One of the main banking stories of the past 25 years has been the dramatic growth of large banks. Less well known is that credit unions have been expanding their market share during this time, too, especially after membership criteria were relaxed in 1998. While credit unions have been increasing their market share, small banks’ market share has declined. And now, legal changes that took effect in January 2017 expanded credit unions’ capacity to make loans to commercial customers, raising further concern among small banks that they might lose ground to credit unions.

As nonprofit institutions, credit unions are largely tax-exempt, a status that for-profit banks argue constitutes an unfair competitive advantage. Credit unions respond that their member-owned, cooperative structure allows them to provide unique financial services that would otherwise not be available, and hence their tax-exempt status is warranted. Taking no stance in this debate, we instead seek to shed light on some central questions: Do small banks and credit unions serve separate clienteles, or do they compete in the same markets with essentially indistinguishable products? What exactly do the new regulations change? What evidence can we find that regulatory changes for credit unions might take market share away from small banks?

This article appeared in the First Quarter 2017 edition of Economic Insights. Download and read the full issue.