Report looks at Iowa credit unions

Northwestern Financial Review, Dec 1-Dec 14, 2004

Notes, news and views on community banking

Large credit unions compete head to head with community banks, and they have lost their ability to serve low-income people, concludes an Iowa State University research report. The white paper, released Oct. 27, was prepared by Robert Jolly, professor of economics; Gary Koppenhaver, associate professor of finance, and Joshua Roe, research assistant in economics. The report was commissioned by the Iowa Bankers Association.

The report also concludes that Iowa's largest credit unions control the majority of credit union assets, and that credit unions charge higher fees per dollar of investment and offer less competitive rates than Iowa banks.

"This study raises some important public policy questions for Iowa lawmakers," said IBA President and CEO John Sorensen. "The majority of Iowans, it seems, are not benefiting from the antiquated credit union tax exemption."

In examining Iowa-based financial institutions, the study found significant consolidation among Iowa credit unions. In 2003, credit unions with assets greater than $100 million represented 6 percent of all credit unions in Iowa, but they controlled 57 percent of all credit union assets.

Reviewing financial performance between 1999 and 2003, researchers found:

* In 2003, banks paid customers a higher interest rate on their deposits than did credit unions.

* The average loan rate is significantly higher for small credit unions compared to small banks, while the difference in loan rates for medium and large credit unions and banks is not statistically different.

* As a percent of total assets, banks charge customers lower fees than do credit unions.

* Credit unions pay appreciably higher overhead costs and wages than do banks.

From this data, the study found little evidence the tax, regulatory and organizational advantages conferred upon credit unions translate into lower loan rates, higher deposit rates, or reduced fees for members. Further, credit unions have higher wage bills and other non-interest expenses compared to banks.

The study concludes that as credit unions grow in size, complexity, range of services, and in the markets they serve, they have no more inherent capacity to reach individuals of "small means" than do banks. Other studies cited in the report have found banks serve a greater proportion of low and moderate-income families than do credit unions.