Jun 11 2014

Only Up: Regulatory Burden and Its Effects on Credit Unions


Regulations for financial institutions can be taxing and burdensome, especially for smaller credit unions. Aside from the operational and strategic limitations, there is also an economic cost associated with increased regulatory activity.

Giovanni Ferri
Professor of Economics
LUMSA University, Rome, Italy
Panu Kalmi
Professor of Economics
University of Vaasa, Finland
Report Number 331

Executive Summary

Well-functioning regulation is necessary for the working of modern financial organizations and markets. However, legislative regulation can be particularly taxing and burdensome for smaller credit unions. The experiences of credit unions in Canada and the United States are slightly different. In Canada, credit unions in the largest quartile bear one-fifth of the comparable costs of those in the smallest quartile. In the United States, those in the largest quartile bear just one-tenth of the regulatory compliance costs borne by those in the smallest quartile. Regulation related costs have led many small credit unions to consider mergers. In fact, regulatory motivations are cited as factors in more than 50% of all past mergers and often in prospective mergers.

What is the research about?

Many US credit unions feel that regulators are trying to micromanage them, often in ways that seem inconsistent with the credit union mission. This report examines the increased regulatory burden for credit unions in the United States and Canada based on a 2013 survey. It includes quantitative estimates of regulatory compliance costs and the relationship between credit union size and compliance costs.

Many of the surveyed credit unions in the report do not expect that the introduction of new regulations will level off in the future. Despite the competitive disadvantage smaller credit unions experience with increased regulatory activity, they are committed to the cooperative business model. Only a handful of respondents are even thinking of converting into a commercial bank.

What are the credit union implications?

Rising regulation has demonstrable economic costs. Between 2007 and 2012 the number of full-time equivalents (FTEs) devoted to regulatory compliance increased on average by 70% in the United States—over four times as much as the increase in average number of employees (17%)—and by 94% in Canada—more than three times the increase in average number of employees (29%). This report explores the consequences of the rising tide.

This report is sponsored by Credit Union Central of Canada.