Who receives the benefit of credit unions' tax exemption? : an examination of net interest margins and agency costs

Credit unions originally were granted tax-exempt status by the U.S. government to offer lower loan rates and higher deposit rates to low-income groups with an occupational, associational, or residential common bond. However, as credit unions increase in size and expand their range of services, and as the common bond weakens, other financial institutions increasingly see credit unions as a direct source of competition. These financial institutions argue that the government gives tax-exempt credit unions an unfair competitive advantage. Credit unions must maintain a mutual ownership form for their tax-exempt status. Mutual ownership allows for greater separation of ownership and control than stock organizations. Agency theory contends that this separation of ownership and control can lead to an increase in management consumption of perquisites. If management is consuming more perquisites, the benefits gained from tax-exempt status are not accruing to the credit union members as the government originally intended. Increased perquisite consumption leads to higher costs than needed for an efficiently run organization. This dissertation examines the net interest margin (the spread between loan and deposit rates divided by earning assets) between credit unions and mutual S&Ls for compliance with original government objectives. In addition, variables related to agency theory are assessed to determine possible areas of management perquisite consumption. OLS regression results indicate that credit unions are not passing along their tax subsidy to members through a lower net interest margin. In addition, credit unions have higher total personnel and travel expenditures, higher other operating expenditures, and higher full-time equivalent employees per asset dollar than do mutual S&Ls, indicating that credit unions are subject to higher agency costs than mutual S&Ls.