ST. LOUIS–A member of the Federal Reserve’s Board of Governors said the growth of credit unions and other non-bank financials should be factors that are considered moving forward when the Fed is considering bank mergers.
The Fed governor also offered some insights on how the community bank landscape is changing that will sound quite familiar to credit unions.
Speaking to the 2022 Community Banking Research Conference hosted by the Federal Reserve Bank of St. Lous, Gov. Michelle Bowman said the world of community financial services has changed, and credit unions are a primary indicator of the evolution taking place.
Bowman’s comments were met with a response from NAFCU (see related story).
Citing research conducted as part of the CSBS National Survey of Community Banks and its findings around changing competition in the community banking landscape, Bowman said the majority of community banks report that other community banks are still their primary competitors, but that majority has steadily declined in each year of the survey as credit unions and larger banks have become the dominant competitors for deposits in an increasing number of markets.
Similar to what the U.S. credit union market has seen, Bowman noted that in just 10 years the number of bank charters has declined by approximately 20%, with the decline in charters concentrated among banks with less than $250 million in total assets.
She spent several moments in her remarks discussing bank mergers.
Growing Credit Unions
“Historically, credit unions were not seen as competitors to banks because they offered fewer small business and commercial lending products and were limited in their customer base because of field of membership restrictions. For this reason, credit union deposits were not factored into the initial competitive screens at all under the 1995 Bank Merger Guidelines,” Bowman said. “However, in the past few decades, we’ve seen credit unions expand their fields of membership. Many credit unions now go well beyond the traditional common bond requirements for membership and increasingly allow membership based on geography.
“We’ve also seen an increase in the percentage of credit unions offering small business loans. The National Credit Union Administration has reported that 94% of credit unions with $500 million or more in assets offer business loans. Total business loans at federally insured credit unions grew at an annualized rate of 14% from 2004 through 2015,” Bowman continued. “Underscoring just how much credit unions are competing directly with banks, particularly community banks, is the recent increase in acquisitions of community banks by credit unions. Credit unions today are much more likely to compete directly with traditional banks offering the full cluster” of banking products and services than they did in 1995, which supports the argument that our analysis needs to give more weight to competition from credit unions.”
Modernizing The Competitive Analysis
After also addressing online deposit gathering and fintechs, Bowman told the meeting, “With the proliferation of new competitors to traditional banks, it’s imperative that we modernize our evaluation of competition to more consistently and comprehensively factor in all competitors in a market and consider how to address markets where deposits are a poor proxy for the full cluster of products and services offered to consumers and small businesses.
Getting it ‘Right’
“Getting this right is particularly important for community banks. The Federal Reserve has long recognized the important public benefits that community banks provide to their communities. Not fully accounting for all competitors in a market limits the options available to banks that need to achieve scale to offer the products and services that customers want while managing the high overhead costs that come with being a regulated depository institution,” Bowman said.
Bowman added the “consequences of getting this wrong will be felt acutely in rural communities—especially in markets where populations have declined to such an extent that local institutions have trouble achieving the scale they need to compete with out-of- market banks or nonbanks operating on a national or regional scale.”
And in comments that echo what many credit unions have also experienced, Bowman observed that banks in rural areas may also struggle with succession planning.
“Attracting and retaining qualified management and staff can be very difficult, and in some cases may force a bank to close its doors, to the detriment of its customers,” she said.
‘Interesting’ Position
John McKechnie, a long-time credit union advocate in Washington, and now senior partner with the advocacy firm Total Spectrum, said of Bowman’s comments, “The emphasis that a Fed governor is putting on credit unions, in the context of competition and mergers, is interesting to say the least. This is somewhat uncharacteristic from a central banker, and bears watching.”
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