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

Lending powers of credit unions have expanded considerably during the deregulation era. Interest rate ceilings are no longer a concern for two reasons: the NCUA can temporarily raise ceilings on deposit rates if they deem economic conditions warrant such a change and the long term decline of interest rates in general has almost made this concern moot.

Credit unions have been offering self-replenishing (revolving) lines of credit for more than a decade and they have proven quite popular with the membership. This phenomenon has also lowered the barriers to credit union participation in the offering of credit cards to members, thus expanding the scope and lending capacity of the industry.

Real estate lending is one of the largest segments of the consumer marketplace and credit unions are now well positioned to meet first mortgage needs of members. Credit unions may choose to originate and keep them on their books or sell them in the secondary market. Home equity loans, at both fixed and variable rates, have been another segment of credit union loan offerings to members.

With respect to the investment portion of a credit union's assets, there has been a slow and carefully crafted expansion of instruments allowable under NCUA guidelines.(10) This liberalization trend has been especially helpful during the late 1980s and early 1990s, as the industry has been relatively more successful at attracting member savings than attracting loan volume. There has been a long term decline in the loan/asset ratio, to recent levels below 60 percent. Projections for the 1990s suggest that the industry might do well if it could hold at these levels. Therefore, more emphasis must be placed on the earnings abilities of the investment portfolio and additional instruments would contribute to credit union earnings generation in the future.

On the liability and capital side of the balance sheet, data suggest that deregulation has contributed importantly to credit union success in the marketplace. The industry has been attracting deposits and member savings accounts in record numbers and quantities. Share accounts now include fixed rate, fixed term certificates of deposit as well as money market deposit accounts whose rates change monthly. These accounts compare favorably to money market mutual fund shares, in terms of liquidity and accessibility, and have the added benefit of NCUSIF insurance up to $100,000 per account. A potential drawback to these accounts may be the rate they are able to pay to the member, since credit union investment portfolios do not have the flexibility of some mutual fund offerings. This situation could be exacerbated in the 1990s if traditionally more profitable loan volume does not increase at past rates and credit unions have to rely more and more on their investment portfolios to generate competitive income flows.

V

Common Bond: The Glue That Binds the Membership

THE THIRD DIMENSION of the credit union industry examined in this paper is the aspect of common bond. For most of the years covered in this study, there have been only three broad categories within the common bond distribution: associational, occupational and residential. Since 1989 CUNA has added a new category called multiple groups, an unknown composite of all three other categories. This multiple group category is still small so the other three categories are the basis for analysis in this section.(11)