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Credit unions in 'perilous' position on taxation

Credit unions are under serious threat of losing their tax-exempt status, former National Credit Union Administration board member Todd Harper said.

With President Donald Trump's 2017 tax cuts set to expire later this year and the Republican-led Congress working to advance new tax legislation, bank industry interest groups are making a renewed push to eliminate some credit unions' tax-exempt status. The exemption has drawn the ire of bank industry advocates, who say it gives credit unions, which have become increasingly active acquirers of banks in recent years, an unfair advantage over banks as they bid for potential acquisition targets.

At the same time, support for credit unions' tax-exempt status appears to be eroding among Democratic lawmakers, Harper, himself a Democrat, said during a May 1 event at the Brookings Institution.

"Credit unions are in the most perilous place that they've been on the taxation issue in the 25 years that I've worked on credit union policy issues," Harper said.

Trump fired Harper and his fellow Democratic National Credit Union Administration board member, Tanya Otsuka, in April, leaving Republican Chairman Kyle Hauptman as the only remaining board member. The pair subsequently launched a lawsuit against the administration seeking reinstatement and alleging that their removal was "patently unlawful."

America's Credit Unions, the top credit union trade association in the US, is not speaking in favor of Harper and Otsuka's lawsuit, and that lack of public support, in combination with recent reports of redlining, or racial discrimination in mortgage lending, at certain credit unions, has weakened the industry's position with Democrats in Congress, Harper said.

He also cited new legislation in Washington State that would repeal the business and occupation tax for state-chartered credit unions that merge with or acquire banks in the state. The bill passed in both of the state's Democrat-led legislative chambers.

If credit unions lose their tax-exempt status, they would build retained earnings, and therefore capital, at a slower rate, which could pose risks to their safety and soundness, Harper said.

"Unlike banks, which can go to the equities markets or can go to the debt markets and raise funds, credit unions are limited," Harper said. "I see a slowing of growth, so that concerns me."

Taxing credit unions would also have implications for credit union members, who would receive lower yields on their deposits and would have to pay higher rates on loans, Harper told S&P Global Market Intelligence in an interview following his remarks.

"That 25-basis-point typical difference you see in home lending would shrink, and that would be a bad thing for consumers," Harper said.

Harper also targeted credit union stadium naming rights deals. He raised questions about the return on average assets for these deals, said using complimentary seats for prospective mortgage borrowers could violate RESPA restrictions against lender kickbacks, and warned that naming-rights deals are hurting the credit union industry’s reputation.

“There’s an identity crisis out there with credit unions,” Harper said. “Big banks like to name stadiums. Do credit unions want to be banks? … If you’re going to be a bank, there should be other changes that happen along the way. There also needs to be greater regulation, oversight, practices, and watchfulness.”

The growing debate over the credit union tax exemption and community bank acquisitions has continued to generate headlines, with CUToday reporting that more credit unions are considering converting to mutual banks, CU Daily writing that some in the credit union industry are concerned about larger mergers, Banking Dive spotlighting ICBA’s advocacy efforts, and ICBA’s Mickey Marshall telling American Banker that the growth of large credit unions is fueled by acquisitions of community banks.   

Source: S&P Global Market Intelligence; ICBA

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Source: ICBA Innovtion

Credit unions' bank buying spree persists with 3rd-largest deal since 2019

Credit unions' bank deal appetite is unwavering despite ongoing uncertainty, striking the third-largest such deal in six years and the sixth so far this year.

While the broader US bank M&A environment has been relatively slow so far this year, credit unions' appetite appears intact. Overall, they have announced six deals targeting US banks through April 22, just one transaction shy of these announcements during the year-ago period.

The six deals make up 13% of all US bank deals announced through April 30.

As credit unions continue their bank buying spree, the deals are getting larger. Of the five largest transactions announced since 2019, four have been announced since the start of 2024.

So far this year, $2.25 billion in bank assets have been sold to credit unions across the six deals.



Source: S&P Global Market Intelligence

FDIC optimistic over reg relief

Analysts are optimistic about the Federal Deposit Insurance Corp. (FDIC)'s upcoming regulatory relief for banks, as acting Chairman Travis Hill signals changes to asset thresholds, resolution planning, and de novo bank formation.

In the resolution plan process, the agency has shifted away from previous requirements for banks to base their plans on hypothetical failure scenarios. Instead, banks will now be asked to provide detailed information about their digital offerings, key personnel and essential business components that contribute to the bank’s franchise value. This new strategy aims to prevent costly outflows of deposits during a resolution.

Source: S&P Global Market Intelligence

OCC data breach sparks concerns over bank-regulator communication

A recent cybersecurity breach at the Office of the Comptroller of the Currency has undermined banks' trust in the agency and raised questions about the best way for them to communicate with regulators.

The OCC discovered the breach on Feb. 11 and issued a public notice on Feb. 26. However, the extent of the incursion and the information accessed were not fully known until nearly two months later, when the OCC classified it as a major incident and informed Congress.

Many banks regulated by the OCC were not aware of the breach, which the agency said involved "highly sensitive information relating to the financial condition of federally regulated financial institutions," until media reports emerged in April, according to the Wall Street Journal. Acting Comptroller Rodney Hood on April 14 sent a letter to banks regulated by the OCC regarding the incident, nearly a week after the report to Congress that spurred media coverage of the hack.

The agency's slow response and communication about the breach have made banks wary, eroding trust and prompting some to seek alternative methods for sharing sensitive information with regulators. The situation has sparked debate over the most secure and efficient methods for delivering sensitive information to regulators.

"I don't think it's crazy for the banks to take this position," Carleton Goss, who was formerly a lawyer at the OCC and is now a partner at Hunton Andrews Kurth LLP, said in an interview. Banks "have other legal and contractual obligations to parties to ensure confidentiality of information."

It remains unclear what information the hackers accessed, but depending on the severity, banks may be required to make disclosures to the Securities and Exchange Commission. The breach lasted about a year and a half, from May 2023 to February 2025, when Microsoft alerted the OCC to suspicious activity. The OCC will "notify potentially impacted parties as its review progresses," a spokesperson told S&P Global Market Intelligence on April 9.

The OCC regulates more than 1,000 of the nation's largest banks, overseeing more than $16 trillion in total assets, according to Market Intelligence data.

Source: S&P Global Market Intelligence

Possible stablecoin threat to bank deposits

A Treasury Department report said stablecoins could lead to a loss of bank deposits, which may prompt banks to increase interest rates to maintain funding or find alternative funding sources.

The Treasury Borrowing Advisory Committee report, which details the current state of stablecoins and considers their potential future impacts, comes as Congress is working quickly to finalize a stablecoin bill.

ICBA continues its efforts to preserve the role of community banks by addressing the concerns associated with stablecoins. It is currently protecting and strengthening provisions that would prohibit yield-bearing stablecoins, the major threat to deposits discussed in the Treasury report.

In a statement before last month’s House Financial Services Committee markup of legislation to establish a federal supervisory framework for stablecoins and their issuers, ICBA said:

• It appreciates the committee’s inclusion of language clarifying that community banks are able to utilize payment stablecoin reserve funds held as deposits to carry out the business of banking.
• It supports provisions that disallow payment yield or interest on stablecoins, which would create incentives for consumers to shift funds out of community bank deposits.
• To further protect against community bank disintermediation, permitted payment stablecoin issuers’ activities should be limited to payment stablecoin activities.
• The committee should make additional clarifications to affirm the legislation’s intent to not expand eligibility of Federal Reserve Master Accounts to nonbank issuers.

Source: U.S. Treasury; ICBA

Fed report highlights key risks

Asset valuation pressures, borrowing by businesses and households, financial-sector leverage, and funding risks are the primary vulnerabilities in the U.S. financial system, according to the Federal Reserve’s semiannual Financial Stability Report.

The report also noted near-term risks to the financial system such as risks to global trade, policy uncertainty, fiscal debt sustainability, persistent inflation, and corrections in asset markets.

Source: Federal Reserve