Credit Union Mergers: Efficiencies and Benefits

Abstract

The tide of financial sector mergers has ebbed and flowed. Over the past few decades, thousands of banks merged. The common rationale is that larger banks have lower operating costs—that is, they are more efficient. Many studies have analyzed whether bank costs, revenue, stock market valuation, and other measures improve after mergers (e.g., Berger 1998, Kwan and Wilcox 2002). The evidence for improvement is not very compelling. Credit unions have grown steadily over recent decades. In 1969, when their number peaked at 23,866, credit union assets totaled $16 billion, only 3% of the assets of commercial banks and 1.6% of GDP. Since 1970, there have been nearly 13,000 credit union mergers. As the number of credit unions declined, so did the number of annual mergers. Nonetheless, the annual percentage of credit unions that merged was remarkably steady, ranging from 2.5% to 3.5% in all but three years since 1984. By 2010, the remaining 7,491 credit unions had $927 billion in assets, equal to 7.6% of bank assets and 6.3% of GDP. In this Economic Letter, we examine credit union costs and revenues in the five years following mergers that took place between 1984 and 2009 (see Dopico and Wilcox 2009 and 2010 for more detailed data and analysis). Credit unions are financial cooperatives with no outstanding stock. Rather, they are “owned” by their members, who are also their borrowers and depositors. This structure presumably leads to different practices and performance goals than those of banks. Credit union “member-owners” may judge effects of mergers on noninterest expenses and on interest income and expenses differently than do bank shareholders. For example, a bank might merge to reduce noninterest expenses and thereby raise net earnings. By contrast, a credit union might use merger-related cost savings to offer its members lower rates of interest on loans and higher rates on deposits. We discuss here three measures of credit union performance: interest income, interest expense, and noninterest expense, all measured as a percentage of assets. We focus primarily on operating costs, which are measured as noninterest expenses, including employee compensation, facilities management, equipment, and similar outlays. We distinguish merger effects from the broader forces that affected credit unions generally. Therefore, we analyze changes in post-merger performance relative to changes over the same periods at other, similarly sized credit unions that did not merge. Thus, if a credit union’s