Credit Unions and the Common Bond

A distinguishing feature of credit unions is the legal requirement that members share a common bond. This organizing principle recently became the focus of national attention when the Supreme Court and the U.S. Congress took opposite sides in a controversy regarding the number of common bonds (fields of membership) that could coexist within a single credit union. In this article, a model of credit union formation and consolidation is developed and simulated to examine the effects of common-bond restrictions on the performance of credit unions. The performance measures are based on participation rates among potential members and the operating costs of credit unions. Using a semiparametric econometric model and a large dataset drawn from federally-chartered occupational credit unions in 1996, the authors find that, for a given number of potential members, credit unions with multiple-group charters have higher participation rates. They also find that, for a given number of members, the operating costs of multiple-group credit unions are higher. Average operating costs at large credit unions, however, decrease as the number of members increases. The authors also find that local deposit-market concentration is related to participation rates and operating costs of credit unions.