Profitability of Credit Unions, Commercial Banks and Savings Banks: A Comparative Analysis

Article excerpt

I. Introduction

The liberalization of product and price competition among depository intermediaries in the United States has tended to make them more similar since enactment of the Depository Institutions Deregulation and Monetary Control Act in 1980 (DIDMCA). Commercial banks, savings banks and credit unions compete against one another even as they remain different deposit taking institutions under the law. Regulation, in an environment of changing laws relating to financial services, applicable to these institutions has moved in favor of taking advantage of economic forces and laws allowing them to enter one another's traditional areas of business while continuing to offer their specialized services to the public. It is important to assess the performance of depository institutions in the new market process. Credit unions have expanded their loan portfolios and deposit categories only in the consumer marketplace. In contrast, commercial banks, with broader authority, have made significant inroads in real estate lending, corporate financing and the transactions side of financial services. Savings banks, likewise, have expanded their products and services while losing a part of their portfolio and market share to the other two institutions.

The focus of this study is on a comparison of the performance of credit unions, commercial banks and savings banks in the deregulatory environment of the 1980's. Profitability is the measure of both performance of each of the industries and the degree of competition among them. This approach follows the on-going study of profitability of the commercial banking industry during the past four years by the Board of Governors of the Federal Reserve System. Whereas the Federal Reserve analyzed performance of commercial banks only, this study presents a comparative analysis of profitability of credit unions, commercial banks and savings banks.

II. Methodology

The methodology used in this paper is similar to the Federal Reserve studies of commercial banking profitability in each of the four years since 1989. The structure of those studies is used as a model for this study. Profitability results of commercial banks, using income statement and balance sheet data, are compared with those of credit unions and savings banks.

Data representing the financial performance of credit unions have been generated from National Credit Union Association (NCUA) annual reports. Information is presented in two major categories, Federally Chartered/Federally Insured credit unions and State Chartered/ Federally Insured credit unions. These two groups, representing over 90 percent of operating credit unions and over 90 percent of total industry assets, were combined into composite balance sheets and income statements and used as a proxy for the entire industry.

Data for the commercial banking industry comes from the Flow of Funds Statements of the Federal Reserve. Specifically, information is provided covering "all insured domestic commercial banks and non-deposit trust companies." Data on insured savings banks are from the Federal Deposit Insurance Corporation.

It is hypothesized that credit unions, although only one-twelfth their size, are at least as profit able as commercial banks and savings banks. A joint hypothesis is that, on average, a large commercial bank is not more profitable than the average credit union or a medium size savings bank.

III. A Comparative Analysis of Profitability

Consolidation among depository institutions has been a major trend in the financial services industry over the last decade. The number of commercial banks has declined by over 20 percent since 1980, while credit unions contracted by over 25 percent.(1) Even greater decline of over 30 percent were observed in the savings and loan industry. These results reflect both the economic environment of increased competition in financial services as well as problems more specific to each of the industries as they reallocate their asset and liability portfolios in response to changing market conditions. …