The Structure and Growth of the Credit Union Industry in the United states: Meeting Challenges of the Market

I Introduction THE DEREGULATION of the financial services industry in the United States, which began to be implemented in 1977, is now more than fifteen years old. Depository, investment, insurance, brokerage and credit type financial intermediaries have evolved into what is called the financial services industry. A complex interplay of forces of innovation, technology, deregulation and competition have made various types of financial intermediaries similar in function. But separate and distinct legal and regulatory structure remains. The credit union industry, the focus of this paper, has been affected by these changes.(1) Before the commencement of the deregulation movement in the 1970s, fairly clear lines of distinction existed between types of depository institutions operating in the US marketplace and serving their traditional customer base. Commercial banks, the largest players, primarily offered checkable deposits and made commercial loans. Mutual savings banks and savings and loan associations offered fixed rate passbook savings accounts and made residential mortgage loans. Credit unions offered share accounts, on which they paid dividends, and made consumer installment loans. In the last decade and a half, the unique functional characteristics and distinctions of most institutions have nearly disappeared. Each type of financial institution or group has expanded its menu of offerings to both lenders (saver-financial investors) and borrowers (spender-user-real investors). Also new forms of financial services have been created. The financial marketplace has become more competitive. Among organizations accepting deposits, the credit union industry was the fastest growing financial intermediary in the early 1970's up to the emergence of money market mutual funds (MMF). Since the innovation of a 6-month money market certificate of deposit (CD) linked to the 6-month Treasury bill rate was approved by regulators in 1977, credit unions are still the fastest growing depository institution in terms of assets and second highest among all financial intermediaries, following money market mutual funds operating, in the United States.(2) A central goal of this study is to examine the response of credit unions to the process of deregulation in which, while separate regulatory structures were retained, the credit unions acquired additional powers that overlapped those of other financial institutions. An analysis of the response to changes in the marketplace is important not only for further regulatory changes but also for a broad financial services industry reform by Congress. The purposes of this paper are to (i) analyze and assess the status of the credit union industry during the past thirteen years, (ii) identify hypotheses and strengths which have allowed credit unions to expand their market share among savings and depository institutions and (iii) offer projections of their size and structure at the turn of the century. II Structure of the Credit Unions Industry Since 1980 AT THE CORE OF THE CREDIT UNION MOVEMENT since its inception in the early twentieth century (around 1903) in Massachusetts is the concept of the common bond among its members. This is perhaps its most unique feature. Members come from the same association, or community, or are employed by the same firm, government agency or non-profit institution. Since the early 1980s, the common bond requirement has been relaxed significantly by both the National Credit Union Administration (NCUA) and state regulatory authorities. The result has been an expansion in the potential membership of the industry, to approximately one-half of the current population in the US even though actual membership is only about one-quarter of all Americans.(3) Relaxation of common bond requirements also has made a contribution to the consolidation trend of the industry which started from the 1969 peak of 23,876 credit unions operating in the US. …