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Commercial Banks & Credit Unions: 

Commercial Banks & Credit Unions Facts, Fallacies, and Recent Trends June 2006 Mike Schenk Economics & Statistics Department CUNA & Affiliates mschenk@cuna.coop

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Bankers claim that credit unions are getting too big At year-end 2005 banking institutions held over fifteen times more assets than credit unions ($10.9 trillion vs. $701 billion). Each of the nation’s three largest banking entities are larger than the entire credit union movement. The average banking institution is over fifteen times larger than the average credit union ($1.23 billion vs. $79 million in assets). At year-end 2005 roughly one-half of U.S. credit unions had less than $12 million in assets. Overall, 1.7% of banking institutions are this small. Over one-half (56%) of banking institutions had $100 million or more in total assets at year-end 2005. Just 14% of credit unions are this large.

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Bankers claim credit unions are “empire builders” The first U.S. CU was established on November 24, 1908. Assets in all U.S. CUs grew to $771 billion by year-end 2005. In other words it took 97 years of growth for the credit union movement to grow to $771 billion in assets. In contrast, U.S. banking institutions grew by $771 billion in 2005 alone! U.S. Banker magazine recently reported that community banks make up one-third of the fastest growing small companies in America.

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Largest 100 Banking Institutions (1992 assets = $2.0 trillion; 2005 assets = $7.8 trillion) Smaller Banking Institutions (1992 assets = $2.6 trillion; 2005 assets = $3.0 trillion) Credit Unions (1992 assets = $0.3 trillion; 2005 assets = $0.7 trillion)

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Largest 100 Banking Institutions (1992 share = 41%; 2005 share = 68%) Smaller Banking Institutions (1992 share = 53%; 2005 share = 26%) Credit Unions (1992 share = 6%; 2005 share = 6%)

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Bankers claim credit unions are making “huge” market share gains Credit union market share of financial institution assets has not changed markedly over the past decade. Credit union market share was 6% in 1993 and remained 6% by year-end 2005. In contrast, bank market share started 1993 at 74% but now stands at 78% of total financial institution assets. In other words, as the S&L industry shrank, bank market share increased by four percentage points whereas credit union share increased less than one percentage point.

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Bankers claim that credit union member business lending is “exploding” Only 1,929 credit unions are engaged in member business lending. The number of credit unions with MBLs has increased by fewer than 325 in the decade ending 2005. According to the NCUA the average size of credit union member business loans at year-end 2004 was $155,433. Additionally, a 1991 Treasury Department study found that 59% of credit union loans made for business purposes were loans of $50,000 or less. Credit union market share of depository institution commercial loans remains at less than 1% at year-end 2005. A recent ABA survey revealed that only 4% of commercial bankers viewed credit unions as chief competitors in business lending, in business deposits, and in business investment management (February 2002 ABA Banking Journal).

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Bankers claim credit unions make it difficult for them to compete But most don’t believe banker rhetoric - and rightly so: “This decade has been the best in living memory for America’s commercial banks…banks have been growing fast around the world…but nowhere does the industry seem more triumphant than in the United States. Last year American banks declared a fifth straight year of record earnings. Their return on equity has been at a 60-year high. No bank has failed for almost two years, an all-time record.” The Economist. Vol. 379 no. 8478. May 20th 2006. America’s Banking Boom.

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Bankers claim credit unions make it difficult for them to compete The dollar amount of bank profits have increased in fifteen of the past sixteen years. Bank profits as a percent of average assets (ROA) have been above 1% in each of the past thirteen years. The 1.31% level of ROA banks recorded in 2005 remains near the modern-day high. In 2005 3,766 banks and S&Ls (42% of all banking institutions) recorded full-year pre-tax ROA greater than 1.5%. Small banking institutions (those with less than $100 million in assets) recorded a healthy ROA of 1.00% in 2005 about the same as their 1.01% earnings in 2004 and up from 0.95% in 2003.

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Bankers claim credit unions make it difficult for them to compete But in “The Economic Performance of Small Banks, 1985-2000” (November 2001 Federal Reserve Bulletin) William F. Bassett and Thomas F. Brady conclude that “…small banks have thrived over the past decade and a half despite what might be seen as a variety of adverse circumstances, including extensive bank consolidation, a solid improvement in the balance sheet health of large banks, rapid growth in mutual funds and other elements of a ‘parallel’ banking system, and a steady decline in the real value of deposit insurance. Despite these circumstances and abstracting from the effects of mergers and acquisitions, small banks have grown considerably more rapidly than large banks and have tended to meet or exceed them in some measures of profitability….The robust growth and high profitability we find at small banks apparently have not gone unnoticed by the investors that have formed significant numbers of new banks in recent years.” In a more recent publication, “What Drives the Persistent Competitiveness of Small Banks” (A Federal Reserve Economic Discussion Series paper published in May, 2002) Bassett and Brady further reveal that increased deposit account interest costs at small banks primarily reflect the higher rate of return that small banks earn on their assets. So it’s not the credit unions that are driving them up.

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Bankers claim credit unions make it difficult for them to compete Banking industry publications consistently contradict the idea that credit unions are hurting small banks. Publications like the American Banker, ABA Banking Journal and Independent Banker are replete with stories about how community bankers (individually and collectively) are making bumper profits and growing quickly. The vast majority of the successful banks these publications highlight face credit union competition on a daily basis. While it is possible to find small banks that have poor financial or operational performance, credit union competition is at or near the bottom of the list of causes. The contributors to poor bank performance seem to be (in no particular order) fraud, mismanagement, nepotism, overly aggressive expansion, too many big branches, bad pricing decisions (on either side of the balance sheet), too much credit risk (i.e., overly-aggressive lending decisions), weak ALM, misguided investment decisions, bad service, and lack of synergy in mergers. This, as most bank consultants will tell you, is not an exhaustive list.

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Bankers claim credit unions make it difficult for them to compete Since 1986, 3,363 new banking institutions have been chartered and 518 new institutions have been chartered in just the past five years. Bankers simply wouldn’t be chartering new institutions if credit union competition was as stifling as bank trade groups claim. If bankers really believed that credit unions had unfair competitive advantages they would convert their institutions to credit union charters. None do this however because doing so would expose them to democratic ownership and control, would likely cause banker salaries to decline dramatically, and would force these institutions to adhere to a more restrictive regulatory regime, including higher capital standards.

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Bankers claim the credit union tax exemption hurts government budgets If bankers really cared about government budgets they wouldn’t be chartering so many SubS institutions. In fact, over 2,200 of these institutions have been chartered since 1997. And bankers continue to try to expand SubS eligibility and/or eliminate all taxation of dividends. While SubS status is not the same as a tax exemption, it results in significant loss of government revenue. For example, the direct cost to the federal government from banking institution SubS elections is estimated to be $824 million in lost revenue in 2005 and $5.1 billion in lost revenue since 1997. Bankers want state policymakers to believe that taxing state chartered credit unions raises state revenue. In fact recent experience shows it simply encourages state chartered credit unions to convert to federal charters. It also results in revenue losses because these converted institutions no longer pay state supervision fees.

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Total = $5.1 billion since 1997

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Bankers claim the credit unions don’t serve their members Credit union members seem to believe that credit unions do a great job of providing the products and services they need. Indeed, credit unions have outpaced other financial institutions by a wide margin in every American Banker customer satisfaction survey since 1989. Bank trade groups also like to point out that credit unions don’t serve all members, often accusing them of “cherry picking” the best customers and ignoring low-income individuals. However, these same bankers also complain loudly and even file lawsuits when credit unions expand their membership fields into underserved areas. The record exposes banker rhetoric for what it is. For example, historical HMDA statistics provide good clues about credit union commitment to the underserved. This data consistently shows that low income and minority borrowers in the market for a mortgage are substantially more likely to be approved for a loan at a credit union.

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