MADISON, Wis. -
New research has concluded that most U.S. credit unions are 30% to 40% overcapitalized. Most CUs, notes the new study from the Filene Research Institute, measure themselves according to two metrics: asset size and capital ratio.
"For the former, bigger is always better; for the latter, there is a range of thought on what constitutes a reasonable capital level," said Filene. "Most credit unions have a general preference for more capital in the service of safety and soundness."
But is more capital better? That's at the heart of the study by William E. Jackson III, professor of finance at the University of Alabama, and a Filene Research Fellow. Titled, "Is the U.S. Credit Union Industry Overcapitalized? An Empirical Examination," the study seeks to answer two fundamental questions: Was the capitalization rate in 1990 reasonable given the risk profile of the credit union industry, and has the risk profile of the credit union industry increased to such an extent as to warrant an increase in capitalization to current levels?
Jackson points out that the capital level of the U.S. credit union industry stood at 11.6% at the end of 2006, more than four percentage points higher than the legislatively mandated level of "Well Capitalized," and exactly four percentage points higher than U.S. credit union capital in 1990. After studying the data, Jackson concluded that the industry capitalization rate in 1990 was reasonable and perhaps a bit too high; and that the credit union industry in 2006 was less risky than it was in 1990.
These answers, coupled with an analysis of credit union regulatory capital regime and a comparison of credit union and bank capital requirements, led Jackson to conclude that U.S. credit unions are "overcapitalized by an amount in the 30%-40% range." Translated into dollars, U.S. credit unions are overcapitalized between $8.8 billion and $11.7 billion.
"According to Jackson's assessment, almost all credit unions are overcapitalized," noted Filene Chief Research Officer George Hofheimer.
For info: www.filene.org.
