Credit Union Failures: Why Liquidate Instead of Merge?

• In Event: Financial Accounting and Reporting # 2

Abstract

We examine whether certain credit union (CU) characteristics are associated with the likelihood of CU liquidations. Using a sample of CU liquidations and a control group of CUs involved in a merger, we find that a CU’s percentage of delinquent loans, provision for loan losses, and average loan balance are positively related to the likelihood of liquidation. Moreover, a CU’s return on assets (ROA) is negatively associated with the likelihood of liquidation. We incorporate tests of the impact of the financial crisis on determinants of CU liquidation and find that neither ROA, percentage of delinquent loans, or provision for loan losses are more important liquidation predictors in the post-financial crisis period. Our findings have implications for not only academics, but for practitioners as well because existing and potential CU members have incentives to avoid CUs that are likely to be liquidated. Moreover, regulators may be interested in empirical evidence that shows which CU characteristics are most likely to lead to liquidation instead of a merger.

Authors

• Daniel Ames, Illinois State University

• Chris S. Hines, Illinois State University

• Jomo Sankara, Illinois State University