Regulatory Change and Capital Adjustment of Financial Institutions

Abstract

We investigate the determinants of US credit union capital-to-assets ratios, before and after the implementation of the current capital adequacy regulatory framework in 2000.Capitalization varies pro-cyclically, and credit unions classified as adequately capitalized or below followed a faster adjustment path than well capitalized credit unions. Credit unions managed their capital more actively following the change in regulation. During the recent financial crisis, large credit unions experienced a smaller reduction in capitalization, on average, than small credit unions. The z-score risk measure was a more reliable predictor of survival or non-survival during the crisis than several other financial-health indicators.

Keywords: Credit unions, Banking, Capital ratios, Pro-cyclical, Prompt Corrective Action, Regulation

JEL Classification: G21, G18, G28