With one in three Canadians having a credit union membership, one might not have expected the federal government would, without consultation, act to grab some of the sector’s capital in the recent budget. It might not have been expected, but it can’t be reasonably labelled as a surprise.
Credit unions, after all, are co-operatives, not exactly the sort of business the governing Conservative party would typically favour. It’s tempting to think that the words pinko, commie and socialist might have been tossed around in the backrooms of the federal finance department as minions struggled to hold down costs and find revenue sources in what can only be described as a lousy economic time.
You see, credit unions are not the profit-oriented, bigger-is-always-better, stomp-on-the-competition and fleece-the-customer business that we tend to think, oh, for instance, banks are. Their first goal is to serve their members so there is no particular benefit to fleecing account holders with service charges because the resulting windfall is only going to get put back in their pockets in the form of rebates at the end of the year.
It is true that there has been a huge trend to amalgamate smaller credit unions with larger ones, on the still prevailing, though often incorrect, assumption that economy of scale is a truism. But the Creston and District Credit Union, on whose board I sat for 20 years, is proof that small financial institutions can be as efficient as larger ones. For at least 15 years our local credit union has ranked among the province’s top performers.
It’s easier to be small in a small community than in a larger one, though. The primary reason is that to compete in the lending market, including the mortgage business, a credit union or bank has to have capital to back its lendings. Simply put, it has to have a legislated amount of money set aside to secure the money it lends. With insufficient capital, the lender is restricted in the marketplace and is more easily shoved aside by the bigger players. In Creston, where it is easier to find depositors than borrowers (a reflection of our demographics), the credit union has never faced much of a challenge in maintaining far in excess of the minimum in capital requirements.
Things get a little trickier in areas where the borrowing demand is higher. Credit unions operate under different legislation than banks, because governments have traditionally recognized that they operate under a different mandate than banks. Credit unions exist to serve their shareholder/members and banks exist to serve their shareholder/investors. It’s a clear and obvious distinction. Unlike banks, credit unions can’t sell more shares to raise capital.
By introducing a change in the way credit union capital is taxed, the federal government is putting an added challenge in keeping medium-sized operations competitive. Every dollar taken away by taxation means less money is likely to be available to lend out. And make no mistake about it: Both credit unions and banks make a lot more money on loans than they do on deposits. Sitting on money is costly. If it isn’t put out there into the marketplace to earn interest it is a liability.
As successful as the credit union system has been, not only in Canada but in other countries, the success has obviously not come at the expense of banks, which continue to announce record profits whether the economy is booming or busting. But keep in mind that banks, like all corporations, are by definition greedy; money left on the table is seen as an affront to shareholders, a sign of incompetent management. So you would be quite reasonable to assume that every federal government, regardless of its philosophical leaning, gets a regular, quiet push to start treating credit unions like their publicly-traded competition.
In my years of involvement with the credit union system, I came to believe that most provincial and federal governments have insiders who would just like to see it go away. It would be a political nightmare, though, because such a large proportion of the population hold credit union memberships, even if they are primarily bank customers. There is a comfort knowing that at least part of one’s own economic activity ends up back in one’s own pockets and that another, not insignificant part, goes back to communities, building things like a palliative care room in a hospital, something reported on here.
Lorne Eckersley is the publisher of the Creston Valley Advance.