The policy impact of new rules for loan participation on credit union returns

Abstract

Abstract In recent years, credit unions have increasingly purchased loan-participation agreements in order to diversify their loan portfolios and manage loan growth. Responding to high charge-off rates for these loans and concern for systemic risk, the National Credit Union Administration imposed in 2013 new rules on federally insured credit unions that limited the purchase of loan participations from a single originator to the greater of $5 million or 100% of net worth. This study uses a difference-in-difference framework to examine the effect the policy had on returns. As a result of the policy change, credit unions with a high share of net worth in loan participations earned, on average, a return on assets 47 basis points less than their counterparts. Further, we find evidence that suggests these lower returns were driven by a decline in participation loans with recourse provisions, liquidity issues, and relatively higher interest expenses.