Are Banks Too Big to Compete?
Big banks spent years buying up their smaller rivals to achieve greater market share. Then, having been deemed "too big to fail," they greedily sopped up billions of dollars in government support during the last recession, while reducing lending to consumers and small businesses. And now, big banks are asking Congress to impose taxes on the tiny rivals that are still left -- the credit unions.
Credit unions, as opposed to banks, do not havestockholders and investors. They are nonprofit entities that share all of their earnings with their members -- individuals and small businesses -- in the form of lower interest on loans and higher interest on deposits. Because they plow all their earnings back into the business, they have no corporate taxes to pay under current law -- though depositors pay higher income taxes when they benefit from higher interest payments, and small businesses pay higher taxes when low interest rates on their loans make them more profitable. Credit unions' board members are often paid nothing as well.
Of course, if banks operated the same way -- serving their customers better in lieu of profit -- they would have no corporate taxes to pay as well. It is for this reason that the banks' plea for congressional help is completely disingenuous.
In addition, taxing credit unions would serve as double taxation, since credit unions' members and customers are exactly the same people, and those people already pay income tax. In comparison, small-business owners, such as proprietors and Limited Liability Companies, are taxed once; they don't pay taxes once as a business and then again as an individual, as banks would like credit-union members to do.
For big banks, however, double-taxing credit unions would eliminate a competitor. Credit unions may have a small market share, but they pose a threat because they have done a good job when it comes to small-business lending.
During the last recession, bank loans fell sharply, but credit unions increased lending by 40 percent. Because access to capital is the single most important issue for small businesses today, if banks can't fill this role, then why not give credit unions a shot?
Instead of taxing credit unions, Congress might consider removing a major roadblock to competition: Today, credit-union lending to small businesses is capped at 12.25 percent of assets, which explains why banks account for 95 percent of the market share of small-business lending.
Some legislators are working on fixing this. Sen. Mark Udall (D., Colo.) has introduced the Small Business Lending Enhancement Act of 2013 (S. 968), and Reps. Carolyn McCarthy (D., N.Y.) and Ed Royce (R., Calif.) have introduced a companion bill, the Credit Union Small Business Jobs Creation Act (H.R. 688). These bills would raise the cap from 12.25 percent to 27.50 percent of assets.
Increasing the credit-union lending cap would produce 140,000 in new jobs and $13 billion in new investment. With indirect effects included, the total economic benefits would come to $32.7 billion.
Unfortunately, banks are lobbying hard to keep the caps in place and calling on new taxes for credit unions. Or, as the big banks see it, if you can't beat ‘em, ask Congress for more help.
One must wonder if these too-big-to-fail banks have become too big to compete. Maybe it is time for the government to stop protecting them and start promoting competition.
Steve Pociask is president of the American Consumer Institute Center for Citizen Research, an educational and research organization.