Deposit insurance and risk-taking behavior in the credit union industry

Karels, Gordon V.; McClatchey, Christine A.

doi:10.1016/s0378-4266(98)00074-0

Cited by 87 publications

(51 citation statements)

References 25 publications

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“…Karels and McClatchey (1999) show that the introduction of deposit insurance has not led to increased risk-taking in the US credit union industry. Gueyie and Lai (2003) find no empirical support for the hypothesis that the adoption of official deposit insurance creates moral hazard.…”

Section: Previous Empirical Evidencementioning

confidence: 93%

The Effect of Deposit Insurance on Risk Taking in Asian Banks

Enkhbold

Otgonshar

2013

AJFA

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This paper uses a panel database of 401 banks in 31 Asian countries over the period from 2000 to 2010 to examine the effects of deposit insurance on banks' risk-taking incentives. We find that risk-taking incentives vary with bank size and risks. In addition, differentiated premiums may not accurately reflect the level of risk that a bank poses. In the presence of a deposit insurance scheme, the pattern of the non-linear relationship between bank size and risk-taking significantly changes. Our results suggest that market discipline exercised by banks is stronger in the presence of mandatory deposit insurance scheme. Government-funded deposit insurance funds allow Asian banks to take a higher risk. A risk-based deposit insurance scheme functions more effectively in the countries with good regulatory framework and institutional quality.

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Section: Previous Empirical Evidencementioning

confidence: 93%

The Effect of Deposit Insurance on Risk Taking in Asian Banks

Enkhbold

Otgonshar

2013

AJFA

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“…The PCA framework, included in Section 301 of CUMAA 1998 and implemented in August 2000, defines five categories of capitalization, in terms of the ratio of net worth-to-assets, 3 Insured credit unions are more highly capitalized, more liquid and take fewer risks than their non-insured counterparts (Karels and McClatchey, 1999). By contrast, increased access to deposit insurance provides perverse incentives for banks to undertake riskier investments, increasing the probability of bank failure (O'Hara and Shaw, 1990).…”

Section: Capital Adequacy Regulation Of Credit Unionsmentioning

confidence: 99%

Regulatory Change and Capital Adjustment of US Credit Unions

2015

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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. KeywordsCredit unions, Banking, Capital ratios, Pro-cyclical, Prompt Corrective Action, Regulation JEL G21, G18, G28 The authors would like to thank an anonymous referee for extensive comments and suggestions on a previous draft of this paper. We also thank Christine Brown, Santiago Carbo Valverde, Rebel Cole, Bob DeYoung, Kevin Davis, Scott Frame, Michael Goldstein, Jens Hagendorff, Mohammad Kabir Hassan, Michael King, Phil Molyneux, Rob Nijskens, Steven Ongena, Matthew Osborne and Barry Quinn for useful comments and suggestions on a previous draft of this paper. The usual disclaimer applies. Regulatory Change and Capital Adjustment of US Credit Unions IntroductionDuring the 2000s (and especially since the onset of the financial crisis in 2007), the role of capital in minimizing the impact of unforeseen losses on the part of financial institutions has received widespread attention. In this paper we examine the capitalization of US credit unions.Credit unions are non-profit, cooperative financial institutions governed by their membership on a one-member-one-vote basis, with eligibility for membership defined by the credit union's common bond. At the end of 2012, credit unions accounted for approximately 10% of all consumer savings and deposits in the US, servicing over 96 million members drawn from a wide cross-section of society.Unlike other retail financial institutions, credit unions are not permitted to raise capital by issuing new equity. Over time, net worth accumulates through the retention of (tax exempt)earnings that are not distributed to members, in the form of dividends on share accounts, or favourable rates paid on deposit accounts, or subsidized rates charged on loans. 1 This implies capital shortages cannot be rectified quickly, and suggests that the capital adjustment of credit unions may differ from that of commercial banks and non-financial firms.Before 2000 US credit unions were not subject to any formal capital (net worth)requirements. In 1997, the US Treasury recommended that the National Credit Union Association (NCUA), the regulator, introduce specific net worth requirements in the form of 1 The tax exemption affords credit unions a competitive advantage over banks and other mutual financial services providers, and has as...

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“…Fischer and Fournier (2002) demonstraram que o seguro depósito induz cooperativas de crédito ao problema de risco moral e que cooperativas dominadas por membros tomadores de recursos se expõem mais ao risco do que aquelas dominadas por membros aplicadores de recursos. Por outro lado, Karels and McClatchey (1999) avaliaram as cooperativas de crédito americanas no período de 1970 a 1977 e não encontraram evidências de que a adoção do seguro depósito estimulou o comportamento pró-risco destas cooperativas.…”

Section: O Seguro Depósito Induz Ao Risco Moral Nas Cooperativas De Cunclassified

“…Ainda na mesma década, Karels and McClatchey (1999) avaliaram as cooperativas de crédito americanas no período de 1970 a 1977 e não encontraram evidências de que a adoção do seguro depósito aumentou o nível de exposição ao risco destas cooperativas. Esta mesma constatação é verificada na década seguinte no estudo de Hannafin and McKillop (2007) quando avaliaram o período de 1991 a 2005 e concluíram que o mecanismo de seguro depósito para as cooperativas de crédito irlandesas não levou os seus membros a um comportamento pró-risco.…”

Section: O Seguro Depósito Induz Ao Risco Moral Nas Cooperativas De Cunclassified