Credit Unions, Consolidation and Business Formation: Evidence from Canadian provinces

This study empirically evaluates the impact of consolidation activity in the credit union system on the rate of business formation at the regional level. A theoretical framework is developed which supports a number of hypotheses. First, it is hypothesized that there is no systematic relationship between the relative size of the credit union system, as measured by credit union assets per 1,000 working-age (15-64) individuals, and the rate of business formation among these individuals. Second, it is hypothesized that competition, as measured by the number of credit unions per 1,000 working-age individuals, will negatively moderate the relationship between the relative size of the credit union system and the rate of business formation. Finally, it is hypothesized that there is a statistically positive relationship between competition and the rate of business formation. Drawing on Canadian provincial-level data for the period 1992-2009, it provides statistical evidence from fixed effects models that robustly supports the first hypothesis, but weakly supports the other two hypotheses. These findings suggest that policies and regulations that are intended to create a level playing field in a consolidated banking sector may have implications for small business formation; therefore, they warrant attention when formulating policies that are aimed at facilitating small business and entrepreneurship development