MADISON, Wis.-It is now a little easier to pinpoint what exactly the "credit union difference" is thanks to a new report from Filene Research.
The just-released paper, which looked at bank and credit union performance from 1986 through 2009, showed that credit unions are much less susceptible to business cycle variations as delinquencies and charge-offs during recessions rise much less sharply than their banking counterparts.
George Hofheimer, chief research officer at Filene, said the report helps promote understanding of how credit unions "explicitly differ" from banks and provides strong statistical models demonstrating that difference. "It's very easy to show that charge-offs for credit unions are lower than banks but to be able to draw conclusions about how charge-offs are impacted by a large economic shock like unemployment had been missing in the past," he said.
The report, authored by professors Stephen Woodbury and David Smith, concluded that credit unions are 75% as sensitive to macroeconomic shocks as banks, noting that for every 1% increase in nationwide unemployment, banks' lending growth declined 1.15%.
But a rise in joblessness and the general economic slowdown actually didn't hurt credit union lending in any statistically significant way, and while CUs did see a rise in charge offs and delinquencies, their portfolios stayed much healthier than the banks'. In fact, for every 1% jump in unemployment, delinquencies soared by 21.3% at banks, while credit unions only saw an 11.2% increase.
With the same rise in unemployment, the charge-off rate jumped 20.9% at banks,16.2% at credit unions. Both datapoints were indicative of credit unions' lower sensitivity to macroeconomic problems.
CUs Quicker To Realize Losses Than Banks
Smith suggested to Credit Union Journal that the narrower difference in the charge-off rate change could be indicative of credit unions' tendency to realize losses more quickly than banks, but could also indicate credit unions could reduce their charge-off rates by adopting different collection practices.
"This study suggests there are benefits to credit unions being much closer to their members and in being member-owned, and the benefits come through in better loan performance," Smith said. "In many ways it validates conservative stance that credit unions take with their business practices. The things that make credit unions unique in the marketplace need to endure because there is a specific advantage to them when it comes to performance."
The research also indicated that more open charters have not made credit unions more risky because conservative portfolio management is still the order of the day across the board, likely because of the member-owned governance structure.
The report calls upon financial regulators to recognize credit unions' ability to absorb macroeconomic shocks by mandating lesser capital requirements than banks.
