Despite Major Differences Commercial Banks and Credit Unions Fare Equally in the 1990’s

Banks and credit unions are equal performers says a quantitative analysis comparing the performance and profitability of commercial banks — those that accept deposits and have the ability to make commercial loans — and credit unions in the 1990’s. Raymond H. Lopez and Surendra K. Kaushik, professors of finance at Pace University’s Lubin School of Business, find that banks are not at a competitive disadvantage despite their tax-paying status. Credit unions, on the other hand, maintain a non-taxable status and have a limited client base, and perform on par with behemoth banks. Some of these findings are explained by the new competitive realities of deregulated financial markets.

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NEW YORK — Banks and credit unions are equal performers says a
quantitative analysis comparing the performance and profitability of
commercial banks — those that accept deposits and have the ability to
make commercial loans — and credit unions in the 1990’s. Raymond H.
Lopez and Surendra K. Kaushik, professors of finance at Pace
University’s Lubin School of Business, find that banks are not at a
competitive disadvantage despite their tax-paying status. Credit
unions, on the other hand, maintain a non-taxable status and have a
limited client base, and perform on par with behemoth banks. Some of
these findings are explained by the new competitive realities of
deregulated financial markets.
Looking at both loan and securities portfolios of the two industries,
Lopez and Kaushik conclude that the large size of the commercial banking
industry does not necessarily generate higher profitability.
Demonstrating a significant comeback from the 1980’s, commercial banking
has visibly recovered from some of its crises, and is performing well
across the board. According to Lopez, “Credit unions — even with their
circumscribed client base and potential volatility — have continued
since the Eighties to steadily perform well.” Data show a narrowing of
spreads between the two industries in most areas of financial
performance. Key findings include:
* Although credit unions operate under more restrictive guidelines
than commercial banks, their loan portfolios have grown more rapidly
than banks in the 1990’s and their net interest margins have remained
above banks.

* Non-interest income margins for credit unions, although still lagging
behind banks,
are rising, as are non-interest expense margins. In contrast, at
commercial banks, these expenses have been declining slightly since
1993. With the unprecedented consolidation taking place in the banking
industry through mergers and acquisitions, within the next decade,
parity could be reached between the two.

* Credit union growth rates of equity capital have ranged from 11
percent in 1994 to 20 percent in 1992. These growth rates have mostly
been 50 percent higher than bank equity growth.

Lopez and Kaushik further point out that product and service diversity
between these two industries is not converging. Whereas commercial
banks are branching out into many areas of the financial services
marketplace that were previously unavailable to them, credit unions
remain primarily domestic institutions and highly regional in their
operating composition.
Pace University is a comprehensive, independent University with
campuses in New York City and Westchester County. Nearly 14,000
students are enrolled in undergraduate and graduate degree programs in
the Dyson College of Arts and Sciences, Lubin School of Business, School
of Computer Science and Information Systems, School of Education, School
of Law and Lienhard School of Nursing.

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