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Credit unions go on offense with plan to revive Glass-Steagall

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Ten years after the collapse of Lehman Brothers and "too big to fail," the National Association of Federally-Insured Credit Unions is going on the offensive against big banks and calling for a modern-day Glass-Steagall Act.

In a new white paper, NAFCU calls on legislators to separate traditional banks — ones working primarily with savings and checking accounts — from riskier financial institutions such as hedge funds and investment banks.

The trade group’s action is notable because credit unions rarely tackle legislation or regulations that don't specifically apply to credit unions. In most credit union-versus-bank battles, CUs play defense, not offense. Enacted in 1933 as a response to the Stock Market Crash, the Glass-Steagall Act separated commercial banking from investment banking for 66 years, until its demise at the hands of Bill Clinton through the Gramm-Leach-Bliley Act.

In an interview with Credit Union Journal, NAFCU CEO Dan Berger explained that the trade group is taking a two-pronged approach with its efforts.

“The first prong was to start a policy discussion to protect our industry from any economic downturn or the steroids that the big banks need to be on when there is a down cycle" in the economy, Berger said. “The second is that you have to punch the schoolyard bully in the nose and you have to fight back.”

“The banking trade associations are on Capitol Hill everyday passing out talking points against credit unions, so now we’re pushing back,” he added.

The rift between banks and credit unions is well known, “but this year shows that schism that really started with the financial crisis continue to play itself out here,” said Ed Mills, public policy analyst at Raymond James.

NAFCU stopped short of calling for the breakup of big banks, suggesting that decision be left up to Congress.

Dodd-Frank’s weaknesses

The current white paper delves into what NAFCU sees as weaknesses within the Dodd-Frank act, including how credit unions have been burdened with allocating "immense resources to compliance." The paper also alleges that a modern Glass-Steagall Act would "alleviate competitive inequalities and improve overall financial stability in times of stress" through separation of commercial and investment banking activities."

Furthermore, it lambastes reduced competition as a result of concentrated financial power that stems from consolidation. The paper specifically calls out the acquisition of large banks, including JPMorgan's acquisition of Bear Stearns, Bank of America's acquisition of Merrill Lynch and Countrywide Financial and Wells Fargo's acquisition of Wachovia.

“I think that credit unions are glad to see this," said John McKechnie, a partner at the DC-based consultancy Total Spectrum and a former staffer at the Credit Union National Association and the National Credit Union Administration. "After a summer of 'divide and conquer' grenades being lobbed at credit unions by the bank lobby, there is an appetite to see credit unions fight back. Maybe the NAFCU initiative will result in the bankers thinking twice in the future.”

Geoff Bacino, a credit union consultant and former NCUA board member, echoed McKechnie's sentiments, pointing out that Glass-Steagall's initial repeal is "where all our troubles began."

“I think anything that reduces risk in the system is good and obviously, for credit unions who were caught up in the financial crisis in 2007-2009, without being a reason for the crisis, I think they’re looking for if and when it happens again, there’s a little more protection for the little guys in comparison to the big banks,” said Bacino.

NAFCU also asserts that Dodd-Frank's stringent regulatory requirements, when coupled with the repeal of Glass-Steagall protections, have been a contributing factor to the massive consolidation within the credit union movement, which loses more than 200 institutions per year to mergers and a handful of failures. According to NAFCU, only 29 new credit unions have been chartered within the last decade, while 2,528 have been closed or merged out of existence.

Past attempts

While NAFCU's push is a relative novelty in the credit union space, it's not the first time attempts have been made to reintroduce legislation similar to Glass-Steagall. In April 2017, Sens. Elizabeth Warren (D-Mass.), Maria Cantwell (D-Wash.), Angus King (I-Maine) and John McCain (R-Ariz.) put forth legislation for a 21st-century Glass-Steagall Act. The bipartisan effort aimed to "protect American taxpayers, help community banks and credit unions compete, and decrease the likelihood of future financial crises."

Despite banks and credit unions typically being at odds with one another, NAFCU's proposal has support from an unexpected place. The Independent Community Bankers of America backs the idea, particularly for the ways it could help smaller banks.

“We support it," but "we think it should only apply to banks of a specific size: $50 billion-plus,” said Chris Cole, vice president and senior regulatory counsel of the ICBA. “We think it ought to be confined to banks over $50 billion because there’s no systemic risk to the country or the banking industry to have smaller banks be included in investment banking.”

That sentiment wasn't shared by the American Bankers Association, which told CU Journal the Depression-era law that NAFCU “should be dusting off” is not the Glass-Steagall Act, but the Federal Credit Union Act of 1934.

“The real scandal here is that large credit unions are no longer meeting that mission, and instead offering membership to anyone with a pulse, all without paying a dime in federal income taxes,” said an ABA spokesperson. “That hurts taxpayers and the hundreds of credit unions playing by the rules.”

Delivering a modern GSA

Whether or not NAFCU's proposal gets much traction is largely dependent upon Congress — and possibly not until the next Congress convenes in January after midterm elections.

As for the timeline, Berger would like to see Glass-Steagall hearings in the Financial Services and Senate Banking Committee "right away," but he doesn’t forecast any obstacles ahead, as he believes it’s a good policy decision and that “good policy makes good politics.”

On top of that, with control of the House likely to change hands, Democratic legislators could be more open to new banking regulations if they hold the majority starting in January.

But no matter how blue the new Congress may lean in 2019, Mills says that “there’s no path to 60 votes in the Senate.”

“It has extremely low odds of passage because you actually see regulators moving in the opposite direction,” Mills said. “This has a bit more political support and is seeing larger support from the credit union movement, but it comes at a time when the likelihood of it passing and the likelihood of regulators implementing something similar to this is at an all-time low.”

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