Credit Union Capital Insolvency and Mergers Before and After Share Insurance

Abstract

From their beginnings in 1908, credit unions have differed from banks. One fundamental difference was that share accounts in credit unions, unlike bank deposits, were not debt. Credit unions could delay and discount payments. Thus, during the Great Depression, when thousands of banks failed, no credit unions did. Federal insurance had larger effects on credit unions than on banks. In 1934, insurance turned bank deposits from risky debt into riskless debt. In 1971, insurance turned credit union share accounts from risky equity into riskless debt. Thus, insurance introduced insolvency risk to credit unions. To reduce insolvency risk, regulators encouraged mergers. They also discouraged new credit unions. These regulatory responses moved the credit union industry from high entry and low merger rates to near-zero entry and high merger rates. We further argue that while major bank regulations almost always followed banking crises, major credit union regulations usually followed prosperity among credit unions.