WASHINGTON—A report published in the Journal of Regulatory Economics suggests that credit unions with broader fields of membership operate at greater risk than single-bond credit unions.
The 2014 paper, Credit Unions and Risk, examined the impact of field of membership type on credit union risk. The paper employed two measures of risk – risk of bankruptcy and risk of breaching regulatory capital standards, reported Keith Leggett, the former senior vice president and senior economist at the ABA, in his analysis.
The paper examines the performance of credit unions between 2001 and 2011. Only federal credit unions with more than $2 million in assets and more than 100 members are included in the study. The paper also excludes federal credit unions that had five or more mergers during the time period of the analysis.
“The author, David Ely, found that ‘community and multiple-bond credit unions are found to operate at greater risk than similarly-sized single-bond credit unions, all else equal. The author attributed this finding to greater volatility of earnings, lower return on average assets, and lower net worth ratios, said Leggett.
The paper also concluded that community credit unions have a greater risk of bankruptcy and of breaching regulatory capital standards than multiple-bond credit unions. This is due to community charters having lower net worth ratios than multiple-common bond credit unions, Leggett said.
“An additional finding is that asset size is inversely related to the probability of bankruptcy and of breaching regulatory capital standards. Thus, the direct impact of a broader FOM is less on larger credit unions than on smaller credit unions,” Leggett said.
Evidence was also presented that credit unions that switched from single-bond institutions to broader field-of-membership types operated with greater risk, Leggett said.
“A policy implication of this study is that credit unions with broader membership bases have greater risk. In addition, regulatory priorities should focus on smaller credit unions with community and multiple-common bond charters; because