The Community Bankers Association of Illinois introduced legislation early in the Illinois General Assembly session that would create an exit fee when credit unions buy banks.
The Illinois bankers’ bill has yet to go to committee. The next step will be for the association and the Illinois Credit Union League to sit down and decide if an acceptable solution can be negotiated, according to Jerry Peck, senior vice president of government relations for the group.
The proposed exit fee is intended to serve two purposes, Peck said. First, when a credit union buys the assets of a bank, those assets are no longer taxable, creating a loss of tax revenue for the state. Exit fees would help mitigate some of that loss, he said.
The other objective is to completely discourage such transactions.
“We believe an exit fee payable at the time of sale would help level the playing field in bank auctions,” Peck said. “This would partly prevent credit unions from using their tax advantage as a weapon to outbid interested community banks.”
Tom Kane, president and CEO of the Illinois Credit Union League, said the organization and its members are troubled by the new approach to tax credit unions.
Nonetheless, Kane called the bill “very flawed” in its attempt to impose a state tax on federal credit unions.
“Although the intention is to impose restrictions on credit unions, this is an anti-competitive bill that would hurt banks by removing legitimate buyers from the market,” Kane said. “Banks are not obligated to sell to a credit union, so we believe this bill to impose additional costs on credit unions would have unintended negative consequences for all financial institutions and consumers in Illinois. .”
The idea of an exit right was floated last year by the Independent Community Bankers of America, which said the fee could essentially be a tax collected by the Treasury Department or the Internal Revenue Service.
Six community banks in Illinois have been sold to credit unions since 2019.
Illinois ranks only behind Texas in total bank charters, Peck said, but increased regulatory pressure and administrative burdens have made it harder to operate a small community bank in the state. Illinois over the past decade.
“That makes them ripe targets for mergers and acquisitions,” he said. “Credit unions enjoy significant regulatory and tax advantages that they can leverage to take control of community banks.”
The role of the CBAI as a trade association is to work to protect the competitive environment for all community banks in Illinois, according to Peck.
“We advocate for policies that develop the community banking profession. We oppose policies that force community bankers to consider exiting the markets they serve,” he said.
Michael Bell, an attorney at Honigman Law Firm in Detroit, which has advised credit unions on more than 90% of bank-to-credit union transactions since 2010, predicted that more than 25 offers involving credit unions buying banks could be announced in 2022. The previous record was 16 announced in 2019.
“There are always new regulatory pressures and new administrative burdens that threaten the existence of independent community banks,” he said. “Our goal is to reverse the trend from an environment where banks need to merge or grow to remain competitive to a market that encourages new community banks to enter the profession. Consolidation destroys communities and leads to less competition , which ultimately harms the consumer.”