Home > #OWS, finance, FogOfWar, guest post, news > Why Credit Unions? (#OWS) (part 1)

Why Credit Unions? (#OWS) (part 1)

October 23, 2011

This is a guest post by FogOfWar. See also the “Credit Unions in NYC flyer“.

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

Categories: #OWS, finance, FogOfWar, guest post, news
  1. October 23, 2011 at 8:10 am

    Thanks for another interesting and informative post, FOW

  2. October 24, 2011 at 12:02 am

    This is a totally random comment, and I frankly doubt anyone make this the decisive factor. But, if someone cares, corporate banks aren’t allowed to charge customers 20+ bucks in fees their purchases only exceeded the money in their account by a little bit. The story differs with credit unions.

  3. October 24, 2011 at 5:56 am

    Yes, Rabobank is still a cooperative bank. It is actually a collection of several loosely-dependent cooperatives, each with its own banking license. By becoming a customer, you also become a member and are allowed to take part to your local bank gatherings, vote to decide which projects get financed, and what policies are to be followed.

    As a sidenote, Rabo is the only triple-A rated bank in the world. Not that ratings matter these days, but still.

    I am not in any way related to Rabo, but my girlfriend has an account there, and I am thinking about switching from the taxpayer-financed basket case that ABN AMRO has become.

    • FogOfWar
      October 24, 2011 at 11:01 am

      Thanks for the info. Pretty sure Rabo is the largest CU in the world (and I believe one of the oldest).

      FoW

  4. Sukh
    October 24, 2011 at 9:49 am

    I have been trying to get the credit unions here in British Columbia to rise to the challenge and actually differentiate themselves from the banks by actually better educating their member/owners instead of giving them virtually the same advice banks tend to give their customers. Yet we all know the reason banks exist is to take profits from their customers and pass them onto their shareholders, so why is the advice generally coming from credit unions not materially different than what we get from the banks?

    To learn more, I hope you’ll visit my “Shayre The Wealth” (a play on my first initial and last name) blog:

    http://shayrethewealth.blogspot.com/2011/06/you-dont-know-what-you-dont-know-part-2.html

    (this post includes all the emails I have sent to credit union CEO’s asking them to do more)

    http://shayrethewealth.blogspot.com

    (this is my blog)

    Sukh Hayre

  5. May 12, 2012 at 4:58 pm

    FogOfWar, I feel like this is a really crucial issue to address, since the substantive action #OWS has taken seems to be convincing people to move their money to credit unions. If I’m not mistaken, thrifts were the source of a major financial crash 2.5 decades ago.

    What’s to say moving cash to CU’s and giving them special positive treatment wouldn’t just kick the problems over to their field?It seems counterproductive to glorify any particular kind of banking since they all serve a purpose and all are risky.

    The trick would seem to be solving principal-agent problems. (not that I have some genius schemes myself)

  1. October 24, 2011 at 4:35 am
  2. October 14, 2012 at 8:02 pm
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