Are Credit Unions Superheroes?
When the big American banks started sucking up to funds from the Troubled Asset Relief Program, or TARP, credit unions, with many fewer subprime mortgages on their balance sheets, started looking really good.
In many countries, the worst bullets of the crisis seemed to bounce off credit unions’ chests. Now, they are on a roll, bolstered not only by their subversively conservative lending practices but also by a loss of public trust in larger financial institutions.
Credit unions are nonprofit enterprises that aim to serve individuals brought together by some “common bond” of association, whether institutional (e.g. a common employer) or geographic (a local community). Most are relatively small-scale, though many have expanded their scope in recent years. In electing management, each member wields one vote.
This structure fundamentally differs from that of banks, whose goal is to maximize profit. Most banks are much larger institutions (especially after a wave of mergers in recent years) and they dominate the industry. Today, Wells Fargo, JPMorgan Chase and Bank of America alone control more than 30 percent of the nation’s deposits. In electing management, owners wield votes proportionate to their number of shares.
These differences in incentives and governance structure should make credit unions less likely than banks to pursue excessively risky investments.
Because American credit unions don’t need to generate profits, and also because they are not required pay federal and state income taxes, they typically offer higher interest rates to savers and charge lower rates to borrowers than banks do.
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