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Best Seat in the House? Credit Unions' Place in the Financial Services Industry

Credit Unions’ Place in the Financial Services Industry

Making loans, offering savings accounts, providing checking accounts—isn’t this what credit unions—er, banks—do? As a matter of fact, yes. Credit unions play a smaller role in the U.S. financial system than do banks, but—much to the chagrin of bankers—their role has grown over time.

Credit Unions’ Niche

Credit unions are regulated and insured financial institutions dedicated to helping targeted groups of consumers meet their savings, credit and other basic financial needs. By law, credit unions are cooperative enterprises controlled by their members. In addition, credit union members must be united by a "common bond of occupation or association, or [belong] to groups within a well-defined neighborhood, community or rural district," according to the Federal Credit Union Act (FCUA) of 1934. In 1998, the Supreme Court issued a statement that said, "Credit unions were believed to enable the general public, which had been largely ignored by banks, to obtain credit at reasonable rates.

Historically, members of credit unions were drawn from groups that were underserved by traditional private financial institutions; these consumers tended to have below-average incomes or were otherwise not sought out by banks. Today, however, the demographic characteristics of credit union members have become more like those of the median American. In fact, current members are over-represented by the upper-middle income strata, defined as household incomes between $30,000 and $80,000 in 1987.

Only 1 percent of the U.S. adult population aged 18 or over belonged to a credit union in 1935, but about 38 percent of the adult population had joined by 2001. Not surprisingly, given the prominent role of occupational credit unions, a majority of members of all credit unions are in the prime working age group of 25-44. According to a 1987 credit union survey, 79 percent of all Americans who were eligible to join a credit union had done so. It appears that credit unions, banks and thrifts (savings and loans associations) are more direct competitors today than when credit unions first appeared.

Bankers Feel the Squeeze

The American Bankers Association (ABA) has alleged that the playing field is not level. Their arguments are based on three premises. First, bankers believe it is unfair that credit unions are exempt from federal taxation while the taxes that banks pay represent a significant fraction of their earnings—33 percent last year. Credit union advocates say this is justified because they cannot raise equity in a public offering (i.e., a stock offering); so, they must be able to build capital internally

Second, bankers believe that credit unions have been allowed to expand far beyond their original purpose. Originally, credit unions were to be organized around a field or fields of membership such as occupation (the employees of a firm), association (such as a religious or fraternal organization) or geographic location (all individuals who live, work, attend school or worship within a defined community). In 1998, however, President Bill Clinton signed the Credit Union Membership Access Act, which, among other provisions, allows credit unions to accept additional membership groups with multiple common bonds so long as the group to be acquired has fewer than 3,000 members.

Third, banks are concerned about how credit unions are regulated and the financial services they’re allowed to offer. For example, banks are subject to the Community Reinvestment Act (CRA), which requires them to make specified amounts of loans in the communities in which they take deposits. Credit unions are exempt from CRA. As for services, credit unions have been allowed to increase the amount of business lending they do. This frustrates bankers, who believe that credit unions should focus on households.

Does Size Matter?

Credit unions numbered 10,041 at the end of last year, serving more than 80 million members. At the same time, there were 7,887 FDIC-insured commercial banks and 1,534 insured thrift institutions. Most credit unions are small, though. Credit union assets totaled $575 billion, compared to $7,075 billion held by commercial banks and $1,359 billion held by thrifts. The deposits (or, technically, “shares”) of virtually all credit unions are now federally insured by the National Credit Union Administration (NCUA), regardless of the type of charter the credit union holds. In terms of size, most credit unions had less than $10 million in assets in mid-2000. Large credit unions exist, however, and they are an important part of the sector. For example, the 15 percent of credit unions with more than $50 million in assets (1,554 institutions) accounted for 79 percent of total credit union assets.

Credit unions play a limited role in the U.S. financial system. More than 95 percent of all federal credit unions offer automobile and unsecured personal loans. Large credit unions also offer mortgages, credit cards, loans to purchase planes, boats or recreational vehicles, ATM access, certificates of deposit and personal checking accounts. Only about 14 percent of credit unions have business loans outstanding. Clearly, by any measure, credit unions are much smaller than banks. Nonetheless, from the perspective of some, their seat at the financial services table is an enviable one.

This article was adapted from “Credit Unions Make Friends—But Not with Bankers,” which was written by William R. Emmons and Frank A. Schmid and appeared in the October 2003 issue of The Regional Economist, a St. Louis Fed publication.