Within Minnesota's financial industry, conflict lurks like it did with the U's hospitals

Early this summer, a district court judge in St. Paul handed the Minnesota Department of Commerce a victory in a challenge to its authority to decide who can buy banks in the state.

But the ruling didn't touch on the substance of the department's policy, which is to review deals involving banks and credit unions on a case-by-case basis. And as a result, a long-running tension between Minnesota's banks and credit unions continues to simmer.

This is the kind of situation that lurks in the background until a crisis pops up. In that way, it's similar to how the U of M hospital system's role on the state's health scene was taken for granted until an out-of-state company tried to buy Fairview Health, partner to the U of M health system.

But as with the U of M and Fairview situation, it's one in which state leaders should more clearly set a direction.

Just over a year after he became governor, Tim Walz was thrust into managing the state's response to the COVID-19 pandemic. After his re-election, Walz this spring spent a windfall to the state's coffers, checking off a wish list of Democratic priorities.

Now, it's time for Walz and other state leaders to start shaping Minnesota for a future that's different than the past, one in which population growth is slower than ever.

That means deciding difficult things, like whether some Twin Cities suburbs should merge, whether the U should be a dominant health care brand and whether there will be a bank or something like it on as many Minnesota corners.

People don't go into banks, thrifts or credit unions as often as they did. But they still want them around, particularly when they need mortgages and other complex loans. And that demand for utility-like access and service leads to costs that many people overlook.

Investors don't, however. For all the changes and innovation in banking and other financial services over the last quarter-century, the KBW Bank Index tracking the market value of the nation's 24 largest financial institutions today is just slightly higher than it was in fall 1998.

So that's the setting against which credit unions, while shrinking in overall number, have been growing market share over banks in Minnesota in recent years.

Much of that growth has been organic, helped by the tax advantage that credit unions have. While they pay property and payroll taxes, they don't pay income tax since they are non-profit organizations.

But on a few occasions, credit unions have sought to grow by purchasing banks in Minnesota. And one of those efforts led to the court challenge against the Commerce Department.

It happened two years ago when Royal Credit Union, the Wisconsin-based institution that got its start as a service for employees of Uniroyal Tire, tried to buy Lake Area Bank, which served the suburbs and exurbs north of St. Paul. Since Royal had purchased another Minnesota bank in 2016, its leaders expected to have no difficulties picking up Lake Area.

But the Commerce Department said the purchase of Lake Area was incompatible with state law. Royal then filed suit and was joined by other credit unions and an industry trade group. They said the department's position, which was expressed to FDIC regulators also reviewing the prospective deal, was inconsistent with past practice.

Lori Swanson, a former state attorney general who represented the credit unions in the suit, told me recently, "There's an appropriate role for government to regulate that kind of transaction, to make sure they have the financial wherewithal and ability to run a bank. But short of that, it doesn't make any sense to say, 'We're going to have to stop that in its tracks.'"

Ultimately, Royal and Lake Area Bank restructured the transaction, with the credit union buying three branches and a mortgage unit. The Commerce Department took no stand on the pared-down deal, and the FDIC approved it.

By the time the district judge ruled this summer, he noted that the dispute was over and that deciding anything else would be "speculative."

A spokesman for the department told me this month it will "continue to review applications on a case by case basis based on the facts of each proposed transaction."

But that leaves the industry and its customers subject to regulatory whims and short-term tactics, not reason and strategy. There's a chilling effect that may become more visible and painful in a future financial crisis.

Jim Amundson, president of BankIn Minnesota, a trade group of community banks, wants a working group of leaders from banks, credit unions, the Commerce Department and the Legislature to look at the disparate tax structures and other dilemmas in the industry.

"There are some good questions to be asked," he said. "And I don't know where it would go."