Retired economist for the American Bankers Association, Keith Leggett, answers a question he (and I) have been asked, primarily by credit union officials: "If you bankers think that the credit union charter has unfair competitive advantages, why don't you just convert your bank charter to a credit union charter?" Often, the question is accompanied by a smirk. Keith answers the question with a straight face.
Although I encourage readers to peruse the entire article (it's not beyond the attention span of even those most severely afflicted with ADHD), here is a bullet point summary of the reasons:
- Banks have shareholders. Credit unions are owned by members. Compensating shareholders for their investment would, in most cases, wipe out capital. This, standing alone, makes most conversions of shareholder-owned banks a non-starter (as Keith notes, mutual banks do not have this obstacle).
- Investment powers and lending limits are in conflict. A converting bank would likely have to divest a significant portion of its loans and other investments, especially business loans. Perversely, if credit unions succeed in their perpetual quest for higher commercial lending limits, this hurdle might become less problematic.
- Credit unions have a national usury cap and prohibition of prepayment penalties that are not applicable to commercial banks. A converting bank would likely have a lot of nonconforming loans in portfolio that would have to be modified or sold.
- Although often mocked by bank trade association pundits as akin to the ever-expanding universe result of the Big Bang, credit unions are subject to field of membership requirements that do not apply to banks, which can legally accept customers throughout the known galaxy (and even where no man, woman, or self-determined-gender has gone before). The smaller the bank, the greater the potential that is might be able to structure a plausible geographic field of membership, but the bigger the bank, the higher the hurdle.
Keith states that he is aware of only two banks who have converted charters to a credit union, and both were mutual banks. I am not aware of any others. Thus, while it might sound like a snappy put-down when banks complain about credit unions having an unfair competitive advantage due to their tax-free status to challenge banks to convert their charters, conversion is actually not a viable alternative for most banks. Believe me, if banks could do what they do and pay no taxes simply by means of a charter conversion, the whole world would be a credit union kind of world, and following that mass migration, there wouldn't be a bank lawyer left. We'd all be credit union lawyers, and this world would obviously be a much better place for that, wouldn't it?