# Presentation: 393760

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

- John Goddard
- University of Wales, Bangor
-  Donal McKillop
- Queen’s University of Belfast
-  John Wilson
- University of St Andrews

## Summary

- 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

## Motivation

- 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 2006

## Merger – the Credit Union Story

- 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

- 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 Technology

- 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 

## Estimation method

- hazard function
- contribution to partial likelihood
- log-partial likelihood function

**Hazard function modelled as**

**description**

## Preliminary Data – ‘the disappeared’ 2001 to 2006

## Preliminary Data – Non-Time-Varying Covariates

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

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

## Hazard Function Estimation Results (part one)

## Hazard Function Estimation Results (part two)

## A Final Comment

- 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