Monday, July 23, 2018

Commercial Bank and Credit Union Failures

A paper by Luis G. Dopico and James A. Wilcox examines the failures of credit union and commercial bank failures.

Between 1980 and 2016, more credit unions failed than commercial banks -- 2,165 versus 1,904. But the paper noted that credit unions had a slightly lower annual failure rates than commercial banks, averaging 0.44 percent for credit unions versus 0.48 percent for commercial banks over the same time period.

However, going back to 1971, the annual failure rate for credit unions was higher than the failure rate for commercial banks.

The study found that the rate of bank and credit union failures varied over time between 1980 and 2016. During the time periods of 1980 and 1986, 1994 - 2007, and 2014 - 2016, credit unions had a higher failure rates than commercial banks. But during 1987 - 1993 and 2008 - 2013, bank failure rates exceeded credit union failure rates.

The paper noted that the National Credit Union Share Insurance Fund had a lower loss rate per insured deposits than the Federal Deposit Insurance Corporation.

The paper stated that many of the reasons associated with the failure of commercial banks were also present with the failure of credit unions. Both credit unions and commercial banks that failed had more commercial mortgages, fewer assets, more delinquent loans, higher noninterest expenses, less capital, and lower return on assets (ROAs).

The authors also found the following differences in bank and credit union failures. "Having more residential mortgages signaled more failures of credit unions, but not of banks. Conversely, having more commercial and industrial (C&I) loans and higher local unemployment rates signaled more failures of banks, but not of credit unions."

The paper further pointed out that many credit union failures are not related to historical financial conditions; but rather due to largely idiosyncratic reasons, such as sponsor failures, poor record keeping, etc.

Read the paper.


  1. Jim Wilcox should be an expert on cu failure.
    He was removed by NCUA along with the rest of the board at Cal State 9 CU for allowing the cu to over load on indirect brokered line of credit loans which led to the cu’s failure.
    If he wasn’t on the board at failure he was on the board as it loaded up on the loans while cfo and ceo got outsized incentives.
    Berkeley prof.
    CUES speaker.
    Failure expert.

  2. From the report: “Failure risks rose at both credit unions and at banks when they had more commercial mortgages, fewer assets, more delinquent loans, less capital, or lower ROAs.”

    Tell me something I don’t know already. More delinquent loans, less capital and lower ROAs are all the end result of loan losses, which result in failure.

    The study should have looked at factors that precede financial institutions taking elevated levels of risk. For example, analyzing trends of net revenue growth (when net revenue slows or declines, more risk is taken to fix the problem). Expense trends. Cost cutting is a knee-jerk reaction to lack of net revenue growth. Efficiency ratio. The relationship between expense and revenue growth. The seeds of failure are not in loan losses. The seeds of failure are in the events that precede it. Do some analysis there instead.

  3. These credit union failures never had a revenue problem. What they had was a spending problem. Operating expenses get squeezed in a down rate environment & they enter rectal bleed to the income statement. Get reckless they chase subprime debtors, and toxic waste investments. It is a race to the bottom. The gamble is "making it up in volume" & they always fail. They have a back stop. The NCUA will guarantee the deposits up to the insured limits and properly structured beyond all that, too. So if the reckless bet does work the CEO & CFO get greased like pigs at the trough. When they lose as is the case with Telesis, CalState #9, etc. the deposits are covered with NCUSIF insurance & the CEO & CFO walk on. No work prohibition order. No salary/bonus clawback. The NCUA supervises these huge failures...can you say WesCorp, MembersUnited, USCentral, etc. Blame the Boards. Hell, Blame the NCUA for gross incompetence. The NCUA fails to ever get proactive before these credit unions fail. What the hell does the NCUA care. If the NCUSIF is cash short, there is always assessments. When the hell has the NCUA ever been held to account? NEVER. Now with Capital Market Specialists they remain forever stuck on stupid. The NCUA gets the quarterly call report data & yes they do nothing with it. But if you are a day late to file they impose a penalty. The NCUA fails to act and credit unions fail. And the NCUA civil servants continue to collect filthy stinking salary and bad behavior continues to be its own reward. Pissants.



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