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SAN FRANCISCO-The San Francisco Federal Reserve Bank recently released an “economic letter” entitled “Credit Union Failures and Insurance Fund Losses: 1971-2004,” which paints credit unions’ resilience in a very positive light. The August 19 report stated that the credit unions industry’s assets have grown considerably and have grown relative to banking, as well as “considerable structural change,” including 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,” the economic letter, written by James A. Wilcox, visiting scholar to the FRBSF and Professor at the Haas School of Business, UC Berkeley, read. He has also done research previously for the Filene Research Institute on secondary capital in 2002 and capital instruments in 2003. “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,” Wilcox wrote. “Credit unions also tended to impose lower loss rates on their insurance fund than commercial banks did.” Between 1971 and 2004, losses to the National Credit Union Share Insurance Fund totaled $953 million, or $1,474 million in 2004 dollars, averaged 0.018% of insured shares, and peaked at 0.082% in 1982. This compares favorably to the Bank insurance Fund losses from 1971 through 2004, which totaled $38,254 million ($59,283 million in 2004 dollars). BIF losses also 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,” Wilcox concluded. He also identified 4,371 failures of federally insured credit unions between 1971 and 2004, which involved 2,314 involuntary liquidations (including purchase and assumptions), 1,087 assisted mergers, and 970 cases of government assistance. Generally, smaller credit unions failed more often than larger ones, as was also the case with banks. However, Wilcox wrote, “Despite having lower failure rates than similarly sized [federally insured commercial banks], the failure rate across all FICUs was higher than that for FICBs because (1) FICUs are typically smaller than [federally insured commercial banks] 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.” He also commented on the credit union regulators’ handling of the 1970s and 1980s high and volatile unemployment, inflation, and interest rates, which impacted all depository institutions. “Some analysts argue that bank and thrift regulators often delayed closing seriously troubled institutions (citation omitted). 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,” Wilcox surmised. “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.” There are other measures of failures and insurance losses, Wilcox pointed out, such as losses per dollar of assets of failed institutions and assets of institutions per dollar in all depositories. NCUSIF losses per dollar of assets in failed credit unions averaged 14% a year from 1984 to 2004 and ranged from 7% in 1999 to 43% in 1997. BIF losses per dollar of assets by comparison averaged 15% annually and ranged from 7% in 1991 to 79% in 1998. In addition, assets in failed credit unions per dollar of all assets averaged 0.08% from 1984 through 2004 and peaked at 0.46% in 1991. The average assets in failed federally insured commercial banks, on the other hand, “were substantially higher” at 0.21% over the same period with a peak of 1.30% in 1991. Wilcox clarified, “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.” Wilcox stated that differences in products and services between banks and credit unions “have become less pronounced” and that credit unions’ fields of membership restrictions have eased. Much of this came following the “macroeconomic shocks” of the 1970s and 1980s, when deregulation allowed credit unions to diversify more fully. Wilcox noted that mergers, liquidations and the creation of few new credit unions have led to a decrease in credit unions from their peak of 23,866 in 1969 to 9,274 in 2005. “At the same time,” Wilcox wrote, “the average size of credit unions grew rapidly enough to boost total credit union shares considerably.” The number of federally insured credit unions over $100 million in assets (in 2004 dollars) jumped from 192 to 1,155 between 1980 and 2004. These larger institutions also rose from representing 31% of the industry’s assets to 79% in 2004. Credit union assets have grown from 1% of assets of all depository institutions in 1939 to 2% in 1971 and 6% in 2004. According to NAFCU Senior Economist Jeff Taylor, while there is no real news in the report, “it is good that it came out.” “It does show that credit unions tend to be less volatile,” he added, which he said is inherent in the credit union business model. It also shows that the Fed may be paying more attention to credit unions, but Taylor also noted Wilcox’s previous work on credit unions. “The conclusions of this study seem to reaffirm our contention that credit unions are generally strong and well-managed, making responsible decisions that safeguard their members’ savings,” CUNA Vice President for Communications and Media Outreach Pat Keefe said. “Specifically, the study seems to indicate that credit union growth over the last several years has not resulted in an increased appreciable risk to the safety and soundness of credit unions, or risk of loss to the National Credit Union Share Insurance Fund.” [email protected]


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