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The impact of differing operating environments on US Credit Union Performance, 1993-2001

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  • J. Colin Glass
  • Donal McKillop
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    Abstract

    Today US credit unions operate within a highly competitive financial market place. Set against this competitive operating environment, the present study employs stochastic frontier analysis to evaluate the performance of large credit unions (assets greater than $50 million) over the period 1993 to 2001. Although credit unions may share a common co-operative philosophy, differences between credit unions are also apparent across a range of operational, structural and locational characteristics (environmental conditions). The impact of these different environmental influences is modelled in two ways. One assumes that environmental factors affect the efficiency with which the production process is operated, while the second assumes that the environment affects the production process itself. Net and gross cost efficiency measures are obtained for both models, with the differences between these measures for a specific credit union being viewed as the impact that environmental variables have on the inefficiency of that credit union. In addition, if it is assumed that the main environmental factors are accounted for in the modelling, then a credit union's net efficiency measure may be interpreted as a measure of managerial performance when operating in equivalent environments. The analysis revealed that different environments (the age of the credit union; the potential for expansion within the existing common bond; whether the credit union has the option of expansion through the addition of select employee groups; whether the credit union is state or federally regulated; whether insurance is provided at state or federal level; as well as regional characteristics such as per capita income and the level of unemployment) account for much of the variability in cost efficiency between credit unions and once credit unions are placed in broadly equivalent operating environments only marginal differences are apparent in their managerial performance.

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    Bibliographic Info

    Article provided by Taylor & Francis Journals in its journal Applied Financial Economics.

    Volume (Year): 16 (2006)
    Issue (Month): 17 ()
    Pages: 1285-1300

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    Handle: RePEc:taf:apfiec:v:16:y:2006:i:17:p:1285-1300

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    References

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    1. Janice Caudill & Steven Caudill & Daniel Gropper, 2001. "Charter status, ownership type and efficiency in the thrift industry," Applied Financial Economics, Taylor & Francis Journals, vol. 11(2), pages 147-155.
    2. Esho, Neil, 2001. "The determinants of cost efficiency in cooperative financial institutions: Australian evidence," Journal of Banking & Finance, Elsevier, vol. 25(5), pages 941-964, May.
    3. Fried, Harold O. & Knox Lovell, C. A. & Eeckaut, Philippe Vanden, 1993. "Evaluating the performance of US credit unions," Journal of Banking & Finance, Elsevier, vol. 17(2-3), pages 251-265, April.
    4. Aly, Hassan Y, et al, 1990. "Technical, Scale, and Allocative Efficiencies in U.S. Banking: An Empirical Investigation," The Review of Economics and Statistics, MIT Press, vol. 72(2), pages 211-18, May.
    5. Andrew Worthington, 1998. "The determinants of non-bank financial institution efficiency: a stochastic cost frontier approach," Applied Financial Economics, Taylor & Francis Journals, vol. 8(3), pages 279-287.
    6. Ellene Kebede & Curtis Jolly, 2001. "Effects of financial structure and instruments on income of low income credit unions," Applied Financial Economics, Taylor & Francis Journals, vol. 11(2), pages 231-236.
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    Cited by:
    1. Andrew C. Worthington, 2010. "Frontier Efficiency Measurement In Deposit-Taking Financial Mutuals: A Review Of Techniques, Applications, And Future Research Directions," Annals of Public and Cooperative Economics, Wiley Blackwell, vol. 81(1), pages 39-75, 03.
    2. Bauer, Keldon J. & Miles, Linda L. & Nishikawa, Takeshi, 2009. "The effect of mergers on credit union performance," Journal of Banking & Finance, Elsevier, vol. 33(12), pages 2267-2274, December.
    3. Glass, J. Colin & McKillop, Donal G. & Rasaratnam, Syamarlah, 2010. "Irish credit unions: Investigating performance determinants and the opportunity cost of regulatory compliance," Journal of Banking & Finance, Elsevier, vol. 34(1), pages 67-76, January.
    4. Nemanja Radić & Franco Fiordelisi & Claudia Girardone, 2012. "Efficiency and Risk-Taking in Pre-Crisis Investment Banks," Journal of Financial Services Research, Springer, vol. 41(1), pages 81-101, April.
    5. Robert Tokle & Joanne Tokle, 2010. "Credit Union Growth in Mid-sized Markets," New York Economic Review, New York State Economics Association (NYSEA), vol. 41(1), pages 45-56.

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