CLEMSON, S.C. – A Clemson University study has been published that examines how credit unions compete with community banks and larger banks, and finds for the most part credit unions benefit consumers in their markets.
Authored by Clemson economics Ph.D. candidate Jacob Walloga, the study is based on an analysis of banks’ entry decisions into local markets, and measures competition between credit unions, community banks, and large banks in 1,771 financial services markets in the U.S.
“The oft used argument made by community banks is that credit unions compete intensely with and that any new policies designed to increase entry by credit unions comes at their detriment,” Walloga says in introducing the study.
“At the center of this issue is the income tax exemption status held by credit unions. The bankers often argue that tax exemptions create an unfair competitive environment and lead to negative consequences for community banks. Additionally, the continued entry of credit unions by acquisition signals that their growth in the future is likely.”
According to Walloga’s findings:
• Although the study finds large credit unions can compete as intensely as large banks with community banks, only 18.8% of large credit unions crowd out community banks. Walloga suggests most large credit unions exist to offer unique products and services and do not mainly exist to replace community banks.
• The study suggests policymakers should be aware that enacting policies that encourage the entry of credit unions into local markets may not lead to particularly adverse outcomes for community banks, but to offer more variety for consumers.
• Of the largest credit unions, 72.2% represent an additional financial services and product provider that is not replacing a community bank within the sample market.
“The key findings of this study suggest that product differentiation may insulate big banks and community banks from competition from credit unions as a whole,” according to Walloga. “The competitive effect of the first and additional credit union entrant on community bank profit is negative, but nearly 10 times as small as the effects of the big bank entrant and statistically insignificant.”
He added, however, estimates for the presence of small and large credit unions “reveals that large credit unions may compete similarly to large banks with community banks, while the competitive effect of small credit unions is statistically insignificant. This suggests that policy makers should consider relevant competitive effects of large credit unions as similar to large banks. But results from the counterfactual reveal that product differentiation may insulate community bank profits from large credit union competition.”