UC Berkeley

From their beginnings in 1908, U.S. credit unions have grown into a trillion-dollar industry with more than 100 million members. Despite many similarities, credit unions have always differed fundamentally from banks. One fundamental difference was that share accounts in credit unions, unlike bank deposits, were not debt. Thus, credit unions had options to delay and discount payments to account holders. Those options were one reason why, when thousands of banks failed, no credit unions failed during the Great Depression. Insolvency came to credit unions only after share accounts became federally insured in 1971. Insurance and its associated regulations had larger effects on the structure of the credit union industry than it had on the banking industry. Insurance turned bank deposits from risky debt into riskless debt. Insurance largely turned credit union share accounts from risky equity into riskless debt. Thus, insurance introduced insolvency risk and insolvency to credit unions. Before federal insurance, many credit unions voluntarily liquidated, and of those, only about one-fifth imposed losses on their members. After federal insurance took effect in 1971, voluntary liquidations of solvent credit unions became rare. To reduce insolvency risk and losses to the share insurance fund, regulators enabled and encouraged mergers of both strong and weak credit unions. 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 the proximate causes of regulation differed between credit unions and banks. Major bank regulations almost always, and only, happened following banking crises. In contrast, major credit union regulations rarely followed crises, but rather usually followed prosperity in the credit union industry. Insurance is one of the examples we give.