The Effects of Membership Expansion on Credit Union Risk, Growth and Returns

Between 1996 and 2017, regulatory changes led to over a thousand credit unions converting to community charters. These changes significantly increased and diversified credit union membership, which now consists of 108 million members, or roughly one-third of the U.S. population. This study attempts to determine whether these developments improve safety and soundness by enabling credit unions to diversify their loan portfolios, or whether risk increases as the social capital of a tight common bond becomes diluted. We improve on previous cross-sectional approaches by utilizing a generalized difference-in-differences model with credit union and quarter fixed effects for the period 1994 to 2017, which allows us to control for unobserved time-invariant endogenous factors between credit unions. We find that conversions to community charter unambiguously improve credit union returns (as measured by ROA, net income, membership growth and loan growth), reduce risk (as measured by the standard deviation of earnings and the probability of liquidation or merger) and have no effect on the probability of exhausting net worth (Z-score). There is some evidence of an increase in delinquencies, but no effect on other indicators of asset quality or interest rate exposure. Capital adequacy also decreases, but this is likely the result of active managers responding to a more diversified portfolio and not an exogenous outcome of charter conversion