SAN FRANCISCO — Larger credit unions have been faster growing over the last couple of decades which has helped lower their non-interest expenses while boosting industry consolidation.
"By various measures, larger credit unions have recently had stronger financial performance than smaller credit unions, indicating that these institutions face large and pervasive economies of scale," the Federal Reserve Bank of San Francisco stated in its Aug. 4 FRBSF Economic Letter.
The report calls the performance difference "long-running" and states that the gap is widening. "Thus, it is not surprising that the number of smaller institutions has been shrinking, while the number of larger institutions has been rising," according to the FRBSF. The data provided showed the number of credit unions under $100 million in assets dropping from 17,132 in 1980 to 7,859 as of 2004 while credit unions over $1 billion increased from two to 98.
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The cost advantage of larger credit unions has increased from about 100 basis points during the 1980s, according to the Federal Reserve Bank of San Francisco, to 120 basis points between 1992 and 2004. "This sizable increase in the already large cost advantage of large credit unions might have several sources," the Economic Letter read. "One might be the faster growth of large credit unions relative to smaller institutions, which would allow them to achieve relatively more scale-related cost savings. In addition, recent legislation may have imposed costs on banks and credit unions that weigh more heavily on small institutions." The Bank Secrecy Act was specifically cited.
On the other side of the balance sheet, earnings are diverging too in favor of the larger institutions. Looking at the higher returns on average assets and interest expenses at credit unions, the authors deduced that larger credit unions earned more net income and paid higher interest–about 40 basis points–to their members because of "substantially lower" non-interest expenses. Members also tend to receive better loan rates and a better variety of services with a larger credit union.
Given the overlapping fields of membership as permitted over time, members began migrating toward the larger credit unions, which has led to the total credit union assets in smaller credit unions to drop from 69% in 1980 to 21% in 2004.
Still, the credit union community is far from being dominated by a few nationwide institutions. However, the report concluded, "The industry's successes suggest that some small credit unions (like some small banks and some small non-financial businesses) are sufficiently cost-efficient and attuned to the needs and circumstances of their local deposit and loan customers that they will thrive.
"Many other credit unions, however, will not thrive or even survive. Continuing performance divergence will make it increasingly difficult for smaller credit unions to serve their members as effectively as larger credit unions do and to meet standards for safety and soundness. In that event, less-efficient and less-profitable credit unions will increasingly feel pressures to liquidate, merge, or convert to other charters."
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