WASHINGTON and BERKELEY, Calif. (9/16/11)--A new independent report from the Small Business Administration (SBA) confirms that credit unions' member business lending (MBL) portfolios grew while banks' small business lending (SBL) portfolios shrank during the past two decades and especially since the financial crisis that began in 2007. The report, "The Increasing Importance of Credit Unions in Small Business Lending," is authored by James A. Wilcox of the Haas School of Business at the University of California-Berkeley and was released by the SBA's Office of Advocacy. "Credit unions devoted increasingly important shares of their assets to SBLs since the 1980s. Strikingly, over the same period, banks did the opposite," wrote Wilcox in the report. "SBLs as a share of credit union assets rose gently during the 1990s and increased much more rapidly through 2010. In contrast, banks devoted a fairly steady share of their assets to SBLs until the 2000s, when the share fell substantially." In another view, the report maintained, "SBLs at banks slowed somewhat during and after the 2001 recession. Moreover, during much of the 2000s, SBLs at banks grew at lackluster rates, especially compared with the 1990s. During and after the recession of 2007-2009, SLBs at banks actually shrank, and considerably so in 2010. "In contrast, SBLs at credit unions grew faster that at banks from 1995 to 2010, with an average annual growth rate of 16% compared with 3% at banks. Furthermore, the growth of SBLs at credit unions during and after the 2001 recession continued its double-digit pace, exceeding 20% annually for several years into the 2000s." The report said growth rates of SBLs at credit unions "tended to be highest when the growth rates at banks were at historically low levels. Of course, during the crisis that enveloped the U.S. credit markets after 2007, growth rates of SBLs declined at both credit unions and banks. While growth rates of SBLs at credit unions slowed during the financial crisis and ensuring slow recovery, those growth rates remained remarkedly positive, far above those of banks, and were actually higher than those of banks at almost all points during this extended period." Part of the differential resulted in the fact that the business loan market was new to some credit unions. "Nonetheless, even during the financial crisis, the gap between annual growth rates of SBLs at credit unions and at banks continued at well over 10%," Wilcox said. Over shorter periods if the supply of business loans at banks were disrupted, "the availability of SBLs at credit unions might well be of importance to small businesses," said the report. "Indeed, because credit unions in the aggregate are relatively new to SBLs, the importance of credit unions as an alternative to bank SBLs may be greater than the amounts of SBLs at credit unions relative to those at banks might suggest," said the report. Other findings:
* SBLs at credit unions tended to partially offset declines in business loans at banks. Credit unions offset about four cents per dollar of fluctuations in business loans at banks and seven cents per dollar of fluctuations in all business loans at banks. * Credit unions offset more of the fluctuations in SBLs at small banks than at large banks, and they offset more of the fluctuations in SBLs than in larger business loans at banks. * The developments that boosted SBLs at credit unions tended to reduce business loans at banks. The offset was about 20 cents per dollar of additional SBLs at credit unions. That reduction in business loans at banks implies that a $1 increase in the supply of SBLs by credit unions would lead to a net increase in business loans of 80 cents.
The report's conclusion: "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." It also noted, "credit unions perhaps should be included as alternative suppliers of business loans when regulators assess the effects on market concentration and competition of bank mergers. 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." The Credit Union National Association (CUNA), state-level associations and credit unions are pressing Congress to pass bills that would enable credit unions to make more MBLs by lifting their MBL cap to 27.5% of assets from the current 12.25% of assets. Doing so would enable credit unions to infuse $13 billion into the economy in small business loans and help create 140,000 jobs the first year--without costing taxpayers. CUNA also is encouraging the Obama administration to include credit unions as a source of MBLs in his jobs package.