Over the past 24 years, when banks were pulling back on lending to businesses, it appears credit unions were quietly and consistently stepping in to fill the void.
In a rare report on credit unions from the Small Business Administration, "The Growing Impact of Credit Unions on Small Business Lending," data from the agency's Office of Advocacy looked at how much business lending at credit unions responded to a decrease in bank business lending. The report also examined the effects of changes in bank business lending on business lending by credit unions.
"We found that small business loans at credit unions tended to partially offset declines in business loans at banks," wrote James Wilcox, author of the report and professor of financial institutions at the Haas School of Business at the University of California-Berkeley. "Credit unions' increasing share of SBLs and the estimated offsets suggest that [they] are increasingly important sources of SBLs as a longer run development and in response to fluctuations in SBLs at banks."
Wilcox acknowledged that credit unions as a source of small business loans have not previously been studied in depth. However, because SBLs under $1 million within the industry have risen substantially over the last decade, more attention was warranted.
Looking at annual state level data and national aggregate data from credit union and bank Call Report data, the report revealed some differences between the two. At the national level, the estimates show that credit unions changed their business lending in the same direction banks did; that is, when banks increased or decreased their business lending, credit unions did the same, according to the study.
At the state level, credit union business lending served as a partial offset to changes in bank business lending. That is, as banks reduced their business lending, firms found that they could obtain loans from credit unions.
Wilcox estimated that credit unions offset about four cents per dollar of fluctuations in SBLs at
banks and about seven cents per dollar of fluctuations in all business loans at banks.
"The 'four-cent solution' and the 'seven-cent solution' are far from being complete, dollar-for-dollar offsets," Wilcox explained. "Offsets of this size are considerably larger than the percentage of all business loans that are at credit unions, but they are close to the percentages of SBLs and of assets that are at credit unions."
Over the past two decades, credit unions' products and services have increasingly caught up to those offered by banks. Business lending has expanded in part due to "loosening regulatory restrictions on their fields of membership," and the growth of potential membership bases such through communities, states and entire industries, according to Wilcox citing previous research.
"With their broader fields of membership, many credit unions now have actual and potential memberships that include not only payroll employees, but also many who own small businesses and thus seek business loans," Wilcox said.
While credit unions have devoted more of their assets to small business loans since the 1980s, banks have gone in the other direction, according to the report. The growth rose gently during the 1990s and much more rapidly through 2010, Wilcox noted. In contrast, banks devoted a fairly steady share of their assets to SBLs until the 2000s, when their share fell rather substantially, he added.
Even though credit union SBL growth continued for a decade, the figures were still not a match for bank business lending activity. From 1994 to 2010, credit union SBLs grew from "negligible
amounts" to $37 billion in 2010. Bank loans went from nearly $400 billion to more than $600 billion.
The recession of 2001 and the nation's financial crisis in 2007 shifted the playing field. At banks, SBLs declined by about 10% while credit unions continued to grow their portfolios, according to Wilcox. The average annual growth rate at credit unions was 16% compared to 3% at banks. For several years after the 2001 recession, credit unions SBL growth exceeded 20%.
Another factor for the growth had to do with bank consolidation in local markets. Credit unions tended to initiate business loan programs where banks had consolidated more. However, it is still undetermined if bank mergers involving smaller community banks had an impact on local small business formation, according to the report. Over the longer term, the report noted that small banks would go on to perform better than their bigger counterparts but not enough to show that one had an advantage or disadvantage over each other.
"Short-term and long-term changes in the market for small business loans may provide an opening for credit unions," Wilcox said. "In the short term, anecdotal evidence suggests that, due to banks' lending stringency during the financial crisis, small businesses increasingly turned to credit unions for credit."
Looking ahead, Wilcox hypothesized that SBLs at credit unions will be impacted more by those from community banks rather than larger banks. The plan is to continue to look at empirical data
over time and across states when business loans at banks decreased. Evidence about whether credit unions' partial offsets of SBL reductions at banks were larger when the cooperatives offered more loans will also be looked at.
"Our results are pertinent to public policy. If credit unions can appreciably and increasingly offset fluctuations in banks' SBLs, potential small business borrowers should be made aware of this alternative source of loans," Wilcox said. "In addition, regulators might consider the extent to which credit unions could otherwise offset fluctuations in business loans at banks when setting ceilings on business loans at credit unions. And small businesses might face better loan terms and availability if more credit unions recognized more opportunities for more SBLs."
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