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Differences in Bank and Credit Union Capital Needs

An examination into the differences in business conditions between banks and credit unions given various risk factors.

Executive Summary

The purpose of this research is to investigate whether the capital needs of U.S. credit unions and banks are identical, given various risk factors involved in their respective operations. In examining the effect of macroeconomic shocks on banks and credit unions, we find that differences in governance and policy have a considerable impact on the risks undertaken by banks and credit unions, and produce important differences in their exposure to loan losses caused by macroeconomic shocks.

What is the research about?

The findings are based on evaluation of the effect of a range of macroeconomic shocks in every state and the District of Columbia during 29 semiannual periods, from 1986 to 2000. State-level unemployment rates were used as the measure of macroeconomic shock. Loan delinquencies and loan charge offs at banks and credit unions were examined in each state during each semiannual period. Statistical models that estimate both contemporaneous and lagged impacts revealed the links between unemployment rates and (1) state-level delinquencies and (2) state-level charge offs.

What are the credit union implications?

The implications for public policymakers are clear, banks and credit union differ significantly in their sensitivity to business cycles. These differences can provide legislators and regulators with an appropriate rationale to rethink the basis for capital requirements, and judge each type of financial institution on the merits of its capital needs, rather than as identical organizations. For credit unions, the research opens avenues to achieve reasonable capital levels without creating new infrastructure or capital programs.