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Cottage Industry Credit unions may resemble a cot tage industry, in view of their gen erally small size and limited range of operations, but they deserve closer attention because of the competitive gains they have recent ly achieved. Indeed, they account ed for practically the entire growth of consumer instalment credit in 1975, when commercial banks and finance companies sharply reduced their own activities. Moreover, if financial-reform legislation had not been sidetracked in Congress, they could probably have counted on even faster growth because of the broadened range of lending pow ers they would have gained under such legislation. After several decades of rapid growth, credit unions now account for 15.7 percent of the nation's outstanding instalment credit—up from 4.0 percent in 1950. Within the 1970-75 period alone, the number of credit-union accounts increased by a third and savings deposits more than doubled to $33.0 billion. This growth took place through the expansion of existing institutions, since there was no increase in the number of credit unions (23,000) during this period. Growth industry This impressive performance re flects the fact that credit unions withstood the dangers of disin termediation better than much larger institutions during the 1973 74 period. In 1974, for example, credit union deposits increased 12.3 percent, compared with gains of only 6.6 percent for bank savings deposits and 7.0 percent for savings-and-loan deposits. During that period of high interest rates, credit unions—paying up to 7 per cent on savings accounts—were better able to withstand the com petitive attractiveness of high mar ket rates than were other financial institutions, whose savings rates were limited by Regulation Q rate ceilings. Credit unions could pay such high rates because they gener ally make only short-term consum er loans with relatively high rates of return—unlike other thrift institu tions, which still hold substantial portfolios of older mortgages made at low interest rates in earlier (non inflationary) periods. Several other factors have helped account for the continued growth of credit-union deposits, regardless of the level of interest rates. Most credit unions are organized for the employees of a particular firm and hence are located near their work place, making it convenient for them to save. Also, their accounts are generally smaller—and less interest sensitive—than accounts at other thrift institutions. Moreover, many credit-union members make their deposits through payroll de ductions, which they generally change infrequently or not at all. As funds continued to pour in dur ing the 1975 recession-recovery year, credit unions were able to make a strong contribution to their principal field of activity, consumer credit—for example, with a 25(continued on page 2) Opinions expressed in this newsletter do not necessarily reflect the views of the management of the Federal Reserve Bank of San Francisco, nor of the Board of Governors of the Federal Reserve System. percent increase in extensions of auto credit. Their outstanding in stalment credit increased 15 per cent over the year to $25.4 billion, so that they accounted for 87 per cent of the year's entire $3.7-billion increase in that lending category. In contrast, credit unions accounted for only 13 percent of the much larger instalment-credit increase of $20.8 billion in the 1973 boom year. The difference reflected not only the strengthening performance of credit unions, but also the much weaker performance of the domi nant consumer lenders, commer cial banks. The latter sharply re duced their outstanding auto loans in both 1974 and 1975, as well as their mobile-home loans in 1975, and meanwhile slowed down their lending pace in other categories. Cottage industry Despite the recent upsurge in growth, there is still a cottageindustry aura to the credit-union movement. Although the require ments for chartering vary from state to state, almost any group of seven people with a common bond (em ployment or otherwise) and a $5 to $25 filing fee stands a good chance of obtaining a certificate. (Credit 2 unions have been organized by groups as diverse as felt-hat makers and Bay Area feminists.) But along with ease of entry into the industry goes a relative lack of managerial sophistication, since volunteers ac count for about 80 percent of all credit-union staffers. However, larger credit unions—those with assets of $5 million and over— employ about15 full-time employ ees on the average. The 31 million CU shareholders seem to save a relatively stable pro portion of their income, since their average savings account rose from $681 to $934 over the 1970-74 period—just matching the 37percent increase in per capita in come over that period. As borrow ers, they tend to pay higher rates than bank customers but lower rates than finance-company bor rowers. They tend to be good risks because of their common member ship bond but also because of their above-average incomes, which av eraged $17,000 in 1975. The largest concentration of shareholders is in the 30-39 age group—a span in the life cycle which normally borrows heavily for consumer durable goods. Credit-union membership is closely correlated with union membership—and female union members are more likely to be CU members than are male union members. Circumscribed industry? The credit-union movement would like to broaden its range of opera tions, as it made clear in the debates over the shape of the 1976 financialreform legislation. It has argued for the establishment of a Central Li quidity Facility which would make low-interest advances to credit un ions; for the expansion of lending powers, such as longer-term loans and residential mortgages; and for the establishment of “ draft ac counts" with access to electronic funds-transfer systems. These draft accounts, like the S&L's NOW ac counts, would be tantamount to interest-bearing demand deposits. The tie-in to electronic payments systems, moreover, would allow CU's to participate in the growing trend toward automatic deposit of payroll checks and government ben efit checks, as well as other computer-based transactions. Critics argue that CU's should not have such broadened powers, some because of competitive reasons, but other because of a belief that new 3 operations of this scope are too costly and too complex for most credit unions to undertake. Creditunion spokesmen, understandably, argue differently, in light of the circumscribed nature of their pres ent operations. Those funds which are not used for consumer lending are invested in government securi ties, savings-and-loan shares and bank CD's, with investment assist ance provided by the Credit Union National Association (CUNA). Like other specialized lenders, CU's tend to believe that broadened powers would lead to larger, better balanced and more profitable oper ations. As recent data indicate, however, credit unions already play a crucial role, by helping to stabilize the flow of consumer credit when other major lenders move their funds elsewhere. This role could become even larger if other lenders decide to reduce their participation in this market, as a consequence of the increasingly costly paperwork asso ciated with new consumer legisla tion. In this event, credit unions might have all the consumer credit they can handle, and then some. Joan Walsh uoiSujqsBM • MBifl • uo§0JO • EpBA9|\| . oqepi HBM BH . B jU J 0 p | B 3 . BUOZUy o s s n s in n ic n j . s r a * } j | B 3 'O D S jD U B J J U B S ZSL ON HWU3d aivd S / c^ \S / r P © M p M fa > (Q [ 3D V lSO d sn HVW SSV13 JLSBIJ BANKING DATA—TWELFTH FEDERAL RESERVE DISTRICT (Dollar amounts in millions) Amount Outstanding 4/28/76 Change from 4/21/76 Loans (gross, adjusted) and investments* Loans (gross, adjusted)—total Security loans Commercial and industrial Real estate Consumer instalment U.S. Treasury securities Other securities Deposits (less cash items)—total* Demand deposits (adjusted) U.S. Government deposits Time deposits—total* States and political subdivisions Savings deposits Other time deposits! Large negotiable C D ’s 86,966 65,124 1,086 22,867 19,613 10,747 9,412 12,430 86,813 23,363 613 61,306 6,848 25,849 26,281 11,335 - 720 + 162 110 + 13 + 35 + 37 - 651 231 - 1,010 934 139 + 11 5 + 104 111 107 Weekly Averages of Daily Figures Week ended 4/28/76 Selected Assets and Liabilities Large Commercial Banks Member Bank Reserve Position Excess Reserves Borrowings Net free(+)/Net borrowed (-) Federal Funds—Seven Large Banks Interbank Federal fund transactions Net purchases (+)/Net sales (-) Transactions of U.S. security dealers Net loans (+)/Net borrowings (-) - 4 7 11 Change from year ago Dollar Percent + + + + + + + - Week ended 4/21/76 + + + + + + + + - 1,540 95 47 1,181 36 860 1,705 70 2,105 645 357 1,638 727 6,316 2,777 4,367 1.80 0.15 4.15 4.91 0.18 8.70 22.12 0.56 2.49 2.84 36.80 2.75 9.60 32.34 9.56 27.81 Comparable year-ago period 99 0 99 + 38 2 36 + 352 + 1,391 + 503 + 136 + - 279 288 "■Includes items not shown separately, individuals, partnerships and corporations. Editorial comments may be addressed to the editor (William Burke) or to the author. . . . Information on this and other publications can be obtained by calling or writing the Public Information Section, Federal Reserve Bank of San Francisco, P.O. Box 7702, San Francisco 94120. Phone (415) 544-2184. E>jSB|V
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