May 07 2012

Commercial Lending During the Crisis: Credit Unions Vs. Banks

At a time when the economy needs kindling from any corner, credit unions’ stable commercial lending history shows they may be a helpful source.

This report, from David Smith, an economist at Pepperdine University’s Graziadio School of Business and Management, seeks to quantify the performance of credit union commercial lending at a time when credit unions seek to widen their access to the business lending market. If the economy needs as much kindling as possible, shouldn’t credit unions be able to help? Opponents of the loosened standards argue that increasing credit unions’ ability to lend to businesses goes against their historical mandate and should threaten their tax-exempt status, arguments that are beyond the scope of this report. What this research does address is the argument, echoed as recently as June 2011, that “business lending is risky and raises serious safety and soundness concerns” (Wilson 2011).

This study builds on previous work by Smith and Stephen Woodbury from 2010, Withstanding a Financial Firestorm: Credit Unions vs. Banks (Madison, WI: Filene Research Institute). In it, the authors show that credit unions are surprisingly resilient to the downside of the business cycle, especially compared with commercial banks. According to that study, credit unions’ aggregate loan portfolios appear to be about 25% less sensitive to macroeconomic shocks than those of banks.

This report follows a similar methodology to examine business lending, a topic that has seen far less comparative research. Starting with high-level trends in lending, the analysis goes on to compare commercial lending delinquency and charge-off data from banks and credit unions, with special attention paid to how the two portfolios compare during unemployment spikes in the business cycle.

David Smith
David Smith
Associate Professor of Economics
Pepperdine University
Report Number 268

Executive Summary

My long stint as a mediocre Boy Scout taught me a lot of painful trivia: Apply sunscreen when trekking above 7,000 feet, sleeping bags rated for 40 degrees are virtually useless at 10, and “moon boot” is definitely not synonymous with “hiking boot.” But compensating for the painful moments were the handful of practical lessons that forestalled more painful lessons. Among them: A bowline is the best knot around, and you can’t start a raging campfire without slivers and clumps of kindling. A match (even one abetted by a generous splash of lighter fluid) just won’t light a dry log.

The US economy is struggling to catch fire after years of recession and slow growth. One of the essential components of economic kindling, business lending, is simply hard to find. An early 2012 report from the National Federation of Independent Business (NFIB) shows the “availability of loans” for small businesses as only now approach-ing 2008 levels, and the number of its survey respondents expecting credit conditions to improve during the next three months has been stagnant for more than a year (Dunkelberg and Wade 2012). The Federal Reserve’s January 2012 survey of senior bank loan officers shows that while credit is slowly easing, it is still hardest to come by for small firms (Federal Reserve Board 2012). Kindling needed.