Credit Union and Bank Subprime Lending in the Great Recession

Kangli Li and Jordan van Rijn

The Review of Corporate Finance Studies, 2024, vol. 13, issue 2, 494-538

Abstract: Firm structure affects incentives and performance. We document significant differences in subprime lending between banks and credit unions prior to and during the Great Recession. In 2006, 23.6% of mortgages from commercial banks were subprime versus only 3.6% of mortgages from credit unions. Moreover, banks were more likely to fail, and had higher delinquency and net charge-off ratios immediately following the financial crisis. Our empirical models control for important differences between credit unions and banks including firm-level characteristics, borrower-level characteristics, and state-level economic conditions. We argue that the remaining difference captures the effects of credit unions’ nonprofit and cooperative structure, which encourages them to internalize the utility of their customer-owners. Our findings explain why credit unions often appear more risk averse relative to commercial banks, a result with important research and policy implications. (JEL G12, G31)

Date: 2024
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