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Scale Economies in Credit Unions: Accounting for Subsidies Is Important

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Abstract

In 1998, the Credit Union Services Corporation Australia Limited (CUSCAL) recommended that Australian credit unions with assets below $5 million should consider merging with larger credit unions. This industry position is at odds with empirical studies, which find little evidence of increasing returns to scale in credit unions. However, an important bias in previous studies of scale economies in credit unions has been the omission of credit union subsidies. This paper shows that the failure to account for subsidies biases the results toward finding diseconomies of scale. After correcting for the subsidy bias, there is very strong evidence of increasing returns to scale in a sample of New South Wales credit unions, supporting the industry recommendation.

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Authors and Affiliations

  1. School of Banking and Finance, University of New South Wales, Sydney, Australia

    Neil Esho

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  1. Neil Esho
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Esho, N. Scale Economies in Credit Unions: Accounting for Subsidies Is Important. Journal of Financial Services Research 18, 29–43 (2000). https://doi.org/10.1023/A:1026523506546

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