Jun 04 2007

Determinants of Credit Union and Commercial Bank Failures: Similiarities and Differences, 1981-2005

You have become accustomed to reading Filene Research Institute studies on the future of the credit union charter, exciting innovations, new strategic frameworks, and emerging consumer behaviors. Why, then, you may be asking yourself, do we present this seemingly downbeat study that investigates past credit union and commercial bank failures?

Good question. We believe studying poor financial institutional performance is a superb way to enlighten readers about the qualities of safe and sound credit unions -and, for that matter, commercial banks. In this report, James A. Wilcox, Filene Research Fellow and Professor of Financial Institutions at the University of California, Berkeley, deftly presents the first large-scale, long-term (1981 – 2005) econometric analysis of individual commercial bank and credit union failures.

One of the most interesting and practical conclusions of this study is that the behaviors and operating procedures that foretell credit union failures differ from those that foretell bank failures. While I doubt this is what industry watchers have in mind when they talk about “the credit union difference,” the implications are potentially profound. Wilcox promotes the idea of regulators (and policymakers by proxy) using this research to assess how altering balance sheet and income statement variables might reduce failure risk for individual credit unions and banks. Put another way, the figures and statistics presented in this study are potential raw materials for regulatory relief.