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Credit Union Asset Growth: Long-Term Trends and Projections for the COVID-19 Crisis

Analyzing five decades of macroeconomic and credit union data, Filene economist Luis Dopico highlights long-term trends in credit union asset growth and predicts the effect of the COVID-19 crisis on asset growth rates in the near future.

Executive Summary

During the last five decades, periods of rising unemployment have coincided with periods of marked increases in credit union asset growth. The countercyclical nature of credit union asset growth highlights that financial consumers view insured credit unions as a safe harbor during times of economic upheaval. Although the degree of the impact varies with each recession, and despite deep uncertainty regarding the COVID-19 pandemic, credit union asset growth rates are expected to increase in 2020. 

What can credit unions do to maintain this growth in a sustainable manner and what role do policymakers play? 

What is the research about? 

The impacts of unemployment rates on credit union asset growth rates, however, can differ over time. For instance, the Great Recession exhibited a far smaller impact. Then, unemployment rates rose from 4.4% to 9.9% (or by 5.5 percentage points) and asset growth rates rose from 1.4% to 6.2% (or by 4.8 percentage points), implying a far smaller impact of .9. Why were the impacts of unemployment on growth so much lower?

Each past (and future) recession, and its attending policy responses, differs somewhat. Thus, we are ultimately, and unavoidably, limited in how much we can rely on history to develop projections that turn out to be accurate. However, studying past recessions remains the logical first step in developing projections for the COVID-19 crisis. 

There are three key reasons why the Great Recession had a far-smaller impact of unemployment on growth:

  1. The Great Recession combined both an economic recession and a financial crisis. 
  2. While the financial crisis resulted in unprecedented policy responses, expansionary monetary policies may not have been transmitted as much as in earlier recessions from the Federal Reserve to financial institutions and to depositors.
  3. The financial crisis was the first (deep) recession since the US Congress shifted credit union capital requirements, through the Credit Union Membership Access Act (CUMAA) of 1998, from a flow requirement to a level requirement. 

What are the credit union implications? 

Beyond the macroeconomic environment, which individual credit union managers cannot control, Dopico (2018) identifies key factors that managers can control more readily and that reliably contributed to asset growth during the extended period in that study (1979–2016). Among other findings: 

  • Paying interest rates on deposits that are higher by 1% increases asset growth by 1.1%, which is a large fraction of the variation in growth rates across credit unions.
  • Increasing marketing expenses by 0.1% of assets (i.e., doubling the average amount reported in call reports) increases asset growth by 0.8%. Thus, the impacts of a dollar spent on marketing are far larger than from offering higher interest rates on deposits.
  • Credit unions with more restrictive fields of membership (FOMs) can grow by expanding those FOMs, by adding potential members that may choose to join. However, credit unions with less restrictive FOMs, i.e., with large numbers of potential members that have yet to join, may not expect similar impacts from expanding their FOMs further.

Filene thanks its members and Inner Circle sponsors for helping support this research from the Center for Performance & Operational Excellence.

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