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September 2009

Credit Union Conversions to a Bank: Governor Doyle Halts a Bad Idea
by the Legislature

Wisconsin cooperatives were faced with a large number of serious issues in the Legislative budget session that ended in late June. Last month I wrote about how the Legislature ultimately dropped a troublesome oil franchise tax that the cooperative community actively opposed. Unfortunately, legislators advanced a second very bad idea during budget deliberations: a state process for demutualizing credit unions. In this case, fortunately, Governor Doyle vetoed the idea.

The credit union demutualization proposal passed both the Wisconsin Assembly and Senate following its adoption by the Joint Finance Committee. This proposal did not receive a public hearing and was added by the panel after midnight during its final meeting—no public announcement by anyone that this provision would be considered by the committee and certainly no opportunity for public debate. The provision was quickly adopted as part of a multi-page amendment.

The provision would have created a state process for conversion of a credit union, which is a member-owned cooperative, into a mutual savings bank. Mutual savings banks are also cooperatively owned. While it is difficult to argue with a well-informed democratic decision by members of a cooperative to change to another form of business, my concern is that conversion from a credit union to a mutual savings bank generally leads to a subsequent conversion to a bank owned by stockholders. In turn, according to the National Credit Union Administration (the federal government’s board for regulating credit unions), this conversion process often leads to an “equity grab” by the credit union’s management and consultants, gaining them a disproportionate share of the equity held by the credit union. This is equity that previously belonged to the credit union’s members.

In cases where federal credit unions consider conversions of this type, federal law requires the credit union boards to make a specific finding of fact that conversion would benefit the members—as opposed to the board and management. The provision state lawmakers approved was particularly striking because it did not include a similar disclosure requirement. There were other protections also missing.

Credit union members should be concerned about such moves away from member ownership and control. A January 2008 study published by two University of Wisconsin–Whitewater economists found that consumers pay more for necessary services following a credit union’s conversion to a bank.

Plus, cooperatives have long argued the Legislature should do its work out in the open. We appreciate that a number of legislators wrote to Governor Doyle seeking a veto of the budget language relating to credit union conversions. In his resulting veto message, the governor said, “I am vetoing this provision because it requires further review through the legislative committee where the merits can be fully considered. This is a significant change to the credit union chartering process and it requires broad input and discussion.”

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