It’s Congress, Not the Tax Exemption, That is Killing Community Banks

October 28, 2019 at 9:24 am Leave a comment

Cachet Financial Services, the company that I talked about in my blog this past Thursday, is going out of business. Cachet is the company that facilitated ACH payroll transactions for MyPayrollHR, whose founder has admitted to engaging in fraudulent transactions totaling in the multi-millions. In my blog on Thursday, I described the relationship that led to tens of thousands of employees not having immediate access to their paychecks. In today’s blog, I’m going to point out how the troubles of Pioneer Savings Bank underscore just how counterproductive and intellectually dishonest the attacks on credit unions by community banks like Pioneer are.

Pioneer has been caught in the MyPayroll mess. It stands to lose at least $35 million because of banking services it provided to the payroll processing company. Pioneer is based in the Albany Capital Region and in January of this year, it reorganized into a mutual holding company. More and more “community” banks have reorganized into these structures. As explained in my trusty Banking Law Handbook, the MHC structure is designed to permit the advantages of being in a holding company structure, which allows the banks to issue stock and gain other access to the capital markets while providing them protection against the ever-present threat of a takeover. The problems faced by Pioneer are serious enough that it felt the need to refile its SEC disclosures, leading to an announcement that it was in danger of being delisted by NASDAQ.

As I explained in my previous blog, my purpose has always been to aid credit unions without bashing banks. It’s extremely difficult to hold my fire in this case, though, because Pioneer has been one of the banks in New York quickest to criticize credit unions and oppose common sense innovations such as permitting credit unions to compete for municipal deposits, in part on the grounds that credit unions are not sophisticated enough to take on these responsibilities. I’m not going to take this opportunity to argue that because of Pioneer’s troubles, no savings bank should be allowed to take on huge commercial loans or accept municipal deposits. It would be dumb to suggest that the mistakes of one or two institutions should be held against an entire industry. Then again, that’s the type of nonsense that the banks argue on both the state and the federal level every day.

In fact, there is much that credit unions and banks could agree on, if only the banks would look at the facts. Most importantly, the consolidation of the banking industry with the resulting demise of the true community bank has nothing to do with the fact that credit unions don’t pay taxes, and everything to do with the deregulation of banking, which has been gradually progressing for decades, but put on overdrive during the Clinton Administration. This has placed tremendous pressure on traditional community banks such as Pioneer to expand into regional entities, or risk being merged out of existence. Most notably, with the passage of the Regal Neale Act, community banks lost the ability to hold their own in specific states. It is not credit unions that have triggered the ensuing merger mania, but the resulting dynamics that this race to get bigger has unleashed.

Banks have always disliked credit unions, and if they could make them disappear, they gladly would. However, it was just a generation ago that the primary focus of community banks wasn’t on destroying the credit union industry, but on ensuring that the federal regulatory framework left space for both small and larger financial institutions. Unfortunately, that has fundamentally changed, and much of the extra zest with which community banks such as Pioneer and bankers associations attack credit unions on these days reflects the fact that they have largely lost the ability to shield themselves against their larger banking competitors. As explained in this phenomenal law review article, “today it is a relatively small group of large diversified financial companies, rather than the far more numerous group of small and community banks, that plays the critical role in shaping the regulatory and legislative dynamics in the financial services sector.”[1]

[1] Saule T. Omarova & Margaret E. Tahyar, That Which We Call A Bank: Revisiting the History of Bank Holding Company Regulation in the United States, 31 Rev. Banking & Fin. L. 113, 196–97 (2011)


Entry filed under: Advocacy, HR, Legal Watch, New York State, Political, Regulatory. Tags: , , , , .

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Authored By:

Henry Meier, Esq., Senior Vice President, 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. In addition, although Henry strives to give his readers useful and accurate information on a broad range of subjects, many of which involve legal disputes, his views are not a substitute for legal advise from retained counsel.

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