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The Effect of Captial Ratios on Credit Union Rates Nationwide

Listed author(s):
  • Robert J. Tokle
  • Joanne G. Tokle
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    The average net worth ratio of credit unions has increased substantially over the past twenty years. During this time period, there has been a little pressure by the National Credit Union Administration (NCUA) to increase this ratio. The average net worth ratio of credit unions has increased significantly since 1985 to well beyond the well-capitalized ratio of 7 percent. Much of this increase came in the early 1990's, when falling interest rates, due to an easy monetary policy, helped increase net income for depository institutions.With the average net worth ratio at around 11.4 percent in 2007, how high this ratio should be has continued to be an issue. There are two basic arguments that credit unions should maintain a lower net worth. First, since credit unions are cooperatives, any retained earnings greater than what is needed, given their risks, should go back to the credit union members. Second, credit unions may have to restrict growth if they try to maintain a higher net worth ratio than what is needed. However, adequate net worth is needed to maintain credit union soundness and to protect against interest rate risk and credit risk.

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    Article provided by New York State Economics Association (NYSEA) in its journal New York Economic Review.

    Volume (Year): 39 (2008)
    Issue (Month): 1 ()
    Pages: 85-93

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    Handle: RePEc:nye:nyervw:v:39:y:2008:i:1:p:85-93
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