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.

Director Liability

In a letter to the editor of Credit Union Times in the March 24, 2010 issue, Henry Wirz, President of SAFE Credit Union, objected to credit union directors’ exposure to personal liability. He wrote:

“Bob Fenner [NCUA’s General Counsel] opined that the WesCorp board of directors has no indemnity. What does that mean? It means that all of our volunteers who claim indemnity under a board resolution (that is most of our volunteers) have no indemnity. That means whenever the NCUA comes in and takes over a credit union that any board member loses his indemnity and has to dig into his own pockets to defend himself.”

He worries that if “directors do not have indemnity, then who will serve?”

Henry, welcome to the world that bank directors have lived under for the last twenty years. Bank directors can be held personally liable for losses when a bank fails. FDIC writes that “[l]awsuits against former directors and officers of failed banks result from a demonstrated failure to satisfy the duties of loyalty and care.” See FDIC’s Statement Concerning the Responsibilities of Bank Directors and Officers.