MADISON, Wis. (6/13/14)--Increased regulatory developments and the cost for credit unions to comply with them is driving the growing trend of credit union mergers, according to a new white paper from the Filene Research Institute.
"Only Up: Regulatory Burden and Its Effects on Credit Unions"--written by Giovanni Ferri, professor of economics, LUMSA University, Rome, and Panu Kalmi, professor of economics, University of Vaasa, Finland--considers the number of regulations imposed on U.S. and Canadian credit unions since the financial crisis.
The large financial institutions and their practice of "uninformed credit" led to a regulatory environment that does not take into account the "informed credit" and relationship banking used by credit unions, the report noted.
Regulation may be generating artificial economies of scale, thereby weakening the cooperative business model, the report noted, adding that there is a "very strong negative relationship between the size of a credit union and the relative intensity of its regulatory compliance costs."
Smaller credit unions with high compliance costs often cite regulatory concerns as a reason to merge, and more than 50% of past mergers indicated compliance stress factored into decision.
Rising costs are driven by the additional staff needed to maintain compliance. U.S. credit unions increased the numbers of full-time employees devoted to regulatory compliance by 70%--more than four times the increase in the average number of employees--between 2007 and 2012. Canadian credit unions also increased compliance staff by 94% in the same time frame.
The report concluded that the increased burden--especially the "one size fits all" approach--may result in credit unions being "fundamentally disadvantaged" or begin behaving like commercial banks.
For the full report, use the resource link.