FRBSF Economic Letter
2005-20; August 19, 2005
Credit Union Failures and Insurance Fund Losses: 1971-2004
Over the past few decades, assets
in the credit union industry have grown considerably and
have grown relative to banking.
As with banking, the credit union industry has experienced
considerable structural change that, in part, involved
failures. While the data on failures in the banking industry
have been analyzed at length, the same has not been true
for credit unions, so far.
This Economic Letter presents
newly produced data on losses in the federal insurance
program for credit union shares
and on the rates at which federally insured credit unions
(FICUs) failed. (Shares in credit unions are analogous
to deposits in banks.) We compare these data to data
for institutions insured by the Bank Insurance Fund (BIF)
of
the Federal Deposit Insurance Corporation (FDIC). We
also briefly review the macroeconomic and microeconomic
factors
that likely contributed to credit union failures and
the losses they entailed.
Transformation of credit unions
Credit unions are member-owned,
nonprofit, financial institutions that serve circumscribed
fields of membership.
Many of
the differences in products, services, and regulations
that formerly distinguished credit unions from banks
have become less pronounced. For instance, many credit
unions
are switching from narrow fields of membership, such
as the employees in a single company, to broader
geographically based fields of membership, such as the
people who
live or work in specified counties. Also, many regulations
that
historically limited credit unions' offerings of
deposit and loan products have been relaxed.
In recent decades,
mergers, liquidations, and the formation of relatively
few new credit unions combined
to reduce
the number of credit unions from a peak of 23,866
in 1969 to 9,274 in 2005. At the same time, the
average size of
credit unions grew rapidly enough to boost total
credit
union shares considerably. The number of FICUs
with over $100 million in assets (in 2004 dollars) increased
from
192 in 1980 to 1,155 in 2004. The share of FICU
assets
in these larger FICUs increased from 31% in 1980
to 79% in 2004. Assets in credit unions grew from
less
than
1% of the dollar amount of assets in all depositories
in 1939
to 2% in 1971 and to 6% in 2004.
Insurance fund
losses in credit unions and in banks
Federal insurance
for credit unions, which began in 1971, nearly 40 years
after federal insurance
began
for banks,
has been operated by the National Credit Union
Administration, an independent agency. So far,
FICUs have funded
the National Credit Union Share Insurance Fund
(NCUSIF) via insurance
premiums and required deposits.
 NCUSIF losses
include the payments that it makes to those who have
insured shares in failed
credit
unions.
Figure
1 displays annual insurance fund losses as
a percent of shares insured by the NCUSIF
and of
deposits
insured by
the BIF for 1971-2004. During this period,
losses imposed on the NCUSIF totaled $953
million ($1,474
million
in 2004 dollars), averaged 0.018% of insured
shares, and
peaked
at 0.082% in 1982. NCUSIF loss rates exhibit
three distinct regimes: averaging 0.006%
during 1971-1979,
0.041% during
1980-1994, and 0.002% during 1995-2004.
From
1971 through 2004, losses imposed on the BIF totaled
$38,254 million ($59,283
million
in 2004
dollars),
averaged 0.073% of insured deposits, and
peaked at 0.395% in 1988.
Thus, BIF losses were considerably larger,
both in dollars and per dollar of insured
deposits, than
NCUSIF losses.
Failures of credit unions
and commercial banks
Failed FICUs and federally insured
commercial banks (FICBs) were those involved in
involuntary liquidations,
assisted
mergers, purchase and assumptions (P&As),
and cases of receipt of government
assistance to avoid liquidation.
The 4,371 FICU failures identified
during 1971-2004 consisted of 2,314
involuntary
liquidations (including P&As),
1,087 assisted mergers, and 970 cases
of government assistance.
We computed
annual failure rates (i.e., the percent
of institutions failing)
for FICUs
and for FICBs
of different
asset sizes. Smaller FICUs and FICBs
failed more often than larger ones.
For instance,
average
annual failure
rates during 1981-2004 were 1.24% for
FICUs with under $1 million in assets
(in 2004
dollars), 0.42% for those
with $1-10 million, 0.17% for those
with $10-100 million, and 0.05% for
those
with over $100
million.
(We were
unable to compute failure rates for
FICUs by size before 1981.)
Compared
with FICBs of similar size, FICUs typically had lower
failure rates.
For
instance, the failure
rate for
FICUs with over $10 million in assets
averaged 0.15% during 1981-2004 and
peaked at 0.68%
in 1991, while
FICBs of that
asset size averaged 0.52% during
the period and peaked at 1.53% in 1989.
Though often
less well-diversified
than banks, FICUs may have had lower
failure rates because they
generally made loans, such as (collateralized)
auto
loans, that on average have imposed
smaller losses on lenders.
 Figure
2 displays annual failure rates for FICUs and FICBs for
1971-2004.
The FICU failure
rate
averaged 0.95% per
year and peaked at 2.67% in 1981.
The
failure rate for FICBs averaged
0.40% per year
and peaked at
2.04% in
1988. Despite having lower failure
rates than similarly sized
FICBs, the failure rate across
all FICUs was higher than that for FICBs
because
(1) FICUs
are typically
smaller
than FICBs and (2) smaller institutions
have higher failure rates. In fact,
47% of FICUs
held under
$10 million in
assets in 2004, while fewer than
2% of FICBs were that
small.
During the 1970s and 1980s,
high and volatile unemployment, inflation,
and
interest rates
adversely affected
depositories of all kinds. Some
analysts argue that bank and
thrift regulators often delayed closing
seriously troubled institutions
(Kane
and Hendershott
1996, Hanc
1998). If delaying closures
increased eventual insurance
losses, then artificially low recorded
FICB failure rates in the early
1980s may have both delayed BIF
losses
and raised their
eventual total amounts. Conversely,
less delay in closing troubled
FICUs may have led to high recorded
FICU failure rates in the early
1980s, but
avoided
larger
eventual total
losses imposed on the NCUSIF.
Other
measures of failures and insurance losses
Failure rates
are based on the numbers of failures, rather
than the dollar
losses that
failures
impose. However,
uninsured depositors, unsecured
creditors, and deposit insurers
are
interested not just in whether
depositories fail, but also
in how severe their
losses might be.
Two additional
measures
of the severity of losses
are (1) losses imposed on an insurance
fund per dollar
of assets in
failed depositories
and (2) assets in failed
depositories per dollar of assets
in all depositories.
NCUSIF
losses per dollar of assets in failed FICUs
averaged
14%
annually from
1984-2004
and ranged
from 7% in 1999
to 43% in 1997. In contrast,
BIF losses per dollar of
assets in
failed FICBs
averaged 15% annually
over the
same period
and ranged from 7% in 1991
to 79% in 1998. Since the
claims of insured
accountholders
have priority
over
those of bondholders
and tended to be larger
than the remaining assets of failed
FICUs
or FICBs, bondholders
would have
been
unlikely to
recover much of their investments
in either
FICUs or FICBs that later
failed.
Assets in failed
FICUs per dollar of assets
in
all FICUs
averaged
0.08% from 1984 through
2004
and peaked
at 0.46%
in 1991. In contrast, assets
in failed FICBs per dollar
of assets
in all
FICBs
were substantially
higher, averaging
0.21% over the same period,
and peaking at 1.30% in
1991.
Fewer assets in failed
FICUs per total assets
need not
imply that
credit unions
were better
managed.
FICUs may
simply take on less total
risk than banks. Credit
unions tend
to serve
different
customers and
to hold different
kinds of loans than banks
do. For instance, most
credit unions
hold
far smaller
proportions of
their assets
in business loans, which
historically have had higher
loan
loss rates than the current
mainstays of credit union
lending, (collateralized)
mortgage and
auto loans.
Causes of credit
union insurance losses
and failures
Both macroeconomic
and microeconomic factors are
likely to contribute
to insurance losses
and failures.
High
NCUSIF loss rates from
1980-1994 coincide mostly
with either
high real interest rates
or high unemployment
rates, and the highest
loss rates, which occurred
in the early
1980s,
coincide with both. Our
preliminary
analysis indicates that
just two macroeconomic
factors—the
then-current
unemployment rate and
the prior year's real interest
rate—may
account
for over half of the
variation of annual
NCUSIF loss rates from
1971-2004.
Microeconomic
factors, such as differences across
individual
depositories, also
help account for
which ones are
most likely to fail
(Kharadia and Collins 1981, Gordon
et al. 1987, Hanc 1998).
Our preliminary
analysis suggests that
FICUs were more likely
to fail if they were
smaller, younger,
less
well capitalized,
more loaned up,
less profitable,
and less efficient.
Other
studies of credit unions additionally
attribute the
failures of many
small FICUs to "mundane" causes,
such as a lack of
trained managers, weak lending
and collection operations,
poor record keeping,
and closures of sponsoring
companies (Gordon
et al. 1987, U.S. GAO
1991, Shafroth
1997).
The macroeconomic
shocks of the 1970s
and 1980s
also revealed
credit unions'
exposure
to risks
associated
with financial
regulation. Like
other depositories,
credit
unions were then
importantly limited
in
the types of
deposits, loans,
and products and
services that they
could provide,
and their
interest rates
on loans and deposits
were constrained
by regulatory ceilings.
In addition,
each credit union's
field of membership
was
typically so
narrowly defined
that credit unions
were precluded
from achieving
much diversification
across either their
borrowers or their
savers. Such restrictions
likely contributed
to the
high failure
and loss rates
of credit unions
in the 1970s and
1980s.
Deregulation
has
since enhanced
credit unions' ability to
manage their
interest rate,
credit,
and
(lack of)
diversification
risks, much as it has for
banks.
Conclusion
Our newly constructed
data show that
failure rates
have typically
been
lower for larger
than for smaller
credit
unions and
lower for credit unions
than
for commercial
banks of
similar size.
Credit unions
also tended to impose
lower loss
rates on their
insurance fund
than commercial
banks did.
Our
data also show that credit
unions'
failure
and loss
rates, like
those of
banks, fluctuated
with
the macroeconomic
environment.
The relatively
stable
macroeconomic
performance
of recent
years contributed
to
both failure
and loss
rates that were
lower
than their
historical
averages.
James
A. Wilcox
Visiting
Scholar,
FRBSF,
and
Professor,
Haas School
of Business,
UC Berkeley
References
Gordon, Daniel, et al. 1987. "Causes
of Credit Union Failures 1981-85." Research Study
No. 4, NCUA Office of the Chief Economist, National Credit
Union Administration,
(September). Washington, DC.
Hanc, George. 1998. "Banking
Crises of the 1980s and Early 1990s: Summary and Implications." FDIC
Banking Review 11(1).
Kane,
Edward J., and Robert Hendershott. 1996. "The
Deposit Insurance Fund That Didn't Put a Bite on U.S.
Taxpayers." Journal
of Banking and Finance 20, pp. 1305-1327.
Kharadia,
V.C., and Robert A. Collins. 1981. "Forecasting
Credit Union Failures." Journal of Economics
and Business 33(2) (Winter) pp. 147-152.
Shafroth, Marc.
1997. "An Analysis of Unexpected Credit
Union Failures in 95 and 96." CUNA Economics & Statistics. Madison, WI.
U.S. General Accounting Office. 1991. Credit
Unions: Reforms for Ensuring Future Soundness. Washington,
DC.
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do not necessarily reflect the views of the management
of the Federal Reserve Bank of San Francisco or of the
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