Introduction to Bank Regulation: Credit Unions and Community Banks: A Comparison

Introduction to Bank Regulation: Credit Unions and Community Banks: A Comparison

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December 14, 2018
Introduction to Bank Regulation: Credit Unions and
Community Banks: A Comparison
Depository institutions—specifically, credit unions and
Consolidation trends. Figure 1 presents the total number
banks—provide financial services to savers (via accepting
and total asset holdings of U.S. community banks (referred
checking and savings deposits) and borrowers (via
to as “small banks” in Figure 1) and credit unions from
providing consumer and business loans). A credit union is a
2004 to 2017.
membership-owned cooperative organization established on
the basis of its common bond (occupation, association, or
Figure 1. Credit Unions and Community Banks:
geographical definition), specified by its federal or state
Number of Firms and Total Assets
charter. Credit unions face statutory restrictions on their
2004-2017
customer base and commercial lending activities because,
as specified in the Federal Credit Union Act of 1934 (FCU
Act; 48 Stat.1216), they are formed for the purpose of
promoting thrift among their members and providing them
with a low-cost source of credit. Conversely, a bank is a
for-profit institution owned by equity holders who may not
necessarily be customers (depositors or borrowers).
Although it must also obtain a state or federal charter, a
bank does not have similar membership and commercial
lending restrictions. Credit unions and banks—particularly
community banks—still provide similar financial services
as a result of financial market evolution over the last several
decades. This In Focus highlights selected similarities and
differences between credit unions and community banks for
Congress as it deliberates regulatory policy issues that
pertain to their roles as financial service providers. For the
purposes of this In Focus, community banks will be defined
as those with $1 billion or less in assets.
Selected Similarities
Business models. The business models of credit unions and
community banks share some similarities, thus making
them competitors. For example, community banks and
credit unions both engage in relationship banking, which
involves developing close familiarity with their customer
bases. Because community banks frequently provide

Source: CRS, using data provided by the FDIC and the NCUA.
financial services within a circumscribed geographical area,
the development of close relationships with customers helps
Figure 1 illustrates the following trends over 2004 to 2017.
them understand local and idiosyncratic lending risks.
Similarly, developing close relationships with customers
 Community banks declined in numbers (blue bars), from
helps credit unions tailor financial product offerings and
8,379 to 4,920, and in total aggregate assets, from $6.47
services to their defined memberships. For this reason,
trillion to $1.38 trillion.
small depository firms have been able to provide financial
services (e.g., small-dollar personal loans and small
 The total number of credit unions (yellow bars) declined
business loans, including microloans to businesses with five
from 9,014 to 5,573. The number of small credit unions
or fewer employees) to some niche markets with cost
with total assets below $1 billion declined from 8,915 to
advantages in underwriting and servicing.
5,176 (not depicted separately in Figure 1).
Community banks and credit unions rely primarily on
 The number of credit unions with $1 billion or more in
borrowings from their depositors (and less frequently from
total assets increased from 99 to 287. By 2017, large
the short-term financial markets) to obtain the funds
credit unions held 63.5% of aggregate assets in the
necessary to provide customer loans. (The Federal Deposit
credit union system.
Insurance Corporation [FDIC] insures bank deposits. The
National Credit Union Administration [NCUA] insures
credit union share deposits, analogous to bank deposits.)
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Introduction to Bank Regulation: Credit Unions and Community Banks: A Comparison
The increase in aggregate assets of the credit union system
treatment of a small credit union that offers a very limited
(orange line) exceeded the amount of aggregate assets held
range of financial services is likely to have a negligible
by small community banks by the end of 2016, an outcome
impact on the activities of a nearby community bank.
associated with the aggregate asset growth of large credit
Conversely, a large credit union that serves a regional or
unions (red line). Hence, lending and membership growth
national market may arguably benefit from the difference in
rates are higher for the larger credit unions, which is similar
tax treatment relative to (community) banks of similar sizes
to trends observed in the banking industry.
that serve similar markets.
Selected Differences
Fair lending requirements. Congress enacted the
Business lending activities. Unlike community banks, credit
Community Reinvestment Act of 1977 (CRA; P.L. 95-128)
unions have a statutory cap on their business lending
in reaction to perceptions that banks were not sufficiently
activities. The Credit Union Membership Access Act of
addressing the credit needs of low- and moderate-income
1998 (CUMAA; P.L. 105-219) codified the definition of
(LMI) neighborhoods. The CRA requires that federal
credit union member business loan (MBL) to be any loan,
banking regulatory agencies evaluate how regulated
line of credit, or letter of credit used for an agricultural
institutions meet the credit needs of their entire
purpose or for a commercial, corporate, or other business
communities. No statutorily set rules are imposed. Banking
investment property or venture. The CUMAA limited the
institutions, however, typically receive CRA credits after
aggregate amount of outstanding business loans to one
providing LMI loans (subject to existing federal prudential
member or group of associated members to a maximum of
regulations for safety and soundness) or other financial
15% of the credit union’s net worth or $100,000, whichever
retail services in their communities. Because banks may
is greater. The CUMAA limited the aggregate amount of
accept deposits from all individuals in a community, CRA
MBLs made by a credit union to the lesser of 1.75 times the
provides them with a reciprocal obligation to meet credit
credit union’s actual net worth or 1.75 times the minimum
needs, as much as possible, of their communities at large.
net worth amount required to be well-capitalized under the
CRA credits are useful to banks when they apply for
prompt corrective action supervisory framework. (P.L. 115-
charters, branches, mergers, acquisitions, and other
174 amended the FCU Act to exclude loans made on any 1-
applications that require approval from their regulators. By
to-4-unit residential dwelling from counting toward a credit
contrast, credit unions are not subject to the CRA. Credit
union’s MBL cap.) The CUMAA authorized an exception
unions are not awarded credits that would allow them to
to the MBL limit for credit unions that either have low-
expand beyond the common bonds defined in their
income designations, participate in the Community
membership charters. Instead, a credit union may add an
Development Financial Institutions program, or are
underserved area to its field of membership and provide
chartered specifically for the purpose of making business
financial services in that designated area.
loans. Because credit unions with assets under $10 million
generally lack the resources and expertise to become more
Minority ownership. As of December 31, 2017, the FDIC
substantial MBL providers, larger credit unions are more
reported 155 banking institutions with minority ownership;
likely to compete with community banks for business loans.
128 of them had assets of $1 billion or less (and thus would
be considered community banks in this In Focus). For these
Tax treatment. Depositors in banks and credit unions pay
firms, a majority of the equity shares are held by minorities.
taxes on the interest received on their deposit (e.g.,
Bank customers, however, are not required to be equity
checking, savings) accounts. Although the interest received
owners. The NCUA reported supervising 580 credit unions
by share deposit holders is referred to as “dividends”
designated as minority depository institutions as of June 30,
because credit unions are financial cooperatives, share
2017. As previously discussed, credit unions are owned by
depositors are analogous to bank depositors (as opposed to
their memberships (analogous to customers). Thus, the
bank equity shareholders).
membership composition of minority credit unions consists
primarily of minorities.
At the entity level, credit unions are exempt from federal
income tax because they are not-for-profit financial
CRS Resources
cooperatives. Some credit unions may pay unrelated
CRS Report R43167, Policy Issues Related to Credit Union
business income tax (UBIT) for tax-exempt organizations.
Lending, by Darryl E. Getter.
For example, if a credit union were to provide financial
services (e.g., check-cashing) to non-members, any revenue
CRS Report R44439, Taxation of Credit Unions: In Brief,
generated from those activities would be subject to UBIT.
by Donald J. Marples.
By contrast, community banks are for-profit financial
institutions that generally pay taxes at the corporate level.
CRS Report R43661, The Effectiveness of the Community
Reinvestment Act, by Darryl E. Getter.
Whether credit unions’ exemption from federal income tax
affords them a competitive advantage relative to
Darryl E. Getter, Specialist in Financial Economics
community banks must be determined on a case-by-case
basis, taking into account the nature of competition and
IF11048
market size. For example, the difference in the tax

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Introduction to Bank Regulation: Credit Unions and Community Banks: A Comparison

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