to choose credit unions. That's being debated right now in the U.S. Supreme Court and in Congress.

CUNA President Mica will tell you that credit unions are the only remaining force between consumers and pretty much a solid bank monopoly. "If banks win, consumers lose," he says ("Grass-roots strength will prevail," p. 50). That's why the case before the Supreme Court and the Credit Union Membership Access Act in the House of Representatives are so important.

At stake: 20% of members The outcome of the Supreme Court case directly affects more than 10.1 million members of 3,602 federal credit unions that serve multiple groups. Indirectly, the case could affect another 4.3 million members of 1,730 statechartered credit unions with multiple-group memberships.

State regulators in at least two states-Virginia and Oregon-have placed moratoriums on multiplegroup expansion pending the outcome of the Supreme Court case. Virginia bankers want the state's common bond interpretation pared down to eliminate multiple-group memberships and community credit unions.

If all 5,332 state and federal credit unions that serve multiple groups had to deny membership beyond their primary sponsors, an estimated 254,426 employee groups containing 14.4 million members would lose credit union services. That's 20% of all credit union members.

The banks' court complaint centers on the Federal Credit Union Act phrase "that federal credit union membership shall be limited to groups having a common bond of occupation or association, or to groups within a well-defined neighborhood, community, or rural district."

CUNA supports the National Credit Union Administration's (NCUA) 1982 interpretation that "groups having a common bond" can mean multiple groups, "provided each of these groups has its own common bond." The American Bankers Association (ABA) argues that from 1934 to 1982, NCUA and predecessor agencies interpreted the language to mean "all members of any one federal credit union must share a single common bond."

But before the Supreme Court acts on the field-of-membership definition, the high court will decide if banks and their trade groups have standing to question NCUA's interpretation in the first place. (See "Two questions for Supreme Court to answer," CU Mag 9/97, p. 58.)

Win or lose in the Supreme Court, credit unions also have staked out a backup position. The Credit Union Campaign for Consumer Choice sought and in March obtained House member support for H.R. 1151-a simple, straightforward bill to clarify the ambiguous language.

The bill reads: "Section 109 of the Federal Credit Union Act [12 U.S.C. 1759] is amended by striking `Federal credit union membership shall be limited to groups having a common bond' and inserting `the membership of any federal credit union shall be limited to one or more groups each of which have [within such group] a common bond.' "

"It would be unconscionable not to have a backup position should we lose in the Supreme Court," says Mica. "Under the circumstances, it's absolutely appropriate that we do everything we can to build support prior to the decision."

The day the Supreme Court renders its decision, it becomes the law of the land, Mica notes, and a loss would be devastating to the credit union movement. If credit unions had waited to seek sponsors for legislation until after the high court rules, it would take months to get a bill passed.

"We need to be in the best position possible on the day the court rules," says Mica. "Assuming we win, the bankers have indicated they'll move to the Hill to seek legislation to undo the court's decision. Any strength we can show prior to that decision also will have an impact on what the bankers are able to do or not do to us."

Bank earnings never better

So how are banks doing in the face of "unfair" credit union competition? Never better.

"Banks returned to shareholders nearly three-quarters of the record $52.4 billion earned in 1996," the American Banker reported in March. That marked the fifth consecutive annual record for bank earnings. Those earnings have increased 66% from 1992 when banks made $31.6 billion.

Much of the dividend payouts went to bank holding companies, which in turn used much of the proceeds to repurchase their own stock. The effect was to raise the industry's total equity capital $25.7 billion in 1996 to 8.2% of assets. "There is excess capital in the banking industry," American Bankers Association President Walter A. Dods Jr. said in the American Banker report. "If banks can't put it to work profitably, they are returning it to their shareholders."

Banks continue to post record earnings this year. "As with previous quarters in recent years, banks have steadily increased earnings by expanding businesses that generate fee income, such as brokerage, asset management and insurance, and raising the costs of checking and savings accounts," says Bloomberg News.

How about the thrift institutions, the mutual savings banks, and S&Ls that have sided with the bankers in their fight with credit unions. How are they doing?

Very well, too.

Last year, the thrift industry paid a one-time $2.1 billion special assessment to the Savings Association Insurance Fund. That payout depressed year-end 1996 earnings to $4.8 billion, but it was still the fourth highest level in the industry's history, according to BNA Banking Daily. Equity capital is near record levels at 7.94%, and thrifts paid out 83% of 1996 earnings to shareholders.

Thrifts' strong economic performance continued this year, earning $1.7 billion in the first quarter. But their ranks are thinning. They're selling off, mostly to banks, in an effort to achieve size to compete with mortgage bankers and secondary mortgage market agencies Fannie Mae and Freddie Mac, says the American Banker in a May report. In 1987, during the depth of the thrift industry crisis, they numbered 3,622. At year-end 1996, they numbered 1,924. And pending financial reform legislation could wipe out the thrift charter, if bankers have their way.

Bank management isn't being overlooked as banks rack up earnings records. Banks reward their CEOs with bigger salaries than credit union CEOs receive, according to Credit Union Magazine's Complete Staff Salary Survey Report (Table I). Bank CEOs' base salaries are about 15% greater than those of credit union CEOs. The base salary figures don't include bonuses for either set of CEOs, and the base figures don't include stock options many bank CEOs receive.

Even given this record of financial success, bankers still claim that unfair credit union competition is eating their lunch. The reality is that from 1980 to 1995, credit union market share of financial assets held by depository institutions increased from 2.9% to 5.3%. Meanwhile, banks' share increased from 63.3% to 77%. Thrift institutions were the losers, going from a 33.8% market share down to 17.6%, according to Federal Reserve data.

The institutions actually eating the bankers' lunch could be nonbank competitors. The ABA complained about this competition in a 16-page booklet distributed to lawmakers this past summer. It describes the financial operations of companies such as Ford Motor Co., Merrill Lynch & Co., General Electric Co., Travelers Group, and American Express Co. The booklet claims these companies have ventured into banking's domain by investing household deposits and making consumer loans. As a result, banks' share of total financial assets (as opposed to depository institution assets) is 28% today, down from 60% in 1977.

The Treasury Department released a Coopers & Lybrand study in August that shows the nonbank money service sector to be a $200 billion a year industry. Half of the market is dominated by money order processors, one-quarter by check-cashing, 12% by traveler's checks, and 5% each by wire transfers and currency exchange. There are 146,000 money order outlets, 43,000 money transmission outlets, 5,600 check-cashing sites, 3,100 currency exchanges, and 1,850 traveler's check vendors. These businesses are growing, with 15% growth forecast in money transmission, 11% in check-cashing, and 5% in other markets.

And money market mutual funds (MMMFs) have captured a big share of household savings from all financial institutions, despite the removal of Regulation Q rate controls in the early 1980s. At year-end 1977, MMMFs had $4 billion in assets. Today, MMMFs have surpassed $1 trillion in assets, according to the Investment Company Institute.

Nonbank competition is one reason the ABA wants to wipe out the thrift charter, especially the socalled unitary thrift holding company, which encompasses powers to mix banking and commerce. Nonbank firms either apply for thrift charters or buy thrifts to enter banking through the back door.

But credit union competition is hardly a threat to banks. When banks racked up record profits in 1996, they averaged a 1.19% return on assets (ROA), according to CUNA's economics and statistics department. Even small banksthose with less than $100 million in assets-posted an ROA of 1.15%. The big banks' ROA was 1.24%. Meanwhile, credit unions recorded a favorable, but lower, ROA of 1.11%.

Also, bank asset growth has exceeded credit union asset growth for the past three years. In 1996 alone, bank assets grew $266 billion to reach $4.6 trillion in total assets. Credit union assets grew $16 billion to reach $333 billion. In other words, bank assets grew in one year by more than threefourths of all assets in the credit union movement.

If banks and S&Ls are racking up income records, why are they so afraid of credit union competition? "Because credit unions are a counterbalance to bank rates," Mica reiterates, adding that the challenges won't be settled in this one battle. That's why Mica wants to build an organization that has the national grass-roots strength to put the bank/credit union argument to rest in a different way.

"Short term, we must do everything we can to win this battle and win it decisively," says Mica. "En route to this victory, however, we can build an organization that Congress, the regulators, and the public knows and respects.

"If we can demonstrate that the credit union movement has the combined power of 70-plus million Americans within our economic system, then perhaps the bankers will see it's just not appropriate to harass credit unions and try to eliminate them."

-Eugene Johnson is editor of Credit Union Magazine's News Now, available on the Web at www.cuna.org.

Copyright Credit Union National Association, Inc. Dec 1997
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