Financial intermediation and the theory of the firm : an economic growth model of federal credit unions

Abstract

The purpose of this investigation is to construct and empirically test a microeconomic growth model for the individual federal credit union. Growth is defined as the single-period percentage change in federal credit union share deposits. The model is comprised of two stages. The first stage incorporates the various governmental regulatory constraints placed on the individual credit union. The primary outcome is a proxy for the degree of non-price competition within the individual credit union. The second stage consists of a subset of the constraints in stage one along with the development of a managerial utility maximizing model composed of earnings and growth. So as to empirically test the hypotheses derived from microeconomic growth model, independent large sample data for the time periods 1976 and 1977 were statistically analyzed. The sampling frame consisted of all federal credit unions. In conjunction with the empirical investigation of the growth model, detailed analyses of federal credit union economies of scale and the demand for credit union shares were performed. The economies of scale results were disaggregated by firm asset size. In order to model growth of the individual credit union, three hypotheses are of major importance. First, it is hypothesized that a single-period managerial utility maximizing model composed of earnings and current growth is relevant to track individual credit union behavior. Second, it is hypothesized that based on the model, non-price competitive behavior is detrimental to growth in the individual credit union. Finally, it is hypothesized that operational inefficiency as reflected by diseconomies of scale results in a negative impact on credit union growth. The empirical results of this study tend to support the above as well as the conclusion that the key determinants of individual credit union growth are lending policy, operational efficiencies, and credit union member nonpecuniary benefits.