Dec 06 2007
Is the US Credit Union Industry Overcapitalized?
Credit union board members and employees are likely to measure their credit union using two metrics: asset size and capital ratio. For the former, bigger is always better; for the latter, there is a range of thought on what constitutes a reasonable capital level. Most credit unions have a general preference for more capital in the service of safety and soundness.
We wanted to know whether the “more capital is better”preference has led to U.S. credit unions holding too much capital. The result is a newly released study by William E. Jackson III, Professor of Finance at the University of Alabama, and a Filene Research Fellow. In Is the U.S. Credit Union Industry Overcapitalized? An Empirical Examination, Jackson addresses two fundamental questions: Was the capitalization rate in 1990 reasonable given the risk profile of the credit union industry? And has the risk profile of the credit union industry increased to such an extent as to warrant an increase in capitalization to current levels?
Jackson reports that the capital level of the U.S. credit union industry stood at 11.6% at the end of 2006, more than four percentage points higher than the legislatively mandated level of Well Capitalized and exactly four percentage points higher than U.S. credit union capital in 1990. Before making his conclusions, Jackson studied and analyzed the data. He concluded that the industry capitalization rate in 1990 was reasonable and perhaps a bit too high; and that the credit union industry in 2006 was less risky than it was in 1990.
These answers, coupled with an analysis of credit union regulatory capital regime and a comparison of credit union and bank capital requirements, lead Jackson to state that U.S. credit unions are “overcapitalized by an amount in the 30% – 40% range.” Translated into dollars, U.S. credit unions are overcapitalized between $8.8 billion and $11.7 billion.
Listen to an exclusive interivew with Professor Jackson below:
Report Number 144