Financial Update (October-December 2001)


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Economic Education

New MICR Standard

Credit Unions’ Risk and Membership


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The Docket

Credit Unions’ Risk and Membership

Membership in federally chartered credit unions is limited by law to “individuals sharing a common bond of occupation, association, or geographic area.” As shown by the large number of credit union failures in the early 1980s, limiting membership to a single common bond tends to create portfolio concentration risks.

The 1998 Credit Union Membership Access Act may mitigate these risks by explicitly allowing credit unions to expand their field of membership to include multiple common bonds called “select employee groups” (SEGs).

In Atlanta Fed Working Paper 2001-10, Scott Frame, Gordon Karels and Christine McClatchey document the unique risk profile of occupational credit unions and examine the degree to which SEGs have reduced credit union risk.

The authors’ cross-sectional statistical model examines risk variation relative to the type of common bond and the breadth of the credit union’s membership. The model shows 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.

After examining the subsample of single-bond occupational credit unions and those multibond credit unions primarily made up of occupational group members, the authors find that the presence of SEGs relates negatively to capital ratios and positively to loan-to-share ratios. Survey data are used to confirm 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 to diversifying credit union membership. These benefits derive from expanded investment opportunities and reduced concentration risk.