Why Credit Unions? (Part 1)

Post by FogofWar.

Moving your money from a megabank to a credit union or community development bank makes for a good sound bite, but is it really an action that can have an impact in the right direction?  I think so (although the matter is not free from doubt), and thought it would be worthwhile to lay out thoughts on the subject as a follow-up to the “What is a Credit Union?” post.

I’ll focus this discussion on credit unions, rather than community development banks or smaller locally owned banks as that’s where my knowledge lies.

Credit Unions are not Too Big To Fail

A quick google search indicates the largest credit union in America is Navy FCU with $34Bn in assets. (Internationally, it may be the Dutch Rabobank, although I’ve never gotten a good handle on whether Rabo is still a cooperative or not.) Individual credit unions fail regularly, just like individual banks, but there isn’t one CU that’s in danger of crashing the entire financial system in the same manner as BAC, C, JPM or WF.

During the 2008 crisis and aftermath the only credit unions that got a federal bailout were the corporate credit unions. There’s a good article about that here.  The corporate credit unions definitely got into trouble buying structured products and I don’t want to gloss this fact over.  There’s a split between the retail credit unions, who are going to have to pay for these mistakes, and the corporate credit unions which made the bad investments as well as the NCUA, who was asleep at the switch when the corporate CUs were making that investment.  Also worth noting that the NCUA has filed suit against the banks for selling crap product to the corporate CUs.

The corporate credit union bailout was small proportionate to the overall credit union size.  $30 bn of  gov’t backed bonds equates to $270 bn proportionate for banks—less than ½ of the official state of TARP and a small fraction of the overall size of the taxpayer support given to the large (non-CU) banks indirectly through TAF, TSLF, PDFC, TARP, TALF, etc.,… (see this for an explanation of term).

All in all, I’d say CUs come out somewhat ahead by this measure.

Volker Rule/Glass Steagall

Unlike commercial banks, credit unions never revoked the Glass Steagall act and remained segmented as “pure” traditional banking entities.  This means that CUs don’t mingle traditional banking (deposits, checking accounts, loans to customers), with investment banking activities (IPOs, M&A advisory) or derivatives trading or sales desks, let alone prop desk frontrunning of client information.

There’s a lot of ink out there on Volker and Glass Steagall.  In short, it seems like a good idea, if not sufficient as a complete solution, to keep traditional banking segmented from investment banking and proprietary trading.  The core point is that trading risk should not infect the core banking business putting it (and the taxpayer standing behind the federal deposit insurance) at risk.  Very good recent example of this here.

CUs come out dramatically ahead on this measure.

Lobbying—just as bad?

Credit Unions do lobby, largely through two groups, CUNA and NAFCU.   In fact, NAFCU has been an opponent of the CPFB, and the CU lobby got itself removed from the debit swipe fee cap.

There was a time I can remember when CUNA and NAFCU just went up to the hill to remind Congress that they existed and defend against the ABA’s occasional attempts to change the tax status of CUs.  It seems times have, rather unfortunately, changed.

Regrettably, no advantage to Credit Unions here.

Part 2 will talk about investments in local communities, democratic control (the good, the bad and the ugly) and securitization/mortgage transfers.

FoW

6 thoughts on “Why Credit Unions? (Part 1)

  1. YES… credit unions… are a better option… but there is no assurance that they are not open to investor manipulation over time… but at this time… yes, good option.
    i myself… joined a credit union.
    -Mosheh Thezion

  2. I am a junior man majoring in finance in China and have knowledge of the financial institutions. Philosophically, theoretically, I think it is not necessary to withdraw money from the mega-bank in case TBTF. The basic reason of the TBTF, in my opinion, is a completely personal thing. A high risk deserve a high return, that is common sense. However the risks come from so many types, it is hard to define and hedge every risk. Basically, the risks should be divide into two categories, one from completely the nature or the universe, the other from completely human. And the TBTF is a consequence of the latter risk. When the managers and owners of the mega-bank behave well, no matter how big the bank is, the bank is hard to fall. Even the bank fails, the ripple it generates will be completely controlled only with the well-behavior. The only thing we should is just to clarity the risks from the nature. Based on one’s hobbies and interests, his or her money will be allocated and invested satisfactorily.
    So the practical action is that we set laws and rules to make sure both everyone’s income and expense are associated with the one’s hobbies and interests, maybe in another word , “love”. For example(another day to say )

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