Study Says Liberal CU FOM Policies Don't Affect Banks

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A new research study seeks to quantify the effects of field-of-membership regulations on the ability of banks to exercise pricing power in a market.

Not too surprisingly, the study notes that "liberalized field of membership (FOM) policies make it easier for consumers to access credit union services, and that restrictive policies make access more difficult."

But how does the ability to join a credit union affect competitors? In its new Filene study, the analysts seek to measure that effect by the degree of monopoly power of banks, and by rates on two types of loans in markets within the states studied. Effects on other financial institutions were measured by the credit union market share of deposits and by growth in the number of bank branches, are also examined.

The study, "Less-Restricted Fields of Membership for Credit Unions: Public Policy Implications," notes that 47 states offer a choice between a state and federal charter, and the associated degrees of regulations on membership eligibility. In the study, authors Robert M. Feinberg of American University, and William A. Kelly of the University of Wisconsin-Madison developed an index of FOM policy restrictions by reviewing state statutes, regulations, and information from credit union leagues.

Based on available data and the predominance of state and federal charters in each state, they selected a sample of 20 states that were then placed in three groups: those with FOM policies similar to federal policies, those with more restrictive policies, and those with more liberal policies. The policies were then correlated with their potential effects on consumers and on other financial institutions.

The authors said they found that FOM policies have negligible effects on the degree of bank monopoly power in local markets. They also found negligible association with rates on new auto loans. However, they also reported finding a significant association between FOM policies and unsecured (non-credit card) loan rates at banks. In markets in states with more liberal FOM policies these rates are lower. "This suggests that the power of banks to exercise their pricing power is limited by potential credit union entry into the market," the authors stated. "The result is that consumers benefit from more liberal FOM policies."

Feinberg and Kelly also said they found a modest correlation between more liberal FOM and credit union share of deposits, and that more liberal FOM policies are modestly correlated with the growth rate in bank branches. It appears that banks respond to actual or potential increases in competition by increased branching to make access more convenient to consumers.

"This report contributes significantly to our knowledge and understanding of the effects of field of membership regulation on consumer and competitive behavior," says Bob Hoel, Executive Director, Filene Research Institute. "The analysis demonstrates that more liberal field of membership policies benefit consumers without diminishing the ability of banks to provide competing services. We do not see much adverse effect on banks in loss of market share or any withdrawal from the market. In fact, we see an increased presence in the market from bank branches where field of membership policies are more liberal."

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