Are Credit Unions Too Small?

U.S. credit unions serve 93 million members, hold 10 percent of U.S. savings deposits, and make 13.2 percent of all non-revolving consumer loans. Since 1985, the share of U.S. depository institution assets held by credit unions has nearly doubled, and the average (inflation-adjusted) size of credit unions has increased over 600 percent. We use a non-parametric local-linear estimator to estimate a cost relationship for credit unions and derive estimates of ray-scale and expansion-path scale economies. We employ a dimension-reduction technique to reduce estimation error, and bootstrap methods for inference. We find substantial evidence of increasing returns to scale across the range of sizes observed among credit unions, suggesting that further industry consolidation and growth in the average size of credit unions are likely. ∗Wheelock: Research Department, Federal Reserve Bank of St. Louis, P.O. Box 442, St. Louis, MO 63166–0442; [email protected]. Wilson: The John E. Walker Department of Economics, 222 Sirrine Hall, Clemson University, Clemson, South Carolina 29634–1309, USA; email [email protected]. This research was conducted while Wilson was a visiting scholar in the Research Department of the Federal Reserve Bank of St. Louis. The authors thank an anonymous referee for comments on a prior draft of this paper, and Craig Aubuchon and Heidi Beyer for research assistance. The authors also thank the CyberInfrastructure Technology Integration group at Clemson University for providing the Condor Pool for use in computations; they are especially grateful to Sebastien Goasguen for technical assistance. The views expressed in this paper do not necessarily reflect official positions of the Federal Reserve Bank of St. Louis or the Federal Reserve System. JEL classification nos.: C12, C13, C14, L11, G21.