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

Benefits of the common bond concept have been reduced risk as well as lower operating costs for credit unions as compared to other financial intermediaries. Subsidies provided by sponsors, in areas such as personnel and physical facilities, result in comparatively lower operating expenses. The benefits are lower loan rates and/or higher dividend rates on savings.

There are three basic categories of credit unions in operation in the United States: Federal Charter/Federal Insurance, State Charter/Federal Insurance and State Charter/Private Insurance. There were 21,465 credit unions in 1980: 12,440 federally chartered and 9,025 state chartered. The state chartered credit unions are further divided into those that are federally insured and those that are privately insured as presented in Figure 1. The number of credit unions has declined to 13,379 in 1992, (about 40 percent) over a period of twelve years. Privately insured state chartered institutions have declined by over 80 percent (from 4,115 to 970), and those federally chartered and insured decreased by about 40 percent (from 12,440 to 7,961). State chartered and federally insured also declined but by only 18 percent (from 4,910 to 4,449) during the 1980 to 1992 period.

While the federally chartered/federally insured group has remained remarkably stable at about 58 percent of the total, significant shifts have taken place and are expected to continue between the remaining two categories of state chartered institutions.

The 1980s witnessed a generally declining trend in the state chartered/privately insured category, primarily due to what could be called "event risk-related" activities. These "events" have been shocks to the perceived solvency of the private insurers, with the latest example being the Rhode Island debacle of 1990-1991. Difficulties were precipitated by failure of a savings bank, insured by the same private company which also insured credit unions. When the insurance company filed for bankruptcy, credit unions and their members in the state were adversely affected. Many of these credit unions applied for and received federal insurance while keeping their state chartered status. In addition, some other states where private insurance was prevalent, changed their insurance requirements and many credit unions converted to federal coverage.

Share (deposit) insurance is a critical factor in the changing market structure of the credit union industry. Of the 21,465 credit unions in operation in 1980, 80 percent were insured by the National Credit Union Share Insurance Fund (NCUSIF). As the number of credit unions decreased to 13,379 by the end of 1992, the percentage of credit unions insured by NCUSIF increased to 93 percent.

The significance of federal insurance as an important survival factor is also borne out by a strong surge in the percent of state chartered but federally insured institutions.(6) They increased from 23 percent of all credit unions operating in the U.S. in 1980 to 33 percent in 1992 while the share of federally chartered and insured credit unions remained stable at 58 to 59 percent throughout the period.