110th CONGRESS, LEGISLATIVE ISSUES A - Z

June 23, 2005

The Hon. John M. Reich
Vice Chairman
Federal Deposit Insurance Corp.
550 17th Street, N.W.
Washington, DC 20429

Dear Vice Chairman Reich:

On behalf of the Credit Union National Association, the nation’s largest credit union trade group, I am writing to take strong issue with portions of your written testimony to the Senate Banking Committee on June 20 that called upon Congress to tax and impose new regulatory restrictions on the nation’s credit unions in order to level what you termed “an uneven playing field” with banks. Such comments display a serious lack of understanding of the structure and uniqueness of the U.S. credit union movement and ignore the U.S. banking industry’s own extensive history of deregulation and record profitability.

First and foremost, I must question the appropriateness of your testimony regarding credit unions, coming as it does from a federal regulator whose role is to ensure the safety and soundness of the nation’s banks. Given that credit unions have a separate federal regulatory agency and insurance fund, we viewed your comments as outside the scope of your authority and out of place at this congressional hearing. Moreover, your statements advocating the banking industry’s anti-credit union position struck us as the type of rhetoric we would expect from an American Bankers Association lobbyist rather than a federal regulator.

Indeed, your support for the taxation of credit unions stands in direct contrast to President Bush’s stated position and ignores concerns expressed by the National Credit Union Administration Board about the detrimental effects taxation would have on the credit union movement’s overall safety and soundness. As not-for-profit cooperatives, credit unions rely on undivided earnings as their sole means of building capital. Imposing a tax on these undivided earnings would inevitably lead to the erosion of credit unions’ now-healthy capital position.

I must also question your support for imposing on credit unions more restrictive field-of-membership limits and Community Reinvestment Act requirements. These issues were non-germane at a hearing devoted to ways that Congress can help relieve unnecessary regulatory burdens on financial institutions. In indicating that your rationale was to level the playing field with banks, you ignore the fact, attested to by the U.S. Treasury Department, that credit unions are already the most heavily regulated of the nation’s depository institutions. While not covered by CRA—a law passed to address illegal redlining by banks—credit unions have more restrictive regulations in the area of investments, capital, membership requirements, and member business lending, to name just several examples. I would therefore suggest that if the so-called playing field is tilted at all, it tips heavily in favor of the banking industry.

For evidence of this, one need only look to the quarterly earnings figures released by your agency. With each successive quarter, bank profitability climbs to new heights. Indeed the banking industry has posted record profits in 13 of the last 14 years—and shows no sign of suffering any impact from credit union competition. Community banks, for which you express particular concern, are making bumper profits and growing quickly. Federal Reserve Board Governor Mark Olson, among others, has noted that, “Community banking has a long history of strength and success and a bright future.” And in a speech last fall, FDIC Chairman Don Powell said the banking industry is doing so well it has entered “a golden age.” This is quite a contrast to the fragile state of the industry that you portrayed in your testimony.

If your aim truly is to level the playing field, you might consider eliminating some of the advantages that banks enjoy over credit unions, which include no restrictions whatsoever on membership or customers, unfettered access to capital markets, lower capital standards, far less restrictive business lending, and the election of Subchapter S status as means of avoiding taxation at the corporate level.

I realize, however, that the recent pattern at the FDIC and other federal bank regulatory agencies has been not to tighten regulation but to address the industry’s desire for less regulation. From this week’s hearing it was clear that the FDIC has been working with the other banking agencies to develop a comprehensive regulatory relief proposal for consideration by Congress. It is unfortunate this inter-agency coordination was not expanded to include the NCUA, whose chairman, like you, was appointed by President Bush. More unfortunate still is your decision to use your position at the FDIC to promote banking trade association objectives and direct baseless, inappropriate criticism at NCUA, the credit union movement, and its 86 million member-owners.

Sincerely,

Daniel A. Mica
President and CEO

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