You know, it’s really hard to feel any sympathy for the big banks, especially (but not limited to) the events of the past 5 years after the collapse of Lehman Bros. caused the largest bankruptcy in US history… and precipitated the Great Recession. We’ve reported on all kinds of banking scandals: the manipulation of food commodities derivatives earned Goldman Sachs $400 million in 2012 while cereal prices hit a record hit, threatening marginal communities around the globe; Wells Fargo has been charged with mortgage fraud by the feds; the federal investigations of money laundering at JP Morgan; the Bank of America has been ordered to pay a $12 billion settlement over foreclosure violations; and, of course, the entire LIBOR scandal when we found out that banks had been rigging of the rate that sets the payments on financial instruments like mortgages and derivatives, effectively allowing them to set the interest rates they wanted and trade rates with each other as favours .
And now, after having in 2012 the third most profitable quarter in history, banks have a new agenda for their lobbyists in Washington: get rid of the tax exempt status for credit unions.
Reforming the tax code is an agenda item with a lot of coverage these days, with people from Bernie Sanders (I-VT) to The Economist speaking of the urgent need to reform taxation to meet the needs of the American economy. Bankers, too, feel that the tax code is in need of reform: they argue that their businesses, with their 94% share of the market in financial services, just can’t compete with the $1 trillion credit union industry due to the tax exempt status of credit unions as non-profit organizations.
Earlier this year, the American Bankers Association began advertising its anti-credit union message throughout Washington, and last month ABA executives wrote letters to President Barack Obama and Congress requesting a repeal of the tax exemption status. The ABA and their lobbyists complain that the growing financial stature of credit unions throughout the country proves that they should be taxed like banks. They even refer to the tax exemption as a government “expenditure,” which they claim should be eliminated as part of a larger tax reform and budget reduction package.
Now, there are arguments for both sides of the case. While banks point out that credit unions have survived in countries like Canada and Australia without retaining tax exempt status, the fact that credit unions put their profits back into their businesses in the form of lower fees and higher interest rates on deposits for their members gives them a specific social function in providing a lower cost financial alternative to banks for low income families. Big banks complain that significantly more high income families and individuals choose to use credit unions, which they say is a violation of the credit unions’ purpose of serving lower- and middle-income families; but their complaints really started after the successful Bank Transfer Day campaign saw millions of Americans switching from banks to credit unions for financial services.
Bank Transfer Day (Nov. 5, 2011) became a nationwide phenomenon for credit unions. What began as a single frustrated bank customer’s Facebook event to protest a proposed $5 debit fee transformed into an organic consumer movement that had people voting with their wallets by moving their accounts from large Wall Street banks to Main Street credit unions. In one year, credit unions gained 2.2 million members (June 2011 to June 2012) and topped $1 trillion in assets.
Even with millions of Americans switching to credit unions, bank dominance of the financial sector is incredibly entrenched, so it seems unlikely that credit unions at this point represent a credible “competitive threat” to banks. They do, on the other hand, pose a threat to the monopoly control banks hold over people’s ideas of what financial services can be. By focusing on their members rather than their shareholders, credit unions have become incredibly popular with the people who keep their money there.
As for the tax exemption itself, that’s likely to stay in place, said David Primo, a professor of political science and business administration at the University of Rochester.
“While it’s not clear the exemption is justified, I think the credit unions have the upper hand politically,” he said.
“There are credit unions in so many congressional districts, it would be hard for Congress to repeal it. They can mobilize and are well connected to their lawmakers,” Primo added.
“Besides, banks have an image problem after the recession and the bailout they got. I don’t think helping Chase or any other big bank by ending the exemption is going to fly,” he added.
If people are starting to prefer credit unions to banks, banks really have no one to blame but themselves. As the Los Angeles Times points out, it was consumer frustration over rising fees and outrage over Wall Street’s role in the financial crisis that caused customers to leave banks in the first place, and taxing credit unions like banks would effectively… turn them into banks. Which is exactly what the big banks want: level the playing field by making everyone play by their (rigged) rules.