The structure and growth of the credit union industry in the United States: meeting challenges in the market

American Journal of Economics and Sociology, The, April, 1994 by Surendra K. Kaushik, Raymond H. Lopez

I

Introduction

THE DEREGULATION of the financial services industry in the United States, which began to be implemented in 1977, is now more than fifteen years old. Depository, investment, insurance, brokerage and credit type financial intermediaries have evolved into what is called the financial services industry. A complex interplay of forces of innovation, technology, deregulation and competition have made various types of financial intermediaries similar in function. But separate and distinct legal and regulatory structure remains. The credit union industry, the focus of this paper, has been affected by these changes.(1)

Before the commencement of the deregulation movement in the 1970s, fairly clear lines of distinction existed between types of depository institutions operating in the US marketplace and serving their traditional customer base. Commercial banks, the largest players, primarily offered checkable deposits and made commercial loans. Mutual savings banks and savings and loan associations offered fixed rate passbook savings accounts and made residential mortgage loans. Credit unions offered share accounts, on which they paid dividends, and made consumer installment loans.

In the last decade and a half, the unique functional characteristics and distinctions of most institutions have nearly disappeared. Each type of financial institution or group has expanded its menu of offerings to both lenders (saver-financial investors) and borrowers (spender-user-real investors). Also new forms of financial services have been created. The financial marketplace has become more competitive.

Among organizations accepting deposits, the credit union industry was the fastest growing financial intermediary in the early 1970's up to the emergence of money market mutual funds (MMF). Since the innovation of a 6-month money market certificate of deposit (CD) linked to the 6-month Treasury bill rate was approved by regulators in 1977, credit unions are still the fastest growing depository institution in terms of assets and second highest among all financial intermediaries, following money market mutual funds operating, in the United States.(2)

A central goal of this study is to examine the response of credit unions to the process of deregulation in which, while separate regulatory structures were retained, the credit unions acquired additional powers that overlapped those of other financial institutions. An analysis of the response to changes in the marketplace is important not only for further regulatory changes but also for a broad financial services industry reform by Congress.

The purposes of this paper are to (i) analyze and assess the status of the credit union industry during the past thirteen years, (ii) identify hypotheses and strengths which have allowed credit unions to expand their market share among savings and depository institutions and (iii) offer projections of their size and structure at the turn of the century.

II

Structure of the Credit Unions Industry Since 1980

AT THE CORE OF THE CREDIT UNION MOVEMENT since its inception in the early twentieth century (around 1903) in Massachusetts is the concept of the common bond among its members. This is perhaps its most unique feature. Members come from the same association, or community, or are employed by the same firm, government agency or non-profit institution.

Since the early 1980s, the common bond requirement has been relaxed significantly by both the National Credit Union Administration (NCUA) and state regulatory authorities. The result has been an expansion in the potential membership of the industry, to approximately one-half of the current population in the US even though actual membership is only about one-quarter of all Americans.(3)

Relaxation of common bond requirements also has made a contribution to the consolidation trend of the industry which started from the 1969 peak of 23,876 credit unions operating in the US.(4) By the end of 1990, the number was reduced to 14,549 and it has continued its decline through 1992 to 13,379.

These declines do not imply that credit unions are "going out of business" at the rate of almost 500 per year. Rather, the pattern of consolidation through mergers between credit unions has increased the accessibility of credit unions to the general public as measured by number of offices and branches. Reduced numbers of operating credit unions does not reduce member's access to credit unions or to the number and type of services provided by them. Where a closing does occur, it is most often because a more efficient means of meeting member needs is possible from another site.

The overall financial strength of the industry continues to grow along with its competitiveness. The average capital/asset ratio, at year end 1992 was 8.1%, comfortably ahead of the ratio required of banks under new capital standards beginning in 1993.(5)

The merger/consolidation trend in recent years has resulted in a safer and more stable credit union industry. A credit union with one sponsor is vulnerable to the financial health, safety and competitiveness of the sponsoring institution. If the sponsor's situation deteriorates, or the local area is adversely affected by social, economic or political forces (for example, the defense base closings of the 1990s), these credit unions could experience severe financial pressures that could possibly result in their insolvency. Therefore, diversification of the field of membership (geographically, economically, etc.) is a prudent course of action for any credit union.