Tuesday, February 01, 2005

Banks and Big Credit Unions: Still Very Different

I like fresh peaches with the skin still intact. Others dislike the fuzzy exterior and prefer the smooth skinned nectarine. Nectarines are a cross between a peach and a plum. Their color, meat, and pit are similar to that of a peach, while their skin texture is similar to that of a plum. However similar the nectarine is to both the peach and the plum, anyone that eats one can tell you that it is neither.

I respect Utah Policy’s LeVarr Webb, but his continual (paid) arguments in favor of taxing large credit unions and treating them like banks are rather myopic. In the Jan. 31 edition of the Utah Policy Newsletter Mr. Webb effectively argues that large credit unions have departed from the original spirit of the credit union philosophy. How so? 1) Large credit unions have large membership bases that do not share an intimate common bond. 2) Large credit unions increasingly offer services that directly compete with banks.

Many people belong to small credit unions. The employees at my workplace run one of these institutions. It is only for employees and is nothing like our state’s larger credit unions. I belong to one of these larger credit unions. In many ways it looks and acts like some of the larger banks in the area. For Mr. Webb, these two facts are enough to require that large credit unions be treated like banks.

However, Mr. Webb’s arguments totally ignore the ways in which large credit unions and small credit unions are the same. The members, i.e. the customers, own the credit unions. The average bank customer does not own the bank any more than the average supermarket customer owns the supermarket.

How is this implemented? Banks handsomely pay directors that primarily represent the interests of the shareholders. The interests of bank customers are only represented by considering how customer behavior affects the bank’s shareholders. Credit unions, on the other hand, are non-profit organizations with directors that are unpaid volunteers. These volunteers, who are themselves members, represent the interests of the members, i.e. the customers. That is why credit unions consistently offer better customer service than banks. The customers are the owners. Their interests come first.

To be sure, banks and credit unions have their similarities. They both offer many similar services. They both pay their executives and employees competitively. Is there anything wrong with that? They are both required to retain a certain amount of their earnings to protect deposits, maintain infrastructure, and fund future needs.

However, banks pay taxes on retained earnings while credit unions currently do not. The reason for this is not the types of service these intitutions offer, the markets in which they operate, or even the size of their membership bases. The reason for this is that credit unions are non-profit cooperative organizations whose only customers are their owners. Banks, on the other hand, are for-profit organizations where the interests of owners do not necessarily align with the interests of their many non-owner customers.

Perhaps large credit unions are now sufficiently different from small credit unions that they should be treated somewhat differently. Does that mean that we should tax them like banks? Is a nectarine a peach? I think not.

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