A note on Credit Union reserve ratios and asset growth

Abstract

The rapid growth of the British Credit Union movement in the 1990s has been accompanied by low and declining levels of reserves relative to assets. This has occurred even though the movement has more than fulfilled its statutory obligations to contribute to reserves out of surplus. A model of credit union accounts is developed to illustrate the negative relationship between the change in savings and the dividend rate. It also considers lags in the use of new savings as a further factor. The analysis supports the conclusion of the Chief Registrar of Friendly Societies that the only way for British Credit Unions to achieve the statutory minimum reserve ratio within a reasonable period is to cut back on dividend payments.