The Mother of All Tax Subsidies

February 26, 2013 at 8:04 am 4 comments

It’s time for CUNA’s Annual GAC in Washington so it’s not surprising that the Bankers’ Association has begun its annual blitz of DC-centered advertising expressing outrage at the credit union tax exemption.  But even by the normal standards of Association bravado, this year’s advertising push takes a tremendous amount of chutzpah.  Why?

Because it appears that the largest banks in the country receive an indirect tax subsidy equal to $83 billion annually.  That’s right, the equivalent of $0.03 of every tax dollar goes to subsidizing the captains of capitalism.  As succinctly summarized in a Bloomberg News editorial that means that but for the taxpayer guarantee of their solvency, the largest U.S. banks wouldn’t be profitable at all.  According to research performed by International Monetary Fund economists the commitment of governments to support systemically important financial institutions translates into an 80 basis point discount in borrowing costs for these banks.  Now that’s one heck of a subsidy, especially when one considers how little the American taxpayer has gotten in return for its support.

On top of all that, whereas credit unions are comprised of volunteer boards of directors with each shareholder getting an equal vote in the credit union’s activities, the banking industry is getting so complicated, according to an article in last months Atlantic Magazine, that institutional investors are shying away from investing in big banks.  In fact, a surprising number of individuals were willing to go on the record in the article saying that the numbers peddled by the big banks simply can’t be trusted.

So, if you’re in Washington this week, don’t begrudge the Bankers’ Association for believing that the best defense is a good offense.  But, there’s no getting around the fact that the industry they represent still has a lot of explaining to do that has nothing to do with credit unions and everything to do with treating the American public fairly.

NCUA Releases Guidance on Member Business Lending

NCUA released a letter to credit unions detailing the waiver process for which credit unions may be eligible when seeking to provide loans to small businesses that would put them up against the various caps embedded in NCUA regulations.  The guidance is a helpful reminder to credit unions that despite all their justifiable frustration with MBL limitations, there are mechanisms to get around at least some of these roadblocks if they are willing and able to work with their regulators.

Entry filed under: Advocacy, Compliance, Regulatory. Tags: , , , .

On The Oscars And The CFPB State Pressures Banks to Release Insurance Proceeds

4 Comments Add your own

  • 1. Keith Leggett  |  February 27, 2013 at 8:22 am


    The Bloomberg story is based on an IMF study. The IMF study only looks at data as of the end of 2007 and the end of 2009. The study fails to look at the impact Dodd-Frank Act.

    Most large banks after the enactment of Dodd-Frank Act saw a reduction in their ratings as the ratings agencies lowered their level of sovereign support.

    Also, research by Balasubramnian and Cyree (2012) looking at bond market data comparing pre and post Dodd-Frank Act ound that the Dodd-Frank Act effectively removed most, if not all, the funding advantage for TBTF financial institutions.

  • 2. Keith Leggett  |  February 27, 2013 at 9:07 am


    One more point. If you use the IMF methodology, the corporate credit unions also received a taxpayer subsidy. There was a large difference (several notches) between the individual stand alone ratings and the ratings with the government support.

    Fitch upgarded the support rating from 4 to 1 for its universe of corporates that it rated in February 2009. The support floor went to A+. At the same time, the individual stand alone ratings were downgraded.

    • 3. Henry Meier  |  February 27, 2013 at 10:16 am

      Keith- for Dodd Frank to be relevant to this discussion investors have to believe, that in the next financial crisis, the largest banks are going to be wound down and left to go bankrupt-which, by the way, is what happened to the corporates that you suggest received an analogous subsidy. In reality Dodd Frank’s wind- down provisions are based on the premises that that (A) banks are going to write “ living wills” detailed enough to react to a financial crisis which by definition they won’t see coming and (B)that are effective enough to allow their corporations to go bankrupt. It is one of the most cynical and useless reforms mandated by Dodd Frank.
      For years banks and the Wall Street Journal editorial page correctly argued that Fannie Mae and Freddie Mac were grossly mismanaged quasi-public institutions that had cheaper operating costs than their private sector competitors because of an implicit Government guarantee. Why doesn’t the same argument apply to the largest banks that were given billions of dollars to stay alive? This research just empirically proves what commonsense tells the average investor is true: Some banks simply won’t be allowed to fail and as a result their borrowing costs are going to be cheaper since a lender knows he is going to get his money back.

  • 4. Keith Leggett  |  February 28, 2013 at 7:55 am


    While you are correct equity holders at the corporate credit unions took a hit, creditors did not. They were made whole.

    This happens everytime a corporate CU gets into trouble. NCUA made whol all uninured depositors at CapCorp when it failed in 1995 and its failure did not pose any systemic risk.


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Authored By:

Henry Meier, Esq., General Counsel, New York Credit Union Association.

The views Henry expresses are Henry’s alone and do not necessarily reflect the views of the Association.

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