1. Background


Credit unions are important institutions of financial intermediation in both Hawaii (HI) and Puerto Rico (PR). Most credit unions in HI are federally insured (FICUs). The Puerto Rican government insures most credit unions in PR.  This study compares only federally insured credit unions.  This limit might introduce a severe sample selectivity bias if the object were to compare credit unions generally.   The goal of this paper, however, is to compare the performance of FICUs specifically to study the determinants of efficiency and the effect of the higher level of development of the state vs. the lower level of development of the US territory on performance.


Significant differences exist between FICUs in HI and PR.  Credit unions in HI are almost twice as large as credit unions in PR. Those in HI also have on average more experience, a lower delinquency rate and a larger membership base than in PR. Yet, the number of FICUs in PR remained stable throughout the time frame of this study (December 1998-December 2000) while it declined in HI. This fact relates to the topic of this study given the observation by Berger and Humphrey (1997) that lower levels of efficiency in the banking system are associated with bank failure.

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