A comparative analysis of the US and EU retail banking markets - Wsbi

State credit unions were first exempted from federal
income tax in a 1917 administrative ruling of the U.S.
Attorney General 61 on the grounds that they closely
resembled the cooperative banks and similar
institutions that had been expressly exempted from
tax by legislation.
By 1937, after the establishment of federally chartered
credit unions in 1934, some states had begun to
tax federal credit unions. Since virtually all other
cooperative organisations including mutual savings
banks, mutual insurance companies and mutual
savings and loans were tax exempt at that time,
Congress amended the Federal Credit Union Act to
exempt federally chartered credit unions from
substantially all taxes, too 62 .
In 1951, Congress preserved the tax exempt status
of state-chartered credit unions 63 . Although this
exemption applies to both state and federal credit
unions, federal credit unions enjoy the broader tax
exemption enacted by Congress in 1937.
The institutions with which credit unions were
identified when their tax exemption was initially
granted lost their tax exemptions in 1951 when they
had reached the point of “active competition” 64 with
taxable institutions. Although this point has also
been reached with regard to credit unions, the tax
advantage for them still exists today.
3.2.1.1.5 Mortgage banks
During the savings and loan crisis in the 1980’s a lack
of capital forced institutions to remove loans from
their balance sheets through securitisation. Those
circumstances provided an opportunity for a new
type of lender, the mortgage banks, which originate
and warehouse mortgage loans for a short period
before reselling them.
Mortgage banks in the US do not operate under a
bank charter. Instead, they need a special mortgage
banking licence, to be issued by the respective state
department (for example the department of
corporations or the mortgage lending division).
As mentioned above, the main business of mortgage
banks is to originate and package mortgage loans,
holding them on the balance sheet for a short period
of time before selling them into the secondary market.
Primarily, loans are sold to the US government
sponsored agencies Ginnie Mae, Freddie Mac and
Fannie Mae that bundle them and issue so called
mortgage backed securities.
3.2.1.1.6 Non-banking institutions offering
financial services
Non-banking institutions offering financial services in
the US are called non-bank banks or limited service
banks. Both terms arose because of the “and” in the
Bank Holding Company Act’s definition of a bank:
According to the Act a bank is an organisation that
"accepts demand deposits and makes commercial
loans." Thus, a financial institution that either only
accepts demand deposits or only makes commercial
loans but does not do both, is not a bank for the
purposes of the Bank Holding Company Act.
Because limited-service institutions fail to satisfy
the legal definition of a bank, neither their parent
corporations nor other subsidiaries are subject to the
strictures imposed by the act. They may engage in any
activities they wish, including activities that are closed
to traditional banks and to bank holding companies
– manufacturing, retailing, corporate securities
underwriting, and insurance brokerage, to name a
few. Anyone can acquire a non-bank bank and this
can be done anywhere, breaching the still existing
legal geographic restrictions for banks as well 65 .
Companies in a wide range of industries have
acquired limited-service banks. They have done so
for a variety of reasons: Gulf & Western 66 , one of the
first companies to acquire a limited-service bank, did
so to support its credit card and consumer lending
activities. Merrill Lynch obtained its non-bank bank
so that it could process its cash management account
customers' check and credit card transactions in-house.
Other firms have acquired non-bank banks in order
to offer customers access to their funds through
nationwide automatic teller machine networks.
61 Op. Att’y Gen. 176 (1917).
62 Pub. L. No.416, c. 3, section 4, 51 Stat. 4 (Dec. 6, 1937); Section 122 of the Federal Credit Union Act (12 U.S.C. § 1768).
63 Now section 5(c)(14)(A) of the Internal Revenue Code.
64 See Senate Report No. 781 of 1951.
65 See section on regulatory trends in the US in the chapter on regulatory issues for more detailed information on these restrictions.
66 Gulf & Western was a US conglomerate the legal successor of which is Viacom.
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