Credit unions - Industry Overview

US Industrial Outlook, Annual, 1993 by D. Michael Riley

Credit unions are thriving in a time of consolidation for other federally insured financial institutions. Credit union assets, capital, and membership are all growing solidly. The federal insurance fund is strong, and credit unions are enjoying a growing market share among depository institutions.

Credit unions increased their mortgage lending activities in 1992, and tried to educate auto dealers and other consumer retailers about the availability of credit unions as an alternative to commercial banks and thrifts. The growth of share deposits and the easing of consumer demand for loans raised problems for credit union management seeking the most productive assets.

Mortgage lending by credit unions, including first and second mortgages, rose from less than 5 percent in 1980 to about 35 percent of the loan portfolio today. Credit unions originate about $12 billion in mortgage loans a year and presently hold about $49 billion of these loans. About one quarter of the loans originated in 1991 were sold into the secondary market. This percentage is growing rapidly.

Credit unions, for purposes of this chapter, include cooperative thrift and loan associations organized under either Federal or state charters to finance short-term credit needs of their members under the following Standard Industrial Classification (SIC) categories: Federal Credit Unions (6061) and State Credit Unions (6062). For answers to questions regarding data collection procedures, sources and references, and the SIC system, see "How to Get the Most Out of This Book" on page 1. For other topics related to this chapter, see chapters 45 (Commercial Banking), 46 (Savings Institutions) and 48 (Mutual Funds).

Credit unions are cooperative financial institutions that provide saving and lending services to their members. In addition to basic services, larger credit unions offer transaction accounts (analogous to checking accounts), automated teller machines (ATMs), credit cards, individual retirement accounts (IRAs), and other services. Total credit union assets of $265 billion compare with assets of $3.7 trillion for commercial banks, $815 billion for thrifts, and $1.5 trillion for mutual funds.

In accordance with the Federal and state laws establishing credit unions, members must share a common characteristic. This so-called common bond may arise through place of employment or residence, fraternal affiliation, and certain other legally specified shared characteristics. About 60 million Americans, one-third of the adult population, belong to a credit union.

Deposits in a credit union are called shares because they represent ownership. In virtually all credit unions, shares are insured. The largest insurer is the National Credit Union Administration (NCUA), an agency of the Federal Government. NCUA insures $254 billion, 96 percent of all assets, in 12,700 credit unions. An additional 524 credit unions are insured either privately or by states. These credit unions have about 2 million members and assets of $11 billion.

The National Credit Union Administration (NCUA) examines and regulates most federally insured credit unions to ensure their safety and soundness. The remainder of the federally insured and all the privately insured credit unions are state regulated. The rest of this report will cover only federally insured credit unions.

Credit unions' equity consists entirely of retained earnings-money earned but not paid out to members as dividends. Equity and reserves provide a safety net against loan losses and other possible losses (Table 1).

Table 1: Simplified Balance Sheet for Federally
insured Credit Unions
(in billions of dollars)
    As of Dec. 31, 1982
  Liabilities              Assets
Deposits             63   Loans           43
Equity                5   Investments     23
Other liabilities     2   Other assets     4
Total Liabilities    70   Total Assets    70
    As of June 30, 1992
  Liabilities              Assets
Deposits            222   Loans          134
Equity               19   Investments    100
Other liabilities     4   Other assets    11
Total liabilities   245   Total assets   245
SOURCE: National Credit Union Administration.

Credit unions make most of their investments in US. Government obligations and Federal agency securities of less than one year in duration. Riskier investments, such as stocks and "junk" bonds, and speculative activities such as arbitrage, are prohibited.

Credit unions' loan portfolios are generally safer than those of either banks or thrifts (Figure 47-1). They are safer than thrifts because they are more diversified and shorter in duration. They are safer than banks because there is no lending to foreign countries and only a minuscule amount of business lending. Both these types of loans are in general riskier than consumer loans.

In the decade from 1981 to 1991, the safety of the credit union system increased significantly. The equity capital ratio (retained earnings and reserves as a percentage of total assets) grew from 5.5 percent to 7.7 percent. This represents a substantial increase in safety, since capital is a cushion against unpredictable losses.