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Is the US Credit Union Industry Overcapitalized?

This study seeks to answer the important question of whether the credit union industry is overcapitalized and the benefits and challenges that come from being overcapitalized. 

  • William E. Jackson III Smith Foundation Endowed Chair of Business Integrity, Culverhouse College of Business at University of Alabama

Executive Summary

At your next credit union conference you may notice board members and employees alike sizing up their credit union using two measurements: asset size and capital ratio. For the former, bigger is always better; for the latter, there is a range of thought on what constitutes a good capital level. Most credit unions tend to believe their capital level is appropriate, with a general preference for more capital in case of the proverbial rainy day. The Filene Research Institute was curious to know whether the “more capital is better” preference has led to U.S. credit unions holding too much capital. William Jackson, professor of finance, management, and ethics at the University of Alabama, meticulously answers the question, are U.S. credit unions overcapitalized?

What is the research about?

This study seeks to answer the important question of whether the credit union industry is overcapitalized by addressing two fundamental questions: Was the capitalization rate in 1990 reasonable given the risk profile of the credit union industry? Assuming that the answer to this question is yes, has the risk profile of the credit union industry increased to such an extent to warrant an increase in capitalization from 7.6% to 11.6%?

What are the credit union implications?

This report calls attention to important issues. Credit unions are in the business of helping people. What benefit accrues to members when their credit union holds on to excessive levels of capital? Credit unions need to balance their efforts to achieve safety and soundness with efforts to put their capital to its best use. While credit unions have done a superb job in the distant and recent past serving the financial needs of consumers, the future success of the industry holds a host of challenges. To meet these challenges, credit unions need capital to invest in new delivery channels, technology, innovative products, talent development, collaborative strategies, marketing, and many other capital- intensive activities.