CONSOLIDATION IN THE US CREDIT UNION SECTOR:DETERMINANTS OF FAILURE AND ACQUISITION

John GoddardUniversity of Wales, Bangor  Donal McKillopQueen’s University of Belfast  John WilsonUniversity of St Andrews

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Summary2

We examine the determinants of disappearance through liquidation or acquisition for US credit unions, 2001-2006.

Around 3% of the total population have disappeared annually over the past 10 years.

We estimate competing risks hazard functions for the probabilities of liquidation and acquisition.

Covariates of the hazard functions include controls for technological capability as well as other variables

Motivation3

Technology improvements in data collection, storage and processing capabilities costs of product development and service delivery have declined.

 Deregulation institutions can trade more freely increasing range of products and services.

Increased competition has led to an increased emphasis on efficiency through scale and institutions have responded by growth through merger and acquisition.

US credit unions are no different {1969 – 23,866 CUs; 1999 – 10,628 CUs; 2006 - 8,372 CUs}

A Snapshot end 20064

Merger – the Credit Union Story

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Studies include - for the US (Fried et al; 1999) and Australia (Ralston; 2001 and Worthington; 2004)

Insights - Institutions must be large to remain competitive. Retirement of CEO and Sr. Management - smaller

credit unions face serious challenges in replacing such key individuals – alternative may be to merge

Desire for wider distribution networks (extended common bond) and/or to provide more services

Failure – the Credit Union Story

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Key study Wilcox (2005) for US suggests the following are important reasons for failure macroeconomic conditions (high real interest

rates and high unemployment rates) Microeconomic factors (smaller, younger, less

well capitalised, less profitable and less efficient credit unions are more likely to fail)

However, credit unions may be less risky than banks.

Mergers and Technology7

Mergers take place when institutions respond to technological shocks that alter cost and demand conditions

Technological innovation requiring significant capital investment gives institutions an incentive to cooperate which may be a forerunner to merger {Smythe, 2001}

Mergers may serve as an important vehicle for the diffusion of new technology {Mansfield, 1969; Damanpour, 1992}

Table profiles technology adoption by US credit unions

Product Provision and Delivery Channels

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Estimation method

))'(exp()()),t(|t( ,,, kikkkikik txtx hazard function

contribution to partial likelihood

log-partial likelihood function

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Hazard function modelled as description

tRj

kjkkikkik txtxL ))'(exp(/))'(exp()( ,,,

T

t Di Rjkjktkkikk

tk t

txdtxL1

,,,,

)}])'(exp(ln{)'([)](ln[

Preliminary Data – ‘the disappeared’ 2001 to 2006

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Preliminary Data – Non-Time-Varying Covariates

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Preliminary Data – Mean Values of Time-Varying Covariates: All Credit Unions12

Preliminary Data – Mean Values of Time-Varying Covariates: Credit Unions That Disappeared During the Subsequent Six-Month Period

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Hazard Function Estimation Results (part one)14

Hazard Function Estimation Results (part two)15

A Final Comment16

A variety of factors have been identified as influencing the hazard of disappearance - many are common to studies in other sectors Unique to credit unions were factors such as charter type and common bond categorisation More importantly and perhaps with resonance for other sectors was the link between hazard of disappearance and technological capability Using website sophistication as a technology proxy it was noted that the risk of disappearance reduced as the level of website capability increased Next step – explore in depth the role of technology in dictating credit union behaviour