Jan 01 2001

Differences in Bank and Credit Union Capital Needs

The purpose of this research is to investigate whether the capital needs of U.S. credit unions and banks are identical, given various risk factors involved in their respective operations. In examining the effect of macroeconomic shocks on banks and credit unions, we find that differences in governance and policy have a considerable impact on the risks undertaken by banks and credit unions, and produce important differences in their exposure to loan losses caused by macroeconomic shocks.

More specifically, the findings suggest that to create an even-handed regulatory environment for credit unions and banks, credit union capital requirements to cover loan losses caused by macroeconomic shocks should be about two-thirds the bank requirement.

The findings are based on evaluation of the effect of a range of macroeconomic shocks in every state and the District of Columbia during 29 semiannual periods, from 1986 to 2000. State-level unemployment rates were used as the measure of macroeconomic shock. Loan delinquencies and loan charge offs at banks and credit unions were examined in each state during each semiannual period. Statistical models that estimate both contemporaneous and lagged impacts revealed the links between unemployment rates and (1) state-level delinquencies and (2) state-level charge offs.