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Bankers compare credit union situation to S&L debacle

Banks and credit unions still at odds over federal legislation

The long simmering feud between banks and credit unions has escalated to a higher level with legislation pending in Congress that the banking industry claims not only continues unfair tax advantages to the credit unions, but could also create problems with credit unions similar to those that required a huge government bailout of savings and loan institutions.

The Mississippi Bankers Association has taken out full-page newspaper advertisements that ask state residents to contact Senators Thad Cochran and Trent Lott to oppose the bill. The bill, House Resolution (HR) 1151, passed the U.S. House by a vote of 411-8. It has been approved by the Senate Banking Committee, but is expected to face more opposition before the full Senate than was seen in the House. The legislation overturns a U.S. Supreme Court ruling that said credit unions had overstepped their authority by allowing membership by diverse groups of individuals. Traditionally, credit union members were required to have a common bond such as the same employer.

George A. Schloegel, President of the Mississippi Bankers Association and of Hancock Bank, said the current law allows people who have a common bond such as the same employer to band together to join a credit union. HR 1151 would allow different groups of less than 3,000 to join credit unions.

“If credit unions are going to violate the common bond and open their doors to anyone, that’s okay, but they should come under same regulations as any financial institution,” Schloegel said. “They should have the same rules about safety and soundness, and also ought to pay taxes. For instance, Hancock Bank just sent a check of $17.4 million to the IRS for income tax. There is at least a billion dollars a year in lost government revenues due to the credit unions’ exemption from taxes. If credit unions were paying their taxes, then you wouldn’t have had to pay so much, and we wouldn’t have had to pay so much. We think that is an inequity.”

Charles Elliott, president/CEO of the Mississippi Credit Union System, counters that banks had record profits in 1997, and most of those profits were paid out to stockholders.

“The only unfair competitive advantage that credit unions have over for-profit financial institutions such as banks is that credit unions do not have to generate additional income to compensate their stockholders,” Elliott said. “The banking industry had record profits in 1997 of $59.2 billion, and $42.6 billion of those profits were paid out to stockholders. This is an expense that credit unions do not have because their members are their owners.”

Banking representatives also resent what they call a “free ride” by the credit unions when it comes to offices on government installations such at the Stennis Space Center. Schloegel said Hancock Bank pays $15,600 per year to rent a branch office at Stennis Space Center. Across the hall from them Keesler Federal Credit Union has free offices.

“Keesler Federal doesn’t pay any rent, any light bills or any janitorial bills,” Schloegel said. “They don’t even pay for their telephones; they go through the government switchboard. Every nickel of revenues they get over there is tax free, whereas we had to pay $17.4 million for taxes. What that means is the taxpayers are paying for Keesler to be on the government installation. We think that is wrong.

“Can Hancock Bank or any other commercial bank compete with the credit unions? Absolutely. We are doing it every single day. But we think that the credit think that the unions’ free ride ought to be looked at.”

Elliott said that if it is such a competitive advantage to be a credit union, then banks should just become credit unions.

“It is very easy for a bank to not have to pay taxes,” Elliott said. “The only thing they have to do is one, pay off all stockholders. Two, make every customer an owner with an equal vote regardless of the size of their deposit. Three, eliminate all compensation to their board of directors. Four, eliminate all commercial loan and deposit accounts. And, five, return all of their profits back to their member owners. If banks did all that, they wouldn’t have to pay taxes either. But we don’t ever get past number one.”

Bank would also have to determine its field of membership, the group of people they would serve. The banks would no longer be able to take in anyone as a customer, but only people who shared a common bond. “That is the last thing they would have to do to become tax exempt,” he said.

Elliott said credit unions simply want to be able to continue to grow, and continue to serve people that banks are unwilling to serve. Keesler Federal Credit Union, with $450 million in assets, is the second largest financial institution on the Coast after Hancock Bank. Keesler has 127,000 members, and 76,000 of the members have savings accounts with a balance of less than $100.

“Not a single one of those 76,000 members would be successful in opening an account at Hancock Bank because you can’t open a savings account there for less than $100,” Elliott said. “Hancock Bank doesn’t want to serve those people because they are not profitable. That’s the difference between a bank and a credit union.”

The banks versus credit union debate continues over issues of soundness. Schloegel said that HR 1151 could be repeating the mistake the country made with savings and loan (S&L) institutions 20 years ago. He said the S&Ls petitioned Congress to expand their powers so they could do more than just make home loans.

“With that new power, they didn’t limit themselves to checking accounts and car loans,” Schloegel. “A few got into commercial loans and real estate development loans. The economy turned, and about three out of four S&Ls that had gotten into that more risky lending went bankrupt. And we experienced the largest financial institutional bailout in history of the country. It cost us billions of dollars as taxpayers, and a lot of scandal.”

Since the S&L didn’t have adequate deposit insurance, money was taken from the bank’s FDIC fund to pay for the bailout. Schloegel said it cost the banks millions to absorb the S&L losses. “We ended up bailing out our competitors,” Schloegel said. “That didn’t make us happy.”

History is repeating itself right now with HR 1151. The credit unions are asking for almost same thing the S&Ls asked for 20 years ago. And I think history is going to repeat itself. It really upsets me that we would make the same mistake again.”

Schloegel said banks are required to mail their insurance premiums to the FDIC, and it is listed as an expense of the bank. When credit unions send in their insurance check, it is posted as capital of the credit union instead of as an expense. He said that means the credit unions have only half as much money as they say since the credit union counts the insurance payment twice.

As long as the economy remains good, allowing the credit unions to expand probably won’t be a problem. “Sure times are good,” Schloegel said. “But they won’t always be good. And when there is a turn around, some of the loans are going to be very, very speculative. And we are concerned that we might again end up in a bailout, this time of the credit unions.”

Elliott disagrees about the soundness of credit unions, saying they are among the highest capitalized financial institutions. “Credit unions take minimal risk in their loans and investments,” he said. “They only loan to their member/owners, and generally invest most of the money that cannot be loaned out in insured financial institutions. Credit unions are forbidden by law to engage in risky ove
rseas investments as loans. As far as business lending, credit union
s can only loan money to their members and cannot loan money to corporations.”

Elliott said the problems encountered by the S&Ls were that most of their assets were in long- term, fix


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