The Effect of the Common Bond and Membership Expansion on Credit Union Risk

Abstract

Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. The authors are indebted to the Credit Union National Association for sharing their survey data on the number of select employee groups at individual credit unions. They also thank Sam Allgood, Brian Tishuk, seminar participants at the 1999 Financial Management Association meetings, and two anonymous referees for helpful comments. Abstract: This paper examines differences in institutional risk profiles based on credit union membership type and membership expansion via "select employee groups," or SEGs, which are now expressly allowed by the Credit Union Membership Access Act of 1998. A cross-sectional statistical model is specified that examines risk variation relative to the type of common bond and the breadth of the credit union's membership. In findings that are consistent with earlier research, the authors document that occupationally based credit unions have a unique risk profile relative to other common bonds. This profile includes a greater exposure to concentration risk, which is hedged by holding greater proportions of capital. Terms of use: Documents inThe authors also examine the subsample of Single-Bond occupational credit unions and those Multi-Bond credit unions with primarily occupational group members. They find that the presence of SEGs is negatively related to capital ratios and positively related to loan-to-share ratios relative to the Single-Bond occupational credit unions. The use of survey data documenting the number of SEGs confirms that, as more SEGs are added, credit unions tend to increase their loan-to-share ratios and decrease their capital ratios. However, the number of SEGs and the proportion of loan delinquencies are found to be positively related, suggesting that the informational advantages associated with the common bond become diluted as new groups are added. Overall, the authors conclude that there are material benefits of credit union membership diversification and that these benefits derive from expanded investment opportunities and reduced concentration risk.JEL classification: G21, G28

Credit Unions: A Theoretical and Empirical Overview

“…Agency problems, in the form of greater inefficiency and the retention of earnings solely to support growth may have materialized as a result of common bond expansion. Frame et al (2002) examine differences in institutional risk profiles of US credit unions delineated by membership type and membership expansion via select employee groups (SEGs). 13 A cross-sectional statistical model is specified that examines risk variation relative to the type of common bond and the breadth of the credit union's membership.…”

U.S. Credit Unions: Survival, Consolidation, and Growth

“…8 8 For discussion of the background to CUMAA, see Frame, Karels, and McClatchey (2002). CUMAA also introduced a capital regulation system of net worth requirements and prompt corrective action, which came into force in 2000.…”

Understanding Cooperative Finance as a New Common

“…These institutions are generally smaller, based on a common bond shared by all their members and, in a sense, closer to the early financial cooperatives than large cooperative banks (Frame et al. ).…”

“…This principle stipulates that all members have to share one common characteristic, such as living in the same area (geographical bond) or sharing the same professional activity (occupational bond) (Frame et al. ; Forker et al. ).…”