The Effect of the Common Bond and Membership Expansion on Credit Union Risk

Abstract

This paper examines differences in institutional risk profiles based on credit union membership type and membership expansion via "select employee groups," or SEGs, which are now expressly allowed by the Credit Union Membership Access Act of 1998. A cross-sectional statistical model is specified that examines risk variation relative to the type of common bond and the breadth of the credit union?s membership. Consistent with earlier research, we document that occupationally based credit unions have a unique risk profile relative to other common bonds. This includes a greater exposure to concentration risk, which is hedged by holding greater proportions of capital.

We also examine the sub-sample of Single-Bond occupational credit unions and those Multi-Bond credit unions with primarily occupational group members. We find that the presence of SEGs is negatively related to capital ratios and positively related to loan-to-share ratios relative to the Single-Bond occupational credit unions. The use of survey data documenting the number of SEGs confirms that, as more SEGs are added, credit unions tend to increase their loan-to-share ratios and decrease their capital ratios. However, the number of SEGs and the proportion of loan delinquencies are found to be positively related ? suggesting that the informational advantages associated with the common bond becomes diluted as new groups are added. Overall, we conclude that there are material benefits of credit union membership diversification and that they derive from expanded investment opportunities and reduced concentration risk.

Keywords: Credit unions, common bond, concentration risk

JEL Classification: G21, G28