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Bank of America’s 2011 results revealed declining trends across a number of key business components. Consumer deposit balances are down nearly $10 billion. Credit card balances fell by more than $10 billion. The mortgage servicing portfolio shrank by $154 billion in the last three months of the year – almost double the $83 billion of first mortgages credit unions originated throughout 2011 – partially due to consumers taking advantage of refinancing options at other institutions.
BofA’s customers are talking with their feet, and the financial results point to an exodus of relationships – at least some of which moved to credit unions. The bank’s results are in sharp contrast with credit unions, which reported a $41 billion rise in deposits, $1.5 billion increase in card balances and $12 billion growth in their mortgage servicing portfolio during 2011.
Credit union membership growth is accelerating as more Americans review their financial services options and find value in the cooperative approach. BofA’s new strategic direction in mortgage banking involves shifting from a market share focus to a relationship focus. The 2011 results seem to indicate that consumers are looking for that approach in more than just the mortgage business. To get back on a growth trajectory, BofA needs to shift to a model that aligns with customer needs across all of their consumer businesses.
So we have a challenge to Bank of America: Convert your retail banking business into a credit union.
A conversion would require overcoming some hurdles, of course. About half of Bank of America’s business is in investment banking and commercial banking, and it would need to decide how to handle those. Bank of America could not include its investment banking business in its credit union charter, so it would have to spin that off. Without a waiver, it could not include its commercial banking segment, either, as that would exceed the member business lending cap.
According to Bank of America, it serves approximately 57 million consumer households. If it were to become a credit union, its customers-cum-members would benefit from lower fees, lower borrowing rates, and higher savings rates. This would put money in the pockets of 57 million Americans and their families and could be the stimulus needed to recharge the consumer segment of the economy. The positive effects would reverberate through millions of households and throughout the nation.
This proposal is not as far-fetched as it appears on the surface, especially considering Bank of America’s history. Founder Amadeo Giannini, a formidable and forward-looking man, entered the banking industry after selling his produce business at age 31 to its employees. He soon realized banks operated to serve the wealthy and well-connected yet saw the opportunity in other demographics. In 1904 he founded the Bank of Italy to serve San Francisco’s Italian immigrant community, a community other banks would not serve. When fires leveled parts of the city after the 1907 San Francisco earthquake, Giannini hid his bank’s reserves in a garbage wagon and spirited them to a suburb, then loaned money on a handshake while conventional banks couldn’t even open their vaults for fear of igniting the paper money. In 1928, Giannini merged Bank of Italy with Los Angeles’ Bank of America, continuing to stress that the newer, larger bank cater to middle class Americans rather than to the wealthy.
Given this community-focused orientation, we suspect Giannini would have chosen a credit union charter had it been available during those years, so converting its retail business to a credit union in 2012 would not be such a severe move for Bank of America. It would be a return to its roots.
If Bank of America did apply for a credit union charter, however, it could not call itself Credit Union of America, one exists in Wichita, KS, or America’s Credit Union, one exists in Lewis McChord, WA. But it could adopt a name like Giannini Credit Union or Credit Co-Op of America.
The Benefits Of A Credit Union Charter
For the many millions of people and families who filter through Bank of America’s doors, call centers, and website each day, there are numerous advantages of a credit union charter not only for members but also for the nation.
Resiliency: Bank of America’s present institutional existence has the single goal of maximizing shareholder value. Its charter practically requires it to concentrate on share price as the measure of shareholder value. Accordingly, it puts a great deal of brainpower and other resources into meeting quarterly stockholder expectations.
With a credit union charter, it could strategize for a longer horizon. With a credit union charter, there are no Wall Street analysts and stock watchers examining your every move, ready to punish you if you don’t meet projected quarterly earnings. With a credit union charter, members and regulators expect you to operate in the black, but the main point is to deliver high-quality, low-cost financial services. You work hard as a credit union, but you are not beholden to investors looking for quarterly dividend checks. You are beholden to your member-owners and their best interests. The credit union charter measures success by impact and achievement over decades, not months.
Without its singular focus on the bottom line, Bank of America can avoid what it went through in 2008-09. With a bank charter, it is natural to pull in your horns during a credit crisis. But during this period credit unions increased credit, making it available to members at exactly the time they needed it most. Consider this: In the first quarter of 2012, credit unions leveraged their $1 trillion asset base to originate $26.4 billion in first mortgages. Bank of America, with double the asset base, originated only slightly more than $16 billion in first mortgages.
By being countercyclical, as credit unions are, Bank of America would be able to grow market share and make a larger impact in America’s recovery. Under a credit union charter, more money deposited with Bank of America would stay local. According to a study by the nonprofit research firm Institute for Local Self-Reliance and Austin-based consultant Civic Economics, $45 of every $100 spent at a locally owned institution remains local. For larger chains, that drops to $13.
Stakeholder Alignment: Financial institutions have three primary stakeholders: the institution, its customers, and its employees. Bank of America’s current charter tilts toward perpetuating the institution. The institution is the vehicle that creates profits, and it does so through serving customers and using employees. This is an imbalance that does not bode well for the future. During the Occupy Wall Street movement and Dump Your Bank Day, participants rose in protest that banks were paying too much attention to the institution and too little attention to the customers. And as for employees, the bank charter leads institutions to consider employees a cost center that should be minimized.
Under a credit union charter, Bank of America could restore balance and more evenly distribute its consideration of the three stakeholders. Credit unions exist for the members, so Bank of America’s primary focus would be on them. Sure, it would still work hard to maintain the institution – it would even strive to build retained earnings (aka capital) for future investments – but it would do so in the service of people who join. Under a credit union charter, employees are still a cost center, but they are more than a line on a spreadsheet. Under a credit union charter, self-correcting mechanisms hold balance among institution, members, and employees.
Democracy: Bank of America’s current charter tilts interest toward the largest investors. When voting for directors, who hire management, investors are given votes in proportion to their investment. So it is only natural the company is run for the benefit of the largest investors. And the largest investors are likely institutional investors whose officers are cozy with Bank of America’s board. What enriches one enriches the other, which reinforces the imbalance of institution over customers and employees. The smaller investors, the customers, and the employees get short shrift.
There are no investors that receive preferential treatment in a credit union charter. Every member-owner is an equal investor. When it comes time to vote for board members, every member gets one, and only one, vote. This ensures the institution is run for the equal benefit of all members, rich and the poor alike.
In this setup, it’s not only the members but also their community that benefit from institutional success. Bank of America began as a way to improve the Italian community of San Francisco. Under a credit union charter, Bank of America’s obligation would be weighed evenly among the institution, its members, and its employees. Along with working to build institutional longevity, Bank of America would be tasked with helping its members and employees achieve a higher level of living. In doing so, it would also help their larger communities.
From Bank Of America To Help For America
The credit union charter is a member-facing charter. It allows the institution to operate in a philosophically different way. The outcome benefits the people the institution serves.
An important outcome, of course, is that the whole nation is better off. People receive quality products and services at a lower price. As the original Federal Credit Union Act made clear, credit unions are meant to improve the credit component of the American economy and to help persons of modest means.
Based on a comparison of average deposit rates, Bank of America customers would have earned an additional $2.9 billion in interest income in 2011 under a credit union charter. That amount of additional interest on the bank’s $417 billion deposit portfolio could almost certainly be matched in interest savings on their $609 billion consumer loan portfolio. That would result in a $5.8 billion stimulus, or approximately $100 for each of Bank of America’s 57 million “members,” that they would be able to save or spend. That is not an insignificant stimulus.
Bank of America, do yourself and every citizen of this nation a favor. Live up to your name. Live up to your heritage. Convert your retail business to a credit union charter. Put people first. Your customers will like it, your business will grow and the nation will benefit. The future lies in the credit union business model. We’d be happy to have you join us.
Click here to download the entire August edition of The Callahan Report.