FEDERAL WAY, Wash. – All major claims made by critics of credit unions about an uneven playing field are unsubstantiated, according to an economic analysis released Friday. The study also found there is "no evidence that state and federal tax policies give credit unions unfair competitive advantages over banks."
"Credit Unions vs. Banks: The Myth of the Uneven Playing Field" is authored by ECONorthwest's Randall Pozdena, managing director and senior economist, and Michael Wilkerson, senior economist. The report was commissioned by the Northwest Credit Union Association.
The independent economic analysis was commissioned after bank trade associations in Oregon and the U.S. lobbied to eliminate not-for-profit credit unions' tax-exempt status in the state and in Congress.
"In our view," wrote the authors, the difference in organizational forms of credit unions and commercial banks, the asymmetry of powers enjoyed by the respective institutions, and the trends in credit union development are not consistent with the claim that credit unions enjoy unfair competitive advantages."
In the study, they reviewed the theory and historical performance of credit unions then statistically tested where there is a comparative performance difference based on the adoption of the community common bond membership criterion, or credit unions' exemption from corporate income taxation.
"All the major claims made by critics of the credit union industry are unsubstantiated," said the report. Contrary to the claims of banks, the study concluded:
• Credit unions' share of consumer deposits has not been growing for more than a decade;
• There is no evidence that either the community bond designation or corporate tax policy has had any positive statistical effect on deposit or institution share trends;
• Credit unions' growth and consolidation is mainly a response to the risk and inefficiency of reduced scale revealed by credit union liquidations in the 1970s and 1980s--not a consequence of changes in common bond designation or tax policy;
• Untaxed credit union net income is not going to higher credit union labor compensation;
• Consistent with the theory of cooperative banking, credit unions continue to provide superior deposit and loan rates, in addition to greater protection from portfolio risk relative to outside-ownership commercial banks;
• The channeling of free cash flow to savers and borrowers means that free cash flow does not go untaxed;
• Credit unions have not abandoned small account holders.
The authors said their "review of the theory, data and formal statistical analysis does not offer support for disturbing the tax policy and provides room for charter enhancements of credit unions. Indeed, to disturb the tax policy and limit the charter evolution of the not-for-profit cooperative may eliminate a small, but important class of institutions that theory says should be able to better manage risk and provide benefits to consumers than investor-owned commercial banks under the right operating conditions."
The full report is available here.