The Determinants of Credit Union Failure in the United Kingdom: How Important Are Macroeconomic Factors?

Abstract

Using regulatory data on credit unions, this paper provides empirical evidence on the determinants of credit union failure in the United Kingdom. We find that a small set of financial attributes related to capital adequacy, asset quality, earnings performance and liquidity is useful for early identification of troubled credit unions. In and out-of-sample results indicate that this parsimonious set of firm-level characteristics, augmented with national and regional unemployment rates, reliably identifies failures while keeping false alarm rates at modest levels. The results provide support for establishing early warning criteria for supervisory use in monitoring credit unions.

Keywords: Credit unions, failure, early-warning, logit, policymaker loss function

JEL Classification: G21, G28, G38