FOM Type and Risk

Since the enactment of the Credit Union Membership Access Act in 1998, the credit union industry has undergone a structural transformation as many credit unions have switched from a single-common bond to community and multiple-common bond charters.

There is a belief that the expansion in community and multiple-common bond credit unions would permit the diversification of membership bases, making credit unions safer.

However, a 2014 paper, Credit Unions and Risk, published in the Journal of Regulatory Economics found that credit unions with broader fields of membership operated at greater risk than single-bond credit unions.

The paper examined the impact of field of membership (FOM) type on credit union risk. The paper employed two measures of risk -- risk of bankruptcy and risk of breaching regulatory capital standards.

The paper examines the performance of credit unions between 2001 and 2011. Only federal credit unions with more than $2 million in assets and more than 100 members are included in the study. The paper also excludes federal credit unions that had five or more mergers during the time period of the analysis.

The author, David Ely, found that "community and multiple-bond credit unions are found to operate at greater risk than similarly-sized single-bond credit unions, all else equal." The author attributed this finding to greater volatility of earnings, lower return on average assets, and lower net worth ratios.

The paper also concluded that community credit unions have a greater risk of bankruptcy and of breaching regulatory capital standards than multiple-bond credit unions. This is due to community charters having lower net worth ratios than multiple-common bond credit unions.

An additional finding is that asset size is inversely related to the probability of bankruptcy and of breaching regulatory capital standards. Thus, the direct impact of a broader FOM is less on larger credit unions than on smaller credit unions.

Evidence was also presented that credit unions that switched from single-bond institutions to broader field-of-membership types operated with greater risk.

A policy implication of this study is that credit unions with broader membership bases have greater risk. In addition, regulatory priorities should focus on smaller credit unions with community and multiple-common bond charters; because these credit unions lack the benefits arising from scale.

Read the paper (subscription required).