The Effect of Tarp Funding on Recipient Credit Unions

Abstract

Credit unions have become an important component of the American financial system, with more than 10% of all savings deposits and non-revolving consumer loans; as well as some 12% of all depository institution employees. With nearly any measure of depository institution market share, credit unions have been growing.Credit unions fared better than banks in the past two big financial crises (1980s and 2008-2010). But there were some institutions whose common bond forced them to take on more risk during that time period. In some of those cases, their members were underserved by other financial institutions, making the small credit union a systemically important financial institution for them. Therefore, in 2010, a TARP program was offered to shore up community development financial institutions (CDFIs). The Community Development Capital Initiative (CDCI) was the only direct TARP loan program offered to credit unions. Although nearly 200 credit unions qualified, only 48 received funding (all in late September 2010). The recipient credit unions borrowed less than $70 million total.This paper assesses the effectiveness of the TARP program for the recipient credit unions. We find that CDFI credit unions were far more likely to fail since the initiation of the TARP than other credit unions. We also find that recipient credit unions did not use funds to enrich members, but used the funds as they were intended, to improve capital and liquidity. We wonder if a special program needed to be established to generate these $70 million in loan funds because of the weakness among credit unions’ preferred lender, the corporate credit unions.