US Credit Unions Research Articles

The risk implications of the business loan activity in credit unions

US credit unions have been subject to a strict regulation of their commercial lending which included both requirements for enhanced organizational practices and a cap on the proportion of business loans relative to assets (imposed in 1998 by US Congress). Since 2003, however, these limitations have been steadily relaxed, a process which has resulted in an increase in credit union business lending activity. Using data from the universe of US credit unions we provide comprehensive evidence that expansion of the business loan portfolio increases the risk of the asset side of the credit union. This is the case even for credit unions which benefit from partnership with the SBA, for which we observe an initial increase in the risk of non-SBA backed loans (an overconfidence effect) which reverses over time (a learning effect). Our results suggest, furthermore, that the risk of business loans is exacerbated for credit unions which initiate their business loan activity and which do so rapidly. In the second part of our analysis we provide descriptive and quasi-experimental evidence that expansions of credit union activity into business loans are associated with lower subsequent growth rates of deposits. This result is similar to the reaction to risk indicators found in the banking literature and might give an ex-ante incentive for the CU that could work as a market-based stabilization mechanism complementary to that of explicit regulation.

Who Could We Blame? The Impact of Strategic Orientations on the Failure of Financial Institutions

We evaluate the impact of strategic orientation on the failure probability of financial institutions. Using the US credit union industry as the empirical setting, we find that credit unions which exhibit preferential treatment to borrowers are more likely to fail, whereas those who set operational strategies towards balancing the benefits between savers and borrowers experience a lower failure probability. The impacts appear to be more pronounced in small credit unions and in credit unions which have a lower operating experience. We also find that borrower-oriented credit unions generate lower interest margins while neutral behavior credit unions generate higher margins.

Income structure, diversification strategy and owners’ benefit in cooperative financial institutions

PurposeThe purposes of this paper are twofold. First, it analyses the income structure in cooperative financial institutions and examines how traditional and non-traditional incomes are related. Second, it evaluates whether increasing diversification towards non-traditional incomes facilitates or hampers the benefits of financial cooperative owners.Design/methodology/approachData are collected from over 3,100 US credit unions over the period of 1994–2016. A number of modern econometric techniques are employed throughout the analysis, including the use of panel fixed effect, generalised method of moments (GMM) and two-stage least square (2SLS) methodologies.FindingsUsing US credit unions as the empirical setting, the empirical results reveal that the expansion of traditional income leads to a corresponding increase in income from non-traditional activities. However, an increasing reliance on non-traditional income causes a significant drop in interest margins. The authors also find that the extent to which income diversification affects owner benefit varies across credit union types and period of time. While income diversification negatively affects owners' benefits in single common bond credit unions, it has no significant influence on multiple common bond and community credit union owners' benefits. Third, diversification can be beneficial during crisis time, but can be detrimental to owner benefit during normal time.Originality/valueThis paper provides some of the first empirical investigations on the diversification strategy of cooperative financial institutions. Therefore, the results offer significant policy implications for policymakers and market participants on whether financial cooperatives should diversify or specialise.

Financial Crises and the Transmission of Monetary Policy to Consumer Credit Markets

How does the health of creditors affect the pass-through of monetary policy to households? In a financial crisis, asset losses among creditors can either dampen or amplify the effects of monetary policy on lending, depending on how these losses and policies interact with financial frictions. Frictions such as leverage constraints my hinder creditor responses, however easing may instead alleviate frictions that would otherwise constrain lending. Using data on the universe of US credit unions, I document that asset losses increase the sensitivity of consumer credit to monetary policy. Identification exploits plausibly exogenous variation in asset losses and high frequency identification of monetary policy shocks. I find that a one standard deviation asset loss increases the response of credit union lending to a 10 basis point fall in the two-year Treasury rate from a 0.86 to 1.15 percentage point increase. The estimates imply that constraints on monetary policy become more costly in a financial crisis characterized by creditor asset losses and that an additional benefit of monetary easing is that it weakens the causal, contractionary effect of asset losses.

Determinants of organizational vigilance: Leadership, foresight, and adaptation in three sectors

AbstractWhy are vigilant organizations better at developing foresight than their rivals and acting faster on the insights and alerts? Four attributes were hypothesized to explain the difference between vigilant and vulnerable organizations: (a) a leadership commitment to sensing and acting early on signals of change, (b) strategic investments in foresight abilities, (c) a flexible approach to incorporating uncertainty in their strategy processes, and (d) clear accountability and coordination for sharing information and acting on weak signals. This conceptual model was tested with survey responses from 345 organizational leaders representing three sectors of the economy: international companies, US credit unions, and American foundations. The survey assessed key components of the above constructs and our regression models explained close to half of the variance in organizational vigilance scores relative to competitors. The most important of the four factors above was investment in foresight (for each sector), followed by leadership commitment. The relative importance of strategy and accountability factors varied by sector as well as organizational size.

Who Consumes the Credit Union Tax Subsidy?

Credit unions are exempt from paying income taxes, and these tax savings are supposed to subsidize the provision of financial services to credit union members. In this paper, we investigate whether the entire credit union tax subsidy is being passed along to credit union members — in the form of increased quantities of financial services and/or better-than-market interest rates — or whether some of the credit union tax subsidy is being consumed by inefficient credit union operations. We estimate a structural model of profit inefficiency for US commercial banks between 2005 through 2017, and use the estimated parameters to evaluate the relative performance of US credit unions and commercial banks. When inputs and outputs are valued in terms of market prices, profit inefficiencies at credit unions exceed those at similar commercial banks by an economically significant order. About half of this inefficiency gap can be attributed to legally mandated credit union activities — such as producing loans and issuing deposits — while the remainder can be attributed to operational inefficiencies at credit unions relative to banks. When inputs and outputs are valued in terms of the prices that credit unions actually pay, our results suggest that over nine-tenths of the tax subsidy is simply passed through to credit union members in the form of higher deposit interest rates.

What Is Holding Back the Development of Comprehensive Businesses Services in US Credit Unions?

The credit union movement has experienced rapid growth across the United States in recent years. After the financial crisis of 2007-2008, US credit unions emerged more resolutely as trusted financial partners, able to maintain lending during the credit crunch and offering better loan and deposit rates, greater investment security and superior customer service. Credit unions are known for their focus on consumer banking. Yet this has obscured their changing relationship with businesses. This paper seeks to discover the state of US credit union capabilities with respect to business banking services. After creating a classification for the level of US credit union business banking capabilities, we conducted informal, semi-structured interviews with a small sample of key stakeholders from the US credit union industry in order to provide insights into the nature of existing US credit union business banking capabilities. Since US credit unions have been shown to provide direct economic benefits from consumer banking, along with a positive track record for small businesses, we are interested in credit unions’ potential to serve larger businesses beyond the provision of loans. Given that businesses have higher average deposits than consumers, there is potential for shifting significant resources from banks to credit unions. Our findings suggest that while many US credit unions offer Basic Business Services, and some US credit unions offer Semi-comprehensive Business Services, no US credit union offers Comprehensive Business Services. We discovered three main factors holding back the development of these commercial capabilities: mission constraints; lack of apparent business demand; and lack of a strong business case according to a cost-benefit risk analysis. These factors appear to reinforce each other in a vicious cycle. However, these factors may also present points of leverage for those seeking to expand business service capabilities within the US credit union system. For example, if weak business demand stems from an absence of targeted marketing to the private sector, a campaign to document pledged allegiance could reverse this phenomena. Indeed, we see strategic interventions at one of the three points offering the ability to shift the system from a vicious cycle to a virtuous one.

Determinants and heterogeneity of switching costs in IT outsourcing: estimates from firm-level data

ABSTRACTWe study how firms decide whether to continue an existing relationship or switch the vendor of outsourced services. Because of incomplete contracts and relationship-specific investments, client organisations may face switching costs, which in some cases may be large enough to render vendor switching an unattractive option. Based on an extensive review of the literature, we develop hypotheses about relationship-, firm-, and market-specific determinants of switching costs. We then develop an econometric model to identify those determinants and their relative importance and estimate the magnitude of switching costs. In the empirical study, we observe accounting data of 1318 US credit unions (CUs) and follow their IT outsourcing choices over 11 years. We find that the largest portion of switching costs is due to relationship- and firm-specific factors, while market-specific variables are much less important. Our estimates suggest that average switching costs account for one-third of the average annual expenditure for professional services. We further highlight that the average hides substantial heterogeneity. Switching costs of CUs that decide to switch vendors are about 50% lower than those of CUs that stay. Looking more closely at stayers, our most conservative estimate of the lock-in effect, i.e., the difference in switching costs of deliberate and non-deliberate stayers, is equivalent to about 70% of the average annual expenditure for professional services.

How Employment Responds to Changes in Assets at US Banks and Credit Unions

How Employment Responds to Changes in Assets at US Banks and Credit Unions

What’s Holding Back the Development of Comprehensive Businesses Services in US Credit Unions?

What’s Holding Back the Development of Comprehensive Businesses Services in US Credit Unions?

Economies of diversification in the US credit union sector

SummarySignificant scale economies have been recently cited to rationalize a dramatic growth in the US retail credit union sector over the past few decades. In this paper, we explore another plausible supply‐side explanation for the growth of the industry, namely economies of diversification. We focus on the fact that credit unions differ among themselves in the range of financial services they offer to their members. Since larger credit unions tend to offer a more diversified financial service menu than credit unions of a smaller size, the incentive to grow in size may be fueled not only by present scale economies but also by economies of diversification. This paper provides the first robust estimates of such economies of diversification for the credit union sector. We estimate a flexible semiparametric smooth coefficient quantile panel data model with correlated effects that is capable of accommodating a four‐way heterogeneity among credit unions. Our results indicate the presence of non‐negligible economies of diversification in the industry. We find that as many as 27–91% (depending on the type and the cost quantile) of diversified credit unions enjoy substantial economies of diversification; the cost of most remaining credit unions is invariant to the scope of services. We also find overwhelming evidence of increasing returns to scale in the industry.

How Employment Responds to Changes in Assets at US Banks and Credit Unions

While US credit unions have one of the highest market penetration rates in the world (more than 40 per cent), they have been rarely investigated by economists. In this study, we use new panel data to provide the first evidence of how US commercial banks and credit unions adjust their employment levels to output shocks. Monitoring by cooperative members leads us to expect that asset quality and growth will differ between coops and investor owned firms. The role of employee-members leads us to predict variation in employment adjustment when assets rise and fall. We find differing employment adjustment responses in reaction to growing versus shrinking assets and across types of firm. Some of our findings point to greater employment resiliency in credit unions. Our results complement findings from studies of workers cooperatives and firms with employee ownership and thus expand the range of alternative institutional arrangements for which evidence exists for greater employment resiliency compared to investor-owned firms (IOFs). Our findings, as does work by others suggest that credit unions and cooperatives were more resilient during the Great recession than IOFs and also point to the economic potential of credit unions and cooperatives compared to IOFs.

Uninsured deposits and excess share insurance at US credit unions: the impact on risk and returns to members

Using NCUA credit union call report data, I find that uninsured depositors and excess share insurers provide valuable monitoring benefits for credit unions for the years following the 2008 financial crisis. I find that the capital ratio, liquidity ratio, and delinquencies-to-total loans and leases decrease with an increase in the percentage of deposits that exceed the $250,000 per depositor regulatory threshold of standard deposit insurance. The influence of uninsured depositors is generally more significant for small credit unions than large credit unions. The results for the precrisis period are not consistent with those of the postcrisis period. However, the results are consistent across the six-year period following the financial crisis. Overall, the results are consistent with the hypothesis that uninsured depositors are value-maximizing stakeholders who exercise control over the firm.

Regulatory Change and Capital Adjustment of US Credit Unions

We investigate the determinants of US credit union capital-to-assets ratios, before and after the implementation of the current capital adequacy regulatory framework in 2000. Capitalization varies pro-cyclically, and until the financial crisis credit unions classified as adequately capitalized or below followed a faster adjustment path than well capitalized credit unions. This pattern was reversed, however, in the aftermath of the crisis. The introduction of the PCA regulatory regime achieved a reduction in the proportion of credit unions classified as adequately capitalized or below that continued until the onset of the crisis. Since the crisis, the speed of recovery of credit unions in this category following an adverse capitalization shock was sharply reduced.

The Size Distribution of US Banks and Credit Unions

This study examines the firm size distribution of US banks and credit unions. A truncated lognormal distribution describes the size distribution, measured using assets data, of a large population of small, community-based commercial banks. The size distribution of a smaller but increasingly dominant cohort of large banks, which operate a high-volume low-cost retail banking model, exhibits power-law behaviour. There is a progressive increase in skewness over time, and Zipf’s Law is rejected as a descriptor of the size distribution in the upper tail. By contrast, the asset size distribution of the population of credit unions conforms closely to the lognormal distribution.

The evolution of cost-productivity and efficiency among US credit unions

Advances in information-processing technology have eroded the advantages of small scale and proximity to customers that traditionally enabled small lenders to thrive. Nonetheless, the membership and market share of US credit unions have increased, though their average size has also risen. We investigate changes in the efficiency and productivity of US credit unions during 1989–2006 by benchmarking the performance of individual firms against an estimated order-α quantile lying “near” the efficient frontier. We construct a cost analog of the Malmquist productivity index, which we decompose to estimate changes in cost and scale efficiency, and changes in technology. We find that cost-productivity fell on average across all credit unions but especially among smaller credit unions. Smaller credit unions confronted a shift in technology that increased the minimum cost required to produce given amounts of output. All but the largest credit unions also became less scale efficient over time.

The Corporate Demography of the US Credit Union Industry

This paper uses hazard function estimations together with cross-sectional growth regressions to examine the impact of exit through merger and acquisition (M&A) or failure, and internally-generated growth, on the firm-size distribution of the US credit union industry. Consolidation through M&A was the principal cause of a reduction in the number of credit unions, but impact on concentration was small. A positive relationship between size and growth, and a pattern of positive persistence in growth, reflects a divergence in the population size distribution. Divergence between average internally-generated growth of smaller and larger credit unions was the principal driver of the rise in concentration.

Kreditgenossenschaften in den Vereinigten Staaten von Amerika

Zusammenfassung Der vorliegende Beitrag gibt einen Überblick über die Geschichte und die Entwicklung der Kreditgenossenschaften in den Vereinigten Staaten. Es zeigt sich, dass eine enge geistesgeschichtliche und institutionelle Verwandtschaft mit ihren europäischen Vorbildern besteht, dass es aber auch einige Unterschiede gibt. Die Credit Unions sind in den vergangenen Jahrzehnten trotz ihrer strikten Begrenzung auf das Mitgliedergeschäft stetig gewachsen und stellen einen wichtigen Wettbewerbsfaktor in der amerikanischen Bankenlandschaft dar. Allerdings stößt ihre weitere Expansion inzwischen an Grenzen.

Spatial patterns in the location decisions of US credit unions

Building on central place theory, we offer a series of simple location models for US credit unions. Credit unions are historically viewed as a community-based strategy designed to fill voids in spatial financial markets. Unlike banks and more traditional retail financial institutions, our results show that credit unions operate in areas with a low concentration of retail banks. This suggests that credit unions do not follow the “herd” mentality that dominates traditional retail banking institutions. Instead they cluster around common bonds of association. That is credit unions are fundamentally capturing a different market than traditional banks and do not behave in a pro-competitive manner with banks. In the spirit of Bitter et al. (J Geogr Syst 9:7–27, 2007), we compare the overall performance of geographically weighted regression with a set of both spatial and non-spatial estimators. We find that the spatial estimators generally performed better than the aspatial estimators, and there is significant spatial heterogeneity in some of the determinants of credit union concentrations. Results on individual variables of interest tend to be stable across the different estimators lending confidence to our hypothesis that credit unions serve niche markets.

Regulatory Change and Capital Adjustment of Financial Institutions

We investigate the determinants of US credit union capital-to-assets ratios, before and after the implementation of the current capital adequacy regulatory framework in 2000.Capitalization varies pro-cyclically, and credit unions classified as adequately capitalized or below followed a faster adjustment path than well capitalized credit unions. Credit unions managed their capital more actively following the change in regulation. During the recent financial crisis, large credit unions experienced a smaller reduction in capitalization, on average, than small credit unions. The z-score risk measure was a more reliable predictor of survival or non-survival during the crisis than several other financial-health indicators.