No full-text available
To read the full-text of this research,
you can request a copy directly from the authors.
Credit Unions as Liquidity Creators
Abstract
This paper examines the level and the main determinants of liquidity created by credit unions. The contribution of credit unions to the aggregate liquidity created by the financial system has increased over time from $206 billion in 2000 to $318 billion in 2008. We document a negative relationship between the level of capital and liquidity created by credit unions across all size classes. Liquidity creation is positively related to the level of deposit insurance for medium credit unions and for credit unions with no special credit and borrowing agreements and negatively related to deposit insurance for a sample of large credit unions and for credit unions with special credit and borrowing agreements. The evidence suggests that credit unions’ decision to substitute insured funds with funds obtained through special credit and borrowing agreements alters the traditional role played by deposit insurance on liquidity creation.
... Pana et al. (2011) also find the positive relationship between capital and liquidity creation for large banks, but find no evidence for small banks. Mukherjee and Pana (2010) report the negative relationship between capital and liquidity creation for credit unions. ...
... Assets size is negatively and significantly related to liquidity creation in most cases, except that it is positive and insignificant for large insurers. Thus, for the insurance industry, smaller size of firms create relatively more liquidity, which is somewhat consistent with Mukherjee and Pana (2010) who report a negative relationship between size and liquidity creation for all credit unions and for sub-samples of large and medium size credit unions, but a positive relationship between them for small size credit unions. Another bank study shows a different conclusion on the size variable (Berger and Bouwman, 2009). ...
Purpose
– The purpose of this study is two‐fold. The first purpose is to properly measure the level of US property and liability (P/L) insurers liquidity creation, applying the liquidity creation measure developed by Berger and Bouwman. The second purpose is to identify factors affecting P/L insurers' liquidity creation using a regression. Particularly, this paper tests two competing hypotheses regarding the relationship between the level of capital and liquidity creation.
Design/methodology/approach
– The paper calculates liquidity creation for the US P/L insurers. First, the paper categorizes all items in assets, liabilities and surplus into liquid, semi‐liquid, or illiquid. This process is based on the ease, cost, and time for insurers to meet their contractual obligation to obtain liquid funds or to pay off their liability. The paper also constructs the regression model to test the impact of insurers' surplus level on liquidity creation while controlling for the firm‐specific variables. The paper examines this relationship for the time period between 1998 and 2007.
Findings
– Contrary to the study of depository institutions, the paper reports that P/L insurers are liquidity destroyers than liquidity creators. This paper also provides that liquidity destruction varies over time and differs among insurers in different size. The total amount of liquidity destruction ranges from 47 to 58 percent of insurer total asset. In addition, the results of a regression show that insurer capital is negatively related to the level of liquidity creation. This provides implications that insurers with lower level of capital face more regulatory requirements and are forced to meet liquidity demand more.
Practical implications
– The level of liquidity creation and the trend of liquidity creation of P/L insurers are of particular interest to regulators and consumers because the level of liquidity creation as shown during the financial crisis has a significant adverse impact on the financial intermediaries.
Originality/value
– The paper do not aware of any study that attempts to measure liquidity creation by insurers and its relationship with both organizational and financial characteristics. The paper reports that P/L insurers are, unlike depository institutions, liquidity destroyers. Whether or not P/L insurers create/destroy liquidity is an interesting economic question to shed light on the roles of P/L insurers as a financial intermediary.
... Pana et al. (2011) also find the positive relationship between capital and liquidity creation for large banks, but find no evidence for small banks. However, Mukherjee and Pana (2010) report the negative relationship between capital and liquidity creation for credit unions. Other studies have noted that different levels of liquidity can be created by changing the funding mix on the liabilities (Diamond & Rajan, 2001;Gorton & Winton, 2000), and the amount of equity capital impacts the level of lending and the asset portfolio composition, and thus affects liquidity transformation (Thakor, 1996). ...
The level of liquidity in banking determines the extent to which a bank can meet its financial intermediation role. Liquidity and regulatory capital requirements have gained momentum after the 2008 global financial crisis. Meeting the shareholder’s need (i.e profitability) and regulatory requirements (liquidity and capital) is a delicate balance that banks strive to achieve. Applying a pooled fixed-effects model on a complete panel of 179 banks from 2008 to 2019 in the European Union, the results show how banks in Europe strive to achieve profitability requirements at the same time meeting the regulatory hurdles. The results indicate, better-capitalised banks lend much more, which in turn enhances profitability. Also, the findings indicate that higher capital requirements for banks significantly positively influence liquidity. Furthermore, there is an inverse relationship between growth in loans and total regulatory capital. The results imply banks should ensure that the quality of the capital base and the buffers above the regulatory minimum are built up during periods of strong earnings growth. The results also indicate that profitability is significant in influencing the liquidity of the bank. The results emphasise the need to regulate not only the minimum capital requirement but also the liquidity level.
... find that credit union capital buffers tend to vary pro-cyclically with capital accumulated during economic upturns and depleted through write-offs during downturns. This confirms the view that in the absence of an option to raise new capital in the form of equity, credit unions manage their capital cautiously over the course of the business cycle. Pana and Mukherjee (2010) examine the level and determinants of liquidity created by US credit unions. The authors show that the level of liquidity increased by 50% over the 2000 to 2008 period, reaching a level of $318 billion in 2008 and that the contribution of large credit unions to aggregate liquidity has increased over time, while the role played by medium ...
In 2009 there were over 49,330 credit unions across 98 countries with more than 184 million members and approximately $1,354 billion in assets. There is a great diversity within the credit union movement across these countries. This reflects the various economic, historic and cultural contexts within which credit unions operate. This paper traces the evolution of the credit union movement. It examines credit union objectives, and considers issues relating to efficiency, technology adoption, product diversification, merger, failure and demutualisation. The regulatory environment within which credit unions operate is also explored under the themes of interest rate regulation, common bond requirements, taxation, deposit insurance and capital regulation. The overview also considers demutualisation and the costs and benefits to credit unions of altering their organisational form.
Purpose
– The purpose of this paper is twofold: first, this paper measures how much liquidity is transformed by the US life insurance industry for the sample period; and Second, this study tests the “risk absorption” hypothesis and “financial fragility-crowding out” hypothesis to identify the impact of capital on liquidity creation in the US life insurance industry. In addition, a regression model is conducted to explore the relationship between liquidity creation and other firm characteristics.
Design/methodology/approach
– In order to construct the liquidity creation measures, all assets and liabilities are classified as liquid, semi-liquid, or illiquid with appropriate weights to these classifications, which will then be combined to measure the amount of liquidity creation. In addition, a regression model is analyzed. The level of insurers’ liquidity creation is regressed on the capital ratio (surplus over total assets) and other financial and organizational variables to test two prevailing hypotheses.
Findings
– This paper finds that the US life insurers de-create liquidity. The authors provide that the amount of liquidity de-creation is related to the size of insurers such that liquidity de-creation has increased as assets grow and that large insurers de-create most of liquidity. The US life insurance industry de-created $2.1 trillion in liquidity, i.e., 43 percent of total industry assets, in 2008. The empirical results support the “financial fragility-crowding out” hypothesis. Life insurers’ liquidity de-creation is mainly caused by the large portion of liquid assets, which is required by regulation and capital is not a main factor of liquidity de-creation.
Originality/value
– There is no known study on the issue of liquidity creation by life insurers. Thus, the extent of liquidity creation by the life insurance industry, if any, is an empirical matter to investigate, but also an important matter to regulators and the academia since the products and business operations (e.g. asset portfolio and asset and liability management) of life insurers are different from those of property and liability insurers.
Traditional theories of intermediation are based on transaction costs and asymmetric information. They are designed to account for institutions which take deposits or issue insurance policies and channel funds to firms. However, in recent decades there have been significant changes. Although transaction costs and asymmetric information have declined, intermediation has increased. New markets for financial futures and options are mainly markets for intermediaries rather than individuals or firms. These changes are difficult to reconcile with the traditional theories. We discuss the role of intermediation in this new context stressing risk trading and participation costs.
Banks can create liquidity precisely because deposits are fragile and prone to runs. Increased uncertainty makes deposits excessively fragile, creating a role for outside bank capital. Greater bank capital reduces the probability of financial distress but also reduces liquidity creation. The quantity of capital influences the amount that banks can induce borrowers to pay. Optimal bank capital structure trades off effects on liquidity creation, costs of bank distress, and the ability to force borrower repayment. The model explains the decline in bank capital over the last two centuries. It identifies overlooked consequences of having regulatory capital requirements and deposit insurance. Copyright The American Finance Association 2000.
For US credit unions, revenue from non-interest sources has increased significantly in recent years. We investigate the impact of revenue diversification on financial performance for the period 1993–2004. The impact of a change in strategy that alters the share of non-interest income is decomposed into a direct exposure effect, reflecting the difference between interest and non-interest bearing activities, and an indirect exposure effect which reflects the effect of the institution’s own degree of diversification. On both risk-adjusted and unadjusted returns measures, a positive direct exposure effect is outweighed by a negative indirect exposure effect for all but the largest credit unions. This may imply that similar diversification strategies are not appropriate for large and small credit unions. Small credit unions should eschew diversification and continue to operate as simple savings and loan institutions, while large credit unions should be encouraged to exploit new product opportunities around their core expertise.
This paper reports the findings of a national survey regarding the financial management practices of United States credit unions. The US credit union industry is clearly in a period of transition. The study indicates that the way in which credit unions approach financial management may have a decided impact on how successful the industry adjusts to deregulated marketplaces. The research highlights the importance of managed growth through selective product diversification, identification of profitable market niches, and the use of modern risk management techniques.
Bank Liquidity Creation and Financial Crises delivers a consistent, logical presentation of bank liquidity creation and addresses questions of research and policy interest that can be easily understood by readers with no advanced or specialized industry knowledge. Authors Allen Berger and Christa Bouwman examine ways to measure bank liquidity creation, how much liquidity banks create in different countries, the effects of monetary policy (including interest rate policy, lender of last resort, and quantitative easing), the effects of capital, the effects of regulatory interventions, the effects of bailouts, and much more. They also analyze bank liquidity creation in the US over the past three decades during both normal times and financial crises. Narrowing the gap between the "academic world" (focused on theories) and the "practitioner world" (dedicated to solving real-world problems), this book is a helpful new tool for evaluating a bank's performance over time and comparing it to its peer group. Explains that bank liquidity creation is a more comprehensive measure of a bank's output than traditional measures and can also be used to measure bank liquidity Describes how high levels of bank liquidity creation may cause or predict future financial crises Addresses questions of research and policy interest related to bank liquidity creation around the world and provides links to websites with data and other materials to address these questions Includes such hot-button topics as the effects of monetary policy (including interest rate policy, lender of last resort, and quantitative easing), the effects of capital, the effects of regulatory interventions, and the effects of bailouts.
We examine the determinants of disappearance through liquidation or acquisition for US credit unions during the period 2001-06. The hazard of disappearance is inversely related to both asset size and profitability, and positively related to liquidity. Growth-constrained credit unions are less attractive acquisition targets, but are more likely to fail. Credit unions with low capitalization and those with relatively small loans portfolios are attractive as acquisition targets. We report unique empirical evidence of a link between technological capability and the hazard of disappearance. The absence of an internet banking capability rendered a credit union more vulnerable to acquisition, but did not affect the probability of failure.
This paper proposes a new framework for understanding financial intermediation. In contrast to previous research, we consider a setting in which intermediaries possess no inherent information processing or monitoring advantages. Instead, in an economy with overly optimistic entrepreneurs who require funding from pessimistic investors, we show that intermediaries can arise endogenously. In such a setting, only a rational intermediary will be sufficiently optimistic to find it worthwhile to invest in a technology for screening entrepreneurs' projects, and yet be pessimistic enough to use this technology. Our framework produces implications consistent with heretofore unexplained stylized facts, and conjectures which are thus far untested.
This paper examines the relationship between deposit insurance and risk-taking behavior within the credit union industry. Time series tests employing industry average financial ratios for federal and state credit unions did not support the increased risk-taking hypothesis. Although federal credit union capital declined immediately following the adoption of deposit insurance, this was most likely the result of reduced capital requirements, not deposit insurance. Liquidity and loan delinquency ratios had a negative time trend coefficient, implying a decline in risk-taking behavior during the post-insurance period. Cross-sectional test results employing Iowa state-chartered credit union data indicated that insured credit unions were better capitalized and more liquid than their uninsured counterparts. Overall there was no evidence that the adoption of deposit insurance increased the risk-taking behavior of credit unions.
This paper presents a dynamic model of imperfect competition in banking where the banks can invest in a prudent or a gambling asset. We show that if intermediation margins are small, the banks' franchise values will be small, and in the absence of regulation only a gambling equilibrium will exist. In this case, either flat-rate capital requirements or binding deposit rate ceilings can ensure the existence of a prudent equilibrium, although both have a negative impact on deposit rates. Such impact does not obtain with either risk-based capital requirements or nonbinding deposit rate ceilings, but only the former are always effective in controlling risk-shifting incentives.
It is not uncommon in the arrangement of a loan to include as part of the financial package a guarantee of the loan by a third party. Examples are guarantees by a parent company of loans made to its subsidiaries or government guarantees of loans made to private corporations. Also included would be guarantees of bank deposits by the Federal Deposit Insurance Corporation. As with other forms of insurance, the issuing of a guarantee imposes a liability or cost on the guarantor. In this paper, a formula is derived to evaluate this cost. The method used is to demonstrate an isomorphic correspondence between loan guarantees and common stock put options, and then to use the well developed theory of option pricing to derive the formula.
Loans are illiquid when a lender needs relationship-specific skills to collect them. Consequently, if the relationship lender needs funds before the loan matures, she may demand to liquidate early, or require a return premium, when she lends directly. Borrowers also risk losing funding. The costs of illiquidity are avoided if the relationship lender is a bank with a fragile capital structure, subject to runs. Fragility commits banks to creating liquidity, enabling depositors to withdraw when needed, while buffering borrowers from depositors' liquidity needs. Stabilization policies, such as capital requirements, narrow banking, and suspension of convertibility, may reduce liquidity creation.
This article provides empirical tests of the risk differences between two types of ownership structure in the property-liability insurance industry. Empirical evidence is provided that suggests stock insurers have more risk than mutuals where the risk inherent in future cash flows is proxied by the variance of the loss ratio. Further evidence suggests that stock insurers write relatively more business than do mutuals in lines and states having higher risk. Copyright 1993 by University of Chicago Press.
Australian credit unions (CUs) have introduced new fee generating activities, increased transaction fees on existing products, and diversified into residential mortgages. Using DeYoung and Roland’s degree of total leverage and other risk measures we find that more diversified CUs have lower risk and return. CUs that increase the revenue share of transaction fees (matched by a lower share of personal loan interest) increase risk and reduce returns while those that increase residential lending revenues reduce both risk and returns. There is also evidence of scale related economies with risk decreasing and returns increasing with CU size.
I hypothesize that risk taking is greater in stock thrifts than in mutual thrifts because the residual and fixed claims are separable. I find that stock thrifts exhibit greater profit variability during the 1982–1988 period and that conversions from mutual to stock ownership are associated with increased investment in risky assets and increased profit variability. These findings illustrate the relation between the structure of residual claims, incentives, and firm performance as well as the unintended consequences resulting from changes in thrift regulations.
L'int�r�t de l'approche par les jeux globaux ("global games'') est pr�cis�ment d'ancrer les anticipations sur des variables exog�nes r�elles. On peut ainsi garder l'aspect auto-r�alisateur des anticipations mais en restaurant l'unicit� de l'�quilibre et donc un meilleur pouvoir pr�dictif du mod�le. Nous illustrons ces m�canismes sur deux exemples. Le premier a trait au choix r�sidentiel d'agents qui ont une pr�f�rence "identitaire''. Le second a trait � la contagion de paniques bancaires d'un pays � un autre. De mani�re plus g�n�rale, tous les jeux qui pr�sentent des compl�mentarit�s strat�giques sont susceptibles d'�tre analys�s au moyen des techniques des "global games''. Il convient toutefois de rappeler que les techniques utilis�es demeurent assez sp�cifiques: l'incertitude strat�gique porte essentiellement sur les croyances de premier degr� des autres acteurs. Or, si de mani�re plus g�n�rale on suppose que cette incertitude peut porter sur des ordres plus �lev�s, les conclusions des mod�les peuvent changer. Ainsi, Weinstein et Yildiz (2004) montrent que dans un oligopole de Cournot, il y a une tr�s grande multiplicit� d'�quilibres si on suppose que l'incertitude porte sur les croyances de niveaux suffisamment �lev�s.
Unlike the Federal Savings and Loan Insurance Corporation and the Bank Insurance Fund, the National Credit Union Share Insurance Fund (NCUSIF) survived the 1980s without falling into a state of accounting insolvency. This paper analyzes how differences in incentive structure constrain the attractiveness of interest-rate speculation and other risk-taking opportunities to managers and regulators of credit unions. Despite these better incentives, robust present-value calculations establish that NCUSIF fell into economic insolvency during the mid-1980s. Besides calculating the extent of this insolvency, the paper also seeks to explain why, after NCUSIF became insolvent, it could rebuild its reserves without an explicit or implicit taxpayer bailout. Our explanation turns on cross-industry coinsurance responsibilities and the shallowness of the fund's observed insolvency relative to industry net worth. We identify forces in the decisionmaking environment tending to limit the depth and duration of unresolved insolvencies at individual credit unions. Managerial opportunities to benefit personally from taking risks that would flow through to NCUSIF are constrained by difficulties in converting a credit union to stockholder form and by the intensity of proactive monitoring of troubled credit unions by sister institutions and other private coinsurers. We conjecture that expanded use of coinsurance and private monitoring could reduce taxpayer loss exposure elsewhere in government deposit insurance systems.
What ties together the traditional commercial banking activities of deposit-taking and lending? We argue that since banks often lend via commitments, their lending and deposit-taking may be two manifestations of one primitive function: the provision of liquidity on demand. There will be synergies between the two activities to the extent that both require banks to hold large balances of liquid assets: If deposit withdrawals and commitment takedowns are imperfectly correlated, the two activities can share the costs of the liquid-asset stockpile. We develop this idea with a simple model, and use a variety of data to test the model empirically. Copyright The American Finance Association 2002.
Bank capital adequacy regulation under the new Basel Accord Credit union conversions to banks: facts, incentives, issues and reforms
- Von Thadden
Von Thadden, E.L., 2004. Bank capital adequacy regulation under the new Basel Accord. J Financ Intermed 13 (2), 90-95 Wilcox, J., 2006. Credit union conversions to banks: facts, incentives, issues and reforms
The impact of bank mergers on liquidity creation. Working Paper Pennacchi Deposit insurance, bank regulation, and financial system risks
- E Pana
- J Park
- T Query
Pana, E., Park, J., Query, T., 2009. The impact of bank mergers on liquidity creation. Working
Paper
Pennacchi, G., 2006. Deposit insurance, bank regulation, and financial system risks. J Monet
Econ 53, 1-30
Illiquid Liabilities/GTA Large Credit Unions Medium Credit Unions Small Credit Unions Coefficient Std. Err
- D Panel
Panel D:
Illiquid Liabilities/GTA
Large Credit Unions
Medium Credit Unions
Small Credit Unions
Coefficient
Std. Err.
Coefficient
Std. Err.
Coefficient
Std. Err.
Do Federal Home Loan Bank Membership and Advances Lead to More Community-Bank Risk-Taking? Research Paper, Federal Reserve Bank of Chicago Tatom Competitive advantage: a study of the federal tax exemption for credit unions
- D Sojanovic
- M D Vaughan
- T Yeager
Sojanovic, D., Vaughan, M.D., Yeager, T., 2001. Do Federal Home Loan Bank Membership and
Advances Lead to More Community-Bank Risk-Taking? Research Paper, Federal Reserve Bank
of Chicago
Tatom, J.A., 2005. Competitive advantage: a study of the federal tax exemption for credit unions,
US Tax Foundation.
The implementation of prompt corrective action
- Andrew Jones
- D S King
Andrew
Jones, D.S., King, K.K., 1995. The implementation of prompt corrective action. J Bank Financ,
19, 491-510
Are banks liquidity transformers? Working paper Bank runs, deposit insurance, and liquidity
- A Deep
- G D W Schaefer
- P H Dybvig
Deep, A., Schaefer, G., 2004. Are banks liquidity transformers? Working paper, Harvard
University
Diamond, D.W., Dybvig, P.H., 1983. Bank runs, deposit insurance, and liquidity, J Polit Econ
91, 401-419.