Academic journal article Canadian Journal of Nonprofit and Social Economy Research

Is There a Credit Union Difference? Comparing Canadian Credit Union and Bank Branch Locations

Academic journal article Canadian Journal of Nonprofit and Social Economy Research

Is There a Credit Union Difference? Comparing Canadian Credit Union and Bank Branch Locations

Article excerpt

INTRODUCTION

As member-based associations and a form of co-operative, credit unions in Canada fulfill a social mission alongside the financial services they provide. In a Canadian financial landscape dominated by chartered banks, credit unions are finding themselves under increasing pressure to compete while at a disadvantage given that they cannot raise capital in the market in the same manner as banks. In addition, they no longer receive the tax benefits they enjoyed since 1972, as these were removed from the 2013 federal budget (Flaherty, 2013).

In this context, this study explores how credit unions distinguish themselves by exploring the communities they serve. Research studying credit unions in three U.S. states (Arizona, Wisconsin, and New Hampshire) found that credit union branches are predominantly located in urban centres, much like bank branches; however, they are overrepresented in lower-income areas as compared to banks (Mook, Maiorano, & Quarter, 2015). This finding was consistent with the credit union tradition of offering financial services to demographic groups in need. In a similar manner, this study explores if this phenomenon holds in Canada. That is, are credit unions in Canada overrepresented in lower-income or more marginalized communities as compared to banks?

CREDIT UNIONS IN CANADA

Credit unions in Canada are a form of co-operative with share capital that differs from that of a bank. In credit unions, share capital is not publicly traded on a stock market, and its value is not as tied to market forces. Voting rights in credit unions, like co-operatives in general, are associated with membership, with each member holding one vote and one membership share. For banks, voting rights are tied to shares representing ownership and influence can be associated with large blocks of capital.

While recent changes to federal tax policy have not favoured Canadian credit unions, recent changes to federal financial policy have supported credit union expansion and competitiveness. In 2012, following the credit crisis, the federal government adopted new legislation enabling credit unions to expand beyond their provincial borders as national financial institutions in order to promote their growth, their competitiveness with banks, and to enhance stability of the financial system (Flaherty, 2010; Government of Canada, 2012). Given challenges credit unions have faced in expanding nationally, the federal government has indicated it will propose legislative measures to smooth the expansion process for credit unions, and to provide protection for them against transitional risks (Morneau, 2016), including potential changes in deposit insurance associated with different provinces. Only one credit union in Canada, Uni Financial, has obtained a federal charter, in July 2016 (CCUA, 2016).

Credit unions have less stringent disclosure requirements than banks, which are federally regulated, making risks for banks easier to measure (Shecter, 2014). Credit unions are provincially regulated, and these agencies may have less capacity to monitor larger more complex credit unions (IMF, 2014). In this vein, the Bank of Canada has highlighted that smaller non-federally regulated institutions, entities such as credit unions, may be more vulnerable to economic downturns, potentially having adverse financial and economic spillover effects. Reasons for this vulnerability include that credit unions may have a higher portion of business and lending directed at riskier areas, and varying requirements on policy to mitigate these risks, such as higher capital positions and tighter supervision (Bank of Canada, 2014).

In our study of U.S. credit unions (Mook, Maiorano, & Quarter, 2015), we posit that credit union location was driven by at least two theoretical factors: the need to find a distinct niche that struck an appropriate balance between market forces and social mission and that separated credit unions from banks; and market accommodation, or the need to accommodate themselves to the market forces that all financial institutions must compete within. …

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